BBA (General)

Second Year – III Semester (A.Y 2023-24)

Paper Title: BUSINESS LAW

UNIT-I: LAW OF CONTRACT

Definition, Essentials of valid contract, Kinds of contract, Offer, Acceptance, consideration.
Capacity of Parties to contract, Free Consent, Discharge of Contract, Breach of Contract and
Remedies for Breach . Special Contracts, Indemnity, Guarantee, Bailment.

UNIT-II: NEGOTIABLE INSTRUMENTS ACT 1881

Nature and characteristics of Negotiable Instruments, Kinds of Negotiable Instruments-
Promissory Notes, Bills of Exchange and Cheques. Partnership Act, 1932- Definition,
Essentials of Partnership, Kinds of Partners, Rights and Liabilities of Partners. Dissolution
of Partnership Firm.

UNIT–III: COMPANIES ACT, 2013

Definition of Company, Types of Companies. Memorandum of Association, Articles of
Association, prospectus, Meetings and Resolutions. Doctrine of Ultra Vires, Doctrine of
Constructive Notice, Modes of Winding up of a Company.

UNIT–IV: SALE OF GOODS ACT

Meaning and definition, Essentials of Sale Contract, Sale and Agreement to Sell. Rules of
transfer of property- conditions and warranties. Unpaid Seller- Rights of Unpaid Seller. Sale
by Non-Owners , Auction Sale.

UNIT–V: RIGHT TO INFORMATION ACT & CONSUMER PROTECTION ACT

Right to Information Act- Overview of the Act, The Consumer Protection Act 2019,
Consumer Councils, Consumer Redressal Agencies- District Forum, State Forum, National
Forum, Penalties for violation.
 UNIT-I

INTRODUCTION TO LAW
A rule or set of rules, enforceable by the courts, regulating the government of a state,
the relationship between the organs of government and the subjects of the state, and the
relationship or conduct of subjects towards each other. 2. a. a rule or body of rules made by
the legislature. See statute law.
DEFINITION OF LAW
In the words of Salmond,‖ Law is the body of principles recognized and applied by the
state in the administration of justice.‖
Woodrow Wilson has defined law as ―that portion of the established habit and
thought of mankind which has gained distinct and formal recognition in the shape of uniform
rules backed by the authority and power of the government.‖

• Law is not static

• Laws are changed to fit the requirements of the society.
• Law prevailing in a society at any point of time must be in conformity with –
-the general sentiments
- Customs and
-aspirations of its people.
• It is a real phenomenon having a real existence in relation to the facts of human affairs.

Business Law
All the laws which pertain to how, what and why of how businesses are legally
allowed to and supposed to function are encompassed by what is business law. Business law
meaning includes contract laws, manufacturing and sales laws, and also hiring practices and
ethics. In simple words, it refers to and pertains to the legal laws of business and commerce in
the public as well as the private sector. Note that it is also known as commercial law and
corporate law, due to its nature of regulating these worlds of business.

Significance of Business Law

Business law is an important aspect of law in general because, without the same, the
corporate sector, manufacturing sector and retail sector would be in tyranny. The aim of
putting business and law together is to maintain safe and functional working spaces for all
individuals involved in the business, whether they‘re running it or working for the people
running it.

Business law is defined as the body of legislation governing the rights, relationships, and
behavior of businesses and individuals engaged in commerce, merchandising trade, and sales.
It deals with both private and public law issues and is sometimes seen as a branch of civil
law.
As a social being, man comes into contact with people in different capacities
 CONTRACT Introduction

The Indian Contract Act which was passed on 25th April, 1872, came into effect
from 1st Sep. 1872. It was passed with an object to define and amend certain portions of the
laws relating to contracts. It lays down general principles of law relating to contracts. It
applies to the whole of the country except the State of Jammu and Kashmir. It does not affect
the provisions of any Statue, Act or Regulation. Originally, the Act contained provisions
relating to sale of goods and partnership. In 1930, rules relating to sale of goods were taken
out from this Act and incorporated in a new Act, namely ―Sale of Goods Act‖. Similarly in
1932, provisions relating to partnership were codified as a separate Act and The Indian
Partnership Act, 1932 was passed in the parliament. The Indian Contract Act in its present
status contains the general principles of contracts, (Section 1 to 75) and special types of
contract (Sec 124-238)

Object and Scope

Law of Contract constitutes the most important branch of mercantile law. It is
the nerve centre of trade and commerce. It is not only the business community which is
concerned with the law of contract, but it plays its role on every one‘s walks of life. Every
one of us enters into a number of contracts from dawn to dusk. When a person brings
newspaper or rides a bus or goes to a hair-cutting saloon or purchases vegetables or borrows a
loan from a friend etc., he enters into a contract through he may not be conscious of it. Such
contracts create legal rights and obligations.

The object of the law of contracts is to introduce definiteness in commercial and other
transactions. How this is done can be illustrated by an example,

X entered into a contract to deliver 10 tons of iron ore on a particular date. Since such a
contract is enforceable by the courts, Y can plan his activities on the basis of getting iron ore
on the fixed date. If the contract is broken, Y will get damages from the court and will not
suffer any loss.

Sir William Anson observes in this regard that the law of contract is intended ―to ensure that
what a man has been led to except shall come to pass and what has been promised to him
shall be performed‖.

Meaning of contract
In simple terms, a contract means when two parties put into writing an agreement which
contains certain obligations (promises) which are to be performed by such parties, and when
such written agreement becomes enforceable by law, it becomes a Contract. Enforceable by
law means when the agreement has acquired the force of law only for those who are a party to
it and a violation of those obligations would attract legal action, including repudiation of the
entire contract.

Contract Act defines a Contract as “An agreement which is enforceable by Law”.

 An Agreement is a settlement between two parties, which contains obligations or
promises which both parties need to fulfil. When such an agreement is made binding by Law
it becomes a Contract.

Therefore an agreement consists of reciprocal Promises which are to be performed

by parties to the contract. Promises are reciprocal when both parties have to perform
something for the other.

Pollock- “Every agreement and promise enforceable by law is a contract‖.

Salmond- “A contract is an agreement creating and defining obligation between two or more
persons by which rights are acquired by one or more to acts or forbearance on the part of
others‖.
Anson- ―The law of contract is that branch of law which determine the circumstances in
which a promise shall be legally binding on the person making it‘.
Now after examining the definitions of contract we can say that-
Contract = Agreement + Enforceability

Illustration: A contracted with B for purchase of 10 bags of cement of a certain quality, for
Rs 1, 00,000. In this case, B‘s promise is to provide A with 10 bags of cement of that quality
only for which A has contracted and A‘s promise is to duly pay B Rs.1, 00,000. In this case,
both have to perform something for the other, thus it is a case of reciprocal promise.
Charity is not a case of reciprocal promise, because a person doing charity does not expect
anything in return.

Contracts in India are primarily governed by INDIAN CONTRACT ACT, 1872 (“Contract
Act”). It contains basic elements of a contract and several general rules which apply to
contracts. It does not impose any positive duty on the parties rather; it states various
formalities regarding contracts.

OBLIGATION
It is defined as a legal tie which imposes upon a definite person or persons the necessity of
doing or abstaining from doing a definite act or acts .It may relate to social or legal matters

• An agreement which gives rise to social obligation is not a contract

• An agreement creating and defining obligations between the parties
• An agreement is defined as ―Every promise and every set of promises, forming
consideration for each other‖
• A promise is defined thus ―When the person to whom the proposal is made signifies
his assent thereto, the proposal is said to be accepted.
• A proposal, when accepted, becomes a promise
• An agreement is an accepted proposal
To form an agreement, there must be a proposal or offer by one party and its acceptance by
the other.
ESSENTIAL ELEMENTS OF VALID CONTRACT

• Offer and acceptance

• Intention to create legal relationship
• Lawful consideration
• Capacity of parties – competency
• Legal Obligation
• Free and genuine consent
• Lawful object
• Certainty and possibility of performance
• Agreement not declared void
• Legal formalities

1. Offer and acceptance

There must be two parties to an agreement one party makes the offer and other party accepts
it
The terms of the offer must be definite and the acceptance of the offer must be
absolute and Unconditional
The acceptance must be according to the mode prescribed and must be communicated
to the offeror.
2. Intention to create legal relationship
When two parties enter into an agreement, their intention must be to create legal
relationship between them.If there is no such intention on the part of the parties, there is no
contract between them.
Agreements of social or domestic nature do not contemplate legal relationship as such they
are not contracts
Case :( Balfour V. Balfour)

• A husband promised to pay his wife a household allowance of $30 every month. Later the
parties separated and the husband failed to pay the amount. The wife sued for the allowance.
Held, agreements such as these were outside the realm of contract altogether
3. Lawful consideration
Consideration means an advantage or benefit moving from one party to the other. It is the
essence of a bargain. ―Something in return‖
A promise to do something and getting nothing in return is usually not enforceable by law
Consideration need not necessarily be in cash or kind
• It may be an act or abstinence or promise to do or not to do something
• It may be past, present or future
• It must be real and lawful
Example: ―X‖ agrees to sell his car to ―Y‖ for Rs.1, 00,000.
For ―X‖‘s promise, the consideration is Rs.100,000.
For ―Y‖‘s promise the consideration is the car
4. Capacity of parties - Competency
The parties to the agreement must be capable of entering into a valid contract
Every person is competent to contract if he
• Is of the age of majority
• Is of sound mind and
• Is not disqualified from contracting by any law to which he is subject
5. Legal Obligation
An obligation is the responsibility of a party to meet the terms of a contract or
agreement. If an obligation is not met, the legal system often provides recourse for the
injured party.
 Failure to meet obligations is often met with punishment, such as imprisonment or
fines.
6 .Free and genuine consent
It is essential to the creation of every contract that there must be free and genuine consent
of the parties to the agreement The consent of the parties is said to be free when they are of
the same mind on all the material terms of the contract There is absence of the free consent if
the agreement is induced by Coercion, Undue Influence, Fraud, Misrepresentation etc.,
7. Lawful object
The object must not be
• Illegal
• Immoral
• Opposed to public policy
If an agreement suffers from any legal flaw, it would not be enforceable by law
8. Certainty of the Terms of the contract:
The terms of the agreement must be definite and certain and it must not contain any
ambiguous information.
Example: ‗A‘ agrees to sell to ‗B‘ a hundred tons of oil‖. There is nothing whatever to show
what kind of oil was intended. The agreement is void for want of certainty.
9. Agreement not declared void
The agreement must not have been expressly declared void by law in force in the country.
a. Agreement in restraint to marriage (Sec.26)
b. Agreement in restraint to trade (Sec.27)
c. Agreement in restraint to legal proceedings (Sec.28)
d. Agreement having uncertain meaning (Sec.29)
e. Wagering agreement (Sec.30

10. Legal formalities

• A contract may be made by words spoken or written
• As regards the legal effects, there is no difference between a contract in writing and a
Contract made by word of mouth
• In the interest of parties, the contract should be in writing
• The document in which the contract is incorporated is to be stamped
• When there is a statutory requirement that a contract should be made in writing or in
 the presence of witnesses or registered, the required statutory formalities must be
Complied with.

Classifications of Contracts
Contract Classified According To Formation:
(1)Express Contract:
If the terms of contract expressly agreed upon at the time of formation of the contract, the
contract is said to be an express contract. Express Contract is one which is made by words
spoken or written.
(2)Implied Contract: Where the proposal or acceptance is made otherwise than in words ,it
Is an implied contract. An implied contract is one which is inferred from the acts or conduct
of the parties or course of dealings between them

(3)Constructive or Quasi Contract:

Quasi contract – A quasi contract is not a contract at all. A contract is intentionally entered
into by the parties. A quasi contract is created by law. It resembles a contract in that a legal
obligation is imposed on a party who is required to perform it. • Eg : T a tradesman, leaves
goods at C‘s house by mistake. C treats the goods as his own. • C is bound to pay for the
goods
CONTRACTS ACCRODING TO VALIDITY Voidable contract
An agreement which is enforceable by law at the option of one or more parties
There to, but not at the option of the other or others is a voidable contract

• When the consent of a party of a contract is not free the contract is Voidable at his option

• When a party to a contract promises to perform all obligation within a specified time, any
failure on his part to perform his obligation within the fixed time makes the contract
voidable at the option of the promise
Void agreement
– An agreement not enforceable by law is said to be void
– A void agreement does not create any legal rights or obligations
Void contract
A contract which ceases to be enforceable by law becomes void when it ceases to be
enforceable

• A contract, when originally entered into, may be valid and binding on the parties, it may be
subsequently become void
Eg war or Govt. Order.
Illegal agreement
An illegal agreement is one which transgress (controversy) some rule or basic public policy
or which is criminal in nature or which is immoral. All Illegal agreements are void but all
void agreements are not necessarily illegal.
Unenforceable contract
An unenforceable contract is one which cannot be enforced in court of law because of some
technical defect such as absence or writing etc.,

CLASSIFICATION ACCORDING TO PERFORMANCE Executed contract

• Executed means that which is done. If both the parties have performed their
obligations, they are executed contracts Executory contract

• Both the parties have yet to perform their obligations

• It may sometimes partly executed and partly executed Unilateral

• When only one party has to fulfill his obligation at the time of the formation of
the contract, the other party having fulfilled his obligation at the time of the contract or
before the contract comes into existence

• A permits a railway coolie to carry his luggage and place it in a carriage.

The contract comes to an end as it places it in carriage. Now it is the
Obligation of A to pay the amount‘ Bilateral contract
– The obligation on the part of both the parties the contract is outstanding at the time
of formation of the contract. (Executory Contracts).

OFFER (PROPOSAL) AND ACCEPTANCE

Introduction

As discussed earlier, a contract is defined as a promise or agreement enforceable by law. So,

two elements namely, agreement and enforceability are essential for a valid contract. All
contracts are made by the process of a lawful offer by one party and the lawful acceptance of
the offer by the other party.
Example: If ‗X‘ says to ‗Y‘ ―will you buy my house for Rs. 5,00,000‖? It is an offer. If ‗Y‘
says ―Yes‖, the offer is accepted and a contract is formed.
An ‗offer‘ involves the making of a proposal. The term proposal is defined under Sec 2(a) in
the Contract Act as follows: ―when one person signifies to another his willingness to do or
to abstain from doing anything with a view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal‖

A proposal is also called an offer. The promisor or the person making the offer is called the
offeror. The person to whom the offer is made is called the offeree.
Promise and Acceptance:

Sec.2(b) of the Act defines promise as ―when the person to whom the proposal is made
signifies his assent thereto, the proposal is said to be accepted.

A proposal when accepted becomes a promise‖ Promisor and promise are defined under Sec
2(c) as ―The person making the proposal is called the ‗promisor‘ and the person accepting
the proposal is called the ‗promisee‘ – Sec. 2(c).

A proposal or acceptance may be made in any of the following manners:

• By express words spoken,  In writing.

• By conduct

Examples:

1. When A says to B: ―will you buy this building for Rs.20 lakhs‖? It is an express oral offer.

2. When A writes to B stating the above offer, then it is an express written offer.

3. When a transport company runs a bus on a particular route, it is termed as an implied offer
or an offer by conduct

An offer simply means willingness, to do something (a positive act) or to not do something (a

negative act). It must be noted that if an offer is not made, to get the acceptance of the other
party, then it cannot be construed as an offer under the Contract Act. An offer must be made
with the object of getting a favourable response from the intended acceptor. Thus, there may
be ‗positive‟ or „negative‟ acts which the proposer may be willing to do.

Types of Offer
An offer can be of many types, ranging across the spectrum. There are basically 7 kinds of
offers:

• Express offer
• Implied offer
• General offer
• Specific Offer
• Cross Offer
• Counter Offer
• Standing Offer
Express offer and Implied offer
Section 9 of The ICA defines both of them as: In so far as the proposal or acceptance
of any promise is made in words, the promise is said to be express. In so far as such a
proposal or acceptance is made otherwise than in words, the promise is said to be implied.
Therefore, any offer that is made with words, it may be regarded as express. Any
promise that is made otherwise than in words is implied. A bid at an auction is an example of
an Implied offer. A case in this regard is Upton-on-Servern RDC v. Powell, wherein the
defendant called a fire brigade assuming that those services would be free to him, however it
was found that his Farm did not come under that of Upton. The court held that the truth of the
matter is that the Defendant wanted the services of Upton, he asked for the services of Upton
and in response to that they offered their services and they were rendered on an implied
promise to pay for them.

General Offer
A General Offer is an offer that is made to the world at large. The genesis of a General
Offer came about from the Landmark case of Carlill v. Carbolic Smoke Ball Co. A company
by the name Carbolic Smoke Ball offered through an Advertisement to pay 100 Pounds to
anyone who would contract increasing epidemic Influenza, colds or any disease caused by
cold after taking its Medicine according to the prescribed instructions. It was also added that
1000 Pounds have been deposited in Alliance bank showing our sincerity in the matter. One
customer Mrs Carlill used the medicine and still contracted Influenza and hence sued the
company for the reward. The Defendants gave the argument that the offer was not made with
an intention to enter into a legally binding agreement, rather was only to Puff the sales of the
company. Moreover, they also contended that an offer needs to be made to a specific person,
and here the offer was not to any specific person and hence they are not obliged to the
Plaintiff.

Specific Offer
A Specific offer is an offer that is made to a specific or ascertained person, this type of
offer can only be accepted by the person to whom it is made. This concept was seen briefly in
the case of Boulton v. Jones, wherein the Plaintiff had taken the business of one Brocklehurst,
the defendant used to have business with Brocklehurst and not knowing about the change in
ownership of business, sent him an order for certain goods. The Defendant came to know
about the change only after receiving an invoice, at which point he had already consumed the
goods. The Defendant refused to pay the price, as he had a set off against the original owner,
for which the plaintiff sued him.

Cross Offer
When two parties make an identical offer to each other, in ignorance to each other‘s
offer, they are said to make cross offers. Cross offers are not valid offers. For example- if A
makes an offer to sell his car for 7 lakhs to B and B in ignorance of that makes an offer to buy
the same car for 7 Lakhs, they are said to make a cross offer, and there is no acceptance in
this case, hence it cannot be a mutual acceptance.

Counter offer
When the offeree offers a qualified acceptance of the offer subject to modifications
and variations in terms of the original offer, he is said to have made a counter offer. A counter
offer is a rejection of the original offer. An example of this would be if A offers B a car for 10
Lakhs, B agrees to buy for 8 Lakhs, this amounts to a counter offer and it would mean a
rejection of the original offer. Later on, if B agrees to buy for 10 Lakhs, A may refuse. Sir
Jenkins CJ in Haji Mohd Haji Jiva v. Spinner, held that any departure from original offer
vitiates acceptance. In other words, an acceptance with a variation is not acceptance, it is
simply a counter proposal which must be accepted by the original offeror, for it to formulate
into a contract.

Standing offer
An Offer which remains open for acceptance over a period of time is called a standing
offer. Tenders that are invited for supply of goods is a kind of Standing Offer. In Perclval Ltd.
V. London County Council Asylums and Mental deficiency Committee, the Plaintiff
advertised for tenders for supply of goods. The defendant took the tender in which he had to
supply to the company various special articles for a period of 12 months. In-between this the
Defendant didn‘t supply for a particular consignment. The Court held that the Tender was a
standing offer that was to be converted into a series of contracts by the subsequent acts of the
company and that an order prevented pro tanto the possibility of revocation, hence the
company succeeded in an action for breach of contract.

ESSENTIALS OF VALID OFFER

1. An offer may be express or may be implied from the circumstances:
In so far as the proposal or acceptance of any promise is made in words, the promise is
said to be express. In so far as such proposal or acceptance is made otherwise in words, the
promise is said to be implied (Sec. 9).
2. An offer may be made to a definite person; to some definite class of persons; or to the
world at large
: An offer made to a definite persons or a definite class of person is called a specific offer. An
offer sent to all persons (the world of public at large) is called a General offer or Public offer.
Examples: Specific offer: ‗X‘ offers to sell his motor cycle to ‗Y‘ for Rs.10,000. This is a
specific proposal. This proposal is specifically given to ‗Y‘. Only ‗Y‘ can accept this
proposal.
3. Offer must be capable of creating legal relationship: The offer must be one which is
capable of creating a legal relationship. An invitation to a birthday party or an invitation to
play cards will not crate legal relationship. Therefore an offer for such social events will
not constitute a contract.
Example: Balfour Vs Balfour (1919): A husband promised to send money to his wife, so long
as she remained away from him. It was held that if the husband fails to pay, the wife could
not sue for the amount on the ground that the promise made by the husband was never
intended to give rise to legal consequences.
4. The terms of the offer must be definite and certain: The terms of the offer must be
definite, unambiguous and certain and not loose and vague. To constitute a valid contract, it
is essential that the proposal must be so certain, that the rights and obligations of the parties
arising out of the contract can be exactly fixed. If the terms of an offer are uncertain, its
acceptance cannot create any contractual relationship. According to Sec. 29 of the Act,
agreements, the meaning of which is not certain or capable of being made certain are void.

Example: ‗X‘ says to ‗Y‘ ―I will give you some money if you marry ‗Z‘‖. This is not an
offer which can be accepted because the amount of money to be paid is not certain.
5. a mere statement of intention is not an offer:
 Every expression of willingness to enter into a contract may not amount to an offer in
the legal sense. It may be only a first and preliminary step in the formation of a contract. Thus
it becomes necessary to distinguish between the offer on the one hand and (i) a mere
declaration of intention (ii) an invitation to make an offer, and (iii) auction sale, on the other
hand A distinction is usually made between an ‗offer‘ and ―a statement of intention‖. Price
lists and catalogues and enquiries from customers are merely statements of intention. They
are not regarded as offers but as invitation to others to make offers
Harvey Vs Facey: Harvey telegraphed to Facey asking to inform him whether he would sell
Bumper Hall pen and if so at what price? Facey informed Harvey that the lowest price was
$900 but did not say that he was willing to sell at that price. Harvey telegraphed that he
would buy at that price. Facey gave no reply to the telegram. Held, there was no contract
because facey did not say that he was willing to sell or not. Mere mentioning of price is not
an offer.
6. An offer must be communicated to the offeree:
A person cannot accept an offer unless he knows of the existence of the offer
Example: ‗P‘ offers a reward to anyone who finds his lost dog. ‗Q‘ on finding the dog brings
it to ‗P‘ without having heard of the offer. Held he was not entitled to the reward. Lalman Vs
Gauri Dutt: ‗G‘ sent his servant ‗L‘ in search of his missing nephew, subsequently ‗G‘
announced a reward for information concerning the boy. ‗L‘ brought back the missing boy,
without having the knowledge of the reward. Held, there was no contract between L and G
and the reward cannot be claimed.
7. An offer may have certain conditions:
A proposer is at liberty to make an offer subject to certain conditions. It is immaterial if the
terms are hard or ridiculous. Conditions attached to the offer must clearly be
communicated to the offeree. The offeree must fulfil all the conditions mentioned in the
offer. 8. Offer must not thrust the burden of acceptance:

Offer should not contain the term ―the non-compliance of which may be assumed
to amount to acceptance‖. Thus a man cannot say that if he fails to hear from the other party
within a week he would consider the offer as being accepted. Similarly, if ‗A‘ writes to ‗B‘.
―I will sell you my house for Rs.5 lakhs. If you do not reply. I shall assume that you have
accepted the same. There is no contract even if ‗B‘ does not reply.

Revocation of Offer

A revocation of offer is the withdrawal of a previous offer to engage in some sort of legally
binding contract. The previous offer had to have been such that it would have immediately
become legally binding if the other party had formally agreed to it.

• A proposal may be revoked at any time before the communication of its acceptance is
complete as against the proposer, but not afterwards.
 • An acceptance may be revoked at any time before the communication of the
acceptance is complete as against the acceptor, but not afterwards.

REVOCATION OF OFFER AND ACCEPTANCE

Revocation of an offer:
An offer comes to an end and is no longer open to acceptance under the following
cases-Sec.6
1. Lapse of time.
2. After expiry of reasonable time.
3. An offer lapses by the failure of the acceptor to fulfil a condition precedent to
acceptance, where such a condition has been prescribed.
4. An offer lapses by the death or insanity of the proposer, if the fact of his death or
insanity comes to the knowledge of the acceptor before acceptance.
5. When the counter-offer is given, the original offer lapses.
6. A proposal once refused is dead and cannot be revived by its subsequent acceptance.

Example: ‗A‘ offers to sell his farm to ‗B‘ for Rs.1,00,000.‘B‘ replies offering to pay
Rs.90,000. ‗A‘ refuses. Subsequently ‗B‘ writes accepting the original offer. There is no
contract because the original offer has lapsed.

7. By notice: If the offeror gives notice of revocation to the other party, an offer may be
revoked anytime before acceptance but not afterwards. Once an offer is accepted there
is a binding contract.
The acceptance of an offer becomes binding on the offeror as soon as the
acceptance is put in course of communication to the offeror so as to be out of the power
of the acceptor. But anytime before this happens, the offer may be revoked.

Example: A proposal is sent by ‗X‘ to ‗Y‘ and accepted by ‗Y‘ by letter. The proposal
might have been revoked anytime before the letter of acceptance was posted but it
cannot be revoked after the letter is posted.

The notice of revocation does not take effect until it comes within the knowledge of the
offeree.

ACCEPTANCE
As stated earlier, the second step in the formation of a contract is the acceptance of the offer.
Acceptance means when the person to whom the offer was made, has given his assent to such
offer– Section 2(b) of Contract Act.
Once the offer is accepted and such acceptance has been communicated, to the offeror, the
parties are bound by their respective promises. Just like an offer, even an acceptance can be
revoked before the communication of acceptance reaches the offeror
The most important aspect of acceptance is that performance of an offer, in ignorance of the
said offer is not an acceptance. Therefore an act done, amounting to acceptance, but acceptor
being unaware of the offer, it is not a valid acceptance.

ESSENTIALS OF VALID ACCEPTANCE

1. Acceptance should be absolute and unqualified (unconditional), and must be made whilst
the offer is subsisting.
2. Acceptance to offer can be expressed or implied i.e. conducting in a manner which
implies acceptance. Eg. If a watch is taken by someone to test it, before making the final
purchase and the person pledges it, this amounts to an implied acceptance.
3. Acceptance must be communicated in a reasonable manner, or, if any, must be
communicated through a reasonable medium, like telephone, mail, WhatsApp message,
automatic reply to emails, if there are no exceptions
4. Traditionally acceptance was made through posts or letters. If an acceptance is intended
to be made through a post, it will be deemed accepted when the letter of acceptance is
posted and it is out of the reach of the acceptor.
However with the advent of instant communication like telephone, offer is accepted,
when the offeror hears the acceptance on his part.

5. Acceptance or communication of acceptance by a third person or a stranger is not a valid

acceptance. If a contract mentions a specific person to whom acceptance is to be
communicated, then acceptance shall be deemed to be valid if it is made to that person
only.
6. Acceptance can be either in express words or can be implied i.e. by conducting in a
reasonable manner which signifies acceptance. Eg. A offered B to sell his watch for
Rs.1000 and lends it for his satisfaction. B, in turn, pledges it or further sells it. The act
of B is conduct amounting to a valid acceptance.
Eg. In a contract of sale, acceptance is when an act by the purchaser does an act which is
inconsistent with the ownership of the seller.

Revocation of Acceptance
A proposal may be revoked at any time before the communication of its acceptance is
complete as against the proposer, but not afterwards. An acceptance may be revoked at any
time before the communication of the acceptance is complete as against the acceptor, but not
afterwards.
Consideration
A Contract is formed when a person, A, makes an offer to another person, B. When such
Offer is accepted by the other person, it becomes an agreement.
 Consideration means value given for the performance of a promise. It need not
necessarily be money, however, it should be something which has been agreed by the parties
and has some value.
Usually, a contract without consideration is void, however, exceptions to this rule are
specified in Section 25 of the Contract Act.

Consideration need not be adequate, however, it must have some value. Consideration for a
promise includes either performance of an act or non-performance (abstinence) of a certain
act. Performance of an act also includes the act of paying money.

The consideration may consist of either:

(i) An act (which one is legally bound to perform)
(ii) An abstinence or forbearance from doing (iii)
A return promise.

TYPES OF CONSIDERATION
Consideration may be classified as
1. Past consideration 2.
Present consideration, and
3. Future consideration.
Past consideration: When the consideration of one party was given before the date of the
promise, it is said to be past.
For Example, ‗X‘ does some work for ‗Y‘ in the month of January and ‗Y‘ promised
him to pay some money during February. The consideration of ‗X‘ is past consideration.
Under English law past consideration will make the contract invalid. But under Indian law a
past consideration is good consideration because the definition of consideration in Sec.2(d)
includes the words ―has done or abstained from doing.‖

Present consideration: Consideration which moves simultaneously with the promise is

called present consideration or executed consideration.
Future Consideration: When the consideration is to move at a future date it is called future
consideration or executory consideration.

ESSENTIALS OF VALID CONSIDERATION

1. Consideration Must Move at the Desire of the Promisor: The act done or loss
suffered by the promise must have been done or suffered at the desire of the promisor.
An act done without any request is a voluntary act and does not come within the
definition of consideration.
The collector of a district asked ‗D‘ to spend money on the improvement of
a market and he did so. ‗D‘ cannot demand payment from the shopkeepers using the
market for having improved the market. (Durga Prasad Vs Baldeo).
2. It must be a real consideration: The consideration must have some value in the eyes
of law. It must not be illusory. The impossible acts or non-existing goods cannot
support a contract. A contribution to charity is without consideration. A promise to pay
an existing debt within due date if the creditor gives a discount is without
consideration and the discount cannot be enforced.
3. Public Duty: ―Where the promise is already under an existing public duty, an
express promise to perform or performance of that duty will not amount to
consideration.
Example: A contract to pay a sum to a witness who has already received some money
to appear at a trial is invalid
4. Promise to a stranger: A promise made to a stranger to perform an existing contract,
is enforceable because the promisor undertakes a new obligation upon himself which
can be enforced by the stranger.
‗X‘ wrote to his nephew ‗B‘, promising to pay him an annuity of 150
pounds in consideration of his marrying ‗C‘. ‗B‘ was already engaged to marry ‗C‘.
Held that the fulfilment of B‘s contract with ‗C‘ was consideration to support X‘s
promise to pay the annuity. (Shadwell Vs Shadwell)
5. Consideration need not be adequate: Explanation 2 under Sec. 25 provides that
―An agreement to which the consent of the party is freely given is not void merely
because the consideration is inadequate.‖ Law requires the presence of consideration,
but does not inquire into the adequacy.
Example: ‗P‘ agrees to sell a house worth Rs.5,00,000 for Rs.1,00,000. P‘s consent
to the agreement was freely given. The agreement is valid in spite of inadequate
consideration.
6. The consideration must not be illegal, immoral or opposed to public policy: If the
consideration of the object of the agreement is illegal, immoral or opposed to public
policy, the agreement to contract is invalid. Example: ‗X‘ agreed to pay Rs.50,000 to
‗Y‘ if he kills ‗C‘.
7. The consideration may be past, present and future In the past promise,
consideration has already been taken place. In the present consideration, it
simultaneously moves with promise. In the future consideration, it passes
subsequently
8. The consideration may move from the promise or from any other person: A
person has given some properties to his wife ‗C‘ directing her at the same time to pay
an annual allowance to his brother ‗R‘. ‗C‘ also entered into an agreement with ‗R‘
promising him to pay the allowance. This agreement can be enforced by ‗R‘ even
though no part of consideration received by ‗C‘ moved from ‗R‘
 1. It has to be At the desire of the promisor, which means that it should originate from
the promisor out of his own accord and not at the instance of a third party.
Accordingly, the performance of a legal duty is thus not a consideration.
2. Consideration could be:
1. Past Consideration, when the promisor has received consideration before the
date of the performance of the contract by any party. Eg. Advance money paid.
2. Present Consideration, when consideration is provided immediately when
the contract is made or executed. Thus it is also called “executed
consideration.
3. Future Consideration, when consideration is paid after making of the
contract. In consideration given for ‗construction contracts‘-Constructed
building is given after the execution of the contract.
3. It must not be illegal or void or impossible to perform.
4. Consideration is not void just because it is inadequate, provided it was at the desire of
the promisor.
5. It must be real, not illusionary. Consideration can be tangible or intangible-e.g.
Performance of service like teaching, labour.

CAPACITY OF PARTIES
As per, section 10 of the contract act, an agreement is a contract if it is made among
other essentials, by free consent of parties who are competent to contract. People who are of
the age of majority (i.e. above 18 years of age) and are of sane mind, and are not disqualified
to contract by any law to which such person is subjected to, are competent to contract.

Thus a minor or a person with an unsound mind is not competent to contract or if

such person has been barred from contraction by laws to which he is subjected. In such a case
the contract is void.
From this definition we come to the conclusion that the following are not competent to
contract:
1. A person who has not attained the age of majority.
2. A person who is of unsound mind, e.g. lunatic or an insane person.
3. Any other person who has been disqualified from contracting under any law, e.g. a person
who has been adjudicated an insolvent.

THE LEGAL RULES REGARDING MINOR‟S AGREEMENT

1. Minor‟s agreement is Void-ab-initio: (void from the very beginning)

Today an agreement with or by minor is void and inoperative. Formerly, the position
was not clear. The Indian Contract Act, does not expressly state whether a contract made by a
minor is void or voidable. Sec.11 of the Act simply states that a minor is not competent to
contract. Following the English law, it was held formerly that a minor‘s contract was voidable
but not void. The issue came up again in the case of Mohori Bibee Vs Dharmadas Ghose
(1903)
In this case, a minor executed an agreement for Rs.20,000 and received Rs.8,000 from
a mortgagee by way of earnest money. H sued for setting aside the mortgage. The lender
wanted refund of the sum which he had actually paid. Held an agreement by a 36 minor was
absolutely void and therefore, the question of refunding the money did not arise. Had the
agreement been only voidable, the benefit received would have been refunded under Sections
64 and 65 of the Act.

2. A Minor can be a Promisee or a Beneficiary:

During his minority, a minor cannot bind himself by a contract, but there is nothing in
the contract act which prevents him from making the other party to the contract to be bound
to the minor. Thus, a minor is incapable of making mortgage, or a promissory note. But he is
capable of becoming a mortgagee, a payee or endorsee. He can derive benefit under the
contract.

3. A minor‟s Agreement cannot be Ratified by the Minor on his attaining Majority:

A minor cannot ratify the agreement on attaining the age of majority as the original
agreement is totally void from the beginning, and, therefore, validity cannot be given to it
later on.
Example: Indira Ramasamy V Anthiappa Chettiar. ‗A‘ a minor makes a promissory
note in favour of ‗B‘. on attaining majority, he makes out a fresh promissory note in place of
the old one. Neither the original nor the fresh promissory note is valid.

4. If a Minor has Received any Benefit Under a Void Contract he Cannot be Asked to
Refund the same:
We have already mentioned the facts in Mohiri Bibee‘s case. In that case, the lender
could not recover the money paid to the minor. Also the property mortgaged by the minor in
favour of the lender could not be sold by the latter for the realisation of his loan.

5. A Minor is Always Allowed to plead Minority:

He is not prevented from this right even where he had procured a loan or entered into
some other contract by falsely representing that he was of full age. Thus, an minor who has
deceived the other party to the agreement by representing himself as of full age is not
prevented from later asserting that he was minor at the time he entered into agreement.
Examples: Leslie V Shiell (1914) In this case ‗S‘, a minor, borrowed ₤ 400 from L, a
money lender, by fraudulently misrepresenting that he was of full age. On default by ‗S‘, ‗L‘
sued for return of ₤ 400 and damages for the crime. Held, ‗L‘ could not recover ₤ 400, and
his claim for damages also failed. Even on equitable grounds, the minor could not be asked to
refund ₤ 400, as the money was not traceable as the minor had already spent it In the case of a
fraudulent misrepresentation of his age by the minor, inducing the other party to enter into a
contract, if money could be traced. The court may award compensation to that other party
under Sections 30 and 33 of the Specific Relief Act,1963
6.A Minor Cannot be a Partner in a Partnership Firm:
He cannot become a partner but for the benefit of the partnership with the consent of
all the partners he can be admitted as a partner. Other partners cannot file a case against the
minor partner if the latter commits any offence.

7.A Minor‟s Estate is Liable to a Person Who Supplies Necessaries of Life to a Minor:
However there is no personal liability on a minor for the necessaries of life supplied.
The term ‗necessaries‘ is not defined in the Indian Contract Act, 1872. but the English
Sale of Goods Act defines necessaries as ―goods suitable to the condition in life of the minor
and to his actual requirements at the time of sale and delivery‖.
From the above definition it is very clear that in order to entitle the supplier to be
reimbursed from the minor‘s estate, the following conditions must be fulfilled:
• The goods are necessaries for that particular minor having regard to his status.
For example, Purchase of a car may be a necessity for a particular minor and
may not hold
good for the other person.
• The minor needs the goods both at the time of sale and delivery.

8. Minor‘s parents or guardians are not liable to a minor‘s creditors for the breach of
contract by the minor, whether the contract is for necessaries or not. But the parents are
liable where the minor is acting as an agent of the parents or the guardian.

9. A minor can act as an agent and bind his principal by his acts without incurring any
personal liability.

10. No specific performance: An agreement by a minor being void, the court can never
direct specific performance of such an agreement by him.

11. No Insolvency: A minor cannot be declared insolvent even though there are dues
payable from the properties of the minor.

12. Company‟ shares to a minor:

A minor cannot apply for and be a member of a company. If a minor has,

by mistake, been recorded as a member, the company can rescind the transaction and
remove the name from the register. But where a minor was made a member and, after
attaining majority, he received and accepted dividends, he will be stopped from denying
that he is a member. (Fazalbhoy V The Credit Bank of India )
 FREE CONSENT

Definition of free consent: An agreement is valid only when it is the result of free consent
of all the parties to it.

Sec. 13 of the Act defines the meaning of the term ‗consent‘ and Sec. 14 of the Act specifies
under what circumstances consent is ―free‖. Sec. 13 ―Two or more persons are said to
consent when they agree upon the same thing in the same sense‖. Consent involves a union of
the wills and an accord in the minds of the parties.

When the parties agree upon the same thing in the same sense, they have consensus-adidem.

For a valid contract the parties must have ―identity of mind‖.

Sec. 14 lays down that consent is not free if it is caused by

1. Coercion.
2. Undue influence,
3. Fraud,
4. Misrepresentation and
5. Mistake.

COERCION

Definition:

Coercion is defined by Sec. 15 of the Act as follows:

―Coercion is (1) the committing or threatening to commit, any act forbidden by the Indian
penal code, or

(2) 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.

Examples: 1. A Hindu widow is forced to adopt ‗X‘ under threat that her husband‘s dead
body would not be allowed to be removed unless she adopts ‗X‘. the adoption is voidable as
having been induced by coercion. (Ranganayakamma Vs Alwar setti)

2. ‗A‘ threatens to kill ‗B‘ if he does not transfer all his property in ‗A‘s favour for a very
low price. The agreement is voidable for being the result of coercion. It is not necessary
that coercion must have been exercised against the promisor only, it may be directed at
any person.

Examples: 1. ‗A‘ threatens to beat ‗B‘ (C‘s son) if ‗C‘ does not let his house to ‗A‘ the
agreement is caused by coercion.

3. ‗X’threatens to kill ‗Y‘ if he does not sell his house to ‗B‘ at a very low price. The
agreement is caused by coercion though ‗X‘ is a stranger to the transaction.
Further, it is immaterial whether the Indian penal code is or is not in force in the place
where the coercion is employed.

Example: ‗A’ on board an English ship on the high seas, causes ‗B‘ to enter into an
agreement by an act amounting to criminal intimidation under the Indian penal code. ‗A‘
afterwards sues ‗B‘ for breach of contract at Calcutta. ‗A‘ has employed coercion,
although his act is not an offence by the law of England, and although the Indian penal
code was not in force at the time or place where the act was done.

Threat to commit suicide – is it coercion? As per Section 15 ―committing or

threatening to commit any act forbidden by the Indian Penal Code is coercion.‖ As the
act of suicide is forbidden by the IPC, a threat to commit suicide must be treated as
coercion.

Example: Ammiraju Vs Seshamma In this case, ‗A‘ obtained a release deed from his
wife and son under a threat of committing suicide. The transaction was set aside on the
ground of coercion.

Duress: The English equal of coercion is Duress. Duress has been defined as causing, or
threatening to cause, bodily violence or imprisonment, with a view to obtain the consent
of the other party to the contract.

Duress differs from coercion on the following points:

1. ‗coercion‘ can be employed against any person whereas ‗duress‘ can be employed
only against the other party to the contract or members of his family.

2. ‗Coercion‘ may be employed by any person, and not necessarily by the promisee.
‗Duress‘ can be employed only by the party to the contract or his agent

. 3. ‗Coercion‘ is wider in its scope and includes unlawful detention of goods also.
‗Duress‘ on the other hand does not include unlawful detention of goods.

Only bodily violence or imprisonment is duress. Consequences of coercion: Sec.19:

When consent to an agreement is caused by coercion the agreement is contract voidable
at the option of the party whose consent was so obtained.

In other words, the affected party can have the contract cancelled or if he so desires to
insist on its performance by the other party. Sec. 72: A person to whom money has been
paid or anything delivered under coercion must repay or return it.

Example: A railway company refuses to deliver certain goods to the consignee, except
upon the payment of an illegal charge for carriage. The consignee pays the sum charged
in order to obtain the goods. He is entitled to recover so much of the charge as was
illegally excessive.
UNDUE INFLUENCE

Definition: A contract is said to be induced by undue influence where, (i) One of the parties
is in a position to dominate the will of the other, and (ii) He uses the position to obtain an
unfair advantage over the other Sec. 16(1) Sec. 16(2) provides that undue influence may be
presumed to exist in the following cases:

1. Where one party holds a real or apparent authority over the other or where he stands in
a fiduciary relationship to the other. Fiduciary relationship means a relationship of mutual
trust and confidence, such a relationship is supposed to exist in the following cases – father
and son; guardian and ward; solicitor and client; doctor and patient; saint and disciple; trustee
and beneficiary etc.

2. Where a party makes a contract with a person whose mental capacity is temporarily or
permanently affected by reason of age, illness or mental or bodily distress.

Example: ‗F‘ having advanced money to his son ‗B‘ during his minority, upon B‘s coming
of age obtains by misuse of parental influence, a bond from B for a greater amount than the
sum advanced. ‗F‘ employs undue influence. Consequences of Undue influence: An
agreement caused by undue influence is a contract voidable at the option of the party whose
consent was obtained by undue influence (Sec. 19-A).

Example: a money-lender, advances Rs.100 to ‗B‘ an agriculturist, and by undue influence

induces ‗B‘ to execute a bond for Rs.200 with interest at 6 percent per month. The court may
set the bond aside, ordering ‗B‘ to repay Rs.100 with such interest as may seem just.

Burden of proof [Sec. 16(3)]: If a party is proved to be in a position to dominate the will of
another and the transaction appears on the face of it or on the evidence adduced to be
unconscionable, the burden of proving that the contract was not induced by undue influence,
lies on the party who was in a position to dominate the will of the other.

Undue Influence is suspected in the following cases.

1. Inadequacy of consideration.

2. Fiduciary relationship between the parties.

3. Inequality between the parties as regards age, intelligence, social status, etc

. 4. Absence of independent advisors for the weaker party.

5.Unconscionable bargains: Unconscionable bargain is one which is against the

conscience of reasonable persons and what shocks the public. If excessive profit is
made it will also fall within this term.

High rates of Interest: It is usual for money lenders to charge ‗High rates of interest‘
from needy borrowers can the court presume the existence of undue influence in such
cases?
 Difference between Undue Influence and Coercion: In both undue influence and
coercion, one party is under the influence of another.

1. In coercion the influence arises from committing or threatening to commit an offence

punishable under the IPC or detaining or threatening to detain property unlawfully. In
undue influence, the influence arises from the domination of the will of one person over
another.

2. Cases of coercion are mostly cases of the use of physical forces. But in undue
influence it is a question of mental pressure.

MISREPRESENTATION

Representation is a statement or assertion, made by one party to the other, before or at the
time of the contract, regarding some fact relating to it.

Misrepresentation arises when the representation made is inaccurate but the inaccuracy is not
due to any desire to defraud the other party.There is no intention to deceive.

Sec.18 of the Contract Act classifies cases of misrepresentation into three groups as
follows:

1. 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.

Example: ‗X‘ learns from ‗A‘ that ‗Y‘ would be director of a company to be formed. ‗X‘
tells this to B‘ in order to induce him to purchase shares of that company and ‗B‘ does so.
This is misrepresentation by ‗X‘ though he believed in the truthiness of the statement and
there was no intent to deceive as the information was derived not from ‗Y‘ but from ‗A‘ and
was mere hearsay.

2. Any breach of duty which, without an intent to deceive, gives an advantage to the
person committing it, (or anyone claiming under him) by misleading another to his prejudice
or to the prejudice of anyone claiming under him. Under this heading would fall cases where
a party is under a duty to disclose certain facts and does not do so and thereby misleads the
other party. In English law such cases are known as cases of ―constructive fraud‖.

3. Causing however, innocently, a party to an agreement to make a mistake as to the

substance of a thing which is the subject of the agreement.

Consequence of Misrepresentation:

In cases of misrepresentation the party aggrieved can,

1. Avoid the agreement, or

2. Insist that the contract be performed and that he be put in the position in which he would
have been if the representation made had been true.
 Example: ‗A‘ informs ‗B‘ that his estate is free from encumbrance. B‘ thereupon buys the
estate in fact unknown to ‗A‘, the estate is subject to mortgage. ‗B‘ may either avoid the
contract or may insist on its being carried out and the mortgage debt be redeemed. In case of
misrepresentation the aggrieved party cannot claim compensation or damages from the other
person.
This however, is subject to certain exceptions. These are:

1. Breach of Warranty of authority by an agent: Where an agent believes that he has the
authority to represent his principal while in fact he has no such authority, the agent is liable
for damages even though he is only guilty of innocent misrepresentation. (Collen V. Wright)

2. Misstatement in prospectus: The directors of a company are liable for damages under
Sec. 62 of the companies Act, 1956 for innocent misrepresentation made in the prospectus.

3. Negligent representation made by one person to another between whom confidential

relationship exists.

E.g. solicitor and client. However, if the aggrieved party whose consent was caused by
misrepresentation had the means of discovering the truth with ordinary diligence, he has no
remedy.

FRAUD

Definition: The term ‗fraud‘ includes all acts committed by a person with a view to deceive
another person. To ―deceive‖ means to ―induce a man to believe that a thing is true which
is false‖

Sec. 17 of the contract act states that ‗Fraud‘ means and includes any of the
following acts committed by a party to a contract (or with his connivance or by his agent)
with intent to deceive another party thereto or his agent; or to induce him to enter into a
contract.

1. False statement: ―The suggestion as to a fact, of that which is not true by one who
does not believe it to be true.‖ If a false statement is intentionally made it is fraud

2. Active concealment: ―The active concealment of a fact by one having knowledge or

belief of the fact.‖ Mere non-disclosure is not fraud where the party is not under any duty to
disclose all facts. But active concealment is fraud .

Examples

(i) ‗B‘ having discovered a vein of ore on the estate of ‗A‘ decided to conceal the
existence of ore from ‗A‘ with ‗A‘s ignorance, ‗B‘ contracted with ‗A‘ to buy the estate at
an under value. The contract is voidable at the option of ‗A‘.

(ii) ‗A‘ sells by auction to ‗B‘ a horse which ‗A‘ knows to be unsound. ‗A‘ says nothing
to ‗B‘ about the horses‘ unsoundness. This is not because ‗A‘ is under no duty to disclose the
fact to ‗B‘ but if between ‗A‘ and ‗B‘ there exists a fiduciary relationship (if ‗B‘ is
‗A‘daughter) here arises the duty to disclose and nondisclosure amounts to fraud.

3. Intentional non-performance: ―A promise made without any intention of performing it‖

(e.g. purchase of goods without any intention of paying for them) is fraud.

4. Any other act fitted to deceive

5. Fraudulent act or omission: ―Any such act or omission as the law specially declares to
be fraudulent‖. This clause refers to provisions in certain acts which make it obligatory to
disclose relevant facts. E.g. under Sec. 55 of the Transfer of Property Act, the seller of
immovable property is bound to disclose to the buyer all material defects. Failure to do so
amounts to fraud.

CONTINGENT CONTRACTS

Definition: [Sec.31]: A Contingent Contract is a contract to do or not to do something, if some

event, collateral to such contract does or does not happen.

Example: ‗A‘ contracts to pay ‗B‘ Rs. 10,000 if B‘s house is burnt. This is a contingent
contract.

Essentials of a Contingent Contract:

1. The performance of a contingent contract is made dependent upon the happening or

nonhappening of some event.

2. The event on which the performance is made to depends is an event collateral to the
contract. i.e it does not form part of the reciprocal promises which constitute the contract.

3. The contingency is uncertain. If the contingency is bound to happen, the contract is

due to be performed in any case and is not therefore a contingent contract.

Examples

i. Life insurance, indemnity and guarantee are examples of contingent contract.

ii. Where ‗A‘ agrees to deliver 100 bags of rice and ‗B‘ agrees to pay the price only
afterwards, the contract is a conditional contract and not contingent, because the event on
which B‘s obligation is made to depend is a part of the promise itself and not a collateral
event.

4. The contingent event should not be the mere will of the promisor.

Example: ‗A‘ promises to pay ‗B‘ Rs.1000. if he so choose, it is not a contingent contract. If
the event is within the promisor‘s will but not merely his will, it may be a contingent contract.
Example: ‗A‘ promises to pay ‗B‘ Rs.10,000, if ‗A‘ left Delhi or Bombay; it is a contingent
contract, because going to Bombay is an event, no doubt within A‘s will but is not merely his
will.

Rules Regarding Enforcement of Contingent Contracts:

1. Contracts contingent upon the happening of a future uncertain event cannot be enforced by
law unless and until that event has happened. And if the event becomes impossible such
contract becomes void (Sec. 32)

Examples
(i) ‗A‘ makes a contract with ‗B‘ to buy ‗B‘s house if ‗A‘ survives ‗C‘. This contract
cannot be enforced by law unless ‗C‘ dies in A‘s life-time.

(ii) ‗A‘ contracts to pay ‗B‘ a sum of money when ‗B‘ marries ‗C‘ ‗C‘ dies without
being married to ‗B‘. the contract becomes void.

2. Contracts contingent upon the non-happening of an uncertain future event can be enforced
when the happening of that event becomes impossible, and not before (Sec. 33)

Example: ‘A‘ agrees to pay ‗B‘ a sum of money if a certain ship does not return. The ship is
sunk. The contract can be enforced when the ship sinks.

3. When the event to be deemed is impossible

Examples: ‗A‘ agrees to pay ‗B‘ a sum of money if ‗B‘ marries ‗C‘. ‗C‘ marries ‗D‘. the
marriage of ‗B‘ to ‗C‘ must now be considered impossible although it is possible that ‗D‘
may die and that ‗C‘ may afterwards marry ‗B‘.

4. a. The happening of an event within a fixed time: Contracts contingent upon the happening
of an event within a fixed time become void if, at the expiration of the fixed time, such
event has not happened or if before the fixed time, such event becomes impossible.

Example: ‗A‘ promises to pay ‗B‘ a sum at a certain ship returns within a year. The contract
may be enforced if the ship returns within a year, and becomes void if the ship is burnt within
the year.

b. The non-happening of an event within a fixed time example: ‗A‘ promises to pay ‗B‘ a
sum of money if a certain ship does not return within a year. The contract may be enforced
if the ship does not return within the yea, or is burnt within the year.

5. Impossible event: Contingent agreements to do or not to do anything if an impossible event

happens, are void, whether the impossibility of the event is known or not to the parties to
the agreements at the time when it is made (Sec. 36)

Example: ‗A‘ agrees to pay ‗B‘ Rs.10,000 if two straight lines should enclose a space. The
agreement is void.
QUASI-CONTRACTS

‗Quasi ‘is a Latin word which means ―to resemble‖. Contracts which are not full-
fledged contracts are called quasi contracts. i.e., when all the essentials of a valid contract are
not there, they are called quasi-contracts.
According to Dr. Jenks, quasi-contract is ―a situation in which law imposes upon
one person, on grounds of natural justice, an obligation similar to that which arises from a
true contract, although no contract express or implied has in fact been entered into by them‖.

Example: ‗X ‘supplies goods to his customer ‗Y‘who receives and consumes them. ‗Y‘ is
bound to pay the price. ‗Y ‘s acceptance of the goods constitutes an implied promise to pay.

This kind of contract is called a tacit contract.

In the above example, if the goods are delivered by the servant of ‗X‘ to ‗Z‘
mistaking ‗Z‘ for ‗Y‘, then ‗Z‘ will be bound to pay compensation to ‗X‘ for the
value.

Breach of contract
Breach of contract is a legal cause of action and a type of civil wrong, in which a
binding agreement or bargained-for exchange is not honored by one or more of the parties to
the contract by non-performance or interference with the other party's performance. Breach
occurs when a party to a contract fails to fulfill its obligation(s), whether partially or wholly,
as described in the contract, or communicates an intent to fail the obligation or otherwise
appears not to be able to perform its obligation under the contract. Where there is breach of
contract, the resulting damages have to be paid to the aggrieved party by the party breaching
the contract

If a contract is rescinded, parties are legally allowed to undo the work unless doing so
would directly charge the other party at that exact time.

It is important to bear in mind that contract law is not the same from country to
country. Each country has its own independent, freestanding law of contract. Therefore, it
makes sense to examine the laws of the country to which the contract is governed before
deciding how the law of contract (of that country) applies to any particular contractual
relationship.

INDEMNITY AND GUARANTEE CONTROL

The contract of indemnity and guarantee are special kinds of contracts. These contracts
are therefore also required to fulfil all the essential of a valid contract.

Indemnity Contract: Indemnity contract is a type of contingent contract. The term

‘Indemnity` Simply means ‘Making Somebody Safe` or ‘Paying Somebody back`.

Section 124 of contract Act defines that ‘‘A contract by which one party. Promises
to save the other from loss caused to him by the conduct of the promise himself by the
conduct of any other person, is called a conduct of indemnity”.
 The party who gives indemnity or who promises to compensate for or to make
good the loss, is called. Indemnifier and the party for whose protection or safety the
indemnity is given or the party whose loss is made good is called ‘Indemnified’ or
‘indemnity holder’.

Important features of an indemnity

contract –
1. Two party.
2. Promises for pay compensation of loss/damage.
3. Loss/damage may be the own or other person.
4. Creation of liabilities.
5. It must be faith.
6. All essential features of valid contract.
7. Compensation for actual loss/damage.
8. It may be express or implied.
Loss/damage may be caused by some event, or accident, or some natural phenomenon or
disaster.

Rights of Indemnified
(IndemnityHolder) –
1. Rights to claim for all
damages/losses.
2. Rights to claim for all costs which is related to contract.
3. Rights to claim for all sums which his may have paid for contract.

Liabilities/Duties of
Indemnified –
1. Liabilities to pay all
damages/losses.
2. Liabilities to pay all costs related to contract.
3. Liabilities to pay all sum which is received by sell for contract from indemnified.

Guarantee Contract

The object of the contract of guarantee is to enable. A person to obtain an employment, or

a loan, or some goods or service on credit,

According to section 126 of the contract Act ‘‘A contract of guarantee is a contract to
perform the promise, or discharge the liability, of a third person in case of his default.”

The person who gives the guarantee is called the ‘Surety’ or ‘guarantor’ & the person in
respect of whose default the guarantee is given is called the principal debtor or he is the
party on whose behalf. Guarantee is given and the person to whom the guarantee is given
is called the ‘Creditor’.
Essential features of a Guarantee
Contract –
1. Three parties
2. Three agreements
3. Concurrence of the three parties
4. Control may be experts or implies
5. It may be oral or written
6. Liability of surety is secondary is dependent on principal debtor’s default.
7. Guarantee must be in the knowledge of debtor.
8. All essential of a valid contract.
9. Guarantee must not be obtained by means of misrepresentation.
10. Existence of a primary liability.

Bailment and pledge

Bailment the world ‘bailment’ is derived from the French world the French world
‘bailer’ which means ‘to deliver Etymologically, it means any kind of handling
over’. In legal sense, it involves change of possession of goods from one person to
another for some specific purpose.
Definition of Bailment
Sec. 184 defines Bailment as 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’ and the person the person to whom they
are delivered is called the ‘bailee’.
Examples
(a) A delivers a piece of cloth to B, a bailor, to be stitched into a suit. There
is a contract or bailment between A and B.
(b) A sells certain goods to B who leaves them in the possession of A . The
relationship between B and A is that of bailor and bailee.

Consideration in a contract of bailment

In a contract of bailment, the consideration is generally in the form money payment either
by the bailor or the bailee, as for example, when A gives his bicycle to B for repair, or
when A gives his car to B on hire. Such consideration in money form, however, is not
necessary to support the promise on the part of the bailee to return to goods. The
detrainment suffered by the bailor, in parting with possession of the goods, is a sufficient
consideration to support the contract of bailment.
Distinction between Bailment and Contract of sale
A contract of bailment differs from a contract of sale in the following respects:
S. Basics of distinction Bailment Contract of sale
No.
1 Transfers of There is only a transfer of possession There is a transfer of
ownership/possession of goods from the bailor to the bailee. ownership of goods
from the seller to the
buyer.
2 Consideration not to be The consideration need not be passed The consideration in
passed between bailor and bailee. terms of price must be
passed between seller
and buyer.
3 Return of goods The bailee must return the goods to There is no question of
the bailor on the fulfillment of the such return of goods in
purpose for which the bailment is contract of sale.
made.

Kids/types of Bailments

DUTIES OF A BAILOR
• Duty to disclose defects [Section 151]
• Duty to bear expenses [Section 158]
• Duty to indemnity the bailee in case of premature termination of gratuitous
bailment [Section 159]
• Duty to indemnity the bailee against the defective title of bailor [Section 164]
• Duty to receive back the goods [Section 164
• Duty to bear the risk of loss [Section 152]
DUTIES OF A BAILEE
• Duty to take care of the goods bailed [Section 151&152]
• Duty not to make any unauthorised use of goods [Section 154]
• Duty not to mix bailor ‘s goods with his own goods [Section 155 to 157]
• Duty to return the goods [Section 160 & 161]
• Duty to return accretion to the goods [Section 163]
 Rights of a Bailor
• Right to claim damage in case of negligence [Section152]
• Right to terminate the contract in case of unauthorized use [Section 153]
• Right to claim compensation in case of unauthorized use [Section 154]
• Right to claim the separation of goods in case of unauthorized mixture of goods
which cannot be separated [Section 157]
• Right to demand return of goods [Section 160]
• Right to claim compensation in case of unauthorized retention of goods [Section
161]
• Right to demand accretions to goods [Section 163]

RIGHTS OF A BAILEE
• Right to claim damage [Section 150]
• Right to claim reimbursement of expenses [Section 158]
• Right to be indemnified in case of premature termination of gratuitous bailment
[Section 159]
• Right to recover loss in case of bailor ‘s defective title [Section 164]
• Right to recover loss in case of bailor ‘s refusal to take the goods back [Section
164]
• Right to deliver goods to any one of the joint bailors [Section 165]
• Right to deliver goods to bailor in case of bailor ‘s defective title [Section 166]
• Right to particulars lien [Section 170]

RIGHTS OF BAILOR AND BAILEE AGAINST WRONGDOERS

Rights of Bailor and Bailee against Wrongdoer [Section 180] If a third party
wrongfully deprives a bailee of the use or possession of the goods bailed, or does them
any injury, the bailee is entitled to such remedies as the owner might have used in the
like case if no bailment had been made; and either the bailor or the bailee may bring a
suit against a third person for such deprivation or injury.
Apportionment of Relief or Compensation Obtained by Such Suits [Section 181]
Whatever is obtained by way of relief or compensation in any such suit shall, as between
the bailor and the bailee, be dealt with according to their respective interests.
Example X delivered a TV to Y for repairs. Z forcefully takes possession of TV from Y‘s
shop. In this case, either X or Y may sue Z. If Y files the suit, he shall hand over the
amount received after deducting his repairs charges to X.

TERMINATION OF BAILMENT
I. Termination of every Contract of Bailment (whether Gratuitous or not)
Every contract of bailment comes to end under the following circumstances:
(a) On the Expiry of Fixed Period
(b) On fulfilment of the Purpose
(c) Inconsistent Use of Goods
(d) Destruction of the subject Matter of Bailment
II. Termination of Gratuitous Bailment
A contract of gratuitous bailment is terminated in the following circumstances also.
(a) Before the Expiry of fixed Period
(b) On Death of Bailor/Bailee.
 UNIT-II

Negotiable Instruments Act, 1881

The Negotiable Instruments Act was enacted, in India, in 1881 and it came into force on
1st March,
1881. Prior to its enactment, the provision of the English Negotiable Instrument Act were
applicable in India, and the present Act is also based on the English Act with certain
modifications. It extends to the whole of India except the State of Jammu and Kashmir.
The Act operates subject to the provisions of Sections 31 and 32 of the Reserve Bank of
India Act, 1934
Definition
A “negotiable instrument” means a promissory note, bill of exchange or cheque payable
either to order or to bearer.
Explanation (i) - A promissory note, bill of exchange or cheque is payable to order which
is expressed to be so payable or which is expressed to be payable to a particular person,
and does not contain words prohibiting transfer or indicating an intention that it shall not
be transferable.
Explanation (ii) - A promissory note, bill of exchange or cheque is payable to bearer
which is expressed to be so payable or on which the only or last endorsement is an
indorsement in blank.
Explanation (iii) - Where a promissory note, bill of exchange or cheque, either originally
or by endorsement, is expressed to be payable to the order of a specified person, and not
to him or his order, it is nevertheless payable to him or his order at his option.
(2) A negotiable instrument may be made payable to two or more payees jointly, or it may
be made payable in the alternative to one of two, or one or some of several payees. The
word negotiable means ‘transferable by delivery,’ and the word instrument means ‘a
written document by which a right is created in favour of some person.’ Thus, the term
“negotiable instrument” literally means ‘a written document which creates a right in
favour of somebody and is freely transferable by delivery.’

A negotiable instrument is a piece of paper which entitles a person to a certain sum of

money and which is transferable from one to another person by a delivery or by
endorsement and delivery.

“According to Blackburn J, a negotiable instrument has two characteristics namely

1. It is transferable, like cash, by delivery (which assumes it is in a deliverable state) so
that the transferee can enforce the rights embodied in it in his own name.
2. The transferee being a bonafide holder for value can acquire a better title to it than
that of his transferor.”

Negotiable Instrument is moreover a document of title which clearly

explains the rights towards the payment of money or a security for money which is
transferable by delivery either by custom or by legislation. The use of negotiable
Instrument is mainly to facilitate payment for exports and imports of trade. The rapid
growth of technology has revolutionized the world with computer, which is used in every
field of profession. This has reduced the use of negotiable instrument and in future it may
decline more. Even though the electronic revolution has got more advantages it may be
considered as the next step because the world needs time to get used to it. But, the
negotiable instrument are still in use.

Characteristics of Negotiable Instruments

1. Free transferability or easy negotiability

Negotiable instrument is freely transferable from one person to another without any
formality. The property (right of ownership) in these instruments passes by either
endorsement and delivery (in case it is payable to order) or by delivery merely (in case it
is payable to bearer) and no further evidence of transfer is needed.
2. Title of holder is free from all defects
A person who takes negotiable instrument bona-fide and for value gets the instrument free
from all defects in the title. The holder in due course is not affected by defective title of
the transferor or of any other party.
3. Transferee can sue in his own name without giving notice to the debtor:
A bill, promissory note or a cheque represents a debt, i.e., an “actionable claim” and
implies the right of the creditor to recover something from the debtor.
The creditor can either recover this amount himself or can transfer his right to another
person. In case he transfers his right, the transferee of a negotiable instrument is entitled
to sue on the instrument in his own name in case of dishonour, without giving notice to
the debtor of the fact that he has become holder.
In case of transfer or assignment of an ordinary “actionable claim” i.e., a book debt
evidenced by an entry by the creditor in his account book, under the transfer of property
act, notice to the debtor is necessary in order to make the transferee entitled to sue in his
own name.

4. Presumptions:
Certain presumptions apply to negotiable instruments. Section 118, 119 and 139 lay
down the following presumptions:
(a) For consideration : that every negotiable instrument, was made, drawn, accepted,
endorsed or transferred for consideration.
(b) As to date : that every negotiable instrument bearing a date was made or drawn on
such date. (c) As to time of acceptance : that every bill of exchange was accepted within
a reasonable time after its date and before its maturity.
(d) As to transfer: that every transfer of a negotiable instrument was made before its
maturity (e) As to time of endorsements : that the endorsements appearing upon a
negotiable instrument were made in the order in which they appear thereon.
(f) As to stamps : that a lost promissory-note, bill of exchange or cheque was duly
stamped.
(g) As to a holder in due course: that every holder of a negotiable instrument is holder in
due course (this presumption would not arise where it is proved that the holder has
obtained the instrument from its lawful owner, or from any person in lawful custody
thereof, by means of an offence, fraud or for unlawful consideration and in such a case
the holder has to prove that he is a holder in due course (h) As to dishonour: that the
instrument was dishonoured, in case a suit upon a dishonoured instrument is filed with
the court and the fact of protest is proved.
Section 139 - Presumption in favour of holder:
It shall be presumed, unless the contrary is proved, that the holder of a cheque received
the cheque of the nature referred to in section 138 for the discharge, in whole or in part, of
any debt or other liability. “The effect of these presumptions is to place the evidential
burden on the accused of proving that the cheque was not received by the complainant
towards the discharge of any liability. Because both sections 138 and 139 require that the
court shall presume the liability of the drawer of the cheques for the amounts for which
the cheques are drawn…it is obligatory on the courts to raise this presumption in every
case where the factual basis for the raising of this presumption had been established. It
introduced an exception to the general rule as to the burden of proof in criminal cases and
shifts the onus on to the accused.”

Types of Negotiable Instruments

There are two types of Negotiable instruments: -
Negotiable Instruments recognized by statutes: The Negotiable Instruments Act mentions
only three kinds of negotiable instruments (Section 13).
These are:
1. Promissory Notes
2. Bills of Exchange, and
3. Cheques

Negotiable instruments recognized by usage or customs of trade: There are certain other
instruments which have acquired the characteristic of negotiability by the usage or custom
of trade.
For example: Exchequer bills, Bank notes, Share warrants, Circular notes, Bearer
debentures, Dividend warrants, Share certificates with blank transfer deeds, etc.

Promissory Note
Definition: According to Section 4 of Negotiable Instruments Act, “A promissory note
is an instrument in writing (not being a bank-note or a currency-note) containing an
unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or
to the order of, a certain person, or to the bearer of the instrument.”

Parties to a Promissory Note

There are primarily two parties involved in a promissory note. They are:
(i) The Maker or Drawer: The person who makes the note and promises to pay the
amount stated therein.
(ii) The Payee – The person to whom the amount is payable i.e. to whom the payment is
to be made is called a payee.

In course of transfer of a promissory note by payee and others, the parties involved
may be – (a) The Endorser – the person who endorses the note in favour of
another person.
(b) The Endorsee – the person in whose favour the note is negotiated by endorsement.
 Characteristics of
Promissory Note
1. It must be in writing:
A promissory note has to be in writing
An oral promise to pay does not become a promissory note
The writing may be on any paper or book
Illustrations: A signs the instruments in the following terms:
“I promise to pay B or order Rs.500/-”
“I acknowledge myself to be indebted to B in Rs.1,000/- to be paid on demand, for value
received” Both the above instruments are valid promissory notes.

2. It must contain a promise or undertaking to pay:

There must be a promise or an undertaking to pay
The undertaking to pay may be gathered either from express words or by necessary
implication. A mere acknowledgement of indebtedness is not a promissory note, although
it is valid as an agreement and may be sued upon as such
Illustrations: A signs the instruments in the following terms:
“Mr. B I owe you Rs.1,000”
“I am liable to pay to B Rs.500”
The above instruments are not promissory notes as there is no undertaking or promise to
pay.
There is only an acknowledgement of indebtedness.
Where A signs the instrument in the following terms:
“I acknowledge myself to be indebted to B in Rs.1,000, to be paid on demand, for value
received,” there is a valid promissory note

3. The promise to pay must be unconditional:

A promissory note must contain an unconditional promise to pay
The promise to pay must not depend upon the happening of some uncertain event, i.e., a
contingency or the fulfillment of a condition
Illustrations: A signs the instruments in the following terms:
“I promise to pay B Rs. 500 seven days after my marriage with C”
“I promise to pay B Rs. 500 as soon as I can”
The above instruments are not valid promissory notes as the payment is made depending
upon the happening of an uncertain event which may never happen and as a result the sum
may never become payable

4. It must be signed by the maker: It is imperative that the promissory note should be
duly authenticated by the ‘signature’ of the maker
‘Signature’ means the writing or otherwise affixing a person’s name or a mark to represent
his name, by himself or by his authority with the intention of authenticating a document.

5. The maker must be a certain person:

The instrument must itself indicate with certainty who is the person or are the persons
engaging himself or themselves to pay
Alternative promisors are not permitted in law because of the general rule that “where
liability lies no ambiguity must lie”
6. The payee must be certain:
Like the maker the payee of a pronote must also be certain on the face of the instrument
A note in favour of fictitious person is illegal and void
A pronote made payable to the maker himself is a nullity, the reason being the same
person is both the promisor and the promisee

7. The undertaking must be to pay a certain and definite sum of money only.
For a valid pronote it is also essential that the sum of money promised to be payable must
be certain and definite
The amount payable must not be capable of contingent additions or subtractions
Illustrations: A signs the instruments in the following terms:
“I promise to pay B Rs.500 and all other sums which shall be due to him”
“I promise to pay B Rs.500, first deducting thereout any money which he may owe me”
The above instruments are invalid as promissory notes because the exact amount to be
paid by A is not certain

8. The amount payable must be in legal tender money of India:

A document containing a promise to pay a certain amount of foreign money or to deliver a
certain quantity of goods is not a pronote. The payment must be in a legal money of the
country.
9. Revenue stamps or requisite value under the stamp Act of the country should be
affixed.
10. Other matters of form like number, date, place etc, are usually found given in notes,
but they are not essentials in law.
11. A bank note or a currency note is not a promissory note within the meaning of this
section.
12. A promissory note cannot be made payable to bearer on demand.

Bill of Exchange
Definition: Section 5 of the Negotiable Instruments Act defines a Bill of Exchange as
follows:
“A bill of exchange is an instrument in writing containing an unconditional order, signed
by the maker, directing a certain person to pay a certain sum of money only to, or to the
order of, a certain person or to the bearer of the instrument.” It is also called a Draft.
Illustration:
Mr. X purchases goods from Mr. Y for Rs.1000/-
Mr. Y buys goods from Mr. S for Rs.1000/-
Then Mr. Y may order Mr. X to pay Rs.1000/- Mr. S which will be nothing but a bill of
exchange.

Parties to a Bill of Exchange

There are three parties involved in a bill of exchange
(i) The Drawer – The person who makes the order for making payment.
(ii) The Drawee – The person to whom the order to pay is made. He is generally a
debtor of the drawer. The person directed to pay the money by the drawer is called the
drawee.
(iii) The Payee – The person to whom the payment is to be made. The person named in
the instrument, to whom or to whose order the money are directed to be paid by the
instruments are called the payee.

• The drawer can also draw a bill in his own name thereby he himself becomes the
payee.
• Here the words in the bill would be Pay to us or order.
• In a bill where a time period is mentioned, is called a Time Bill.
• But a bill may be made payable on demand also. This is called a Demand Bill.

Essentials of a Bill of Exchange

1. It must be in writing
2. It must contain an order to pay. A mere request to pay on account, will not
amount to an order
3. The order to pay must be unconditional
4. It must be signed by the drawer
The drawer, drawee and payee must be certain. A bill cannot be drawn on two
or more drawees but may be made payable in the alternative to one of two or more
payees
5. The sum payable must be certain
6. The bill must contain an order to pay money only
7. It must comply with the formalities as regards date, consideration, stamps,
etc

Cheque
Definition: A cheque is bill of exchange drawn on a specified banker and not expressed to
be payable otherwise than on demand and it includes the electronic image of a truncated
cheque and a cheque in the electronic form. (Sec. 6, NIA)

Explanation I - For the purposes of this section, the expressions-

(a) a cheque in the electronic form means a cheque which contains the exact mirror
image of a paper cheque, and is generated, written and signed in a secure system ensuring
the minimum safety standards with the use of digital signature (with or without biometrics
signature) and asymmetric crypto system;
(b) a truncated cheque means a cheque which is truncated during the course of a clearing
cycle, either by the clearing house or by the bank whether paying or receiving payment,
immediately on generation of an electronic image for transmission, substituting the
further physical movement of the cheque in writing.

Explanation II - For the purposes of this section, the expression clearing house means the
clearing house managed by the Reserve Bank of India or a clearing house recognised as
such by the Reserve Bank of India.

A cheque is a kind of bill of exchange but it has additional qualification namely-

 1. It is always drawn on a specified banker and
2. It is always payable on demand without any days of grace.

Parties to a cheque
Drawer: Drawer is the person who draws or makes the cheque.
Drawee: Drawee is the drawer’s banker on whom the cheque has been drawn.
Payee: Payee is the person who is entitled to receive the payment of a cheque.

Crossing of Cheques
A Crossed Cheque is one which bears across its face two parallel transverse lines with or
without certain words. Such lines are usually drawn on the left side top corner of the face
of the Cheque. However, such lines can be drawn anywhere on the face of the Cheque.
Crossing of Cheque is a direction to the drawee bank to pay the amount of the Cheque to
a bank or to a particular bank. Therefore, a crossed Cheque is not payable to the payee or
holder at the counter of the bank. In order to get the payment of the Cheque, it is required
to be deposited in an account with a bank. The bank, in turn, presents the Cheque to the
drawee bank and gets payment on behalf of the payee or indorse of the Cheque.
The objects of crossing of a Cheque are as follows:
To direct the drawee bank to pay the amount of the Cheque only to a bank or a
particular bank; To prevent the payment of the Cheque to an unauthorized or wrong
person.

KINDS OF CROSSING
Crossing of Cheque is basically of
two kinds: -
1. General crossing, and
2. Special crossing.

These basic kinds of crossing may take several forms. Some of them are:
3. Restrictive crossing.
4. Not negotiable crossing.

1. General crossing: A Cheque is deemed to be generally crossed in any of the following

cases:
a. When it bears across its face two parallel transverse lines without any words.
b. When it bears across its face an addition of the words “and company” or any
abbreviation thereof between two parallel transverse lines. It may also be with or
without the words ‘Not negotiable’.

Effects of general crossing

The Cheque is not payable at the counter of the bank.
The drawee bank shall pay the amount of the Cheque only to a banker. Therefore, the
holder will have to deposit the Cheque in an account with any banker. [Sec. 126 Para 1]
2. Special crossing: A Cheque is said to be specially crossed when the name of a banker
is added across the face of the Cheque, either with or without words, not negotiable.
Usually, two parallel transverse lines are used in special crossing but they are required
not by law.

Effects of special crossing:

In the case of a Cheque especially crossed, the payment can be obtained only through the
particular banker whose name appears across the face of the Cheque or his agent for
collection.

3. Restrictive crossing: Restrictive crossing has not been described anywhere in the
Negotiable Instrument Act. It is a type of crossing which has evolved out of business
and banking usage and now recognized by the law. Every Cheque crossed wither
generally or specially may be crossed restrictively credit the proceeds of the Cheque
only to the account of the payee.
4. Not negotiable crossing: Sometimes, a Cheque crossed generally or specially contains
the words ‘not negotiable’ A crossing with such words is said to be ‘not negotiable’
crossing.
The words ‘not negotiable’ on a crossed Cheque destroy the negotiable character of the
Cheque but not the transferability of the Cheque. Therefore, any person taking a crossed
Cheque bearing the words ‘not negotiable’ shall not have and shall not be capable of
giving a better title to the Cheque than the title of the person from whom he took it. [Sec.
130]

Parties to a Negotiable Instrument:

Holder and Holder in due course
Holder (Sec. 8, NIA)
Holder means any person entitled in his own name to the possession a promissory note
bill of exchange or cheque and to recover or receive the amount due thereon from the
parties thereon. A holder must therefore have the possession of the instrument and also the
right to recover the money in his own name.
Therefore, holder of a negotiable instrument is the person:
1. Who is entitled in his own name to the possession of the instrument, and
2. Who has the right to receive or recover the amount due thereon from the parties
thereto.

Characteristics:
a) Entitled to possession of an instrument
b) Entitled to receive or recover the amount
c) Holder of lost or destroyed instrument

Powers of Holder
I. He is entitled in his own name to the possession of the instrument.
II. He can receive or recover the amount due on the instrument.
III. If necessary, he can sue the parties in order to recover the money due on the
instrument.
 IV. He can validly discharge the instrument on payment of the instrument. V. He
may indorse the instrument to any other person

“Holder in due course" (Sec. 9, NIA)

Holder in due course means any person who for consideration became the possessor of a
promissory note, bill of exchange or cheque, if payable to the bearer or the payee or
indrosee thereof, if payable to the order before the amount mentioned in it became
payable, and without having sufficient cause to
believe that any defect existed in the title of the person from who he derived
his title’ Thus, a person is a holder in due course if he satisfies the following
conditions:
a) He must be a holder (possessor) of a negotiable instrument.
b) He must have become holder (possessor) of the instrument for consideration.
c) He must have become holder before maturity of the instrument.
d) He must have obtained the instrument in good faith.
e) He must have received the instrument complete and regular on the face of it.

RIGHTS AND PRIVILEGES OF HOLDER IN DUE COURSE

A holder in due course enjoys certain rights and privileges. They are available in the
following particular cases:
In case of an inchoate instrument: Sometimes a person signs a stamped but otherwise
incomplete (inchoate) instrument and delivers it to another person. In such a case, it
implies that the holder may fill in any amount for which authority has been given by the
maker.
In case of a fictitious bill: Sometimes the name of the drawer or the payee or both is
fictitious in a bill. Such a bill is called a fictitious bill. The acceptor of such a fictitious
bill is not liable to the holder of the bill. But if the same bill is passed on to a holder in
due course, he will have a privilege to claim money on it from the acceptor. [Sec.42]
In case of the liability of prior parties: A holder in due course has a privilege to hold every
prior party to a negotiable instrument liable on it until the instrument is duly satisfied.
[Sec.36]
In case of instrument without consideration: Sometimes an instrument is made, drawn,
accepted, indorsed or transferred without consideration. But, if the same instrument
comes into the hands of a holder in due course, he has a privilege to recover the amount
from any party thereto [Sec.43]
In case of transfer of title to a subsequent holder: A holder in due course has a privilege to
transfer the title to an instrument free from all defects to subsequent holder. Therefore,
any holder of a negotiable instrument who derives title to a negotiable instrument from a
holder in due course enjoys all the rights and privileges of that holder in due course.
In case of an instrument obtained by unlawful means or for unlawful consideration:
Sometimes, a person gets a lost instrument or obtains an instrument by means of an
offence (i.e. by stealing or defrauding). In such a case, the holder cannot claim any right
against the party liable on it. But if the same instrument is negotiated to a holder in due
course, he will get good title to it.

DISTINCTION BETWEEN HOLDER AND HOLDER IN DUE COURSE

Basis of Holder Holder in Due Course
Distinction
1. Definition Holder is a person who is entitled in Holder in due course is a person who
his own name to the possession of becomes the possessor of the
the instrument and to receive the instrument for consideration before its
amount due on it. maturity and in good faith. [Sec. 9]
2. Consideration A holder need not necessarily A holder in due course can acquire the
acquire the instrument for instrument for consideration only.
consideration. For instance, a
holder may get the instrument by
way of gift.
3. Before A holder may obtain possession A holder in due course must obtain the
maturity before or after the maturity of the possession before maturity of the
instrument. instrument.
4. Good faith A holder need not necessarily A holder in due course must always
acquire possession of the acquire possession of the instrument in
instrument in good faith. good faith.
5. Inchoate A holder can claim only the amount A holder in due course can claim any
instrument which signer of the inchoate amount filled in the inchoate
instrument intended to pay. instrument provided it is covered by
the stamp affixed on it. [Sec. 20]
6. Right against A holder does not have rights A holder in due course has rights
prior parties against all the prior parties. He has against every prior party to the
rights against the original parties instrument. He can hold them liable
and his immediate indorser. jointly and severally.[Sec. 36]
7. Title better A holder can never get a better title A holder in due course can acquire a
than the than that of the transferor. better title than that of the transferor.
transferor In other words he gets the instrument
cleansed of all prior defects.

Negotiation
One of the essential features of a negotiable instrument is its transferability. A negotiable
instrument may be transferred from one person to another in either of the followings way-
1. By negotiation
2. By assignment

1) By negotiation - The transfer of an instrument by one party to another so as to

constitute the transferee a holder is called Negotiation. Negotiation means as the process
by which a third party is constituted the holder of the instrument so as to entitle him to the
possession of the same and to receive the amount due thereon in his own name.
According to section 14 of the Act, “when a promissory note, bill of exchange or cheque
is transferred to any person so as to constitute that person the holder thereof, the
instrument is said to be negotiated.” The main purpose and essence of negotiation is to
make the transferee of a promissory note, a bill of exchange or a cheque the holder there
of.

Modes of negotiation (Sec. 47 and 48, NIA)

1. Negotiation by delivery (Sec. 47): Where a promissory note or a bill of exchange or a
cheque is payable to a bearer, it may be negotiated by delivery thereof.
Example: A the holder of a negotiable instrument payable to bearer, delivers it to B's agent
to keep it for B. The instrument has been negotiated.

2. Negotiation by delivery (Sec. 48):

A promissory note, a cheque or a bill of exchange payable to order can be negotiated only
be endorsement and delivery. Unless the holder signs his endorsement on the instrument
and delivers it, the transferee does not become a holder. If there are more payees than one,
all must endorse it.

2) By Assignment –
When a holder of a bill, promissory note or cheque transfers the same to another, he in
fact gives his right to receive the payment of the instrument to the transferee.

Difference between Assignment & Negotiation: -

1) Mode of transfer- The transfer by negotiation requires only delivery with or
without endorsement of a bearer or order instrument. Whereas the transfer by
assignment requires a separate written document such as transfer deed signed by
the transferor.
2) Notice of transfer-Not require in negotiation
3) Consideration-consideration must be proved in assignee.
4) Title
5) Right to sue

Endorsement
The word “endorsement” in its literal sense means, writing on the back of an instrument.
But under the Negotiable Instruments Act, it means, the writing of one’s name on the back
of the instrument or any paper attached to it with the intention of transferring the rights
therein. Thus, endorsement is signing a negotiable instrument for the purpose of
negotiation. The person who effects an endorsement is called an “endorser”, and the
person to whom negotiable instrument is transferred by endorsement is called the
“endorsee”. Who may Endorse / Negotiate [Section 51]: Every Sole maker, drawer, payee
or endorsee, or all of several joint makers, drawers, payees or endorsees of a negotiable
instrument may endorse and negotiate the same if the negotiability of such instrument has
not been restricted or excluded as mentioned in Section 50.
When the maker or holder of a negotiable instrument signs the instrument (otherwise than
as maker) for the purpose of its negotiation, it is said to be the Endorsement of the
instrument. [Section 15]

Essentials of a Valid Endorsement: Following are the essentials of a valid

endorsement:
1. Indorsers must be holder: For a valid Endorsement, the indorser must be holder of the
instrument. In other words, indorser must be entitled in his own name to the possession
of the instrument and recover or receive the amount due thereon. Therefore, a person
who steals or finds a lost instrument cannot indorse the instrument because he is not a
holder.
2. On the instrument: Endorsement must be on the face or back of the instrument or on a
piece of paper annexed to the instrument.
3. Signature: Endorsement must be signed by the indorser for the purpose of negotiation
of the instrument. It may be signed by the maker or holder of the instrument but the
maker must not sign the Endorsement in the capacity of the maker.
4. Additional words and form of words: Indorser may sign the Endorsement with a
without additional words or statement.
5. Endorsement by joint holders: An Endorsement is valid only when all joint holders
(i.e. all makers, drawers, indorses or payees) join in Endorsement unless any one of
them has the authority to indorse for the others.
6. Endorsement of entire instrument: Endorsement must be of the entire instrument. An
Endorsement which purports to transfer only a part of the amount of the instrument is
not a valid Endorsement.
7. Delivery: In order to make a complete and effective Endorsement, the instrument must
be delivered by the endorser to the indorse.

8. It must be made by the holder of the instrument.

9. It must be completed by the delivery of the instrument.
10.It must be signed by the endorser. It must be on the back or face of instrument or
on a slip of paper annexed thereto.

Persons Entitled to Indorse:

1. Payee
2. Maker, drawer or holder
3. Indorse
4. Joint makers, drawers etc.

Kinds of Endorsements
1. Blank or general Endorsement: When the indorser signs his name only on the
instrument for the purpose of its negotiation, it is called the blank or general
Endorsement. Illustration: Anta has a Cheque payable to ‘Anta or order’ Anta merely
signs on the instrument. It constitutes a blank Endorsement.
2. Full or special Endorsement: When an indorser signs his name and adds a direction
to pay the amount mentioned in the instrument to or to the order of a specified person, it
is called the Endorsement in full. Illustration: Anita is a holder of a Cheque. He writes
‘Pay Banta or Order or Pay Banta only’ and signs the Cheque. It is a full or special
Endorsement.
3. Restrictive Endorsement: Illustration: (a) ‘Pay the contents to Banta only’. (b) ‘Pay
Banta for my use’.
4. Partial Endorsement: Sometimes, an Endorsement purports to transfer only a part
of the amount of the instrument. Such an Endorsement is called as partial Endorsement. It
is not a valid Endorsement for the purpose of negotiation.
5. Conditional or qualified Endorsement: When an indorser inserts a condition in his
Endorsement, it is called a conditional Endorsement. Sometimes, an indorser by express
words in the Endorsement may exclude his liability on the instrument makes the right of
the indorse to receive the amount due thereon on the happening of a specified event or on
the implement of some condition. In such a case, the Endorsement is said to be
conditional.

Effects of Endorsement:
1. An unconditional Endorsement of a negotiable instrument followed by an
unconditional delivery of the instrument has the following effects:
2. The property in the instrument stands transferred to the indorse.
3. The indorse gets the right of further negotiation of the instrument [Sec. 50]
4. The indorse is entitled to sue all parties, whose names appear on it.

Discharge of a negotiable instrument

“Discharge means release from obligation.” Discharge can take place-
1) By payment in due course: The instrument is discharged by payment made in
due course by the party who is primarily liable to pay, or by a person who is
accommodated in case the instrument was made or accepted for his
accommodation, The payment must be made at or after the maturity to the holder
of the instrument if the maker or acceptor is to be discharged. A payment by a
party who is secondarily liable does not discharge the instrument.

2) By party primarily liable by becoming holder (Section 90): If the maker of a

note or the acceptor of a bill becomes its holder at or after its maturity in his own
right, The Negotiable Instruments Act, 1881 4.5 instrument is discharged.

3) By express waiver: When the holder of a negotiable instrument at or after its

maturity absolutely and unconditionally renounces in writing or gives up his rights
against all the parties to the instrument, the instrument is discharged. The
renunciation must be in writing unless the instrument is delivered up to the party
primarily liable.

4) By Cancellation: Where an instrument is intentionally cancelled by the holder or

his agent and the cancellation is apparent thereon, the instrument is discharged.
Cancellation may take place; by crossing out signatures on the instrument, or by
physical destruction of the instrument with the intention of putting an end to the
liability of the parties to the instrument.
 5) By discharge as a simple contract: A negotiable instrument may be discharged in
rile same way as any other contract for the payment of money. This includes for
example, discharge of an instrument by innovation or rescission or by expiry of
period of limitation.

The Partnership Act of 1932

The Partnership Act of 1932 is a law that governs partnerships in India. It defines a
partnership as the relation between persons who have agreed to share the profits of a business
carried on by all or any of them acting for all. Here are some key points from the Partnership
Act of 1932:

1. **Definition of Partnership**: The Act defines a partnership as the relation between

persons who have agreed to share profits of a business carried on by all or any of them acting
for all.

2. **Essential Elements**: For a partnership to exist, there must be an agreement between the
partners, sharing of profits, business carried on by all or any of them acting for all, and
mutual agency.

3. **Registration**: While registration of a partnership is not mandatory, it is advisable.

Unregistered partnerships face certain limitations, especially in legal proceedings.

4. **Rights and Duties of Partners**:

The Act outlines the rights and duties of partners, including the right to take part in the
management of the business, share profits equally in absence of an agreement, and the duty to
act in good faith towards the firm.

5. **Liability of Partners**: Partners are jointly and severally liable for all acts of the firm
done while they are partners. This means that each partner is individually responsible for the
debts and obligations of the partnership.

6. **Dissolution of Partnership**: A partnership can be dissolved based on various grounds

such as expiry of the term, mutual agreement, death of a partner, insolvency, etc.

Introduction

Partnership results from a contract and is governed by the Partnership Act 1932.
The partnership is also governed by the general provision of the Indian Contract Act on such
matters where the Partnership Act is silent. It is expressly mentioned that the provision of
India Contract Act which is not repealed will be applicable on Partnership until and unless
such provision is in contrary to any provision of Partnership Act, 1932. The rules of contract
regarding the capacity to contract, offer, acceptance etc will also be applicable to the
partnership. But the rules regarding the status of minor will be governed by the Partnership
Act, 1932 since Section 30 of the Act talks about the position of the minor.
Meaning

According to Section 4 of the Partnership Act,1932

“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”.

Essential requirements of a partnership

 It must be an association of two or more persons.
 There must exist an agreement between the partners.
 There must be a business undertaking or a commercial activity that is lawful.
 The motive must be to earn the profit and share between the partners.
 The agreement must be to carry out the business jointly or by any of them acting on
the behalf of all i.e., there must be mutual agency.
Examples:

A and B buy 100 tons of oil which they agree to sell for their joint account. This forms a
partnership and A and B are considered as partners.

A and B buy 100 tons of oil and agreed to share it among them. It does not form a partnership
as they had no intention to carry out business.

Number of members
Any two or more persons may form a partnership. There is no limit imposed on the minimum
and the maximum number of partners under the Partnership Act,1932. According to
Companies Act 2013, the maximum number of 100 must not exceed in case of partnership
and minimum is 2 partners.

If in any case, it exceeds the maximum limit then it will amount to the illegal association
under Section 464 of Companies Act,2013. According to Section 11 of Companies Act the
maximum number of partners in case of:

Banking purpose-10 persons

Other purposes- 20 persons

Agreement
The partnership is an agreement in which two or more person has decided to carry out
business and share the profit and losses equally. To create a legal relationship, it is necessary
to form a partnership agreement.

The partnership agreement becomes the foundation or the basis on which it is based. It can be
either written or oral. The written agreement is known as a partnership deed. Partnership deed
mainly consists of the following details:

• Name and address of its firm and business

• Name and address of its partner
 • Capital contributed by each partner
• Profit and loss sharing ratio
• Rate of interest on capital, loan, drawings etc
• Rights, duties and obligation of partners
• Settlement of accounts on the dissolution of the firm
• Salaries, commission payable to partners
• Rules to be followed in case of admission, retirement and death of a partner
• Mode of settlement on disputes among partner.
• Any other affecting the rights of the partners

Business (Section 12)

The partnership must be created for the purpose of carrying the business which is legal in
nature. Co-ownership of property does not amount to the partnership. As per the definition
given in Section 2(b), a business includes any trade, occupation or profession. It is any kind
of occupation that is not something done just for pleasure. It is an operation conducted by a
particular method that is continuous, and from which income or profits can be derived.

Mutual agency (Section 13)

The business is to be carried by all of them or by any one of them on behalf of all. It gives
two assumptions

Each partner is entitled to carry out the business. The mutual agency exists between the
partners. Each partner is a principal as well as an agent for the other partners.he is bound by
the acts of other partners as well as can bind others by his own act.

Sharing of profit
The agreement is to share profit and losses among the partners. The sharing of profit and
losses can be according to the ratio of the capital contributed or equally.

It helps to distribute the burden among the partners in the case when the partnership suffers
losses.

Liability of partnership
All the partners are jointly liable for paying the debts of the firm. The liability is unlimited
which means that the partner’s private assets can be disposed of for the purpose of paying the
debts of the firm.

Test of partnership
Section 6
Section 6 of the Indian Partnership Act provides the mode of determining the existence of a
partnership. The following are the provisions in Section 6:

While determining whether an association of persons is a firm or if a person is a partner to a

firm, the real relation shown by relevant facts between the parties must be examined.
Sharing profits from a property held by persons jointly does not automatically qualify such
persons as partners.
A person can hold a receipt of the share in profits or receipt of payment that is contingent
upon the profits, but that does not make him a partner.

Kinds of partnership
The various types of partnership are based on two different criteria.

With regard to the duration of the term of partnership:

Partnership at will
when no fixed period is prescribed for the expiration of partnership then it is a partnership at
will. According to Section 7 two conditions need to be fulfilled.
No agreement about the determination of the fixed period of partnership
No clause with respect to the determination of partnership.

Partnership for a fixed period

When the partners fixed the duration of the partnership firm then after the expiration of the
fixed period the partnership comes to an end. When the partners decided to continue with the
partnership even after the expiry of the fixed period then it becomes a partnership at will.

On the basis of the extent of the business carried by a partnership

Particular Partnership (Section 8)

When the partnership is created for completing any project or undertaking. When such an
undertaking or project have been completed then partnership comes to an end. The partners
have a choice to continue with the firm.

General Partnership
when the partnership is created for the purpose of carrying out the business. There is no
particular task that has to be completed. The task is general in nature.

Scope of Partnership Act (Section 5)

The partnership arises from the contract but not from the status. The intention of partners is a
question of the partnership. the partners may exercise any of its power at time but must not
exercise in the pursuance of illegal, fraudulent or misconduct.

If any of the partners have made the contract without the consent of all other partners then the
question as to the validity of such contract arises. If all the partners have accepted or ratified
the contract then no question as to the validity of such contract arise.

With the consent of all the partners, the partnership can become a member of another firm.

Partners
The member of a partnership is called partners.it is not mandatory that all the partners are the
same or all the partners participate in the conduct of the business or share the profit or losses
equally. The partners are classified depending on the nature of work, the extent of liability,
etc.
There are basically six types of partners:

1.Active/managing partner: The partner who takes participation in the conduct of the
business daily. This partner is also called an ostensible partner.
2.Sleeping/Dormant: He does not participate in the conduct of the business but he is bound by
the conduct of all the partners.
3.Nominal partner: He is a partner to the firm only by his name. In reality, he has no
significant or real interest in the firm.
4.Partner in profit only: The partner who agrees to share the profit but does not suffer
losses. He is not liable for any liabilities in case of dealing with the third party.
5.Minor partner: A minor cannot be a partner according to the Indian Contract Act, but he
can be admitted to get the benefit of all the partners gives the consent. His will share the
profit equally but his liability will be limited in case of loss of the firm.
6.Partner by estoppel: it means when the person is not a partner but he has represented
himself by conduct, or words to another person to be the partner then he cannot deny
afterwards. Even though he is not a partner but he becomes the partner by holding out or by
estoppel.

Rights of the Partners

Right to take part in the conduct of the firm’s business:

Section 12(a) provides that every partner has the right to be involved in the
conduct of the firm’s business. All partners have the right to manage the firm’s business.
Right to express opinion:
Section 12(c) provides that all partners can freely express their opinion in
matters concerning the firm’s business. However, before a decision is made based on an
opinion of a partner, the consent of other partners must be obtained.
Right to have access to books of the firm:
Section 12(d) of the Act provides that every partner has the right to look into
the books of the firm, whether the books concern the accounts of the firm or not.
Right to profit:
As per Section 13(b), all partners must equally share profits earned through the
business.
Right to interest on capital:
Section 13(c) provides that on an agreement, the partners of a firm have the
right to claim interest on the firm’s profits from the capital.
Right to interest on advances made by partner:
In some cases the firm may need extra money apart from the capital. In such
cases, a partner may make advances to the firm and he may also claim interest on such
advances.
Right to indemnity:
Section 13(e) of the Act provides that a partner may make some payments and incur
liabilities while acting on behalf of the firm. The firm shall indemnify a partner in respect of
such payments and liabilities, whether it was made in ordinary course of business or in
emergency.
Right to dissolve the partnership:
Section 44 provides that a partner has the right to file a suit to dissolve the
partnership.

 The court may dissolve firm on any of the grounds given below:
Unsoundness of mind of a partner, where the suit shall be brought by another
partner or the next friend of the unsound partner;
Permanent incapability of another partner to perform his duties;
Another partner is guilty of conduct that prejudices the business of the firm;
Committing breach of agreement by another partner by wilfully or persistently;
Transfer of interest in firm by another partner to a third person;
Business of firm cannot be carried on due to losses;
Any other ground which makes it just and equitable to dissolve the partnership.

Section 46 provides that after dissolution, a partner has the right to wind up the
business of the firm. On dissolution, every partner or his representative is entitled, as
against all the other partners, to have the firm’s property applied in payment of debts and
liabilities of the firm, and then have the surplus distributed among the partners or their
representatives.
Right to not get expelled: Section 33 provides that all partners have right to not get expelled
except on certain grounds and they must be given reasonable warning and opportunity of
explanation before the expulsion.

Right to prevent introduction of new person: Section 31 provides that every partner
has the right to prevent the introduction of a new partner without his consent to the firm,
unless the agreement has expressly provided that such introduction is permitted.
Right to retire: Section 32 of the Act provides that a person has right to retire with the consent
of other partners, unless the requirement of consent is waived by the agreement. The partners
can retire by simply providing a notice to other partners in partnerships at will.

Liabilities of partners:
Liability of partners for the acts of the firm (Section 25): All the partners is jointly and
severally liable for the acts of the firms. He is liable only for those acts which are done at the
time he is a partner.
Liability of a firm for the wrongful act of partner (Section 26): When any wrongful act or
omission is done by any of its partners in the ordinary course of its business or with the
consent of others partners then the firm is liable to the same extent as a partner.
Liability of a firm for the misapplications by partner (Section 27): when any partner acting as
an agent receives the money from the third party and misapplies it or the firm receives the
money and money are misappropriated by any of its partners then the firm is liable to pay for
the loss suffered.

Dissolution of a firm
Section 39 to 44 deals with the Dissolution of a firm.
Sometimes circumstances arise when the firm gets dissolved. Sometimes a firm is dissolved
voluntary or by the order from the court. There are various modes prescribed under Section
39 to 44 for the dissolution of a partnership firm. Even when the partnership is dissolved then
it gives certain rights and liabilities to the partners.

Let’s us understand the concept of dissolution in detail through the Powerpoint Presentation
given below.

Liability of partners in Different Situations

Liabilities of partners after the dissolution of the partnership firm.
The partners are liable for the acts of the firm to the third party until public notice is given. A
partner who is declared as insolvent, or who is retired, the estate of a person who dies, or who
was not known as a partner at the time of dealing with the third party will not be liable for the
act.
Wind up the Business Post-Dissolution (Section 46)
When the firm is dissolved every partner has a right to apply for the firm’s property in the
payment of debts and liabilities. If there is any surplus it needs to be distributed among the
partners.
The partners have mutual obligations and rights until the affairs of the firm is wound up.

When the partnership has dissolved the accounts of the partners needs to be settled under the
usual course of business. Various modes can be used for the settlement of accounts.

If there is a deficiency in capital or loss is incurred when it is paid out of profit. If profit is not
sufficient or no profit is earned then it is paid out by the capital and by the partners if
necessary. The partners contribute to the proportion of the profit sharing ratio.

The asset of the firm and the capital contributed by the partners to meet up the deficiency in
the capital is applied in the following order:

Repayment to third parties

The amount which is due to him from the capital
The amount which is due to him on account of capital
And if any amount is left then it is distributed among all the partners in their profit sharing
ratio.
Paying Firm Debts and Separate Debts (Section 49)
In a case when there are joint debts from the firm and the separate debts from the partner then
joint debts from the firm is given priority and if any surplus is left then separate debts from
the partner is to be paid off.

The property of the individual partners is applied firstly for the payment of separate debts.

Personal Profit Earned After Dissolution of Firm (Section 50 and Section 53)
When the firm is dissolved by the death of the partner and business is carried out by the
existing partners or his legal heirs then they have to account for the personal benefit earned
before winding up the partnership.
Section 53 states that if there is no contract the partner can restrain other partners from
carrying similar activities, or using the firm’s name or firm’s property for their own benefit
until the winding up process is complete.

Return of Premium on the Premature Dissolution of the firm (Section 51)

When the firm is dissolved before the expiry of a fixed period, then a partner paying a
premium can receive a return of a reasonable part of the premium. Such rules are not
applicable in a case when the partnership is dissolved by:

Misconduct of partner paying a premium (Section 52)

Post an agreement in which there is no clause for return of premium.

Contract Rescinded for Fraud or Misrepresentation

When the partnership arising from the contract is rescinded due to fraud and
misrepresentation then the party who has rescinded the contract will be liable as:

After the debt of the firm is paid the lien on remaining assets. He will be treated as a creditor
for the payment of any debts made by him.

An indemnity from the partners guilty of misrepresentation or fraud against all debts of firms.

Sale of Goodwill After Dissolution of Firm (Section 55)

The goodwill is treated as an asset. The goodwill is included in the assets while settling the
account after the dissolution of the firm. The goodwill may be sold separately or with other
assets. Once the firm is dissolved and goodwill is sold then any partners can carry on a
similar business or advertise a business competing with the buyers of the goodwill. The
partners are prohibited from doing the following acts:

To use the name of the firm

To represent himself as carrying the business
To solicit the customers of the firm dealing before dissolution.
 UNIT -III

COMPANY ACT-2013

Definition:
―In terms of the Companies Act, 2013 ‗company ‘means a company incorporated
under the Act, or under the previous company law‖ [Sec. 2(20)]. A company may be an
incorporated company or a corporation, or an unincorporated company. An incorporated
company is a single and legal (artificial) person distinct from the individuals constituting it,
whereas an unincorporated company, such as a partnership, is a mere collection or
aggregation of individuals. Therefore, unlike a partnership, a company is a corporate body
and a legal person having status and personality distinct and separate from that of the
members constituting it.

Features
Independent corporate existence the outstanding feature of a company is its
independent corporate existence. It is a distinct legal person existing independent of its
members. By incorporation under the Act, the company is vested with a corporate personality
which is distinct from the members who compose it. A well-known illustration of this
principle is the decision of the House of Lords in Salomon v. Salomon & Co. [(1898) AC 22].

Limited Liability
The privilege of limiting liability for business debts is one of the principal advantages
of doing business under the corporate form of organization. Where the subscribers exercise
the choice of registering the company with limited liability, the members ‘liability becomes
limited or restricted to the nominal value of the shares taken by them or the amount
guaranteed by them. No member is bound to contribute anything more than the nominal value
of the shares held by him.

Separate property
A company, being a legal person, is capable of owning, enjoying and disposing of
property in its own name. The company becomes the owner of its capital and assets. The
shareholders are not the several or joint owners of the company’s property. The company is
the real person in which all its property is vested, and by which is controlled, managed and
disposed of [Bacha F Guzdar v. C.I.T. AIR 1955 SC 74.]. The property is vested in the
company as a body corporate, and no changes of individual membership affect the title. The
property, however much, the shareholders may come and to remains vested in the company,
and the company can convey, assign, mortgage, or otherwise deal with it irrespective of these
mutations. CORPORATE LAWS & COMPLIANCE

Transferable Shares
When joint stock companies were established, the great object was that their shares
should be capable of being easily transferred. Accordingly, the Companies Act, 2013 in
Section 44 declares: ‗The shares or debentures or other interest of any member in a company
shall be movable property, transferable in the manner provided by the articles of the company
‘. Thus, incorporation enables a member to sell his shares in the open market and to get back
his investment without having to withdraw the money from the company. This provides
liquidity to the investor and stability to the company. Common seal Since the company has no
physical existence, it must act through its agents and all such contracts entered into by its
agents must be under the seal of the company. The common seal acts as the official signature
of the company. Prior to the Companies (Amendment) Act, 2015 the common seal is a seal
used by a corporation as the symbol of its incorporation and also a statutory requirement for a
company. As a departure from this concept, the Companies (Amendment) Act, 2015 has
deleted the requirement of having Common Seal compulsorily.
Types of companies
A company may be incorporated as a One Person Company (OPC) a new concept all
together in the Companies Act, 2013, Private Company or a Public Company, depending
upon the number of members joining it. Again it may either be an unlimited company, or may
be limited by shares or by guarantee or by both. On the basis of control, companies can be
classified as associate company, holding company and subsidiary company. Some other forms
of classification of companies are: foreign company, Government Company, small company,
dormant company, Nidhi Company and company formed for charitable objects.

Companies may be classified into various classes on the following basis:

On the Basis of Incorporation

(a) Statutory companies These are the companies which are created by a special
Act of the Legislature, e.g., the Reserve Bank of India, the State Bank of India, the Life
Insurance Corporation, the Industrial Finance Corporation, the Unit trust of India and
State Financial Corporations These are mostly concerned with public utilities, e.g.
railways, tramways, gas and electricity companies and enterprises of national
importance. The provisions of the Companies Act, 2013 do not apply to them unless the
special act specifies such application. Banking Regulation Act, 1949 is a special
legislation concerning banking companies.

(b) Registered companies These are the companies which are formed and
registered under the Companies Act, 2013, or were registered under any of the earlier
Companies Acts

On the basis of liability

a. Company limited by shares Section 2 (22) of the Companies Act, 2013,
defines that when the liability of the members of a company is limited by its
memorandum of association to the amount (if any) unpaid on the shares held by them, it
is known as a company limited by shares. It thus implies that for meeting the debts of
the company, the shareholder may be called upon to contribute only to the extent of the
amount, which remains unpaid on his shareholdings. His separate property cannot be
encompassed to meet the company‘s debt.

b. Company limited by guarantee Section 2 (21) of the Companies Act, 2013

defines it as the company having the liability of its members limited by the
memorandum to such amount as the members may respectively undertake by the
memorandum to contribute to the assets of the company in the event of its being wound
 up. Thus, the liability of the member of a guarantee company is limited up to a
stipulated sum mentioned in the memorandum. Members cannot be called upon to
contribute beyond that stipulated sum.

c. Unlimited company Section 2 (92) of the Companies Act, 2013 defines

unlimited company as a company not having any limit on the liability of its members.
In such a company the liability of a member ceases when he ceases to be a member. The
liability of each member extends to the whole amount of the company‘s debts and
liabilities but he will be entitled to claim contribution from other members.

On the basis of members

(a) One person company (1) The Concept of One Person Company (OPC) The
concept of One Person Company (OPC) has now been introduced in India, through
Section 2 (62) of Companies Act, 2013 thereby enabling Entrepreneur(s) carrying
on the business in the Sole Proprietor form of business to enter into a Corporate
Framework. Though this concept is new in India but it is already a part of many
other countries like China, Australia, Pakistan and UK etc. According to Section 2
(62) of the Companies Act, 2013 ‗One Person Company‘ means a company which
has only one person as a member. A company formed under one person company
may be either: a) A company limited by shares, or b) company limited by guarantee,
or c) An unlimited company. One Person Company is a hybrid of Sole-Proprietor
and Company form of business, and has been provided with concessional/relaxed
requirements under the Act.

(b) Private Company [Section 2 (68)] According to Section 2 (68) of Companies Act,
2013 a ‗private company‘ means a company having a minimum paid-up share capital as
may be prescribed, and which by its articles:

(1) Restricts the right to transfer its shares.

2) Except in case of One Person Company, limits the number of its members to two
hundred: Provided that where two or more persons hold one or more shares in a
company jointly, they shall, for the purposes of this clause, be treated as a single
member;

(c) Public company [Section 2 (71)] According to Section 2 (71) of Companies

Act, 2013 a ‗public company ‘means a company which: (1) is not a private company.
(2) has a minimum paid-up share capital, as may be prescribed: (3) Seven or more
members are required to form the company.

(d) Small Company [Section 2 (85)] According to Section 2 (85) of Companies

Act, 2013 a ‗‗small company ‘‘means a company, other than a public company: (1)
paid-up share capital of which does not exceed fifty lakh rupees or such higher amount
as may be prescribed which shall not be more than five crore rupees. Or (2) turnover of
which as per its last profit and loss account does not exceed two crore rupees or such
 higher amount as may be prescribed which shall not be more than twenty crore rupees:
Provided that nothing in this clause shall apply to: a) a holding company or a subsidiary
company. b) a company registered under Section 8, or c) a company or body corporate
governed by any special Act.

On the basis of control

Holding company and Subsidiary company ‗Holding‘ and ‗Subsidiary‘ Companies are
relative terms. A company is a holding company of another if the other is its subsidiary.
According to Section 2 (46) of the Companies Act, 2013 'holding company', in relation to one
or more other companies, means a company of which such companies are subsidiary
companies. According to Section 2 (87) of the Companies Act, 2013 'subsidiary company' or
'subsidiary', in relation to any other company (that is to say the holding company), means a
company in which the holding company :
(a) controls the composition of the Board of Directors, Or
(b) exercises or controls more than one-half of the total share capital either at its own or
together with one or more of its subsidiary companies: Provided that such class or classes
of holding companies as may be prescribed shall not have layers of subsidiaries beyond
such numbers as may be prescribed.

On the basis of Listing in the recognised Stock Exchange

(a) Listed company

(also widely held) According to Section 2 (52) of the Companies Act, 2013, a 'listed
company' means a company which has any of its securities listed on any recognised stock
exchange. Whereas the word securities as per the Section 2 (81) of the Companies Act, 2013
has been assigned the same meaning as defined in clause (h) of Section 2 of the Securities
Contracts (Regulation) Act, 1956. (b) Unlisted company Unlisted Company means company
other than listed company.
(b) Others (a) Government Company According to Section 2 (45) of the Companies
Act, 2013, a 'Government company' means any company in which not less than fifty one per
cent of the paid-up share capital is held by the Central Government, or by any State
Government or Governments, or partly by the Central Government and partly by one or more
State Governments, and includes a company which is a subsidiary company of such a
Government company.
(c) Foreign Company According to Section 2 (42) of the Companies Act, 2013, ‗foreign
company‘ means any company or body corporate incorporated outside India which: (a) has a
place of business in India whether by itself or through an agent, physically or through
electronic mode. And (b) conducts any business activity in India in any other manner.
(c) Associate Company According to Section 2 (6) of the Companies Act, 2013,
'associate company' in relation to another company, means a company in which that other
company has a significant influence, but which is not a subsidiary company of the company
having such influence and includes a joint venture company. As per the Explanation given
under the Section, the clause, 'significant influence' means control of at least twenty per cent
of total share capital, or of business decisions under an agreement.
(d) Dormant company Where a company is formed and registered under this Act for a
future project or to hold an asset or intellectual property and has no significant accounting
transaction, such a company or an inactive company may make an application to the Registrar
in such manner as may be prescribed for obtaining the status of a dormant company

Memorandum of Association
A Memorandum of Association (MoA) represents the charter of the company. It is a
legal document prepared during the formation and registration process of a company to define
its relationship with shareholders and it specifies the objectives for which the company has
been formed.

Content of the memorandum

The memorandum of a company shall state:

(1) the name of the company with the last word ‗Limited‘ in the case of a public limited
company, or the last words ‗Private Limited‘ in the case of a private limited company.
(2) the State in which the registered office of the company is to be situated.
(3) the objects for which the company is proposed to be incorporated and any matter
considered necessary in furtherance thereof. If any company has changed its activities
which are not reflected in its name, it shall change its name in line with its activities
within a period of six months from the change of activities after complying with all the
provisions as applicable to change of name.
(4) the liability of members of the company, whether limited or unlimited, and also state:
a) in the case of a company limited by shares, that the liability of its members is limited to
the amount unpaid, if any, on the shares held by them.
And b) in the case of a company limited by guarantee, the amount up to which each
member undertakes to contribute:
i) To the assets of the company in the event of its being wound-up while he is a member
or within one year after he ceases to be a member, for payment of the debts and
liabilities of the company or of such debts and liabilities as may have been contracted
before he ceases to be a member, as the case may be, and
ii) to the costs, charges and expenses of winding-up and for adjustment of the rights of the
contributories among themselves.
(5) in the case of a company having a share capital:
a) the amount of share capital with which the company is to be registered and the
division thereof into shares of a fixed amount and the number of shares which the subscribers
to the memorandum agree to subscribe which shall not be less than one share, and
b) the number of shares each subscriber to the memorandum intends to take, indicated
opposite his name.
 Articles of Association
Articles of association form a document that specifies the regulations for a company's
operations and defines the company's purpose. The document lays out how tasks are to be
accomplished within the organization, including the process for appointing directors and the
handling of financial records.
Section 5 of the Companies Act, 2013 seeks to provide the contents and model of
articles of association as follows:

(a) Regulations for management: The articles of a company shall contain the regulations
for management of the company.
(b) Inclusion of matters: The articles shall also contain such matters, as are prescribed
under the rules. However, a company may also include such additional matters in its articles
as may be considered necessary for its management.
(c) Contain provisions for entrenchment: The articles may contain provisions for
entrenchment (to protect something) to the effect that specified provisions of the articles may
be altered only if conditions or procedures as that are more restrictive than those applicable in
the case of a special resolution, are met or complied with.
(d) Manner of inclusion of the entrenchment provision: The provisions for entrenchment
shall only be made either on formation of a company, or by an amendment in the articles
agreed to by all the members of the company in the case of a private company and by a
special resolution in the case of a public company.
(e) Notice to the registrar of the entrenchment provision: Where the articles contain
provisions for entrenchment, whether made on formation or by amendment, the company
shall give notice to the Registrar of such provisions in such form and manner as may be
prescribed.
(f) Forms of articles: The articles of a company shall be in respective forms specified in
Tables, F, G, H, I and J in Schedule I as may be applicable to such company.
(g) Model articles: A company may adopt all or any of the regulations contained in the
model articles applicable to such company.
(h) Company registered after the commencement of this Act: In case of any company,
which is registered after the commencement of this Act, in so far as the registered articles of
such company do not exclude or modify the regulations contained in the model articles
applicable to such company, those regulations shall, so far as applicable, be the regulations of
that company in the same manner and to the extent as if they were contained in the duly
registered articles of the company.

Prospectus

The Companies Act, 2013 defines a prospectus under section 2(70). Prospectus can be
defined as ―any document which is described or issued as a prospectus‖. This also includes
any notice, circular, advertisement or any other document acting as an invitation to offers
from the public. Such an invitation to offer should be for the purchase of any securities of a
corporate body. Shelf prospectus and red herring prospectus are also considered as a
prospectus.
Essentials for a document to be called as a prospectus
For any document to considered as a prospectus, it should satisfy two conditions.
1. The document should invite the subscription to public share or debentures, or it should
invite deposits.
2. Such an invitation should be made to the public.
3. The invitation should be made by the company or on the behalf company.
4. The invitation should relate to shares, debentures or such other instruments.

Contents of Prospectus
For filing and issuing the prospectus of a public company, it must be signed and dated and
contain all the necessary information as stated under section 26 of the Companies Act, 2013:
1. Name and registered address of the office, its secretary, auditor, legal advisor, bankers,
trustees, etc.
2. Date of the opening and closing of the issue.
3. Statements of the Board of Directors about separate bank accounts where receipts of
issues are to be kept.
4. Statement of the Board of Directors about the details of utilization and non-utilisation of
receipts of previous issues.
5. Consent of the directors, auditors, bankers to the issue, expert opinions.
6. Authority for the issue and details of the resolution passed for it.
7. Procedure and time scheduled for the allotment and issue of securities.
8. The capital structure of the in the manner which may be prescribed.
9. The objective of a public offer.
10. The objective of the business and its location.
11. Particulars related to risk factors of the specific project, gestation period of the project,
any pending legal action and other important details related to the project.
12. Minimum subscription and what amount is payable on the premium.
13. Details of directors, their remuneration and extent of their interest in the company.
14. Reports for the purpose of financial information such as auditor‘s report, report of profit
and loss of the five financial years, business and transaction reports, statement of
compliance with the provisions of the Act and any other report.
 MEETINGS

Shareholders meetings
The shareholders‘ meeting is the body that passes resolutions for joint-stock
companies. The shareholders‘ meeting has such important tasks as approving the financial
statements and the appointment of the board of directors. Basically the shareholders‘ meeting
represents ownership claims, i.e. the company‘s shareholders.

Different kinds of Meetings under Companies Act of 2013

1. Shareholders Meeting:

a. Annual General Meeting – This is defined u/s 96 of CA‘13, wherein every company,
whether public or private, except One Person Company, is required to convene first AGM
within 9 months from the end of first Financial Year to decide the overall progress of the
company as well as to plan future courses of action.
Place: Such meeting is called at Registered Office of the Company or any other such
place
in the city where such Reg. Office is
situated.
Time Hours: Between 9.00 am – 6:00 pm., and not on any public holiday as so declared
by
Central or State
Government.
Time Gap: Gap between two meetings not more than 15 months, and after conducting first
AGM, the subsequent AGMs need to be conducted within 6 months from the end of Financial
Year, and if there any urgent circumstances or emergency situations arises, when company
wasn‘t able to conduct the AGM, then the Tribunal may grant the extension of 3 months, but
said extension not available in first AGM, and therefore first AGM must be conducted within
9 months from end of F.Y.

b. Extraordinary General Meeting: Certain matters are so much important that they
require
an immediate attention of the members, and that‘s where the Board has been granted to call
for such EGM u/s 100 of
CA‘13.

Place: At Reg. Office or any such place in the city where such Reg. Office is situated Notice:
To all the members in writing or through an electronic mode of at least 21 Clear Days before
convening such meeting, and one important thing here is that if meeting is called up by
the
requisionists, then there‘s no formality of attesting explanatory statement to it

2. Directors Meeting: a. Board of Directors Meeting: As per Sec. 173 of CA‘13, every
company needs to convene first board meeting within 30 days of its incorporation, and then
minimum four meetings in each calendar year, with time gap of not more than 120 days( at
present it is 180 days because of COVID-19) between two board meetings

In case of OPC, Dormant Company, Small Company, Sec. 8 Company or any private
company( Start-Up), then required to hold two board meetings in each half of calendar year
with time gap of at least 90 days.

In case of Specified IFSC Private & Public Company, then to hold first board meeting
within 60 days of incorporation and then hold one meeting in each half of calendar year.

Meeting can be attended by directors either in person, or through audio-visual mode or

through video conferencing, subject to the nature of meeting being discussed and after
complying with necessary formalities as specified in Sec.173 r/w such rules.

Here notice of at least 7 days is necessary to be given to directors at their registered address
with company and also to be provided through e-means, if not possible hand delivery or
postdelivery, and there is one exception wherein a shorter notice can be called off for
transacting a very urgent matter provided one independent director is present at such meeting.

3. Other Meetings: Creditors Meeting (Sec. 230) / Debenture Holders Meeting with the
Board of Directors Audit Committee Meeting (Sec. 177) Nomination and Remuneration
Committee Meeting (Sec. 178) Any other committee meetings with the respective Board of
Directors of the Company, as and here specified under Companies Act of 2013.

Doctrine of Ultra Vires

Introduction
Companies have to borrow funds from time to time for various projects in
which they are engaged. Borrowing is an indispensable part of day to day transactions of a
company, and no company can be imagined to run without borrowing from time to time.
Balance sheets are released every year by the companies, and you will hardly find any
balance sheet without borrowings in the liabilities clause of it. However, there are certain
restrictions while making such borrowings. If companies go beyond their powers to borrow
then such borrowings may be deemed as ultra-vires.

Ultra-vires
It is a Latin term made up of two words “ultra” which means beyond and “vires”
meaning power or authority. So we can say that anything which is beyond the authority or
power is called ultra-vires. In the context of the company, we can say that anything which is
done by the company or its directors which is beyond their legal authority or which was
outside the scope of the object of the company is ultra-vires.
Doctrine of Ultra-Vires
Memorandum of association is considered to be the constitution of the company. It
sets out the internal and external scope and area of company’s operation along with its
objectives, powers, scope. A company is authorized to do only that much which is within the
scope of the powers provided to it by the memorandum. A company can also do anything
which is incidental to the main objects provided by the memorandum. Anything which is
beyond the objects authorized by the memorandum is an ultra-vires act.

The doctrine of ultra-vires in Companies Act, 2013

Section 4 (1)(c) of the Companies Act, 2013, states that all the objects for which
incorporation of the company is proposed any other matter which is considered necessary in
its furtherance should be stated in the memorandum of the company.

Whereas Section 245 (1) (b) of the Act provides to the members and depositors a right to file
a application before the tribunal if they have reason to believe that the conduct of the affairs
of the company is conducted in a manner which is prejudicial to the interest of the company
or its members or depositors, to restrain the company from committing anything which can be
considered as a breach of the provisions of the company’s memorandum or articles.

Basic principles regarding the doctrine

Shareholders cannot ratify an ultra-vires transaction or act even if they wish to do so.
Where one party has entirely performed his part of the contract, reliance on the defense of the
ultra-vires was usually precluded in the doctrine of estoppel.
Where both the parties have entirely performed the contract, then it cannot be attacked on the
basis of this doctrine.
Any of the parties can raise the defense of ultra-vires.
If a contract has been partially performed but the performance was insufficient to bring the
doctrine of estoppel into the action, a suit can be brought for the recovery of the benefits
conferred.
If an agent of the corporation commits any default or tort within the scope of his employment,
the company cannot defend it from its consequences by saying that the act was ultra-vires.

Doctrine of constructive notice

When we study Company Law, one of the most important doctrines that come our
way is the doctrine of Constructive Notice. The doctrine of Constructive Notice implies that
the Article of Association is well-known by the outsider who seeks to hold any relation with
the company in the near future because the Article of Association of the Company is a public
document and is available to everyone according to Section 399 of the Companies Act, 2013.

From the time when the company is registered, the Article of Association and the
Memorandum of Association are considered the ‘public document.’ They are open for
inspection by anyone from the general public. It is therefore presumed that any person who is
dealing with the company is well equipped by its rules and regulations.
The rule of constructive notice extends not merely to Memorandum and Articles but also to
all the other documents which are required to be registered with the Registrar of Companies.
But for the documents that are filed with the registrar of companies for the sake of records
only, the doctrine of constructive notice doesn’t apply.

This English doctrine was initially applied to only cases of fraud but was soon thereafter
extended to cases of gross negligence also. When we study Company Law, one of the most
important doctrines that come our way is the doctrine of Constructive Notice. The doctrine of
Constructive Notice implies that the Article of Association is well-known by the outsider who
seeks to hold any relation with the company in the near future because the Article of
Association of the Company is a public document and is available to everyone according to
Section 399 of the Companies Act, 2013.

From the time when the company is registered, the Article of Association and the
Memorandum of Association are considered the ‘public document.’ They are open for
inspection by anyone from the general public. It is therefore presumed that any person who is
dealing with the company is well equipped by its rules and regulations.

The rule of constructive notice extends not merely to Memorandum and Articles but also to
all the other documents which are required to be registered with the Registrar of Companies.
But for the documents that are filed with the registrar of companies for the sake of records
only, the doctrine of constructive notice doesn’t apply.
This English doctrine was initially applied to only cases of fraud but was soon thereafter
extended to cases of gross negligence also.

Modes of Winding up of a company.

The process of ending the life of a company by administering its properties for the benefit of
shareholders & creditors of the company is known as winding up of a company. A company is
a corporate body which is an association of people for some common purpose of carrying on
the business and earning profits. A company has to be incorporated and registered according
to the Companies Act 2013. Chief Justice Marshall defines a company as “a corporation
which is an artificial being, invisible, intangible and exists only in contemplation of law.”

A company, being a corporate body has the following characteristics:

• It has a separate legal entity.
• It is an artificial person.
• It has limited liability.
• It can own separate properties and assets.
• It has a common seal.
• It has perpetual succession.
• It can sue and be sued in its own name.
• In a public company, shares can be transferred freely.

Modes of winding up of a company

According to Section 270 of the Act, a company can be wound up by either of the two modes.
These are:
Winding up by the Tribunal ( NCLT)/ Compulsory winding-up
Voluntary winding up of a company
The Companies Act, 2013 deals with the winding up of a company. Part I provides for
winding up by the tribunal, while Part II provides provisions for the voluntary winding up of
a company. However, Part II has been omitted by the Insolvency and Bankruptcy Code, 2016.
Winding up by court/tribunal
The Companies Act, 2013 in part I deals with the winding up of a company by a court or
tribunal. When a company is wound up by the order of a court or tribunal, it is called winding
up by the court or tribunal. This mode of winding up is also called compulsory winding up of
a company.
 UNIT-IV

Sale of Goods Act, 1930

The Sale of Goods Act, 1930 herein referred to as the Act, is the law that governs the sale of
goods in all parts of India. It doesn‘t apply to the state of Jammu & Kashmir. The Act defines
various terms which are contained in the act itself. Let us see below:
I. Buyer and Seller
As per the sec 2(1) of the Act, a buyer is someone who buys or has agreed to buy goods.
Since a sale constitutes a contract between two parties, a buyer is one of the parties to the
contract.

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

A faint difference between the definition of buyer and seller established by the Act and the
colloquial meaning of buyer and seller is that as per the act, even the person who agrees to
buy or sell is qualified as a buyer or a seller. The actual transfer of goods doesn‘t have to take
place for the identification of the two parties of a sales contract.

II. 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‖

As you can see, shares and stocks are also defined as goods by the Act. The term actionable
claims mean those claims which are eligible to be enforced or initiated by a suit or legal
action. This means that that claims where an action such as recovery by auction, suit, refunds
etc. could be initiated to recover or realize the claim.

We say that goods are in a deliverable state when their condition is such that the buyer would,
under the contract, be bound to take delivery of these goods. Goods may be further
understood in the following subtypes:
1. Existing Goods
The goods that are referred to in the contract of sale are termed as existing goods if they are
present (in existence) at the time of the contract. In sec 6 of the Act, the existing goods are
those goods which are in the legal possession or are owned by the seller at the time of the
formulation of the contract of sale. The existing goods are further of the following types:

A) Specific Goods
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 an advertisement with its picture and information. A buyer agrees to the sale
and a contract is formed. The mobile, in this case, is specific good.

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.

III. Delivery
The delivery of goods signifies the voluntary transfer of possession from one person to
another. The objective or the end result of any such process which results in the goods
coming into the possession of the buyer is a delivery process. The delivery could occur even
when the goods are transferred to a person other than the buyer but who is authorized to hold
the goods on behalf of the buyer.

There are various forms of delivery as follows:

• Actual Delivery: If the goods are physically given into the possession of the buyer, the
delivery is an actual delivery.

• Constructive delivery: The transfer of goods can be done even when the transfer is
affected without a change in the possession or custody of the goods. For example, a case
of the delivery by attornment or acknowledgment will be a constructive delivery. If you
pick up a parcel on behalf of your friend and agree to hold on to it for him, it is a
constructive delivery.

• Symbolic delivery: This kind of delivery involves the delivery of a thing in token of a
transfer of some other thing. For example, the key of the godowns with the goods in it,
when handed over to the buyer will constitute a symbolic delivery.

IV. The Document of Title to Goods

From the Sec 2(4) of the act, we can say that this ―includes the bill of lading, dock-warrant,
warehouse keeper‘s certificate, railway receipt, multimodal transport document, warrant or
order for the delivery of goods and any other document used in the ordinary course of
business as proof of the possession or control of goods or authorizing or purporting to
authorize, either by endorsement or by delivery, the possessor of the document to transfer or
receive goods thereby represented.‖

V. Mercantile Agent [Section 2(9)]

Mercantile agent is someone who has authority in the customary course of business, either to
sell or consign goods under the contract on behalf of the one or both of the parties. Examples
include auctioneers, brokers, factors etc.
VI. Property [Section 2(11)]
In the Act, property means ‗ownership ‘or the general property i.e. all ownership right of the
goods. A sale constitutes the transfer of ownership of goods by the seller to the buyer or an
agreement of the same.

VII. Insolvent [Section 2(8)]

The Act defines an insolvent person as someone who ceases to pay his debts in the ordinary
course of business or cannot pay his debts as they become due, whether he has committed an
act of insolvency or not.

VIII. Price [Section 2(10)]

In the Act, the price is defined as the money consideration for a sale of goods.

IX. Quality of Goods

In Sec 2(12) of the Act, the quality of goods is referred to as their state or condition.

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.

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 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 every time 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 the condition but
rather a breach of warranty, because the stipulation made by the seller was only a collateral
one.

Identification of a Stipulation as a Condition or Warranty

Whether a stipulation is a condition or a warranty is a very important aspect to have the
knowledge about. A stipulation in a contract of sale is either a condition or is a warranty
depending in either case on the construction of the contract. A stipulation may be a condition,
though called a warranty in the contract.

Difference between a Condition and a Warranty?

 Difference Basis Warranty Condition

Nature A warranty is only collateral to the It is essential to the main

main purpose of the contract. purpose of the contract.

Exemption The aggrieved party can

from In this case, the aggrieved party repudiate the contract and
performance in can ‘t rescinds the contract but is exempted from
case of a breach can claim damages only. performance and can also
of the claim damages.
stipulation.
Treatment A breach of contract
may be treated as a
Breach of warranty can ‘t be breach of warranty.
treated as a breach of condition.

Rights and Duties of Buyer in a Contract of Sale

Rights of the Buyer in a Contract of Sale
1. He has the right to have delivery of the goods as per the contract.

2. If the seller does not send, as per the contract, the right quantity of goods to the buyer, the
buyer can reject the goods.

3. The buyer has a right not to accept delivery of the goods by installments by the seller.

4. If the goods are sent by sea route by the seller, the buyer has a right to be informed by the
seller so that he may get the goods insured.

5. The buyer has a right to examine the goods which he has not seen earlier before giving his
acceptance for the same.

6. If the seller wrongfully refuses to deliver the goods to the buyer as per the contract, the
buyer may sue the seller for damages for non delivery. The amount of damages will be the
difference between the contract price and the market price of the goods.

7. If the buyer has already paid the price and the seller has not delivered the goods as per the
contract, the buyer can recover the amount paid.

8. If the contract is for the sale of specific or ascertained goods, the buyer may sue the seller
for the specific performance of the contract in case of breach of contract by the latter.
9. The buyer may sue the seller for damages for the breach of any implied warranty as per the
provisions of this Act.

10. If the seller rejects the contract before the date of delivery, the buyer may either treat
the contract as still existing and wait till the date of delivery or he may treat the contract as
cancelled and sue the seller for damages for the breach. The second case is known as the
anticipatory breach of contract.

11. If, in view of the breach of contract by the seller, the price has to be refunded to the
buyer, the buyer has a right to claim interest on the amount.

Duties of the Buyer in a Contract of Sale

The following are the duties of a buyer in a contract of sale.

1. It is the duty of the buyer to accept the goods and pay for them in accordance with the
terms of the contract.

2. It is the duty of the buyer to apply for delivery.

3. It is the duty of the buyer to demand delivery of the goods within a reasonable time.
4. If the contract specifically provides for the delivery of the goods by the seller by
installments, the buyer shall accept such a delivery.

5. It is the duty of the buyer to take the risk of deterioration in the goods which is necessarily
incident to the course of transit. Example: Rusting of iron.

6. If the buyer refuses to accept the goods, it is his duty to inform the seller about it.

7. If the seller delivers the goods as per the contract, it becomes the duty of the buyer to take
delivery of the same within a reasonable time. He remains liable to the seller for any loss
arising on account of his refusal to take delivery.

8. If the ownership rights have already been passed on to the buyer by the seller, the former
has the duty to pay the price as per the terms of the contract.

9. If the buyer wrongfully refuses to accept and pay for the goods, he will have to compensate
the seller for damages for non-acceptance.

UNPAID SELLER

He is the seller to whom: -

1. Whole of the price is not paid
2. Conditional payment
Bill of exchange/ promissory note/ cheque has been received by seller but it
dishonours. Till the time bill of exchange/ promissory note/ cheque is with the seller so, till
that time he is only called as seller but when any of the mentioned instruments dishonours
then after this seller is called unpaid seller.

Features of an unpaid seller

1. Seller must sell the goods on cash basis and must be unpaid (in cash
transactions payment becomes due instantly)
2. Seller must be unpaid either wholly or party
3. The decided period has expired and the price has not been paid to seller
4. Seller must not refuse to accept the payment
5. Where the price paid through negotiable instrument (bill of exchange/
promissory note/ cheque) and the same has been dishonoured

Example: A sells his bike to B for Rs. 60,000 and receives a cheque for the price. Till
this time seller will only be called as seller. But when subsequently, the cheque is
dishonoured due to insufficiency of funds in B‘s bank account, then only A becomes an
unpaid seller.

Rights (Remedies) of Unpaid Seller

(The unpaid seller has the rights/ remedies against goods and buyer both) Rights of unpaid
seller against goods Rights of unpaid seller against buyer

A. Rights of unpaid seller against goods

1.Right of possession/ lien

If the buyer fails to pay the price within the decided time, then unpaid seller has the
right to keep the goods in his possession and he can refuse to deliver the goods until the due
payment is paid.

When right of possession can be exercised: -

• When goods are sold on cash basis, but payment is unpaid
• When goods have been sold on credit basis and the term of credit has expired
• When the buyer becomes insolvent even within the decided period for
payment
• So, far as the goods are in the possession of unpaid seller, he can exercise this
right.
If goods are lost/ given up then right of possession/ lien is also lost/ given up
Termination of Right of Possession
• By delivery of goods to the buyer/ his agent à by delivery of goods to the
carrier/ courier company
• By waiver This means that it’s specifically mentioned in the contract that
seller can‘t retain the possession of the goods even if the price has not been
paid
• When buyer has obtained the possession of goods lawfully

2. Right of stoppage of goods in transit

If a buyer fails to pay the price within the decided time, then unpaid seller has the right to
stop the goods in transit.
Conditions for stoppage of goods: -
• When seller is unpaid either wholly or partially
• When the buyer becomes insolvent
• Goods must be in the course of transit-
This means that goods must not be in the possession of the seller and have not reached the
buyer ‘s possession as well

Termination of Transit
• By delivery to the buyer/ his agent
• Interception by the buyer (Interception means the act of catching/ receiving)
When buyer or his agent obtains the delivery of the goods before their arrival
at the appointed destination hence, the transit comes to an end
• Acknowledgement to the buyer by the carrier/ courier company that they are holding
the goods on buyer ‘s behalf, then also transit comes to an end
• Part delivery of goods
If parts of the goods are delivered to the buyer, then the transit comes to an end for the
remainder of the goods as well

3. Right of resale
The unpaid seller has the right to resell the goods.
Conditions for resale:
• When goods are of perishable nature- Then unpaid seller can resell them immediately
without the notice to the buyer. But in case of non-perishable items unpaid seller
needs to send notice to the buyer for reselling them
• Where unpaid seller gives the notice to buyer and buyer still don ‘t pays for it
• Where the right of resale is reserved/ mentioned in the contract If contract clearly
specifies that reselling can ‘t be done or vice versa
• Buyer becomes insolvent
• Buyer fails to pay the price of the goods

PASSING OF PROPERTY
There are four primary rules that govern the passing of property:

• Specific or Ascertained Goods

• Passing of Unascertained Goods

• Goods sent on approval or ―on sale or return‖

• Transfer of property in case of reservation of the right to disposal

Passing of Ascertained Goods
Section 19
This is the first rule of the passing of property. It deals with the passing of specified goods
and states that –Specific or ascertained goods pass when intended to pass. Section 19 of The
Sale of Goods Act, 1930, has three sub-sections as follows:

• Sub-section (1): Imagine a contract for the sale of specific or ascertained goods with a
clear mention of the time when the parties to the contract intend to transfer the property.
In such cases, the property is transferred at the time mentioned in the contract.

• Sub-section (2): To understand the intention of the parties, the terms of the contract, the
conduct of the parties, and the circumstances of the case are considered.

• Sub-section (3): Sections 20 to 24 of The Sale of Goods Act, 1930, contain rules to
ascertain the intention of the parties. This intention is about the time at which the
property in the goods will pass to the buyer. Let‘s look at these sections
Section 20
Section 20 relates to Specific goods in a deliverable state. It states that if the contract is
unconditional for the sale of specific goods in a deliverable state, then the property in the
goods passes to the buyer the moment the contract is made. This rule holds true even if the
time of payment of price or delivery of the goods or both is postponed.

Example: Peter goes to an electronics store and buys a television set. He asks the shopkeeper
to deliver it to his house. The shopkeeper agrees. The television immediately becomes the
property of Peter.

Section 21
Specific goods to be put into a deliverable state (Section 21) – Imagine a contract for the sale
of goods where the seller has to do something before the goods are ready for delivery. In such
cases, the passing of property happens only after the seller does the things and informs the
buyer.

Example: Peter buys a laptop from an electronics store and asks for a home delivery. The
shopkeeper agrees to it. However, the laptop does not have a Windows operating system
installed. The shopkeeper promises to install it and call Peter before making the delivery. In
this case, the property transfers to Peter only after the shopkeeper has installed the OS
making the laptop ready for delivery.

Section 22
Specific goods are in a deliverable state but the seller has to do something to ascertain the
price – Imagine a contract of sale of goods which are in a deliverable state but the seller has
to do something like weight, measure, test, or perform any other act on the goods to ascertain
the price. In such cases, the property does not pass until the seller does the act and informs
the seller.
Example: Peter sells a carpet to John and agrees to lay it in John ‘s house as a part of the
contract. He delivers the carpet and informs John that he will lay it the next day. That night
the carpet gets stolen from John ‘s premises. In this case, John is not liable for the loss since
the property had not passed to him. According to the terms of the contract, the carpet would
be in a deliverable state only after it is laid.

Passing of Unascertained Goods

If there is a contract for the sale of unascertained goods, then the passing of the property of
the goods to the buyer cannot happen unless the goods are ascertained. This is specified under
Section 18 of The Sale of Goods Act, 1930.

Section 23
Further Section 23 lists two important rules for the passing of property of unascertained
goods:

• Sale of unascertained goods by description: Imagine a contract for the sale of

unascertained or future goods by description. If any goods of that description are
appropriated to the contract either by the buyer or the seller with the consent of the other
party, then the property of the goods passes to the buyer. The consent can be express or
implied and given before or after the appropriation is made.

• Delivery to the carrier: If the seller delivers the goods to the buyer or a carrier or a
bailee (whether named by the buyer or not) for the purpose of transmission to the buyer,
but does not reserve the right of disposal, then he is deemed to have unconditionally
appropriated the goods to the contract.

Some Points to Remember about the Appropriation of Goods:

If goods are selected with the intention of using them in performing the contract, with the
mutual consent of the buyer and the seller, then it is called appropriation of goods. Here are
some essentials:

• A contract for the sale of unascertained or future goods exists

• The goods conform to the quality and description stated in the contract

• They are in a deliverable state

• The goods are unconditionally appropriated to the contract either by delivery to the
buyer of his agent or the carrier.

• The appropriation is made by the buyer with the assent of the seller or the seller with the
assent of the buyer.

• The assent can be express or implied

• The assent can be given before or after the appropriation.


Goods Sent on Approval

When a seller sends good to a buyer on approval basis or on terms similar to ‗on sale or
return ‘, the property passes to the buyer only when:

• The buyer communicates his approval to the seller or does an act which signifies
acceptance of the transaction.

• He does not give his approval or acceptance to the seller but accepts the goods without
giving notice of rejection. There are two possibilities here:

o A time has been fixed for the return of goods – In this case, if the approved time has
elapsed, then the property is passed to the buyer.

o A time has not been fixed for the return of goods – In this case, the property is
passed to the buyer once a reasonable time has elapsed.
• The buyer does something to the goods which signifies acceptance of goods. For
example, he sells the goods or pledges it.
Let us see an example. Peter is a jeweller. John visits his shop to buy a necklace for his wife
Olivia. However, he is not sure if Olivia will like the necklace he has chosen. Peter agrees to
deliver the necklace to John ‘s house on a sale or return basis.

If Olivia does not like the necklace, then John can return it to Peter without having to pay for
it. When Peter reaches John ‘s house, another man called Chris is also present in the house.
Olivia or John don ‘t express their approval to Peter but John pledges the necklace with Chris
for a certain amount.

In this case, the ownership of the necklace transfers to John since his act of pledging the
necklace shows his unequivocal intention to buy it. Peter can recover the price of the
necklace from John.

Cash Only or Return

In some cases, the terms of sale can be cash or return. This means that the seller will deliver
the goods to the buyer under the condition that the goods continue to remain the property of
the seller unless the buyer pays cash for it. In such cases, the buyer needs to pay cash in order
to transfer the property in his name.

In example 1 above, if Peter agrees to deliver the necklace to John under cash only or return
basis and John pledges the necklace with Chris before paying cash for it, the pledge is
deemed invalid by law and Peter can recover the necklace from Chris.

AUCTION SALE

An auction sale is the sale of goods through a bidding process and is covered under the Sale
of Goods Act, 1930. The process of sale by auction involves the selling of any goods and
property of value, in a public gathering where buyers make a bid for the purchase and the sale
is made to the highest bidder. Let us understand in detail an auction sale, parties involved,
and their rights and obligations.

Auction of goods to the highest bidder among all buyers present at the time. Auction Sale is
an economic system where sellers offer goods for sale, and bidders compete with one
another, based on the price or quality of the item being offered. Auction Sales can be
conducted either through oral or written bidding methods like Dutch Auction (where bids are
sealed), English Auction (traditional), and Online Auction (in which bidders bid via the
internet)

Different Types of Auction Sales

1. Private Auction: This is an auction sale where the seller and buyers are known to
each other.

2. Advertisement Auction: In this type of auction, the seller publishes a notice in

newspapers or online about the product he wishes to sell through auction.

3. Sealed Bid Auction: In this type of auction, potential buyers send their bids to the
seller in sealed envelopes. The highest bidder wins the product at the end of the
bidding process.

4. Live Auction: This is an auction sale where bidders participate live either by
attending physically or participating through phone or the internet.

5. Sale in lots: Auction Sale where the items are sold in lots or batches.

6. First Lot Auction: In this type of auction, each lot is sold to the highest bidder at a
time.

7. Second Lot Auction: This type of Auction allows for batching of goods into two parts
and then offering these as individual lots to potential buyers interested in acquiring
them during an auction sale process.

8. Auction Sale of Unsold Lots: In this kind of Auction, the seller offers only those lots
that he has not been able to sell in first or second lot auctions to interested bidders
during an auction sale process.

Rules of Auction Sales Are

 1. Sale Completion: It is one of the most important Auction Sale rules that the seller
must complete the sale once a bid has been accepted. In case, he is unable to do so for
any reason, he must inform all potential buyers of this before the Auction commences
and also refund their money

2. Auctioneer: The Auctioneer conducts the Auction Sale by announcing each product
being put up for bidding and calling for bids from interested buyers.

3. Reserve Price: This is the minimum price at which the seller is willing to sell a
particular item in an auction sale. If no bidder meets or exceeds this price, then the
item goes unsold.

4. Bidding Increments: In most auctions, there are predetermined bidding increments

that determine how much a can increase her/his bid amount.

5. Auction Closing Time: The Auction Sale must have a definite ending time so that all
interested buyers are aware of when the bidding process will end.

UNIT-V
CONSUMER PROTECTION ACT 2019

Right to Information Act

 The right to information act was passed in the year 2005. This law empowers
Indian citizens to seek any accessible information from a Public Authority and makes the
Government and its functionaries more accountable and responsible.

The Right to Information Act (RTI) is a significant legislation that

empowers citizens to seek information from public authorities. It aims to promote
transparency and accountability in the functioning of government bodies.
Under the RTI Act, individuals have the right to request information from
public authorities, and these authorities are obligated to provide the information within a
specified time frame. This act plays a crucial role in ensuring good governance and
empowering citizens to hold the government accountable.

The Information Commission under RTI Act

The Information Commission, as established by the Act, is an independent body
that operates at both the central and state levels. Its primary function is to adjudicate on
appeals and complaints. In situations where a public authority refuses or neglects to furnish
information, individuals have the option to submit an appeal to the appropriate Information
Commission.

The Code of Civil Procedure, 1908, has conferred upon the Central Information Commission
(CIC) the authority of a civil court. As such, the CIC is empowered to summon individuals
and enforce their attendance, as well as compel them to furnish evidence or documents for
inspection as necessary.

Powers of the Central Information Commission

The Central Information Commission possesses the authority to levy a penalty on public
information officers under certain circumstances such as where a public information officer
declines to accept an RTI application, fails to respond within the designated time frame as
stipulated by the act, engages in a malicious refusal of the RTI application, deliberately
provides inaccurate, inadequate, or deceptive information, destroys the information that was
requested, or obstructs the provision of information in any way.

The meaning of “Public Authorities” under the Act

The RTI Act is legislation that creates a strong system for individuals to request and receive
information. The policy requires that all individuals, regardless of their residency status, have
the right to submit a formal request to public entities in order to obtain information.

The definition of public authorities under the Act is comprehensive and includes government
departments, ministries, agencies, and organisations that receive significant funding from the
government.

Responsibility of Public Authorities under the RTI

The Act places importance on the responsibility of public authorities to keep records
in a way that enables convenient accessibility. The provision allows citizens to exercise their
right to access public records by facilitating their inspection, note-taking, and copying at a
minimal fee. It is mandatory for public authorities to disclose specific types of information
through various channels, such as websites, manuals, or other means, to promote
transparency.

How to make a request under the RTI Act?

The Act allows citizens to make requests either in writing or electronically and
mandates that public authorities provide a response within a period of 30 days. In situations
where an individual’s life or freedom is at stake, it is imperative that the necessary
information be disclosed within a 48-hour timeframe.

What if the requested information is not received within a period of 30 days?

In the event that the information requested through the Right to Information (RTI) is not
received within a period of 30 days from the date of filing the RTI, or if the information
received is deemed to be incomplete, the applicant may choose to file an appeal with the First
Appellate Authority (FAA) within a period of 30 days from the date of receiving the
information, provided that the applicant is of the opinion that the information provided is
incomplete.

In the event that the individual does not receive any information within a
period of 60 days subsequent to filing the Right to Information (RTI), they may proceed to
file an appeal with the First Appellate Authority (FAA). The (FAA) is required to issue an
order within a 30-day period, which may be extended to 45 days upon submission of written
justification for the delay.

In addition, in the event that the FAA to furnish the requested information
subsequent to the submission of an appeal or if the information is not provided within the
designated timeframe, the petitioner may initiate a secondary appeal with either the State or
Central Information Commission. The filing of this appeal is subject to a 90-day time limit
from the issuance date of the most recent order. The Central Information Commission (CIC)
serves as the supreme appellate authority in accordance with the provisions of the Right to
Information (RTI) Act.

Consumer Protection Act-2019

Consumer Protection Act, 2019 is a law to protect the interests of the consumers. This Act
provides safety to consumers regarding defective products, dissatisfactory services, and
unfair trade practices.

The basic aim of the Consumer Protection Act, 2019 is to save the rights of the
consumers by establishing authorities for timely and effective administration and settlement
of consumers’ disputes.

The objects of the Act are as follows:

1. Better protection of interests of consumers. The Act seeks to provide for better
protection of the interests of consumers. For that purpose, the Act makes provision for the
establishment of Consumer Councils and other authorities for the settlement of consumer
disputes and for matters connected therewith.

2. Protection of rights of consumers. The Act seeks, inter alia, to promote and protect the
rights of consumers such as—

a) The right to be protected against marketing of goods or services which are hazardous to
life and property;
b) The right to be informed about the quality, quantity, potency, purity, standard and price
of goods or services so as to protect the consumers against unfair trade practices;
The right to be assured, wherever possible, access to goods and services at competitive prices;
c) The right to be heard and to be assured that consumers' interest will receive due
consideration at appropriate forums;
d) The right to seek redressal against unfair trade practices or restrictive trade practices or
unscrupulous exploitation of consumers; and
e) right to consumer education.
3. Consumer Protection Councils. The above objects are sought to be) promoted and
protected by the Consumer Protection Councils established at the Central and State levels.
4. Quasi-Judicial machinery for speedy redressal of consumer disputes. The Act seeks to
Provide speedy and simple redressal to consumer disputes. For this purpose, there has
been set up quasi-judicial machinery at the district, State and Central levels.

CONSUMER Sec. 2(1) (D)

‗Consumer ‘means any person who:

(i) Consumer of goods buys any goods for a consideration which has been paid or
promised or partly paid and partly promised, or under any system of deferred payment and
includes any user of such goods other than the person who buys such goods for consideration
paid or promised or partly paid or partly promised, or under any system of deferred payment
when such use is made with the approval of such person, but does not include a person who
obtains such goods for resale or for any commercial purpose; or
(ii) Consumer of services hires or avails of any services for a consideration which has
been paid or promised or partly paid and partly promised, or under any system of deferred
payment and includes any beneficiary of such services other than the person who hires or
avails of the services for consideration paid or promised, or partly paid and partly promised,
or under any system of deferred payment, when such services are availed of with the approval
of the first mentioned person;

CONSUMER DISPUTE
―Consumer dispute‖ means a dispute where the person against whom a complaint has
been made, denies or disputes the allegations contained in the complaint;

DEFECT
―defect‘ means any fault, imperfection or shortcoming in the quality, quantity,
potency, purity, or standard which is required to be maintained by or under any law for the
time being for or under any contract, express or implied or as it claimed by the trader is any
manner whatsoever in relation to any goods;‖ ―manufacture‖ means a person who- (i) makes
or manufactures any goods or parts thereof : or (ii) does not make or manufacture any goods
but assembles parts thereof made or manufactured by other; or (iii) puts or causes to be put
his own mark on any goods made or manufactured by any other manufacture.

COMPLAINANT Sec. 2(1) (13)

―Complainant‖ means- (i) a consumer; or
(ii) Any voluntary consumer association registered under the Companies Act, 1956
(1 of 1956). Or under any other law for the time being in force; or
(iii) The Central Government or any State Government, who or which makes a
complaint;
(iv) One or more consumers, where there are numerous consumers having the same
interest
(v) In case of death of a consumer, his legal heir or representative*‖

COMPLAINT Sec. 2(1) (C) ―Complaint‖ means any allegation in writing made by a
complaint that- (i) an unfair trade practice or a restrictive trade practice has been adopted by
any trader;

The object of the Consumer Protection Act, is to provide better protection to

consumers. To secure this object, the Act intends to provide simple, speedy and inexpensive
redressal to the consumer’s grievances.

For this purpose, the Act provides for the establishment of three-tier quasi-judicial machinery
at the District, State and National levels.
The three consumer disputes redressal agencies at the different levels are as under:
1. Consumer Disputes Redressal Forum to be known as District Forum at the District level.
2. Consumer Disputes Redressal Commission to be known as State Commission at the State
level.
3. National Consumer Disputes Redressal Commission to be known as National Commission
at the National level.
ESTABLISHMENT OF AGENCIES

1. DISTRICT FORUM The ‗District Forum is the short name of the Consumer Disputes
Redressal Forum established in the District under Section 9(a) of the Consumer Protection
act; it is the redressal agency to deal with the complaints of the consumers at the district
level.

Legal provision relating to District forum:

1. Composition of the district forum

The District Forum is a body of three persons appointed by the State Government. The
qualifications of the President and other members are as follow:
(a) President: A person who is, or has been or is qualified to be, a District Judge shall be the
President of the District Forum.
(b) Other Member: A part from the President, the District Forum shall consist of two other
members one of whom shall be a woman.
The qualification for appointment of other members are: (i)
She/he must not be less than 36 years of age.
(ii) She/he must possess a bachelor ‘s degree from a recognised university.
(iii) She/he must be a person of ability, integrity and standing and have adequate
knowledge and experience of at least 10 years in dealing with problems relating to
economics, law, commerce, accountancy, industry, public affairs or administrations.
2. Appointment of members of District Forum: The appointment of the President and of
the members shall be made by the State Government on the recommendation of the
selection committee consisting of (a) the President of the State Commission, (b) Secretary,
Law Department of the State, and (c) Secretary, in charge of the Department dealing with
consumer affairs in the State.
3. Disqualifications of members:
a) If he has been convicted and sentenced to imprisonment for an office, which, in the
opinion of the State Government, involves moral turpitude, or
b) If he is an under charged insolvents, or
c) If he is of unsound mind and stands so declared by a competent court, or
d) If he has been removed or dismissed from the services of the Government or a body
corporate owned or controlled by the Government,
4. Tenure of office of the members of the District Forum
A person may act as a President or a member of the District Forum for 5 years or up to the
age of 65 years, whichever is earlier. Thus, in any case, a person cannot hold the office of the
President or that of the member beyond the age of 65 years
5. Vacancy in the office of the District Forum
The officer of the President or of any member of the forum may become vacation on his
attaining the age of sixty-five years.
6. Jurisdiction of the District Forum
The District Forum has the jurisdiction to entertain complaints where the value of the goods
or services and the compensation, if any, claimed does not exceed rupees 20 lakhs.
PROCEDURE ON RECEIPT OF COMPLAIN SECTION-13
The district forum has to observe the procedure mentioned in section. It may be
summarised as follows
I. Reference of complaint to opposite party – Whenever the district forum receives a
complaint, relating to a goods, it should refer a copy of the complaint to the opposite party.
It must be given within 30 days of receiving the complaint. However, it may be extended
by a further period not exceeding 15 days.
II. On refusal or dispute by opposite party – When the opposite party, on receipt of a
complaint, refusal/disputes the allegations contained in the complaint or fails to take any
action within the time given by the district forum, the forum shall proceed to settle the
consumer dispute in the following manner –

1. Reference of sample to laboratory

2. Deposit of fees

3. Forwarding of report to opposite partly

4. Objection by any of the parities.

5. Reasonable opportunity to parties of being heard and issue order.

Consumer Rights under the Consumer Protection Act, India

1. Right to Safety:
According to this right the consumers have the right to be protected against the marketing of
goods and services which are hazardous to life and property, this right is important for safe
and secure life. This right includes concern for consumer ‘s long term interest as well as for
their present requirement.

Sometimes the manufacturing defects in pressure cookers, gas cylinders and other electrical
appliances may cause loss to life, health and property of customers. This right to safety
protects the consumer from sale of such hazardous goods or services.

2. Right to Information:
According to this right the consumer has the right to get information about the quality,
quantity, purity, standard and price of goods or service so as to protect himself against the
abusive and unfair practices. The producer must supply all the relevant information at a
suitable place.

3. Right to Choice:
According to this right every consumer has the right to choose the goods or services of his or
her likings. The right to choose means an assurance of availability, ability and access to a
variety of products and services at competitive price and competitive price means just or fair
price.

The producer or supplier or retailer should not force the customer to buy a particular brand
only. Consumer should be free to choose the most suitable product from his point of view.

4. Right to be Heard or Right to Representation:

According to this right the consumer has the right to represent him or to be heard or right to
advocate his interest. In case a consumer has been exploited or has any complaint against the
product or service then he has the right to be heard and be assured that his/her interest would
receive due consideration.

This right includes the right to representation in the government and in other policy making
bodies. Under this right the companies must have complaint cells to attend the complaints of
customers.
5. Right to Seek Redressal:
According to this right the consumer has the right to get compensation or seek redressal
against unfair trade practices or any other exploitation. This right assures justice to consumer
against exploitation.

The right to redressal includes compensation in the form of money or replacement of goods
or repair of defect in the goods as per the satisfaction of consumer. Various redressal forums
are set up by the government at national level and state level.

6. Right to Consumer Education:

According to this right it is the right of consumer to acquire the knowledge and skills to be
informed to customers. It is easier for literate consumers to know their rights and take actions
but this right assures that illiterate consumer can seek information about the existing acts and
agencies are set up for their protection.
The government of India has included consumer education in the school curriculum and in
various university courses. Government is also making use of media to make the consumers
aware of their rights and make wise use of their money.

STATE COMMISSION

‗State Commission is the short name given to the Consumer Disputes Redressal
Commission established in the State under Section 9(b) of the Consumer Protection Act, 1986
[Section] 2(1) (p).

It is the redressal agency to deal with the complaints of the consumers at the State level.

Legal provision relating to District forum Composition of the State Commission

Section 16(1) makes the following provisions regarding the qualifications of the President
and other members:
(a) President: A person who is or has been a judge of a High Court shall be the
President of the State Commission.

(b) Other members: Apart from the President, the State Commission shall consist
of two other member one of whom shall be a woman. The qualifications for appointment of
the other member are:
(i) He/She must not be less than 35 year of age. (ii) He/She must possess
a bachlor‘s degree from a recognised university.
(iii) He/She must be a person of ability, integrity and standing and have adequate
knowledge or experience of at least 10 years in dealing with problems relating to
economics, law, commerce, accountancy, industry, public affairs or administration.
1. Appointment of members of State Commission
The appointment of the President shall be made by the State Government after
consultation with the Chief Justice of the High Court of the State. And the appointment of the
other members shall be made by the State Government on the recommendation of the
selection committee consisting of (a)President of the State Commission, (b) Secretary of the
Law Department of the State and (c)Secretary, in charge of Department dealing with
consumer affairs in the State.

2. Disqualification of members
These disqualifications are the same as already discussed the District Forum.

3. Tenure of office of the members of the State Commission

The President or the member of the State Commission shall hold office for a term of 5
years or up to the age of 67 year, whichever is earlier. Thus, in any case, a person cannot hold
the office of President or that of a member beyond the age of 67 years.
4. Jurisdiction of the State Commission

(a) Pecuniary jurisdiction: The State Commission has the jurisdiction to entertain
Complaints where the value of the goods or services and compensation, if any, claimed
exceeds rupees 20 lakhs but does not exceed rupees one crore.

(b) Appellate jurisdiction: Any person aggrieved by an order made by the District Forum
may prefer an appeal to the State Commission with a period of 30 days from the date of the
order.

NATIONAL COMMISSION

The ‗National Commission is the short name given to the National Consumer
Disputes Redressal Commission established in the country under Section 9(c) of the
Consumer Protection Act, 1986.

Legal provision relating to District forum

1. Composition of the National Commission The National Commission is a body of

minimum five persons appointed by the Central Government. Legally, the National
Commission shall consist of a President and at least four other members.
(a) President: A person who is or has been a judge of the Supreme Court
shall be the President of the National Commission. Thus, only the sitting or retired
judges of the Supreme Court are eligible for appointment as President.

(b)

other members: A part from the President, the National Commission shall consist of at least
four other members one of whom shall be a woman. The qualifications for appointment of
other members are:

(i) He/She must not be less than 35 year of age.

(ii) He/She must possess a bachelor‘s degree from a recognised university.

He/She must be a person of ability, integrity and standing and have adequate knowledge or
experience of at least 10 years in dealing with problems relating to economics, law,
commerce, accountancy, industry, public affairs or administration.

2. Appointment of the members of the National Commission [Section 20(1) (a) (b):

The appointment of the President shall be made by the Central Government after
consultation with the Chief Justice of India. The appointment of the other four members shall
be made by the Central Government on the recommendation of the selection committee
consisting of

(a) sitting judge of the Supreme Court,

(b) Secretary in the Department of Legal Affairs, Government of India,

(c) Secretary of the Department dealing with consumer affairs in the Government of India
3. Disqualification of members

These disqualifications are the same as already discussed in case of members of

District Forum and of State Commission. Any other disqualification may also be prescribed
the Central Government.

4. Tenure of office of the members of the National Commission

The President or the members of the National Commission shall hold the office for a
term of 5 year or up to the age of 70 years, whichever is earlier.

Thus, in any case, a person cannot hold the office of President or that of a member
beyond the age of 70 years.

5. Jurisdiction of the National Commission

(a) Pecuniary jurisdiction: The National Commission has the jurisdiction to

entertain complaints where the value of the goods or services and compensation,

if any claimed exceeds rupees 1 core. Prior to the Consumer Protection (Amendment)
Act, 2002, the National Commission had the jurisdiction where the value of this claim
exceeded rupees twenty lakhs.
(b) Appellate jurisdiction: The National Commission also has the appellate
jurisdiction to entertain appeals against the order of any State Commission.

Penalties for Offences

Any failure in carrying out the directions of the National, State or District CDRC
may amount to an imprisonment of not less than one month with chances of it getting
extended to three years or a fine of at least 25,000 which may extend to one lakh rupees or
both.
As laid down in section 89, any manufacturer or service provider, for putting up a
false or misleading advertisement may also be punished with a penalty extending to ten lakh
rupees with imprisonment up to two years, with every repetition of the same attracting a
penalty up to fifty lakh rupees and imprisonment extending to five years.

Further, the endorser of such advertisements may also be restrained from endorsing
any other goods or services for a period extending to one year, which may aggravate to three
years in case of each subsequent contravention.

Any failure to comply with the directions of the Central Consumer Protection
Authority under sections 20 and 21 shall result either in imprisonment extending to six
months or a fine extending to twenty lakh rupees or both according to section 88. Cognizance
of offence under sections 88 and 89 shall be taken by a court only after receiving a complaint
from CCPA or an officer authorized by it.
 Penalties imposed for manufacturing, storing, selling, distributing, or importing
adulterated or spurious products as laid down in sections 90(1) and 90(2) are-

 Fine up to one lakh with imprisonment up to six months if no injury is caused

(applicable only in case of adulterated products)
 Fine up to three lakhs with imprisonment up to three years if injury not resulting in
grievous hurt is caused. Grievous hurt carries the same meaning as assigned under
s.320 of the IPC.
 Fine up to five lakhs with imprisonment up to seven years if grievous hurt is caused.
 Fine up to ten lakhs with minimum imprisonment for seven years which may extend to
imprisonment for life if death is caused.
The latter two offences are non-bailable and cognizable. For any of the offences
included under section 90(1) or 90(2), the court is authorized to suspend any license
issued to the convict under any currently operative law for up to two years and cancel
the license in case of a subsequent conviction. Also, for any officer causing search or
seizure without having any reasonable grounds to do so, the penalty shall be
imprisonment up to one year or a fine up to ten thousand rupees or both.

Landmark Judgements

Horlicks Ltd. v. Zydus Wellness Products Ltd. (2020)

In this case, both parties are nutritious drink makers, but Zydus promoted a television
advertising that denigrated Horlicks Ltd.’s goods. In multiple languages, including
Bengali, Tamil, and English, we’re used to broadcast advertisement. The Delhi High
Court concluded that the commercial is defamatory since it offers no specific evidence
of the product’s quality, citing several decisions on defamation, deceptive advertising,
and the legislation restricting the publishing of ads on television. Furthermore,
because electronic media creates an imprint on the minds of viewers, these sorts of
commercials would not only be harmful to consumers but would also cause
irreversible harm to the complaint.

In Pepsi Co. Inc. v. Hindustan Coca-Cola Ltd., 2003, the Delhi High Court found
that there are several crucial considerations to be made in cases of disparagement,
including the manner of the advertisement, its intended audience, and its plot. This
case is based on this famous decision.