LEGAL ASPECTS OF

BUSINESS
 Business Law
Topic-1 Contract Act
The Indian Contract Act, 1872 defines the term “Contract” under its section 2 (h) as “An agreement enforceable by
law”. In other words, we can say that a contract is anything that is an agreement and enforceable by the law of the
land.

Agreement
The Indian Contract Act, 1872 defines what we mean by “Agreement”. In its section 2 (e), the Act defines the term
agreement as “every promise and every set of promises, forming the consideration for each other”. Now that we
know how the Act defines the term “agreement”, there may be some ambiguity in the definition of the term
promise.

Promise
This ambiguity is removed by the Act itself in its section 2(b) which defines the term “promise” here as: “when the
person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. Proposal when
accepted, becomes a promise”.
Agreement = Offer + Acceptance.
An agreement to change into a Contract as per the Act, it must give rise to or lead to legal obligations or in other
words must be within the scope of the law. Thus we can summarize it as
Contract = Accepted Proposal (Agreement) + Enforceable by law (defined within the law)

Essential Elements of a Contract

Essential Elements of a Contract as defined in Section 10 of the Indian Contract Act 1872
1. Agreement - Offer and Acceptance
2. Legal purpose
3. Lawful Consideration
4. Capacity to contract
5. Consent to contract
6. Lawful object
7. Certainty
8. Possibility of Performance
9. Not expressly declared void
10. Legal formalities like Writing, Registration etc.

1. Agreement - Offer and Acceptance

The parties to the contract should have a mutual understand regarding the subject-matter of the contract. There
must be a "lawful offer" and "lawful acceptance" thus resulting in an agreement. The parties must have agreed to
the subject-matter in the same sense.

2. Legal purpose
There must be an intention among the parties that the agreement should be attended to by legal consequences and
create legal obligation. Agreements of social or domestic nature do not contemplate legal relations

3. Lawful Consideration
Consideration means 'something in return'. In every legal contract, there must be something in return. An
agreement is legally capable to be enforced only when each of the parties to it gives something and gets something.
The consideration should not be unlawful, illegal, immoral or opposed to public policy.

4. Capacity to contract
Every person who enters into a contract must be competent. In other words, the person should be of the age of
majority, should have a sound mind, and must not be disqualified from any law to which they subject.
Minors, lunatics, unsound and intoxicated persons are incompetent to enter into a contract. However, there are
exceptions as defined in Section 68. In case of an exception the minor or lunatic is not personally liable.

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5. Consent to contract
All the parties must have agreed upon the subject matter of the agreement in the same sense. Section 14 says that if
the agreement is induced by coercion, fraud misinterpretation or mistake, it is said to be "no free consent" and such
a contract is voidable and cannot be enforceable by law.

6. Lawful object
If the object in the agreement is unlawful, the agreement is void.
Eg: The landlord cannot recover rent through court of law when he knowingly lets his house to carry on
prostitution.

7. Certainty
Every agreement of the contract must be certain. If the agreement is not certain or incapable of being made certain,
it is void.

8. Possibility of Performance
Every contract must be capable of performance. Otherwise, the agreement is void. An agreement to do an
impossible act whether physically or legally, is void.

9. Not expressly declared void

The agreement must not have been expressly declared to be void under the Act. Examples of such agreements are
restrainment of trade, marriage, legal proceedings and wagering agreements. Such agreements are not enforceable
by law.

10. Legal formalities like Writing, Registration etc.

A contract may be oral or in writing according to the Indian Contract Act. In certain special cases the agreement
must be in written. In some cases like contracts by companies, selling or buying of shares etc., the contract must be
registered.

Types of Contract as per Indian Contract Act, 1872

A). On the basis of the validity
1. Valid Contract: Section 2(h) of the Indian Contract Act, 1872 as-“an agreement enforceable by law”.
• It contains all the essential elements of a valid contract. Valid Contract Intention to create legal relationship
Lawful consideration Capacity of parties Legal formalities Not declared to be void possibility of performance
certainty of meaning lawful object free consent offer and acceptance

2. Void Contract • Section 2 (j) states as follows: “A contract which ceases to be enforceable by law becomes
void when it ceases to be enforceable”. Thus a void contract is one which cannot be enforced by a court of law.
Example: Mr. X agrees to write a book with a publisher. After few days, X dies in an accident. Here the contract
becomes void due to the impossibility of performance of the contract. •

3. Voidable Contract • Section 2(i) defines that “an agreement which is enforceable by law at the option of one or
more parties thereto, but not at the option of the other or others is a voidable contract”.
• E.g., Absence of free consent, agreement by coercion, undue influence, fraud or misrepresentation etc. • Evidence
is essential. • Court can cancel the contract.

4. illegal Contract : • It is a contract which the law forbids to be made. The court will not enforce such a contract
but also the connected contracts. All illegal agreements are void but all void agreements are not necessarily illegal

B. On the basis of the formation of contract

1.Express Contracts: • A contract would be an express contract if the terms are expressed by words or in writing.
• Example: A tells B on telephone that he offers to sell his house for Rs. 2 lacs and B in reply informs A that he
accepts the offer, this is an express contract

2. Implied Contracts: • Implied contracts come into existence by implication. Most often the implication is by law
and or by action.
• Example: Where a coolie in uniform picks up the luggage of A to be carried out of the railway station without
being asked by A and A allows him to do so, it is an implied contract and A must pay for the services of the coolie
detailed by him
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Tacit Contracts • The word Tacit means silent. Tacit contracts are those that are inferred through the conduct of
parties without any words spoken or written.
• A classic example of tacit contract would be when cash is withdrawn by a customer of a bank from the automatic
teller machine [ATM

3. Quasi-Contract: • A quasi-contract is not an actual contract but it resembles a contract. It is created by law
under certain circumstances. The law creates and enforces legal rights and obligations when no real contract exists.
Such obligations are known as quasi-contracts.
• Example: Obligation of finder of lost goods to return them to the true owner or liability of person to whom
money is paid under mistake to repay it back

C. On the basis of the performance of the contract

1. Executed Contract: • A contract which has already been performed. • Example: When a grocer sells a sugar on
cash payment it is an executed contract because both the parties have done what they were to do under the contract.

2. Executory Contract: • A contract which has to be performed in future.

• Example: Where G agrees to take the tuition of H, a pre- engineering student, from the next month and H in
consideration promises to pay G Rs. 1,000 per month, the contract is executory because it is yet to be carried out. •
Unilateral or Bilateral are kinds of Executory Contracts and are not separate kinds
(a)Unilateral Contract: • Unilateral contract is a one sided contract in which one party has performed his duty or
obligation and the other party’s obligation is outstanding. (performance is due from one party.)
• Example: M advertises payment of reward of Rs. 5000 to any one who finds his missing boy and brings him. As
soon as B traces the boy, there comes into existence an executed contract because B has performed his share of
obligation and it remains for M to pay the amount of reward to B

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

Topic-2 Quasi Contract

 Can there be a contact without offer, acceptance, consideration etc? Well, yes there can be such a contract
based on social responsibility. We call such contracts quasi contract.
 There are cases where the law implies a promise and imposes obligations on one party while conferring
rights to the other even when the basic elements of a contract are not present. These promises are not legal
contracts, but the Court recognizes them as relations resembling a contract and enforces them like a
contract. These promises/ relations are Quasi contracts.
Sections 68 – 72 of the Indian Contract Act, 1872 detail five circumstances under which a Quasi contract comes to
exist. Remember, there is no real contract between the parties and the law imposes the contractual liability due to
the peculiar circumstances.

Section 68 – Necessaries Supplied to Persons Incapable of Contracting

 Imagine a person incapable of entering into a contract like a lunatic or a minor. If a person supplies
necessaries suited to the condition in life of such a person, then he can get reimbursement from the
property of the incapable person.
 A is a lunatic. B supplies John with certain necessaries suited to his condition in life. However, John does
not have the money or sanity and fails to pay B. This is termed as a Quasi contract and Peter is entitled to
reimbursement from A’s property.

Section 69 – Payment by an Interested Person

 If a person pays the money on someone else’s behalf which the other person is bound by law to pay, then
he is entitled to reimbursement by the other person.
 Ram is a zamindar. He has leased his land to Shyam, a farmer. However, Ram fails to pay the revenue due
to the government. After sending notices and not receiving the payment, the government releases an

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 advertisement for sale of the land (which is leased to Shyam). According to the Revenue law, once the land
is sold, Shyam’s lease agreement is annulled.
 Shyam does not want to let go of the land since he has worked hard on the land and it has started yielding
good produce. In order to prevent the sale, Shyam pays the government the amount due from Ram. In this
scenario, Ram is obligated to repay the said amount to Shyam.

Section 70 – Obligation of Person enjoying the benefits of a Non-Gratuitous Act

 Imagine a person lawfully doing something or delivering something to someone without the intention of
doing so gratuitously and the other person enjoying the benefits of the act done or goods delivered. In such
a case, the other person is liable to pay compensation to the former for the act, or goods received. This
compensation can be in money or the other person can, if possible, restore the thing done or delivered.
 However, the plaintiff must prove that:
 The act that is done or thing delivered was lawful
 He did not do so gratuitously
 The other person enjoyed the benefits

Section 71 – Responsibility of Finder of Goods

 If a person finds goods that belong to someone else and takes them into his custody, then he has to adhere
to the following responsibilities:
 Take care of the goods as a person of regular prudence
 No right to appropriate the goods
 Restore the goods to the owner (if found)
 Peter owns a flower shop. Olivia visits him to buy a bouquet but forgets her purse in the shop.
Unfortunately, there are no documents in the purse to help ascertain her identity. Peter leaves the purse on
the checkout counter assuming that she would return to take it.

Section 72 – Money paid by Mistake or Under Coercion

 If a person receives money or goods by mistake or under coercion, then he is liable to repay or return it.
 Let us see an example. Peter misunderstands the terms of the lease and pays municipal tax erroneously.
After he realizes his mistake, he approached the municipal authorities for a reimbursement. He is entitled to
be reimbursed since he had paid the money by mistake.
 Similarly, money paid by coercion which includes oppression, extortion or any such means, is recoverable.

Topic-3 CAPACITY OF PARTIES

 Section 10 of the Contract Act requires that an agreement to be enforceable by law must be made by the
parties competent to contract.
 Section 11 of the contract Act provides 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 disqualified
from contracting by any law to which he is subject.”
 This Section deals with personal capacity in three distinct branches:
➢ (a) Disqualification by infancy, i.e. minors.
➢ (b) Disqualification by insanity, i.e. lunaties.
➢ (c) Other special disqualifications by personal laws, such as insolvancy, conviction etc.

Disqualification by Infancy
 Age of Majority: A valid agreement requires that both the parties to the contract should understand the
legal implications of their conduct. They must have mature mind. They should be major in age.
 According to Indian Majority Act, 1875, every person domiciled in India shall be deemed to have
attained his majority when he shall have completed his age of eighteen years and not before. In case,
guardian has been appointed to the minor or where the minor is under the guardianship of the court of
wards, the person shall become major on the completion of the age of 21 years.

Law Relating to Minor’s Agreement

 The Act makes it essential that all contracting parties should be competent to contract, and if a person is
incompetent to contract by reason of infancy, he cannot make a contract within the meaning of the Act.
Therefore, an agreement with a minor is void and a minor can neither sue nor be sued upon it. The
Contract is also not capable of ratification in any manner. The parents of a minor are not legally
responsible for his contracts unless he acts as their agent.
 Following important provisions govern agreements made with a minor.
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  (i) Agreement is absolutely void: An agreement by or with a minor is void-ab-initio. It is considered to
be a nullity and non-existing from the very beginning. Thus, if a party who has parted with goods, can trace
them with the minor then he can recover damages for the breach of contract or recover their price. Nor can
money lent to such a minor be recovered because if that were to be allowed it would tentamount of
enforcing the contract

Leading case: Mohiri Bibi V. Dharmodus Ghosh.

 In this case a minor executed a mortgage for Rs. 20,000 and received Rs.8,000 from the mortgagee.

 3. Mino’s liability for necessities: All contracts relating to the necessities supplied to a minor according
to this status in life are valid. But only the minor’s property is liable for necessities, and no personal
liability is incurred by him.
 Necessities must be things which the minor actually needs; therefore it is not enough that they be of a kind
which a person of his condition may reasonably want for ordinary use, they will not be necessities if he is
already sufficiently supplied with things of that kind, and it is immaterial whether the other party knows
this or not. Objects of mere luxury cannot be necessities nor can objects which, though of real use, are
excessively costly. The fact that buttons are normal part of any kinds of clothing, but it will not make pearl
or diamond buttons necessities.

 2. No ratification: Since the contract is void ab initio it cannot be ratifed by the minor on attaining the
age of majority. However, a minor who, on attaining majority, takes up and carries on transaction
commenced while he was under disability, will bind himself for the whole transaction.
 Example :
 A, a minor, takes a loan of Rs. 1,000 from B during his minority. After attaining age of majority, A applies
for a fresh loan of Rs. 1,000 B gives the loan and obtain from A a combined promissory note of Rs.2,000.
This will be taken as a new contract and will therefore, be enforceable.

 3. No restitution: When a contract becomes void, it is not to be performed by either party. But if any
party has received any benefit under such a contract from the other party he must restore it or make
compensation for it to the other party. This is called restitution.
 A minor is not liable to repay any money or compensation for any benefit that he might have received
under a void contract. Court, may however, in certain cases, while ordering for the cancellation of an
instrument at the instance of the minor, require him to pay compensation to the other party to the
instrument under Sec. 33 of the Specific Relief Act.

 4. No Estoppel: A minor is not bound by his mis-representations. If a minor procures a loan or enters
into any other agreement by representing that he he is of full age. He cannot be prevented from pleading his
minority in his defence. He will not be held liable under the contract. It was held in Sadiq Ali Khan V. Jai
Kishore (1928) that a deed executed by a minor is a nullity there can be no estoppel against a statue, Thus
the rule of estoppel as per S.115 of the Evidence Act, 1872 is not applied against a minor.
 But this does not mean that the minors are allowed to cheat and to enjoy the fruits of their fraud. According
to S.33 of the Sepcific Relief Act, 1963 Court will order, on equitable considerations for restitution if the
minor is still in possession of the money or things purchased out of it. The minor shall have no liability if
the money or things cannot be traced out in his hands.

 Examples:
 (a) A minor borrowed Rs. 1000 on a fraudulent representation that he was a major, and he spent the whole
of the money in a picnic tour of Kashmir. In this case the creditor cannot sue for the realisation of the
money so advanced by him.
 (b) A minor fraudulently over states his age and takes delivery of a motor car after executing a promissory
note in favour of the trader for its price, though the minor cannot be compelled to pay on the promissory
note; but the court on equitable grounds may order the minor to return the car to the trader, if it is still with
the minor.
 (c)A grocer supplies monthly rations for 6 months to B who is aged 17 years. On B’ failure to pay, he sues
him for the realisation of his dues. In this case B’s property is liable for the payment of credit rations
consumed by B during the period of his minority.
 Costs incurred in successfully defending a suit on behalf of a minor in which his property was in jeopardy
are “necessities”.

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 6. Minor as a beneficiary: All such contracts under which the minor is to receive some benefit or which
are beneficial to him are valid. These contracts include agreements which provide for the teaching,
instruction or employment of a minor. It is to be noted that only his property is liable for liabilities arising
out of such contracts. In no case he will be personally liable.
 English law has expressly made a contract for the minor’s benefit enforceable. But in India all contracts
made by minors are void. Still majority of the contracts for the benefit of minor have been held to be
enforceable on the ground that it will be unjust in the circumstances to deprive a minor of a benefit which
he may be entitled to get under a contract.

 7. Minor as Agent: A minor can be appointed as an agent. He can represent his principal in dealings
with other parties. Since minor does not incur any personal liability, he cannot be held responsible for his
any act of negligence or fault. Therefore the principal will be responsible to the third parties for the acts of
his minor agent. He cannot hold the minor agent personally liable for any wrongful acts. Thus the principal
runs a great risk.

 8. Minor as a partner: A minor cannot be a partner of a firm. An agreement of partnership making a

minor a full-fledged partner is invalid between all partners. However, he may be admitted to the benefits of
an already existing partnership firm with the unanimous express consent of all the existing partners. Such
an agreement may be entered into by his guardian on his behalf with the partners.
 A minor admitted to the benefits of partnership, has a right to share the property and profits of the firm in
the proportion agreed upon by him with the other partners. Further, he has a right to have access to and
inspect and copy any of the accounts of the firm but not the books of accounts of the firm. He liability
is limited to the extent of his share in the firm.

 9. Minor as a member of a company: A minor cannot be a member of a company since he is

incompetent to enter into a contract. A minor may be allotted shares. His name may remain on a company’s
register of members, but during minority he incurs no liability. On attaining majority and becoming aware
of the presence of his name in the register of members, the major has the option to repudiate his shares
within a reaonsable time. Where he does not do so he may safely be taken to have accepted his position.
His liability as a share-holder then commences.
 However, it a minor has been allotted shares through ignorance and his name has been entered in the
Register of members both the compoany and the minor, can repudiate the allotment of shares during his
minority.

 10. Surety for a minor: A person who stands as a surety for a loan taken by the minor will be liable to the
creditor for payment of the loan, even though minor was not liable.

 11. Mortages and sales in favour of minors : A sale or mortgages of his property by a minor is void. But
a duly executed transfer by way of sale or mortgage in favour of a minor who has paid the consideration
money is not void and it is enforceable by him or any other person on his behalf. A minor, therefore, in
whose favour a deed of sale is executed is competent to sue for the possession of the property conveyed
thereby.
 12. A minor can not be declared as an insolvent even for his necessities of life. Only his property is
liable even for necessities of life and he, personally, is not liable for the same.

 Thus, the contract made with the minors can be under three heads.
 (i) Valid Contracts: They include (a) contracts for necessities which include goods as well as services.
(b) Contracts for loans taken to purchase “necessities”.
 (ii) Voidable Contracts: This category of voidable contracts is not recognised our country. This category
includes those contracts in which minor is a beneficiary. Only minor is entitled to enforce but not the other
party. They can be reasonably called as contract voidable at the option of the minor.
 (iii) Void Contracts: All contracts by a minor other than those referred to above shall be void

 Disqualificatioin by insanity
 According to Sec.12 “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 judgement as to its effect
upon his interests.”
 A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is
of sound mind.
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  A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when
he is of unsound mind.
 Example:
 (a) A patient in a lunatic asylum, who is at intervals of sound mind, may contract during those intervals.
 (b) A sane man, who is delirious from fever, or who is so drunk that he can not understand the terms of a
contract or form a rational judgement as to its effect on his interests, can not contract during such delirium
or drunkness.
 Thus, idiots, lunatics and drunkard are not considered to be persons of sound mind.
 (i) Idiot : A person who is devoid of any faculties of thinking or rational judgement. All agreements,
other than those for necessaries of life, with idots are absolutely void.
 (ii) Lunatic: A person whose mental powers are derange is called a lunatic. Lunatic is not a person who
is continuously in state of unsoundness of mind but he may have lucid intervals. period in which he is to
his senses. Agreement with lunatics are void except those made during lucid intervals and made for
necessities of life. However, for necessities of life, the property of such persons is liable. He does not have
personal liabilities.
 (iii) Drunkards: A person under the influence of drink or drugs, stands on the same footing as lunatic.
Mere drunkenness affords no ground for resisting a suit to enforce a contract. But where the judgement of
one party was, to the knowledge of the other part, seriously affected by drink, equity will generally refuse
specific performance at the suit of the other. And, where the court is satisfied that a contract
disadvantageous to the party affectedhas been obtained by “drawing him into drink” or that three has been
real unfairness in taking advantage of his position, the contract may be set aside.

Persons disqualified by any other laws:

Certain types of people are specifically disqualified by special statues from entering into valid contracts
(I) Alien Enemies: A person who is not an Indian citizen is an alien. An alien may be either an alien friend or an
alien enemy. An alien friend is one, whose state or Sovereign is at peace with India. He has full contractual
capacity like an Indian Citizen subject to certain restrictions put by the Government of India, e.g., and alien can not
acquire any ownership interests in any Indian ship. On the declaration of war between India and alien’s country he
becomes an alien enemy. A contract with an enemy becomes unenforceable on the outbreak of war. With regard to
a contract with an alien enemy following rules will apply:
 (i) Since trading with an alien enemy is considered illegal, no contract can be made with an alien enemy
during the subsistence of war except with the prior approval from the Central Government.
 (ii) Contracts entered into before the outbreak of war will be suspended during the course of war. They
will be performed after the war is over.

(II) Foreign Sovreigns and Ambassadors: Foreign sovereigns and accredited representatives of foreign states,
i.e., Ambassadors. High Commissioners. enjoy a special priviledge in that they can not be used in Indian courts,
unless they voluntarily submit to the jurisdiction of Indian courts. Though they can enter into contracts through
agents residing in India. In such cases the agent becomes personally liable for the due performance of the contracts

(III) Corporations: A corporations is only an artificial person created by law, e.g. a company registered under the
Companies Act, public bodies created by statue such as Industrial Finance Corporation of India, A corporation
exists only in contemplation of law, it has no physical body or form. It can hold property, can sell or purchase
goods and can sue or be sued in relation to any of the contracts entered into by it. Being a mere creature of law it
cannot go beyond those objectives which have been laid down in the charter of its creation, i.e., Memorandum of
Association. Further, its capacity and powers to contract are also limited by its charter. Any contract beyond such
powers is ultra vires and void. Such ultravires contracts can not be ratified even by the unanimous vote of all its
members.

(IV) Convicts: While undergoing sentence a convict is incapable of entering into a contract. This inability comes
to an end on the expiration of the sentence or if he has been “pardoned”.

(V) Professional persons: In England barristers-at law, are prohibited by the etiquette of their profession from
suing for their fees. So also are the Fellow Members of the Royal College of Physicians. In our country no such
professional disqualification exists.

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Topic-4 Free Consent
 Contracts are usually described as valid, void and voidable. Valid Contract is an agreement enforceable at
the law courts. Those agreements which are not enforceable at the law courts, i.e., for the enforcement of
which legal recourse cannot be taken, are known as Void Contracts. In between the valid and the void
contracts are the voidable contracts. Such contracts are the outcomes of Flaw in Consent. At an early stage
you have read that, “an agreement can be called a contract provided it is made with the Free Consent
of the parties, competent to contract for a lawful consideration and for a lawful object and is not
expressly declared to be void”. When we analyse this statement we come to know that to be a contract, an
agreement must be made with the Free Consent of the parties to the contract. Here is the importance of
“Free Consent” which is very much necessary for the validity of the contract.

 The genuineness of the consent implies that the parties to the contract must mean the some thing in the
same sense and not only that but they should mutually agree voluntarily. If their minds do not meet at the
same thing in the same sense voluntarily, then their consent shall not be called Free or Voluntary. The
consent in such case might have been obtained under Fraud or Misrepresentation or Coercion or undue
influence. In such a case the party giving his consent under any of these four elements shall have a right to
withdraw his consent. Such a contract where the consent of a party or parties to the contract is caused by
any of the elements stated above, i.e. Fraud Misrepresentation, Coercion or Undue Influence/shall be called
a Voidable Contract and shall be enforceable at the option of the aggrieved party or parties and not at the
option of the other or others.

Coercion (Section 15)

 Meaning: It is committing, or threatening to commit, any act forbidden by the Indian Penal Code (XLV of
1860), or the unlawful detaining or threatening to detain, any property to the prejudice of any person
whatever, with the intention of causing any person to enter into an agreement.

Characteristics:
 Coercion by threat need not necessity be directed by a party to the contract. It may or may not emanate
from a stranger to the contract. Similarly, it may be aimed at any person. either a party to the contract or a
strange to the contract. But the idea or intention of the party resorting to coercion should be to cause a
person to enter a contract.
Example :
 (a) A threatens to Kill C (B’s son), if B does not lend Rs. 10,000 to A. B agrees to lend the aforesaid
amount. The agreement is caused by Coercion.
 (b) A threatens to Kill B if B does not lend Rs. 10,000 C.B agrees to lend the amount to C. This
agreement is made under Coercion.

Effect of Coercion
 Coercion vitiates Free Consent. The party or parties whose consent is taken under the effect of Coercion
get a right to avoid the contract, if he so likes. However, if the aggrieved party has received any benefit
under the contract which he is avoiding on the basis of Coercion, he has to return that benefit to the other
party or parties (S.72). The point can be made clear by the following example:
 A enters into a contract with B to sell his horse for Rs. 5000 B takes A’s consent under Coercion. A at the
time of entering into an agreement receives Rs. 1000 as an advance from B. Later on, A avoids the sale of
the horse on the basis of Coercion. A has to return Rs. 1000 to B. He cannot retain the money received as
an advance from B.

 Burden of Proof: The party avoiding the contract has to prove that Coercion was exercised upon him and
his consent received is not voluntary or he has not exercised his consent freely.

 Threat to commit suicide : It is an important question whether threat to commit suicide amounts to
‘Coercion? The act of committing suicide is forbidden by the Indian Penal Code and on this basis Madras
High Court has decided in Amiraju vs Seshamma (1918, 41 Mad. 33) that threat to commit suicide
amounts to Coercion and the party affected is entitle to avoid the contract.

Coercion and Duress distinguished

➢ (a) Coercion is the term applied under the Indian law of Contracts while Duress is the term applied under
the English law of Contracts.

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 ➢ (b) Coercion has a wide scope than Duress, Coercion includes threat to property also while Duress includes
actual act of violence over the person and not of property.
➢ (c) Coercion can be applied by even a stranger, while Duress must be applied by a party to the Contract
upon the other party or to his wife or patent or child.

Undue Influence (S.16)

Definition as per S.16:
 (1) A contract is said to be induced by “undue influence” where the relations subsisting between the
parties are such that one of the parties is in a position to dominate the will of the other and uses that
position to obtain an unfair advantage over the other.
 (2) In particular and without prejudice to the generality of the foregoing principle, 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, or where he stands in a fiduciary relation to
the other; or
(b) when he makes a contract with a person whose mental capacity is temporarily or permanently affected
by reason of age, illness, or mental or bodily distress.
 3) Where a person who is in a position to dominate the will of another, enters into a contract with him,
and the transaction appears, on the fact of it or on the evidence adduced, to be unconscionable, he burden
of proving that such contract was not induced by undue influence shall lie upon the person in a position to
dominate the will of the other.
 a) A, a man enfeebled by desease or age, is induced, by B’s influence over him as his medical attendant,
to agree to pay B an unreasonable sum for his profession services. B employs undue influence.

Salient Features
The above definition has got the following salient features:-
 (1) One of the two parties to the contract is in a position to dominate the will and mind of the other party.
This is presumed when the parties to the contract have a real or apparent authority over the other or one of
the parties has got a fiduciary relationship which puts him in a position to win over the mind of the other
party. Such position or relationship exists in the cases of minor and guardian; trustee and beneficiary;
son and father, wife and husband or vice-versa.
 The positon is also presumed where the party is disabled or infirm and has to depend upon the other party
to the contract. Mentally deficient and physically disabled people can take the plea of undue influence in
avoiding the contract.
 (2) The dominating party should have obtained an unfair advantage from the weaker party: and
 (3) The transaction between the contracting parties is unconscionable. The bargain is called
 ‘unconscionable’ where the two parties are not on equal footing and one of them is making an exhorbitant
profit of the other’s distress.

Effect of Undue Influence (S.19-A)

 A contract vitiated by undue influence is voidable at the option of weaker party. The court can set aside
such contract-
 (i) either wholly: or
 (ii) where the weaker party has enjoyed some benefit under the terms of the contract, then upon just and
equitable terms.

Burden of Proof
 The weaker party has a right to avoid the transaction on the plea of Undue Influence. It is the other party who is
to prove that he has not exercised any undue influence in getting the consent of the weaker party. If the other
party is unable to prove it, the court shall set aside the transaction.

Transaction with Parda-nishin women:

Who is a parada-nishin women? A woman who observes complete seclusion due to the prevailing custom in her
community is said to be parda-nishin. She does not act independently but has to depend upon someone else for
performing her outward duties. A woman going to the Court to give her evidence, settling gent with her tenant,
collecting rents from them, dealing with other parties in matters of business, falling to outsiders can not be regarded
as a Parda- nishin woman. The training, habit and surrounding circumstances are the main elements to be
considered to decide whether a woman is a Parda-nishin or not Wearing a Burga does no make a woman a Parda-
nishin

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Distinction between Coercion and Undue Influence
 We can distinguish between Coercion and Undue Influence. The distinction can be made on the following
basis:
 (a) Definition, Coercion is an act punishable under the Indian Penal Code, while Influence is not a penal
act.
 (b) Nature of force used, Coercion requires physical force exercised by one of the parties to contract,
while undue influence requires moral force.
 (c) Parties Even a stranger’s act may account to coercion, but undue influence can be exercised only by
one of the parties to the contract. Stranger has no place in undue influence.
 (d) Effect. Coercion gives a right to the effected party to repudiate the contract in full but under undue
influence court may set aside the contract absolutely or modify the terms of the contract on such terms
which it feels just and equitable.

“Fraud” : (S.1)
 “Fraud” means and includes any of the following acts committed by a party to contract or with his
connivance, or by his agent, with intent to deceive another party thereto of his agent, or to induce him to
enter into the contract:
 (1) the suggestion, as to fact, of that which is not true, by one who does not to believe it to be true;
 (2) the active concealment of a fact by one having knowledge or belief of the fact;
 (3) a promise made without any intention of performing it;
 (4) any other act fited to deceive;
 (5) any such act or commission as the law specially declares to be fraudulent.

 Explanation
 Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud,
unless 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 unless his silence is in itself, equivalent to speech.
 1. Sir Samuel Romilly argued in Hurgamin Vs. Raseley (1807) Ves. 285;Mulla on the Indian Contract Act
10th Ed. P. 53.

Characteristics
 From the above definition we can state the following characteristics of Fraud:
 (1) The act done by the party is done with an intention to device.
 (2) The act may be done by the party himself or with his connivance by some one else or by his agent.
 (3) The act amounting to fraud may be a suggestion of fact (suggestion false) i.e., the statement being
made is without belief to its truth.
 (4) The act may amount to an active concealment of a fact (suppressio veri) i.e. the party has concealed a
fact which was duty bound to disclose.
 (5) The act amounting to fraud is in the form of a false promise.
 (6) The act or mission is declared fraudulent by the Court or regarded by the Court as a deceit.
 (7) The act committed must have deceived the other party and the party has suffered the damage

Is silence a Fraud?
 Explanation to S.17, states in clear terms that mere silence is not fraud. Where silence amounts to active
concealment, it shall amount to fraud. Thus generally silence does not amount to fraud. However where a
party chooses to speak, he must do so clearly and fully. He should not make a partial and fragmentary
statements of fact, so that the other party is misled. The court has decided in Bimla Bai vs Shankarlal (AIR
1959 M.P. 8) that a partial statement verbally accurate may be as false a statement as if it has been
misstated fully. A father called his illegitimate son, a ‘son’ at the time of fixing his marriage. It was held
that the statement was false and thereby fraudulent.

Effects of Fraud
 Fraud gives the following rights to the aggrieved party.
 (1) He can avoid the contract and file a suit on the other party for damages; or
 (2) He can revoke the contract, or
 (3) He can refuse to fulfill his part of the promise and defend the suit filed by the other party for the
breach of contract for damages or specific performance, or
 (4) He can treat the contract as a valid one and ask for the specific performance, or for damages in
addition to the substitution of the original contract.
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Misrepresentation (S.18)
 Misrepresentation has been defined by the Act as follows: “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;
 (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 anyone
claiming under him.
 (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.

Characteristics
 The ingreditients of a contract vitiated by misrepresentation are: (a) There must be a misstatement of a
material fact.
 (b) The statement must not be a mere opinion, or hearsay, or commendation, because praise carries no
obligation.
 (c) The mis-statement must be made with the intention that the other party shall act upon he contract.
 (d) The other party must have been induced by the mis-statement.
 (e) The statment being made is a wrong one, although the party making it has not known it to be false.
 (f) The statement has been made by the party to the contract or his agent and not by a stranger.

Effect of Misrepresentation
 The party being affected by misrepresentation has got the following rights: (1) He can avoid or revoke the
contract; or
 (2) He can affirm the contract and insist on the misrepresentation to be made good, if it is possible to do
so; or
 (3) He can rely upon the misrepresentation as a defence to an action of the contract.

Distinction between Fraud and Misrepresentation

Basis Fraud Misrepresentation

Intention In Fraud the party’s intention is to deceive the other while in Misrepresentation the party
party and got the benefit from him does not have any intention to
deceive. It makes a careless
misstatement of facts of only.

Rights: Faurd gives two rights to the aggrieved party, a right to while misrepresentation give only
action for damages and also to avoid the contract, one right, i.e. to avoid the contract.
It does not allow any damages.

Plea Fraud does not allow the defendant to take the place but defendant is allowed to take
that the plaintiff had means to discover the truth this plea in case of
misrepresentation

Penalty : The party defrauding the other can be prosecuted for but such is not the case in
cheating under I.P.C also misrepresentation

Topic-5 DISCHARGE OF CONTRACTS

A contracts is discharged when the obligations created by it come to an end. A contract may be discharged in any
of the following ways:
 1. By agreement.
 2. By performance of the contract.
 3. By lapses of time.
 4. By operation of law.
 5. By material alteration.
 6. By subsequent impossibility of the performance.
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  7. By breach.

1. By Agreement Sec. (62-64)

 The parties may agree to terminate the existence of the contract by any of the following ways:-
(a) By Novation (Sec. 62): Substitution of a new contract in place of the old existing one is
 known as ‘inovation of contract’. New contract may be either between the same parties or between
different parties, the consideration being mutually the discharge of the old contract.
➢ (i) Substitution of a contract with new terms for an old contract between the same parties.
➢ (ii) Substitution of a new party for an old one, the contract remaining the same. Promise will now look to
the third party for the performance of the contract. Original promisor is released of the obligations under
the old contract.
As a result of novation, old contract is completely discharged and law will not entertain any action based upon the
terms of the old contract.

(b) By rescission (Sec. 64): Rescission means cancellation of the contract. A contract can be rescinded by any of
the following ways :-
➢ (i) By mutual consent :- Parties may enter into a simple agreement to rescind the contract before it’s
breach.
➢ (ii) By the aggrieved party :- Where a party has committed a breach of the contract, the aggrieved party
can rescind the contract without in any way effecting his right of getting compensation for the breach of
contract.
➢ (iii) By the party whose consent is not free:- In case of a voidable contract, the party whose consent is
not free can, if so decides, rescind the contract.
A contract may also be taken to be impliedly rescinded where none of the parties has performed his part till a long
and no party has any complaint against the other.

(c) By alteration: Alteration means change in one or more of the conditions of the contract.
 Alteration made by the mutual consent of the parties will be perfectly valid. But any material alteration in
terms of a written contract by the one party without the consent of other party will discharge such party
from its obligations under the contract.
 In case of novation a new contract replaces an old contract. The parties may also change. While in case of
alteration only some of the terms of the contract are changed. Parties also continue to be the same.

(d) By remission (Sec. 63): Remission means acceptance of a lesser performance than what was actually due
under the contract. According to Sec. 63 a party may dispense with or remit, wholly or in part, the performance of
the promise made to him. He can also extend the time of such performance or accept instead of any satisfaction
which he deems fit. A promise to do so will be binding even though there is no consideration for it.
 Example:
 (1) A owes B Rs. 5,000. A pays to B and B accepts in satisfaction of whole debt Rs. 2,000 paid at the time
and place where Rs. 5,000 were payable. The whole debt is discharged.

2. By performance of the contract (Sec. 37)

 When parties fulfil their obligations and promises under a contract the contract is said to have been
performed and discharged. Performance should be complete and according to the real intentions of the
agreement. Offer of performance shall have the same effect as performance. A party to a contract shall
become free from all obligations if it had offered to perform his part of the promise but it was not accepted
by the other party.

(3) By Lapse of time

 Every contract must be performed either within the period fixed or within a reasonable time of the contract.
Lapse of time may discharge the contract by barring the right to bring an action to enforce the contract
under the Limitation Act.

4. By operation of Law
 A contract is discharged or terminated by operation of other laws in the following cases:
 (a) Merger. Merger implies coinciding and meeting of an inferior and superior right on one and the same
person. In such a case inferior right available to a party under an agreement will automatically vanish.

13
  Examples: A is holding a property under lease. He subsequently buys that property. A’s right as a tenant is
inferior to his right as an owner of the property. The right as a tenant and right as owner have coicided and
met in one persion i.e. A. Thereofre, A’s rights as a lesee will terminate.
 (b) Death: In case a contract is of a personal nature, the death of the promisor will discharge the contract.
In other caes, the rights and liabilities of the deceased person shall pass to his legal representatives.
 (c) By complete loss of evidence of the existence of the contract.
 (d) By insolvency. An insolvent is released from performing his part of the contract by law. Order of
discharge, however gives a new lease of life to the insolvent and he is discharged from all obligations
arising from all his earlier contracts.

5. By material alternation
 Any material alteration made intentionally in a written contract by the promisee or his agent without the
consent of the promisor entitles the later to regard the contract as rescinded.
 An alternation will be taken to be material if it directly or indirectly affects the nature or operation of the
contract or the identity, validity or effect of the document.

6. By supervening impossibility of performance (Sec. 56)

 Supervening impossibility arises due to the happening of certain events which were neither in the
contemplation of the parties when they entered into the agreement nor either of the parties are responsible
for causing the performance of the contract impossible. In such a case the contract will be void as soon as
such events make the performance of the contract impossible. The impossibility must be either legal or
physical but not commercial. This is called “Doctrine or Supervening Impossibility”. Section 56 of the
Indian Contract Act lays down:
“An agreement to do an impossible act is void”.
 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, becomes void when the act becomes impossible or unlawful. This is
called “Supervening Impossibility”, i.e. impossibility arising subsequent to the formation of the contract.
The supervening impossibility may be due to any of the following causes:
➢ (a) By the destruction of the subject matter. If the subject matter of the contract is destroyed subsequent
to the formation of the contract, without any fault of either of the parties, the contract shall become void.
 Example: (i) A music hall was let for a series of concerts on certain days. The hall was burnt down before
the date of the first concert. The contract was held to be void.

 (b) By the non-existence of a state of things necessary for the performance. If a contract is made on
the basis of continued existence of certain state of circumstances, the contract stands discharged if the state
of things ceases to exist

➢ (c) Death or personal incapacity of the promisor. Contracts involving personal skill of the promisor will
stand discharged in the case of his death or personal incapacity.
 Example: A contracts to act at a theatre for six months in consideratin of a sum paid in advance by B. On
several occasions A is too ill to act. The contract to act on the occasions becomes void.

➢ (d) Change of law. On account of subsequent change in law, the performance of the contract may become
impossible. The object of the contract may be declared to be unlawful.
 Example: (i) A, who is governed by Muslim law and who already had a wife promises to marry B.
Subsequent to this promise and before it is carried out, Special Marriage Act prohibiting polygamy is
passed. The contract to marry becomes void.

➢ (E) Outbreak of War. A contract entered into with an alien enemy during the war is unlawful and,
therefore, void ab initio contracts made before the outbreak of war either suspended or declared void by the
Government. If they are suspended, they may be performed after the termination of the war.
 Example: A contracts to take in cargo for B at a foreign port. A’s Government afterwards declared war
against the country in which port is situated. The contract becomes void when war is declared.

Cases not Covered by Supervening Impossibility

(a) Difficulty in performance
➢ Commercial impossibility
➢ Impossibility due to behaviour of a third person
➢ Strikes, lockouts and civil disturbances:
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 ➢ Partial Impossibility

7. By Breach
 Breach means failure of a party to perform his or her obligation under a contract Breach of contract may
arise in two ways.
 1. Actual Breach.
 2. Anticipatory Brerach.

Actual Breach : Actual breach means breach committed either;

(i) at the time when the performance of the contract is due; or
(ii) during the performance of the contract.
 Example: (i) agrees to supply to B on the 1st February, 1975, 1000 bags of sugar. On 1st February, 1975 he
fails to supply. This is actual breach of contract at the time when the peroformance is due. The breach has
been committed by A.

Anticipatory Breach
 Breach of a contract committed before the date of performance of the contract is called anticipatory breach
of contract. (Sec. 39). The contract in this case is repudiated before the time fixed for its performance
arrives and is so discharged.
 Example: (i) A agrees to employ B from 1st of March. On 1st February, he writes to B that he need not join
the service, the contract has been expressly repudiated by A before the date of its performance.

REMEDIES FOR BREACH OF CONTRACT

In the case of breach of contract on the part of one party, the aggrieved or injured party has the following remedies
available:-
➢ 1. Rescission of the contract.
➢ 2. Damages.
➢ 3. Quantum meruit.
➢ 4. Specific Performance.
➢ 5. Injunction.

Rescissioin of the Contract

Rescission means the setting aside of the contract. The aggrieved party may be allowed by the court of treat the
contract at an end and thereby, terminate all his liabilities under the contract. The court, however, will not allow
recession of the contract in the following cases:
➢ (i) Where the party wishing to set aside the contract has expressly or impliedly ratified the contract.
➢ (ii) Where only a part of the contract is sought to be set aside and that part cannot be separated from the
rest of the contract.
➢ (iii) Where without fault of either party, there is a change in the circumstances since the making of the
contract, on account of which the parties canot be substantially restored to the position in which they were
before the contract was made.
➢ (iv) Where during the subsistence of the contract, third parties have acquired rights in the subject matter of
the contract in good faith and for value.

Damages
Damages mean monetary compensation payable by the defaulting party to the aggrieved party in the event of the
breach of a contract. The object of providing damages is to put the aggrieved party in the same position, so far as
money can do, in which he would have been, had the contract been performed.
Types of Damages
 Damages may be.
 1. Ordinary damages.
 2. Special damages.
 3. Exemplary or vindictive damages.
 4. Nominal damages.
1. Ordinary damages: Damages which arise in the ordinary course of events from the breach of contract are
called ordinary damages. These damages constitute the direct loss suffered by the aggrieved party. They are
estimated on the basis of circumstances prevailing on the date of the breach of the contract. Subsequent
circumstances tending to change the quantum of damages are ignored.

15
 2. Special damages: They are those which result from the breach of the contract under special circumstances.
They constitute the indirect loss suffered by the aggrieved party on account of breach of the contract. They can be
recovered only when the special circumstances responsible for the special losses were made known to the other
party at the time of the making of the contract
3. Exemplary or vindictive damages: They are quite heavy in amount and are awarded only in two cases:
 1. Breach of a contract to marry.
 2. Dishonour of a customer’s cheque by the bank without any proper reason. These damage are awarded
with the intention of punishing the defaulting party. They are of a different nature and their object is to
prevent the parties from committing breach. In the case of breach of contract to marry damages will include
compensation for the loss of the feelings and the reputation of the aggrieved party. In the case of dishonour
of a cheque damages are awarded taking into consideration the loss to the prestige and goodwill of the
customer and the general rule is that the smaller the cheque the greater is the amount of damages.

(4) Nominal Damages: These damages are quite small in amount. They are never granted by way of
compensation for the loss. In such usually actual loss is very negligible. They are awarded simply to recognize the
right of the party of claim damages for breach of the contract.

Quantum Meruit
Literally speaking the words “Quantum Meruit” mean “as much as merited” or “as much as earned”. It is principle
which provides for payment of compensation under certain circumstances, to a person who has rendered goods or
services to another person under a contract which could not or has not been fully performed.
Example (i) :A person renders some service to a company under contract of employment which is duly approved
by the Board of Directors of that compnay. Subsequently the constitution of Board of Director’s found to be illegal
and, therefore, the contract of employment becomes void. The employee who has rendered some service to the
company shall be entitled to claim remuneration for his service under the doctrine of quantum meruit
 Specific performance: Law courts can at their discretion, order for the specific performance of a contract
according to the provisions of the Specific Relief Act in those cases where compensation will not be an
adequate remedy or actual damages cannot accurately be assessed.
 Specific performance means the actual carrying out by the parties to contract, and in proper cases the court
will insist on the parties carrying out their agreement.

Specific performance of agreement will not be granted in the following cases:-

➢ (1) Where the agreement has been made without consideration.
➢ (2) Where the court cannot supervise the execution of the contract e.g. a building contract.
➢ (3) Where the contract is of a personal nature.
➢ (4) Where on of the parties is a minor.

Injunction:
Where a contract is of a negative character, i.e., a party has promised not to do come thing and he does it, and
thereby commits a breach of the contract, the aggrieved party may under certain circumstances, seek the protection
of the court and obtain an injunction forbidding the party from committing breach. An injunction is an order of the
court instructing a person to refrain from doing some act which has been the subject matter of a contract, Courts, at
their discretion, may grant a temporary or a perpetual injunction for an indefinite period.

For example: A agreed to sing at B’s theatre and to sing nowhere else for a certain period. Afterwards A made a
contract with E to sing at E’s theatre and refused to sing at B’s theatre. The court refused to order specific
performance as the contract was of a personal nature but granted an injunction to restrain the breach of A’s promise
not to sing else where.

Topic-7 CONTRACTS OF INDEMNITY

Definition:
 A contract of indemnity is “a contract by which one party promises to save the other from the loss
caused to him by the conduct of the promisor himself, or by the conduct of a third party” (Sec.123).
 Example : A contracts to indemnify B against consequences of any proceedings which C may take against
B in respect of a certain sum of 200 rupees. This is a contract of indemnity. A will be termed
as “Idemnifier” and B as the “Idemnity-holded”.

Definition is not very exhaustive:

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  According to the definition given by Sec. 124 of the Contract Act, contract of indemnity includes
➢ (i) only express promise to idemnify and
➢ (ii) cases where loss is caused by the conduct of the promisor himself or by the conduct of any other
person.
 It does not include (a) implied promise to indemnify and (b) cases where the loss is caused by accident or
by the conduct of the promises.

 According to English law, a contract of indemnity is “a promise to save another harmless from loss
caused as a result of a transaction entered into at the instance of the promisor”.
 It thus, includes the loss caused by events or accidents also. The definition of a contract of indemnity as per
Indian Law is thus very restrictive. If it is strictly applied, even the contracts of insurance would fall
outside the purview of contract of indemnity. But Indian Courts apply the English definition to contracts of
indemnity.

Rights of the indemnity-holder when sued

The indemnify holder is entitled to the following rights:
➢ 1. Indemnity-holder is entitled to recover all damages which he might have compelled to pay in any suit
in respect of a matter covered by the contract.
➢ 2. Indemnity holder is entitled to recover all costs incidental to the institution or defending of the suit.
But the party indemnified can not recover costs when he has not acted as a prudent man in defending the
action against him or has not been authorised by the indemnifier to defend the suit or where the costs
incurred have been unreasonable in amount.
➢ 3. Indemnity holder is entitled to recover all sums paid under any compromise of any such suit, provided
the compromise was not contrary to the directions of the promisor and it has been made on the best
available terms. Promisee must have acted prudently in making such a promise. (Sec. 125).
It is to be noted that a contract of indemnity being a specie of the general contract and therefore, must satisfy all
essentials of a valid contract such as competent parties, free consent, lawful object etc., otherwise it will not be
valid.

Topic-8 CONTRACTS OF GUARANTEE

Definition
 A ‘Contract of Guarantee” is a contract to perform the promise or discharge the liability, of a third person
in case of his deault. The person who gives the guarantee is called the ‘surety’; the person in respect of
whose default the guarantee is given is called ‘the principal debtor’ and the person to whom the guarantee
is given is called the ‘creditor’. The contract of guarantee may be either written or oral (Sec. 126).
 Purpose: Contracts of guarantee are usually entered into
 (a) to secure the performance of something which may be immediately related to a mercantile agent, or
 (b) to secure the honesty and fidelity of someone who is to be appointed to some offce, or
 (c) to secure some one from injury arising out of some wrong committed by another.

Essentials of a valid contract must be present

A contract of guarantee like other ordinary contrary must satisfy all the essentials of a contract but it has two
distinctive features.
 (a) Something done or any promise made for the benefit of the principal debtor is presumed by law to be a
sufficient consideration for the contract of guarantee. It is not necessary that the surety himself must be
benefited.
 Example: A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a
year and promises that if he does so, C will pay for them in default of payment by B. A agrees to forbear as
requested. This is a sufficient consideration for C’s promise.

 (b) In a contract of guarantee, the creditor and surety must be competent to enter into a contract but
principal debtor may be a minor or a person incapable of entering into a contract. In such a case the surety
will be taken as the principal debtor and will be liable to pay.

 (c) In a contract of guarantee, the liability of the surety is condition. It arises only when the principal
debtor makes a default. A liability which arises independently of a ‘default’ is not within the definition of
guarantee. (Punjab National Bank V. Sri Vikram Cotton Mills, (1970) ISCC 60).

Invalid Guarantee
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Following are a few of those cases when the guarantee given by the surety will be invalid and cannot be
enforced against him:
 (i) Guarantee obtained by misrepresentation (Sec. 142): Any guarantee which has been obtained by
means of misrepresentation made by the creditor, or with his knowledge and assent, concerning a material
part of the transaction, is invalid.
 (ii) Guaranttee obtained by concealment (Sec. 143): Any guarantee which the creditor has obtained by
means of keeping silence as to material circumstances is invalid.
 (iii) In case co-surety does not join (Sec. 144): Where a person gives a guarantee upon a contract that the
creditor shall not act upon until another person has joined in it as co-surety, the guarantee will be invalid if
that other person does not join.
Example
➢ (i) A agrees with B to stand as a surety for C for a loan of Rs. 1000 provided D also joins him as surety. D
refuses to join. A is not liable as a surety.
➢ (ii) A guarantees to C payment for iron to be supplied by him to B to the amount of 2,000 tons.
 B and C have privately agreed that B should pay five rupees per ton beyond the market price, such excess
to be applied in liquidation of an old debt. This agreement is concealed from A. A is not liable as a surety.

Difference between contract of Indemnity and Contract of Guarantee

CONTRACT OF INDEMNITY CONTRACT OF GUARANTEE

Parties Only two parties- There are three parties--

‘indemnifier & indemnified ‘Creditor’ ‘principal debtor’ and ‘surety’

Liability00 The liability of the indemnifieris ‘primary’ The liability of the surity is secondary, i.e.,
the surety’s is liable only if the principal
debtor fails. The liability of the principal
debtor is primary.

Contingency The liability of the idemnifier arises only There is an existing debt or duty the
on the happening of a contingency. performance of
which is guaranteed by the surety.

Contract There is only one contract Three contracts; one between the creditor
between the indemnifer and and principal debtor; second, between the
the indemnified surety and the creditor, and third, between
the surety and the principal debtor.

Object The indemnity contract is for The contract of guarantee provides ‘surety’
reimbursement of loss. It provides to the creditor
‘security’.

Right to sue Indemnifier cannot sue a third party for the Surety can sue the principal debtor.
loss suffered.

Kinds of Guarantee
 Contracts of guarantee may be
➢ (i) Specific, or
➢ (2) Continuing.

 1. Specific guarantee: Specific guarantee means a guarantee given for one specific transaction. In this
case the liability of the surely extends only to a single transaction.
 Example: A guarantee payment to B of the price of 5 sacks of flour to be delivered by B to C and to be
paid in a month. B delivers sacks to C. C pays for them. Afterwards B delivers four sacks to C, which C
does not pay. The guarantee given by A was only a specific guarantee and accordingly he is not liable for
the price of the four sacks
 2. Continuing guarantee (Sec. 129): A continuing guarantee is that which extends to a series of
transactions (Sec. 129). It is not confined to a single transaction. Surety can fix up a limit on this liability as

18
 to time or amount of guarantee, when the guarantee is a continuing one. The fact that the guarantee is
continuing can also be ascertained from the intentions of the parties and the surrounding circumstances.
 Example: (i) A, in consideration that B will employ C in collecting the rents of B,s zamindari, promises B
to be responsible, to the amount of 5,000 rupees, for the due collection any payment by C of those rents.
This is continuing guarantee.

Revocation of continuing guarantee

 A continuing guarantee is revoked by any of the following ways.
 1. By notice (Sec. 130). A continuing guarantee may at any time be revoked by the surety as to future
transactions, by giving a distinct notice to the creditor.
 Example: A in consideration of B’s discounting at A’s request, bills of exchange, for C guarantees to B,
for twelve months, the due payment of all such bills to the extent of 5,000 rupees, B discounts bills for C to
be extent of 2,000 rupees. Afterwards at the end of three months, A revokes the guarantee. This revoation
discharges A from all liability to B for any subsequent discount. But A is liable to B for 3,000 rupees, on
the default of C
 2. By Death (Sec. 131): Death of the surety will operate as a revocation of the continuing guarantee with
regard to the future transactions unless the contract provides otherwise. No notice of death need be given to
the creditor. Heirs of the surety will not be liable forany fresh transactions entered into by the creditor with
the principal debtor after the death of the surety without knowledge of such death.

Nature of surety’s liability

 Where the parties do not specifically agree as to the extent of he liability or the surety does not put up any
limit on his ability at the time of entering into the contract, the liability of the surety will be co-extensive
with that of the principal debtor. In other words, whatever amount of money a creditor can legally realise
from the principal debtor including interest, cost of litigation, damages etc., the same amount he can
recover from the surety.
 Example: A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured
by C. A will be liable not only for the amount of the bill also for any interest and charges which have
become due on it.

Rights of the Surity

Rights of the surety can be classified under three heads:
➢ (i) Against the principal debtor.
➢ (ii) Against the creditor.
➢ (iii) Against the co-sureties.

1. Rights of the surety against the principal debtor

 (a) Rights to be subrogated: When the principal debtor had committed the default and the surety pays the
debt to the creditor, surety will stand in the shoes of the creditor and will be invested with all the rights
which the creditor had against the debtor (Sec. 140).
 b) Right to claim indemnity:( In every contract of guarantee, there is an implied promise by the principal
debtor to indemnify the surety and the surety is to recover from the principal debtor whatever sum he has
rightfully paid under the guarantee but no sums which he has paid wrongfully, e.g., cost of fruitless
litigation (Sec. 145).
 Examples : (i) B is indebted to C, and A is surety for the debt. C demands payments from A, and on his
refusal sues him for the amount. A defends the suit, having reasonable grounds for doing so, but is
compelled to pay the amount of the debt with costs. He can recover from B the amount paid by him for
costs, as well as the principal debt.

 2. Rights of the surety against the creditor

 A surety is entitled to the benefit of every security which the creditor has against the debtor at the time
when the contract of suretyship is entered into, whether the surety knows of the existence of such security
or not and if the creditor loses or without the consent of the surety parts with such security, the surety is
discharged to the extent of the value of the security (Sec. 141). But a surety, however, cannot claim the
benefit of the securities only on the payment of a part of the debt.

 3. Right against co-sureties

 When two or more persons stand as sureties for the same debt or obligation they are termed as co-sureties.
The position of co-sureties is as follows.
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  Co-sureties liable to contribute equally (Sec. 146): Where two or more persons are co-sureties for the
same debt or duty, either jointly or severally, and whether under the same or different contract, and whether
with or without the knowledge of each other, the co-sureties in the absence of any contract to the contrary,
are liable, as between themselves, to pay each an equal share of the whole debt, or of that part of it which
remains unpaid by the principal debtor.
 Example: A, B and C are sureties to D for the sum of 3,000 rupees lent to E.E makes default in payment.
A, B and C are liable, as between themselves, to pay 1,000 rupees each.

Discharge of surety
Surety will be discharged from his liability in the following cases:
➢ 1. By notice or death (Secs. 130 & 131): A contract of continuing gurantee may be terminated at any
time by notice to the creditor. The death of the surety brings an end to continuing gurantee. No notice of
death need to given to the creditor. The surety will not be responsible for acts done after his death.

➢ 2. Variations in terms of the original contract between the principal debtor and the creditor (Sec.
133): If the contract between the creditor and the principal debtor is materially altered without the consent
of the surety, the surety is discharged as to transactions subsequent for the alteration.

➢ 3. By release or discharge of the principal debtor (Sec. 134). The surety is discharged by any contract
between in creditor and the principal debtor, by which the principal debtor is released or by any act or
omission of the creditor, the legal consequence of which is the discharge of a surety on one agreement will
not release the other surety bound for the same debtor by a separate agreement from his engagement, unless
the effect of such release is to adversly affect the others right to contribution.

 Example (i) : A gives a gurantee to C for goods to be supplied by C to B. C supplies goods to B, and
afterwards B becomes embrassed and contracts with his credtiors (including C) to assign to them his
property in consideration of their releasing him from their demands. Here B is released from his debt by the
contract with C, and A is discharged from his suretyship.

➢ 4. Compounding by creditor with the principal debtor (Sec. 135). A contract between the creditor and the
principal debtor by which the creditor makes a composition with, or promise to give time to, or not sue to
the principal debtor discharges the surety unless the surety assents to such contract.

➢ 5. Creditor’s act or omission imparing surety’s eventual remedy (Sec. 139). If the creditor does any act
which is inconsistent with the rights of the surety, or omits to do any act which his duty to the surety
requires him to do, any the eventual remedy of the surety himself against the principal debtor is thereby
impaired, the security is discharged.

➢ 6. Loss of security (Sec. 141). If the creditor losses on, without the consent of the surety, parts with any
security given to him at the time of the contract of guarantee, the surety is discharged from liability to the
extent of the value of security.

➢ 7. By invalidation of the contract of guarantee (Secs. 142, 143 and 144). A contract of guarantee
becomes invalid if guarantee was obtained by fraud or concealment etc. about meterial facts as discussed
before. Surety in such a case will be discharged from his liability.

Topic-9 CONTRACTS OF BAILMENT

Bailment is “the delivery of goods by one person to another for some purpose, upon a contract that they shall, when
the purpose is accomplished, be returned or otherwise disposed of according to the direction of the person
delivering them. The person delivering the goods is called the ‘bailor’. The person to whom they are delivered is
called the ‘bailee’.
 Examples:-
 (i) A lends his motor cycle to B for his use.
 (ii) A gives a piece of cloth to a tailor to make it into a coat. (iii) A gives his radio set to a mechanic for
repairs.

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Essential characteristics
The essentail elements of the definition of bailment can be summed up as under:-
➢ (a) Bailment is always based upon a contract. In exceptional cases it can also be implied by law, e.g.,
finder of goods.
➢ (b) There can be a bailment of moyable properties only but money is not included in the category of
movable goods.
➢ (c) In Bailment the possession of goods must change. It thus requires temporary delivery of goods. Mere
custody of goods without possession will not be sufficient to constitute bailment. A servant or a guest using
his master’s or host’s goods will not be a bailee.
In bailment the delivery of goods may be actual or constructive
Example:
 (i) A delivers his radio set to B for repair. This s a case of actual delivery of goods by A to B. A is the
bailor and B is the bailee.
 (ii) A employed a goldsmith to melt old jwellery and prepare new jewels. Everyday she used to receive
half-made jewels from the goldsmith and put them in a box and leave the box in the goldsmith’s room.
She kept the key of the room with her. On one night-the jewels were stolen. It was held that there was
redelivery of jewels to the lady and the goldsmith could not be regarded as bailee. The lady herself
must bear the loss (Kaliapurimal v. Visalakshmi).
➢ (d) In bailment, ownership is not transferred. The bailor continues to be the owner of the goods. (e) Goods are
delivered upon a condition that they are to be returned in specie.
Deposit of money in a bank is not a case of bailment since the return of money will not be of the identical
coins deposited. Moreover the money handed over to the bank is not for safe custody but to be credited to
some kind of account. The relation between the bank and the depositor of money is that of a borrower and
the lender and not that of a bailor and bailee.

RIGHTS AND DUTIES OF THE BAILEE

Rights of the bailee
 1. Rights to interplead (Sec. 165). If a person, other than the bailor, claims the goods bailed, bailee may
apply to the court to stop the delivery of the goods to the bailor and to decide the title to the goods.
 2. Rights against third person (Sec. 180). If a third person wrongfully deprives the bailee of the use or
possession of the goods bailed, or causes them any injury, the bailee is entitled to use such remedies as the
owner might have used in a like case if no bailment has been made. Bailee can thus bring a suit against a
third person for such deprivation or injury.
 3. Right of particular lien for payment for services (Sec. 170). Where the bailee has
a. in accordance with the purpose of bailment,
b. rendered any service involving the exercise of labour of skill,
c. in respect of the goods, he shall have
d. in the absence of a contract to the contrary, right to retain such goods, until he receives due
remuneration for the services he has rendered in respect of them. Bailee has, however, only a right
to retain the article and not to sell it. The service must have entirely been formed within the time
agreed or a reasonable time and the remuneration must have become due.
This right of particular lien shall be available only against the property in respect of which skill and labour has been
used.
Examples
(i) A delivers a rough diamond to jeweller, to be cut and polished, which is accordingly done. B is
entitled to retain the stone till he is paid for the services he has rendered.
(ii) A gives cloth to B, a tailor, to make into a coat. B promises A to deliver the coat as soon as it is
finished, to give A three month’s credit for the price. B is not entitled to retain the coat until he is paid.

 4. Right of general lien (Sec. 171). Bankers, factors, wharfingers, attorneys of a High Court and policy
brokers will be entitled to retain, as a security for a general balance of amount, any goods bailed to them in
the absence of a contract to the contrary. By agreement other types of bailees excepting the above given
five may also be given five may also be given this right of general lien.

 5. Right to indemnity (Sec. 166). Bailee is entitled to be indemnified by the bailor for any loss arising to
him by reasons that the bailor was not entitled to make the bailment or to receive back the goods or to give
a directions respecting them. If the bailor has not title to the goods, and the bailee in good faith, delivers
them back to, or according to the directions of the bailor, the bailee shall not be responsible to the owner in

21
 respect of such delivery. Bailee can also claim all the necessary expenses incurred by him for the purpose
of gratuitous bailment.

 6. Right to claim compensation in case of faulty goods (Sec. 150): A bailee is entitled to receive
compensation from the bailor or any loss caused to him due to the failure of the bailor to disclose any faults
in the goods known to him. If the bailment is for hire, the bailor will be liable to compensate even though
he was not aware of the existence of such faults.

 7. Right to claim extraordinary expenses (Sec. 158) : A bailee is expected to take reasonable care of
the gods bailed. In case he is required to incur any extraordinary expenses, he can hold the bailor liable for
such expenses.

 8. Right of delivery of goods to any one of the several joint bailor of goods. Delivery of goods to any
one of the several joint bailors of goods will amount to delivery of goods to all of them in the absence of
any contract to the contrary.

Duties of the bailee

 1. To take reasonable care (Sec. 151 & 152): Bailee is bound to take as much care of the goods bailed
to him as a man of ordinary prudence would, under similar circumstances, take of his own goods of the
same bulk, quality and value as the good bailed. It will not make any difference whether the bailment is
gratuitous for reward. If any loss is caused to the goods, in spite of such reasonable care by the bailee, he
shall not be liable for the loss. Bailee shall be held liable for losses arising due to his negligence.
Example
 (i): A delivered to B certain gold ornaments for safe custody. B kept the ornaments in a locked safe and
kept the key in the case box in the same room. The room was on the ground and was locked from outside,
and therefore, was easily accessible to burglars. The ornaments were stolen. It was held that the bailee did
not take reasonable care, and therefore, was liable for the loss (Rampal V. Gauri Shanker, 1952).

 2. To return the goods. Bailee must return or deliver the goods bailed according to the direction of the
bailor, on the expiry of the time of bailment or on the accomplishment of the purpose of bailment (Sec.
160).
 Bailee shall be responsible to the bailor for any loss, destruction or deterioration of the goods from of the
date of the expiry of the contract of bailment, if he fails to return deliver or tender the goods at the proper
time (Sec. 161).

 3. To return any increase or profit from the goods (Sec. 163). Bailee is bound to deliver to the bailor
any increase or profit which might have came from the goods bailed, provided the contract does not
provide otherwise.
 Example: A leaves a cow in the custody of B. The cow gives birth a calf. B is bound to deliver the calf as
well as the cow to A.

 4. To use goods according the conditions of bailment (Sec. 154). Bailee must use the goods according
to the conditions of the contract of bailment or the directions of the bailor. He shall be held liable for
compensation to the bailor if any damage is caused to the goods because of his unauthorised use. Bailee
must not do any act with regard to the goods bailed which is inconsistent with the terms of the bailment,
otherwise the contract shall become voidable at the option of the bailor and bailee shall be held liable to
compensate and damages caused to the goods.
Example: A lends his horse to B for his own riding only. B allows C, a member of his family, to ride the
horse. C, rides with care but the horse accidently falls and is injured. What remedy has A against B ?
A can claim damages from B for the injury caused to the horse from an unauthorised use. B in this case has
failed to use the horse according to the conditions of bailment, and therefore, he shall be liable to pay
compensation to the bailor for the damages caused to the horse because of his unauthorised use.

 5. Must not mix up the goods with his own goods (Sec. 155 & 156-157). Bailee is not entitled to mix up
the goods bailed with his own goods except with the consent of the bailor. If he, with the consent of the
bailor, mixes the goods bailed with his own goods, both the parties shall have an interest in proportion to
their respective shares in the mixture thus produced (Sec. 155).

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 If the bailee, without the consent of the bailor, mixes the goods bailed with his own goods and the goods
can be separated or divided, the property in the goods remains in the parties respectively bailee is bound to
bear the expenses of separation and division and any damage arising from the mixture (Sec. 156).

 6. Must not set up an adverse title. Bailee must not set up a title adverse to that of the bailor. He must
hold the goods on behalf of and for the bailor. He cannot deny the title of the bailor

Rights of Bailor and Bailee against Third Parties

 1. Suit by bailor or bailee against a wrong-doer (Sec. 180). If a third person wrongfully deprives the
bailee of the use of possession of the goods bailed, or does them any injury, the bailee is entitled to use
such remedies as the owner might have in a like case if no bailment had been made; and either the bailor or
the bailee may bring a suit against a third person for such deprivation or injury.

 2. Appointment of compensation obtained by such suits (Sec. 181). Whatever is obtained by way of
relief or compensation in any such suit shall as between the bailor and bailee, be dealt with according to
their respective interests.

Rights and liabilities of the finder of goods

 One who finds goods belonging to another and takes them in his possession is called the finder of the
goods. He rights and liabilities have been discussed in Secs. 168 and 169 of the Contract Act as follows:
 (i) A finder of the goods is free to take or not to take the goods found out under his custody. A person
who finds goods belonging to another and takes them into his custody is subject to the same responsibility
as a bailee.
 (ii) Finder of goods is not entitled to bring a suit for the realisation of compensation for the trouble and
expenses voluntarily incurred by him in preserving the goods and in finding out the real owner. However,
he can exercise his right of particular lien on the goods found out and may refuse to deliver them to the real
owner until he receives the compensation for his trouble and expenses.
 (iii) In case where the real owner of the goods has offered a specific reward for their return of goods lost,
the finder of the goods may sue for the realization of such rewards and may also retain his possession ever
the goods until he received the reward with all other necessary costs.
 (iv) Finder of the goods has no right to sell the goods found out except when all the following conditions
are satisfied.
➢ (a) When the thing found out is commonly the subject of sale.
➢ (b) When the owner cannot be found out with reasonable diligence or when the owner refuses to pay the
lawful charges of the finder.
➢ (c) When the thing is in danger of perishing or losing the greater part of its value or when the lawful
charges of the finder in respect of thing found out exceed two-thirds of the value of the goods.

Lien
Lein is a right of person to retain that which is in his possession and which belongs to another, until the demands of
the person in possession are satisfied.
Kinds of Lien
There are two kinds of liens :
 (a) particular lien,
 (b) general lien.

Particular Lien
 It is a right to retain possession over those particular goods in connection with which the debt arose. It is
restricted to those goods which are subject matter of the contract and are liable for certain demands of the
person in possession of those goods.
 According to Section 170 where the bailee has, in accordance with the purpose of the contract of bailment,
rendered any service involving the exercise of labour and skill in respect of the goods bailed, he has, in the
absence of a contract to contrary, a right to retain such goods in his possession until he receives due
remuneration for the services he had rendered in respect of them.
 Besides the bailee, other persons who are entitled to exercise particular lien are unpaid seller of goods,
finder of goods, pawnee, agents, etc.

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General Lien
It entitles a person in possession of the goods to retain them until all claims of the person in possession against the
owner of the goods are satisfied. It is not necessary that the demands should arise only out of the articles detained
under possession. General lien is a kind of a special privilege which the law has granted only to few persons
 (i) bankers,
 (ii) factors
 (iii) wharfingers,
 (iv) attorney of the High Courts,
 (v) policy brokers, and
 (vi) others by agreement.

These parties, can exercise general lien against any goods under their possession and for any sum legally due on a
general balance of account. But where the goods are deposited for some special purposes, e.g., safe custody, they
will not come under the spell of general lien. This is because acceptance of goods for, special purpose implied by
excludes general lien
Example
 (i) K deposited certain jewels with the Madras Bank to secure certain debt. after payment of this debt he
demanded the return of these jewels from the bank. He was still indebted to the bank for certain other
debts. On the bank’s refusal to return, it was held that he was not entitled to recover unless he proved that
the bank had agreed to give up its general lien (Kunhan V. Bank of Madras, 1895).
 (ii) A solicitor has a general lien on all the papers of the client in his possession in his professional
capacity as solicitor. He can claim a lien for all costs due to him from the client but not for money loans
(Re. Taylor).

Pledge
 Pledge is the bailment of goods as security for payment of a debt or performance of promise. Bailor in this
case is called the ‘pawnor’ and the bailee is called the ‘pawnee’ (Sec. 172).
 Pledge by non-owners
 Ordinarily only a person who is the real owner of the goods can make a valid pledge, but in the following
cases pledge made by non-owners will also be valid.

 1. Pledge by a mercantile agent (Sec. 178). Where a mercantile agent is, with the consent of the owner,
a possession of goods or the documents of title to goods, any pledge made by him, when acting in the
ordinary course of business of a mercantile agent, shall be as valid as if he were expressly authorised by the
owner of the goods to make the same, provided that the pawnee act in good faith and has not at the time of
the pledge notice that the pawnor has no authority to pledge.

 2. Pledge by person in possession under voidable contract (Sec. 178 A). When the pawnor has
obtained possession of the goods pledged by him under a contract voidable under Section 19 or Section
19A, but the contract has not been rescinded at the time of the pledge, the pawnee acquired a good title to
the goods, provided he acts in good faith and without notice of the pawnor’s defect of title.

 3. Pledge where pawnor has only a limited interest (Sec. 179). Where a person pledges goods in which
he had only a limited interest, the pledge is valid to the extent of that interest.
 Example: A finds a watch on the road and spends Rs. 25 on its repairs. He pledges it with B for Rs. 50/-.
The real owner can get the watch by paying Rs. 25 to the pledge.

 4. Pledge by a co-owner in possession. If there are several joint owners of goods and goods are in the
sole possession of one of the co-owners with the consent of other co-owners, such a co- owner can make a
valid pledge of goods.

 5. Pledge by seller or buyer in possession after sale: A seller who has got possession of goods even
after sale, can make a valid-pledge, provided the pawnees act in good faith.
 Example: X buys goods from Y, pays for them, but leaves them in the possession of Y, and Y
 Similarly, if the buyer obtains possession of goods with the consent of the seller before payment of price
and pledges them, the pawnee will get a good title provided he does not have the notice of seller’s right of
lien or any other right

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Rights and duties of the pawner and pawnee
Rights and duties of the pawner
 Right to receive goods till sole (Sec. 177). If a time is stipulated for the payment of the debt or
performance of the promise, for which the pledge is made, and the pawnor makes default in the payment of
the debt or the performance of the promise at the stipulated time he may redeem the goods pledged at any
subsequent time, before their actual sale of them, but he must in that case pay, in addition, any expenses
which might have arisen from his default.

Rights and duties of the pawnee

 1. Right to receive payment of the debt or to obtain the performance of promise with interest and
expense(Sec. 173). Pawnee has a right to retain possession on the goods pledged till he obtains payment of
his debt interest on that debt and all other necessary expenses which he might have incurred for the
preservation of the goods pledged or in respect, of his possession.

 2. Right of Particular lien (Sec. 174). Pawnee has no right to retain his possession over the goods
pledged for any debt or promise other than the debt or promise for which they were pledged unless
otherwise provided for, by a contract.

 3. Right to receive extraordinary expenses (Sec. 175). Pawnee is also entitled to receive from the
pawnor any extraordinary expenses which he might have incurred for the preservation of the goods
pledged.

 4. Pawnee’s right in case of default of the pawnor (Sec. 176). In the case of default by the pawnor in
the payment of debt or the performance of promise at the stipulated time or on demand or within
reasonable time, the pawnee can exercise the following two rights:
 (a) He has a right to bring a suit on the debt or promise and can retain the goods pledged as a collateral
security.
 (b) He has also a right to sell the goods pledged after giving reasonable notice of sale to the pawnor.
 He has a right to claim any deficit arising from the sale of the goods pledged from the pawnor. He will
have to return to the pawnor any excess obtained by the sale of goods pledged beyond the amount
necessary to pay the debt and other expenses due.

 5. Pawnee must not use the goods pledged. He must not use goods pledge unless they are such as will
not deteriorate by wear.
 Besides the above rights and duties, all other rights and duties of the bailor and bailee apply equally to
pawnor and the pawnee.

Termination of Bailment
A contract of bailment shall terminate in the following circumstances:1.
1. On expiry of stipulated period: If the goods were given for a stipulated period, the contract of bailment shall
terminate after the expiry of such period.

 2. On fulfillment of the purpose: If the goods were delivered for a specific purpopse, a bailment shall
terminate on the fulfillment of that purpose.
 3. By Notice:
 (a) Where the bailee acts in a manner which is inconsistent with the terms of the bailment, the bailor can
always terminate the contract of bailment by giving a notice to the bailee.
 (b) A gratuitous bailment can be terminated by the bailor at any time by giving a notice to the bailee.
 4. By death: A gratuitous bailment terminates upon the death of either the bailor or the bailee.

Topic-10 CONTRACT OF AGENCY

Meaning
 When a person employs another person to do any act for himself or to represent him in dealing with third
persons, it is called a ‘Contract of Agency’. The person who is so represented is called the
 ‘principal’ and the representative so employed is called the ‘agent (Sec. 182). The duty of the agent is to
enter into legal relations on behalf of the principal with third parties. But, by doing so he himself does not
become a party to the contract to the contract not does he incur any liability under that contract. Principal
shall be responsible for all the acts of his agent provided they are not outside the scope of his authority

25
Competence of the parties to enter into a contract of agency
➢ The person employing the agent must himself have the legal capacity or be competent to do the act for
which he employ the agent.
➢ A minor or a person with unsound mind cannot appoint an agent so as to be legally represented by him
(Sec. 183).
➢ But an agent so appointed need not necessarily be competent to contact (Sec: 184) and
➢ hence minor or an insane can be appointed as an agent he can bring about legal relations between the
principal and
the third party but such an incompetent agent cannot personally be held liable to the principal

Consideration not required: Contract of agency requires no consideration. It comes under the category of those
contracts which law has declared to be valid without consideration (Sec. 185).
 Creation of Agency: Agency may be created by any of the following ways:
 1. Expressly (Sec. 187):- When an agent is appointed by words spoken or written, his authority is said
to be express.
 2. Impliedly (Sec. 187):- When agency arises from the conduct of the parties or inferred from the
circumstances of the case, it is called implied agency.
 Example: A of Calcutta has a shop in Delhi. B, the manager of the shop, has been ordering and purchasing
goods from C for the purpose of the shop. The goods purchased were being regularly paid for but of the
funds provided by A. B shall be considered to be an agent of A by his conduct.

Wife as an implied agent to her husband

 (a) Where the husband and wife are living together in a domestic establishment of their own, the wife shall
have an implied authority to pledge the credit of her husband for necessaries. The implied authority can be
challenged by the husband only in the

Following circumstances.
➢ (1) The husband has expressly forbidden the wife from borrowing money or buying goods on credit
(Debenham V. Mellon (1880) 6 A.C. 24).
➢ (2) The articles purchased did not constitute necessities.
➢ (3) Husband had given sufficient funds to the wife for purchasing the articles she needed to the knowledge
of the seller (Miss Gray Ltd. V. Cathcort (1922) 38 T.L.R. 562).
➢ (4) The creditor had been expressly told not to give credit to the wife (Etheringtion V. Parrot
 (1703) Salia 118).
 (b) Where the wife lives apart from husband without any of her fault, she shall have an implied authority
to bind the husband for necessaries, if he does not provide for her maintenance.

 3. Agency by necessity
 Under certain circumstances, a person may be compelled to act as an agent to the other, e.g. master of the
ship can borrow money at a port where the owner of the ship has not agent, to carry out necessary repairs to
the ship in order to complete the voyage. In such a case of necessity, person acting as an agent need not
necessarily have the authority of the principal. However, the agent must act under pressing conditions and
for the benefit of the principal.
 Example: The master of the ship on finding that the cargo is rapdily perishing is entilted to dispose it of at
the best price available so as to bind the consignor as an agent by necessity.

 4. Agency by estoppel (Sec. 237)

 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 and obligations if he has by his words or conduct induced
such third person to believe that such acts and obligations were within the scope of the agent’s authority.
 Example: A says to B in the presence of and within the hearing of C that he is C’s agent. C remains mum.
B supplies goods of Rs. 10,000/- to A taking him as C’s agent. C’s responsible for the payment of price of
these goods

 5. Agency by ratification (Sec. 196 to 200)

 Ratification means subsequent acceptance and adoption of an act by the principal originally done by the
agent without authority. According to section 196. “Where acts are done by one person on behalf of

26
 another but without his knowledge or authority, he may check to ratify or to disown such act. If he ratifies
them, the same effects will follow as if they had been performed by his previous authority.”
 Example: The manager of a company perporting to act as an agent on the compnay’s behalf but without its
authority, accepted an offer by L, the defendant L subsequently withdrew the offer, but the company
ratified the manager’s acceptance. L was held to be bound by the acceptance. His revocation of the offer
was held to be invalid. Ratification relates back to the due when the agent had first acted and, therefore,
subsequent revocation shall have no effect.*
In order that ratification may be legal and valid, it must satisfy the following essentials.
 (1) The act must be done in the name of the principal
 (2) Principal must have been in existence and competent to contract at the time when agent acted on his
behalf as well as on the date of ratification.
 (3) The act must be legal which the principal must be competent to do.
 (4) Ratification must be with full knowledge of all the material facts (Sec. 198).
 (5) Ratification must relate to the whole act and not to a part of it. Ratification of a part of the act will not
be valid (Sec. 199).
 (6) There can be no valid ratification of an act which is to the prejudice of a third person (Sec. 200).
 Example: A holds a lease from B, terminable on three months notice, C, an unauthorised person gives
notice to termination to A. The notice cannot be ratified by B, so as to be binding on A.
 (7) Ratification of an act must be made, either within the time fixed for this purpose or within a reasonable
time after the contract was entered into by the agent.

Rights of an Agent
 1. Right to claim reimbursement for expenses: Agent has the right to retain, out of the money received
on behalf of the principal, money advacned or expenses properly incurred in conducting the agency
business (Sec. 217). The agent may have paid the money at the request of the principal, or on account of
the understanding implied by the terms of the agency or through mercantile usage.

 2. Right to receive remuneration: He has also a right to claim remuneration as may be payable to him
for acting as an agent. In the absence of any contract to the contrary, this right to claim remuneration will
arise only when he has carried out the object of the agency in full without being guilty of misconduct (Sec.
219).
 An agent who is guilty of misconduct in the business of the agency is not entitled to any remuneration in
respect of the part of that business which had been misconducted (Sec. 220).
 Example: A employs B to recover 1,00,000 rupees from C, and to lay it out on good security. B recovers,
1,00,000 rupees and lays out 90,000 rupees on good security, but lays out 10,000 rupees on security which
he ought to have known to be had, whereby A losses 2,000 rupees. B is entitled to remuneration for
recovering the 1,00,000 rupees and for investing the 90,000 rupees. He is not entitled to any remuneration
for investing the 10,000 rupees and the he must make good the 2,000 rupees to A.

 3. Right to indemnification against consequences of all lawful acts : An agent has a right to be
indemnified by the principal against the consequences of all lawful acts done in exercise of his authority.
(Sec. 222).
 Example: B, a broker at Calcutta, by the orders of A, merchant there, contracts with C for the purchase of
10 casks of oil for A. Afterwards A refuses to receive the oil and C sues B. B informs A, who repudiates
the contract altogether. B defends, but unsuccessfuly, and has to pay damages and incurs expenses. A is
liable to B for such damages, costs and expenses.

 4. Rights of indemnification against consequences of acts done in good faith: An agent has a right to
be indemnified by the principal for any compensation which he may be required to pay to the third parties
for injuries caused to them by his wrongful acts within the scope of his actual authority done in his good
faith, i.e., without any wrong or dishonest intentions (Sec. 223).
 Example: B at the request of A, sells goods in the possession of A, but which A had no right to dispose of
B does not know his, and hands over the proceeds of the sale to A. Afterwards C, the true owner of the
goods sues B and recover the value of the goods and cost. A is liable to indemnify B for what he has been
compelled to pay to C and for B’s own expenses.
 But where one person employs another to do an act, which is criminal, the employer is not liable to the
agent either upon an express or an implied promise, to indemnify him against the consequences of the act
(Sec. 224).

27
P
r
  5. Right of indemnification for injuries caused by Principal’s neglect: An agent has a right to claim
compensation from the principal for injuries caused to him by the negligence or want to skill on the part of
the principal (Sec. 225).
 Example: A employs B as a bricklayer in building a house, and puts up the scaffolding himself. The
scaffolding is unskillfully put up, and B is in consequence hurt. A must make compensation to B.

6. Right of particular lien: An agent is entitled to retain under the possession both movable and
immovable of the property of the principal received by him until the amount due to him for commission,
disbursements and services has been paid or accounted for him, provided the contract does not provide otherwis
(Sec. 221).

Personal liability of the agent

• Generally an agent is not personally responsible for the contracts made by him on behalf of his principal.
But he incurs personal liability in the following cases:
• 1. Foreign principal: When the contract is made by the sale or purchase of goods for a merchant resident
abroad, in case of breach of contract the third party can make the agent personally liable.
• 2. Undisclosed principal: When the agent does not disclose the name of the principal the third party can
make the agent personally liabily if he has relied upon the responsibility of the agent.
• 3. Principal cannot be sued: Wherer the principal though disclosed cannot be sued, e.g. foreign
sovereign, ambassador, etc., or the principal is disqualified from contracting though otherwise competent to
contrast and this inability of the principal was not communicated to the third party at the time of
contracting, he can hold the agent personally liable.
• 4. Personal liability by agreement: When the agent expressly by agreement or impliedly by conduct
undertakes personal liability of the contract.
• 5. Agent’s liability for breach of warranty: When the agent acts without or beyond his authority and in
this was commits a breach of warranty of authority, he can be hold personally liable.
• If the agent knows that he is exceeding his authority, the breach of warranty will amount to deceit (Polhill
V. Walter (1832) 3 B & Ad. 114).
• 6. Agent signs the contract in his own name: An agent who signs a Negotiable Instrument e.g. Bills of
Exchange, Promissory Notes etc., his own name without making it clear that he is signing as an agent, will
be held, personally liable.
• 7. Agency coupled with interest: Where the contract of agency relates to a subject matter in which the
agent has a special interest, agent shall be personally liable to the extent of his interest since he shall be a
principal for that interest.
• 8. Non-existent principal: If an agent acts for a non-existent principal, he shall be held personally liable
as if he had contracted on his own account, e.g., promoters entering into contracts on behalf of a company
yet to come into existence.

Duties of an Agent
 1. To follow the instructions of his principal: The agent must conduct the business of the principal
according to the directions of the latter. In the absence of any such directions, he must follow the custom of
the business prevailing in the locality where the agent is conducting such business. If the agent acts
otherwise and the principal sustains a loss, the former must compensate the latter for it. He will have to
account for the profits to the principal if there are any. He will also lose his remuneration (Sec. 211).
 Example: A, an engaged in carrying on for B a business in which it is the custom to invest from time to
time, at interest, the money which may be in hand omits to make such investment. A must take good to B
the interest usually obtained by such investment

 2. Duty to act, with skills and diligence (Sec. 212): The agent must conduct the business of agency with
as much skill as is generally possessed by persons engaged in similar business unless the principal has
notice of his want of skill.
 Example: A, an agent for the sale of goods, having authority to sell on credit, sells to B on credit without,
making the proper and usual enquires as to the solvency of B. B. at the time of such sale is insolvent. A
must make compensation to his principal in resepct of any loss thereby sustained.

 3. Duty to render accounts: An agent is bound to render proper accounts to his principal on demand. He
must explain those accounts to the principal and produce the vouchers in support of the entries (Sec. 213).

28
  4. Duty to communicate with the principal: In cases of difficulty it is the duty of the agent to use all
reasonable diligence in communicating with the principal and in seeking to obtain the instructions. It is
only in an emergency where there is no time to communicate that he may act bonafide without consulting
the principal (214)

 5. Duty not to deal on his own account: The relationship of principal and agent is of a fiduciary
character. An agent, therefore, should not deal on his own account and should not do anything which may
indicate a clash between his interest and duties. An agent shall have to pay all the benefits to the principal,
which may have resulted to him from his dealings on his own account in the business of the agency without
the knowledge of the principal (Secs. 215 & 216).
 Example: A directs B, his agent, to buy a certain house for him. B tells A that it cannot be bought, any
buys the house for himself. A may, on discovering that B has bought the house, compel him to sell it to A
at the price he gave for it.

 6. Duty not to delegate his authority: An agent cannot delegate his authority to another person unless
authorised or warranted by the usage of trade or nature of the agency. A work entrusted to the agent must
be done by him.

 7. Duty to protect the interest of principal or his legal representative in the event of principal’s
unsoundness of mind or his death: When an agency is terminated by the principal dying or becoming of
unsound mind, the agent is bound to take on behalf of the representatives of his late principal, all
reasonable steps for the protection and preservation of the interests entrusted to him (Sec. 209).

 8. Duty to pay sums received for principal: The agent is bound to pay to his principal all sums received
on his account after deducting for his own claim (Sec. 218).

Rights and Duties of the Principal

 The agent’s duties are principal’s right and agent’s rights are principal’s duties.

Termination of Agency
 Agency may be terminated by any of the following ways.
 By Act of Parties
 1. By agreement between the principal and agent: In some cases contract of agency itself may contain
provisions as regard the termination of agency. They may be express or implied, which may be inferred
from the circumstances of the case and terms of the contract.
 2. By revocation of agency by the principal: Principal may either expressly or impliedly, after giving
reasonable notice, revoke the authority of the agent before it has been exercised by the latter so as to bind
the former (Sec. 207).
 Example: A empowers B to let A’s house. Afterwards A lets it himself. This is an implied revocation of
B’s authority.
 Principal shall have to pay compensation to the agent for any earlier revocation of his authority without
sufficient cause before the period for which it was given to him.

 Irrevocable agency: However, the principal will not be entitled to revoke the authority of the agent in the
following circumstances.
 (i) Where the agency is coupled with interest: An agency where the agent himself has an interest in the
property which form the subject matter of agency is said to be agency coupled with interest. Such an
agency cannot be revoked.
 Example: A gives authority to C to sell A’s land and to pay himself out of the proceeds the debt due to him
from A. A cannot revoke this authority, nor can it be terminated by his insanity or death.

 (ii) Where authority has been partly exercised by the gent: If the authority has partly been exercised by
the agent, the principal cannot revoke the authority of the agent so far as regards such acts and obligations
as arise from acts already done in the agency (Sec. 204).
 Example: A asks B, his agent, to pay out of A’s funds a sum of Rs. 1,000 to C in two equal installments.
By a subsequent letter A revokes B’s authority. Before this revocation B had already paid a sum of Rs. 500
to C. A is bound by this payment.

29
  (iii) Where agent has incurred personal liability: Where the agent has purchased bounds in his personal
name for the principal has thereby made himself personally lilable, the principal cannot revoke agent’s
authority.
 Example: A authorised B to buy 1,000 bales of cotton on account of A and to pay for it but of A’s money
remaining in B’s hands B buys, 1,000 bales of cotton in his own name, so as to make himself personally
liable for the price. A cannot revoke B’s authority so far as regards payment for the cotton.

 4. By renunciation of business by the agent: Agent, after giving reasonable notice to the principal, may
renounce the business of agency. In case the contract of agency is enterest into for a fixed period, agent
shall have to pay compensation to the principal for his earlier renunciation of the business of agency.

 5. By insolvency of the principal: The contract of agency will come to an end when the principal
becomes insolvent and the fact of his insolvency comes to the knowledge of the agent. As against third
persons, the agency will terminate when it comes to their knowledge. Insolvency of an agent will not lead
to the termination of the contract of agency.

 6. Destruction of the subject matter of the contract of agency: The contract of agency will come to an
end when the subject matter of the agency will come to an end or when it ceases to exist or when the
principal is deprived of his powers on the subject matter of the contract of agency.

 7. Principal becoming an alien enemy: Breaking out of war between two countries in one of which
resides principal and in the other resides the agent, shall cause the termination of the authority of an agent.

When termination of agent’s authority takes effect as to agent, and as to third person: The termination of the
authority of an agent does not, so far as regards the agent, take effect before it becomes known to him, or so for as
regards third persons, before it becomes known to them. (Sec. 208).
 Agent’s duty on termination of agency by principal’s death or insanity when an agency is terminated by the
principal dying or becoming of unsound mind, the agent is bound to take on behalf of the representatives of
his late principal, all reasonable steps for the protection and preservation of the interests entrusted to him
(Sec. 209).
 Termination of sub-agent’s authority: The termination of the authority of an agent causes the
termination (subject to the rules herein contained regarding the termination of an agent’s authority) of the
authority of all sub-agents appointed by him (Sec. 210).

Topic-11 Sale and Agreement of Sale (Section 4)

A contract is a formal or verbal agreement that is enforceable by law. Every contract must have an agreement but
every agreement is not a contract. The section 4(1) of the Sale of Goods Act, 1930 states that – ‘A contract of sale
of goods is a contract whereby the seller either transfers or agrees to transfer the property in goods to the buyer for
a decided price.’
Sale
Here the property in goods is transferred at once to the buyer from the seller. The Section 4(3) of the Act says that
“where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is then
known as a sale.” A sale is carried out on deliverable goods. Goods are said to be in a deliverable state when they are in
such a condition that the buyer would, under the contract, be bound to take delivery of them [Section 2(3)].

Agreement To Sell
We saw that in a sale the property in the goods is transferred from the seller to the buyer. However, in an agreement to
sell, the ownership of the property in goods is not transferred immediately. The objective of the agreement is to transfer
the goods at a future date, once some contingent clauses in the agreement or certain conditions are satisfied.

Comparison Chart
BASIS FOR
SALE AGREEMENT TO SELL
COMPARISON

Meaning When in a contract of sale, the When in a contract of sale the parties to
exchange of goods for money contract agree to exchange the goods for
30
BASIS FOR
SALE AGREEMENT TO SELL
COMPARISON

consideration takes place a price at a future specified date is

immediately, it is known as Sale. known as an Agreement to Sell.

Nature Absolute Conditional

Type of Contract Executed Contract Executory Contract

Transfer of risk Yes No

Title In sale, the title of goods transfers In an agreement to sell, the title of goods
to the buyer with the transfer of remains with the seller as there is no
goods. transfer of goods.

Right to sell Buyer Seller

Consequences of Responsibility of buyer Responsibility of seller

subsequent loss or
damage to the goods

Tax VAT is charged at the time of sale. No tax is levied.

Suit for breach of The buyer can claim damages Here the buyer has the right to claim
contract by the seller from the seller and proprietary damages only.
remedy from the party to whom
the goods are sold.

Right of unpaid seller Right to sue for the price. Right to sue for damages.

Elements of A Contract Of Sale

From the Sale of Goods Act, 1930, we see that certain elements must co-exist for a contract of sale to be
constituted. they are as follows:
1) The presence of two parties is a must. As is the case with a contract, there must be at least two parties in the
contract of sale. One shall become the seller and the other a buyer.
2) The clauses therein present in the contract of sale must limit their scope to only the movable property. This
“movable property” may constitute existing goods, goods in the possession or the ownership of the seller or
future goods.
3) One of the important elements is the consideration of price. A price in value (currency and not in kind) has
to be paid or promised. The price consideration or the actual payment could be partly in kind and partly in
money but never in kind alone.
4) The ownership of the property of goods must change from the seller to the buyer. In the contract of sale, like
we saw in the elements of a contract, an offer has to be made and then accepted. The offer is made by a
seller and then accepted by the buyer.
5) The contract of sale may be absolute or conditional.
6) The other essential elements of a contract, that we have already seen must also be present here. The crucial
elements of a contract like competency of parties, the legality of object and consideration etc. have to be
present like in any other contract.

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

1. Existing Goods
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The goods that are referred to in the contract of sale are termed as existing goods if they are present (in existence) at the
time of the contract. In sec 6 of the Act, the existing goods are those goods which are in the legal possession or are
owned by the seller at the time of the formulation of the contract of sale. The existing goods are further of the following
types:
A) Specific Goods- According to the sec 2(14) of the Act, these are those goods that are “identified and agreed
upon” when the contract of sale is formed. For example, you want to sell your mobile phone online. You put u
an add with its picture and information. A buyer agrees to the sale and a contract is formed. The mobile, in this
case, is specific good.

B) Ascertained Goods:- This is a type not defined by the law but by the judicial interpretation. This term is used
for specific goods which have been selected from a larger set of goods. For example, you have 500 apples. Out
of these 500 apples, you decide to sell 200 apples. To sell these 200 apples, you will need to separate them
from the 500 (larger set). Thus you specify 200 apples from a larger group of unspecified apples. These 200
apples are now the ascertained goods.

C) Unascertained Goods:-These are the goods that have not been specifically identified but have rather been
left to be selected from a larger group. For example, from your 500 apples, you decide to sell 200 apples but
you don’t specify which ones you want to sell. A seller will have the liberty to choose any 200 apples from the
lot. These are thus the unascertained goods.

2. Future Goods
In sec 2(6) of the Act, future goods have been defined as the goods that will either be manufactured or produced or
acquired by the seller at the time the contract of sale is made. The contract for the sale of future goods will never have
the actual sale in it, it will always be an agreement to sell.
For example, you have an apple orchard with apples in it. You agree to sell 1000 apples to a buyer after the apples
ripe. This is a sale that has to occur in the future but the goods have been identified already and the agreement made.
Such goods are known as future goods.

3. Contingent Goods
Contingent goods are actually a subtype of future goods in the sense that in contingent goods the actual sale is to be
done in the future. These goods are part of a sale contract that has some contingency clause in it. For example, if you
sell your apples from your orchard when the trees are yet to produce apples, the apples are a contingent good. This sale
is dependent on the condition that the trees are able to produce apples, which may not happen.

Delivery
The delivery of goods signifies the voluntary transfer of possession from one person to another. The objective or
the end result of any such process which results in the goods coming into the possession of the buyer is a delivery
process. The delivery could occur even when the goods are transferred to a person other than the buyer but who is
authorized to hold the goods on behalf of the buyer.
There are various forms of delivery as follows:
a) Actual Delivery: If the goods are physically given into the possession of the buyer, the delivery is an actual
delivery.
b) Constructive delivery: The transfer of goods can be done even when the transfer is effected without a
change in the possession or custody of the goods. For example, a case of the delivery by attornment or
acknowledgment will be a constructive delivery. If you pick up a parcel on behalf of your friend and agree
to hold on to it for him, it is a constructive delivery.
c) Symbolic delivery: This kind of delivery involves the delivery of a thing in token of a transfer of some other
thing. For example, the key of the godowns with the goods in it, when handed over to the buyer will
constitute a symbolic delivery.

Rights of Unpaid Seller Against Buyer

When the buyer of goods does not pay his dues to the seller, the seller becomes an unpaid seller. And now the seller
has certain rights against the buyer. Such rights are the seller remedies against the breach of contract by the buyer.
Such rights of the unpaid seller are additional to the rights against the goods he sold.
1] Suit for Price- Under the contract of sale if the property of the goods is already passed but he refuses to pay for the
goods the seller becomes an unpaid seller. In such a case. the seller can sue the buyer for wrongfully refusing to pay
him his due.

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2] Suit for Damages for Non-Acceptance- If the buyer wrongfully refuses or neglects to accept and pay the unpaid
seller, the seller can sue the buyer for damages caused due to his non-acceptance of goods. Since the buyer refused to
buy the goods without any just cause, the seller may face certain damages.

3] Repudiation of Contract before Due Date-If the buyer repudiates the contract before the delivery date of the
goods the seller can still sue for damages. Such a contract is considered as a rescinded contract, and so the seller can
sue for breach of contract. This is covered in the Indian Contract Act and is known as Anticipatory Breach of Contract

4] Suit for Interest- If there is a specific agreement between the parties the seller can sue for the interest amount due
to him from the buyer. This is when both parties have specifically agreed on the interest rate to be paid to seller from
the date on which the payment becomes due.

Rights of Unpaid Seller Against Goods

➢ Rights of Lien
Seller’s Lien (Section 47)
According to subsection (1) of Section 47 of the Sale of Goods Act, 1930, an unpaid seller, who is in possession of the
goods can retain their possession until payment. This is possible in the following cases:
1) He sells the goods without any stipulation for credit
2) The goods are sold on credit but the credit term has expired.
3) The buyer becomes insolvent.

➢ Part-delivery (Section 48)

Further, Section 48 states that if an unpaid seller makes part-delivery of the goods, then he may exercise his right of lien
on the remainder. This is valid unless there is an agreement between the buyer and the seller for waiving the lien under
part-delivery.

➢ Termination of Lien (Section 49)

According to subsection (1) of Section 49 of the Sale of Goods Act, 1930, an unpaid seller loses his lien:
• If he delivers the goods to a carrier or other bailee for transmission to the buyer without reserving the right
of disposal of the goods.
• When the buyer or his agent obtain possession of the goods lawfully.
• By waiver.

➢ Right of Stoppage in Transit

This right is an extension to the right of lien. The right of stoppage in transit means that an unpaid seller has the
right to stop the goods while they are in transit, regain possession, and retain them till he receives the full price. If
an unpaid seller has parted with the possession of the goods and the buyer becomes insolvent, then the seller can
ask the carrier to return the goods back. This is subject to the provisions of the Act.

➢ Pledge by the Buyer (Section 53)

Unless the seller agrees, the right of lien or stoppage is unaffected by the buyer selling or pledging the goods. The
principle is simple: the second buyer cannot be in a better position that the seller (first buyer). However, if the
buyer transfers the document of title or pledges the goods to a sub-buyer in good faith and for consideration, then
the right of stoppage is defeated.

➢ Right of Resale (Section 54)

The right of resale is an important right for an unpaid seller. If he does not have this right, then the right of lien and
stoppage won’t make sense. An unpaid seller can exercise his right of resale under the following conditions:
• Goods are perishable in nature: In such cases, the seller does not have to inform the buyer of his intention
of resale.
• Seller gives a notice to the buyer of his intention of resale: The buyer needs to pay the price of the goods
and ask for delivery within the time mentioned in the notice. If he fails to do so, then the seller can resell
the goods. He can also recover the difference between the contract price and resale price if the latter is
lower. However, if the resale price is higher, then the seller keeps the profits.
• Unpaid seller resells the goods post exercising his right of lien or stoppage: The subsequent buyer
acquires a good title to the goods even if the seller has not given a notice of resale to the original buyer.
• Resale where the right of resale is reserved in the contract of sale: If the contract of sale specifies that the
seller can resell the goods if the buyer defaults, then the seller reserves his right of sale. He can claim
damages from the original buyer even if he does not give a notice of resale to him.
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 • Property in the goods has not passed to the buyer: The unpaid seller can exercise his right of withholding
delivery of goods. This is similar to the right of lien and is called quasi-lien.

Remedies of Buyer Against the Seller

1] Damages of Non-Delivery- If the seller wrongfully or neglectfully refuses to deliver the goods to the buyer,
then the buyer can sue for non-delivery of the goods. According to Section 57 of the Sale of Goods Act, if the
buyer faces losses due to the wrongful actions of the seller (non-delivery) he can sue for damages caused due to
this.

2] Suit for Specific Performance- If the seller commits a breach of contract, the buyer can approach the court to
ask the seller for specific performance. The court after deliberation can command the seller for specific
performance. One important point to keep in mind is that this remedy is only available if the goods are ascertained
or specific.

3] Suit for Breach of Warranty- When the seller breaches the warranty of the goods, the buyer cannot simply
reject the goods on such basis. The buyer has two options in such a case,

4] Repudiation of Contract- If the seller repudiates the contract, the buyer does not have to wait until the date of
the contract. He can treat the contract as rescinded and sue for damages immediately. This will be an anticipatory
breach of contract.

5] Sue for Interest- The Act specifically states that nothing in the act will affect the right of the seller or the buyer
to recover interest or special damages due to him by the contract. And if there is no specific clause in the contract,
the court can come to the rescue of the affected party.

Doctrine of Caveat Emptor

The doctrine of Caveat Emptor is an integral part of the Sale of Goods Act. It translates to “let the buyer beware”.
This means it lays the responsibility of their choice on the buyer themselves. It is specifically defined in Section 16
of the act “there is no implied warranty or condition as to the quality or the fitness for any particular purpose of
goods supplied under such a contract of sale”
A seller makes his goods available in the open market. The buyer previews all his options and then accordingly makes
his choice. Now let’s assume that the product turns out to be defective or of inferior quality. This doctrine says that the
seller will not be responsible for this. The buyer himself is responsible for the choice he made.
However, the buyer can shift the responsibility to the seller if the three following conditions are fulfilled.
• if the buyer shares with the seller his purpose for the purchase
• the buyer relies on the knowledge and/or technical expertise of the seller
• and the seller sells such goods

Exceptions to the Doctrine of Caveat Emptor

1] Fitness of Product for the Buyer’s Purpose- When the buyer informs the seller of his purpose of buying the
goods, it is implied that he is relying on the seller’s judgment. It is the duty of the seller then to ensure the goods
match their desired usage.

2] Goods Purchased under Brand Name- When the buyer buys a product under a trade name or a branded
product the seller cannot be held responsible for the usefulness or quality of the product. So there is no implied
condition that the goods will be fit for the purpose the buyer intended.

3] Goods sold by Description- When the buyer buys the goods based only on the description there will be an
exception. If the goods do not match the description then in such a case the seller will be responsible for the goods.

4] Goods of Merchantable Quality- The section 16 (2) deals with the exception of merchantable quality. The
sections state that the seller who is selling goods by description has a duty of providing goods of merchantable
quality, i.e. capable of passing the market standards.

5] Sale by Sample- If the buyer buys his goods after examining a sample then the rule of Doctrine of Caveat
Emptor will not apply. If the rest of the goods do not resemble the sample, the buyer cannot be held responsible. In
this case, the seller will be the one responsible. For example, A places an order for 50 toy cars with B. He checks

34
one sample where the car is red. The rest of the cars turn out orange. Here the doctrine will not apply and B will be
responsible.

6] Sale by Description and Sample\- If the sale is done via sample as well as a description of the product, the
buyer will not be responsible if the goods do not resemble the sample and/or the description. Then the
responsibility will fall squarely on the seller.

7] Usage of Trade- There is an implied condition or warranty about the quality or the fitness of goods/products.
But if a seller deviated from this then the rules of caveat emptor cease to apply. For example, A bought goods from
B in an auction of the contents of a ship. But B did not inform A the contents were sea damaged, and so the rules of
the doctrine will not apply here.

8] Fraud or Misrepresentation by the Seller- This is another important exception. If the seller obtains the consent
of the buyer by fraud then caveat emptor will not apply. Also if the seller conceals any material defects of the
goods which are later discovered on closer examination then again the buyer will not be responsible. In both cases,
the seller will be the guilty party.

Topic-12 Warranty And Conditions

In a contract of sale, parties may make certain statements about the stipulation or the course of trade.
These stipulations in the contract of sale are made with reference to the subject matter of the sale. These
stipulations may either be a condition or in the form of a warranty. The provisions of the conditions and
warranty are provided in the sections 11 to 17 of the Act. The stipulations are the essence of the contract
of sale and a breach of these stipulations provides a remedy to the grieved party.

Stipulations As To Time – Sec 11

To understand the concept of warranty and conditions, we need to learn about the stipulation as to time. The stipulation
as to time may be with regards to the delivery of goods or it may be with regards to the payment of the price. However,
it may be noted that stipulations as to the time of delivery of the goods are usually the essence of the contract. In
Section 11 of the Act, the topic of the stipulation as to time has been discussed. The Sec 11 states the follows:
Stipulations as to time: Unless a different intention can be ascertained from the contract, stipulations as to the time of
payment are not considered to be of the essence of a contract of sale. Whether any other stipulation as to time is of the
essence of the contract or not will ultimately depend on the terms of the contract.
This means that whether the stipulations as to the time of payment of the price is of the essence of the contract or not
depends on the terms of the contract. Unless the terms of the contract specify something different than this.

Conditions
A condition is a stipulation essential to the main purpose of the contract, the breach of which gives the right to
repudiate the contract and to claim damages. (Sec 12 (2)). We can understand this with the help of the following
example:
Say ‘X’ wants to purchase a car from ‘Y’, which can have a mileage of 20 km/lt. ‘Y’ pointing at a particular
vehicle says “This car will suit you.” Later ‘X’ buys the car but finds out later on that this car only has a top
mileage of 15 km/ liter. This amounts to a breach of condition because the seller made the stipulation which forms
the essence of the contract. In this case, the mileage was a stipulation that was essential to the main purpose of the
contract and hence its breach is a breach of condition.

Warranty
A warranty is a stipulation collateral to the main purpose of the said contract. The breach of warranty which gives
rise to a claim for damages. However, it does give a right to reject the goods or treat the contract as repudiated.
(Sec 12(3)). Let us understand this with the help of an example below.
A man buys a particular car, which is warranted to be quite to drive and very comfortable. It turns out that after
some days the car starts to make a very unpleasant noise everytime it is operated. Also sitting inside it is also not
very comfortable. Thus the buyer’s only remedy is to claim damages. This is not a breach of condition but rather a
breach of warranty, because the stipulation made by the seller was only a collateral one.

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Comparison Chart
BASIS FOR
CONDITION WARRANTY
COMPARISON

Meaning A requirement or event that should A warranty is an assurance given by

be performed before the completion the seller to the buyer about the state of
of another action, is known as the product, that the prescribed facts
Condition. are genuine.

Defined in Section 12 (2) of Indian Sale of Section 12 (3) of Indian Sale of Goods
Goods Act, 1930. Act, 1930.

What is it? It is directly associated with the It is a subsidiary provision related to

objective of the contract. the object of the contract.

Result of breach Termination of contract. Claim damages for the breach.

Violation Violation of condition can be Violation of warranty does not affect

regarded as a violation of the the condition.
warranty.

Remedy available to the Repudiate the contract as well as Claim damages only
aggrieved party on claim damages.
breach

Implied Conditions
Conditions and Warranties may be either express or implied. The implied conditions and warranties are those which
are presumed by law to be present in the contract though they have not been put into it in expressed words. Implied
conditions are dealt with in the Sections 14 to 17 of the Sale of Goods Act, 1930. Unless otherwise agreed, the law
incorporates into a contract of a sale of goods the following implied conditions:

1) Condition As To Title
In every contract of sale, the first implied condition on the part of the seller is that:
• in case of a sale, he has a right to sell the goods,
• and in the case of an agreement to sell, he will have the right to sell the goods at the time when the property
is to pass. Buyer is entitled to reject the goods and to recover the price if the title turns out to be defective.
[Section 14(a)].

2) Condition As To Description
If there is a contract of sale of goods by description, a default implied condition is that these goods must correspond
with this description. The buyer is not bound to accept and pay for the goods which are not in accordance with the
description of goods. [Section (15)]

3) Sale By Sample
In a contract of sale by sample, there is an implied condition that:
the bulk shall correspond with the sample in the quality;
the buyer shall have or shall be given a reasonable opportunity/chance of comparing the bulk with the sample, and
the goods shall be free from any defect that may render them unmerchantable, which would not be apparent on a
reasonable examination of the sample. [Section (17)]

4) Sale By Sample As Well As By Description

Where the goods are sold by a sample as well as by description the implied condition is that the bulk of the goods
supplied must correspond both with the sample and the description. In case the goods correspond with the sample but
do not tally with the description or vice versa, the buyer can repudiate the contract. [Section 15]
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5) Condition As To Quality Or Fitness
Generally, there is no implied condition as to the quality or fitness of the goods that are sold for a particular purpose.
However, the condition as to the reasonable fitness of goods for a particular purpose may be implied on the part of the
seller for which the buyer wants them. Following are the conditions to be satisfied:
➢ If the buyer had made known to the seller the purpose of his purchase
➢ and the buyer relied on the seller’s skill and judgment, and
➢ seller’s business to supply goods of that description. [Section 16]

6) Condition As To Merchantability
This is implied only where the sale is by description and the goods should be of ‘merchantable quality’ i.e. the goods
must be such as are reasonably saleable under the description by which they are known in the market. [Section 16(2)]

7) Conditions As To Wholesomeness
In the case of eatables and provisions, there is another implied condition that the goods shall be wholesome, in addition
to the implied condition as to merchantability.
For example, A supplies B with milk. The milk contains bacteria and B’s wife consumes the milk and is diagnosed
with a disease. She later succumbs to the disease. Held, there was a breach of condition as to fitness and A was liable to
pay damages to B in this case.

Implied Warranties
In case the buyer is content is content with his right to damages or can’t reject the goods, a condition (implied or
express) may reach to the level of a warranty. Implied Warranties are disclosed in Section 14 and 16 of the Sale of
Goods Act, 1930 and are the warranties which the law implies into the contract. In case the parties don’t want any
of the implied warranties to be included, they will have to expressly mention that in the contract. Implied
Warranties are as follows.

1) Warranty As To Undisturbed Possession

Well once you buy the goods, they shouldn’t be taken away from you. This warranty means that the buyer should have
and enjoy quiet possession of the goods after having gotten the possession of the goods. If he is disturbed in his
possession, he is entitled to sue the seller for the breach of the warranty.

2) Warranty As To Non-Existence Of Encumbrances

This is an implied warranty which maintains that the goods are free from any encumbrance or charge from any third
party who has not been introduced or known to the buyer at or before the time of the contract of sale is entered into.

3) Disclosure Of Dangerous Nature Of Goods

In case the goods are inherently dangerous or they are likely to be dangerous to the buyer and the buyer is ignorant or
unaware of the danger, an implied warranty on the part of the seller emerges. The seller must warn the buyer duly about
the dangerous nature of the goods if any. In case of a breach of this warranty, the seller will be liable in damages.

4) Warranty As To Qualify Or Fitness By Usage Of Trade

An implied warranty as to the quality or the fitness for a particular purpose may be annexed by the usage of the trade.
For example, consider the following example:
A drug was sold through an auction and according to the usage of trade. It was to disclose in advance any sea-damage,
otherwise, it will be taken as a breach of warranty if no such disclosure has been made and the goods found to be
defective.

Topic-13 NEGOTIABLE INSTRUMENT

According to Section 13 (a) of the Act, “Negotiable instrument means a promissory note, bill of exchange or
cheque payable either to order or to bearer, whether the word “order” or “ bearer” appear on the instrument or not.
A negotiable instrument is any transferable document which satisfies certain conditions. These instruments pass
freely from hand to hand and thus form an integral form part this modern businesses instruments.

CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT

A negotiable instrument has the following characteristics:

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1. Property: The possessor of the negotiable instrument is presumed to be the owner of the property contained
therein. A negotiable instrument does not merely give possession of the instrument but right to property also. The
property in a negotiable instrument can be transferred without any formality.

2. Title: The transferee of a negotiable instrument is known as ‘holder in due course.’ A bona fide transferee for
value is not affected by any defect of title on the part of the transferor or of any of the previous holders of the
instrument.

3. Rights: The transferee of the negotiable instrument can sue in his own name, in case of dishonour. A negotiable
instrument can be transferred any number of times till it is at maturity. The holder of the instrument need not give
notice of transfer to the party liable on the instrument to pay.

4. Presumptions: Certain presumptions apply to all negotiable instruments e.g., a presumption that consideration
has been paid under it. It is not necessary to write in a promissory note the words ‘for value received’ or similar
expressions because the payment of consideration is presumed. The words are usually included to create additional
evidence of consideration.

5. Prompt payment: A negotiable instrument enables the holder to expect prompt payment because a dishonour
means the ruin of the credit of all persons who are parties to the instrument

PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENT

Sections 118 and 119 of the Negotiable Instrument Act lay down certain presumptions which the court presumes in
regard to negotiable instruments. In other words these presumptions need not be proved as they are presumed to
exist in every negotiable instrument. Until the contrary is proved the following presumptions shall be made in case
of all negotiable instruments:
1. Consideration: It shall be presumed that every negotiable instrument was made drawn, accepted or endorsed for
consideration. Its presumed that, consideration is present in every negotiable instrumentuntil the contrary is
presumed. The presumption of consideration,
however may be rebutted by proof that the instrument had been obtained from, its lawful owner by means of fraud
or undue influence.

2. Date: Where a negotiable instrument is dated, the presumption is that it has been made or drawn on such date,
unless the contrary is proved.

3. Time of acceptance: Unless the contrary is proved, every accepted bill of exchange is presumed to have been
accepted within reasonable time after its issue and before its maturity. This presumption only applies when the
acceptance is not dated; if the acceptance bears a date, it will prima facie be taken as evidence of the date on which
it was made.

4. Time of transfer: Unless the contrary is presumed it shall be presumed that every transfer of a negotiable
instrument was made before its maturity.

5. Order of endorsement: Until the contrary is proved it shall be presumed that the endorsements appearing upon
a negotiable instrument were made in the order in which they appear thereon.

6. Stamp: Unless the contrary is proved, it shall be presumed that a lost promissory note, bill of exchange or
cheque was duly stamped.

7. Holder in due course: Until the contrary is proved, it shall be presumed that the holder of a negotiable
instrument is the holder endue course. Every holder of a negotiable instrument is presumed to havepaid
consideration for it and to have taken it in good faith. But if the instrument was obtained from its lawful owner by
means of an offence or fraud, the holder has to prove that he is a holder in due course.

8. Proof of protest: Section 119 lays down that in a suit upon an instrument which has been dishonoured, the court
shall on proof of the protest, presume the fact of dishonour, unless and until such fact is disproved.

Promissory notes
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Section 4 of the Act defines, “A promissory note is an instrument in writing (note being a bank-note or a currency
note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money to or to the
order of a certain person, or to the bearer of the instruments.”
Essential elements
1) It must be in writing
2) It must certainly an express promise or clear understanding to pay
3) Promise to pay must be unconditional:
4) It should be signed by the maker
5) The maker must be certain
6) The payee must be certain
7) The promise should be to pay money and money only
8) (The amount should be certain

Bill of exchange
Section 5 of the Act defines, “A bill of exchange is an instrument in writing containing an unconditional order,
signed by the maker, directing certain person to pay a certain sum of money only to, or to the order ofa certain
person or to the bearer of the instrument”.

Essential conditions of a bill of exchange

1) It must be in writing.
2) It must be signed by the drawer.
3) The drawer, drawee and payee must be certain.
4) The sum payable must also be certain.
5) It should be properly stamped.
6) It must contain an express order to pay money and money alone

BASIS FOR
BILL OF EXCHANGE PROMISSORY NOTE
COMPARISON

Meaning Bill of Exchange is an instrument A promissory note is a written promise

in writing showing the made by the debtor to pay a certain sum
indebtedness of a buyer towards of money to the creditor at a future
the seller of goods. specified date.

Defined in Section 5 of Negotiable Instrument Section 4 of Negotiable Instrument Act,

Act, 1881. 1881.

Parties Three parties, i.e. drawer, drawee Two parties, i.e. drawer and payee.
and payee.

Drawn by Creditor Debtor

Liability of Maker Secondary and conditional Primary and absolute

Can maker and payee Yes No

be the same person?

Copies Bill can be drawn in copies. Promissory Note cannot be drawn in

copies.

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 BASIS FOR
BILL OF EXCHANGE PROMISSORY NOTE
COMPARISON

Dishonor Notice is necessary to be given to Notice is not necessary to be given to the

all the parties involved. maker.

Definition of Negotiation
Negotiation can be described as the process in which the transfer of negotiable instrument, is
made to any person, in order to make that person, the holder of the negotiable instrument.
Therefore the negotiable instrument aims at transferring the title of the instrument to the
transferee.
The term of negotiation for any person except maker, drawer or acceptor, until payment and in
the case of the maker, drawer or acceptor, it should be until the due date. The two methods of
negotiation are:
By delivery: Negotiation is possible by mere delivery, in the case of bearer instrument, but that
should be voluntary in nature.
By endorsement and delivery: In the case of order instrument, there must be endorsement and
delivery of the negotiable instrument. The delivery must be voluntary, with an intention of
transferring the underlying asset, to the transferee to complete the negotiation.

Definition of Assignment
By the term assignment we mean, the transfer of contractual rights, ownership of property or interest, by a person,
in order to realise the debt.
An assignment is a written transfer of rights or property, in which the assignor transfers the instrument to assignee
with the aim of conferring the right on the assignee, by signing an agreement called assignment deed. Thus, the
assignee is entitled to receive the amount due on the negotiable instrument, from the liable parties.

Comparison Chart
BASIS FOR
NEGOTIATION ASSIGNMENT
COMPARISON

Meaning Negotiation refers to the transfer of the Assignment implies the transfer of
negotiable instrument, by a person to rights, by a person to another, for the
another to make that person the holder of purpose of receiving the debt
it. payment.

Governing Act Negotiable Instrument Act, 1881 Transfer of Property Act, 1882

Effected by Mere delivery in case of bearer A written document duly signed by

instrument and, endorsement and the transferor.
delivery in case of order instrument.

Consideration It is presumed It is proved

Title Transferee gets the right of holder in due Assignee's title is subject to the title of

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 BASIS FOR
NEGOTIATION ASSIGNMENT
COMPARISON

course. Assignor.

Transfer notice Not required Must be served by assignee on his

debtor.

Right to sue The transferee has the right to sue the The assignee has no right to sue the
third party, in his/her own name. third party in his/her own name.

Holder and Holder in Due

While talking about negotiable instruments such as cheques, bills of exchange and promissory
note, we came across the terms holder and holder in due course, quite commonly. Holder refers
to a person; we mean the payee of the negotiable instrument, who is in possession of it. He/She is
someone who is entitled to receive or recover the amount due on the instrument from the parties
thereto.
On the other hand, the holder in due course i.e. HDC implies a person who obtains the
instrument bonafide for consideration before maturity, without any knowledge of defect in the
title of the person transferring the instrument.
Take a read of this article in which we’ve simplified the differences between holder and holder in
due course.

Definition of Holder
As per Negotiable Instrument Act, 1881, a holder is a party who is entitled in his own name and
has legally obtained the possession of the negotiable instrument, i.e. bill, note or cheque, from a
party who transferred it, by delivery or endorsement, to recover the amount from the parties liable
to meet it.
The party transferring the negotiable instrument should be legally capable. It does not include the
someone who finds the lost instrument payable to bearer and the one who is in wrongful
possession of the negotiable instrument.

Definition of Holder in Due Course (HDC)

Holder in Due Course is defined as a holder who acquires the negotiable instrument in good faith
for consideration before it becomes due for payment and without any idea of a defective title of
the party who transfers the instrument to him. Therefore, a holder in due course.
When the instrument is payable to bearer, HDC refers to any person who becomes its possessor
for value, before the amount becomes overdue. On the other hand, when the instrument is payable
to order, HDC may mean any person who became endorsee or payee of the negotiable instrument,
before it matures. Further, in both the cases, the holder in both the cases he must acquire the
instrument, without any notice to believe that there is a defect in the title of the person who
negotiated it.

Comparison Chart
BASIS FOR
HOLDER HOLDER IN DUE COURSE (HDC)
COMPARISON

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 BASIS FOR
HOLDER HOLDER IN DUE COURSE (HDC)
COMPARISON

Meaning A holder is a person who legally obtains A holder in due course (HDC) is a
the negotiable instrument, with his person who acquires the negotiable
name entitled on it, to receive the instrument bonafide for some
payment from the parties liable. consideration, whose payment is still
due.

Consideration Not necessary Necessary

Right to sue A holder cannot sue all prior parties. A holder in due course can sue all prior
parties.

Good faith The instrument may or may not be The instrument must be obtained in
obtained in good faith. good faith.

Privileges Comparatively less More

Maturity A person can become holder, before or A person can become holder in due
after the maturity of the negotiable course, only before the maturity of
instrument. negotiable instrument.

Dishonour of negotiable instrument

Dishonour of negotiable instrument means loss of honour or respect for the instrument in question on the part of
the maker, drawee, or acceptor, as the case may be, which eventually results in non-realization of payment due on
the instrument.
Dishonour by non-acceptance:
Any type of negotiable instruments, i.e., bill of exchange, promissory note, or cheque may be dishonoured by non-
payment by the drawee/acceptor thereof. But a bill may also be dishonoured by non-acceptance because bill of
exchange is the only negotiable instrument which requires its presentment for acceptance and non-acceptance
thereof, can amount to dishonour.

Dishonoured by Non-Acceptance
A bill is said to be dishonoured by non-acceptance in the following circumstances.
When the drawee or one of the several drawees, not being partners, commit default in acceptance upon being duly
required to accept the bill. In this regard Section 63 expressly provides that the holder must, if so required by the
drawee of a bill of exchange presented to for acceptance, allow the drawee forty-eight hours (exclusive of public
holidays) to consider whether he will accept it.
a) Where presentment is required and the bill remains unrepresented.
b) Where the drawee is incompetent to enter into a valid contract.
c) Where the bill is given a qualified acceptance.
d) If the drawee is a fictitious person.
e) If the drawee cannot be found even after reasonable search.
f) Where the drawee has either become insolvent or is dead and the holder does not present the bill to the
assignee or legal representative of the insolvent or deceased drawee.

Dishonour of negotiable instrument 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 commit default in payment upon being duly required to pay the
same. Also the holder of a bill or pro-note may treat it as dishonoured, without placing for payment when
42
presentment for payment is excused expressly by the maker of the pro-note, or acceptor of the bill and the note or
bill when overdue remains unpaid.

Dishonour by non-acceptance vs Dishonour by non-payment:

If a bill is dishonoured either by non-acceptance or by non-payment, the drawer and all the endorsers of the bill are
liable to the holder, provided notice of such dishonour is given to them. The drawee, on the other hand, shall be
liable to the holder only in the event of dishonour by non-payment.

Dishonour of Cheque for insufficient of funds in the account:

A cheque drawn by a person on an account maintained by him with a bank for payment of any amount of money to
another person can be returned unpaid for lack of enough funds in the said account. This is called dishonour of
chequesfor insufficiency of funds (in the drawer’s account). In such cases, the drawer is also criminally liable for
this offense and may be punished with imprisonment for a term, which may extend to one year, or with fine that
may extend to twice the amount of the cheque, or with both

How is a party to a negotiable instrument discharged

A party to a negotiable instrument is discharged in the following ways
1) By cancellation of the name of a party to the instruments
2) by release of any party to the instruments
3) by payments
4) by allowing drawee more than 48 hours to accept
5) by delay in presenting a cheque for payment
6) by payment in due course of a cheque (payable to order)
7) by taking qualified acceptance
8) by non-presentment for acceptance of a bill of exchange
9) by operation of law
10) by material alteration

Topic-15 What is GST

GST is an Indirect Tax which has replaced many Indirect Taxes in India. The Goods and Service Tax Act
was passed in the Parliament on 29th March 2017. The Act came into effect on 1st July 2017; Goods &
Services Tax Law in India is a comprehensive, multi-stage, destination-based tax that is levied on
every value addition.
In simple words, Goods and Service Tax (GST) is an indirect tax levied on the supply of goods and
services. This law has replaced many indirect tax laws that previously existed in India.
GST is one indirect tax for the entire countrySo, before Goods and Service Tax, the pattern of tax levy was as
follows:

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Under the GST regime, the tax is levied at every point of sale. In the case of intra-state sales, Central GST and
State GST are charged. Inter-state sales are chargeable to Integrated GST.
Now let us try to understand the definition of Goods and Service Tax – “GST is a comprehensive, multi-
stage, destination-based tax that is levied on every value addition.”
Multi-stage
There are multiple change-of-hands an item goes through along its supply chain: from manufacture to final sale to
the consumer.
Let us consider the following case:
➢ Purchase of raw materials
➢ Production or manufacture
➢ Warehousing of finished goods
➢ Sale to wholesaler
➢ Sale of the product to the retailer
➢ Sale to the end consumer

Value Addition

The manufacturer who makes biscuits buys flour, sugar and other material. The value of the inputs increases when
the sugar and flour are mixed and baked into biscuits.
The manufacturer then sells the biscuits to the warehousing agent who packs large quantities of biscuits and labels
it. That is another addition of value after which the warehouse sells it to the retailer.
The retailer packages the biscuits in smaller quantities and invests in the marketing of the biscuits thus increasing
its value.
GST is levied on these value additions i.e. the monetary value added at each stage to achieve the final sale to the
end customer.

Journey of GST in India

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The GST journey began in the year 2000 when a committee was set up to draft law. It took 17 years from then for
the Law to evolve. In 2017 the GST Bill was passed in the Lok Sabha and Rajya Sabha. On 1st July 2017 the GST
Law came into force.

Advantages Of GST
GST has mainly removed the Cascading effect on the sale of goods and services. Removal of cascading effect has
impacted the cost of goods. Since the GST regime eliminates the tax on tax, the cost of goods decreases.

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GST is also mainly technologically driven. All activities like registration, return filing, application for refund and
response to notice needs to be done online on the GST Portal; this accelerates the processes.

Advantages of GST to Citizens:

Simpler tax system
(ii) Reduction in prices of goods and services due to elimination of cascading
(iii) Uniform prices throughout the country
(iv) Transparency in taxation system
(v) Increase in employment opportunities

Advantages of GST to Trade/Industry:

Reduction in multiplicity of taxes
(ii) Mitigation of cascading/double taxation
(iii) More efficient neutralization of taxes especially for exports
(iv) Development of common national market
(v) Simpler tax regime-fewer rates and

Advantages of GST to Central/State Governments:

A unified common national market to boost Foreign Investment and “Make in India” campaign
(ii) Boost to export/manufacturing activity, generation of more employment, leading to reduced poverty and
increased GDP growth
(iii) Improving the overall investment climate in the country which will benefit the development of states
(iv) Uniform SGST and IGST rates to reduce the incentive for tax evasion
(v) Reduction in compliance costs as no requirement of multiple record keeping
(vi) Simpler tax system
(vii) Broadening of tax base
(viii) Improved revenue collections
(ix) Efficient use of resources

GST Council
➢ It is the 1st Federal Institution of India, as per the Finance minister.
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 ➢ It will approve all decision related to taxation in the country.
➢ It consists of Centre, 29 states, Delhi and Puducherry.
➢ Centre has 1/3rd voting rights and states have 2/3rd voting rights.
➢ Decisions are taken after a majority in the council.

FUNCTIONS OF GST COUNCIL

➢ Taxes, cesses, and surcharges to be subsumed under the GST;
➢ Goods and services which may be subject to, or exempt from GST;
➢ The threshold limit of turnover for application of GST;
➢ Rates of GST
➢ Model GST laws, principles of levy, apportionment of IGST and principles related to place of supply
➢ Special provisions with respect to the eight north eastern states, Himachal Pradesh, Jammu and Kashmir,
and Uttarakhand; and
➢ Other related matters

OBJECTIVES / PURPOSE OF GST

➢ One country – one tax
➢ Consumption based tax instead of manufacturing
➢ Uniform GST registration, payment
➢ To eliminate cascading effect of indirect taxes/ doubling tax/ tax on tax
➢ Subsume all indirect taxes at centre and state level
➢ Reduce tax evasion and corruption
➢ Increase productivity

➢Increase Tax to GDP and revenue surplus

What are the components of GST?
There are 3 taxes applicable under this system: CGST, SGST & IGST.
CGST: Collected by the Central Government on an intra-state sale (Eg: transaction happening within
Maharashtra)
SGST: Collected by the State Government on an intra-state sale (Eg: transaction happening within
Maharashtra)
IGST: Collected by the Central Government for inter-state sale (Eg: Maharashtra to Tamil Nadu)
In most cases, the tax structure under the new regime will be as follows:

Transaction New Old Regime

Regime

Sale within CGST + VAT + Central Revenue will be shared equally between
the State SGST Excise/Service tax the Centre and the State

Sale to IGST Central Sales Tax There will only be one type of tax
another State + Excise/Service (central) in case of inter-state sales. The
Tax Centre will then share the IGST revenue
based on the destination of goods.

Tax Laws before GST

In the earlier indirect tax regime, there were many indirect taxes levied by both state and centre. States
mainly collected taxes in the form of Value Added Tax (VAT). Every state had a different set of rules and
regulations.
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Interstate sale of goods was taxed by the Centre. CST (Central State Tax) was applicable in case of
interstate sale of goods. Other than above there were many indirect taxes like entertainment tax, octroi
and local tax that was levied by state and centre.
This led to a lot of overlapping of taxes levied by both state and centre.
For example, when goods were manufactured and sold, excise duty was charged by the centre. Over and
above Excise Duty, VAT was also charged by the State. This lead to a tax on tax also known as the
cascading effect of taxes.
The following is the list of indirect taxes in the pre-GST regime:
➢ Central Excise Duty
➢ Duties of Excise
➢ Additional Duties of Excise
➢ Additional Duties of Customs
➢ Special Additional Duty of Customs
➢ Cess
➢ State VAT
➢ Central Sales Tax
➢ Purchase Tax
➢ Luxury Tax
➢ Entertainment Tax
➢ Entry Tax
➢ Taxes on advertisements
➢ Taxes on lotteries, betting, and gambling

DUAL GST
Many countries in the world have a single unified GST system i.e. a single tax applicable throughout the country.
However, in federal countries like Brazil and Canada, a dual GST system In India, a dual GST is proposed whereby
a Central Goods and Services Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the
taxable value of every transaction of supply of goods and services.

BENEFITS OF DUAL GST

o Reduction in the number of taxes at the Central and State level
o Decrease in effective tax rate for many goods
o Removal of the current cascading effect of taxes
o Reduction of transaction costs of the taxpayers through simplified tax compliance
o Increased tax collections due to wider tax base and better compliance
o Better for business
o Good balance between centre and states
o Better for business
o Least changes, most benefits

CENTRAL GOODS AND SERVICES TAX BILL, 2017

o Levy of CGST
o Tax rates
o Exemptions from CGST
o Liability to pay CGST
o Taxable amount (value of supply)
o Input tax credit
o Registration
o Returns
o Refunds and welfare fund
o Prosecution and appeals
o Transition of the new regime
o Compliance rating – provision of bill

STATE GST / UNION TERRITORY GST

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 • State GST will be levied by the state government on both goods and services to replace the existing taxes like
sales tax, luxury tax, entry tax, etc. It only applies to intra-state trade. The dealer can use the benefit of composition
scheme up to turnover of 50 lakh.

STATE GST / UNION TERRITORY GOODS AND SERVICES TAX BILL , 2017
o Levy of UTGST
o Assistance to search
o Applicability of provisions of central goods and services tax act, 2017
o Transition to the new regime

ACTION PLAN OF GST

o List number of Taxes, cesses, and surcharges to be subsumed under GST
o Preparation of list of goods and services subject to, or exempt from GST
o Determination of threshold limit of turnover for application of GST
o Fixation of rates
o Preparation of model GST Laws, principles of levy, apportionment of tax benefits
o Firming up Place of supply Rules
o Recommend on Compensation to states losing on revenue post implementation of GST, subject to
maximum time limit of 5 years.
o Passage of SGST laws by all State legislatures
o Recommendation of Model GST Rules by GST Council
o Notification of GST Rules
o Recommendation of GST Tax rates by GST Council
o Establishment and up gradation of IT framework
o Meeting implementation challenges
o Effective coordination between Centre & State tax administrations
o Reorganization of field formations
o Training of Officials
o Outreach programs for all stakeholders including Trade & Industry

Topic-16 What is RTI

(Source righttoinformation.gov.in)
"An Act to provide for setting out the practical regime of right to information for citizens to secure access to information
under the control of public authorities, in order to promote transparency and accountability in the working of every
public authority, the constitution of a Central Information Commission and State Information Commissions and for
matters connected therewith or incidental thereto."

Highlights of RTI Act, 2005:

• RTI stands for Right To Information and has been given the status of a fundamental right under Article 19(1) of the
Constitution. Article 19 (1) under which every citizen has freedom of speech and expression and have the right to know
how the government works, what role does it play, what are its functions and so on.
• The Act confers right to the citizens to know as to how the tax payer’s money is being spent by the Government.
• The RTI Act extends to the whole of India (except the State of Jammu and Kashmir), all bodies, which come under
Government notification including NGOs, which are owned, controlled or are substantially financed by the
Government.
• RTI Act confers right to access to information held by a Public Authority. In case you have been denied the access to
information you may file Appeal / Complaint before the Central Information Commission (CIC) using the CIC Online

The RTI Act, 2005 empowers every citizen to:

• Ask any questions from the Government or seek any information.

• Take copies of any governmental documents.
• Inspect any governmental documents.
• Inspect any Governmental works.
• Take samples of materials of any Governmental wor

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 Process of Filing RTI
• Under the Act, all authorities covered must appoint their Public Information Officer (PIO).
• Any person may submit a request to the PIO for information in writing.
• It is the PIO's obligation to provide information to citizens of India who request information under the Act.
• If the request pertains to another public authority (in whole or part), it is the PIO's responsibility to transfer/forward the
concerned portions of the request to a PIO of the other within 5 working days.
• In addition, every public authority is required to designate Assistant Public Information Officers (APIOs) to receive
RTI requests and appeals for forwarding to the PIOs of their public authority.
• The applicant is not required to disclose any information or reasons other than his name and contact particulars to seek
the information.

Provisions of RTI Act, 2005

1) Every public authority has to provide to the citizen the right to information within a prescribed time limit.
Public Authorities has been ascertained by the Act itself, which includes the office of the President, Vice-
President, Prime Minister, Chief Justice of India, the Parliament, State Legislatures, the Supreme Court, High
Courts, constitutional bodies such as CAG (Comptroller and Auditor General), Election Commission etc. It
also includes all the departments, Ministries, Boards, PSUs (Public Sector Undertakings), Agencies of Central
Government, State Governments & Local Governments.

2) It is mandatory for a public authority to create a separate office called as PIO (Public Information Officer), with
an objective to provide information within a prescribed time limit of 30 days. If the information is related to
life and personal liberty than the information should be provided within 48 hours.

3) If any citizen is not satisfied with the content, context or subject matter of any information or the information is
not provided within a prescribed time limit of 30 days than an appeal can be filled before 1st level Appellate
Authority (i.e. the Joint Secretary of the respective department) and against the adjudication of 1st level
Appellate Authority the appeal can be filed before the 2nd Appellate Authority (i.e. CIC- Central Information
Committee & SIC- State Information Committee).
4) This Act also prescribes/describes the term Information in a comprehensive manner. Information means any
material in any form including records, documents, e-mails, opinions, advices, orders, law books, contracts,
samples etc.

5) RTI Act also determines some exceptions under which the public authorities have no obligation to give any
official information to any citizen. These exceptions are as follows:-
a) Information relating to integrity, security, sovereignty and strategic, economic & scientific interest if the
State.
b) Information which has been expressly restricted by any court of law to be published.
c) If disclosure will cause a breach of privilege of Parliament or State Legislature.
d) Information including IPR (Intellectual Property Rights) & trade secrets.
e) Information received in confidence from any foreign government.
f) Information the disclosure of which would endanger the life or physical safety of any person.
g) Information related to the process of investigation and prosecution.
h) Cabinet papers including records of deliberation of Council of Ministers and other high level officials.
i) Personal information, disclosure of which has no relationship with nay public activity or interest.

1. Purpose Clause: Under RTI Act it is being provided that without any purpose, qualification or objective a
citizen can take any information from a public authority. Apart from this free of cost information is provided
to persons who are Below Poverty Line. According to PWC survey because of both these clauses government
spend approximately Rs 10,000 in the disposal of one case and on an average Rs 25,000 petitions are filed in
different PIOs working at different levels of government.

2. Days Clause: This clause does not include administrative exceptions such as public holidays, staff leave and
administrative assignments like election, census, disaster management etc. Situation becomes much more
impractical when information is as old as 20 years.

3. Appeal & Complaint Clause: It has been observed that citizen groups & media are directly filing
complaints in spite of appeal, it leads to extraneous pressure on public functionaries and affect the motivation
of public servant and motive of this Act.
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 4. Any PIO Clause: Under this clause a citizen can ask any information from any PIO whether the PIO is
possessor of that information or not. In the disposal of such cases lots of time and energy is wasted due to
administrative hierarchy. Situations becomes much more difficult when 30 Days Clause is enforced with Any
PIO Clause.

The Demand Side Issues can be listed as follows:-

1) Language Clause: Under this clause the PIO should provide information to the appellant in administrative
language. It should be noted that administrative language has its own terminology, abbreviations and
complexity which is not possible for a citizen to understand.

2) Designation Clause: It has been observed that the designation of the PIO and public authority of similar types
of departments is different in different States. Apart from this the process by which a petition can be filed and
the procedure by which adjudication is done also differ in different States.

3) Issues related to Legal & Political Rights: In our education system there is no separate curriculum which
make people aware about their legal and political rights. Awareness of rights such as Environment Protection
Act, Forest Conservation Act, Consumer Protection Act, Domestic Violence Act and RTI Act is required for
every citizen to make the administration or government more accountable and responsible.

Topic-17 Information Technology Act, 2000

The Information Technology Act, 2000 or ITA, 2000 or IT Act, was notified on October 17, 2000. It is the law that deals
with cybercrime and electronic commerce in India. In this article, we will look at the objectives and features of the
Information Technology Act, 2000.
In 1996, the United Nations Commission on International Trade Law (UNCITRAL) adopted the model law on
electronic commerce (e-commerce) to bring uniformity in the law in different countries.
Further, the General Assembly of the United Nations recommended that all countries must consider this model law
before making changes to their own laws. India became the 12th country to enable cyber law after it passed the
Information Technology Act, 2000.

Features of the Information Technology Act, 2000

a) All electronic contracts made through secure electronic channels are legally valid.
b) Legal recognition for digital signatures.
c) Security measures for electronic records and also digital signatures are in place
d) A procedure for the appointment of adjudicating officers for holding inquiries under the Act is finalized
e) Provision for establishing a Cyber Regulatory Appellant Tribunal under the Act. Further, this tribunal will
handle all appeals made against the order of the Controller or Adjudicating Officer.
f) An appeal against the order of the Cyber Appellant Tribunal is possible only in the High Court
g) Digital Signatures will use an asymmetric cryptosystem and also a hash function
h) Provision for the appointment of the Controller of Certifying Authorities (CCA) to license and regulate the
working of Certifying Authorities. The Controller to act as a repository of all digital signatures.
i) The Act applies to offenses or contraventions committed outside India
j) Senior police officers and other officers can enter any public place and search and arrest without warrant
k) Provisions for the constitution of a Cyber Regulations Advisory Committee to advise the Central
Government and Controller.

Objectives of the Act

The Information Technology Act, 2000 provides legal recognition to the transaction done via an electronic
exchange of data and other electronic means of communication or electronic commerce transactions.
This also involves the use of alternatives to a paper-based method of communication and information storage to
facilitate the electronic filing of documents with the Government agencies.

Further, this act amended the Indian Penal Code 1860, the Indian Evidence Act 1872, the Bankers’ Books Evidence
Act 1891, and the Reserve Bank of India Act 1934. The objectives of the Act are as follows:
1) Grant legal recognition to all transactions done via an electronic exchange of data or other electronic means
of communication or e-commerce, in place of the earlier paper-based method of communication.

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 2) Give legal recognition to digital signatures for the authentication of any information or matters requiring
legal authentication
3) Facilitate the electronic filing of documents with Government agencies and also departments
4) Facilitate the electronic storage of data
5) Give legal sanction and also facilitate the electronic transfer of funds between banks and financial
institutions
6) Grant legal recognition to bankers under the Evidence Act, 1891 and the Reserve Bank of India Act, 1934,
for keeping the books of accounts in electronic form.

Applicability
According to Section 1 (2), the Act extends to the entire country, which also includes Jammu and Kashmir. In order
to include Jammu and Kashmir, the Act uses Article 253 of the constitution. Further, it does not take citizenship
into account and provides extra-territorial jurisdiction.
Section 1 (2) along with Section 75, specifies that the Act is applicable to any offense or contravention committed
outside India as well. If the conduct of person constituting the offense involves a computer or a computerized
system or network located in India, then irrespective of his/her nationality, the person is punishable under the Act.

Non-Applicability
According to Section 1 (4) of the Information Technology Act, 2000, the Act is not applicable to the following
documents:
1) Execution of Negotiable Instrument under Negotiable Instruments Act, 1881, except cheques.
2) Execution of a Power of Attorney under the Powers of Attorney Act, 1882.
3) Creation of Trust under Indian Trust Act, 1882.
4) Execution of a Will under the Indian Succession Act, 1925 including any other testamentary disposition
by whatever name called.
5) Entering into a contract for the sale of conveyance of immovable property or any interest in such property.
6) Any such class of documents or transactions as may be notified by the Central Government in the Gazette.

Provisions of IT Act 2000

The IT Act of 2000 passed in a budget session of parliament and signed by President K.R. Narayanan in 2000. It
underwent further finalization by India’s Minister of Information Technology, Pramod Mahajan.

The original act addressed electronic documents, e-signatures, and authentication of those records. It also enacted
penalties for security breach offenses including damaging computer systems or committing cyber terrorism.
Regulating authorities received power to monitor these situations and draft rules as situations arose.
The IT Act underwent changes as Internet technology grew. In 2008, additions expanded the definition of
“communication device” to include mobile devices and placed owners of given IP addresses responsible for
distributed and accessed content.

Privacy was addressed in 2011 when stringent requirements for collecting personal information came into effect.

The most controversial change in this act involves section 66A. It makes “offensive messages” illegal and holds
the owners of servers responsible for the content.
That means if an IP address with pornographic images is traced to your servers, you can be held liable for it even if
you did not authorize its access.

Penalties arrange from imprisonment of three years to life and fines. Offenses that occur in a corporate setting can
result in further administrative penalties and bureaucratic monitoring that can prove burdensome to doing business.

Listed below are some common cyber-crime scenarios which can attract prosecution as per the penalties and
offences prescribed in the IT Act 2000 (amended via 2008) Act.

Cyber Law of India : Introduction

In Simple way we can say that cyber crime is unlawful acts wherein the computer is either a tool or a target or both
Cyber crimes can involve criminal activities that are traditional in nature, such as theft, fraud, forgery, defamation
and mischief, all of which are subject to the Indian Penal Code. The abuse of computers has also given birth to a
gamut of new age crimes that are addressed by the Information Technology Act, 2000.

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1) Harassment via fake public profile on social networking site: A fake profile of a person is created on a social
networking site with the correct address, residential information or contact details but they are labelled as a
‘prostitute’ or a person of ‘loose character’. This leads to harassment of the victim.
Provisions applicable: Sections 66A, 67 of IT Act and Section 509 of the Indian Penal Code.

2) Online hate community: Online hate community is created inciting a religious group to act or pass
objectionable remarks against a country, national figures etc.
Provisions applicable: Section 66A of IT Act and 153A & 153B of the Indian Penal Code.
4) Email account hacking: If victim’s email account is hacked and obscene emails are sent to people in victim’s
address book.
Provisions applicable: Sections 43, 66, 66A, 66C, 67, 67A and 67B of IT Act.

4) Credit card fraud: Unsuspecting victims would use infected computers to make online transactions.
Provisions applicable: Sections 43, 66, 66C, 66D of IT Act and section 420 of the IPC.

5) Web defacement: The homepage of a website is replaced with a pornographic or defamatory page. Government
sites generally face the wrath of hackers on symbolic days.
Provisions applicable: Sections 43 and 66 of IT Act and Sections 66F, 67 and 70 of IT Act also apply in some
cases.

6) Introducing viruses, worms, backdoors, rootkits, trojans, bugs: All of the above are some sort of malicious
programs which are used to destroy or gain access to some electronic information.
Provisions applicable: Sections 43, 66, 66A of IT Act and Section 426 of Indian Penal Code.

7) Cyber terrorism: Many terrorists are using virtual (G-Drive, FTP sites) and physical storage media (USB’s,
hard drives) for hiding information and records of their illicit business.
Provisions applicable: Conventional terrorism laws may apply along with Section 69 of IT Act.

8) Online sale of illegal articles: Applicable when the sale of narcotics, drugs weapons and wildlife is facilitated
by the internet.
Provisions applicable: Generally conventional laws apply in these cases.

9) Cyber pornography: This is among the largest businesses on the internet. Pornography may not be illegal in
many countries, but child pornography is.
Provisions applicable: Sections 67, 67A and 67B of the IT Act.

10) Phishing and email scams: Phishing involves fraudulently acquiring sensitive information through
masquerading as a trusted entity. (E.g. Passwords, credit card information)
Provisions Applicable: Section 66, 66A and 66D of IT Act and Section 420 of IPC

11) Theft of confidential information: Many business organisations store their confidential information in
computer systems. This information is targeted by rivals, criminals and disgruntled employees.
Provisions applicable: Sections 43, 66, 66B of IT Act and Section 426 of Indian Penal Code.

12) Source code theft: A source code generally is the most coveted and important “crown jewel” asset of a
company.
Provisions applicable: Sections 43, 66, 66B of IT Act and Section 63 of Copyright Act.

13) Tax evasion and money laundering: Money launderers and people doing illegal business activities hide their
information in virtual as well as physical activities.
Provisions applicable: Income Tax Act and Prevention of Money Laundering Act. IT Act may apply case-wise.

14) Online share trading fraud: It has become mandatory for investors to have their demat accounts linked with
their online banking accounts which are generally accessed unauthorized, thereby leading to share trading frauds.

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Topic-18 Competition Act, 2002
On December 16, 2002, the Lok Sabha passed a Bill to replace the MRTP (Monopolies and Restrictive Trade
Practices) Act, 1969 which was enacted to curb the tendency to create monopoly in commerce, trade and industry.
The Act is known as Competition Act, 2002 or Antitrust Law.
In 1999, Government of India appointed a committee on “Competition Policy and Law” under the Chairmanship of
Sri S.V.S. Raghvan. In the year 2000, this committee submitted its report. Accordingly, the competition Act, 2002
was framed and passed on the basis of recommendation of this committee.

Main Features of Competition Act, 2002

Following are some important features of the competition Act:
1) Competition Act is a very compact and smaller legislation which includes only 66 sections.
2) Competition commission of India (CCI) is constituted under the Act.
3) This Act restricts agreements having adverse effect on competition in India.
4) This Act suitably regulates acquisitions, mergers and amalgamation of enterprises.
5) Under the purview of this Act, the central Government appointed director General for conducting detail
investigation of anti-competition agreements for arresting CCI.
6) This Act is flexible enough to change its provisions as per needs.
7) Civil courts do not have any jurisdiction to entertain any suit which is within the purview of this Act.
8) This Act possesses penalty provision.
9) Competition Act has replaced MRTP Act.
10) Under this Act, “Competition Fund” has been created.

Objectives of Competition Act, 2002:

The competition Act 2002 was formulated with following objectives:
1) To promote healthy competition in the market.
2) To prevent those practices which are having adverse effect on competition.
3) To protect the interests of concerns in a suitable manner.
4) To ensure freedom of trade in Indian markets.
5) To prevent abuses of dominant position in the market actively.
6) Regulating the operation and activities of combinations (acquisitions, mergers and amalgamation).
7) Creating awareness and imparting training about the competition Act.

Under this act following are restricted practice and these practices are stopped by
this act.
1. Price fixing:-
If two or more supplier fixes the same price for supply the goods then it will be restricted practice.

2. Bid ragging:-
If two or more supplier exchange sensitive information of bid, then it will also be restricted practice and against
competition.

3. Re-sale price fixation:-

If a producer sells the goods to the distributors on the condition that he will not sell any other price which is not
fixed by producer.

4. Exclusive dealing:-
This is also restricted practice. If a distributor purchases the goods on the condition that supplier will not supply the
goods any other distributor.

Non-Applicability of Competition Act:

Competition Act is not applicable in the following cases:
1) Public Financial Institutions.
2) Foreign Institutional Investors (FIIs).
3) Banks.

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4) Venture capital Funds (VCFs).
5) Agreements related to intellectual property rights (IPRs) such as trademarks, patents, copyrights etc.
6) Central Government has the authority to exempt any class of enterprises from the provisions of Act in the
common interest of national security or public interest.

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