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K.

Yeshwanth Gowda

Unit-I
Contract of Indemnity- Nature and Scope of Indemnity- Rights of
Indemnity Holder- Commencement of the Indemnifier’s liability.
The term Indemnity means “Security against loss” that is the indemnifier
promises to compensate the other party that is the indemnified against the loss
suffered by the other.
Definition
As provisions made in section 124 of the Indian Contract Act 1872 says that,
whenever one party promises to save the other from loss caused to him by the
conduct of the promisor himself, or by the conduct of the any other person, is
called a Contract of Indemnity.
Example
A contract to indemnify B against the consequences of any proceedings which
C may take against B in respect of a certain sum of 200 rupees. This is a
contract of indemnity.
Adamson v. Jarvis.
The plaintiff, an auctioneer sold certain cattle on the instruction of the
defendant. It subsequently turned out that the livestock did not belong to the
defendant, but to another person, who made the auctioneer liable and the
auctioneer in his turn sued the defendant for indemnity for the loss he had
suffered by acting on the defendant’s directions.
The court held that, the plaintiff having acted on the request of the defendant
was entitled to assume that, if he did turn out to be wrongful, he would be
indemnified by the defendant.
Sheffield Corporation v. Barklay
A corporation, having registered to transfer a stock on the request of a banker,
was held entitle to recover indemnity from the banker when the transfers were
discovered to be forged.
Indemnifier: The person who promises to make good the loss is called the
Indemnifier.
Indemnity holder: The person whose loss is to be made good is called
Indemnity holder.
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Nature of contract of Indemnity


Nature of contract of Indemnity a Contract of Indemnity may be express or
implied depending upon the circumstances of the case, though Section 124 of
the Indian Contract Act does not seem to cover the case of implied indemnity.
Case Law
Secretary of State v Bank of India
A broker in possession of a government promissory note endorsed it to a bank
with forged endorsement. The bank acting in good faith applied for and got a
renewed promissory note from the Public Debt Office. Meanwhile the true
owner sued the Secretary of State for conversion who in turn sued the bank on
an implied indemnity. It was held that – it is general principle of law when an
act is done by one person at the request of another which act is not in itself
manifestly tortious to the knowledge of the person doing it, and such act turns
to be injurious to the rights of a third person, the person doing it is entitled to
an indemnity from him who requested that it should be done.
Essential Elements of Contract of Indemnity
1. There must be a loss.
2. The loss must be caused either by the promisor or by any other person.
3. Indemnifier is liable only for the loss.
4. Contingency
5. Consideration
Modes of contract of Indemnity
Expressed
A contract of Indemnity is said to be express when a person expressly promises
to compensate the other from the loss.
Implied
A contract of Indemnity is said to be implied when it is to be inferred from the
conduct of the parties or from the circumstances of the case.

Right of the indemnity holder


Rights of Indemnity Holder When Sued
Right to recover damages - he is entitled to recover all damages which he might
have been compelled to pay in any suit in respect of any matter covered by the
contract.
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Right to recover costs – He is entitled to recover all costs incidental to the


institution and defending of the suit.
Right to recover sums paid under compromise – he is entitled to recover all
amounts which he had paid under the terms of the compromise of such suit.
However, the compensation must not be against the directions of the
indemnifier. It must be prudent and authorized by the indemnifier.
Right to sue for specific performance – he is entitled to sue for specific
performance if he has incurred absolute liability and the contract covers such
liability. The promise in a Contract of Indemnity, acting within the scope of his
authority, is entitled to recover from the promisor.
Right of recover Damages: - All the damages that he is compelled to pay in a
suit in respect of any mater to which the promise of indemnity applies.
Right of recover all Costs: - All the costs that he is compelled to pay in such
suit if in bringing or defending it he did not contravene the orders of the
promisor and has acted as it would have been prudent for him to act in the
absence of the contract of indemnity or if the promisor authorized him in
bringing or defending the suit.
Right of recovery all sums: - All the sums which he may have paid under the
terms of a compromise in any such suite if the compromise was not contrary to
the orders of the promisor and was one which would have been prudent for the
promise to make in the absence of the contract of indemnity.

Case Law
Mohit Kumar Saha v. New India Assurance Co.
It was held that the indemnifier must pay the full amount of the value of the
vehicle lost to theft as given by the surveyor. Any settlement at the lesser value
is arbitrary and unfair and violates Art.14 of the Constitution. All sums which
he may have paid under the terms of any compromise of any such suit.
Yeung v HSBC
It is important to note here that the right to indemnity cannot be claimed of
dishonesty, lack of good faith and contravention of the promisor’s request.
However, the right cannot be negatived in case of oversight.
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Rights of Indemnifier
Commencement Of Liability
When does the Indemnifier become liable to pay, or, when is the
indemnity-holder entitled to recover his indemnity?
The Indian Contract Act, 1872 is silent on the time of commencement of
liability of Indemnifier. On the basis of judicial pronouncement of courts, it can
be said that the liability of an indemnifier commences as soon as liability of the
indemnity holder absolute and certain. In other words, if the indemnity holder
has incurred an absolute liability even though he has himself paid nothing, he
is entitling to ask the indemnifier to indemnify him.
The original English rule was that indemnity was payable only after the
indemnity-holder had suffered actual loss by paying off the claim. The maxim
of law was: “you must be damnified before you can claim to be indemnified.”
But the law is different now.
Case Law
Gajanan Moreshwar Parlekar v. Moreshwar Madan Mantri, Chagla J
Explained the transformation of process. It is true that under English law no
action could be maintained until the actual loss had been incurred. It was
realized that indemnity might be worth very little indeed if the indemnified
could not enforce his indemnity till he had actually paid the loss. Therefore, the
court of equity held that if his liability had become absolute then he was
entitled either to get the indemnifier to pay off the claim or to pay into court
sufficient money which would constitute a fund for paying off the claim
whenever it was made.
Case Law
Richardson Re, Ex Parte The Governors of St. Thomas’s Hospital and Osman
Jamal & Sons ltd. V. Gopal Purushottam observed that “Indemnity is not
necessarily given by repayment after payment. Indemnity requires that the
party to be indemnified shall never be called upon to pay.
Example:
 X promises to compensate Y for any loss that he may suffer by filing a
suit against Z.

 The court orders Y to pay Z damages of Rupees 5000/. As the loss has
become certain, Y may claim the amount of loss from X and pass it on to
Z
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CONTRACT OF GUARANTEE
A “Contract of Guarantee” is a contract to perform the promise, or discharge
the liability, of a third person in case of his default.

A guarantee may be either oral or written.

Example
X and his friend Y enter a shop and X says to Z “Supply the goods required by
Y, and if he does not pay you, I will.” This is a contract of guarantee.
Parties to the contract of guarantee- Sec 126
Principal Debtor
The person in respect of whose default the guarantee is given is called the
'Principal debtor'.
Creditor
The person to whom the guarantee is given, is called the 'creditor'.
Surety
The person who gives the guarantee is called the 'Surety'.
ESSSENTIAL FEATURES OF CONTRACT OF GUARANTEE
(i) The principal debtor need not be competent to contract. In case the

principal debtor is not competent to contract, the surety would be

regarded as the principal debtor and would be personally liable to

pay.

(ii) Surety need not be benefited. According to Section 127, "Anything

done, or any promise made, for the benefit of the principal debtor,

may be a sufficient consideration to the surety for giving the

guarantee."
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(iii) A guarantee need not be in writing. According to Section 126, a

guarantee may be either oral or written.

Tripartite agreement
A contract of guarantee is a tripartite agreement between the principal debtor,
creditor and surety. There are three contracts as under:
(i) Contract between creditor and the principal debtor out of which the

guaranteed debt arises.

(ii) Contract between surety and the principal debtor by which the

principal debtor undertakes to indemnity the surety if surety is

required to pay.

(iii) Contract between surety and the creditor by which the surety

guarantees to pay the principal debtor's debt if the principal debtor

fails to pay.

Principal Debt

a. Recoverable Debt Necessary


For the purpose of valid guarantee and to secure payment of debt, the
existence of recoverable debt is necessary. There must be someone responsible
or liable as principal debtor and the surety must undertake to be liable on his
default.
b. Guarantee for void Debt, When enforceable
Guarantee is for void debt may be still held enforceable.
Example, The Directors of a company guaranteed their company’s loan which
was void as being ultra vires, the directors were never the less held liable.
c. Guarantee of minor’s Debt
Where a minor’s debt has been knowingly guaranteed by the surety then he
should be liable as a principal debtor himself.
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Consideration
As per Section 127 of the Act, “Anything done, or any promise made, for the
benefit of the principal debtor, may be a sufficient consideration to the surety.

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

 A sold the goods and delivers them 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.

 A sold the goods and delivers them to B. C afterwards, without


consideration, agrees to pay for them in default of B. The agreement is
void.

Example
When A requests B to lend `10,000 to C and guarantees that C will repay the
amount within the agreed time and that on C falling to do so, he will himself
pay to B, there is a contract of guarantee. Here, B is the creditor, C the
principal debtor and A the surety.
KINDS OF GUARANTEE
SPECIFIC GUAARANTEE
A guarantee which extends to a single debt or specific transaction is called a
specific guarantee. The liability of the surety comes to an end when the
guaranteed debt is duly discharged or the promise is duly performed.
Example:
X guarantees payment to Y of the price of the five bags of flour to be delivered
by Y to Z and to be paid for in a month. Y delivers five bags to Z; Z pays for
them. This is a contract of specific guarantee because X intended to guarantee
only for the payment of price of the first five bags of flour to be delivered at one
time.
CONTINUING GUARANTEE
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A Guarantee which extends to a series of transactions is called a 'continuing


guarantee'. A surety's liability continues until the revocation of the guarantee.
Example:
A guarantees payment to B, a tea-dealer to the extent of Rs 100, for any tea he
may supply to C from time to time. B supplies C with tea to the above value of
Rs 100, and C pays B for it. Afterwards, B supplies C with tea to the value of
Rs 200. C fails to pay. The guarantee given by A was a continuing guarantee,
and he is accordingly liable to B to the extent of Rs 100.
REVOCATION OF CONTINUING GUARANTEE
By Notice of revocation [Section 130]
A continuing guarantee may at any time be revoked by the surety as to the
future transactions by notice to the creditor. However, the surety remains
liable for the past transactions which have already taken place.
By Death of Surety [Section 131]
In the absence of any contract to the contrary, the death of surety operates as
a revocation of a continuing guarantee as to the future transactions taking
place after the death of surety. However, the surety's estate remains liable for
the past transactions which have already taken place before the death of
surety.
Case Law
Durga Priya v/s Durga Pada
In this case it was held by the court that in each case the contract of guarantee
between the parties must be looked into to determine whether the contract has
been revoked due to the death of the surety or not. It there is a provision that
says that death does not cause the revocation then the contract of guarantee
must be held to continue even after the death of the surety.
By modes of discharging the surety
A continuing guarantee is also revoked in the same manner in which the surety
is discharged such as:
(i) Novation [Section 62]

(ii) Variance in terms of contract [Section 133]

(iii) Release or discharge of principal debtor [Section 134]

(iv) When the creditors enter into an arrangement with the principal

debtor [Section 135]


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(v) Creditor's act or omission impairing surety's eventual remedy [Section

139]

(vi) Loss of security [Section 141]

Rights of a Surety

1. RIGHTS OF A SURETY

 Right to Subrogation [Section 140] On payment of the guaranteed


debt or performance of the guaranteed duty; the surety acquires all
the rights which the creditor had against the principal debtor.
Thus, the surety steps into the shoes of creditor.
 Right to Indemnity [Section 145] In every contract of guarantee
there is an implied promise by the principal debtor to indemnify
the surety; and the surety is entitled to recover from the principal
debtor whatever sum he has rightfully paid under the guarantee,
but not those sums which he had paid wrongfully.

2. RIGHTS AGAINST CREDITOR

a. Right to Securities [Section 141]


A surety is entitled to the benefit of every security which the creditor
has against the principal debtor at the time when the contract of
suretyship is entered into, whether the surety knows of the existence
of such security or not; and if the creditor loses, or, without the
consent of the surety, parts, with such security, the surety is
discharged to the extent of the value of the security.
b. Right to Claim Set Off
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The surety has the right to claim set off or counterclaim, if any, which
the principal debtor had against the creditors in case the creditors
sue him for payment of liability of principal debtor.
3. RIGHTS AGAINST CO-SURETIES
CO-SURETIES
When the same debt or duty is guaranteed by two or more persons, such
persons are called as Co-Sureties.
a. Co-sureties liable to contribute equally (Section 146): Equality of
burden is the basis of Co-suretyship

Example:

A, B and C are sureties to D for the sum of 3,00,000 rupees lent to E, He


makes default in payment. A, B and C are liable, as between themselves,
to pay 1,00,000 rupees each.

b. Liability of co-sureties bound in different sums (Section 147): The


principal of equal contribution is, however, subject to the maximum
limit fixed by a surety to his liability. Co-sureties who are bound in
different sums are liable to pay equally as far as the limits of their
respective obligations permit.

Example:

A, B and C, as sureties for D, enter into three several bonds, each in a


different penalty, namely, A in the penalty of 1,00,000 rupees, B in that
of 2,00,000 rupees, C in that of 4,00,000 rupees, conditioned for D’s duly
accounting to E. D makes default to the extent of 3,00,000 rupees. A, B
and C are each liable to pay 1,00,000 rupees.

4. RIGHT TO CLAIM CONTRIBUTION:


If a co-surety pays more than his proportionate share of liability, he has
a right to claim contribution from the other co-surety or co-sureties.
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Right to Share the Security: If a co-surety obtains any security of


principal debtor, the other co-surety (or co-sureties) has (or have) a right
to share such security.
Extent of Surety’s Liability Sec.128
In the absence of contract to the contrary the liability of the surety is
coextensive with that of the principal debtor. It means that the liability of
surety is equal to that of the principal debtor unless otherwise agreed.

Important cases on Sureties liability


Bank of Bihar Ltd. v. Damodar Prasad
The Supreme Court held that the liability of the surety is immediate and
cannot be defended until the creditor has exhausted all his remedies
against the principal debtor.
Maharashtra Electricity Board Bombay v. Official Liquidator and
Another
Under a letter of guarantee the bank undertook to pay any amount not
exceeding Rs.50000/- to the Electricity Board. It was held that the bank
is bound to pay the amount due under the letter of guarantee given by it
to the Board.
Kellappan Nambiar v. Kanhi Raman
In this case that if the principal debtor happens to be a minor and the
agreement made by him is void, the surety too cannot be made liable in
respect of the same because the liability of the surety is co-extensive with
that of principal debtor. It has been held that the guarantee of the loan
or an overdraft to an infant is void because the loan to the infant itself is
void ab intio.
State Bank of India v. V.N. Anantha Krishnam
In view of the provision of section 128 of Act the Presiding officer was not
correct in giving directions to the bank to proceed against the property
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because cash credit facility and the liability of surety was co-extensive
with that of principal debtor.
Industrial Financial Corporation of India v. Kannur Spinning &
Weaving Mills Ltd.
It was held that the liability of surety does not cease merely because of
discharge of the principal debtor from liability.
Hari Gobind Aggarwal v. State Bank of India
It was held that the principal debtor liability is reduced e.g., after the
creditor has recovered a part of the sum due from him out of his property
the liability of the surety is also reduced accordingly.
DISCHARGE OF SURETY
1. BY REVOCATION OF CONTRACT OF GUARANTEE
 BY NOTICE [SECTION 130]
A specific guarantee may be revoked by a surety by notice to the
creditor if the liability of the surety has not yet accrued. A
continuing guarantee may at any time be revoked by the surety
as to future transactions by notice to the creditor.
 BY THE DEATH OF SURETY [SECTION 131]
In the absence of any contract to the contrary, the death of a
surety operates as a revocation of a continuing guarantee as to
future transactions taking place after the death of surety.
However, the deceased surety's estate remains liable for the
past transactions which have already taken place before the
death of the surety but will not be liable for the transactions
taking place after the death of surety even if the creditor has no
notice of surety's death.
 BY NOVATION [SECTION 62]
A contract of guarantee is said to be discharged by novation
when a fresh contract is entered into either between the same
parties or between other parties, the consideration being the
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mutual discharge of the old contract. The original contract of


guarantee comes to an end and the surety under original
contract is discharged
2. BY CONDUCT OF CREDITOR
By Variance In Terms of Contract [Section 133] Any variance, made
without the surety's consent, in the terms of the contract between the
principal debtor and the creditor, discharges the surety as to
transactions subsequent to the variance.

3. BY RELEASE OR DISCHARGE OF PRINCIPAL DEBTOR [SECTION


134]

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

4. BY ARRANGEMENT [SECTION 135]

A contract between the creditor and principal debtor, by which the


creditor makes a composition with, or promises to give time to, or not
to sue the principal debtor, discharges the surety, unless the surety
assents to such contract.

5. BY INVALIDATION OF CONTRACT

(a) Guarantee Obtained by Misrepresentation [Section 142]


Any guarantee which has been obtained by means of
misrepresentation made by a creditor or with his knowledge and
assent, concerning a material part of the transaction, is invalid.
(b) Guarantee Obtained by Concealment [Section 143]
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Any guarantee which a creditor has obtained by means of keeping


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

UNIT-II

BAILMENT

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

Example:

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

Bailment can also be described as ‘the delivery of goods to another person for a
particular use’. Only ‘goods’ can be bailed and thus, only movable goods can be
the subject matter of bailment.
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In Atul Mehra vs. Bank of Maharashtra [AIR 2003 P&H 11]

It was held that mere hiring of a bank’s locker and storing things in it would
not constitute a bailment. But the position changes completely if the locker in
the safe deposit vault of the bank can be operated even without the key of the
customer.

Example:

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

ESSENTIAL ELEMENTS OF BAILMENT

The contract may be expressed or implied. This contract between the parties
for the delivery of goods. The goods shall be delivered for a special purpose
only. Goods-Bailment can be made of goods only. Bailment can only be done
for movable goods and not for immovable goods or money.

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

Purpose of delivery: The goods must be delivered for some purpose.

1. Delivery of possession of goods:


Delivery of goods from one person to another person for some purpose is
an essential element of bailment. According to Section 149 of the Indian
Contract Act, 1872 the delivery to the bailee may be made by doing
anything which has the effect of putting the goods in the possession of
the intended bailee or of any person authorized to hold them on his
behalf. It is necessary that the goods should be delivered to the bailee. It
is the essence of the contract of bailment. It follows that bailment can be
of movable goods only. It is further necessary that the possession of the
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goods should be voluntarily transferred and is in accordance with the


contract.
2. The purpose may be expressed or implied.
There shall be a transfer of possession of goods, the delivery of goods
must be conditional. The condition shall be that the goods shall be –
returned (either in original form or in any altered from); or disposed of
according to the directions of the bailor, when the purpose is
accomplished. Ownership is not transferred to Bailee; therefore, Bailor
remains the owner, Bailee is duty bound to deliver the same goods back
and not any other goods.
3. Return or disposal of goods Exception:
The money deposited in the bank shall not account to bailment as the
money returned by the bank would not be the same identical notes. And
it is one of the essentials of the bailment that same goods are to be
delivered back.
Case Law:
In Ultzen v. Nicols
An old customer went in to a restaurant for the purpose of dining there.
When he entered the room, a waiter took his coat, without being asked,
and hung it on a hook behind him. When the customer rose to leave the
coat was gone. What the waiter did might be no more than an act of
voluntary courtesy towards customer, yet the restaurant keeper was held
liable as a bailee.

MODES OF DELIVERY Sec.149

Delivery of possession may be actual or constructive

1. Actual delivery:
Transfer of physical possession of goods from one person to another.
Here, the bailor hands over the physical possession of the goods to the
bailee. Example:
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A’s watch is broken. When he leaves his watch at the showroom for
repair, he has given actual delivery of possession of goods to the
showroom.
2. Symbolic delivery
Physical possession of goods is not actually transferred. A person does
some act resulting in transfer of possession to any other person.
Examples:
Delivery of keys of a car to a friend, Delivery of a railway receipt.
3. Constructive delivery
If A person is already in possession of goods of owner. Such person
contracts to hold the goods as a bailee for a third person. Then such
person becomes the bailee, and the third person becomes the bailor.
Constructive delivery is an action that the law treats as the equivalent of
actual delivery. It can be difficult to deliver intangible.

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

Duties of Bailor
1) Duty to disclose defects: Section 150 of the Indian Contract Act, 1872
bound the bailor with certain duties to disclose the latent facts
specifically pertaining to defect in goods. Bailor’s duties of disclosure
are:
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Gratuitous Bailment: It is the duty of the bailor to disclose all the


defects in the goods that he is aware of to the Bailee that can interfere
with the use of goods or can expose him to extraordinary risks. And
failure to do the same will make bailor liable for damages.
Non-Gratuitous Bailment (Bailment for Reward): This duty
particularly deals with the goods given on hire. As per this provision,
when the goods are bailed for hire, then in such a situation even if the
bailor is aware of the defect in the goods or not will be held liable for
the injury that has been caused due to the existence of such defect.

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

2) Duty to bear expenses:


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

Expenses of Bailment

In case of Gratuitous bailment Bailor shall repay to Bailee, all necessary


expenses incurred by him for the purpose of Bailment.

In case of Non – Gratuitous Bailment Bailor is liable to repay only extra –


ordinary expenses, and not the ordinary expenses.
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3) Duty to indemnify the bailee:


To indemnify the loss (Section159) Indemnity means promise to make
good the loss. According to Section 159 of the Indian Contract Act
1872 bailor has a duty to indemnify the loss suffered by the bailee
under the contract.
Example:
A asks his friend B to give him cycle for one hour. B instead of his
own cycle gives C's cycle to A. While A was riding, the true owner of
the cycle catches A and surrenders him to police custody. A is entitled
to recover iron Ball costs, which A had to pay in getting out of this
situation.
4) Duty to bear risks:
It is the duty of bailor to bear the risk of loss, deterioration and
destruction, of the things bailed, provided that bailee has taken
reasonable care to protect the goods from loss etc.
5) Duty to receive back the goods:
It is the duty of the bailor that when the bailee, in accordance with
the terms of bailment, returns the goods to him that: bailor should
receive them. If the bailor, without any reasonable reasons refuses to
take the goods back, when they are offered at a proper time and at a
proper place, the bailee can claim compensation from the bailor for all
necessary and incidental expenses, which the bailee undertakes to
keep and protect the goods.
6) To pay damages for defect in bailor's title (Section 164)
The bailor is responsible to the bailee for any loss which the bailee
may sustain the reason that the bailor was not entitled to make the
bailment, or to receive back the goods, or to give directions, respecting
them.
7) To put bailee into possession (Section 149)
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The delivery to be bailee may be made by doing anything which has


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

Bailee’s Duties

1) Duty to take reasonable care of the goods bailed:


Section 151 of the Indian Contract Act lays down the degree of care,
which a bailee should take, in respect of goods bailed to him. The bailee
is bound to take as much care "if the goods bailed to him as a man of
ordinary prudence would, under similar circumstances, take of his own
goods of the same bulk, quality and value as the goods bailed.
Duty to take reasonable care:
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It is the duty of the Bailee to take care of goods as his own goods. He
shall ensure all safety measures that are necessary to protect the goods.
The standard of care should be such as taken care by a prudent man.
2) Not to make any Unauthorized use of goods:
The bailee is under a duty to use the bailed goods in accordance with the
terms of bailment. If bailee does any act with regard to the goods bailed,
which is not in accordance with the terms of bailment, the contract is
voidable at the option of the bailor. Besides it, the bailee is liable to
compensate the bailor for any damage caused to the goods. By an
inconsistent use of the goods bailed. If he makes unauthorized use of
goods, bailee would not be saved from his liability even if he has taken
reasonable care of the ordinary prudent man.
3) Duty not to mix bailor's goods with his own goods:
Next duty of the bailee is to keep the goods of the bailor separate from
his own. Sections- 155 to 157 of the Act lays down this duty in the
following ways:
i) If the bailee, with the consent of the bailor, mixes the goods of the
bailor with his own goods, the bailor and the bailee shall have an
interest, in proportion to their respective shares, in the mixture
thus produced (Section 1-76].
ii) If the bailee, without the consent of the bailor, mixes the goods of
the bailor with his goods, and the goods can be a separated or
divided, the property in the goods remains in the parties
respectively; but the bailee is bound to bear the expense of
separation or division, and any damages arising from the mixture
(Section 156).
iii) If the bailee, without the consent of the bailor, mixes the goods of
the bailor with his goods, and the goods can be a separated or
divided, the property in the goods remains in the parties
respectively; but the bailee is bound to bear the expense of
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separation or division, and any damages arising from the mixture


(Section 156).
4) Duty not to set up adverse title:
The bailee is duty bound not to do any act which is inconsistent which
the title of the bailor. He should not set up his own title or the title of a
third party on the goods bailed to him.
5) Duty to return the goods:
It is the duty of the bailee to return or to deliver the goods according to
the directions of bailor, without demand, on the expiry of the time fixed
or when the purpose is accomplished. If he does not return or deliver as
directed by the bailor, or tender the goods at the proper time, he becomes
liable to the bailor for any loss, destruction or deterioration of the goods
from that time. He is liable even without his negligence. For example, a
book-binder kept books beyond the time allowed to him for binding, and
they were lost in an accidental fire, the binder is liable.
Duty to return the goods on the fulfilment of purpose:
Bailee is duty bound to return the goods once the purpose is achieved or
on the expiry of the time period for which the goods were bailed.
Case Law
Bank of India v. Grains & Gunny Agencies
the court held that if the goods are lost or destroyed due to the
negligence of servant of Bailee, then in such case as well Bailee shall be
liable.

6) Duty to return accretions to the goods:


In the absence of any contract to the contrary, the bailee must deliver to
the bailor, or according to his directions, any increase or profit which
have accrued from the goods bailed. For example, A leaves a cow in the
custody of B to be taken care of. The cow has a calf. B is bound to deliver
the calf as well as the cow to A.
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**********
Rights of Bailor
1) Enforcement of bailee's duties:
You have just now read the duties of the bailee. Duties of the bailee
are the rights of the bailor. Since Right of the bailor is same as the
right of the Bailee, therefore on the fulfilment of all duties of Bailee
the bailor’s right is accomplished.
2) Right to claim damages:
It is an inherent right of the bailor to claim damages for any loss that
might have been caused to the goods bailed, due to the bailee's
negligence (Section 151). If the Bailee fails to take care of the goods,
the bailor has the right to claim damages for such loss.
3) Right to avoid the contract:
If the bailee does any act, in respect of the goods bailed, which is
inconsistent with the terms of bailment, the bailor has a right to avoid
the contract.
4) Right to claim compensation:
If any damage is caused to the goods bailed because of the
unauthorized use of the goods. The bailor has a right to claim
compensation from the bailee.
5) Right to claim compensation:
If any damage is caused to the goods bailed because of the
unauthorized use of the goods. The bailor has a right to claim
compensation from the bailee.

6) Right to get back the goods:


The bailor has a right to get back the goods bailed by him as soon as
the purpose of bailment is accomplished. If the bailee fails to do so, is
entitled to get reasonable compensation from the bailee.
7) Right to denial return of goods:
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It is a right of the bailor to compel the bailee, to return the goods


hailed, when the time of bailment has expired or when that purpose
for which the goods were bailed has been accomplished.
8) Right to share profit:
The bailor has a right to share with bailee any profit earned from the
goods bailed if it is so provided by the contract.
9) Expenses of separation:
If the bailee has mixed the goods of bailor with someone other goods
not belonging to bailor without the consent of the bailor, the bailor
has a right to get from bailee the expenses which he has to bear for
the separation of his goods from others.
********

RIGHTS OF BAILEE

1) Right to claim damages:


If the bailor has bailed the goods, without disclosing the defects in goods,
and the bailee has suffered some loss, the bailee has a right to sue the
bailor for damages. A hired a carriage of B. The carriage is unsafe,
though B is not aware of it, and A is injured. B is responsible to A for the
injury (Section 150).
2) Right to claim reimbursement:
In case of non-gratuitous bailment, the bailee has a right to recover from
the bailor, all necessary expenses, which the bailee had incurred for
achieving the purpose of bailment. In case of a gratuitous bailment,
bailee has a right to Right to claim damages Right against wrongdoer
Reimbursement Recover losses Right to lien OF Recover compensation
Deliver goods to anyone of the joint bailor Remuneration Deliver the
goods to bailor even his title is defective recover from the bailor, all
extraordinary expenses, borne by the bailee or the purposes of bailment
(Section 158).
3) Right to recover losses:
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It is a right of bailee to recover from the bailor, all losses suffered by him
by reason of the fact that the bailor was not entitled to make the
bailment of the goods or to receive back the goods, or to give directions
regarding them (Section 164). In the contract of Bailment, the Bailee
incurs expenses to ensure the safety of goods. The Bailee has the right to
recover such expenses from the bailor. (Section 158)
4) Right to deliver goods to any one of the joint bailors:
If the goods are owned and bailed by more than one person, the bailee
has a right, in the absence of a contrary contract, to deliver back the
goods to any one of the joint owners, or may deliver the goods back
according to the directions of one of the joint owners, without the
consent of all. (Section 165).
5) Right to deliver the goods to bailor even if his title is defective:
If the title of bailor is defective and the bailee, in good faith returns the
goods to the bailor or according to the directions of bailor, the bailee is
not liable to the true owner in respect of such delivery (Section 166).
6) Right to remuneration:
When the goods are bailed to the Bailee, he is entitled to receive certain
remuneration for services that he has rendered. But in case of gratuitous
bailment, the Bailee is not awarded any remuneration.
7) Right to recover compensation:
At times a situation arises wherein bailor did not have the capacity to
contract for bailment. Such a contract causing loss to the Bailee;
therefore, the Bailee has the right to recover such compensation from the
bailor. (Section 168)

8) Right to lien:
When the bailee, in accordance with the purpose of agreement has
rendered any service involving the exercise of labor or skill, to the goods
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bailed, and his lawful payments are not made by the bailor, the bailee
has a right to retain unless there is a contract to the contrary, the goods
bailed, until he received his remuneration for the services rendered by
him.
Particular Lien: A lien which can be exercised only on goods in respect
of which some payment is due is called particular lien. Where the bailee
has, in accordance with the purpose of the bailment, rendered any
service involving the exercises of labour or skill in respect of the goods
bailed, he has, in the absence of a contract to the contrary, a right to
retain such goods until he received due remuneration for the services, he
has rendered in respect of them (Section 170).
General Lien: The right of general lien, as provided for in Section 171,
means the right to hold the goods bailed as security for a general balance
of account. Whereas right of particular lien entitles a bailee to detain
only that particular property in respect of which charges are due. Right
of general lien entitles the bailee to detain any, goods bailed to him for
any amount due to him whether in respect of these goods or any other
goods. The right of general lien is privilege and is specially conferred by
Section 171 on certain kinds of bailees only. They are bankers, factors,
wharfingers, attorneys of a high court, and policy brokers.
9) Right to suit against a wrongdoer:
After the goods have been bailed and any third party deprives the Bailee
of use of such goods, then the Bailee or bailor can bring an action
against the third party. (Section 180).

PLEDGE
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Pledge is a kind of bailment. Pledge is also known as Pawn. It is defined under


section 172 of the Indian Contract Act, 1892. By pledge, we mean bailment of
goods as a security for the repayment of debt or loan advanced or performance
of an obligation or promise.

The person who pledges the goods as security is known as Pledger or Pawnor

The person in whose favour the goods are pledged is known as Pledgee or
Pawnee.

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

Case Law

Lallan Prasad v. Rahmat Ali

Supreme Court of India defined Pledge as: “Pawn or pledge is a bailment of


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

Examples:

1. Mr. A gives his watch for repair to Mr. B., In this case, Mr. A is bailor,
Mr. B is Bailee and the goods bailed is watch.
2. Harry bailed his bike to David for riding for himself to go to college. David
used it for racing purpose. Now David will be liable for unauthorized use
of the bike bailed.
3. Z pledged his goods with A. But now Z refuses to make the payment of
the same. A now can either sell his goods or can initiate a suit
proceeding against Z.

WHO MAY PLEDGE:


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1. The owner, or his authorized agent


2. One of the several co-owners, who is in the sole possession of goods,
with the consent of other owners
3. A Mercantile agent, who is in possession of the goods with the consent of
real owner, or (Sec. 178)
4. A person in possession under a voidable contract, before the contract is
rescinded, or (Sec. 178 A)
5. A seller, who is in possession of goods after sale [Sec. 30(1)] or a buyer
who has obtained possession of the goods before sale [Sec.30 (2)]
6. A person who has a limited interest in the property. In such a case the
pawn is valid only to the extent of such interest. (Sec. 179)

Rights of Pawnor

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

1) It is the duty of Pawnor to comply with the terms of pledge and repay the
debt on the stipulated date or to perform the promise at the stipulated time.

2) It is the duty of Pawnor to compensate the Pawnee for any extraordinary


expenses incurred by him for preserving the goods pawned.

Rights of a Pawnee (Sec.173 and 176)

1. Right to retain the goods


2. Right of Retainer
3. Retainer for subsequent advances
4. Reimbursement of Expenses
5. Right to Sale
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6. Rights in case of default by Pawnor


7. Right against true owner of goods

Duties of a Pawnor (Sec.175)

Pay the debt: The Pawnor is liable to pay the debt or perform his
promise as the case may be.
Pay extra-ordinary expenses: The Pawnor is liable to pay to the Pawnee
any extraordinary expenses incurred by the Pawnee for preservation of
goods.
Disclose faults in goods: The Pawnor is liable to disclose all the faults
which (a) Are material for use of the goods; or (b) May put the Pawnee to
extraordinary risks. Indemnify the Pawnee: If loss is caused to the
Pawnee due to defect in Pawnor’ s title to the goods, the Pawnor must
indemnify the Pawnee.
Duties of a Pawnee
Not to use the goods: The Pawnee has no right to use the goods
However, he may use the goods, if he has been so authorized by the
Pawnor. Duty not to make unauthorized use of goods pledged.
Return the goods: The Pawnee must return the goods if the Pawnor
pays the debt or performs his promise. Duty to return the goods when
the debt has been repaid or the promise has been performed.
Take reasonable care: The Pawnee must take such care of goods
pledged as a man of ordinary prudence would take care of his own goods.
Duty to take reasonable care of the pledged goods.
Not to mix goods: The Pawnee must not mix his own goods with the
goods pledged. Duty not to mix his own goods with the goods pledged.
Return increase in goods: The Pawnee must return to the Pawnor any
accretion to the goods pledged with him. Duty to deliver increase to the
goods pledged.

UNIT-III
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AGENCY

When one party delegates some authority to another party whereby the latter
performs his actions in a more or less independent fashion, on behalf of the
first party, the relationship between them is called an agency. Agency can be
express or implied.

PARTIES:

1. The principal
2. The Agent
3. Third Party.

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

Illustrations:

1. Joe appoints Mary to deal with his bank transactions. In this case, Joe is
the Principal, Mary is the Agent and the Bank is the Third Party.
2. A, a businessman, delegates B to buy some goods on his behalf. Here, A
is the principal and B is the agent, and the person from whom the goods
are bought is the ‘Third Person’.

Who can appoint an Agent?

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

Who may be an Agent?


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

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

Who may employ an agent?

Any person may employ an agent if – He is of the age of majority; and He is of


sound mind.

Who can be an agent?

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

Liability of agent

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


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

Essentials of Agency

The principal should be competent to contract -Any person who is of the


age of majority and is of sound mind may employ an agent.

Case Law

Mahendra Pratap Singh v Padam Kumar Devi, AIR 1993, ALL 143

When a client gives a power of attorney to his counsel, while he is in good state
of health and mental understanding, but subsequently the client becomes old,
feeble, weak, unable to comprehend under a mental incapacity, the power of
attorney becomes worthless after the change in the state of health and metal
infirmity of the client.
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The agent may not be competent to contract-Between the principal and the
third persons, any person may become an agent. But no person who is a minor
and of unsound mind can become an agent, so as to be responsible to his
principal. (Section- 184).

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

Modes of Creation of Agency

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


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

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

express when it is given by words spoken or written. A contract of agency can

be made orally or in writing. Example of a written contract of agency is the

Power of Attorney that gives a right to an agency to act on behalf of his

principal in accordance with the terms and conditions therein.

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

implied when it is to be inferred from the circumstances of the case. In carrying

out the work of the principal, the agent can take any legal action. That is, the

agent can do any lawful thing necessary to carry out the work of the principal.
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Types of Agents

Agents are classified in various ways according to the point of view adopted.
From the viewpoint of the authority they have, they can be classified as special
agents, general agents and universal agents.

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


power by an agent to a person appointed by him as sub-agent. Incidentally the
agent himself is delegate of his principal.

Substituted Agent: Substituted agents are different from sub-agents. Section


194 provides that substituted agents are not sub-agents but are in fact agents
of the principal.

Example:

A directs B who is a solicitor to sell his estate by auction and to employ an


auctioneer for the purpose. B names C, an auctioneer, to conduct the sale. In
such a situation, C is not sub-agent, but is A’s agent for the sale.

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


is also known as a specific or particular agent.

Example:

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

General agents: Agent appointed to do all acts relating to a specific job. This
type of agents has a general authority to do everything in the course of his
agency and he has to perform all the acts in the interest of his principal.

Universal Agent: A universal agent has a universal or an unlimited power to


act on behalf of his principal. A universal agent is one whose authority is
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unlimited and who any act on behalf of his principal can do provide such act is
legal and is agreeable to the law of land.

Example:

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

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


appoints two or more persons agents jointly or severally, such agents are
known as co-agents.

Factor- An agent who is remunerated by a commission (one who looks like the
apparent owner of the things concerned). A factor is a mercantile agent to
home goods is entrusted for sale.

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


parties.

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

Commission Agent- An appointed to buy and sell goods (make the best
purchase) for his principal.

Del Credere- An agent who acts as a salesperson, broker and guarantor for the
principal. He guarantees the credit extended to the buyer.

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


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

Agency between Husband and Wife

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


ratification.

 Wife as Agent
Where a husband and wife are living together, we presume that the wife
has her husband’s authority to pledge his credit for the purchase of
necessaries of life suitable to their standard of living. But the husband
will not be liable if he shows that:
(i) he had expressly warned the tradesman not to supply goods on
credit to his wife; or
(ii) he had expressly forbidden the wife to use his credit
(iii) he already sufficiently supplies his wife with the articles in
question
(iv) he supplies his wife with a sufficient allowance.

Difference between sub-agent and substituted agent

The difference between sub-agent and the substituted agent is very


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

Illustration

Sarah asks her solicitor to appoint an auctioneer to sell her antique


merchandise. Her solicitor appoints Naas as an auctioneer. In this case, Naas
is not a sub- agent but is, in fact, a substituted agent for this sale.

TERMINATION OF AGENCY

There are various modes/rules in which the agency can be terminated.

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


principal) (sec. 201)
2. Revocation may be express or implied (sec. -207)
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3. Revocation possible before the authority has been exercised (sec. 203)
4. Revocation when authority has been partly exercised (sec. 204)
5. Principal to compensate, if there is premature revocation without
justification (sec. 205)
6. Principal should give reasonable notice of revocation (sec. 206)
7. When the agent renounces the business of the agency
8. When the business of the agency is completed (Mutual Agreement). By
performance- If agency is made for certain purpose on the completion of
achievements of purpose the agency is terminated
9. When either of the parties dies or becomes mentally disabled. The death
of the principal or agent terminates the contract of agency. (sec. 209)
10. When the Principal is adjudicated an insolvent.

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


agreement they can terminate it.

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


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

Rights of Agent

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


agent has right to receive reasonably remuneration for his work for principal.

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


expenses by his principal and of goods of principal are under his control, he
can retain the goods until the lawful charges is paid by principal.

Right to get indemnity- (sec – 222- 224) If principal removes the agent
without concrete reason agent has right to claim compensation from his
principal.
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Right of retainer– (sec – 217 &218) An agent has the right to retain any
remuneration or expenses incurred by him while conducting the Principal’s
business.

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

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


incurring a personal liability, he has a right of stoppage in transit against the
principal, in respect of the money which he has paid or is liable to pay.

CONCLUSION

Contracts establishing a relationship of the agency are very common in

business law. These can be express or implied. An agency is created when a

person delegates his authority to another person, that is, appoints them to do

some specific job or a number of them in specified areas of work.

Establishment of a PrincipalAgent relationship confers rights and duties upon

both the parties. There are various examples of such a relationship: Insurance

agency, advertising agency, travel agency, factors, brokers, del credere agents,

etc.
K. Yeshwanth Gowda

UNIT-IV

PARTNERSHIP

Partnership is the relation between persons who have agreed to share the
profits of a business carried on by all or any one of them acting for all (Section
4). It, therefore, follows that a partnership consists of three essential elements:

(i) It must be a result of an agreement between two or more persons.


(ii) The agreement must be to share the profits of the business.

(iii) The business must be carried on by all or any of them acting for all.
All these essentials must co-exist before a partnership can come into
existence Example: A manager, as a part of his remuneration, may be
given a share in profits of the business.

MEANING OF 'PARTNER', 'FIRM' AND 'FIRM NAME' [SECTION 4]

Persons who have entered into partnership with one another are called
individually ‘partners’ and collectively ‘a firm’, and the name under which their
business is carried on is called the 'firm name'.

MAXIMUM LIMIT ON NUMBER OF PARTNERS

(a) In case of a partnership firm carrying on a banking business-maximum10


members

(b) In case of a partnership firm carrying on any other business-maximum 20


members If the number of partners exceeds the aforesaid limit, the partnership
firm becomes an illegal association.

ESSENTIAL ELEMENTS OF PARTNERSHIP


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1) Two or more Persons - There must be at least two persons to form a


partnership and all such persons must be competent to contract.
According to Section 11 of the Indian Contract Act, 1872, every person
except the following, is competent to contract.

2) Agreement: Partnership must be the result of an agreement between two


or more persons. An agreement from which relationship of Partnership
may arise may be express or implied from the act done by partners and
from a consistent course of conduct being followed, showing mutual
understanding between them. It may be oral or in writing .
3) Business - There must exist a business. According to Section 2(b), the
term ‘Business’ includes every trade, occupation and profession.

4) Sharing of Profits – There must be sharing of profits. Unless otherwise


agreed, sharing of profits implies sharing of losses too.

5) Mutual Agency There must existence of a mutual agency relationship


among the partners. 'Mutual Agency' relationship means that each
partner is both an agent and a principal.

NATURE OF A PARTNERSHIP FIRM

A partnership firm is not a person in the eyes of law [except under Section
2(31) of the Income Tax Act, 1961]. It has no separate legal entity apart from
the partners constituting it [Malabar Fisheries Co. v. CIT]. Thus, firm
themselves cannot enter into a contract for partnership though their partners
can.

TEST OF PARTNERSHIP [SECTION 6]

According to Section 6, "In determining whether a group of persons is or is not


a firm, regard shall be had to the real relation between the parties as shown by
all relevant facts taken together." The real relation between the partners can be
ascertained as under:
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i. If there is an express contact: The real relation is ascertained from the


terms of partnership contact.
ii. If there is no express contract: The real relation is ascertained from all
the relevant factors such as contract of parties, books of accounts,
statement of employees etc.

Who are not partners?

The following persons are not treated as partners:

(a) Members of a Hindu undivided family (HUF) carrying on family business.


(b) Burmese Buddhist husband and wife carrying on a business.

Thus, partnership can be presumed when:

(a) There is an agreement to share the profits of a business and


(b) The business must be carried on by all or by any of them acting for all.
Even when the exclusive power and control is vested with one partner
under an agreement, partnership shall be presumed to exist.

PARTNERSHIP AND CO-OWNERSHIP

Co-ownership means joint ownership of some property. The two or more


persons who own some property jointly arc called co-owners. As per
Explanation I to Section 6, the joint owners of some property sharing profits
or gross returns arising from the property do not become partners.

Partnership and Company

A company is an artificial person created by law having, perpetual


succession, separate legal entity with limited liability and a common seal.

DURATION OF PARTNERSHIP

On the basis of duration, the partnership can be classified in to two types


namely
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1) Partnership at will

2) Particular Partnership.

Partnership at Will (Section 7]

When there is no provision in partnership agreement for duration of the


partnership, the partnership is called 'Partnership at Will'. A partnership at
will may be dissolved by any partner by giving a notice in writing to all other
partners of his intention to dissolve the firm.

TYPES OF PARTNERS

• ACTUAL OR OSTENSIBLE PARTNER- He takes an active pan in the


conduct of the business.

• SLEEPING OR DORMANT PARTNER- He does not take an active pan in


the conduct of the business.

• NOMINAL PARTNER- He lends his name to the firm without having any
real interest in the firm. He neither contrib.

• PARTNER IN PROFITS ONLY - He shares the profits only and not


losses

• SUB PARTNER- He is a third person with whom a partner agrees to


share his profits derived from the firm

Partner by Estoppel or Holding out [Section 28(1)]

(a) He must have represented himself to be a partner by word spoken or


written or by his conduct (such type of representation may be called as
active representation), or He must have knowingly permitted himself to be
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represented as a partner (such type of representation may be called as tacit


representation); and

(b) The other person acting on the faith of such representation must have
given credit to the firm. It is immaterial whether the person so representing
to be a partner, is aware or not that the representation has reached the
other person.

Rights of Partners

(a) Right to take part in the conduct of the business [Section 12 (a)]:
Every partner has a right to take part in the conduct of the business.
(b) Right to express opinion [Section 12(c)]:
Every partner has the right to express his opinion before the matter is
decided. All matters except the change in the nature of the business,
may he have decided by a majority of the partners.

Example:

Admission of new partner to the firm, change in the nature of firm’s


business. Power of majority opinion has to be exercised in good faith. For
instance, if the majority of the partners decided to expel one of the partners
without justifiable reason such expulsion would be set aside.

(c) Right to have access to books of the firm [Section 12(d)]:


Every partner has a right to have access to and to inspect and copy any
of the books of the firm. A partner may exercise this right personally or
by engaging his agent.
(d) Rights to share profits [Section 13(b)]:
generally, A partner is entitled to share the profits of the business of the
firm equally. Partners are entitled to share equally in the profits earned
and so contribute equally to the losses sustained by the firm.
Right to receive interest on capital out of profits [Section 13(c)]:
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Suppose interest on capital subscribed by the partner is payable to him


under the partnership deed, then in such a case the interest will be
payable only out of profits.
Right to claim interest on advances [Section 13(d)]:
A partner is entitled to claim interest on advances made by him to the
firm 6t 6% p.a. Interest on advances is payable whether there are profits
or losses. It may be noted that the partner is not entitled to interest after
the date of dissolution of firm unless otherwise agreed.
RELATION OF PARTNERS WITH THIRD PARTIES [SECTION 18]
The relations of partners with third parties are governed by the mutual
agency relationship existing among the partners. According to Section
18, "every partner is an agent of the firm for the purposes of the business
of the firm." In other words, every partner has the capacity to bind other
partners by his acts done in firm's name. Therefore, all partners are
liable to third parties for the acts of every partner.

DISSOLUTION OF FIRM [SECTIONS 39 TO 47]


Meaning of Dissolution, the term 'dissolution' stands for discontinuation.
Under the Indian Partnership Act, 1932, the dissolution may be either of
Partnership or of a firm.
Meaning of Dissolution of Partnership:
Dissolution of partnership means coming to an end of the relation known
as partnership, between various partners. The firm continues its
business after being reconstituted. This may happen on admission,
retirement or death of a partner in the firm.
Example:
X, Y and Z are partners in a firm. X retires. The partnership between X Y
and Z comes to an end and new partnership between Y and Z comes into
existence. This new partnership between Y and Z shall be known as
‘reconstituted firm’. Thus, on retirement of partner, the old partnership
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stands dissolved, but the firm continues its business with the remaining
partners le and Z.
Meaning of Dissolution of Firm
According to Section 39 Dissolution of a firm means the dissolution of
partnership between all the partners of a firm. In such a situation, the
business of the firm is discontinued, its assets are realized, the liabilities
are paid off and the surplus (if any) is distributed among the partners
according to their rights.
Example:
Firm consisting of A, B and C all of them cease to be partners with one
another, it amounts to dissolution of the firm.

Dissolution of partnership is different from the dissolution of firm.


Dissolution of a partnership firm merely involves a change in the relation
of partners; whereas the dissolution of firm amounts to a complete
closure of the business. When any of the partners dies, retires or become
insolvent but if the remaining partners still agree to continue the
business of the partnership firm, then it is dissolution of partnership not
the dissolution of firm. Dissolution of partnership changes the mutual
relations of the partners. But in case of dissolution of firm, all the
relations and the business of the firm comes to an end. On dissolution of
the firm, the business of the firm ceases to exist since its affairs are
would up by selling the assets and by paying the liabilities and
discharging the claims of the partners. The dissolution of partnership
among all partners of a firm is called dissolution of the firm.

Modes of Dissolution (Section 40-41)


1) By Agreement
2) Compulsory dissolution
3) On happening of certain events
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4) By Notice
5) By the court

UNIT-V
Sale of Goods Act
CONTRACT OF SALE OF GOODS

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


transfer the property to goods to the buyer for a price. There may be a contract
of sale between one part-owner and another [Sec. 4(1)]. A contract of sale may
be absolute or conditional [Sec 4(2)].
The term ‘contract of sale’ is a generic term and includes both a sale and an
agreement to sell.
Sale and agreement to sell:

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

Section 4 of the Sales of Goods Act, 1930 defines a sale of goods as a “contract
of sale whereby the seller transfers or agrees to transfer the property in goods
to the buyer for price”. The term ‘contract of sale’ includes both a sale and an
agreement to sell.
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1) Offer and Acceptance:


A contract of sale is made by an offer to buy or sell the goods for a
price and acceptance of such offer.
2) Delivery and Payment:
It is not necessary that the payment for the goods to the seller and
delivery of goods to the buyer must be simultaneous. They can be
made at different times or in instalments – as per the contract.
3) Express or Implied:
The contract can be in writing, oral or implied. It can also be partly
oral and partly written.

Essential features

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

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

2) Subject matter to be goods

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


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

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


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

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


parties.

Provisions of the sale of goods act

The transfer of title in any goods, e.g., a car depends on fulfilment of the
provisions of the sale of goods act, rather than the provisions of the Motor
vehicles Act, 1939.
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Transfer of general property: There must be a transfer of general property as


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

Valuation by a third party-: It has noted that one of the modes of


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

EFFECT OF DESTRUCTION OF GOODS:

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


Goods perishing before making of contract -A contract for the sale of
specific goods is void if at the time when the contract was made, the
goods have, without the knowledge of the seller, perished. The same
would be the case where the goods become so damaged as no longer to
answer to their description in the contract.

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

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


Where specific goods form the subject- matter of a contract of sale
(both actual sale and agreement to sell), and they, without the
knowledge of the seller, perish, at or before the time of the contract,
the contract is void. This provision is based either on the ground of
mutual mistake as to a matter of fact essential to the agreement, or
on the ground of impossibility of performance, both of which render
an agreement void ab-initio.
(ii) In case of perishing of only ‘a part’ of the goods.
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Where in a contract for the sale of specific goods, only part of the
goods is destroyed or damaged, the effect of perishing will depend
upon whether the contract is entire or divisible.

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


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

Effect of Perishing of Future Goods:


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

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

Classification of goods ‘Goods’


It has been defined under sec 2(7) of the Sale of Goods Act, 1930, to
include every kind of movable property, including stocks, shares, crops,
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grass, severable objects, etc. It is supplemented by the definitions of


movable and immovable property under sec 3(36) and sec 3(26) of the
General Clauses Act, 1897.
Three major commodities are:
(1) Electricity
(2) Lottery tickets
(3) Software programs.
Definition of “goods”
Goods is defined as per Section 2 (7) of the ‘Act’ as. “Every kind of
movable property other than actionable claims and money; and includes
stock and shares, growing crops, grass, and things attached to or
forming part of the land which are agreed to be severed before sale or
under the contract of sale.”
Goods may be classified into:
1. Existing goods
2. Future goods
3. Contingent good

Existing goods: At the time of sales if the goods are physically in existence and
are in possession of the seller the goods are called ‘Existing Goods’.

Future goods: Future goods are goods to be manufactured or produced or yet


to be acquired by seller. There cannot be present sale in respect future goods
because the property cannot pass.

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

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
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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.

Forms of Delivery:

 Actual Delivery: If the goods are physically given into the possession of
the buyer, the delivery is an actual delivery.
 Constructive delivery: The transfer of goods can be done even when the
transfer is affected without a change in the possession or custody of the
goods. For example, a case of the delivery by attornment or
acknowledgment will be a constructive delivery. If you pick up a parcel
on behalf of your friend and agree to hold on to it for him, it is a
constructive delivery.
 Symbolic delivery: This kind of delivery involves the delivery of a thing
in token of a transfer of some other thing. For example, the key of the go
downs with the goods in it, when handed over to the buyer will constitute
a symbolic delivery.

According to Section 2 (2) of the Sale of Goods Act, 1930, delivery means
voluntary transfer of possession of goods from one person to another.
Hence, if a person takes possession of goods by unfair means, then there is
no delivery of goods. Having understood delivery, let’s look at the law on
sales

SALE & AGREEMENT TO SELL

A contract of sale is a generic term and includes both an actual sale and an
agreement to sell. Section 4 provides that if the property in goods is
transferred from the seller to the buyer under a contract, the contract is
called a sale. Where the transfer of the property in the goods will take place
at a future time or is subject to some condition which has to be fulfilled, the
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contract is called an agreement to sell. Such an agreement to sell becomes a


sale when the prescribed time lapses or the conditions are fulfilled.

SALE & HIRE PURCHASE AGREEMENT

A Hire purchase agreement is an agreement for hire of goods where the


person who hires the goods has an option to purchase the goods at the end.
The possession of the goods is delivered to such a hirer and he has to pay
via instalments. The property in the goods passes to the hirer on the
payment of the last instalments. The Hire purchase agreements are treated
as bailment and the parties have the same rights as a bailor and bailee. The
hirer has a right to terminate the agreement at any time before the property
passes.

SALE OF GOODS & WORK AND LABOUR

A contract of sale of goods is one in which some goods are sold or are to be
sold for a price. It requires the delivery of goods. But there are transactions
where there is a contract of exercise of skill and labour, and the delivery of
goods is subsidiary. These are the contracts for work or labour or the
contracts for service. It is the intention of the parties that creates the
difference – whether only delivery of goods is intended or exercise of skill
and labour with regard to the goods has to be delivered.

Conditions

Conditions In the context of the Sale of Goods Act, 1930, a condition is a


foundation of the entire contract and integral part for performing the
contract.

Sec 12(2)- ‘A condition is a stipulation essential to the main purpose of the


contract, the breach of which gives rise to a right to treat the contract as
repudiated’.
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A condition is referred to as, an essential element attached to the subject


matter of an agreement which is mentioned by the buyer to the seller and is
either expressed or implied while entering into the contract.

Kinds of conditions:

Expressed Condition: The dictionary meaning of the term is defined as a


statement in a legal agreement that says something must be done or exist in
the contract.

Implied Condition: There are several implied conditions which are


assumed by the parties in different kinds of contracts of sale.

*******

Warranty

Warranty Sec 12(3)- ‘A warranty is a stipulation collateral to the main


purpose of the contract, the breach of which gives rise to a claim for
damages but not to a right to reject the goods and treat the contract as
repudiated.

A warranty is referred to as extra information given with respect to the


desired good or its condition.

Warranty is the additional stipulation and a written guarantee that is


collateral to the main purpose of the contract.

Kinds of Warranty

Expressed Warranty The warranties which are generally agreed by both the
parties and are inserted in the contract, it is said to be expressed
warranties.

Implied Warranty Implied warranties are those warranties which the


parties assumed to have been incorporated in the contract of sale despite
the fact that the parties have not specifically included them in the contract.
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Subject to the contract, the following are the implied warranties in the
contract of sale:

 Warranty as to undisturbed possession


 Warranty as to freedom from Encumbrances
 Implied warranty to disclose Dangerous nature of the goods sold

Transfer of Title

Nemo Dat Quod Non Habet- Sec. 27

The general rule relating to the transfer of title on sale is that “the seller cannot
transfer to the buyer of goods a better title than he himself has.” If the title of
the seller is defective, the buyer’s title will also be subject to the same defect.

This rule is expressed by the maxim “nemo dat quod non habet”, which means
that no one can give what he has not got, i.e., a seller cannot convey a better
title than that of his own.

E.g., a person finds goods lying on the road and sells them, or a thief sells the
goods after he has stolen them, or a person purchases the goods on credit or
hire-purchase basis and disposes them off, or a person continuing in
possession of the goods which he has already sold resells the goods.

Exceptions:

 Sale under the implied authority of the owner, or transfer of title by estoppel
(S. 27) 2.

 Sale by a mercantile agent (proviso to S. 27)

 Sale by one of joint owners (S. 28)

 Sale by a person in possession under a voidable contract (S. 29)


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 Sale by the seller in possession of goods, the property in which has passed to
the buyer (S. 30(1))

 Sale by the buyer in possession of the goods before the property in them has
passed to him (S. 30(2))  Re-sale of the goods by an unpaid seller after he has
exercised the right of lien or stoppage in transit (S. 54(3))

 Sale by finder of goods (S. 169, Indian Contract Act)

 Sale by a Pawnee when the pawner makes a default in payment (S. 176,
Indian Contract Act.

Who is a seller?

The definition of the seller is given in Section 2(13) of the Sale of Goods Act,
1930. The seller can be defined as a person who agrees to sell goods.

Rights of the Seller (Section 31)

• He can reserve the rights of the goods until and unless payment of goods is
done.

• He can assume that the buyer has accepted the goods or not.

• He will only deliver the goods when the buyer would apply for the delivery.

• He can make the goods delivered in instalments when so agreed by the buyer.

• He can have the possession of the goods until the buyer hasn’t paid for the
goods.

• He can stop the delivery of goods and resume possession of the goods unless
and until the payment is done for the goods.

• He can resell the goods under certain conditions.

• He can bring the goods back if it is not delivered to the buyer.


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• He can sue the buyer if the buyer fails to make the payment on a certain day,
in terms of the contract.

Duties of seller

• He should make an arrangement for the transfer of property to the buyer.

• He should check whether the goods are delivered properly or not.

• He should give a proper title to the goods which he has to pass to the buyer.

• He should deliver the goods according to the terms of the agreement.

• He should ensure that the goods supplied should be agreed to the implied
condition and warranties.

• He should keep the goods in a deliverable state and deliver the goods when
the buyer asks for it.

• He should deliver the goods within a specific time fixed in the contract.

• He should bear all the expenses for which the good should be delivered. Who
is a seller? The definition of the seller is given in Section 2(13) of the Sale of
Goods Act, 1930. The seller can be defined as a person who agrees to sell
goods.

• He should deliver the goods as said by the buyer in the contract in an agreed
quantity.

• To deliver the goods in instalments only when the buyer wants.

• He should make arrangements for the goods while they are in the custody of
the carrier.

Who is a buyer?
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The definition of the buyer is given in Section 2(1) of the Sale of Goods Act,
1930. The buyer can be defined as a person who buys goods from the seller.

Rights of the Buyer (Section 31)

• He should get the delivery of the goods as per contract.

• He can reject the goods if the quality and quantity are not as specified in the
contract.

• To deny the contract when goods are delivered in instalments without any
agreement to the effects.

• The seller should inform him when the goods are to be sent by sea route, so
that the buyer may arrange for their insurance.

• He can examine the goods for checking whether they are in the agreement
with the contract.

• If he has already paid, he can sue the seller for recovery of the price if the
seller fails to deliver the goods.

• He can also sue the seller for damages or the seller’s wrongful neglect or the
seller refuses to deliver the goods to the buyer.

• He can sue the seller for damages for breach of a warranty or for breach of a
condition.

• He can sue the seller for the damages of breach of contract. Who is a buyer?
The definition of the buyer is given in Section 2(1) of the Sale of Goods Act,
1930. The buyer can be defined as a person who buys goods from the seller.

Duties of the Buyer

• He should accept the delivery of goods when the seller is prepared to make
the delivery as per the contract.

• To have possession on it he should pay the price for the goods as per the
contract.
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• He should apply for the delivery of the goods.

• He can ask to deliver the goods at a particular time.

• He should accept delivery of the goods in instalments and pay for it according
to the contract.

• He should bear the risk of failure of delivery of goods if the delivery point is a
distant place.

• He should pay the price on the transfer of possession of the goods as given in
the term of the contract.

• He has to pay for not accepting the goods.

Who is an Unpaid seller?

As defined by Section 45 of Sale of Goods Act, 1930, A person has sold some
goods and has not got the whole price and if the transaction is done through
negotiable instruments like cheque, bill of exchange and a promissory note,
then the person can be said as an unpaid seller.

The seller of goods is deemed to be an “unpaid seller” within the meaning of


this Act.

When the whole of the price has not been paid or tendered.

Rights of an unpaid seller Section 46

• Against the goods – jus in rem (right against property)

• Against the buyer – jus in personam (right against the person)

Right against the goods

• Right to a lien which means the seller has the right on the possession over
the goods.

• Right to stoppage in transit which means the seller can call up the carrier
transporter and tell not to deliver the goods.
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• Right to resale means the seller can again sell the goods as he has the
possession of the goods. And the rights like the right to lien, the right to
stoppage in transit and the right to resale are also applicable for the agreement
which is made for sale.

Rights against the buyer

• The seller has the right to sue the buyer for the price if the seller has already
sold the goods and the buyer hasn’t paid the sum.

• The seller has the right to sue for the damages, for e.g. if the seller has sent
the carrier for the delivery and the buyer isn’t available to receive the delivery
and the goods returned back by the carrier to the seller then he can sue the
buyer for damages like the packing of goods, transportation charges and so
many.

• If the buyer hasn’t paid the price of the goods to the seller after the delivery
within a stipulated time period as given in the contract, then the seller can sue
for the interest on the buyer.

Part-delivery (Section 48)

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.

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