Chapter-1

Q.1 "An agreement enforceable by law is a contract." Discuss

the definition and bring out clearly the essentials of a valid
contract.
In order that an agreement may be regarded as a contract, it must give rise to a legal obligation i.e., it
must be enforceable by law. Any obligation (duty) which is not enforceable by law is not regarded as a
contract. If an agreement is incapable of creating a duty enforceable by law, it is not a contract. Thus,
agreement is a wider term than contract. “All contracts are agreements but not all agreements are
contracts.” In business agreements presumption is usually that the parties intended to create legal
relations. Thus an agreement to buy certain specific goods at an agreed price e.g., 100 bags of wheat at
1430rs per bag is a contract because it gives rise to a duty enforceable by law, and in case of default on the
part of either party an action for breach of contract could be enforced through a court provided other
essential elements of a valid contract as laid down in Section 10 are present, namely, if the contract was
made by free consent of the parties competent to contract, for lawful consideration and with a lawful
object.2 Thus it may be concluded that the Act restricts the use of the word 'contract' to only those
agreements which give rise to legal obligations between the parties. It will be appropriate to point out
here that the law of contract deals only with such legal obligations which spring from agreements.

Essentials Elements of a Valid Contract

A contract has been defined in Section 2(h) as "an agreement enforceable by law." To be enforceable by
law, an agreement must possess the essential elements of a valid contract as contained in Sections 10, 29
and 56. According to Section 10, all agreements are contracts if they are made by the free consent of the
parties, competent to contract, for a lawful consideration, with a lawful object, are not expressly declared
by the Act to be void, and, where necessary, satisfy the requirements of any law as to writing or
attestation or registration. As the details of these essentials form the subject-matter of our subsequent
chapters, we purpose to discuss them in brief here:

The essential elements of a valid contract may be summed up as follows:

1. Offer & Acceptance: For an agreement there must be a lawful offer by one and lawful acceptance of
that offer from the other party. The term lawful means that the offer and acceptance must satisfy the
requirements of Contract Act. The offer must be made with the intention of creating legal relations
otherwise, there will be no agreement.

2. Intention to create legal relations: There must be an intention among the parties that the agreement
should be attached by legal consequences and create legal obligations. Agreements of a social or
domestic nature do not contemplate legal relations, and as such they do not give rise to a contract. An
agreement to dine at a friend's house is not an agreement intended to create legal relations and
therefore is not a contract. Agreements between husband and wife also lack the intention to create
legal relationship and thus do not result in contracts.

3. Lawful Consideration: The third essential of a valid contract is the presence of consideration.
Consideration is "something in return." It may be some benefit to the party. Consideration has been
defined as the price paid by one party for the promise of the other. An agreement is enforceable only
when both the parties get something and give something. The something given or obtained is the price
of the promise and is called consideration.
4. Capacity of parties: The parties to an agreement must be competent to contract, otherwise it cannot
be enforced by a court of law. In order to be competent to contract the parties must be of the age of
majority and of sound mind and must not be disqualified from contracting by any law to which they are
subject. If any of the parties to the agreement suffers from minority, lunacy, idiocy, drunkenness, etc.,
the agreement is not enforceable at law, except in some special cases e.g., in the case of necessaries
supplied to a minor or lunatic, the supplier of goods is entitled to be reimbursed from their estate.

5. Free consent: Free consent of all the parties to an agreement is another essential element of a valid
contract. 'Consent' means that the parties must have agreed upon the same thing in the same sense.
There is absence of 'free consent' if the agreement is induced by (i) coercion, (ii) undue influence, (iii)
fraud, (iv) misrepresentation, or (v) mistake. If the agreement is vitiated by any of the first four factors,
the contract would be voidable and cannot be enforced by the party guilty of coercion, undue influence
etc. The other party (i.e., the aggrieved party) can either reject the contract or accept it, subject to the
rules laid down in the Act. If the agreement is induced by mutual mistake which is material to the
agreement, it would be void.

6. Lawful object: For the formation of a valid contract, it is also necessary that the parties to an
agreement must agree for a lawful object. The object for which the agreement has been entered into
must not be fraudulent or illegal or immoral or opposed to public policy or must not imply injury to the
person or property of another. If the object is unlawful for one or the other of the reasons mentioned
above the agreement is void.

7. Writing & Registration: According to Contract Act, a contract may be oral or in writing. Although in
practice, it is always in the interest of the parties that the contract should be made in writing so that it
may be convenient to prove in the court. However, a verbal contract if proved in the court will not be
considered invalid merely on the ground that it not in writing. It is essential for the validity of a contact
that it must be in writing signed and attested by witness and registered if so, required by the law.

8. Certainty: According to Section 29 of the Contract Act, "Agreements, the meaning of which are not
certain or capable of being made certain are void." In order to give rise to a valid contract the terms of
the agreement, must not be vague or uncertain. For a valid contract, the terms and conditions of an
agreement must be clear and certain.

9. Possibility of performance: Yet another essential feature of a valid contract is that it must be capable of
performance. Section 56 lays down that "An agreement to do an act impossible in itself is void". If the
act is impossible in itself, physically or legally, the agreement cannot be enforced at law.

10. Not expressly declared void: The agreement must not have been expressly declared to be void under
the Act. Sections 24-30 specify certain types of agreements which have been expressly declared to be
void. For example, an agreement in restraint of marriage, an agreement in restraint of trade, and an
agreement by way of wager have been expressly declared void under Sections 26, 27 and 30
respectively.

Q.2 Discuss the essential elements of a valid contract.

Refer the above answer

Q.3 Distinguish Between

1. Void & Voidable Contracts
 Void Contracts Voidable Contracts
1. A void contract is one that is considered 1. A voidable contract, on the other hand,
null and void from the outset. It is as if is initially valid and enforceable, but one
the contract never existed, and it is or more parties have the option to void
completely unenforceable by law. or cancel the contract under certain
circumstances.
2. A contract may be void if it is 2. Voidable contracts are typically valid
fundamentally flawed or involves an contracts at the time of formation, but
essential illegality, such as having an some factor or defect allows one party to
unlawful object or consideration. avoid the contract at their discretion.
3. The parties to a void contract cannot 3. Until the party with the option chooses
seek any legal remedies or relief because to void the contract, it remains in force
the contract is inherently invalid. It lacks and is binding on both parties. However,
legal backing right from its formation. once voided, the contract becomes
unenforceable.
4. Examples: Contracts that are expressly 4. Examples: Contracts entered into under
prohibited by law, agreements with duress, fraud, misrepresentation,
unlawful objectives, or agreements coercion, or by a party lacking
entered into by parties lacking legal contractual capacity are examples of
capacity are considered void. contracts that may be voidable. The
aggrieved party has the choice to either
affirm or void the contract.

2. Void Agreements and Void Contracts

Void Agreements Void Contracts

1. An agreement is void when it lacks 1. A void contract, in contrast, refers to a
enforceability right from its formation. It contract that was initially valid but
is considered as if it never existed in the becomes void due to subsequent
eyes of the law. circumstances or legal reasons.
2. An agreement can be deemed void for 2. The contract is formed with all the
various reasons specified in the Act, essential elements initially in place, but
such as having an unlawful object, later events or factors make it void. Void
consideration, or being against public contracts are often the result of
policy. subsequent illegality, impossibility of
performance, or a change in
circumstances.
3. Since void agreements are inherently 3. Like void agreements, void contracts are
 unenforceable, the parties have no legal unenforceable. However, they differ in
rights or obligations under such that they were valid contracts at the
agreements. Courts will not recognize or time of formation but became void later.
uphold the terms of a void agreement. The parties may be required to restore
any benefits received under the void
contract.
4. Examples: Agreements that involve 4. Examples: A contract that becomes
unlawful activities, agreements against impossible to perform due to a change
public policy, or those entered into by in law, or a contract rendered illegal by
parties lacking contractual capacity are subsequent legislation, may be
typically considered void. considered void.

3. Void Agreements and Illegal Agreements

Void Agreements Illegal Agreements

1. A void agreement is one that is 1. An illegal agreement refers to a contract
considered null and void from the that involves activities that are
outset. It is as if the agreement never prohibited by law or contrary to public
existed in the eyes of the law. policy.
2. An agreement may be deemed void due 2. The illegality in an agreement may relate
to fundamental flaws, such as having an to the subject matter, the purpose of the
unlawful object or consideration, being agreement, or the means used to
against public policy, or involving parties achieve its objectives. Illegality can exist
lacking contractual capacity. at the time of formation or may arise
during the performance of the contract.
3. Void agreements are entirely 3. Illegal agreements are void ab initio
unenforceable, and the parties have no (from the beginning), and the courts will
legal rights or obligations under such not enforce them. In some cases, the law
agreements. Courts will not recognize or may impose penalties on parties
uphold the terms of a void agreement. involved in illegal agreements.
4. Examples: Agreements with illegal 4. Examples: Contracts to commit a crime,
objectives, those against public policy, or agreements to engage in fraudulent
those involving parties lacking legal activities, or contracts that violate
capacity are examples of void statutory provisions are examples of
agreements. illegal agreements.
 Chapter-2
Q.1 Define the term 'Offer'. Explain the legal rules regarding a
valid offer.
The words 'proposal' and 'offer' are synonymous and are used interchangeably. Section 2(a) of the Indian
Contract Act defines a 'proposal' as, “when one person signifies to another his willingness to do or to
abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he
is said to make a proposal". This definition reveals the following three essentials of a 'proposal":
(i) It must be an expression of the willingness to do or to abstain from doing something.
(ii) The expression of willingness to do or to abstain from doing something must be to another person.
There can be no 'proposal' by a person to himself.
(iii) The expression of willingness to do or to abstain from doing something must be made with a view to
obtaining the assent of the other person to such act or abstinence. Thus, a casual enquiry "Do you intend to
sell your motorcycle?" - is not a 'proposal. Similarly, a mere statement of intention - "I may sell my
motorcycle if I can get 14,000 for it" - is not a 'proposal'. But if M says to N, "Will you buy my motorcycle for
14,000," or "I am willing to sell my motorcycle to you for ₹14,000,” we have a 'proposal' as it has been
made with the object of obtaining the assent of N.
The person making the 'proposal' or 'offer' is called the 'promisor' or 'offeror', the person to whom the
offer is made is called the 'offeree' and the person accepting the offer is called the 'promisee' or 'acceptor'.

Legal Rules Regarding a Valid Offer

A valid offer must be in conformity with the following rules:

1. An offer may be 'express' or 'implied: An offer may be made either by words or by

conduct. An offer which is expressed by words, spoken or written, is called an 'express offer' and the one
which is inferred from the conduct of a person or the circumstances of the case is called an 'implied offer'.
For example, if you tell someone, "I offer to sell you my motorcycle for ₹10,000," that is an express offer.
The terms are clear, and the communication is direct.
A shoe shiner starts shining some one's shoes, without being asked to do so, in such circumstances that any
reasonable man could guess that he expects to be paid for this, he makes an implied offer.

2. An offer must give rise to legal consequences and be capable of creating

legal relations: If the offer does not intend to give rise to legal consequences, it is not a valid offer in
the eye of law. An offer to a friend to dine at the offeror's place, or an offer to one's wife to show her a
movie is not a valid offer and as such cannot give rise to a binding agreement, even though it is accepted
and there is consideration, because in social agreements or domestic arrangements the presumption is that
the parties do not intend legal consequences to follow the breach of agreement. But in the case of
agreements regulating business transactions the presumption is just the other way. In business agreements
it is taken for granted that parties intend legal consequences to follow. Even in the case of a business
agreement if the parties agree that the breach of the agreement would not confer on either of the parties a
right to enforce the agreement in a court of law, there is no contract.

3. The terms of the offer must be certain and not loose or vague. If the terms of the
offer are not definite and certain, it does not amount to a lawful offer. Maugham L.J. has rightly observed:
"Unless all the material terms of the contract are agreed, there is no binding obligation." Thus, an
agreement to agree in future is not a contract, because the terms of agreement are uncertain as they are
yet to be settled. For e.g. A offers to B lavish entertainment, if B does a particular work for him. A's offer
does not amount to lawful offer being vague and uncertain.

4. An invitation to offer is not an offer: An offer must be distinguished from an 'invitation to

receive offer or as it is sometimes expressed in judicial language an 'invitation to treat.' In the case of an
'invitation to receive offer' the person sending out the invitation does not make an offer but only invites the
other party to make an offer. His object is merely to circulate information that he is willing to deal with
anybody who, on such information, is willing to open negotiations with him. Such invitations for offers are
therefore not offers in the eye of law and do not become agreements by their acceptance.
We may give some examples of them here: An advertisement for sale of goods by auction does not amount
to an offer to hold such sale. It merely invites offers. Actual bids made at the auction are 'offers', each
higher bid superseding the previous one, and when the hammer falls on the highest bid, there is an
acceptance and the contract becomes complete. An advertisement for an auction sale does not even bind
the auctioneer to hold the auction and the prospective bidders have no legal right to complaint if they have
wasted their time and money in coming to the advertised place of the auction sale.

5. An offer may be 'specific' or 'general’: An offer is said to be ‘specific’ when it is made to a

definite person or persons. Such an offer can be accepted only by the person or persons to whom it is
made. Thus, where M makes an offer to N to sell his bicycle for ₹200, there is a specific offer and N alone
can accept it. A 'general offer', on the other hand, is one which is made to the world at large or public in
general and may be accepted by any person who fulfils the requisite conditions. The leading case on the
subject of 'general offer' is that of Carlill vs Carbolic Smoke Ball Co.
ILLUSTRATION. In the above case the Carbolic Smoke Ball Co., issued an advertisement in which the
Company offered to pay £ 100 to any person who contracts influenza, after having used their Smoke Balls
three times daily for two weeks, according to the printed directions. Mrs Carlill, on the faith of the
advertisement, bought and used the Balls according to the directions, but she nevertheless subsequently
suffered from influenza. She sued the company for the promised reward. The company was held liable.

6. An offer must be communicated to the offeree: An offer is effective only when it is

communicated to the offeree. Until the offer is made known to the offeree, there can be no acceptance and
no contract. Doing anything in ignorance of the offer can never be treated as its acceptance, for, there was
never a consensus of wills. This applies to both 'specific' and 'general' offers.
ILLUSTRATIONS. A, without knowing that a reward has been offered for the arrest of a particular criminal,
catches the criminal and gives the information to the superintendent of police. A, cannot recover the
reward as he cannot be said to have accepted the offer when he was not at all aware of it.

7. An offer should not contain a term the non-compliance of which would

amount to acceptance: Thus, an offeror cannot say that if acceptance is not communicated up to a
certain date, the offer would be presumed to have been accepted. If the offeree does not reply, there is no
contract, because no obligation to reply can be imposed on him, on the grounds of justice.

8. An offer can be made subject to any terms and conditions: An offeror may attach
any terms and conditions to the offer he makes. He may even prescribe the mode of acceptance. The
offeree will have to accept all the terms of the offer. There is no contract, unless all the terms of the offer
are complied with and accepted in the mode prescribed. As regards mode of acceptance, it must be noted
that in case of deviated acceptance, for example, if the offeror asks for sending the acceptance 'by
telegram' and the offeree sends the acceptance 'by post', the offeror may decline to treat that acceptance
as valid acceptance provided, he gives a notice to that effect to the offeree within a reasonable time after
the acceptance is communicated to him. If he does not inform the offeree as to this effect, he is deemed to
have accepted the deviated acceptance (Sec.7).
9. Two identical cross-offers do not make a contract: When two parties make identical
offers to each other, in ignorance of each other's offer, the offers are 'cross-offers'. 'Cross-offers' do not
constitute acceptance of one's offer by the other and as such there is no completed agreement.
ILLUSTRATION. On 15 October, 2008 A wrote to B offering to sell him 100 tons of iron at 25,000 per ton. On
the same day, B wrote to A offering to buy 100 tons of iron at ₹25,000 per ton. The letters crossed in the
post. There is no concluded contract between A and B, because the offers were simultaneous, each being
made in ignorance of the other, and there is no acceptance of each other's offer.

Chapter-22
Q.1 What is a partnership deed? State its main contents.
The document in which the respective rights and obligations of the members of a partnership are set forth
is called a 'partnership deed'. It should be drafted with care and be signed by all the partners. It must be
stamped in accordance with the Indian Stamp Act. Each partner should have a copy of the Deed. The firm
should be registered and copy of the Deed should be filed at the time of registration with the Registrar of
Firms because in the absence of such registration partners cannot enforce the conditions laid down in the
Deed through a court of law.

The Deed should cover the following points:

(i) The name of the firm and the names and addresses of partners who compose it.
(ii) Nature of business and the town and place where it will be carried on.
(iii) Date of commencement of partnership.
(iv) The duration of partnership.
(v) The amount of capital to be contributed by each partner and the methods of raising finance in future if
so required.
(vi) The ratio of sharing profits and losses.
(vii) Interest on partners' capital, partners' loan, and interest, if any, to be charged on drawings.
(viii) Salaries, commissions etc., if any, payable to partners.
(ix) The method of preparing accounts and arrangement for audit and safe custody of cash etc.
(x) Division of task and responsibility, i.e., the duties, powers and obligations of all the partners.
(xi) Rules to be followed in case of retirement, death and admission of a partner.
xii) Expulsion of partners in case of gross breach of duty or fraud.
(xiii) Can a partner carry on a competing business or any other business whether competing or not. Section
11(2) clearly provides that the Deed may provide that a partner shall not carry on any business other than
that of the firm while he is partner, notwithstanding anything contained in Section 27 of the Indian
Contract Act where agreements in restraint of trade are void.
(xiv) The circumstances under which the partnership will stand dissolved.
(xv) Arbitration in case of dispute among the partners.
The terms laid down in the Deed may be varied by consent of all the partners, and such consent may be
expressed or may be implied by a course of dealing [Sec. 11(1)].
Q.2 "The Indian Partnership Act has effectively ensured the
registration of firms without making it compulsory." Comment.

Q.3 Write short notes on (a) Particular partnership, (b) Partner

by estoppel, and (c) Partnership property.
1. Particular Partnership
When a partnership is formed for a particular period or for a specific venture, e.g., for working a coal mine
or producing a film, it is called a 'particular partnership' (Sec. 8). In such a case the partnership is
automatically dissolved at the expiry of the fixed term or on the completion of the venture (Sec. 42). Before
such time the partnership would not be dissolved unless all the partners agree to it (Sec. 40). If the
partners decide to continue such a partnership even after the expiry of the fixed term or the completion of
the specific venture then it becomes a 'partnership at will.'

2. Partner by Estoppel
If a person represents to the outside world by words spoken or written or by his conduct or by lending his
name, that he is a partner in a certain partnership firm, he is then estopped from denying his being a
partner, and is liable as a partner in that firm to anyone who has on the faith of such representation
granted credit to the firm. Actually, such a person is not a partner in that firm-no agreement, no sharing in
profits and losses, no say in the management, may not be knowing exact place of business, but as he holds
himself out to be a partner, he becomes responsible to outsiders as a partner on the principle of estoppel
or holding out. It is for this reason that such a person is called as 'partner by estoppel' or 'partner by
holding out.' He may also be called as 'quasi partner' for he is not a partner in the full implications of the
term; only in the eyes of outside world he is considered a partner. He may also be known as 'nominal
partner.'
It is to be emphasised that in order to entitle a person to bring an action under the doctrine of holding out
it must be shown that he acted on the faith of the representation while giving credit to the firm. It does not
matter whether the person representing himself or represented to be a partner does or does not know that
the representation has reached the other person so giving credit. But a person who knows nothing about
the representation or who knows but does not believe it or who knows about it subsequently cannot take
advantage of this doctrine and make the supposed partner liable as a partner.

3. Partnership Property
Section 14 provides that subject to contract between the partners, the property of the firm includes all
property and rights and interest in property originally brought into the stocks of the firm, or acquired by
purchase or otherwise, by or for the firm, or for the purpose and in the course of the business of the firm,
and includes also the goodwill of the business. If a partner brings in immovable property as his share of
capital in the firm, that becomes the property of the firm even without a formal document of transfer in
the name of the partnership firm. Similarly, property purchased with the partnership money is deemed to
be the property of the firm even if a partner purchases that in his own name, unless a contrary intention
appears from the conduct of the partner concerned.
ILLUSTRATIONS. (a) A and B are partners. A buys railway shares in his own name with the moneys and on
account of the firm. The shares are partnership property.5
(b) A and B are partners. A buys land with partnership moneys, for his sole benefit. Thereafter A debits
himself in the firm books and becomes a debtor to the firm for the amount of the purchase money. The
land is not partnership property, because there was clearly a contrary intention (Smith vs Smith).

Chapter-24
Q. 1 What are the different modes in which a firm may be
dissolved?
Modes of Dissolution of a Firm
A firm may be dissolved in any one of the following ways:

1. By agreement (Sec. 40). A firm may be dissolved with the consent of all the partners or in
accordance with a contract between the partners. Partnership is created by contract; it can also be
terminated by contract.

2. By notice (Sec. 43). Where the partnership is at will, the firm may be dissolved by any partner
giving notice in writing to all the other partners of his intention to dissolve the firm. A notice of dissolution
once given cannot be withdrawn without the consent of other partners (Jones vs Lloyd'). The firm is
dissolved as from the date mentioned in the notice as the date of dissolution or, if no date is so mentioned,
as from the date of the communication of the notice.

3. On the happening of certain contingencies (Sec. 42). Subject to contract between the
partners, a firm is dissolved:
(a) if constituted for a fixed term, by the expiry of that term;
(b) if constituted to carry out one or more adventures or undertakings, by the completion thereof;
(c) by the death of a partner; and
(d) by the adjudication of a partner as an insolvent.
The partnership agreement may provide that the firm will not be dissolved in any of the aforementioned
circumstances. Such a provision is valid.

4. Compulsory dissolution (Sec. 41). A firm is compulsorily dissolved under any of the
following circumstances: (a) When all the partners, or all the partners but one, are adjudged insolvent; or
(b) When some event has happened which makes it unlawful for the business of the firm to be carried on
or for the partners to carry it on in partnership (e.g., when any partner, who is a citizen of a foreign country,
becomes an alien enemy because of the declaration of war between his country and India). Where,
however, a firm is carrying on more than one adventures or undertakings, the illegality of one or more shall
not of itself cause the dissolution of the firm in respect of its lawful adventures or undertakings.

5. Dissolution by the Court (Sec. 44). Dissolution of a firm by the Court is necessitated when
there is a difference of opinion between the partners regarding the matter of dissolution. For example,
where one of the partners has become insane², some of the partners may be willing to continue the firm
and share profits with the insane partner, while the other partner(s) may be insisting on the dissolution of
the firm. Obviously in these circumstances intervention by the Court becomes necessary. On receiving the
petition for the dissolution of the firm the Court is not bound to decree dissolution and it enjoys complete
discretion in the matter. It may or may not order for the dissolution of the firm depending upon the merits
of each case.
Section 44 enumerates the various grounds on which a petition may be made to the court for the
dissolution of the firm. The Section lays down that at the suit of a partner, the Court may dissolve a firm on
any of the following grounds:
(a) Insanity. When a partner becomes insane. In this case the Section permits not only any of the
partners but also the next friend of the insane partner to file the suit for dissolution of the firm.
(b) Permanent incapacity. When a partner, other than the partner suing, becomes permanently
incapable of performing his duties as partner.
(c) Misconduct. When a partner, other than the partner suing, is guilty of misconduct, which is likely to
affect prejudicially the carrying on of the business of the firm. It is not necessary that the misconduct which
is made the ground of dissolution should be connected with partnership business. Conviction for travelling
without ticket or the adultery by one partner with another partner's wife are good grounds for the
dissolution of the firm. Under this clause the suit cannot be brought by the guilty partner for that would
allow him an excuse for getting a firm dissolved at his will.
(d) Persistent breach of agreement. When a partner, other than the partner suing, commits
frequently breaches of the partnership agreement or otherwise so conducts himself in matters relating to
the business that other partners find it impossible to carry on the business in partnership with him. Taking
away the books of accounts, using firm's monies, for his private debts, continuous quarrelling with other
partners are good grounds for the dissolution.
(e) Transfer of interest. When a partner, other than the partner suing, has transferred the whole of his
interest in the firm to a third party or has allowed his share to be sold in execution of a decree. Transfer or
assignment of partner's interest does not by itself dissolve the firm. But the other partners may apply to
the Court to dissolve the firm if such a transfer occurs.
(f) Continuous losses. When the business of the firm cannot be carried on except at a loss.
(g) Just and equitable. When on any other ground the Court considers it just and equitable that the
firm should be dissolved, for example, if partners are not on speaking terms.

Q.2 What are the consequences of the dissolution of a firm?

1. Continuing liability of partners after dissolution (Sec. 45). Notwithstanding the
dissolution of a firm, the partners continue to be liable as such to third parties for any act done by any of
them which would have been an act of the firm if done before the dissolution, until public notice is given of
the dissolution. The notice may be given by the firm or any partner. It must be given to the Registrar of
Firms, in case of registered firms, in the local Official Gazette and in at least one vernacular newspaper
circulating in the district where the firm's principal place of business is situated (Sec. 72). In the absence of
public notice of dissolution, however, the estate of a partner, who dies, or who is adjudicated an insolvent,
or in case of a retiring partner, who is not known to the outside world to be a partner, is not liable for acts
done after the date on which he ceases to be a partner.

2. Continuing authority of partners for purposes of winding up (Sec. 47). After

the dissolution of the firm the authority of each partner to bind the firm, and other mutual rights and
obligations of the partners, continue so far as may be necessary for the following two purposes:
(a) to wind up the affairs of the firm, e.g., disposing of the property, realising amount due from debtors and
paying to creditors and so on; and
(b) to complete transactions begun but unfinished at the time of the dissolution, e.g., taking delivery of the
goods ordered before dissolution and paying for them.
The firm, however, is not bound by such acts of a partner who has been adjudicated insolvent.
3. Right of partners to enforce winding up (Sec. 46). On the dissolution of a firm every
partner or his representative is entitled to have the property of the firm realised and applied in payment of
the debts and liabilities of the firm, and to have the surplus distributed among the partners or their
representatives according to their rights.

4. Liability to share personal profits (Sec. 50). So long as the affairs of the dissolved firm are
in process of winding up, it is still the duty of every partner not to make any personal profit out of
transactions concerning the firm. A partner, therefore, must account to the firm for every benefit so
derived by him and must share it with other partners.

5. Return of premium (Sec. 51). Where a partner has paid a premium on entering into
partnership for a fixed term, and the firm is dissolved before the expiration of that term, such a partner
shall be entitled to repayment of 'rateable amount of premium' for the unexpired period except where the
dissolution has been caused:
(a) by the death of a partner;
(b) by the misconduct of the partner so admitted; or
(c) by mutual agreement of all the partners containing no provision for the return of premium.

6. Rights where partnership contract is rescinded for fraud, etc. (Sec. 52). A
contract of partnership like any other contract may be rescinded on the ground of fraud or
misrepresentation. The partner misled also has a right to claim damages for fraud. This Section grants the
following further rights to the partner thus rescinding the contract:
(a) He has a right of lien on the surplus of the assets of the firm remaining
after the debts of the firm have been paid, for any sum paid by him for the
purchase of a share in the firm and for any capital contribution by him. (b) He is entitled to rank as a
creditor of the firm in respect of any payment made by him towards the debts of the firm.
(c) He has also the right to claim indemnity from the partners guilty of the fraud or misrepresentation
against all the debts of the firm.

7. Right to impose restrictions. In the absence of an agreement to the contrary, each partner or
his representative is entitled to restrain the other partners from carrying on a similar business in the name
of the firm or from using the property of the firm for their own benefit, until the affairs of the firm have
been completely wound up. However, where a partner or his representative has bought the goodwill of the
firm, he can use the firm name. (Sec. 53)
Further, the partners in anticipation of or upon dissolution of the firm, can agree that some of all of them
will not carry on a business similar to that of the firm within a specified period or within specified local
limits. Such an agreement shall be valid and not void on the ground of restraint of trade, if the restrictions
imposed are reasonable. (Sec. 54)

Chapter-25
Q. 1 Define the term 'negotiable instrument.' What are its
essential characteristics?
The word negotiable means 'transferable by delivery,' and the word instrument means 'a written document
by which a right is created in favour of some person.' Thus, the term "negotiable instrument" literally
means 'a written document transferable by delivery.'
According to Section 13 of the Negotiable Instruments Act, "a negotiable instrument means a promissory
note, bill of exchange or cheque payable either to order or to bearer." "A negotiable instrument may be
made payable to two or more payees jointly, or it may be made payable in the alternative to one of two, or
one or some of several payees" [Section 13(2)].

Characteristics of Negotiable Instrument:

1. Easy negotiability: They are transferable from one person to another without any formality. In
other words, 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. Transferee can sue in his own name without giving notice to the debtor: A bill,
note or a cheque represents a debt, i.e., an "actionable claim"4 and implies the right of the creditor to
recover something from his debtor. The creditor can either recover this amount himself or can transfer his
right to another person. In case he transfers his right, the transferee of a negotiable instrument is entitled
to sue on the instrument in his own name in case of dishonour, without giving notice to the debtor of the
fact that he has become holder. In case of transfer or assignment of an ordinary "actionable claim" (i.e., a
book debt evidenced by an entry by the creditor in his account book or bahi), under the Transfer of
Property Act, notice to the debtor is necessary in order to make the transferee entitled to sue in his own
name, otherwise he has always to join his transferor, i.e., the original creditor before he can recover his
claim from the debtor.

3. Better title to a bona fide transferee for value: A bona fide transferee of a negotiable
instrument for value (technically called as a holder in due course) gets the instrument 'free from all
defects.' He is not affected by any defect of title of the transferor or any prior party. Thus, the general rule
of the law of transfer of title applicable in the case of ordinary chattels that 'nobody can transfer a better
title than that of his own' does not apply to negotiable instruments. A man may sell to another a stolen T.V.
set but the true owner may claim back the T.V. set from the buyer even though he may have got it in good
faith for consideration. The result would have been different if instead of the T.V. set a negotiable
instrument, say, a bill of exchange made payable to bearer, had thus been transferred, in which case the
transferee would have obtained a good title. It is relevant to state that such instruments which restrict
transferability (although otherwise appearing as negotiable instruments), i.e., bearing words like 'Pay A
only', 'Pay to A and none else' etc., are treated like ordinary chattels and not like negotiable instruments.
Hence the transferee takes such instruments subject to all equities and his title shall not be better than that
of the transferor.

4. Presumptions: Certain presumptions apply to all negotiable instruments. Sections 118 and 119 lay
down the following presumptions, unless the contrary is proved:
(a) that every negotiable instrument was made, drawn, accepted, endorsed or transferred for
consideration;
(b) that every negotiable instrument bearing a date was made or drawn on such date;
(c) that every bill of exchange was accepted within a reasonable time after its date and before its maturity;
(d) that every transfer of a negotiable instrument was made before its maturity;
(e) that the endorsements appearing upon a negotiable instrument were made in the order in which they
appear thereon;
(f) that a lost negotiable instrument was duly stamped;5
(g) that the holder of a negotiable instrument is a holder in due course; but this presumption would not
arise where it is proved that the holder has obtained the instrument from its lawful owner, or from any
person in lawful custody thereof, by means of an offence, fraud or for unlawful consideration and in such a
case the holder has to prove that he is a holder in due course;
(h) that the instrument was dishonoured, in case a suit upon a dishonoured
instrument is filed with the court and the fact of 'protest' is proved.
The above presumptions are rebuttable by the defendant.

Q.2 What is a bill of exchange? What are its essential elements?

How does it differ from a promissory note?
Section 5 of the Negotiable Instruments Act defines a bill of exchange as follows:
"A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker,
directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to
the bearer of the instrument."
At the very outset the following two facts must be noted:
(i) Although a bill of exchange directing to pay 'only to a particular person' is valid if it satisfies the
requirements of the definition but it shall not be a negotiable instrument within the meaning of the
Negotiable Instruments Act as its transferability is restricted.
(ii) Although a bill of exchange may be originally drawn 'payable to bearer' but in such a case it must be
payable otherwise than on demand (say, three months after date). In other words, a bill cannot be drawn
'payable to bearer on demand.' If it is 'payable on demand' then it must be made 'payable to order' (Sec. 31
of the Reserve Bank of India Act).

Essentials of a Bill of Exchange

To be a valid bill of exchange an instrument must comply with the requirements of the definition given in
Section 5, which are as follows:
1. It must be in writing.
2. It must contain an order to pay. A mere request to pay on account, will not amount to an order. But an
order may be expressed in polite language.
3. The order to pay must be unconditional.
4. It must be signed by the drawer.
5. The drawer, drawee and payee must be certain. A bill cannot be drawn on two or more drawees in the
alternative because of the rule of law that "where liability lies, no ambiguity must lie." But a bill may be
made payable in the alternative to one of two or more payees (Sec. 13).
6. The sum payable must be certain.
7. The bill must contain an order to pay money only.
8. It must comply with the formalities as regards date, consideration, stamps, etc.

Distinction between a Pro-note and a Bill

The points of distinction between a promissory note and a bill of exchange are as follows:

1. Number of parties. In a promissory note there are two parties - the maker of the note and the
payee. In a bill of exchange there are three parties drawer, the drawee and the payee.
2. The maker of a note cannot be the payee. In the case of a promissory note the maker
cannot be the payee for the simple reason that the same person cannot be both the promisor and the
promisee. But in a bill of exchange the drawer and the payee may be one and the same person as where a
bill is drawn "Pay to me or my order."

3. Promise and order. In a promissory note there is a promise to make the payment whereas in a
bill of exchange there is an order for making the payment.

4. Acceptance. A promissory note requires no acceptance as it is signed by the person who is liable to
pay. The drawer of a bill of exchange is generally the creditor of the drawee and therefore it must be
accepted by the drawee before it can be presented for payment.

5. Nature of liability. The liability of the maker of a pro-note is primary and absolute but the liability
of a drawer of a bill of exchange is secondary and conditional. It is only when the acceptor does not honour
the bill that the liability of the drawer arises as a surety. (Secs. 30 and 32)

6. Maker's position. The maker of a promissory note stands in immediate relation with the payee,
while the maker or drawer of an accepted bill stands in immediate relation with the acceptor and not the
payee (Explanation to Sec. 44). The position of the maker of a pro-note also differs from the position of the
acceptor of a bill. A promissory note must contain an unconditional promise to pay and therefore the
maker, who himself is the originator of a note, cannot make it conditional. In the case of a bill of exchange
although the drawer, who is the originator of a bill, has to make an unconditional order to pay but under
Section 86 the acceptor may accept the bill conditionally.

7. Payable to bearer. A promissory note cannot be drawn 'payable to bearer,' while a bill of
exchange can be so drawn provided it is not drawn 'payable to bearer on demand.'

8. Notice of dishonour. In case of dishonour of a bill of exchange, notice of dishonour must be

given by the 'holder' to all prior parties who are liable to pay (including the drawer and endorsers), whereas
in case of dishonour of a promissory note, no notice is necessary to the maker.

9. Applicability of certain provisions. The provisions relating to presentment for acceptance,

acceptance, acceptance supra protest and drawing of bills in sets are applicable only to a bill of exchange,
they are not applicable to a promissory note.

Q.3 Explain the distinguishing features of Promissory Notes, Bills

of Exchange and Cheques.