Paper 1.

5: BUSINESS LAWS
Unit – 1
Indian Contract Act 1872: Contract – Meaning – Essential elements –
Nature of contract – Performance of contract – Discharge of contract - Remedies
for breach of contract – Quasi contracts.
Unit – 2
Special Contracts: Contract of Indemnity and Guarantee – Bailment and
Pledge – Law of Agency.
Unit – 3
Sale of Goods Act, 1930: Contract of sale – Essentials – Duties of
buyers and sellers – Conditions and warranties – Transfer of property –
Performance of the contract of sale – Rights of an unpaid seller.
Consumer Protection Act, 1986: Key definitions – Consumer
Protection Councils – Redressal Forum – Remedies.
Unit – 4
Negotiable Instruments Act, 1881: Negotiable instruments – Parties to
a negotiable instrument – Material alteration.
Indian Partnership Act, 1932: Meaning and test of partnership –
Registration of firms – Relations of partners – Rights and duties – Dissolution
of partnership.
Unit – 5
Law of Insurance: Contract of Insurance – Fundamental of principles –
Life Insurance, Fire Insurance and Marine Insurance.
Unit - 6
Companies Act, 1956: Definition of a company – Characteristics –
Kinds – Incorporation of a company – Memorandum and articles of association
– Prospectus – Directors – Appointment – Powers and duties – Company
Meetings – Resolutions and Minutes.

1
References:
1. Kapoor, N.D., Elements of Mercantile Law, Sultan Chand & Sons, New
Delhi.
2. Shukla, M.C., Mercantile Law, S.Chand & Co., New Delhi
3. D.F. Mulla, The Indian Contract Act.
4. S.M. Shah, Lectures on Company Law.
5. Relevant Bare Acts

Course Material prepared by -

Dr. S. Sudalaimuthu,
Professor of Corporate Secretaryship
Alagappa University, Karaikudi.

2
LESSON TITLE
Indian Contract Act, 1872
1. Meaning and Types of Contracts
2. Offer and Acceptance
3. Consideration and Capacity
4. Free Consent
5. Legality of Object and Contingent Contracts
6. Performance of Contract and Remedies for Breach of
Contract
7. Quasi Contracts
Special Contracts
8. Contract of Indemnity and Guarantee
9. Contract of Bailment
10. Contract of Agency
11. Sale of Goods Act
12. Consumer Protection Act
13. Negotiable Instruments Act
14. Indian Partnership Act
15. Law of Insurance
16. Companies Act, 1956
17. Company Management
18. Company Meetings

3
 LESSON - 1

INDIAN CONTRACT ACT, 1872

MEANING AND TYPES OF CONTRACTS

The law relating to the contracts is contained in the Indian Contract Act,
1872. It is that branch of law which lays down the essentials of a valid contract,
the different modes of discharging the contract and the remedies available to the
aggrieved party in the case of breach of contract. It is the most important branch
of business law. It is, of particular importance to people engaged in trade,
commerce and industry as bulk of their business transactions are based on
contracts.

A contract is an agreement made between two or more parties which the

law will enforce. Sec. 2 (h) of the Indian Contract Act defines it as “An
agreement enforceable by law”. Sec. 10 lays down that “All agreements are
contracts if they are made by the free consent of parties competent to contract,
for a lawful consideration and with a lawful object and are not hereby expressly
declared to be void”.

CLASSIFICATION OF CONTRACTS

Contracts may be classified according to their validity, formation or

performance.

I CLASSIFICATION ACCORDING TO VALIDITY

A contract is based on an agreement. An agreement becomes a contract

when all the essential elements referred to above are present. In such a case, the
contract is a valid contract. If one or more of these elements are missing, the
contract is either voidable, void, illegal or unenforceable.

Voidable Contract

Voidable contract is an agreement that is binding and enforceable, but

because of the lack of one or more of the essentials of a valid contract, it may be
repudiated by the aggrieved party at his option.

4
 Example: A promises to sell his house to B for Rs.2 lakhs. A obtained
B’s consent by exercising fraud on the latter. The contract is voidable at the
option of B.

Void Contract

A contract which is not enforceable by law is a void contract. It confers

no right on any person and creates no obligations.

Example: A promises for no consideration, to give to B Rs.1000. This

contract is void.

Illegal Contracts

An illegal contract is one which are opposed to statutory law or public

morals. It is criminal in nature. The effect of an illegal contract is that, it not
only makes the transaction between the immediate parties void, but also render
the collateral transactions void.

Example: A borrows Rs.1000 from B for manufacturing bombs. As

manufacturing bombs is illegal, the contract is void.

Unenforceable Contract

An unenforceable contract is one which cannot be enforced in a Court of

law because of some technical defect.

Example:

(i) A debt barred by limitation is unenforceable.

(ii) A document for want of prescribed value of the stamp is

unenforceable.

II CLASSIFICATION ACCORDING TO FORMATION

Contracts may be classified according to the mode of their formation as

follows:

5
Express Contract

If the terms of a contract are expressly agreed upon, whether by words

spoken or written at the time of the formation of the contract, the contract is said
to be an express contract.

Implied Contract

An implied contract is one which is inferred from the acts or conduct of

the parties or course of dealings between them. It is not the result of any
express promise or promises by the parties but of their particular act.

Example: A, enters into a hotel and takes lunch. It is an implied contract

that he has to pay the cost of lunch after taking it.

III CLASSIFICATION ACCORDING TO PERFORMANCE

These may be classified as – Executed contracts or Executory contracts,

Unilateral contracts or Bilateral contracts.

Executed Contracts

An executed contract is one in which both the parties have performed

their respective obligations.

Example: A agrees to sell a book to B for Rs.200. When A delivers the

book and B pays the price, the contract is said to be executed.

Executory Contracts

An executory contract is one in which both the parties have yet to perform
their obligations. Thus in the above example, the contract is executory if A has
not delivered the book and B has not paid the price.

Another classification of contracts according to performance is as follows:

6
Unilateral or One-sided Contract

A unilateral or one-sided contract is one in which only one party has to

fulfil 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.

Example: A permits a railway porter to carry his luggage and place it in

the compartment. The contract comes into existence as soon as the luggage is
placed in the compartment. Now only A has to fulfill his obligation of paying the
charges to the porter.

Bilateral Contract

A bilateral contract is one in which the obligations on the part of both the
parties to the contract are outstanding at the time of the formation of the
contract. In this sense, bilateral contracts are similar to executory contracts.

Example: A promises to issue a book to B on payment of Rs.100 by A.

Both A and B have not performed their duties.

ESSENTIALS OF A VALID CONTRACT

A valid contract must have the following essentials:

1. Two parties: There must be two parties for a valid contract.

2. Offer and acceptance: There must be an offer and acceptance. One party
making the offer and the other party accepting it.

3. Consensus-ad-idem or Identity of Minds: The parties to the contract must

have agreed about the subject matter of the contract at the same time and in
the same sense.

Illustration: A has two houses, one at Karaikudi and another at Madurai.

He has offered to sell one to B. B accepts thinking to purchase the house at
Karaikudi, while A, when he offers, has in his mind to dispose of house at
Madurai. There is no Consensus-ad-idem.

7
4. Consideration: It means “something in return”. Every contract must be
supported by consideration.

Illustration: A offers to sell his watch for Rs.800 to B and B accepts the
offer. Thus, Rs.800 is the consideration for the watch and vice-versa.

5. Capacity: The parties to the contract must be competent to contract. For

example, a contract by a minor is void, since he is not competent to contract.

6. Free Consent: The consent of the parties must be free from any flaw. It
must not be caused by a mistake or coercion or undue influence.

7. Lawful Consideration: The consideration to a contract must be lawful.

Illustration: A promises to pay Rs.500/- to B, in consideration of B

murdering C. The consideration is illegal.

8. Lawful object: The object of the contract must be lawful.

Illustration: A promises to pay Rs.500/- for letting B’s house for running
a brothel. The object is illegal. Hence, the contract is void.

Thus, “the essence of a legal contract is that there shall be an agreement

between two persons, that one of them shall do something either for the benefit
of the other or for his own detriment and that these persons intend that the
agreement shall be enforceable at law”.

8
 LESSON - 2

OFFER AND ACCEPTANCE

OFFER

One of the early steps in the formation of contract lies in arriving at an

agreement between the contracting parties by means of offer and acceptance.
One party makes a definite proposal to the other, and that other accepts it in its
entirety.

An offer is also called a proposal. Sec.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”. The person
making the proposal is called the “proposer”, or “offeror” and the person to
whom the proposal is made is called the “offeree”.

LEGAL RULES RELATING TO OFFER

1. It must contain definite, unambiguous and certain and not loose and vague
terms.

Montreal Gas Co Vs Vasey: It was held in this case, that a clause to

favourably consider the application for renewal, is ambiguous and not
binding the company.

Taylor Vs Portington: The terms to put the house into thorough repairs
and decorate drawing rooms according to present style, were held uncertain.

2. It must intend to give rise to legal relationship. A social invitation, even if it

is accepted does not create legal relationship, because it is not so intended.

Balfour Vs Balfour: A husband promised to pay Rs.1000/- per month to

his wife, staying away from him. Held that the promise was never intended
to be enforced in law.

1
3. It must be distinguished from a quotation or an invitation to offer.

MacPherson Vs. Appanna: P offered to buy D’s property for Rs.6000. D

replied, “Won’t accept less than Rs.10,000”. P agreed to pay Rs.10,000.
But D sold it to another person. It was held that mere statement of price by D
contained no implied contract to sell it at that price.

4. An offer may be made to an individual or addressed to the world at large.

An offer is called a specific offer when it is made to a particular person.

Carlill Vs Carbolic Smoke Ball Co: The company has offered by

advertisement, a reward of £ 100 to anybody contracting influenza after using
their smoke ball according to their direction. Mrs. Carlill used it as directed
but still had an attack of influenza. Hence, she sued for the award of £ 100.
It was held that she was entitled to the award since an offer made at large,
can ripen itself into a contract with anybody who performs the terms of the
offer.

5. Offer must be made with a view to obtaining the assent.

The offer to do or not to do something must be made with a view to

obtaining the assent of the other party addressed and not merely with a view
to disclosing the intention of making an offer.

6. An offer must be communicated to the offeree.

Lalman Shukla Vs Gowri Dutt: A’s nephew was missing. B, who was an
employee of A, volunteered his services to search for the boy. Meanwhile,
A had announced a reward to anybody who could trace the boy. B found the
boy and brought him back to home and sued for the reward. It was held that
he was not entitled to the reward as he was ignorant of the offer.

Section 4 lays down that the communication of an offer is complete only

when it reaches the offeree. So, an offer binds the offeror only when the
offeree has the knowledge of the offer.

2
ACCEPTANCE

Section 2 (b) of the Indian Contract Act defines acceptance 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”.
An offer, when accepted, becomes a contract.

Acceptance may be express or implied. It is express when it is

communicated by words spoken or written or by doing some required act. It is
implied when it is to be gathered from the surrounding circumstances or the
conduct of the parties.

Essentials of Valid Acceptance

1. Acceptance must be absolute and unconditional and should correspond with
the terms of the offeror. Otherwise, it amount to counter offer which may be
accepted or rejected by the offeror.

For example, A offers to sell his car for Rs.l lakh. B asks for Rs. 70,000.
It is not an acceptance, but a counter offer only.

2. An offer can be accepted only by the persons to whom the offer is made.

Boulton Vs Jones: A sold his business to B. This sale is not known to

A’s customers. So, Jones, who is a usual customer of the vendor, places an
order for goods with the vendor ‘A’ by name. B, the new owner, receives the
order and supplies the goods without disclosing the fact of sale of business
to him. It was held that the price could not be recovered as the contract was
not entered into with him.

3. Acceptance must be communicated in usual and reasonable manner. It may

be made by express words, spoken or written or by conduct of the parties, i.e.
by doing an act which amounts to acceptance according to the terms of the
offer or by the offeree accepting the benefit offered by the offeror.

Any method can be prescribed for the communication of acceptance. It

must be according to the mode prescribed or usual and reasonable mode.

3
 Silence can never be prescribed as a method of communication. Hence,
mere mental assent without expressing it and communicating it by means of
word or an act, is not sufficient.

Example: A wrote to B, “I offer you my car for Rs.10,000. If I don’t hear

from you in seven days, I shall assume that you accept”. B did not reply at
all. There is no contract.

Brogden Vs Metropolitan Railway Co: The Manager of a railway

company simply wrote on the proposal “approved” and kept it in a drawer.
By oversight, it was not communicated. It was held that the acceptance was
not communicated and hence there was no contract.

4. Acceptance must be made within a reasonable time. If any time limit is

specified, the acceptance must be given within that time. If no time limit is
specified, it must be given within a reasonable time.

Example: On June 8 M offered to take shares in R company. He

received a letter of acceptance on November 23. He refused to take the
shares. Held, M was entitled to refuse as his offer had lapsed as the
reasonable period during which it could be accepted had elapsed.

5. Acceptance should be made before the offer lapses or is revoked or is

rejected.

6. Acceptance cannot precede an offer. If the acceptance precedes an offer, it is

not a valid acceptance and does not result in a contract.

Example: In a company, shares were allotted to a person who had not

applied for them. Subsequently when he applied for shares, he was unaware
of the previous allotment. The allotment of shares previous to the application
is invalid.

7. Communication of acceptance may be waived by the offeror.

This rule is established in the case of Carlill Vs Carbolic Smoke Ball

Company where the advertisement never wanted the communication, apart
from fulfilling the conditions of offer.

4
Acceptance, once made, Concludes the Contract
The rule is that when once an offer is accepted, it concludes the contract.
So, an acceptance is irrevocable. When a lighted match is applied to gun powder
it produces something which cannot be recalled. Sir William Anson compares
here the “gun powder” to “an offer” and “the lighted match” to “acceptance” and
says that either the gun powder may be allowed to become damp or it may be
removed before the lighted match is applied. So also an offer may be allowed to
lapse for lack of acceptance or may be revoked before acceptance is given. But
when once acceptance is given, it ripens into contract, just as when a lighted
match is applied to gun powder it produces an explosion. Thus he emphasises
two things: (i) There cannot be an acceptance after revocation of the offer and
(ii) When once there is an acceptance, there can be no revocation.

COMMUNICATION OF OFFER, ACCEPTANCE AND REVOCATION

An offer, its acceptance and their revocation to be complete must be

communicated.

1. The communication of an offer is complete when it comes to the knowledge

of the person to whom it is made.

Example: A proposes, by a letter, to sell a house to B at a certain price.

The letter is posted on 10th July. It reaches B on 15th July. The
communication of the offer is complete when B receives the letter on 15th
July.

2. The communication of acceptance is complete –

• as against the proposer when it is put into a course of transmission to

him, so as to be out of the power of the acceptor;

• as against the acceptor when it comes to the knowledge of the

proposer.

Example: B accepts A’s proposal, in the above case, by a letter sent

by post on 16th July. The letter reaches A on 18th instant. The
communication of the acceptance is complete, as against A, when the

5
 letter is posted, i.e. on 16th. As against B, when the letter is received by
A, i.e. on 18th.

3. The communication revocation is complete –

as against the person who makes it, when it is put into a course of
transmission to the person to whom it is made, so as to be out of the
power of the person who makes it;

as against the person to whom it is made, when it comes to his

knowledge.

Time for revocation of Offer and Acceptance

An offer may be revoked at any time before the communication of its
acceptance is complete as against the offeror, 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
According to Sec.6, an offer is revoked –

1) By communication of notice of revocation by the offeror at any time

before its acceptance is complete as against him.

2) By lapse of time if it is not accepted within the prescribed time. If

however, no time is prescribed, it lapses by the expiry of a reasonable
time.

3) By death or insanity of the offeror provided the offeree comes to know

ofit before acceptance.

Rejection of Offer
An offer is rejected (i) when the offeree communicates his rejection, or
(ii) when the offeree makes a counter offer, or (iii) when the offeree accepts it
subject to some conditions.

6
lesson - 3

CONSIDERATION AND CAPACITY

Consideration is one of the essential elements of a contract. Consideration is known as quid pro quo, i.e.
something in return for something. When a party to an agreement promises to do something, he must get
“something” in return. This “something” is defined as consideration.

Section 2 (d) of the Indian Contract Act defines consideration thus: “When at the desire of the
promisor, the promisee or any other person has done or abstained from doing, or does or abstains from
doing, or promises to do or abstain from doing something, such act or abstinence or promise is called a
consideration for the promise”.

legal rules as to consideration

1. Consideration at the Desire of the Promisor

Consideration must proceed at the request or desire of the promisor. Hence, acts done voluntarily
or at the request of third parties do not constitute a valid consideration.

Durga Prasad Vs Baldev: A built a market at the request of the Collector of the place. B
promised to pay A, commission on the articles sold in the market. It was held that B’s promise to pay
commission did not constitute a valid consideration because A did not build the market at the request of
B.

1. The Promisee or any other Person

Consideration may move from the promisee or any third party. Hence, a stranger to consideration can
sue on the contract.

2. It may be an act, abstinence or forbearance or a return promise

i) An act, i.e. doing of something. In this sense consideration is in an affirmative form.

ii) An abstinence or forbearance, i.e. abstaining or refraining from doing something. In this sense
consideration is in a negative form.

Example: A promises B not to file a suit against him if he pays him Rs.10,000. The abstinence of A is
the consideration for B’s payment.

iii) A return promise.

Example: A agrees to sell his horse to B for Rs.30,000. Here B’s promise to pay the sum of Rs.30,000 is
the consideration for A’s promise to sell the horse, and A’s promise to sell the horse is the consideration
for B’s promise to pay the sum of Rs.30,000.

4. Consideration may be past, present or future

 The words used in Sec.2(d) are: “…. has done or abstained from doing (past), or does or abstains
from doing (present), or promises to do or to abstain from doing (future) something …..” This means
consideration may be past, present or future.

a) Consideration may be past: When consideration by a party for a present promise was given in the
past.

Example: A renders some service to B at latter’s desire. After a month B promises to compensate A for
the services rendered to him. It is past consideration.

b) Consideration may be present: When consideration is given simultaneously with promise, it is said to
be present consideration.

Example: A receives Rs.500 in return for which he delivers a watch to B. The money A receives is the
present consideration for which he delivers the watch.

c) Consideration may be future: When consideration from one party to the other is to pass subsequently
to the making of the contract, it is future consideration.

Example: A promises to deliver certain goods to B after a week and B promises to pay the price after a
fortnight. Consideration in this case is future.

5. Something in return for Something

There must be “something in return”. This “something in return” need not necessarily be equal in value
to “something given”. Consideration need not be adequate. But it must be real and lawful.

Example: A agrees to sell a cow worth Rs.1200 for Rs.10. He has given his consent freely. The
agreement is a contract though consideration is inadequate.

6. Consideration must be real and not illusory

Although consideration need not be adequate, it must be real, competent and of some value in the
eyes of the law.

Example: A promise to create treasure by magic or to join two straight lines together cannot be
regarded as valid consideration.

7. Consideration must be something which the promisor is not already

bound to do

A promise to do what one is already bound to do, either by general law or under an existing
contract, is not a consideration.

8. Consideration should not be illegal, immoral or opposed to public policy

 Example: A married woman was given money to enable her to obtain divorce from her husband
and then to marry the lender. Held, the agreement was immoral and the lender could not recover the
money.

stranger to contract

It is a general rule of law that only parties to a contract may sue and be sued on that contract.
This rule is known as the doctrine of privity of contract. In other words, a stranger cannot sue.

Example: A receives Rs.50 from B and promises B to deliver a book to C. C cannot sue on this
contract as he has neither supplied the consideration nor is he a party to the contract. So a stranger to
contract cannot sue, as there is no privity of contract between him and the promisor.

However, following are the exceptions:

(1) A Trust: A person, called beneficiary in whose favour a trust or other interest in some specific
immovable property has been created can enforce it even though he is not a party to the contract.

(2) Marriage Settlement, Partition or other Family arrangements: When an arrangement is made in
connection with marriage, partition or other family arrangements and a provision is made for the
benefit of a person, he may sue although he is not a party to the agreement.

(3) Acknowledgement or Estoppel: Where the promisor by his conduct, acknowledges or otherwise
constitutes himself as an agent of a third party, a binding obligation is thereby incurred by him
towards the third party.

(4) Contracts entered into through an Agent: The principal can enforce the contracts entered into by
his agent provided the agent acts within the scope of his authority and in the name of the principal.

(5) Assignment of a Contract: The assignee of rights and benefits under a contract not involving
personal skill can enforce the contract subject to the equities between the original parties.

(6) Charge on Immovable Property: When a charge on some specific immovable property is created for
the benefit of a third party such third party can sue.

a contract without consideration is void

The general rule is that an agreement made without consideration is void. Secs. 25 to 185 dealt
with the exceptions to this rules.

(1) An agreement expressed in writing and registered and made on account of natural love and affection
between parties standing in near relation to each other is enforceable even if it is without
consideration.

(2) A promise to compensate a person who has already voluntarily done something for the promisor, is
enforceable even though without consideration.
 Example: A finds B’s purse and gives it to him. B promises to give A Rs.50. This is a contract.

(3) A promise to discharge a time-barred debt.

Example: D owes C Rs.1,000 but the debt is barred by the Limitation Act. D signs a written promise to
pay C Rs.500 on account of the debt. This is a contract.

(4) The rule “No consideration, no contract” does not apply to completed gifts.

(5) Consideration is not necessary to create an agency.

capacity to contract

The parties who enter into a contract must have the capacity to do so. ‘Capacity’ means the
competence of the parties to understand the nature of the contract and the rights and liabilities arising out
of those contract.

According to Sec. 11, every person is competent to contract who

(a) is of the age of majority according to the law, to which he is subject,

(b) is of sound mind, and

(c) is not disqualified from contracting by any law to which he is subject.

Thus the following persons are incompetent to contract:

(i) Minors

(ii) Persons of unsound mind, and

(iii) Persons disqualified by any law to which they are subject

incapacity to contract

Incapacity may arise out of (a) Status and (b) Mental deficiency.

(A) Incapacity Arising out of Status

Alien Enemies: An alien is a person who belongs to a foreign state. He may be an alien friend
or an alien enemy.

Contracts with an alien friend are valid. Contracts made with an alien enemy before the war may
either be suspended or discharged.

During the continuance of the war, an alien enemy can neither contract with an Indian subject nor
can he sue in an Indian Court.
 Foreign Sovereigns, their diplomatic staff and accredited representatives of foreign States:
They have some special privileges and generally cannot be sued unless they of their own submit to the
jurisdiction of our law Courts. They can enter into contracts and enforce those contracts in our Courts.
But an Indian citizen has to obtain a prior sanction of the Central Government in order to sue them in our
Courts.

Convict: A convict when undergoing imprisonment is incapable of entering into a contract.

Insolvent: The insolvent cannot enter into contract and bind his property as his property shall be
vested with the official receiver when he is adjudged as insolvent.

(B) Incapacity Arising from Mental Deficiency

A person is said to be mentally deficient when (a) he does not attain majority, e.g. a minor, or
(b) he is of unsound mind.

1. When he is a Minor

A minor is a person who has not completed 18 years of age. He attains majority on completion of
18 years. A minor cannot enter into a valid contract.

2. When he is of Unsound Mind

Section 12 lays down that “A person is said to be of sound mind for the purpose of making a
contract if, at the time when he makes it, he is capable of understanding it and of forming a rational
judgement as to its effect upon his interests. A person who is usually of unsound mind, but occasionally
of sound mind, may make a contract when he is of sound mind.

Illustration: A patient in a lunatic asylum, who is at intervals, of sound mind, may contract during those
intervals.

law relating to contracts entered into by minors

According to Sec.3 of the Indian Majority Act, 1875, a minor is a person who has not completed
eighteen years of age. He attains majority on completion of 21 years when his property ismanaged by
court of wards or a guardian.

1) A contract by a minor is void and inoperative ab initio (from the beginning).

Mohoribibi Vs Dharmodas Ghosh: A minor had executed a mortgage for Rs.20,000. The money-lender
had paid Rs.8000 on the security of the mortgage. The minor sued for setting aside the mortgage. It was
held that a contract by a minor was void and that the amount advanced by the lender could not be
recovered under Sections 64 and 65 of the Indian Contract Act.

2) Minor’s agreement cannot be ratified by him on attaining the age of majority.

Arumugam Vs Duraisinga: A minor, having given a promissory note during his minority, has executed
another note on attaining majority in settlement of the first note. It was held that the second note executed
by the minor is void.
3) He can be a promisee or a beneficiary. Incapacity of a minor to enter into a contract does not debar
him from becoming a beneficiary. Such contracts may be enforced at his option, but not at the
option of the other party.

Example: M aged 17, agreed to purchase a second-hand scooter for Rs.5,000 from S. He paid Rs.200 as
advance and agreed to pay the balance the next day. S told him that he had changed his mind and offered
to return the advance. S cannot avoid the contract.

4) If the minor has received any benefit under a void agreement, he cannot be asked to compensate or
pay for it.

Example: M, a minor, obtains a loan by mortgaging his property. He is not liable to refund the loan. Not
only this, even his mortgaged property cannot be made liable to pay the debt.

5) Minor can always plead minority. Even if he has, by misrepresenting his age, induced the other
party to contract with him, he cannot be sued either in contract or in tort for fraud.

The Court may, where a loan or some property is obtained by the minor by some fraudulent
representation and the agreement is set aside, direct him, on equitable consideration, to restore the money
or property to the other party. Whereas the law gives protection to the minors, it does not give them
liberty “to cheat men”.

6) There can be no specific performance of the agreements entered into by him as they are void ab
initio.

7) Minor cannot enter into a contract of partnership. But he may be admitted to the benefits of
partnership with the consent of other partners.

8) Minor cannot be adjudged as insolvent, because he is incapable of contracting debts.

9) Minor can be an agent, since an agent is merely a link between the principal and the third party.

10) A contract by a guardian on behalf of the minor is enforceable by or against the minor, provided the
guardian is competent to contract and the contract is beneficial to the minor. But he cannot
purchase immovable property without obtaining the consent of the court.

11) A minor is liable for ‘necessaries’ supplied to him.

Minor’s Liability for Necessaries

The property of the minor is liable for the ‘necessaries’ supplied to him, provided the goods are suitable
to the condition of his life and status. Even here, he is not personally liable; but his estate only is liable.

The term ‘necessaries’ is not defined in the Indian Contract Act. The English Sale of Goods Act, 1893,
defines it in Sec.2 as “goods suitable to the condition in life of such infant or other person, and to his
actual requirement at the time of sale and delivery”.
 Ryder Vs Wombell: A, a minor has property worth £ 20000 and has annual income of £ 500. He
purchased a golden goblet to be presented to a friend and cuff-links for personal use. It was held that
these articles were not necessaries and hence his estate was not liable.

Robert Vs Gray: A promised to pay certain amount to Roberts, a noted billiards player and to learn
playing matches with him so that he might become a professional player. It was held that the contract
was beneficial to the minor and hence minor’s property was liable.

Loans incurred to obtain necessaries. A loan taken by a minor to obtain necessaries also binds
him and is recoverable by the lender as if he himself had supplied the necessaries. But the minor is not
personally liable. It is only his estate which is liable for such loans.

persons of unsound mind

One of the essential conditions of competency of parties to a contract is that they should be of
sound mind. Sec.12 lays down that “A person is said to be of sound mind for the purpose of making a
contract if, at the time when he makes it, he is capable of understanding it and of forming a rational
judgement as to its effect upon his interests.

A person who is usually of unsound mind, but occasionally of sound mind, may make a contract
when he is of sound mind.

A person who is usually of sound mind, but occasionally of unsound mind, may not make a
contract when he is unsound mind.”

Soundness of mind of a person depends on:

(i) his capacity to understand the contents of the business concerned, and

(ii) his ability to form a rational judgement as to its effect upon his interests.

If a person is incapable of both, he suffers from unsoundness of mind. Whether a party to a contract is of
sound mind or not is a question of fact to be decided by the Court.

Contracts of Persons on Unsound Mind

Lunatics: A lunatic is a person who is mentally deranged due to some mental strain or other
personal experience. He suffers from intermittent intervals of sanity and insanity. He can enter into
contract during the period when he is sane and the contract is valid. The contract entered during the
period of insanity is not valid.

Idiots: An idiot is a person who has only physical maturity but not mental maturity. For
instance, an individual of age 25 can have the brain growth of only 10 years old. Hence he cannot
understand the nature of the transactions. Idiocy is permanent. An agreement with an idiot is void.

Drunkard: A drunkard person suffers from temporary incapacity to contract, i.e. at the time when
he is incapable of forming a rational judgement. He can enter into a valid contract when he is normal,
and the contract entered during the period of intoxication is not valid.
lesson - 4

FREE CONSENT

Consent: It means an act of assenting to an offer. According to Sec.13 “Two or more persons
are said to consent when they agree upon the same thing in the same sense”.

Free Consent: Consent is said to be free when it is not caused by –

(1) Coercion as defined in Sec. 15, or

(2) Undue influence as defined in Sec. 16, or

(3) Fraud as defined in Sec. 17, or

(4) Misrepresentation as defined in Sec. 18, or

(5) Mistake, subject to the provisions of Secs.20, 21 and 22 (Sec.14).

When there is no consent, there is no contract.

Example: A is forced to sign a promissory note at the point of pistol. A knows what he is signing but his
consent is not free. The contract in this case is voidable at his option.

flaw in consent

Coercion Undue influence Misrepresentation Mistake

(Sec. 15) (Sec. 16)

Fraudulent or Innocent or

Willful (Sec. 17) unintentional

(Sec. 18)

Mistake of law Mistake of fact

 (Sec. 21) (Sec. 20)

coercion

Coercion is the committing, or threatening to commit, any act forbidden by the Indian Penal
Code, 1860 or the unlawful detaining, or threatening to detain, any property, to the prejudice of any
person whatever, with the intention of causing any person to enter into an agreement. When a person is
compelled to enter into a contract by the use of force by the other party or under a threat, “coercion” is
said to be employed.

The threat amounting to coercion need not necessarily proceed from a party to the contract. It
may proceed even from a stranger to the contract.

Example: A threatens to kill B if he does not lend Rs.1000 to C. B agrees to lend the amount to
C. The agreement is entered into under coercion.

Consent is said to be caused when it is obtained by:

1) Committing or threatening to commit any act forbidden by the Indian Penal Code.

Ranganayakamma Vs Alwar Chetti: A young girl of 13 years was forced to adopt a boy to her husband
who had just died by the relativesof the husband who prevented the removal of his body for cremation
until she consented. Held, the consent was not free but was induced by coercion.

2) Unlawful detaining or threatening to detain any property

Muthiah Vs Muthu Karuppan: An agent refused to hand over the account books of a business to the new
agent unless the principal released him from all liabilities. The principal had to give a release deed as
demanded. Held, the release deed was given under coercion and was voidable at the option of the
principal.

effect of coercion

When consent to an agreement is caused by coercion, the contract is voidable at the option of the
party whose consent was so caused (Sec.19).

A threat to commit suicide – Does it amount to coercion?

In Chikham Amiraju Vs. Seshamma, it was held that threat to commit suicide amounts to
coercion. In this case, a person held out a threat of committing suicide to his wife and son if they did not
execute a release in favour of his brother in respect of certain properties. The wife and son executed the
release deed under the threat. It was held, that “the threat of suicide amounted to coercion within Sec.15
and the release deed was, therefore, voidable”.

Duress: Coercion in India is called Duress in England. Duress means committing or threatening to
commit bodily violence or imprisonment with a view to obtain the consent of the other party to the
contract.
 undue influence

Sometimes a party is compelled to enter into an agreement against his will as a result of unfair
persuasion by the other party. This happens when a special kind of relationship exists between the parties
such that one party is in a dominant position to exercise undue influence over the other.

Sec. 16(1) defines “undue influence” as follows:

“A contract is said to be induced by ‘undue influence’ where the relations subsisting between the parties
are such that one of the parties is in a position to dominate the will of the other and uses that position to
obtain an unfair advantage over the other”.

The following relationships usually raise a presumption of undue influence, viz.,

(i) teacher and student,

(ii) guardian and ward,

(iii) trustee and beneficiary,

(iv) religious adviser and disciple,

(v) doctor and patient,

(vi) solicitor and client.

The presumption of undue influence applies whenever the relationship between the parties is such that
one of them is, by reason of confidence reposed on him by the other, able to take unfair advantage over
the other.

A person is deemed to be in a position to dominate the will of another where:

he holds a real or apparent authority over the other, e.g. the relationship between teacher and the
student.

he stands in a fiduciary relation (relation of trust and confidence) to the other. It is supposed to exist,
for example, between solicitor and client, trustee and beneficiary.

he makes a contract with a person whose mental capacity is temporarily or permanently affected by
reason of age, illness or mental or bodily distress. Such a relation exists, for example, between a
medical attendant and his patient.

Example: A spiritual guru induced his devotee to gift to him the whole of his property in return of a
promise of salvation of the devotee. Held, the consent of the devotee was given under undue influence.
(Mannu Singh Vs. Umadat Pandey).

effect of undue influence

 When consent to an agreement is obtained by undue influence, the contract is voidable at the
option of the party whose consent was so obtained.

Example: A money lender advances Rs.1000 to B, and agriculturist and by undue influence
induces B to execute a bond for Rs.2000 with interest at 6 per cent per month. The Court may set the
bond aside, ordering B to repay Rs.1000 with such interest as may seem to it reasonable.

difference between coercion and undue influence

S.No. Coercion Undue Influence

1. The consent is obtained under the threat of The consent is obtained by a person who
an offence. is in a position to dominate the will of
another.

2. Coercion is mainly of a physical Undue influence involves use of moral

character. It involves mostly use of force or mental pressure to obtain the
physical or violent force. consent.

3. There must be intention of causing Here the influencing party uses its
physical harm to any person to enter into position to obtain an unfair advantage
an agreement. over the other party.

4. It involves a criminal act. It involves unlawful act.

misrepresentation and fraud

A statement of fact which one party makes in the course of negotiations with a view to inducting
the other party to enter into a contract is known as representation.

misrepresentation

A representation, when wrongly made is a misrepresentation.

A misrepresentation may be (i) innocent misrepresentation (ii) willful misrepresentation or fraud.

Innocent misrepresentation is a false statement which the person making it honestly believes to be
true or which he does not know to be false. It also includes non-disclosure of a material fact or facts
without any intent to deceive the other party.

Sec. 18 defines “misrepresentation”. According to it, there is misrepresentation:

(1) When a person positively asserts that a fact is true when his information does not warrant it to be so,
though he believes is to be true.

(2) When there is any breach of duty by a person which brings an advantage to the person committing
it by misleading another to his prejudice.

(3) When a party causes, however innocently, the other party to the agreement to make a mistake as to
the substance of the thing which is the subject of the agreement.

Example: A told his wife within the hearing of their daughter that the bridegroom proposed for her was a
young man. The bridegroom, however, was over sixty years. The daughter gave her consent to marry
him believing the statement by her father. Held, the consent was vitiated by misrepresentation and fraud.

Consequences of Misrepresentation

The aggrieved party, in case of misrepresentation by the other party, can –

1) avoid or rescind the contract; or

2) accept the contract but insist that he shall be placed in the position in which he would have been if
the representation made had been true.

fraud

Fraud exists when it is shown that a false representation has been made (a) knowingly, or (b)
without belief in its truth, or (c) recklessly, not caring whether it is true or false, and the maker intended
the other party to act upon it, or,

There is a concealment of a material fact or that there is a partial statement of a fact in such a manner that
the withholding of what is not stated makes that which is stated false.

The intention of the party making fraudulent misrepresentation must be to deceive the other party
to the contract or to induce him to enter into a contract.

According to Sec.17, “fraud” means and includes any of the following acts committed by a party
to a contract, or with his connivance, or by his agent with intent to deceive or to induce a person to enter
into a contract:

1. The suggestion that a fact is true when it is not true and the person making the suggestion does not
believe it to be true;

2. The active concealment of a fact by a person having knowledge or belief of the fact;

3. A promise made without any intention of performing it;

4. Any other act or omission as the law specifically declares to be fraudulent.

essential elements of fraud

1. There must be a representation or assertion and it must be false.

Peek Vs Gurney: The prospectus of a company did not refer to the existence of a document disclosing
liabilities. Held, non-disclosure amounted to fraud and anyone who purchased shares on the faith of this
prospectus could avoid the contract.

2. The representation must relate to a material fact and not to an opinion.

Example: A sells some spoons to B and makes the following statements:

• The spoons are as good as that of X. This is a statement of opinion.

• The spoons have as much silver in them as that of X. This is a statement of fact.

3. The representation must have been made before the conclusion of the contract with the intention of
inducing the other party to act upon it.

4. The person making it must have made it knowing it to be false or recklessly or carelessly without
regarding whether it is true or false.

Reese Rive Co. Vs Smith: The prospectus issued by the company has induced the plaintiff to take shares.
Subsequently the shareholder found the property of the company worthless contrary to the statements in
the prospectus. It was held that there was fraud.

5. The other party must have relied upon the representation and must have been deceived.

6. The other party, acting on the representation or assertion, must have subsequently suffered some loss.

consequences of fraud

A contract induced by fraud is voidable at the option of the party defrauded. Until it is avoided, it
is valid. The party defrauded has, however, the following remedies:

1. He can rescind the contract.

2. He can insist on the performance of the contract on the condition that he shall be put in the position in
which he would have been if the representation made had been true.

3. He can sue for damages.

mistake of law

Mistake of law may be — (1) mistake of law of the country, or (2) mistake of law of a foreign
country.

1. Mistake of law of the country: Ignorantia juris non excusat, i.e. ignorance of law is no excuse, is a
well settled rule of law. A party cannot be allowed to get any relief on the ground that it had done a
particular act in ignorance of law. A mistake of law is, therefore, no excuse, and the contract cannot
be avoided.

Example: A and B enter into a contract on the erroneous belief that a particular debt is barred by the
Indian Law of Limitation. This contract may be voidable.
 2. Mistake of law of a foreign country: Such a mistake is treated as mistake of fact and the agreement
in such a case is void. (Sec. 21).

mistake of fact

Mistake of fact may be — (1) a bilateral mistake, or (2) a unilateral mistake.

1. Bilateral Mistake

Where both the parties to an agreement are under a mistake as to a matter of fact essential to the
agreement, there is a bilateral mistake. In such a case, the agreement is void (Sec. 20). The following
two conditions have to be fulfilled for the application of Sec. 20:

(i) The mistake must be mutual, i.e. both the parties should misunderstand each other and should be at
cross-purposes.

Example: A agreed to purchase B’s motor-car which was lying in B’s garage. Unknown to either party,
the car and garage were completely destroyed by fire a day earlier. The agreement is void.

(ii) The mistake must relate to a matter of fact essential to the agreement. As to what facts are essential
in an agreement will depend upon the nature of the promise in each case.

Example: A man and a woman entered into a separation agreement under which the man agreed to pay a
weekly allowance to the woman, mistakenly believing themselves lawfully married. Held, the agreement
was void as there was mutual mistake on a point of fact which was material to the existence of the
agreement.

The various cases which fall under bilateral mistake are as follows:

Mistake as to the Subject-Matter:

Where both the parties to an agreement are working under a mistake relating to the subject-
matter, the agreement is void. Mistake as to the subject-matter covers the following cases:

(1) Mistake as to the existence of the subject-matter: If both the parties believe the subject-matter of
the contract to be in existence, which in fact at the time of the contract is non-existent, the contract
is void.

Example: A agrees to buy from B a certain goat. It turns out that the goat was dead at the time of the
bargain, though neither party was aware of the fact. The agreement is void.

(2) Mistake as to the identity of the subject-matter: It usually arises where one party intends to deal in
one thing and the other intends to deal in another.

Example: W agreed to buy from R a cargo of cotton “to arrive ex-peerless from Bombay”. There were
two ships of that name sailing from Bombay, one sailing in October and the other in December. W meant
the former ship R meant the latter. Held, there was a mutual or a bilateral mistake and there was no
contract/
 (3) Mistake as to the quality of the subject-matter: If the subject matter is something essentially
different from what the parties thought it to be the agreement is void.

Example: A sells to B a piece of silk. B thinks that it is foreign silk. A knows that B thinks so but knows
that it is Indian silk only.

(4) Mistake as to the quantity of the subject-matter: If both the parties are working under a mistake as
to the quantity of the subject-matter, the agreement is void.

Example: A silver bar was sold under a mistake as to its weight. There was a difference in value
between the weight of the bar as it was and as it was supposed to be. Held, the agreement was void.

(5) Mistake as to the title to the subject-matter: If the seller is selling a thing which he is not entitled
to sell and both the parties are acting under a mistake, the agreement is void.

Example: A person took a lease of a fishery which, unknown to either party, already belonged to him.
Held, the lease was void.

(6) Mistake as to the price of the subject-matter: If there is a mutual mistake as to the price of the
subject-matter, the agreement is void.

Example: C wrote to D offering to sell certain property for Rs.15,000. He had earlier declined an offer
from D to buy the same property for Rs.20,000. D who knew that his offer of Rs.15,000 was a mistake
for Rs.25,000, immediately accepted the offer. Held, D knew perfectly well that the offer was made by
mistake and hence the contract could not be enforced.

Mistake as to the Possibility of Performing the Contract

Consent is nullified if both the parties believe that an agreement is capable of being performed
when in fact this is not the case. The agreement, in such a case, is void on the ground of impossibility.

Impossibility may be —

(i) Physical Impossibility.

Example: A contract for the hire of a room for witnessing the coronation procession of Edward VII was
held to be void because, unknown to the parties, the procession had already been cancelled.

(ii) Legal Impossibility: A contract is void if it provides that something shall be done which cannot, as a
matter of law, be done.

2. Unilateral Mistake

When in a contract only one of the parties is mistaken regarding the subject-matter or in
expressing or understanding the terms or the legal effect of the agreement, the mistake is a unilateral
mistake. According to Sec. 22, a contract is not voidable merely because it was caused by one of the
parties to it being under a mistake as to a matter of fact. A unilateral mistake is not allowed as a defence
in avoiding a contract unless the mistake is brought about by the other party’s fraud or misrepresentation.
 Example: A offers to sell his house to B for an intended sum of Rs.44,000. By mistake he
makes an offer in writing of Rs.40,000. He cannot plead mistake as a defence.
LESSON - 5

LEGALITY OF OBJECT

A contract must have a lawful object. The word ‘object’ means purpose or design. In some cases,
consideration for an agreement may be lawful but the purpose for which the agreement is entered into
may be unlawful. In such cases the agreement is void. As such, both the object and the consideration of
an agreement must be lawful, otherwise the agreement is void.

Sec. 23. The consideration or object of an agreement is unlawful —

1. If the object is forbidden by law.

Example: A promises to obtain for B an employment in the public service and B promises to pay
Rs.1,00,000 to A. The agreement is void, as the consideration is unlawful.

2. If the object is permitted, it would defeat the provisions of any law.

Example: N agreed to enter a company’s service in consideration of a weekly wage of Rs.75 and a weekly
expense allowance of Rs.25. Both the parties knew that the expense allowance was a device to evade
tax. Held, the agreement was unlawful.

3. If the object is fraudulent. An agreement which is made for a fraudulent purpose is void. Thus an
agreement in fraud of creditors with a view to defeating their rights is void.

4. If it involves or implies injury to the person or property of the another. ‘Injury’ means ‘wrong’,
‘harm’ of ‘damage’.

5. If the consideration or the object is immoral.

Example: A agrees to let her daughter to B for concubinage (state of living together as man and wife
without being married). The agreement is unlawful, being immoral.

6. Where the object is opposed to public policy.

unlawful and illegal agreements

An unlawful agreement is one which, like a void agreement, is not enforceable by law. An
illegal agreement, is not only void as between the immediate parties but also makes the collateral
transactions void.

Example: L lends Rs.50,000 to B to help him to purchase some prohibited goods from T, an alien
enemy. If B enters into an agreement with T, the agreement will be illegal and the agreement between B
and L shall also become illegal, because it is collateral to the main transaction. L cannot, therefore,
recover the amount.

Every illegal agreement is unlawful, but every unlawful agreement is not necessarily illegal.
 Illegal acts are those which involve the commission of a crime or contain an element of obvious
moral turpitude and forbidden by law. On the other hand, unlawful acts are those which are less rigorous
in effect and involve a “non-criminal breach of law”. These acts do not affect public morals, nor do they
result in the commission of a crime. These are simply disapproved by law on some ground of public
policy.

Effects of Illegality

The general rule of law is that no action is allowed on an illegal agreement and the law will not
help both the parties to the agreement.

agreements opposed to public policy

An agreement is said to be opposed to public policy when it is harmful to the public welfare.
Some of the agreements which are opposed to public policy and are unlawful are as follows:

1. Agreements of trading with enemy. An agreement made with an alien enemy in time of war is illegal
on the ground of public policy.

2. Agreement to commit a crime. Where the consideration in an agreement is to commit a crime, the
agreement is opposed to public policy. The Court will not enforce such an agreement.

3. Agreements which interfere with administration of justice. An agreement, the object of which is to
interfere with the administration of justice is unlawful, being opposed to public policy. It may take
any of the following forms:

(a) Interference with the course of justice. An agreement which obstructs the ordinary process of justice
is unlawful.

(b) Stifling prosecution. It is in public interest that if a person has committed a crime, he must be
prosecuted and punished.

(c) Maintenance and champerty. ‘Maintenance’ is an agreement to give assistance, financial or

otherwise, to another to enable him to bring or defend legal proceedings when the person giving
assistance has got no legal interest of his own in the subject-matter.

4. Agreements in restraint of legal proceedings. Sec. 28 which deals with these agreements:

(a) Agreements restricting enforcement of rights. An agreement which wholly or partially prohibits any
party from enforcing his rights under or in respect of any contract is void to that extent.

(b) Agreements curtailing period of limitation. Agreements which curtail the period of limitation
prescribed by the Law of Limitation are void because their object is to defeat the provisions of law.

5. Trafficking in public offices and titles. Agreements for the sale or transfer of public offices and titles
or for the procurement of a public recognition like Padma Vibhushan or Param Veer Chakra for
monetary consideration are unlawful, being opposed to public policy.
 Example: R paid a sum of Rs.2,50,000 to A who agreed to obtain a seat for R’s son in a Medical College.
On A’s failure to get the seat, R filed a suit for the refund of Rs.2,00,000. Held, the agreement was
against public policy.

6. Agreements tending to create interest opposed to duty. If a person enters into an agreement whereby
he is bound to do something which is against his public or professional duty, the agreement is void
on the ground of public property.

7. Agreements in restraint of parental rights. A father, and in his absence the mother, is the legal
guardian of his/her minor child. This right of guardianship cannot be bartered away by any
agreement.

8. Agreements restricting personal liberty. Agreements which unduly restrict the personal freedom of
the parties to it are void as being against public policy.

9. Agreements in restraint of marriage. Every agreement in restraint of the marriage of any person,
other than a minor, is void (Sec. 26). This is because the law regards marriage and married status as
the right of every individual.

10. Marriage brokerage agreements. An agreement by which a person, for a monetary consideration,
promises in return to procure the marriage of another is void, being opposed to public policy.

11. Agreements interfering with marital duties. Any agreement which interferes with the performance of
marital duties is void, being opposed to public policy. Such agreements have been held to include
the following:

(a) A promise by a married person to marry, during the lifetime or after the death of spouse.

(b) An agreement in contemplation of divorce, e.g. an agreement to lend money to a woman in

consideration of her getting a divorce and marrying the lender.

(c) An agreement that the husband and wife will always stay at the wife’s parents’ house and that the
wife will never leave her parental house.

12. Agreements to defraud creditors or revenue authorities. An agreement the object of which is to
defraud the creditors or the revenue authorities is not enforceable, being opposed to public policy.

13. Agreements in restraint of trade. An agreement which interferes with the liberty of a person to
engage himself in any lawful trade, profession or vocation is called an ‘agreement in restraint of
trade’.

Oakes & Co. Vs Jackson: An agreement between an employee and the company whereby the employee
agrees not to work in a similar company within a distance of 800 miles from Madras after leaving the
employment, is held void.

However, following are the exemptions to the rule that “an agreement in restraint of trade is void”.

1. In the case of sale of goodwill, the seller may agree to restrain from carrying on similar business
within certain specified limited space and time which appear to be reasonable to the court.
2. An agreement between partners that none of them shall carry on any business so long as he is a
partner, is enforceable.

3. An agreement between the partners upon or in anticipation of the dissolution of the firm not to carry
on similar business within certain specified limited area and time is valid if such restrictions are
reasonable from the view of the court.

4. An agreement between a retiring partner and continuing partners whereby the retiring partner agrees
not to carry on similar business within certain specified limited area and time is valid if such limits
appear to be reasonable.

5. An agreement between traders not to sell below a particular price is valid.

6. An agreement between the members of a trade union shall not be void on the ground that it is in
restraint of trade.

7. In case of service agreements, where the employee is prevented from accepting any other engagement
during his employment, such restraint is valid.

VOID AGREEMENTS

A void agreement is one which is not enforceable by law [Sec.2 (g)]. Such an agreement does
not give rise to any legal consequences and is void ab initio.

The following agreements have been expressly declared to be void by the Contract Act:

1) Agreements by incompetent parties (Sec. 11).

2) Agreements made under a mutual mistake of fact (Sec. 20).

3) Agreements the consideration or object of which is unlawful (Sec. 23).

4) Agreements the consideration or object of which is unlawful in part (Sec.24).

5) Agreements made without consideration (Sec. 25).

6) Agreements in restraint of marriage (Sec. 26).

7) Agreements is restraint of trade (Sec. 27).

8) Agreements in restraint of legal proceedings (Sec. 28).

9) Agreements the meaning of which is uncertain (Sec. 29).

10) Agreements by way of wager (Sec. 30).

11) Agreements contingent on impossible events (Sec. 36).

12) Agreements to do impossible acts (Sec. 56).

13) In case of reciprocal promises to do things legal and also other things illegal, the second set of
reciprocal promises is a void agreement (Sec. 57).

wagering agreements or wager

A wager is an agreement between two parties by which one promises to pay money or money’s
worth on the happening of some uncertain event in consideration of the other party’s promise to pay if the
event does not happen. Thus if A and B enter into an agreement that A shall pay B Rs.100 if it rains on
Monday, and that B shall pay A the same amount if it does not rain, it is a wagering agreement.

Essentials of Wagering Agreement

(1) Promise to pay money or money’s worth. The wagering agreement must contain a promise to pay
money or money’s worth.

(2) Uncertain event. The promise must be conditional on an event happening or not happening.

(3) Each party must stand to win or lose. Upon the determination of the contemplated event, each
party should stand to win or lose.

(4) No control over the event. Neither party should have control over the happening of the event one
way or the other.

(5) No other interest in the event. Neither party should have any interest in the happening or non-
happening of the event other than the sum or stake he will win or lose.

CONTINGENT CONTRACTS

‘Contingent’ means that which is dependent on something else. 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
(Sec. 31). For example, goods are sent on approval, the contract is a contingent contract depending on
the act of the buyer to accept or reject the goods.

There are three essential characteristics of a contingent contract:

1. Its performance depends upon the happening or non-happening in future of some event. It is this
dependence on a future event which distinguishes a contingent contract from other contracts.

2. The event must be uncertain. If the event is bound to happen, and the contract has got to be
performed in any case it is not a contingent contract.
3. The event must be collateral, i.e. incidental to the contract.

Contracts of insurance, indemnity and guarantee are the commonest instances of a contingent contract.

rules regarding contingent contracts

1. Contingent contracts dependent on the happening of an uncertain future event cannot be enforced
until the event has happened. If the event becomes impossible, such contracts become void (Sec. 32).

Example: 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. Where a contingent contract is to be performed if a particular event does not happen, its performance
can be enforced when the happening of that event becomes impossible (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. If a contract is contingent upon how a person will act at an unspecified time, the event shall be
considered to become impossible when such person does anything which renders it impossible that he
should so act within any definite time, or otherwise than under further contingencies (Sec. 34).

Example: 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. Contingent contracts to do or not to do anything, if a specified uncertain event happens within a fixed
time, become void if the event does not happen or its happening becomes impossible before the
expiry of that time.

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

5. Contingent agreements to do or not to do anything, if an impossible event happens, are void, whether
or not the fact is known to the parties (Sec. 36).

Example: A agrees to pay B Rs.1,000 if B will marry A’s daughter, C. C was dead at the time of the
agreement. The agreement is void.
LESSON - 6

PERFORMANCE OF CONTRACT

Performance of a contract takes place when the parties to the contract fulfil their obligations
arising under the contract within the time and in the manner prescribed.

offer to perform

Sometimes it so happens that the promisor offers to perform his obligation under the contract at
the proper time and place but the promisee does not accept the performance. This is known as “attempted
performance” or “tender”. Thus, a tender of performance is equivalent to actual performance.

requisites of a valid tender

1. It must be unconditional. It becomes conditional when it is not in accordance with the terms of the
contract.

2. It must be of the whole quantity contracted for or of the whole obligation. A tender of an instalment
when the contract stipulates payment in full is not a valid tender.

3. It must be by a person who is in a position, and is willing, to perform the promise.

4. It must be made at the proper time and place. A tender of goods after the business hours or of goods
or money before the due date is not a valid tender.

5. It must be made to proper person, i.e. the promisee or his duly authorised agent. It must also be in
proper form.

6. It may be made to one of the several joint promisees. In such a case it has the same effect as a tender
to all of them.

7. In case of tender of goods, it must give a reasonable opportunity to the promisee for inspection of
goods.

8. In case of tender of money, the debtor must make a valid tender in the legal tender money.

contracts which need not be performed

A contract need not be performed –

1. When its performance becomes impossible.

2. When the parties to it agree to substitute a new contract for it or to rescind or alter it.

3. When the promisee dispenseswith or remits, wholly or in part, the performance of the promise made
to him or extends the time for such performance or accepts any satisfaction for it.

4. When the person at whose option it is voidable, rescindsit.

5. When the promisee neglects or refuses to afford the promisor resonable the facilities for the
performance of his promisee.

Example: A contracts with B to repair B’s house. A neglects or refuses to point out to A the places in
which his house requires repairs. B is excused for the non-performance of the contract, if it is caused by
such neglect or refusal.

6. When it is illegal.

devolution of joint liabilities and rights

Devolution of Joint Liabilities (Sec.42 to 44)

‘Devolution’ means passing over from one person to another.

When two or more persons have made a joint promise, they are known as joint promisors. Unless
a contrary intention appears from the contract, all joint promisors must jointly fulfil the promise. If any of
them dies, his legal representatives must, jointly with the surviving promisors, fulfil the promise. If all of
them die, the legal representatives must, jointly with the surviving promisors, fulfill the promise. If all of
them die, the legal representatives of all of them must fulfill the promise jointly (Sec.42). It would be seen
that Sec.42 deals with voluntary discharge of obligations. If the parties do not discharge their obligations
of their own volition, Sec.43 comes into play. Sec.43 lays down three rules as regards performance of
joint promises:

(1) Any one of the joint promisors may be compelled to perform (Sec.43, para1). When two or more
persons make a joint promise and there is no express agreement to the contrary, the promisee may
compel any one or more of the joint promisors to perform the whole of the promise. This means the
liability of joint promisors is joint and several.

Example: A, B and C jointly promise to pay D Rs.5,000. D may compel all or any or either A or B or C
to pay him Rs.5,000.

(2) A joint promisor compelled to perform may claim contribution (Sec.43, para 2). When a joint
promisor has been compelled to perform the whole of the promise, he may compel the other joint
promisors to contribute equally with himself to the performance of the promise, unless a contrary
intention appears from the contract.

Example: A, B and C are under a joint promise to pay D Rs.600. A is compelled to pay the whole
amount to D. He may recover Rs.200 each from B and C.

(3) Sharing of loss arising from default (Sec.43 para 3). If any one of the joint promisors makes default
in the contribution, the remaining joint promisors must bear the loss arising from such default in equal
shares. The same principle applies in the case of recovery of a loan by a creditor from the heirs who
by operation of law become joint promisors after the death of the single promisor [Orissa Cement Ltd.
vs Union of India].
Example: A, B and C are under a joint promise to pay D Rs.3,000. C is unable to pay anything and A is
compelled to pay the whole sum. A is entitled to receive Rs.1,500 from B.

Release of a Joint Promisor (Sec. 44)

A release by the promisee of any of the joint promisors does not discharge the other joint
promisors from liability. The released joint promisor also continues to be liable to the other joint
promisors.

Devolution of Joint Rights (Sec. 45)

When a person (say A) has made a promise to several persons (say B, C and D), these persons are
known as joint promisees. Unless a contrary intention appears from the contract, the right to claim
performance rests with all of the joint promisees (B, C and D). When one of the joint promisees (say B)
dies, the right to claim performance rests with his (B’s) legal representatives jointly with the surviving
joint promisees (C and D). When all the joint promisees (B, C and D) die, the right to claim performance
rests with their legal representatives jointly.

Example: B and C jointly lend Rs.5000 to A who promises B and C jointly to repay them that
sum with interest on a day specified. B dies. The right to claim performance rests with B’s
representatives jointly with C during C’s life. After the death of C, the right to claim performance rests
with the representatives of B and C jointly.

The partners of a firm, the members of a joint Hindu family, cosharers, or mortgagees are all joint
promisees when a person, say a debtor, makes a promise in their favour. Unless a contrary intention
appears from the contract, a suit to enforce such promise must be instituted by all the joint promisees.

reciprocal promises

Promises which form the consideration or part of the consideration for each other are called
“reciprocal promises” [Sect. 2(f)]. Where, for example, A promises to do or not to do something in
consideration of B’s promise to do or not to do something, the promises are reciprocal.

These promises have been classified as follows:

(1) Mutual and Independent: Where each party must perform his promise independently and
irrespective of the fact whether the other party has performed, or is willing to perform, his promise
or not, the promises are mutual and independent.

Example: In a contact of sale, B agrees to pay the price of goods on 10th instant. S promises to supply
the goods on 20th instant. The promises are mutual and independent.

(2) Conditional and Dependent: Where the performance of the promise by one party depends on the
prior performance of the promise by the other party, the promises are conditional and dependent.
Example: A promises to remove certain debris lying in front of B’s house provided B supplies him with
the cart. The promises in this case, are conditional and dependent. A need not perform his promise if B
fails to provide him with the cart.

(3) Mutual and Consent: Where the promises of both the parties are to be performed simultaneously,
they are said to be mutual and concurrent. The example of such promises may be sale of goods for
cash.

Rules Regarding Performance of Reciprocal Promises

1) Simultaneous performance of reciprocal promises.

2) Order of performance of reciprocal promises.

3) Effect of one party preventing another from performing promise.

4) Effect of default as to promise to be performed first.

5) Reciprocal promise to do things legal and also other things illegal.

time as the essence of the contract

The expression “time is of the essence of the contract” means that a breach of the condition as to
the time for performance will entitle the innocent party to consider the breach as a repudiation of the
contract.

Sec.55 deals with the question of “time as the essence of the contract” and provides:

1. When time is of the essence: In a contract, in which time is of the essence of the contract, if there is
a failure on the part of the promisor to perform his obligation within the fixed time, the contract (or so
much of it as remains unperformed) becomes voidable at the option of the promisee (Sec. 55 para 1).
If, in such a case, the promisee accepts performance of the promise after the fixed time, he cannot
claim compensation for any loss occasioned by the non-performance of the promise at the agreed
time. But if at the time of accepting the delayed performance he gives notice to the promisor of his
intention to claim compensation, he can do so (Sec.55 para 3).

In commercial or mercantile contracts which provide for performance within a specified time, time is
ordinarily of the essence of the contract. This is so because businessmen want certainty.

Example: In a contract for the sale or purchase of goods the prices of which fluctuate rapidly in the
market, the time of delivery and payment are considered to be the essence of the contract.

2. When time is not of the essence: In a contract, in which time is not of the essence of the contract,
failure on the part of the promisor to perform his obligation within the fixed time does not make the
contract voidable, but the promisee is entitled to compensation for any loss sustained by him due to
such failure (Sec. 55 para 2).
Intention to make time as the essence of the contract, if expressed in writing, must be in a language
which is unambiguous. The mere fact that certain time is specified in a contract for the performance of a
promise does not necessarily make time as the essence of the contract. If the contract includes clauses
providing for extension of time in certain contingencies or for payment of fine or penalty for every day or
week the work undertaken remains unfinished on the expiry of time provided in the contract, such clauses
are construed as rendering ineffective the express provision relating to the time being the essence of the
contract.

appropriation of payments

When a debtor owes several distinct debts to a creditor and makes a payment insufficient to
satisfy the whole indebtedness, a question arises: To which debt should the payment be appropriated?
Secs. 59 to 61 lay down the following three rules in this regard:

1. Where the debtor intimates (Sec. 59). If the debtor expressly intimates at the time of actual payment
that the payment should be applied towards the discharge of a particular debt, the creditor must do so.
If there is no express intimation by the debtor, the law will look into the circumstances attending on
the payment for appropriation.

“There is an established maxim of law that, when money is paid, it is to be applied according to the
expressed will of the payer, not of the receiver”.

Example: A owes B, among other debts, the sum of Rs.567. B writes to A and demands payment of this
sum. A sends to B Rs.567. This payment is to be applied to the discharge of the debt of which B had
demanded payment.

2. Where the debtor does not intimate and the circumstances are not indicative (Sec.60). Where the
debtor does not expressly intimate or where the circumstances attending on the payment do not
indicate any intention, the creditor may apply it at his discretion to any lawful debt actually due and
payable to him from the debtor.

3. Where the debtor does not intimate and the creditor falls to appropriate (Sec.61). Where the debtor
does not expressly intimate and where the creditor fails to make any appropriation, the payment shall
be applied in discharge of the debts in chronological order, i.e. in order of time. If the debts are of
equal standing, the payment shall be applied in discharge of each proportionately.

Rule in Clayton’s Case

This rule is applicable where the parties have a current account, i.e. a running account between
them. In such a case appropriation impliedly takes place in the order in which the receipts and payments
take place and are carried into the account. It is the first item on the debit side of the account that is
discharged or reduced by the first item on the credit side; the appropriation is made by the very act of
setting the two items against each other. In simple words, it means that, unless there is a contrary
intention, the items on the credit of an account must be appropriated against the items on the debit in
order of date.

To conclude,
1) the debtor has, at the time of payment, the right of appropriating the payment;

2) in default of debtor, the creditor has the option of election; and

3) in default of either, the law will allow appropriation of debts in order of time.

TERMINATION AND DISCHARGE OF CONTRACT

Discharge of contract means termination of the contractual relationship between the parties. A
contract is said to be discharged when it ceases to operate, i.e. when the rights and obligations created by
it come to an end.

A contract may be discharged —

1. By Performance

2. By Agreement or Consent

3. By Impossibility

4. By Lapse of Time

5. By Operation of Law

6. By Breach of Contract

1. discharge by performance

Performance means the doing of that which is required by a contract. Discharge by performance
takes place when the parties to the contract fulfil their obligations arising under the contract within the
time and in the manner prescribed.

Performance of a contract is the most usual mode of its discharge. It may be —

(1) Actual Performance: When both the parties perform their promises, the contract is discharged.
Performance should be complete, precise and according to the terms of the agreement.

(2) Attempted Performance or Tender: Tender is not actual performance, but is only an offer to
perform the obligation under the contract.

2. discharge by agreement or consent

Sec. 62 lays down that “if the parties to a contract agree to substitute a new contract for it, or to
rescind or to alter it, the original contract is discharged and need not be performed”.

The various cases of discharge of contract by mutual agreement are dealt with in Secs. 62 and 63 are
given below:
 (a) Novation (Sec. 62): Novation takes place when a new contract is substituted for an existing one
between the same parties.

Example: A owes money to B under a contract. It is agreed between A, B and C that B shall henceforth
accept C as his debtor, instead of A. The old debt of A to B is at an end, and a new debt from C to B has
been contracted.

(b) Rescission (Sec. 62): Rescission of a contract takes place when all or some of the terms of the
contract are cancelled. It may occur—

(i) by mutual consent of the parties, or

(ii) where one party fails in the performance of his obligation. In such a case, the other party may rescind
the contract without prejudice to his right to claim compensation for the breach of contract.

Example: A promises to supply certain goods to B six months after date. By that time, the goods go out
of fashion. A and B may rescind the contract.

(c) Alteration (Sec. 62): Alteration of a contract may take place when one or more of the terms of the
contract is/are altered by the mutual consent of the parties to the contract. In such a case, the old
contract is discharged.

Example: A enters into a contract with B for the supply of 100 bales of cotton at his Godown No.1 by the
first of the next month. A and B may alter the terms of the contract by mutual consent.

(d) Remission (Sec. 63): Remission means acceptance of a lesser fulfilment of the promise made, i.e.
acceptance of a lesser sum than what was contracted for, in discharge of the whole of the debt.

Example: A owes B Rs.50,000. A pays to B and B accepts, in satisfaction of the whole debt, Rs.20,000
paid at the time and place at which Rs.50,000 were payable. The whole debt is discharged.

(e) Waiver: Waiver takes place when the parties to a contract agree that they shall no longer be bound by
the contract. This amounts to a mutual abandonment of rights by the parties to the contract.

(f) Merger: Merger takes place when an inferior right accruing to a party under a contract merges into a
superior right accruing to the same party under the same or some other contract.

Example: P holds a property under a lease. He later buys the property. His rights as a lessee merge
into his rights as an owner.

3. discharge by impossibility of performance

If an agreement contains an undertaking to perform an impossibility, it is void ab initio. This rule

is based on the following maxims:

1. Impossibility existing at the time of agreement. Sec. 56 lays down that “an agreement to do an
impossible act itself is void”. This is known as pre-contractual or initial impossibility.
2. Impossibility arising subsequent to the formation of contract. Impossibility which arises subsequent
to the formation of a contract (which could be performed at the time when the contract was entered
into) is called post-contractual or supervening impossibility.

Discharge by Supervening Impossibility

A contract is discharged by supervising impossibility in the following cases:

1. Destruction of subject-matter of contract: When the subject-matter of a contract, subsequent to its

formation, is destroyed without any fault of the parties to the contract, the contract is discharged.

Example: C let a music hall to T for a series of concerts on certain days. The hall was accidentally burnt
down before the date of the first concert. Held, the contract was void.

2. Non-existence or Non-occurrence of a particular state of things: Sometimes, a contract is entered

into between two parties on the basis of a continued existence or occurrence of a particular state of
things. If there is any change in the state of things which ought to have occurred does not occur, the
contract is discharged.

Example: A and B contract to marry each other. Before the time fixed for the marriage, A goes mad.
The contract becomes void.

3. Death or Incapacity for personal service: Where the performance of a contract depends on the
personal skill or qualification of a party, contract is discharged on the illness or incapacity or death of
that party. The man’s life is an implied condition of the contract.

Example: An artist undertook to perform at a concert for a certain price. Before she could do so, she
was taken seriously ill. Held, she was discharged due to illness.

4. Change of law. When, subsequent to the formation of a contract, change of law takes place, and the
performance of the contract becomes impossible, the contract is discharged.

Example: D enters into a contract with P on 1st March for the supply of certain imported goods in the
month of September of the same year. In June by an Act of Parliament, the import of such goods is
banned. The contract is discharged.

5. Outbreak of war. A contract entered into with an alien enemy during war is unlawful and therefore
impossible for performance. Contracts entered into before the outbreak of war are suspended during
the war and may be revived after the war is over.

4. discharge by lapse of time

The Limitation Act, 1963 lays down that a contract should be performed within a specific period,
called period of limitation. If it is not performed, and if no action is taken by the promisee within the
period of limitation, he is deprived of his remedy at law. For example, the price of goods sold without any
stipulation as to credit should be paid within three years of the delivery of the goods. If the price is not
paid and creditor does not file a suit against the buyer for the recovery of price within three years, the debt
becomes time-barred and hence irrecoverable.
 5. discharge by operation of law

A contract may be discharged by operation of law. This includes discharge —

(a) By Death: In contracts involving personal skill or ability, the contract is terminated on death of the
promisor. In other contracts, the rights and liabilities of a deceased person pass on to the legal
representatives of the deceased person.

(b) By Merger: When an inferior right accruing to a party merges into a superior right accruing to the
same party under the same or some other contract, the inferior right accruing to the party is said to be
discharged.

(c) By Insolvency: When a person is adjudged insolvent, he is discharged from all liabilities incurred
prior to his adjudication.

(d) By Unauthorised Alteration of the terms of a Written Agreement: Where a party to a contract makes
any material alteration in the contract without the consent of the other party, the other party can avoid
the contract. A material alteration is one which changes, in a significant manner, the legal identity or
character of the contract or the rights and liabilities of the parties to the contract.

(e) By Rights and Liabilities becoming vested in the Same Person: Where the rights and liabilities under
a contract vested in the same person, for example when a bill gets into the hands of the acceptor, the
other parties are discharged.

6. discharge by breach of contract

Breach of contract means a breaking of the obligation which a contract imposes. It occurs when a
party to the contract without lawful excuse does not fulfil his contractual obligation or by his own act
makes it impossible that he should perform his obligation under it. It confers a right of action for
damages on the injured party.

REMEDIES FOR BREACH OF CONTRACT

When a contract is broken, the injured party has one or more of the following remedies:

1. Rescission of the contract

2. Suit for damages

3. Suit upon quantum meruit

4. Suit for specific performance of the contract

5. Suit for injunction.

 1. rescission

When a contract is broken by one party, the other party may sue to treat the contract as rescinded
and refuse further performance. In such a case, he is absolved of all his obligations under the contract.

Example: A promises B to supply 10 bags of cement on a certain day. B agrees to pay the price
after the receipt of the goods. A does not supply the goods. B is discharged from liability to pay the
price.

The Court may grant rescission—

(a) where the contract is voidable by the plaintiff; or

(b) where the contract is unlawful for causes not apparent on its face and the defendant is more to blame
than the plaintiff.

When a party treats the contract as rescinded, he makes himself liable to restore any benefits he has
received under the contract to the party from whom such benefits were received. But if a person
rightfully rescinds a contract he is entitled to compensation for any damage which he has sustained
through non-fulfilment of the contract by the other party.

2. damages

Damages are a monetary compensation allowed to the injured party by the Court for the loss or
injury suffered by him by the breach of a contract. The object of awarding damages for the breach of a
contract is to put the injured party in the same position, so far as money can do it, as if he had not been
injured, i.e. in the position in which he would have been had there been performance and not breach. This
is called the doctrine of restitution.

The rules relating to damages may be considered as under:

1. Damages arising naturally — Ordinary damages

When a contract has been broken, the injured party can recover from the other party such
damages as naturally and directly arose in the usual course of things from the breach. This means that the
damages must be the proximate consequence of the breach of contract. These damages are known as
ordinary damages.

Example: A contracts to sell and deliver 50 quintals of Farm Wheat to B at Rs.1000 per quintal,
the price to be paid at the time of delivery. The price of wheat rises to Rs.1200 per quintal and A refuses
to sell the wheat. B can claim damages at the rate of Rs.200 per quintal.

2. Damages in contemplation of the parties — Special damages

Special damages can be claimed only under the special circumstances which would result in a
special loss in case of breach of a contract. Such damages, known as special damages, cannot be claimed
as a matter of right.
 Example: A, a builder, contracts to erect a house for B by the 1st of January, in order that B may
give possession of it at that time to C to whom B has contracted to let it. A is informed of the contract
between B and C. A builds the house so badly that before the 1st January, it falls down and has to be
rebuilt by B, who, in consequence, loses the rent which he was to have received from C, and is obliged to
make compensation to C for the breach of the contract. A must make compensation to B for the cost of
rebuilding the house, for the rent lost, and for the compensation made to C.

3. Vindictive or Exemplary damages

Damages for the breach of a contract are given by way of compensation for loss suffered, and not
by way of punishment for wrong inflicted. Hence, ‘vindictive’ or ‘exemplary’ damages have no place in
the law of contract because they are punitive (involving punishment) by nature. But in case of (a) breach
of a promise to marry, and (b) dishonour of a cheque by a banker wrongfully when he possesses sufficient
funds to the credit of the customer, the Court may award exemplary damages.

4. Nominal damages

Where the injured party has not in fact suffered any loss by reason of the breach of a contract, the
damages recoverable by him are nominal. These damages merely acknowledge that the plaintiff has
proved his case and won.

Example: A firm consisting of four partners employed B for a period of two years. After six
months two partners retired, the business being carried on by the other two. B declined to be employed
under the continuing partners. Held, he was only entitled to nominal damages as he had suffered no loss.

5. Damages for loss of reputation

Damages for loss of reputation in case of breach of a contract are generally not recoverable. An
exemption to this rule exists in the case of a banker who wrongfully refuses to honour a customer’s
cheque. If the customer happens to be a tradesman, he can recover damages in respect of any loss to his
trade reputation by the breach. And the rule of law is: the smaller the amount of the cheque
dishonoured, the larger the amount of damages awarded. But if the customer is not a tradesman, he can
recover only nominal damages.

6. Damages for inconvenience and discomfort

Damages can be recovered for physical inconvenience and discomfort. The general rule in this
connection is that the measure of damages is not affected by the motive or the manner of the breach.

Example: A was wrongfully dismissed in a harsh and humiliating manner by G from his
employment. Held, (a) A could recover a sum representing his wages for the period of notice and the
commission which he would have earned during that period; but (b) he could not recover anything for
his injured feelings or for the loss sustained from the fact that his dismissal made it more difficult for him
to obtain employment.

7. Mitigation of damages
 It is the duty of the injured party to take all reasonable steps to mitigate the loss caused by the
breach. He cannot claim to be compensated by the party in default for loss which he ought reasonably to
have avoided. That is he cannot claim compensation for loss which is really due not to the breach, but
due to his own neglect to mitigate the loss after the breach.

8. Difficulty of Assessment

Although damages which are incapable of assessment cannot be recovered, the fact that they are
difficult to assess with certainty or precision does not prevent the aggrieved party from recovering them.
The Court must do its best to estimate the loss and a contingency may be taken into account.

Example: H advertised a beauty competition by which readers of certain newspapers were to

select fifty ladies. He himself was to select twelve out of these fifty. The selected twelve were to be
provided theatrical engagements. C was one of the fifty and by H’s breach of contract she was not
present when the final section was made. Held, C was entitled to damages although it was difficult to
assess them.

9. Cost of Decree

The aggrieved party is entitled, in addition to damages, to get the cost of getting the decree for
damages. The cost of suit for damages is in the discretion of the Court.

10. Damages agreed upon in advance in case of breach

If a sum is specified in a contract as the amount to be paid in case of its breach, or if the contract
contains any other stipulation by way of a penalty for failure to perform the obligations, the aggrieved
party is entitled to receive from the party who has broken the contract, a reasonable compensation not
exceeding the amount so mentioned.

Example: A contracts with B to pay Rs.1000 if he fails to pay B Rs.500 on a given day. B is
entitled to recover from A such compensation not exceeding Rs.1000 as the Court considers reasonable.

Liquidated Damages and Penalty

Sometimes parties to a contract stipulate at the time of its formation that on the breach of the
contract by either of them, a certain specified sum will be payable as damages. Such a sum may amount
to either ‘liquidated damages’ or a ‘penalty’. ‘Liquidated damages’ represent a sum, fixed or ascertained
by the parties in the contract, which is a fair and genuine pre-estimate of the probable loss that might arise
as a result of the breach, if it takes place. A ‘penalty’ is a sum named in the contract at the time of its
formation, which is disproportionate to the damage likely to accrue as a result of the breach. It is fixed up
with a view to securing the performance of the contract.

Payment of Interest

The largest number of cases decided under Sec. 74 relate to stipulations in a contract providing
for payment of interest. The following rules are observed with regard to payment of interest:
 1. Payment of interest in case of default.

2. Payment of interest at higher rate —

(a) from the date of the bond, and

(b) from the date of default.

3. Payment of compound interest on default —

(a) at the same rate as simple interest, and

(b) at the rate higher than simple interest.

4. Payment of interest at a lower rate, if interest paid on due date.

3. quantum meruit

The phrase ‘quantum meruit’ literally means ‘as much as earned’. A right to sue on a quantum
meruit arises where a contract, partly performed by one party, has become discharged by the breach of
the contract by the other party.

4. specific performance

In certain cases of breach of contract, damages are not an adequate remedy. The Court may, in
such cases, direct the party in breach to carry out his promise according to the terms of the contract.

Some of the cases in which specific performance of a contract may, in discretion of the Court, be
enforced are as follows:

(a) When the act agreed to be done is such that compensation in money for its non-performance is not an
adequate relief.

(b) When there exists no standard for ascertaining the actual damage caused by the non-performance of
the act agreed to be done.

(c) When it is probable that the compensation in money cannot be got for the non-performance of the act
agreed to be done.

5. injunction

Where a party is in breach of a negative term of a contract (i.e. where he is doing something
which he promised not to do), the Court may, by issuing an order, restrain him from doing what he
promised not to do. Such an order of the Court is known as ‘injunction’.

Example: W agreed to sing at L’s theatre, and during a certain period to sing nowhere else.
Afterwards W made contract with Z to sing at another theatre and refused to perform the contract with L.
Held, W could be restrained by injunction from singing for Z.
 LESSON - 7

QUASI CONTRACTS

Under certain circumstances, a person may receive a benefit to which the law regards another
person as better entitled, or for which the law considers he should pay to the other person, even though
there is no contract between the parties. Such relationships are termed quasi-contracts, because, although
there is no contract or agreement between the parties, they are put in the same position as if there were a
contract between them. These relationships are termed as ‘quasi-contracts’.

A quasi-contract rests on the ground of equity that a person shall not be allowed to enrich himself
unjustly at the expense of another. The principle of unjust enrichment requires:

that the defendant has been ‘enriched’ by the receipt of a ‘benefit’;

that this enrichment is at the expense of the plaintiff; and

that the retention of the enrichment is unjust.

Law of quasi-contracts is also known as the law of restitution. Strictly speaking, a quasi-contract is not a
contract at all. A contract is not intentionally entered into. A quasi-contract, on the other hand, is created
by law.

kinds of quasi contracts

1. supply of necessaries (Sec. 68)

If a person, incapable of entering into a contract, or anyone whom he is legally bound to support,
is supplied by another with necessaries suited to his condition in life, the person who has furnished such
supplies is entitled to be reimbursed from the property of such incapable person.

Example: A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled
to be reimbursed from B’s property.

2. payment by an interested person (Sec. 69)

A person who is interested in the payment of money which another is bound by law to pay, and
who therefore pays it, is entitled to be reimbursed by the other.

Example: P left his carriage on D’s premises. D’s landlord seized the carriage as distress for
rent. P paid the rent to obtain the release of his carriage. Held, P could recover the amount from D.

The essential requirements are as follows:

(a) The payment made should be bonafide for the protection of one’s interest.

(b) The payment should not be voluntary one.

(c) The payment must be such as the other party was bound by law to pay.

3. obligation to pay for non-gratuitous acts (Sec. 70)

When a person lawfully does anything for another person or delivers anything to him, not
intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to
make compensation to the former in respect of, or to restore, the thing so done or delivered.

Example: A, a tradesman, leaves goods at B’s house by mistake. B treats the goods as his own.
He is bound to pay for them to A.

Before any right of action under Sec. 70 arises, three conditions must be satisfied:

(a) The thing must have been done lawfully.

(b) The person doing the act should not have intended to do it gratuitously.

(c) The person for whom the acts is done must have enjoyed the benefit of the act.

4. responsibility of finder of goods (Sec. 71)

A person, who finds goods belonging to another and takes them into his custody, is subject to the
same responsibility as a bailee. He is bound to take as much care of the goods as a man of ordinary
prudence would, under similar circumstances, take of his own goods of the same bulk, quality and value.
He must also take all necessary measures to trace its owner. If he does not, he will be guilty of wrongful
conversion of the property. Till the owner is found out, the property in goods will vest in the finder and
he can retain the goods as his own against the whole world (except the owner).

Example: F picks up a diamond on the floor of S’s shop. He hands it over to S to keep it till true
owner is found out. No one appears to claim it for quite some weeks in spite of the wide advertisements
in the newspapers. F claims the diamond from S who refuses to return. S is bound to return the diamond
to F who is entitled to retain the diamond against the whole world except the true owner.

The finder can sell the goods in the following cases:

 when the thing found is in danger of perishing;

 when the owner cannot, with reasonable diligence, be found out;

 when the owner is found out, but he refuses to pay the lawful charges of the finder; and

 when the lawful charges of the finder, in respect of the thing found, amount to two-thirds of the value
of the thing found. (Sec. 169).

5. mistake or coercion (Sec. 72)

A person to whom money has been paid, or anything delivered, by mistake or under coercion,
must repay or return it to the person who paid it by mistake or under coercion. The word ‘coercion’ is
used in Sec. 72 in its general sense and not as defined in Sec. 15.
 Example: A and B jointly owe Rs.100 to C. A alone pays the amount to C, and B, not knowing
this fact, pays Rs.100 over again to C. C is bound to pay the amount to B.

quantum meruit

‘Quantum meruit’ literally means ‘as much as earned’ or ‘as much as is merited’. When a person has
done some work under a contract, and the other party repudiates the contract, or some event happens
which makes the further performance of the contract impossible, then the party who has performed the
work can claim remuneration for the work he has already done. Likewise, where one person has
expressly or impliedly requested another to render him a service without specifying any remuneration, but
the circumstances of the request imply that the service is to be paid for, there is implied a promise to pay
quantum meruit, i.e. so much as the party rendering the service deserves. The right to claim quantum
meruit does not arise out of contract as the right to damages does; it is a claim on the quasi-contractual
obligation which the law implies in the circumstances.

The claim for quantum meruit arises only when the original contract is discharged. If the original contract
exists, the party not in default cannot have quantum meruit remedy; he has to take resort to remedy in
damages. Further the claim for quantum meruit can be brought only by the party who is not in default.

The claim for quantum meruit arises in the following cases:

(a) When an agreement is discovered to be void (Sec. 65).

(b) When something is done without any intention to do so gratuitously (Sec.70).

(c) When there is an express or implied contract to render services but there is no agreement as to
remuneration.

(d) When the completion of the contract has been prevented by the act of the other party to the contract.

(e) When a contract is divisible.

(f) When an indivisible contract is completely performed but badly.

Review Questions

1. Define contract. What are the essentials of a valid contract?

2. What are legal rules relating to offer?

3. What are the rules relating to consideration?

4. Discuss the nature of contract entered into with minors.

5. What are the different modes of discharging the contract?

6. List out the agreements opposed to public policy.

7. What is contingent contract? What are the rules relating to contingent contracts?
8. Discuss the law relating to effect of mistake on contracts.

9. Distinguish between coercion and undue influence. What are their effects on validity of the contract?

10. What are the remedies for breach of contract?

11. What are quasi-contracts? Enumerate the instances of quasi-contracts laid down under the Act.

 SPECIAL CONTRACTS
LESSON - 8
CONTRACT OF INDEMNITY AND GUARANTEE
DEFINITION
Section 124 of the Indian Contract Act defines indemnity as “a contract by which
one party promises to save the other from loss caused to him by the conduct of the
promisor himself or by the conduct of any other person”. The person who promises is
called the Indemnifier and the person to whom the promise is made is called the
Indemnified or Indemnity Holder.
Illustration: A promises not to construct buildings on a particular site so as to
prevent light and air to B’s house and in case of breach of such promise, to indemnify for
the consequent loss.
This is a contract of indemnity. A contract of insurance is also a contract of
indemnity.
RIGHTS OF AN INDEMNITY HOLDER
He is entitled to recover —

all damages,

all costs which he may be compelled to pay in any suit in respect of any matter
to which the promise to indemnity applies, and

all sums which he may have paid under the terms of any compromise of any
such suit provided, such compromise was not contrary to the orders of the
promisor and was prudent or the promisor authorises him to compromise the
suit.

CONTRACT OF GUARANTEE
Section 126 of Indian Contract Act defines guarantee as “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”, the person in respect of whose default, the
guarantee is given is called the “principal debtor”, and the person to whom the guarantee
is given is called the “creditor”.
Illustration: A purchases goods from B on credit. C agrees to stand as a surety
which means that if A does not pay the price of the goods, he will pay. Here, A is the
principal debtor, B is the creditor and C is the surety or guarantee.
KINDS OF GUARANTEE
1. Specific Guarantee: When a guarantee extends to a single transaction or debt, it is
called a specific or simple guarantee. It comes to an end when the guaranteed debt is
duly discharged or the promise is duly performed.
2. Continuing Guarantee: When a guarantee extends to a series of transactions, it is
called a continuing guarantee (Sec.129). The liability of the surety in case of a
continuing guarantee extends to all the transactions contemplated until the revocation
of the guarantee.
Distinction between Contract of Indemnity and Contract of Guarantee

Contract of Indemnity Contract of Guarantee

1. There are two parties, namely There are three parties, viz. the
Indemnifier and the principal debtor, the creditor and the
Indemnified. surety.
2. The liability of the Indemnifier The liability of the surety is
is primary. subsidiary.
3. The liability of the Indemnifier The liability of the surety is
is contingent. subsisting.
4. The Indemnifier cannot sue the The surety can sue the principal
third party in his name even debtor in his own name after paying
after making good the loss the creditor.
unless there is an assignment in
his favour from the
indemnified.

RIGHTS OF SURETY
Rights against the Principal Debtor
1) After discharging the liability of the principal debtor, the surety is entitled to all
those rights which the creditor himself exercises against the principal debtor. This
right of the surety is called “subrogation”.
Illustration: The right of the creditor to receive dividends from the official
assignee when the principal debtor becomes bankrupt, can be exercised by the
surety.
2) The surety can proceed against all those securities of the principal debtor, which the
creditor himself can proceed against.
3) The surety is entitled to be indemnified for all payments rightfully made by him.
Illustrations: B is indebted to C, and A is surety for the debt. C demands
payment from A, and on his refusal sues him for the amount. A defends the suit,
having reasonable grounds for doing so but is compelled to pay the amount of the
debt with costs. He can recover from B the amount paid by him for costs, as well
as the principal debt.
Rights against the Creditor
1) The surety may require the creditor to sue the debtor. But he cannot compel the
creditor to do so.
2) In the case of fidelity contracts, he can insist upon the creditor to dispense with the
services of the principal debtor when his dishonesty is established.
3) He can claim set off or counter-claim which the principal debtor could have obtained
against the creditor.
4) On payment of the guaranteed debt, he can require the creditor to assign to him all
the securities held by the creditor in respect of the debt. If the creditor loses or parts
with such securities without the consent of the surety, the surety is discharged to the
extent of the value of the security.
Illustration: C advances to B, his tenant, Rs.2000 on the guarantee of A. C has
also a further security for the sum of Rs.2000 by mortgage of B’s furniture. C
cancels the mortgage. B becomes insolvent and C sues A on his guarantee. A is
discharged from liability to the amount of the value of the furniture.
Rights against the Co-Sureties
1) All the sureties shall bear equally, the loss caused by the insolvency of the principal
debtor. If one of them bears the entire loss in the first instance he can claim
contribution from other co-sureties.
2) Where the co-sureties agreed to become liable in different sums, they should
contribute, according to English Law, proportionately.
Illustration: A, B and C have agreed to become liable for Rs. 10,000, 20,000 and
40,000 respectively, as sureties for D’s liability. D’s indebtedness was Rs.30,000.
A, B and C would contribute in the ratio of 1 : 2 : 4. But according to Indian Law
they shall bear such loss equally but not exceeding the sums which they have agreed
to pay. So, A, B and C will have to pay Rs. 10,000 each.
DISCHARGE OF SURETY
1. The surety is discharged from liability if the contract of guarantee becomes void or
voidable, on the ground of misrepresentation or concealment by the creditor with
regard to a material circumstance, or on the ground that the guarantee was given on
condition that another person will join as a co-surety and that such other person has
not joined as such.
Illustration: A, engages B as clerk to collect money for him. B fails to account
for some of his receipts and A in consequence, calls upon him to furnish security for
his accounting. C gives his guarantee for B’s accounting. A does not acquaint C
with B’s previous conduct. B afterwards makes default. The guarantee is invalid.
2. The surety is discharged by revocation as to future transactions in case of continuing
guarantee.
3. The surety is discharged:
a) By variance of contract: Any variance in the terms of the contract between the
principal debtor and the creditor without the surety’s consent discharges the
surety.
Illustration: C, contracts to lend B Rs.5000 on the 1st of March. A
guarantees repayment. C pays Rs.5000 to B on the 1st of January. A is discharged
from his liability, as the contract has been varied in as much as C might sueB for
the money before the 1st of March.
b) By release or discharge of principal debtor: The surety is discharged by any
contract between the principal debtor and the creditor by which the principal
debtor is discharged or by any act or omission of the creditor, the legal
consequence of which is the discharge of the principal debtor.
Illustration: A, contracts with B for a fixed price to build a house for B
within a stipulated time, B supplying the necessary timber. C guarantees A’s
performance of the contract. B omits to supply the timber. C is discharged from
his suretyship.
c) By composition with debtor: The surety is discharged when the principal debtor
and creditor enter into a contract by which the creditor (1) makes composition
with or (2) promises to give time or (3) promises not to sue the principal debtor.
d) By act or omission impairing surety’s remedy: The surety is discharged, if the
creditor does any act inconsistent with the rights of the surety or omits to do any
act which his duty to surety requires him to do.
Illustration: A puts M as apprentice to B, and gives a guarantee to B for
M’s fidelity. B promises on his part that he will, at least once a month, see M
make up the cash. B omits to see this done as promised and M embezzles. A is
not liable to B on his guarantee.
e) Loss of security: The surety is discharged if the creditor loses or parts with the
securities belonging to the principal debtor, without the consent of the surety.
The surety is not discharged in the following cases:
1. A surety is not discharged when a contract to give time to the principal debtor is made
by the creditor with a third person and not with the principal debtor.
Illustration: C, the holder of an overdue bill of exchange drawn by A as surety for
B, and accepted by B, contracts with M to give time to B. A is not discharged.
2. Mere forbearance on the part of the creditor to sue the principal debtor does not
discharge the surety.
Illustration: B owes C a debt guaranteed by A. The debt becomes payable. C
does not sue B for a year after the debt has become payable. A is not discharged
from his liability.
3. Release of one co-surety does not discharge the other.
 LESSON - 9
CONTRACT OF BAILMENTS
Section 148 of the Indian Contract Act defines that “a bailment is the delivery of
goods by one person to another for some purpose, upon a contract that they shall, when
the purpose is accomplished, be returned or otherwise disposed of according to the
directions of the person delivering them”. The person delivering the goods is called the
“bailor”. The person to whom they are delivered is called the “bailee”.
Essentials of Bailments
1) There must be delivery of gods. Such delivery may be actual or constructive.
2) The delivery must be made for some specific purpose.
3) The delivery must be made on condition that the goods shall be returned in
specie when the purpose is over, or disposed of according to the directions of
the bailor.
4) Only possession but not the ownership of the goods, is transferred.
Examples: Delivery of a radio for repair.
DUTIES OF A BAILEE
1. To take reasonable care of the goods bailed to him.
Section 151 lays down that in all cases of bailment, the bailee should take that
much of care which an ordinary prudent man would take of his own goods under similar
circumstances. Section 152 lays down that the bailee is not responsible, in the absence of
any special contact, for the loss, destruction or deterioration of the thing bailed, if he has
taken the amount of care described above.
Illustration: A gives gold to B, to be made into an ornament. B keeps them in a
safe where he usually keeps his own valuables. B is not liable if the goods are lost by
him.
2. Not to make unauthorised use of goods bailed.
The bailee should not make use of goods for purposes inconsistent with the terms
of the contract. If he does so, the bailor is entitled to terminate the contract and claim
damages, if any.
Illustration: A lends a horse to B for his own riding only. B allows C, to ride the
horse. C rides carefully but the horse accidentally falls and is injured. B is liable to
compensate A for the injury caused to the horse.
3. Not to mix the goods of the bailor with his own goods.
a) If a bailee mixes the goods of the bailor with his own goods with the consent of
the bailor, both the bailor and the bailee shall have proportionate interest in the
mixture.
 b) If the goods are mixed by the bailee without the consent of the bailor and the
goods are separable, the bailee is bound to bear the expenses of separation and
pay damages if any.
c) If the goods are mixed by the bailee without the consent of the bailor and the
goods are inseparable, the bailee should compensate the bailor for the loss of
goods.
Illustration: A bails a barrel of Cape flour worth Rs.45 to B. B, without A’s consent,
mixes the flour with country flour of his own, worth only Rs.25 a barrel. B must
compensate A for the loss of his flour.
4. Not to set up adverse title
The bailee should not deny the bailor’s title. He should not set up his own title or
that of a third party.
5. To return the goods bailed
The bailee should return goods bailed, to the bailor when the fixed period is over
or when the purpose is accomplished. The bailee should also deliver any increase or
profit which may have accrued from the goods bailed.
Illustration: A leaves a cow in the custody of B to be taken care of. The cow has
a calf. B is bound to deliver the calf as well as the cow to A.
DUTIES OF A BAILOR
1. To disclose the faults in the goods bailed
The bailor should disclose to the bailee, faults in the goods bailed, of which he is
aware. If he does not disclose, he will be liable for the loss resulting therefrom.
Illustration: A lends a horse which he knows to be vicious to B. He does not
disclose this fact. The horse runs away. B is thrown down and injured. A is responsible
to B for damages sustained.
2. To bear extra-ordinary expenses
While the ordinary expenses are payable by the bailee, extra-ordinary expenses
shall be borne by the bailor.
Illustration: Where a horse is lent for a journey, the bailee shall bear the expenses
of feeding the horse. But in case of the horse becoming sick, the bailor shall have to bear
the necessary expenses for its recovery.
3. Responsibility for want of title
The bailor is responsible to the bailee for any loss sustained by the latter by the
reason, that the bailor was not entitled to make the bailment or to receive back the goods
or to give directions respecting them.
RIGHTS OF BAILOR
1. He is entitled to the increase or profit from goods bailed.
2. In the case of gratuitous loan, the lender may require the goods to be returned, even
though he lent it for a fixed period for specific purpose. But if such a request causes
loss to the bailee exceeding the benefit he derives, the bailor should indemnify the
borrower.
3. The bailor is entitled to terminate the contract when the bailee does any act
inconsistent with the terms of bailment.
Illustration: A gives a horse to B for hire for his own riding. B drives the horse
in his carriage. The bailment can be terminated at the option of A.
LIEN
Lien is a right of a person, who has possession of goods of another, to retain such
possession until a debt due to him has been discharged. This right is called a
“Possessory lien”.
Lien is of two kinds: 1. Particular lien and 2. General lien.
1. A Particular Lien is one which is available only against that property in respect of
which the skill and labour are exercised or any expenses are incurred.
Illustration: A delivers a watch for repairs to B, a repairer. B has a right to retain
the watch till he is paid for the services rendered.
The bailees, repairers and unpaid vendors of goods are entitled to particular lein.
2. A General Lien is the right to retain the property of another for a general balance of
accounts. Bankers, can exercise this right for any debt due to them.
FINDER OF LOST GOODS
A person who finds an article need not take charge of it. But if he takes them into
his possession, be becomes a bailee.
Duties and Rights
1) He must take as much care of the goods as an ordinary prudent man would, under
similar circumstances, take of his own goods.
2) He cannot sue for remuneration for trouble and expense incurred by him to preserve
the goods or to find out the owner of the goods.
3) He may exercise particular lien against the goods for such remuneration.
4) If a reward has been offered for the return of the goods, he can sue for such reward.
5) If the goods are the subject of sale and if the owner is not found or when found,
refuses to pay the lawful charges, the finder may sell the goods:

when the goods are about to perish or

when they lose the greater part of their value or

when lawful charges amount to two-thirds of their value.

PLEDGE
A pledge is a “bailment of goods as security for payment of a debt or performance
of a promise”. The bailor is called the “pawnor” and the bailee is called the “pawnee”.
In the case of pawn, there is no transfer of property in goods. Only possession of the
goods is transferred. Hence, it is different from mortgage. Pawn is also different from
lien, as in the case of lien, there is no power to sell the article while a pawnee can sell,
subject to some conditions.
Rights of Pawnor
Even after the expiry of a stipulated period, he may redeem the goods pledged at
any subsequent time before the actual sale of the goods pledged. But he must pay
expenses which may have arisen from his default.
Rights of Pawnee
1. He can retain the goods pledged until he recovers the debt, interest and other
expenses incidental to possession or preservation of the goods.
2. He cannot retain the goods for debts other than those for which pawn is made.
3. He is entitled to receive extra-ordinary expenses incurred for the preservation of
goods.
4. If the pawnor makes a default, the pawnee may:

bring a suit upon the debt or promise and

retain the goods pledged or

sell the goods by giving a reasonable notice of sale to the pawnor.
If the proceeds of such are less than the amount due in respect of the debt or
promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are
greater than the amount so due, the pawnee shall pay over the balance to the pawnor.
lesson - 10

contract of agency

Section 182 of the Indian Contract Act defines an agent as “a person employed to do any act for
another or to represent another in dealings with third persons. The person for whom such act is done, or
who is so represented, is called the “principal”.

essentials of a contract of agency

1. The principal and third parties must be competent into contracts.

2. An agent may be even a minor who can effectively bind his principal. But the principal cannot make
the minor agent liable for misconduct or negligence.

Example: P, a principal gives M, a minor, a jewel worth Rs.1000 and instructs him not to sell it on credit
or for less than Rs.500. M sells the jewel on credit for Rs.400. P cannot make him liable while he is
bound by the sale.

3. Consideration is not essential. That the principal gives his consent to be represented by the agent, is
sufficient consideration for the agent to act as such.

creation of agency

An agency may be created in the following ways:

1. By Express Authority: The authority of an agency may be expressed in words spoken or written.
For example, a contract of agency can be written by means of power of attorney.

2. By Implied Authority: The authority of an agent can be inferred from the circumstances of the case.

Illustration: A, living in Bombay, owns a shop in Madras and he occasionally visits it. B is managing
the shop and is in the habit of ordering goods from C in the name of A for the purpose of the shop and of
paying for them out of A’s funds with A’s knowledge. B has an implied authority from A to order goods
from C in the name of A for the purpose of the shop.

3. By Necessity: Sometimes, exigencies of circumstances require a man to act for another as an agent,
though not appointed as such.

Illustration: A horse was sent by rail. The owner had not taken delivery of the same at the destination.
So, the station master had to feed it. It was held that the station master had become an agent by necessity
and was therefore entitled to recover the charges incurred by him.

4. By Holding Out: Where a master usually sends his servant to pledge his credit for certain purposes,
he is bound by the acts of the servant for similar purposes though done without his consent.

5. By Estoppel: Where one man by words or conduct causes another to believe that some other person
is his agent and that another person had acted on that belief, he would be stopped from denying the
authority of that another person to act on his behalf.
 Illustration: A tells B in the presence and within the hearing of P that he (A) is P’s agent and P does not
contradict this statement. B, on the faith of this statement, subsequently enters into a contract with A,
taking him to be P’s agent. P is bound by that contract.

6. By Ratification or Expost Facto Agency: Section 196 of the Indian Contract Act lays down that
“where acts are done by one person on behalf of another, but without his knowledge of authority, he
may elect to ratify or to disown such acts. If he ratifies them, the same effects will follow as if they
had been performed by his authority”. Thus, ratification relates back to the date of the original
contract and binds the principal as if he has expressly authorised it.

termination of contract of agency

A contract of agency is terminated in the following ways:

1. When the period of agency expires or

2. When the purpose of the agency is accomplished or

3. When the principal or agent dies or becomes of unsound mind.

4. When the principal becomes insolvent.

5. When the subject matter of the contract is destroyed.

6. When the object of the contract becomes unlawful.

7. When the agent renounces the authority.

8. When the principal revokes his authority.

The termination that takes effect, so far as regards the agent, the moment, it becomes known to him and
so far as regards third persons, the moment it becomes known to them. So, if an agent knowing the
termination of agency, contracts with third persons who are not aware of the termination, he becomes
liable to the principal for damages while the contract binds the principal and third persons.

An Agency cannot be terminated in the following cases:

(a) When the agency is one, coupled with interest: A, gives authority to B to sell A’s land and to pay
himself, out of the proceeds, the debts sue to him (B) from A. A cannot revoke this authority nor can
it be terminated by his insanity or death.

(b) When the agent has incurred personal liability and

(c) When the authority has been partly exercised by the agent.
rights of an agent

1. He is entitled to remuneration and other expenses properly incurred by him in the agency.

Illustration: A, employs B to recover Rs.1000 from C. Through B’s miscondut, the money is not
recovered. B is not entitled to any remuneration for his services and must make good the loss.

2. He is entitled to retain the goods, papers and other property, movable or immovable, of the principal
for his claims.

3. The agent has a right to be indemnified by the principal for all lawful acts.

Illustration: B at Singapore under instructions from A of Calcutta, contracts with C to deliver goods. A
does not send the goods to B and C sues B for breach of contract. B informs A of the suit and A
authorises him to defend the suit. B defends and is compelled to pay damages etc. A is liable to B for
such damages etc.

4. The agent is entitled to be indemnified for the injury caused to him by the principal’s neglect or want
of skill.

Illustration: A employs B as a brick-layer in building in a house and puts a scaffolding himself

unskillfully and B is in consequence, hurt. A must compensate B.

5. When an agent acts in good faith, the employer must indemnify him for the consequence of that act,
though it causes an injury to the rights of third parties.

Illustration: B, at the request of A, sells goods in the possession of A, but which A had no right to
dispose of. B does not know this and hands over the sale proceeds to A. Afterwards C the true owner
sues A and recovers the value of goods and costs. A must indemnify B for what he has paid and for B’s
own expenses.

duties of an agent

1. He should act according to the directions of the principal and in default, indemnify the principal for
the loss, if any.

2. In the absence of instructions, he must act according to the trade custom.

Illustration: A, an agent engaged in carrying on for B, a business, in which it is the custom, to invest
from time to time, at interest the monies which may be in hand, omits to make such investment. A, must
make good to B the interest usually obtained by such investment.

3. In case of difficulty, he must be diligent in communicating with the principal and obtaining his
instructions.

4. He must conduct the business of agency with as much skill as is generally possessed by persons
engaged in similar business, unless the principal has notice of want of skill.
Illustration: A, having authority to sell on credit, sells goods to B without enquiring about his solvency.
B, at the time of sale, is bankrupt. A must make good the loss.

5. He must render proper accounts on demand.

6. He must not delegate his authority without the consent of the principal..

7. He must deliver all monies including secret commission to the principal. He can deduct his
remuneration and other lawful expenses spent by him.

8. He should not set up his own title or title of third parties to the goods of the principal in his hands.

9. If, by the nature of profession, an agent is purported to have special skill, he must exercise that degree
of skill ordinarily expected from the members of that profession.

Illustration: A solicitor, who started the proceedings under a wrong section or filed a suit in a court
having no jurisdiction, is liable.

10. He should not disclose confidential information.

11. His interest should not conflict with his duty.

duties and rights of principal

Duties of the Principal

1. To indemnify the agent against the consequences of all lawful acts.

2. To indemnify the agent against the consequences of acts done in good faith.

3. To indemnify agent for injury caused by principal’s neglect.

4. To pay the agent the commission or other remuneration agreed.

Rights of Principal

1) If the principal suffers any loss due to disregard by the agent of the directions by the principal, he
can recover damages from the agent.

2) To obtain an account of secret profits and recover them and resist a claim from remuneration.

3) To resist agent’s claim for indemnity against liability incurred.

personal liability of agent

The general rule is that only the principal can enforce, and can be held liable on, a contract entered into by
the agent. An agent is however, personally liable in the following cases.
1. An agent is liable for breach of warranty of authority. He is liable to third parties when he exceeds
his ostensible authority. He becomes liable to pay damages to the principal, when he exceeds his
actual authority but acts within the ostensible authority and enters into contracts with third parties
who are not aware of the curtailment of his authority.

2. An agent cannot claim performance of a contract entered into by him apparently on behalf of the
principal but really on his own account.

3. An agent is personally liable:

when the contract expressly provides;

when he does not sign the negotiable instrument as agent;

when he acts for a foreign principal;

when he acts for an undisclosed principal;

when the agency is coupled with interest;

when the trade usage makes him liable; and

when the principal cannot be sued as he is a minor or a foreign sovereign etc.

termination of agency

Sec.201describes the modes of termination of agency.

Termination of agency by act of the parties:

1. Agreement: The relation of principal and agent may be terminated at any time, at any stage by the
mutual agreement between them.

2. Revocation by the Principal: The principal may revoke the authority of the agent at any time.

3. Revocation by the Agent: An agency may also be terminated by an express renunciation by the agent
after giving a reasonable notice to the principal.

Termination by agency by operation of law :

1. Performance of the contract: Agency is terminated when the object is accomplished or when the
accomplishment of the object becomes impossible.

2. Expiry of time: When the agent is appointed for a specific period of time, the agency comes to an end
after the expiry of that time even if the work is not completed.

3. Death and Insanity: When the gent or the principal dies or becomes of unsound mind, the agency is
terminated.

4. Insolvency: The insolvency of the principal or agent puts an end to the insolvency of the agency.
5. Destruction of Subject-matter: When the subject matter of an agency is destructed, the agency comes
to an end.

6. Principal becoming an alien enemy: When the agent and principal are aliens, the contract of agency is
valid so long as the countries of the principal and the agent are at peace. If war breaks out between
the two countries, the contract of agency is terminate.

7. Dissolution of a company: When a company is dissolved, the contract of agency with or by the
company automatically comes to an end.

8. Termination of sub-agent’s authority: The termination of an agent’s authority puts an end to the sub-
agents authority.

review questions

1. Define Contract of Indemnity and Contract of Guarantee and bring out differences between them.

2. What are the rights of the Surety against (i) Principal debtor, (ii) Creditor, and (iii) Co-Sureties.

3. When the Surety is discharged from his liabilities?

4. Define bailment. What are the rights and duties of bailor and bailee?

5. What are the duties of finder of lost goods?

6. What are the different methods of creation of agency?

7. What are the rights and duties of an agent?

LESSON - 11

SALE OF GOODS ACT, 1930

Section 4 of the Sale of Goods Act defines a contract of sale as “a contract whereby the seller
transfers or agrees to transfer the property in goods to the buyer for a price”. The term “Contract of Sale”
includes an actual sale as an agreement to sell. It may be absolute or conditional.

When the property in the goods is transferred, the contract is called a sale. The contract is called
an agreement to sell, when the transfer of property is take place at a future time or subject to fulfillment of
some condition. An agreement to sell becomes a sale, when the time lapses or such condition is fulfilled.

essentials of a contract of sale

1. Two parties: There must be two distinct parties, i.e. a buyer and a seller to effect a contract of sale
and they must be competent to contract.

2. Goods: There must be some goods which are to be transferred from the seller to the buyer.

3. Price: The consideration for the contract of sale, called price, must be money.

4. Essential elements of valid contract: All the essential elements of a valid contract must be present in
the contract of sale.

Differences between a sale and an agreement to sell may be summarised as follows:

Sale Agreement to Sell

1. Ownership is transferred to the buyer. Ownership does not pass to the buyer. It
remains with the seller.

2. It is an executed contract. It is an executory contract.

3. It creates rights in rem. It creates rights in personam.

4. The seller can sue for the price though The seller can sue for the damages if the
the goods are in his possession buyer refuses to take delivery and pay the
price.
5. If the seller re-sells the goods, the buyer In case of re-sale the buyer can only
can claim damages for conversion and claim damages.
exercise right of recovery of goods from
third parties who are aware of the prior
sale.

6. If the goods are destroyed by accident, In such cases, the seller has to bear the
the buyer has to bear the loss, though the loss, even if the goods are in the
goods are in the possession of the seller. possession of the buyer.

7. If the buyer becomes insolvent, the seller, If the buyer becomes bankrupt before
in the absence of a lien, must deliver the payment of price, the seller may refuse to
goods to the official receiver and claim deliver the goods unless paid for, since
only ratable dividend for the price due. ownership rests with the seller.

8. If the seller becomes insolvent, the buyer In such cases, the buyer who has paid the
can recover the goods from the official price can only claim ratable dividend.
receiver since the ownership has passed
to him.

Distinction between a Sale and a Hire-Purchase Agreement

Sale Hire-Purchase Agreement

1. Ownership is transferred from the seller Ownership is transferred from the seller
to the buyer, as soon as the contract is to the hire-purchaser only when a certain
entered into. agreed number of instalments is paid.

2. The position of the buyer is that of the The position of the hire-purchaser is that
owner. of the bailee.

3. The buyer cannot terminate the contract The hire-purchaser has an option to
and as such is bound to pay the price of terminate the contract at any stage, and
the goods. cannot be forced to pay the further
instalments.

4. If the payment is made by the buyer in
instalments, the amount payable by the
buyer to the seller is reduced, for the
payment made by the buyer is towards
the price of the goods.
The instalments paid by the hire-
purchaser are regarded as hire charges
and not as payment towards the price of
the goods till option to purchase the
goods is exercised.

subject-matter of contract of sale

Goods form the subject-matter of a contract of sale. According to Sec.2(7), ‘goods’ means every
kind of movable property other than actionable claims and money; and includes stocks 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. Trade marks, copyrights, patent rights, goodwill, electricity,
water, gas are all goods.

subject-matter of contract of sale

classification of goods

The goods which form the subject of a contract of sale may be either –

1. Existing goods, or

2. Future goods, or

3. Contingent goods

1. Existing Goods

These are the goods which are owned or possessed by the seller at the time of sale. Only existing
goods can be the subject of a sale. The existing goods may be –

1) Specific goods: These are goods which are identified and agreed upon at the time of a contract of
sale is made. For example, a specified watch or scooter.

2) Ascertained goods: These are the goods which become ascertained subsequent to the formation of a
contract of sale.

3) Unascertained goods: These are the goods which are not identified and agreed upon at the time of
the contract of sale. They are defined only by description and may form part of a lot.

2. Future Goods

These arethe goods which a seller does not possess at the time of the contract but which will be
manufactured or produced or acquired by him after the making of the contract of sale.

3. Contingent Goods

These are the goods the acquisition of which by the seller depends upon a contingency which may
or may not happen.

document of title to goods

A document of title to goods is one which enables its possessor to deal with the goods described
in it as if he were the owner. It is used in the ordinary course of business as proof of the possession or
control of goods. It authorises, either by endorsement or by delivery, its possessor to transfer or receive
goods represented by it [Sec.2 (4)]. It symbolises the goods and confers a right on the purchaser to
receive the goods or to further transfer such right to another person. This may be done by mere delivery
or by proper endorsement and delivery.

Conditions to be fulfilled by a document of title of goods

• It must be used in the ordinary course of business.

• The undertaking to deliver the goods to the possessor of the document must be unconditional.

• The possessor of the document, by virtue of holding such document, must be entitled to receive the
goods unconditionally.

Some instances of documents of title of goods are given below:

Bill of Lading: It is a document which acknowledges receipt of goods on board a ship and is signed
by the captain of the ship or his duly authorised representative.

Dock warrant: It is a document issued by a dock owner, giving details of the goods and certifying
that the goods are held to the order of the person named in it or endorsee. It authorises the person
holding it to receive possession of the goods.

Warehouse-keeper’s or Wharfinger’s Certificate: It is a document issued by a warehouse-keeper or

a wharfinder stating that the goods specified in the document are in his warehouse or in his wharf.

Railway Receipt: It is a document issued by the railway acknowledging receipt of goods. It is to be

presented by the holder or consignee at the destination to take delivery of the goods.

Delivery Order: It is a document containing an order by the owner of the goods to the holder of the
goods on his behalf, asking him to deliver them to the person named in the document.

transfer of property

The primary rules for ascertaining when the property in goods passes to the buyer are as follows:

1) Where there is a contract for the sale of unascertained goods, no property in the goods is transferred
to the buyer unless and until the goods are ascertained (Sec.18).

2) Where there is a contract for the sale of specific or ascertained goods, the property in them is
transferred to the buyer at such time as the parties to the contract intend it to be transferred. For the
purpose of ascertaining the intention of the parties, regard shall be had to the terms of the contract, the
conduct of the parties and the circumstances of the case (Sec. 19). Where the intention of the parties
cannot be ascertained, the following rules shall apply:

 Specific goods: In case of a contract for the sale of specific goods (a) in a deliverable state, if the
contract is unconditional, property passes as soon as the contract is entered into [Sec.20], (b) if the
seller has to do something to put them in a deliverable state, property passes only when such thing is
done and notice thereof is given to the buyer [Sec.21], (c) in a deliverable state if the seller has to do
something for the purpose of ascertaining the price, property will pass only when such act is done ad
notice thereof is given to the buyer [Sec.22].

 Unascertained goods: In case of unascertained or future goods sold by description, property passes
only when goods according to the description are unconditionally appropriated to the contract and the
 buyer is given a notice thereof. Delivery to a carrier (the seller not reserving right of disposal,
Sec.25) amounts to an unconditional appropriation (Sec.23).

 Goods sent on approval: In case of goods delivered by a buyer on approval or ‘on sale or return’
property passes when he signifies his approval or acceptance or when he does some act adopting the
transaction. If he retains the goods without giving notice of rejection, property passes when the time
agreed for returning the goods expires or after a reasonable time has expired (Sec.24).

condition and warranty

A term or a stipulation in a contract of sale with reference to goods may be either a condition or a
warranty. A condition is a term which is essential to main purpose of the contract and hence is the
foundation of the contract. The effect of a breach of condition is that it gives the right to the aggrieved
party to treat the contract as void and also to claim damages, if any.

A warranty is a term which is collateral to the main purpose of the contract and hence only a subsidiary
promise. The breach of warranty does not give right to the aggrieved party to treat the contract as void
but entitles him to claim damages only. In the absence of contract to the contrary, time of delivery of
goods is treated as condition and for payment of price, as warranty.

In the following cases, the breach of a condition will be treated as breach of warranty only:

(i) when the buyer waives the condition; or

(ii) when the buyer treats the breach of condition as a breach warranty and does not treat the contract as
void; or

(iii) where the contract of sale is inseparable and the buyer has accepted the goods or part thereof; or

(iv) where the contract is for specific goods, the property in which has passed to the buyer.

Conditions and warranties may be express or implied. When they are definitely written in the contract,
they are called express conditions and warranties. They are called implied conditions and warranties,
when they are not written in the contract but applied to the contract either by operation of law or by trade
custom.

implied conditions

1. As to title to goods: There is an implied condition that the seller has a right to sell in case of sale and
that in the case of agreement to sell, he will have the right to sell the goods at the time when the
property is to pass.

Rowland Vs Divall: A purchased a car from B for a certain price and used it for some period.
Subsequently, it was found that the car was stolen by B and therefore, A had returned back the car to the
true owner. It was held that A could recover the full price paid to B.

2. Sale by description: The implied condition is that the goods delivered must correspond with the
description.
Example: Where a machine was described as almost new and used very little but when delivered, was
found to be an old and repaired one, it was held that the buyer was entitled to reject the machine.

3. Sale by sample: The implied condition is —

 that the goods delivered shall correspond with the sample,

 that the buyer shall have a reasonable opportunity of comparing the bulk with the sample and

 that the goods shall be free from any defect rendering them unmerchantable, which would not be
apparent on reasonable examination of the sample.

Drummond & Sons Vs Van Ingen & Co: Where worsted coating was supplied corresponding with the
sample but not suitable for stitching due to a latent defect, it was held that the buyer was entitled to reject
the goods.

4. Sale by sample as well as description: In the case of sale of goods by sample as well as description,
the goods delivered must correspond with both sample as well as description.

5. As to quality or fitness: The general rule is “Caveat Emptor”, i.e. let the buyer beware. So, the
seller need not disclose the faults in the goods he sells nor need he guarantee that the goods are fit for
the purposes of the buyer. So, the buyer takes them as they come. But in the following cases, there
is an implied condition as to quality or fitness of goods for any particular purpose.

a) Where the buyer makes known the purpose to the seller, who is ordinarily dealing with sale of goods
of that description and the buyer relies on the judgement of the seller.

b) Where the seller does not disclose the faults in his goods and such faults cannot be detected on
reasonable examination.

c) Where the seller makes a statement and the buyer relies upon it.

Baldry Vs Marshall: A, purchased a motor car from B for using it as a tourist car. B, the seller knew the
purpose. The car turned out to be unfit for the purpose. Held, A the buyer could repudiate the contract.

But there is no implied condition as to fitness or quality of goods when they are sold under the patent or
trade name.

E.W. Evans Vs Stella Benjamin: Where a refrigerator was sold, it was held that the name of the article
itself implies that it is fit for a particular purpose.

6. As to Merchantability: In case of sale of good by description, there is an implied condition that the
goods shall correspond with the description and also that they shall be of merchantable quality.

Grant Vs Australian Knitting Mills Ltd: The buyer was supplied wollen underpants by the manufacturers.
The buyer wore them for sometime and contracted a skin disease. Held, that the buyer was entitled to
damages.
Exception: If the buyer has examined the goods, there is no implied condition as to quality of goods as
regards defects which such examination must have revealed.

7. As to wholesomeness: In the case of sale of visions, there is an implied condition that they are fit for
immediate use. A, purchased a bun from B and injured his teeth by biting a stone in the bun. B was
held liable.

implied warranties

1. Warranty of Quiet Possession: There is an implied warranty that the buyer shall have and enjoy
quiet possession.

2. Warranty against Encumbrances: There is an implied warranty that the goods shall be free from
encumbrance or charge in favour of any third party not declared or known to the buyer before or at
the time of contract.

rights and duties of buyer and seller

Rights of Buyer

(i) The buyer has the right to have the delivery of goods as per the contract.

(ii) He has the right to reject the goods, if the seller sends to the buyer a different quantity of goods than
he ordered.

(iii) He has the right to repudiate the contract, if the seller violates the terms and conditions.

(iv) He has the right to examine the goods.

(v) He has the right against the seller for breach of contract. He may file a suit for damages or suit for
price or suit for specific performance or suit for breach of warranty.

Duties of the Buyer

(1) He must apply for delivery of the goods.

(2) He must accept the goods and pay the price.

(3) If the goods are delivered by instalments, he may refuse to accept such delivery.

(4) Where the seller sends to the buyer a quantity of goods less than or more than the goods ordered for,
the buyer may refuse or accept the entire goods or accept partly and reject the rest. Where he accepts,
he must pay for them.

(5) Where the seller sends goods of a different description along with the goods ordered for, he may
accept the goods ordered for and reject the rest.
Rights of the Seller

(i) In the absence of a contract to the contrary, delivery of goods and payment of price are concurrent
conditions. So, he may refuse to deliver the goods, if the buyer has not paid the price.

(ii) He is entitled to sue for the recovery of price or damages in case of default of the buyer.

(iii) The unpaid vendor has – right of lien, right of stoppage of goods in transit and right to re-sell the
goods.

Duties of the Seller

(1) He must prepare the invoice showing the cost of the goods, procure bill of lading and ship the goods
at the port of shipment within the time fixed or within a reasonable time, if no time is fixed.

(2) He must deliver the goods when applied for by the buyer. Such delivery may be actual, constructive
or symbolic delivery.

(3) The goods must be delivered at the place fixed by the contract. Where the contract does not specify
the place, goods must be delivered at the place where the goods are at the time of contract. In case of
sale of future goods, they must be delivered at the place where they are manufactured or produced.

(4) Delivery must be made during business hours.

(5) He must get the goods insured when they are delivered to a carrier or wharfinger.

(6) He has to bear the cost of delivery.

sale by non-owners

The general rule of law is that “no one can give that which one has not got”. This is expressed in
Latin maxim “nemo dat qut non habet”. So, a person who has no title to goods cannot convey property in
goods to the transferee or buyer. For example, if A steals an article and sells it to B, B does not become
the owner of the article. But to this rule the following are exceptions:

1. Sale by a person no the owner or title by Estoppel; Where the owner by his conduct, or by an act or
omission, leads the buyer to believe that the seller has the authority to sell and induces the buyer to
buy the goods, he shall be stopped from denying the fact of want of authority of the seller. The buyer
in such a case gets a better title than that of the seller.

2. Sale by Mercantile Agent: A sale by a mercantile agent is valid provided –

 he is in possession of goods or documents of title to goods with the consent of the owner;

 he sells them in the ordinary course of business;

 the buyer has acted in good faith; and

 he has no notice of seller’s defective title.

3. Sale by one of Joint-Owners: A sale by one of the several joint-owners is valid if –

• he is in sole possession of goods with the consent of the other co-owners;

• the buyer has acted in good faith; and

• he has no notice of want of right to sell.

4. Sale by a person in possession of goods under a voidable contract: A sale by a person who is in
possession of the goods under a voidable contract is valid if:

 he sells them before the contract is rescinded;

 the buyer has acted in good faith; and

 he has no notice of the seller’s defective title.

5. Sale by seller in possession of goods after sale: When a seller, after having sold the goods previously,
re-sells them to another buyer, he conveys good title to such another buyer provided:

• he is in possession of goods or documents of title of goods as seller, but not as bailee or hirer etc;

• the buyer has acted in good faith;

• has no notice of the previous sale; and

• he has actually received the possession of goods.

6. Sale by buyer in possession of goods after sale: A sale by a buyer who has bought or agreed to buy
the goods is valid if –

 he is in possession of the goods or documents of title to goods with the consent of the seller;

 the buyer has acted in good faith; and

 he has not notice of lien or any other right of the owner.

7. Sale by unpaid seller: Where an unpaid seller who has exercised his right of lien or stoppage in
transit re-sells the goods, the buyer acquires a good title to the goods as against the original buyer.

8. Sale by finder of lost goods: A finder of goods may sell under certain circumstances.

9. Sale under orders of court: A person who purchases goods under a court sale gets good title.

10. Sale by a pledge: A pledge can sell and convey good title, under certain circumstances.
rights of an unpaid seller

The seller of goods is deemed to be an “unpaid-seller” where —

a) The whole of the price has not been paid or tendered or

b) When a bill of exchange or any other negotiable instrument has been given as conditional payment
but the same has been dishonoured.

An unpaid vendor has the right of withholding the delivery of goods when the property in goods has not
passed to the buyer.

rights of an unpaid seller against the goods

He has the following rights when the property in goods has passed to the buyer:

1. Right of Lien

The unpaid vendor who is in possession of the goods, can retain such possession until the price is
paid or rendered. And if the goods are partly delivered, the an exercise this right on the remaining goods
except when such part delivery amounts to show that he has given up the right of lien. This right of lien
extends to the whole of goods in the possession of the unpaid vendor and can be exercised only for the
recovery of the price of goods but not the amounts like godown rent, incurred in storing the goods in
exercise of lien for the practice.

He can exercise the right of lien —

 where the goods have been sold without any stipulation as to credit;

 where the goods have been sold on credit, but the term of credit has expired and the price remains
unpaid;

 where the buyer becomes bankrupt.

This right of lien is lost —

 when the goods are delivered by him to a carrier, or other bailee for the purpose of transmission
without reserving the right of disposal;

 when the buyer or his agent lawfully obtains the possession of goods ;

 when the unpaid vendor has given up his right of lien.

2. Right of stoppage of goods in transit

When the seller has parted with the possession of goods, he may regain and retain such
possession by stopping the goods in transit, from being delivered to the buyer. This right is available (1)
when the goods are in transit and (2) when the buyer becomes bankrupt.

Following are the rules regarding duration of transit:

a) Goods are deemed to be in transit so long as the buyer or his agent does not take delivery of the
goods.

b) The transit is at an end, when the buyer or his agent obtains delivery before the arrival of the goods at
their destination.

c) The transit is at an end, if the carrier or other bailee acknowledges to the buyer after the arrival of the
goods at the destination the he holds the possession of goods as a bailee for the buyer.

d) The goods are in transit, if the buyer or his agent rejects the goods.

e) The transit is at an end if the carrier or other bailee wrongfully refuses to deliver the goods to the
buyer.

The unpaid vendor must give notice of his claim to the carrier or other bailee, who is in possession of the
goods, in order to exercise this right of stoppage. Such notice takes effect when it reaches the carrier or
his agent who is in actual possession of goods. On receipt of notice of the stoppage, the carrier must re-
deliver the goods to or according to the directions of the seller. The seller shall have to bear the expenses
of such re-delivery.

3. Right of Re-Sale

The unpaid vendor can re-sell the goods —

1) without notice to the buyer if the goods are perishable goods and

2) with notice to the buyer of his intention to re-sell, if the goods are not perishable.

He can retain the profit resulting from such re-sale and claim damages from the original buyer for loss if
any. But if he does not give notice to the buyer of his intention to re-sell the goods where necessary, he
must pay back the surplus or profit to the original buyer and bear the loss, if any.

rights of an unpaid seller against the buyer personally

These are the rights which an unpaid seller may enforce against the buyer personally, in addition
to his rights against the goods.

1. Suit for Price

Where property has passed to the buyer and the buyer wrongfully neglects or refuses to pay for the goods,
the seller may sue him for the price of the goods.

2. Suit for damages for non-acceptance

Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may
sue him for non-acceptance and claim damages.

3. Repudiation of contract before due date

Where the buyer repudiates the contract before the date of delivery, the seller may either –
 (a) treat the contract as subsisting and wait till the date of delivery, or

(b) he may treat the contract as rescinded and sue for damages for the breach.

4. Suit for interest

Where there is a specific agreement between the seller and the buyer as to interest on the price of
the goods from the date on which payment becomes due, the seller may recover interest from the buyer.

remedies for breach of contract of sale

The Sale of Goods Act gives the following remedies to a seller and a buyer for breach of a
contract of sale:

Remedies available to the Seller:

(a) Sue buyer for price

(b) Sue buyer for damages for non-acceptance of the goods

(c) Sue buyer for damages for repudiation of contract by the buyer before due date

(d) Sue buyer for interest.

Remedies available to the Buyer:

(a) Sue the seller for damages for non-delivery of the goods

(b) Sue the seller for specific performance

(c) Sue the seller for breach of warranty

(d) Sue the seller for damages for repudiation of contract by the seller before due date

(e) Sue the seller for interest

review questions

1. Distinguish between sale and agreement to sell.

2. What are the implied conditions and warranties laid down under the Sale of Goods Act?

3. What are the rights and duties of buyer and seller?

4. What are the rights of an unpaid seller?

5. When the sale by non-owner is valid?

LESSON - 12

CONSUMER PROTECTION ACT, 1986

The Consumer Protection Act, 1986 marks the growth of the enlightened consumer movement in
our country. It intends to provide simple, speedy and inexpensive redressal to consumer grievances,
particularly against unfair trade practices or unscrupulous exploitation of consumers.

scheme of the act

The salient features of the act are summed up as under:

The act applies to all goods and services unless specifically exempted by the Central Government.

It covers all the sectors whether private, public or cooperative.

The provisions of the act are compensatory in nature.

It enshrines the following rights of the consumers:

(i) the right to be protected against the marketing of goods which are hazardous to life and property;

(ii) the right to be informed about the quality, quantity, potency, purity, standard and price of goods so
as to protect the consumer against unfair trade practices.

(iii) the right to be assured, wherever possible, access to a variety of goods at competitive prices;

(iv) the right to be heard and to be assured that consumers’ interests will receive due consideration at
appropriate forums;

(v) the right to seek redressal against unfair trade practices or unscrupulous exploitation of consumers;
and

(vi) the right to consumers education.

The act envisages establishment of Consumer Protection Councils at the Central and State levels whose
main object will be to promote the rights of the consumers.

To provide simple, speedy and inexpensive redressal of consumer grievances, the act envisages a
three-tier quasi-judicial machinery at the National, State and District levels. At the national level, these
will be a National Consumer Disputes Redressal Commission (to be known as the ‘National
Commission’). At the state level, there will be Consumer Disputes Redressal Commissions (to be known
as ‘State Commission’) and at the district level, District Consumer Disputes Redressal Forums (to be
known as ‘District Forums’).

The provisions of this act are in addition to and not in derogation of the provisions of any other
law for the time being in force.

who is a consumer?
 All of us are consumers of goods and services. The producers of some goods and services also
consume various other goods and services produced by others. In the Consumer Protection Act, the word
‘consumer’ has been defined separately for the purpose of goods and services.

For the purpose of goods, a consumer means a person belonging to the following categories:

(1) One who buys any goods for a consideration which has been paid or promised or partly paid and
partly promised or under any system of deferred payment.

(2) It includes any user of such goods other than the person who actually buys goods and such use is
made with the approval of the purchaser.

(3) One who hires any service or services for a consideration which has been paid or promised or partly
promised or under any system of deferred payment.

(4) It includes any beneficiary of such service other than the one who actually hires the service for
consideration and such services are availed with the approval of such person.

who can file a complaint?

Following categories of persons may file a complaint under the act:

 A consumer

 Any voluntary consumer organization, registered under the Societies Registration Act, 1860 or the
Companies Act, 1956 or under any other law for the time being in force.

 The Central Government

 The State Government or Union Territory Administrations.

what constitutes a complaint?

Under the Act, complaint means any allegation in writing made by a complainant in regard to one or more
of the following:

(1) That he has suffered loss or damages as a result of any unfair trade practices adopted by any trader.

(2) That the goods mentioned in the complaint suffer from one or more defects.

(3) That services mentioned in the complaints suffer from deficiencies in any respect.

(4) That a trader has charged for the goods mentioned in the complaint, a price in excess of the price.

(i) fixed by or under any law for the time in force; or

(ii) displayed on goods; or

(iii) displayed on any packet containing such goods.

where to file a complaint?

 If the cost of the goods or services and compensation asked for, is less than Rs. 20 lakhs, then the
complaint can be filed in the District Forum.

If the cost of the goods or services and compensation asked for is more than Rs.20 lakhs but less
than Rs.1 crore, the complaint can be filed before the State Commission.

If the cost of goods or services and compensation asked for, exceeds Rs.1 crore, the complaint can be
filed before the National Commission at New Delhi.

how to file a complaint?

Procedures for filing complaints and seeking redressal are simple and speedy.

There is no fees for filing a complaint before the District Forum, the State Commission or the
National Commission.

The complaint or his authorised agent can present the complaint in person.

The complaint can be sent by post to the appropriate Forum Commission.

A complaint should contain the following information:

a) The name, description and the address of the complainant;

b) the name, description and address of the opposite party or parties, as the case maybe, as far as they
can be ascertained;

c) the facts relating to complaint and when and where it arose;

d) documents, if any, in support of the allegations contained in the complaint;

e) the relief which the complainant is seeking.

The complaint should be signed by the complainant or his authorised agent.

relief available to consumers

Depending on the nature of relief sought by the consumer and facts, the Redressal Forums may
give orders for one or more of the following reliefs:

a) removal of defects from the goods;

b) replacement of the goods;

c) refund of the price paid; or

d) award of compensation for the loss or injury suffered.

procedure for filing the appeal

 Appeal against the decision of a District Forum can be filed before the State Commission within a
period of thirty days. Appeal against the decision of a State Commission can be filed before the National
Commission within a period of 30 days. Appeal against the orders of the National Commission can be
filed before the Supreme Court within a period of 30days.

There is no fee for filing appeal before the State Commission or the National Commission.

Procedure for filing the appeal is the same as that of complaint, except that the application should
be accompanied by the orders of the District Forum/ State Commission, as the case may be, and reasons
for filing the appeal should be specified.

time limit for deciding complaint/ appeal

The thrust of the act is to provide simple, speedy and inexpensive redressal to consumer
grievances. To ensure speedy disposal of consumer grievance, the following provisions have been
incorporated in the Act and the rules framed thereunder:

It is obligatory on the complainant or appellant or their authorised agents and the opposite parties
to appear before the Forum/ Commission on the date of hearing or any other date to which hearing could
be adjourned.

The National Commission, State Commission and District Forums are required to decide
complaints, as far as possible, within a period of 3 months from the date of notice received by the
opposite party where complaint does not require analysis or testing of the commodities and within five
months if it requires analysis or testing of commodities.

The National Commission and State Commission are required to decide the appeal, as far as
possible, within 90 days from the first date of hearing.

review questions

1. What is the object of Consumer Protection Act? Specify the rights of consumers.

2. Discuss the procedure of filing complaint under Consumer Protection Act.

3. What is the procedure for appeal under Consumer Protection Act?

 LESSON - 13
NEGOTIABLE INSTRUMENTS ACT, 1881
Section 13 of the Negotiable Instruments Act defines that a negotiable instrument
means a promissory note, bill of exchange or cheque, payable either to order or bearer.
FEATURES
1. The property in it passes either by mere delivery or by endorsement and delivery.
2. The holder in due course is not affected by the defect in the title of his transferor or
any previous party.
3. The holder in due course, can sue in his own name. He need not give notice to the
debtor that he has become the holder.
4. He is not affected by certain defects like fraud to which he is not a party.
5. Consideration is presumed to have passed.
6. It is convenient method of discharging payments.
The Act does not stipulate that only bills of exchange, promissory notes and
cheques are only the negotiable instruments. So, other instruments may also be added to
the list of negotiable instruments provided:

they are transferable by mere delivery and

the holder in due course can sue in his own name.
Hence, Dividend Warrants, Port Trust or Improvement Trust Debentures, Railway
Bonds payable to bearer, or Railway Receipts having the feature of negotiability are all
negotiable instruments. So, a negotiable instrument is an ordinary chattel for chose-in-
action clothed with the feature of negotiability.

PARTIES TO NEGOTIABLE INSTRUMENTS

The parties to a bill of exchange, a promissory note and a cheque are as follows:
Parties to a Bill of Exchange: (1) Drawer, (2) Drawee, (3) Acceptor, (4) Payee,
(5) Holder, (6) Indorser, (7) Indorsee, (8) Drawee in case of need, and (9) Acceptor for
honour.
Parties to a Promissory Note: (1) Maker, (2) Payee, (3) Holder, (4) Indorser, and
(5) Indorsee.
Maker, Drawer: The person who makes a promissory note is called the “maker”.
The person who makes or draws a bill of exchange or cheque is called the “drawer”.
Drawee, Acceptor: The person on whom the bill of exchange or cheque is drawn
and who is directed to pay is called the “drawee”. In case of a cheque, the drawee is
always a banker. In case of a bill of exchage, the drawee becomes the “acceptor” when
he accepts the bill, i.e. signs his accent upon the bill and delivers the same or gives notice
of such signing to the holder or to some person on his behalf. A cheque does not require
acceptance as it is intended for immediate payment.
Payee: The person named in the bill, note or cheque, to whom or to whose order
the money is to be paid, is called the “payee”. In a bill or cheque, the drawer may
himself be the payee. Where the payee named in a bill is a fictitious or non-existing
person, the bill is treated as payable to bearer.
Indorser: The person who endorses the bill, note or cheque to another is called
the “indorser”.
Indorsee: The person to whom the bill, note or cheque is endorsed is called the
“indorsee”.
MATERIAL ALTERATION
Material alteration refers to changes introduced on a cheque which affects its
fundamental character. In other words, “any change in any instrument which makes it
speak a different language, for all legal purposes from what it spoke originally” would
constitute a material alteration. If the alteration is material, it renders the cheque invalid.
Examples of Material Alteration
There is material alteration when:
 the date of the instrument is altered;
 the time of payment is altered;
 the amount is altered;
 the rate of interest is altered;
 the place of payment is altered;
 the name of payee is altered;
 a new party is added etc.
There is no material alteration when:
 a mistake is corrected;
 alteration is made with the consent of all the parties;
 alteration is made to carry out the common intention of the parties;
 blank indorsement is converted into full indorsement.
 an inchoate instrument is completed etc.

EFFECT OF MATERIAL ALTERATION

According to Sec. 87 of the Negotiable Instruments Act, if a cheque is materially
altered, it cannot be regarded as a cheque at all. Therefore, material alteration renders
the cheque void.
CROSSING OF CHEQUES
Crossing means drawing two parallel transverse lines across the face of the cheque
with or without the words “and company” in between the lines. It is a direction to the
drawee bank not to pay the amount at the counter, but only through a bank. It is made to
guard payment against forgery by unscrupulous persons.
KINDS OF CROSSING
It is of two kinds: (1) General Crossing and (2) Special Crossing.
1. General Crossing
Sec. 123 of the Negotiable Instruments Act defines General Crossing as, “where a
cheque bears across its face an addition of the words ‘And Company’ or any
abbreviation thereof, between two parallel transverse lines or of two parallel transverse
lines simply, either with or without the words ‘not negotiable’, that addition shall be
deemed to be a crossing and the cheque shall be deemed to be crossed generally”.
Two parallel transverse lines across the face of the cheque with or without the
words, “& Co”, “Account Payee only”, “Not Negotiable”, constitute general crossing.
The cheque which is crossed generally, is payable only to banker.

Specimens of General Crossing

2. Special Crossing
Sec. 124 of the Negotiable Instruments Act defines Special Crossing as, “where a
cheque bears across its face an addition of the name of a banker, with or without the
words “not negotiable”, that addition shall be deemed a crossing and the cheque shall be
deemed to be crossed specially and to be crossed to that banker”. When a cheque is
crossed specially, the amount is payable by the drawee only, only to the bank named in
the crossing.

Specimens of Special Crossing

“Account Payee Crossing”
When the words “Account Payee”, “Account Payee only” are added to the general
or special crossing, it is called Account Payee Crossing. The collecting banker must
collect the amount of the cheque for the account of the payee only and none else.
Otherwise, it is not a collection in due course and the banker is liable if the title of the
person for whom the bank collects, turns out to be defective.
“Not Negotiable” Crossing
When the words “not negotiable” are added either in general or special crossing,
the person taking the cheque cannot have and cannot give a better title than what his
transferor has. So, a ‘not negotiable’ cheque is transferable. But the transferee gets no
better title than what the transferor has.
RULES OF CROSSING
1. An uncrossed cheque may be crossed generally or specially by the drawer or the
holder.
2. A cheque crossed generally, may be crossed specially by the holder.
3. The holder may add the words “not negotiable”.
4. The banker to whom the cheque is crossed specially, may re-cross it, but only to
another bank as his agent for collection.
5. Where an uncrossed cheque or a cheque crossed generally is sent to a banker for
collection, he may cross it specially to himself. But he cannot enjoy Statutory
protection against being sued for conversion.
INDORSEMENT
It means the writing of a person’s name (otherwise than as maker) on the face or
back of a netgotiable instrument or on a slip of paper (called allonge) annexed thereto, for
the purpose of negotition (Sec.15). The person who signs the instrument is called the
‘indorser’. The person to whom the instrument is indorsed is called the ‘indorsee’.
KINDS OF INDORSEMENTS
1. Blank Indorsement or General Indorsement
When the indorser signs his name only, it is called blank indorsement. An
instrument endorsed in blank is payable to bearer. The holder of an instrument may write
above the indorser’s signature, a direction to pay the amount to or to the another person.
When the holder does so, he does not become liable as an endorser on the instrument, as
he had not signed it.
2. Special or Full Indorsement
If the indorser signs his name and adds a direction to pay the amount to or to the
order of a certain person, it is called full indorsement.
 Illustration: A bill made payable to Smith, may be endorsed in full by him as —
“Pay A or order”.
[Sd.] Smith.
An instrument having been endorsed in blank is indorsed in full, the indorser in
full is liable to the person to whom it is indorsed in full or to others who derive title
through such person.
3. Restrictive Indorsement
It is one which prohibits or restricts further negotiation or which constitute the
indorsee an agent to receive its contents for his indorser.
Examples: (1) “Pay C only” (2) “Pay D for my use” (3) “Pay D on account
of E” (4) “Pay E or order for collection”.
4. Partial Indorsement
When a part of the amount of the instrument is endorsed, it is called partial
indorsement. It is void.
Example: A holds a bill for Rs.800. A endorses thus:
“Pay Rs.400 to B or order”. (or)
“Pay B or order Rs.400 and to C or order Rs.400”.
But if the part of the amount of the instrument is already paid, the unpaid balance
may be endorsed thus: “Pay B or order Rs.400, being unpaid residue of the bill”.
5. Conditional or Qualified Indorsement
This is one which negotiates or limits the indorser’s liability, in the following
ways:
(a) By Sans Recourse Indorsement: The indorser excludes his liability by
express words in indorsement.
Examples: (1) “Pay A or order
Sans Recourse”.
(Sd.) B

(2) “Pay A at his own risk”.

(Sd.) B

(3) “Pay A without recourse to me”.

(Sd.) B
(b) By making his liability depend upon the happening of a specified event, though
such event may never happen.
Example: “Pay A or order on his marrying B”.
 (c) By making the right of the indorsee to receive the amount, depend upon the
happening of a specified event, though it may never happen.
(d) By Facultative Indorsement: This is one which extends the liability of the
indorser.
Example: “Pay A or oder
Notice of dishonour waived”.
(Sd.) B

PAYMENT AND COLLECTION OF CHEQUES

The paying banker should use reasonable care and diligence in paying a cheque so
as to abstain from any action likely to damage his customer’s credit.
PRECAUTIONS BEFORE HONOURING A CHEQUE
In order to safeguard his position, the paying banker has to observe the following
precautions before honouring a cheque:
1. Presentation of Cheque
First of all a paying banker should note whether the presentation of the cheque is
correct. It can be found out by noting the following factors.
(a) Type of Cheque: Cheques may generally be of two types - open or crossed. If
it is open one, the payment may be paid at the counter. If it is crossed, the
payment must be made only to a fellow banker.
(b) Branch: The paying banker should see whether the cheque is drawn on the
branch where the account is kept.
(c) Banking Hours: The paying banker should also note whether the cheque is
presented during the banking hours on a business day.
(d) Mutilation: If the cheque is torn into pieces or cancelled or mutilated, then the
paying banker should not honour it.
2. Form of the Cheque
Before honouring a cheque, a banker should see the form of cheque and find out
whether it is regular or not.
(a) Printed Form: The customer should draw cheques only on the printed leaves
supplied by the bankers failing which the banker may refuse to honour it.
(b) Unconditional Order: The cheque should not contain any condition.
(c) Date: Before honouring a cheque, the paying banker must see whether there is
a date on the instrument. If a cheque is ante dated, it may be paid if it has not
exceeded six months from the date of its issue otherwise it will become stale
one. If a cheque is post dated, he should honour it only on its due date.
 (d) Amount: The paying banker should see whether the amount stated in the
cheque both in words and figures agree with each other.
(e) Material Alteration: If there is any material alteration, the banker should
return it with a memorandum “Alteration requires drawer’s confirmation”.
(f) Sufficient Balance: If the funds available are not sufficient to honour a
cheque, the paying banker is justified in returning it.
(g) Signature of the Drawer: It is the duty of the paying banker to compare the
signature of his customer found on the cheque with that of his specimen
signature.
(h) Endorsement: The banker must verify the regularity of endorsement, if any,
that appears on the instrument.
(i) Legal Bar: The existence of legal bar like Garnishee order limits the duty of
the banker to pay a cheque.
CIRCUMSTANCES UNDER WHICH A CHEQUE MAY BE DISHONOURED
A paying banker is under a legal obligation to honour his customer’s mandate. He
is bound to do so under his contractual relationship with his customer. A wrongful
dishonour will have the worse effect on the banker. However, under the following
circumstances, the payment of a cheque may be refused:-
a) Countermanding: Countermanding is the instruction given by the customer of a bank
requesting the bank not to honour a particular cheque issued by him. When such an
order is received, the banker must refuse to pay the cheque.
b) Upon receipt of notice of death of a customer: When a banker receives written
information from an authoritative source, regarding the death of a particular
customer, he should not honour any cheque drawn by that deceased customer.
c) Upon the receipt of notice of insolvency: Once a banker has knowledge of the
insolvency of a customer he must refuse to pay cheques drawn by him.
d) Upon the receipt of notice of insanity: Where a banker receives notice of a
customer’s insanity, he is justified in refusing payment of the cheque drawn by him.
e) Upon the receipt of notice of Garnishee order: Garnishee order refers to the order
issued by a court attaching the funds of the judgement debtor (i.e. the customer)in
the hands of a third party (i.e. the banker). In such a case, the banker may refuse
payment.
f) Upon the receipt of notice of assignment: The bank balance of a customer
constitutes an asset and it can be assigned to any person by giving a letter of
assignment to the banker. In such case also the banker may refuse payment.
g) When a breach of trust is intended: In the case of trust account, mere knowledge of
the customers intention to use the trust funds for his personal use is a sufficient
reason to dishonour his cheque.
h) Defective Title: If the person who brings a cheque for payment has no title or his title
is defective, the banker should refuse to honour the cheque presented by him.
i) Other Grounds: A banker is justified in dishonouring a cheque under the following
circumstances also:
 a conditional one;
 drawn on an ordinary piece of paper;
 a stale one;
 post-dated one;
 mutilated;
 drawn on another branch where the account is not kept;
 presented during non-banking hours;
 if the words and figures differ;
 if there is no sufficient funds;
 if the signature of the customer is forged;
 if the endorsement is irregular and
 if a crossed cheque is presented at the counter.

COLLECTING BANKER
A collecting banker is one who undertakes to collect the amount of a cheque for
his customer from the paying banker.
DUTIES OF A COLLECTING BANKER
1. Exercise reasonable care and diligence in his collection work: As an agent, he
should exercise reasonable care, diligence and skill in collection work. He should
observe utmost care when presenting a cheque.
2. Present the cheque for collection without any delay: If there is any delay in
presenting the cheque for presentment by the banker, the customer may suffer losses
due to the insolvency of the drawer or insufficiency of funds in the account of the
drawee or insolvency of the banker himself. Hence the collecting banker has to
present the cheque for collection without any delay.
3. Notice to customer in case of dishonour of cheque: If the cheque he collects has
been dishonoured, he should inform his customer without any delay.

REVIEW QUESTIONS
1. Define Negotiable Instruments. What are the characteristics of negotiable
instruments?
2. What are the different kinds of crossing?
3. What is indorsement? What are the kinds of indorsements?
4. What are the precautions to be taken by a banker while honouring a cheque?
5. What are the duties of a collecting banker?

LESSON - 14

INDIAN PARTNERSHIP ACT, 1932

Section 4 of the Indian Partnership Act defines it 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”. Persons who have
entered into partnership with one another are called individually “partners” and collectively “a firm”, and
the name under which their business is carried on, is called the “firm name”.

essentials of partnership

1. Relationship: Partnership is the abstract relationship between partners.

2. Two or More Persons: As no one can be a partner with himself, there must be at least two persons.
The maximum number of members is 10 for a partnership carrying on banking business and 20 for a
partnership carrying on any other business.

3. Agreement or Deed: Partnership arises out of an agreement but not out of status. Such agreement,
also called as deed, may be express or implied from the conduct of the parties. It may be oral or
written. It contains details relating to —

name of the firm and the names of the partners,

nature and place of business,

the date of commencement and the duration of partnership,

capital and banking account,

sharing of profits and losses,

management,

accounts

arbitration etc.

4. Business: The object of the partnership is to carry on any business, profession, vocation, trading or
calling. Such business must be lawful. Mere holding of property in common is not partnership; e.g.
co-ownership.

5. Profit Sharing: Sharing of profits is essential though it does not mean that all those who participate
in profits are necessarily partners.

6. Carried on by all or any of them acting for all: Each partner acts as an agent as well as a principal.
Each one can act in the course of business and bind the other partners by his acts. As such, he can be
called an agent. Since he is also bound by the acts of the other partners, he can be called the
principal. Thus, the law of partnership is a branch of the general law of agency as every partner has
 implied power to bind other partners for the acts of the firm, done in the course of conduct of the
business.

kinds of partnership

1. Partnership at will: Where the partners have not provided in their deed, for the duration of
partnership or for the termination of partnership, the partnership is called “partnership at will”. A
partner may retire to dissolve the partnership at his will, by giving a notice to other partners, of his
intention to do so.

2. Particular partnership: A person may become a partner with another person in particular adventures
or undertakings.

3. Partnership for a fixed term: Where the partners fix the definite period or duration of partnership, it
is called a partnership for a fixed term.

test of partnership

In determining whether a partnership exists or not, or whether a person is a partner or not, the
real relation between the parties as shown by all relevant facts, must be taken into consideration.

The joint use of property in common in business for sharing of profits is evidence that a
partnership exists. But this is not conclusive evidence to show that a partnership exists. Likewise, an
active participation in the conduct of business is evidence that a partnership exists. But again, it is not
conclusive evidence to establish the fact of existence of partnership. For example, a servant may manage
the affairs of a firm. Yet he is not a partner. In the same way, a joint venture having no object of profit
sharing is not a partnership, while sharing of profits is evidence, though not conclusive, that a partnership
exists. So, Section 6 lays down that the receipt of a share of profit, or a payment contingent or varying
with the profits does not itself, make the recipient a partner. Therefore, the true test of partnership is not
sharing of the profit, but whether the relationship of agency exists or not.

kinds of partners

Following are different kinds of partners:

1. Actual or Ostensible Partner: An actual partner is one who actively participates in the conduct of the
business of the partnership.

2. Dormant or Sleeping Partner: He is a partner who is not known to third parties as such. He does not
take active part in the conduct of business. He occupies the position of an undisclosed principal.
Hence, third parties can sue him on discovering that he is a partner. While he has access to accounts
and examine and verify them, he has no duties to perform. Hence, no notice of his retirement to the
public is necessary nor the firm is dissolved when he becomes insane.

3. Partner by Estoppel: Where a person causes, by his conduct, another to believe him to be a partner
and on that belief such other person gives credit to the firm, he is estopped from denying that he is a
partner.
 Example: X, Y and Z are partners of a firm. X, in the presence and within the hearing of A, represents
to D that A is a partner of their firm. A does not contradict this representation. A, on faith of that
representation, lent Rs.5000 to the firm. A, is liable as a partner.

4. Partner by Holding Out: Where a person represents himself or allows others to represent him as a
partner of a particular firm, he becomes liable to all those who act and lend money to the firm, on the
faith of such representation.

Example: A, represents himself as a partner of a particular firm. D on the faith of the representation,
lends credit to the firm. A becomes liable.

registration of firms

The Partnership Act does not provide for the compulsory registration of firms. It has left it to the
option of the firms to get themselves registered. But indirectly, by creating certain disabilities from
which an unregistered firm suffers, it has made the registration of firms compulsory.

procedure for registration

The registration of a firm may be effected at any time by filling an application in the form of a
statement, giving the necessary information, with the Registrar of Firms of the area.

The application for registration of a firm shall be accompanied by the prescribed fee. It shall
state:

(a) the name of the firm;

(b) the place or principal place of business of the firm;

(c) the names of other places where the firm carries on business;

(d) the date when each partner joined the firm;

(e) the names in full and permanent addresses of the partners;

(f) the duration of the firm.

The statement shall be signed by all the partners or by their agents specially authorised on their behalf
[Sec. 58(1)]. It shall also be verified by them in the prescribed manner [Sec. 58(2)].

When the Registrar is satisfied that the above provisions have been duly compiled with, he shall
record an entry of the statement in the Register of Firms. He shall then issue under his hand a certificate
of registration. Registration is effective from the date when the Registrar issues a Certificate of
Registration.

effects of non-registration (Sec. 69)

1. Suits between partners and firm: A partner of an unregistered firm cannot sue the firm or any
partners of the firm to enforce a right arising from a contract or conferred by the Partnership Act.

2. Suits between firm and third parties: An unregistered firm cannot sue a third party to enforce a
right arising from a contract until —

the firm is registered, and

the names of the persons suing appear as partners in the Register of Firms [Sec. 69(2)].

3. Claim of set-off: An unregistered firm or any partner thereof cannot claim a set-off in a proceeding
instituted against the firm by a third party to enforce a right arising from a contract, until the
registration of the firm is effected [Sec. 69(3)].

relations of partners

The relations of the partners of a firm to one another are usually governed by the agreement
among them. Such agreement may be express or implied.

rights of a partner

1. Right to take part in Business

The partnership agreement usually provides the mode of the conduct of the business. Subject to
any such agreement between the partners, every partner has a right to take part in the conduct of business
[Sec. 12(a)]. This is based on the general principle that partnership business is the common business of
all the partners.

2. Right to be Consulted

Every partner has an inherent right to be consulted in all matters affecting the business of the
partnership and express his views before any decision is taken by the partners.

3. Right of Access to Accounts

Every partner has a right to have access to and inspect and copy any of the books of the firm.

4. Right to Share in Profits

In the absence of any agreement, the partners are entitled to share equally in the profits earned
and are liable to contribute equally to the losses sustained by the firm.

5. Right to Interest on Capital

The partnership agreement may contain a clause as to the right of the partners to claim interest on
capital at a certain rate. Such interest, subject to contract between the partners, is payable only out of
profits, if any, earned by the firm.

6. Right to Interest on Advances

 Where a partner makes, for the purposes of the business of the firm, any advance beyond the
amount of capital, he is entitled to interest.

7. Right to be Indemnified

A partner has authority, in an emergency, to do all such acts for the purpose of protecting the firm
from loss as would be done by a person of ordinary prudence, in his own case, acting under similar
circumstances. Such acts of the partner bind the firm. If as a consequence of any such act, the partner
incurs any liability or makes any payment, he has a right to be indemnified.

8. Right to Use of Partnership Property

Subject to contract between the partners, the property of the firm must be held and used by the
partners exclusively for the purposes of the business of the firm. No partner has a right to treat it as his
individual property. If a partner uses the property of the firm directly or indirectly for his private purpose,
he must account to the firm for the profits which he may have earned by the use of that property.

9. Right of Partner as Agent of the Firm

Every partner for the purposes of the business of the firm is the agent of the firm.

10. No New Partner to be Introduced

Every partner has a right to prevent the introduction of a new partner unless he consents to that or
unless there is an express term in the contract permitting such introduction. This is because partnership
is founded on mutual trust and confidence.

11. No Liability before Joining

A person who is introduced as a partner into a firm is not liable for any act of the firm done
before he became a partner.

12. Right to Retire

A partner has a right to retire (a) with the consent of all other partners, or (b) in accordance with
an express agreement between the partners, or (c) where the partnership is at will, by giving notice to all
the other partners of his intention to retire.

13. Right of Outgoing Partner to Share in the Subsequent Profits

Where a partner has died, or has ceased to be a partner by retirement, expulsion, insolvency, or
any other cause, the surviving or continuing partners may carry on the business with the property of the
firm without any final settlement of accounts as between them and the outgoing partner or his estate. In
such a case, legal representative of the deceased partner or the outgoing partner is entitled to such share of
the profits as is proportionate to his share in the property of the firm.
 duties of a partner

Partnership is a contract of uberrimae fide. The partners must act with utmost good faith as the
very basis of partnership is mutual trust and confidence. According to Sec. 9, which deals with the
general duties of partners, partners are bound —

(a) to carry on the business of the firm to the greatest common advantage,

(b) to be just and faithful to each other, and

(c) to render true accounts and full information of all things affecting the firm to any partner or his legal
representative.

The other duties are spread over the Partnership Act. These duties are summed as under:

1. To carry on business to the greatest common advantage

Every partner is bound to carry on the business of the firm to the greatest common advantage. He
is bound, in all transactions affecting the partnership, to do his best in the common interest of the firm.

2. To observe faith

Partnership is a fiduciary relation. Every partner must be just and faithful and observe utmost
good faith towards every other partner of the firm.

3. To indemnify for fraud

Every partner is bound to indemnify the firm for any loss caused to it by his fraud in the conduct
of the business of the firm.

4. To attend diligently

It is the duty of every partner to attend diligently to his duties in the conduct of the business of the
firm [Sec. 12(b)], and to use his knowledge and skill to the common advantage of all the partners.

5. Not to claim remuneration

A partner is not entitled to receive any remuneration in any form for taking part in the conduct of
the business of the firm. It is however, usual to allow some remuneration to the working partners
provided there is a specific agreement to that effect.

6. To share losses

It is the duty of every partner to contribute to the losses of the firm. In the absence of an
agreement to the contrary, the partners are bound to contribute equally to the losses sustained by the firm.
An agreement to share profits implies an agreement to share losses also.

7. To indemnify for willful neglect

 Every partner is bound to indemnify the firm for any loss caused to it by his willful neglect in the
conduct of the business of the firm.

8. To hold and use property of the firm exclusively for the firm

It is the duty of every partner of the firm to hold and use the property of the firm exclusively for
the purposes of the business of the firm.

9. To account for personal profits

If a partner derives any benefit, without the consent of the other partners, from partnership
transactions, he must account for it and pay it to the firm. This is because the relationship between
partners is a fiduciary relationship and no partner is entitled to make any personal profit.

10. To account for profits in competing business

A partner must not carry on any business of the same nature as competing with that of the firm.
If he does that he is bound to account for and pay to the firm all profits made by him in that business.

11. To act within authority

Every partner is bound to act within the scope of his actual or implied authority. Where he
exceeds the authority conferred on him and the firm suffers a loss, he shall have to compensate the firm
for any such loss.

12. To be liable jointly and severally

Every partner is liable, jointly with all the other partners and also severally, for all the acts of the
firm done while he is a partner.

13. Not to assign his rights

A partner cannot assign his rights and interest in the firm to an outsider so as to make him the
partner of the firm. He can, however, assign his share of the profit and his share in the assets of the firm.

liabilities of partners in relation to third parties

1. Liability of a partner for acts of the firm (Sec.25). Every partner is liable, jointly with all the other
partners and also severally, for all acts of the firm done while he is a partner. The significance of
joint and several liability is that for every act of the firm a partner can be sued individually and also
jointly with other partners.

2. Liability of the firm for wrongful acts of a partner (Sec.26). Where, by the wrongful act or
omission of a partner acting in the ordinary course of the business of the firm, or with the authority of
his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable
therefor to the same extent as the partner.

3. Liability of firm for misapplication (Sec.27). A firm is liable to make good the loss where –
• a partner acting within the scope of his apparent authority receives money or property from a third
party and misapplies it; or

• the firm in the course of its business receives money or property from a third party, and the same is
misapplied by any of the partners while it is in the custody of the firm.

minor as a partner

According to Sec.11 of the Indian Contract Act, an agreement by or with a minor is void. As
such, he is incapable of entering into a contract of partnership. But with the consent of all the partners for
the time being, a minor may be admitted to the benefits of partnership [Sec.30(1)].

The position of a minor partner may be studied under the following two heads:

1. Position before attaining majority:

Rights:

(a) He has a right to such share of the property and of profits of the firm as may have been agreed upon.

(b) He has a right to have access to and inspect and copy any of the accounts, of the firm [Sec.30(2)] but
not books.

(c) When he is not given his due share of profit, he has a right to file a suit for his share of the property of
the firm. But he can do so only if he wants to sever his connection with the firm [Sec.30(4)].

Liabilities:

(i) The liability of the minor partner is confined only to the extent of his share in the profits and
property of the firm. Over and above this, he is neither personally liable nor is his private estate
liable [Sec.30(3)].

(ii) He cannot be declared insolvent, but if the firm is declared insolvent his share in the firm vests with
the Official Receiver or Official Assignee.

2. Position on attaining majority

On attaining majority the minor partner has to decide within six months whether he shall continue
in the firm or leave it. These six months run from the date of his attaining majority or from the date when
he first comes to know that he had been admitted to the benefits of partnership whichever date is later.
Within this period he should give a public notice of his choice – to become, or not to become, a partner in
the firm. If he fails to give a public notice, he is deemed to have become a partner in the firm on the
expiry of the said six months [Sec.30(5)]. The burden of proof that he had no knowledge of his admission
until a particular date after the expiry of six months of his attaining majority lies on the person asserting
that fact [Sec.30(6)].

(1) Where he elects to become a partner:

 (a) He becomes personally liable to third parties for all acts of the firm done since he was admitted to
the benefits of partnership.

(b) His share in the property and profits of the firm is the share to which he was entitled as a minor
partner [Sec.30(7)].

(2) Where he elects not to become a partner:

(a) His rights and liabilities continue to be those of a minor till the date of the notice.

(b) His share is not liable for any acts of the firm done after the date of the public notice.

(c) He is entitled to sue the partners for his share of the property and profits in the firm [Sec.30(8)].

implied authority of a partner

The authority of a partner means the capacity of a partner to bind the firm by his act. This
authority may be express or implied. Where the authority to a partner to act is expressly conferred by an
agreement, it is called express authority. But where there is no partnership agreement or where the
agreement is silent, “the act of a partner which is done to carry on, in the usual way, business of the kind
carried on by the firm, binds the firm”. This authority of a partner to bind the firm is called ostensible or
apparent or implied authority of a partner. It flows from the legal relations of the partners and is founded
on the principle of agency. It is subject to the following conditions:

1. The act done by the partner must relate to the normal or usual business of the firm.

2. The act must be such as is done within the scope of the business of the firm in the usual way.

3. The act must be done in the name of the firm, or in any other manner expressing or implying an
intention to blind the firm.

Mathura Nath Vs Sreejukta: Where one of the partners hired an elephant, without the consent of the other
partners, for the purpose of trapping wild elephants. The business of the firm is to trap wild elephants. It
was held that the act of the partner was binding on the firm.

Acts within the Implied Authority of a Partner:

The implied authority of a partner include –

(1) Purchasing goods, on behalf of the firm, in which the firm deals or which are employed in the firm’s
business;

(2) Selling the goods of the firm;

(3) Receiving payment of the debts due to the firm and giving receipts for them;

(4) Settling accounts with the persons dealing with the firm;

(5) Engaging servants for the partnership business;

(6) Borrowing money on the credit of the firm;

(7) Drawing, accepting, indorsing bills and other negotiable instruments in the name of the firm;

(8) Pledging any goods of the firm for the purpose of borrowing money; and

(9) Employing a solicitor to defend an action against the firm for goods supplied.

No Implied Authority:

In the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not
empower him to –

(a) Submit a dispute relating to the business of the firm to arbitration;

(b) Open a bank account on behalf of the firm in his own name;

(c) Compromise or relinquish any claim or portion of a claim by the firm;

(d) Withdraw a suit or proceeding filed on behalf of the firm;

(e) Admit any liability in a suit or proceeding against the firm;

(f) Acquire immovable property on behalf of the firm;

(g) Transfer immovable property belonging to the firm; or

(h) Enter into partnership on behalf of the firm.

A partner can do the above acts if –

• he has specific or express authority from the partners; or

• the usage or custom of trade permits him.

All the partners of a firm can ratify an act of a partner, which has been done by him in excess of the
implied authority or without any authority, provided the act is such as could be legally done with the
authority of all the partners previously given and that the partners ratify the act with full knowledge of the
facts. Such ratification can be proved by the conduct of the partners.

dissolution of firms

Section 39 of the Indian Partnership Act lays down that the dissolution of partnership between all
the partners of a firm is called the “dissolution of the firm”. This is different from the dissolution of
partnership. A partnership may be dissolved without dissoluting the firm. But dissolution of firm
involves dissolution of partnership. In the firm of A, B and C, if C dies or retires, the firm will be
dissolved. But A and B may take in D and continue doing the business. This new firm of A, B and D is
called the new or reconstituted firm.
 Dissolution of Partnership on the happening of certain contingencies

A partnership is dissolved by —

 the death of the partner;

 the completion of the adventure of partnership;

 the insolvency of a partner; and

 the retirement of a partner.

In all these cases, the remaining partners, may constitute the firm. Hence, dissolution of partnership does
not necessarily involve dissolution of the firm. If they do not continue, the firm is dissolved
automatically.

Dissolution of Firm

A partnership between all the partners is dissolved in the following ways:

1) Dissolution by Agreement: (a) By mutual consent of all the partners, or (b) in accordance with the
contract entered into by them.

2) Compulsory Dissolution: (a) By the insolvency of all the partners except one, or (b) by the
business of the partnership becoming illegal or unlawful by subsequent events.

3) Dissolution of Partnership at Will: The firm may be dissolved by any partner giving a notice to the
other partners of his intention to dissolve the firm. But the notice must be in writing and
unambiguous. Once given, it cannot be withdrawn. The firm is dissolved from the date mentioned
in the notice, or if the date is not mentioned, from the date of communication of the notice.

4) Dissolution through Court: A partnership for a fixed period will be dissolved by a court where it is
not dissolved for the reasons mentioned above.

At the suit of a partner, a firm may be dissolved on any of the following grounds:

(a) that a partner has become of unsound mind;

(b) that a partner has become permanently incapable of performing his duties;

(c) that a partner is guilty of conduct which is likely to affect prejudicially, the carrying on of the
business;

(d) that a partner persistently commits breach of agreement. For instance, a firm is dissolved when: (i) a
partner commits breach of trust, or (ii) takes away the partnership books etc.

(e) that a partner has transferred his interest to a third party or allowed his share to be charged or sold in
the recovery of arrears of land revenue.

(f) that the business of the firm cannot be carried on, save at a loss; or
(g) on any other ground which renders it just and equitable that the firm should be dissolved.

review questions

1. Define Partnership. What are the different kinds of partnership?

2. What are the rights and duties of partners?

3. What is the procedure for registration of partnership firm? What is the effect of non-registration?

4. Can a minor become a partner? What are his rights and liabilities?

5. What is meant by ostensible or implied authority of a partner?

6. What are the modes of dissolution of firm?

LESSON - 15

LAW OF INSURANCE

The Contract of Insurance is a contract whereby a person undertakes to indemnify another

against a loss arising on the happening of an event or to pay a sum of money on the happening of an
event. The person who insures is called “Insurer”. The person who effects the insurance is called the
“Insured” or “Assured”. The price for the risk undertaken by the insurer and paid by the insured to the
insurer is called “Premium” and the document which contains the contract of insurance is called “Policy”.

principles of contract of insurance

Following are the general principles of contracts of insurance:

1. Uberrimae Fidei: A contract of insurance is a contract uberrimae fidei, i.e. a contract requiring
utmost good faith of the parties. So, all material facts which are likely to influence the insurer in
deciding the amount of premium payable by the insured must be disclosed by the insured. Failure to
disclose material facts renders the contract voidable at the option of the insurer.

2. Insurable Interest: The assured must have, what is called “insurable interest” in the subject matter
of the contract of insurance. “He must be so situated with regard to the thing insured that he would
have benefit from its existence, loss from its destruction”.

3. Indemnity: Every contract of insurance such as life insurance and personal accident and sickness
insurance, is a contract of indemnity. So, the insurer pays the actual loss suffered by the insured.
He does not pay the specified amount unless this amount is the actual loss to the insured.

4. Mitigation of Loss: The insured must take reasonable precautions to save the property, in the event
of some mishap to the insured property. He must act as a prudent uninsured person would act in his
own case under similar circumstances to mitigate or minimise losses.

5. Risk must attach: The insurer must run the risk of indemnifying the insured. If he does not run the
risk, the consideration for which the premium is paid, fails and consequently, he must return the
premium paid by the insured.

6. Causa Proxima: The insurer is liable for loss which is proximately caused by the risk insured
against. The rule is “causa proxima non remota spectatur”, i.e. the proximate but not the remote
cause is to be looked to. So, the loss must be proximately caused in order that the insurer is to
become liable.

7. Period of Insurance: Except in the case of life insurance, every contract of insurance comes to an
end of the expiry of every year, unless the insured continues the same and pays the premium before
the expiry of the year.

8. Subrogation: According to the rule of subrogation, when the loss is caused to the insured by the
conduct of a third party, the insurer shall have to make good such loss and then have a right to step
into the shoes of the insured and bring an action against such third party who caused the loss to the
 insured. This right of subrogation is enforceable only when there is an assignment of cause of action
by the insured in favour of the insurer. The doctrine of subrogation does not apply to life insurance.

9. Contribution: Where there are two or more insurances on one risk, the principle of contribution
applies as between different insurers. The aim of contribution is to distribute the actual amount of
loss among the different insurers who are liable for the same risk under different policies in respect of
the same subject-matter. In case of loss, any one insurer may pay to the assured the full amount of
the loss covered by the policy. Having paid this amount, he is entitled to contribution from his co-
insurers in proportion to the amount which each has undertaken to pay in case of loss of the same
subject-matter.

There are different kinds of insurance: (1) Life (2) Fire (3) Marine (4) Accident and (5)
Guarantee insurance etc.

life insurance

Life insurance is popularly referred to as life assurance. In this case, the underwriter agrees to
pay the assured or his heirs, a certain sum of money on death or on the happening of an event dependent
upon human life in consideration of premiums paid by the assured.

Section 2(11) of the Insurance Act, 1938 defines Life Insurance business as follows:

“Life Insurance Business” is the business of effecting contracts of insurance upon human life, including
any contract whereby the payment of money is assured on death (except death by accident only) or the
happening of any contingency dependant on human life and any contract which is subject to the payment
of premiums for a term dependant on human life and shall be deemed to include:

(a) The granting of disability and double or triple indemnity accident benefits if so provided in
the contract of insurance.

(b) The granting of annuities on human life; and

(c) The granting of superannuation allowances and annuities payable out of any fund applicable
solely to the relief and maintenance of persons engaged in any particular profession, trade or
employment or of the dependants of such persons”.

A contract of insurance is a contract of utmost good faith technically known as uberrimae fide.
The doctrine of disclosing all material facts is embodied in this important principles, which applies to all
forms of insurance. The Proposer, who is one of the parties to the contract, is presumed to have means of
knowledge, which are not accessible to the insurer, who is the other party to the contract. Therefore, the
proposer is bound to tell the insurer, everything affecting the judgement of the insurer. In all contract of
insurance, the proposer is bound to make full disclosure of all material facts and not merely those which
he thinks material. Misrepresentation, non-disclosure or fraud in any document leading to acceptance of
the risk automatically discharges the insurer from all liabilities under the contract.

Application of General Rules of Law of Contracts to Life Insurance

 A contract of life insurance is in many respects governed by the general law of contracts. There
are also some peculiar aspects relating to life insurance contracts.

As a general rule the terms of contracts are ascertained from the document embodying the
contract. In Life Insurance, the policy is the document which expresses the contract between the insurer
and the insured. The contract comes into existence when the proposal from a party is accepted by the
insurer and the terms of the acceptance are complied with by the party. The contract will have to be
interpreted according to the policy document, though in certain circumstances, the life assured may rely
on the prospectus published by the insurer.

Offer and Acceptance

A contract of Life Insurance, like any other contract, begins with the proposal (offer). If the
insurer, after considering the proposal and other related information, is willing to issue a policy, he sends
a letter termed “letter of acceptance”. In the letter it is stated that he will grant a policy provided
remittance of the premium is received within a specified period and the state of health of the prosper
remains unchanged till the date of remittance of premium or date of the letter of acceptance whichever is
later. The letter of acceptance is a counter offer and the proposer accepts the counter offer by paying the
premium within the stipulated time. Offer and acceptance constitute an agreement and an agreement
enforceable by law is a contract. The communication of a proposal is complete when it comes to the
knowledge of the person to whom it is made.

Consideration

Consideration is something which moves from one party to the other in return for what the other
party give. In Life Insurance contract, the payment of the premium is consideration for the contract on
the part of the life assured and the undertaking of the insurer to pay a sum of money when the claim arises
is consideration on the part of the insurer.

Capacity to Contract

The parties to an assurance contract must be capable of entering into contracts. Every person is
competent to contract who is of the age of majority, who is of sound mind and is not disqualified from
contracting by any law to which he is subject.

Consent of the Parties to the Contract

Two or more persons are said to consent when they agree upon the same thing in the same sense.
Similarly, the parties to contract of Insurance, must agree the terms of agreement in the same sense.

Legality of Consideration and Object

Every agreement wherein the consideration or object is unlawful is void. Therefore, for a valid
contract there should be proper consideration and legally valid object.

reinsurance and double insurance

Reinsurance
 Every insurer has a limit to the risk that he can undertake. If at any time a profitable venture
comes his way, he may insure it even if the risk involved is beyond his capacity. Then in order to
safeguard his own interest, he may insure the same risk either wholly or partially with other insurers. This
is called re-insurance. The reason for re-insurance like the reason for original insurance is the necessity
of spreading the risk.

Re-insurance can be resorted to in all kinds of insurance. The insurer has an insurable interest I
the subject-matter insured to the extent of the amount insured by him because a contract of re-insurance is
also a contract of indemnity. The re-insurers are liable to pay the amount of the loss to the original insurer
only if the original insurer has paid the amount to the assured.

The re-insurer is, however, not liable to the insured or assured. This is because there is no privity
of contract between them. But re-insurance is subject to all the conditions in the original policy and the
re-insurer is entitled to all the benefits which the original insurer is entitled to under the policy. The
policy of re-insurance, in other words, is co-extensive with the original policy. If the original policy for
any reason comes to an end or is avoided, the policy of re-insurance also comes to an end. A contract of
re-insurance is also a contract of uberrimae fidei. The original insurer, vis-à-vis the re-insurer, is in the
position of the assured. He must disclose to the re-insurer all the material facts disclosed to him. On
payment of the loss under the policy of re-insurance, the re-insurer is subrogated to all the rights of the
original insurer including the rights of the assured to which the original insurer is subrogated.

Double Insurance

Where the assured insures the same risk with two or more independent insurers, and the total sum
insured exceeds the value of the subject-matter, the assured is said to be over-insured by double
insurance. There is over-insurance where the aggregate of all the insurances exceeds the total value of the
assured’s interest at risk. If there is no express condition in a contract of insurance, both double insurance
and over-insurance are perfectly lawful.

Example: A insures his houseworth Rs.50,000 with B for Rs.40,000 and with C for Rs.30,000.
There is double insurance. If he insures his house with B and C for Rs.25,000 each, there is no double
insurance.

The rules which apply in case of double insurance are as follows:

1. Recovery of actual loss: A man may insure with as many insurers as he pleases and up to the full
value of his interest with each one. If a loss occurs, he may claim payment from the insurers in such
order as he may think fit, but in no event is he entitled to recover more than his loss, because a
contract of insurance is a contract of indemnity only. This right to sue his insurers in any order he
likes is a valuable right for the assured. It protects him against loss in the event of one or more of the
insurers becoming insolvent.

2. Excess amount recovered to the be held in trust: If an assured recovers more than the value of his
interest in case of loss, he holds the excess amount recovered for the insurers according to their
respective rights inter se, as a trustee.
3. Liability of Insurers – Contribution: The insurers as between themselves are liable to contribute to
the loss in proportion to the amount for which each one is liable. If an insurer pays more than his
ratable proportion of the loss, he has a right to recover the excess from his co-insurers who have paid
less than their ratable proportion.

4. No limit on Life Insurances: In case of Life Insurance, an assured may take any number of policies
on his life and for any amount.

group and superannuation schemes

Just like Life Insurance, Group Insurance also has developed in India to a great extent. Under the
Group Insurance Scheme, the principle involved is more or less same as in the case of Life Insurance but
the scheme is taken for a group of persons employed in an undertaking. In this scheme, the contract of life
insurance can be summed up as an undertaking to pay specified amounts of money on the happening of
certain contingencies in exchange for a previously agreed series of payments called premiums. This
contract is between an employer and the Insurance Company and the contingencies where the death of
employee in service or on survival to the retirement date. In the latter event the employer would possibly
want some pension to be given for the post retirement life time of the employee. To offer cover of death
risk, the system is to cover risk year by year. The employer is asked to pay the premium in advance and if
death occurs the insurer pays the claim.

The Group Insurance portfolio is as such employer employee oriented i.e. Organisation Sector.
This is because the employers feel the need to give insurance as one of the employee’s benefits. Also the
group has the capacity to pay the premiums regularly. There are also different types of insurances under
this scheme. The main schemes are given below:

1) Group Superannuation Scheme: Under this scheme a monthly pension is provided to the retired
employee. The employee will have the option to choose any one of the types of pensions given
below:

• A pension payable throughout his life-time.

• A pension payable during his lifetime but also guaranteed for a specific minimum number of years (5,
10 or 15). If he dies during the guaranteed period, the pension will continue to be paid to his
beneficiary for the remaining part of the period.

• A pension payable during the joint lifetime of the employee and spouse and continued thereafter
during the lifetime of the survivor.

2) Group Insurance Scheme: Under this scheme, the insurer will insure all the employees of the
undertaking with the condition that the sum assured is payable on the death of the employee while
in service. Premiums towards the scheme will be paid by the employer and will get the benefit of
 tax as deductible expenditure and the same will not be treated as perquisites in the hands of the
employee.

3) Group Gratuity Scheme: A Trust Fund is created under Group Gratuity Scheme. The gratuity
liability is funded by introducing a Group Gratuity Scheme with insurers. The employer will have
to pay premium and investment of these contribution. The insurer will be making the payments to
the employees as and when the various contingencies of payment arise.

lic act

The life insurance business was nationalised on 19th January, 1956 and the Life Insurance
Corporation of India came into being on 1st September, 1956 to carry on life business in India with capital
of Rs.5 crores contributed by the Central Government. The Corporation is a body corporate having
perpetual succession with a common seal with powers to acquire, hold and dispose of property and may
by its name sue and be sued.

The functions of the Corporation shall be to carry on and develop life insurance business to the
best advantage of the community.

The Corporation shall have power –

(a) to carry on capital redemption business, annuity certain business or reinsurance business in so
far as such reinsurance business relating to life insurance business;

(b) to invest the funds of the Corporation in such manner as the Corporation may think fit and to
take all such steps as may be necessary or expedient for the protection or realisation of any
investment; including the taking over of and administering any property offered as security
for the investment until a suitable opportunity arises for its disposal;

(c) to acquire, hold and dispose of any property for the purpose of its business;

(d) to transfer the whole or any part of the life insurance business carried on outside India to any
other person or persons, if in the interest of the Corporation it is expedient so to do;

(e) to advance or lend money upon the security of any movable or immovable property or
otherwise;

(f) to borrow or raise any money in such manner and upon such security as the Corporation may
think fit;

(g) to carry on either by itself or through any subsidiary any other business in any case where
such other business was being carried on by a subsidiary of an insurer whose controlled
business has been transferred to and vested in the Corporation by this act;
 (h) to carry on any other business which may seem to the Corporation to be capable of being
conveniently carried on in connection with its business and calculated directly or indirectly to
render profitable the business of the Corporation; and

(i) to do all such things as may be incidental or conducive to the proper exercise of any of the
powers of the Corporation.

(j) In the discharge of any of its functions the Corporation shall act so far as may be on business
principles.

types of life policies

(1) Whole Life Policy

(2) Endowment Policy

(3) Joint Life Endowment Policy

(4) Family Protection Policy

(5) Multipurpose Policy

(6) Convertible Whole Life Policy

(7) Money Back Policy

1. Whole Life Policy

(a) Whole Life Assurance: This is the purest form of permanent contract. Premiums are
payable throughout the Life time of the life assured and the sum assured is payable only at his
death. The element of protection of dependants is the dominating element and that of
provision for old age is totally absent.

This type of assurance provides a larger amount of “life cover” than any other permanent type of life
assurance and it is therefore the most inexpensive form of permanent protection for dependants. It has the
disadvantage that premiums continue in old age when the ability to pay them may be lessened by
contraction of income. To obviate this difficulty the Corporation had decided that under these tables
premiums are now limited to a maximum number and are payable either till age 80 or till 35 annual
premiums are paid whichever is later. For example a person aged 30 has to pay premiums for a maximum
period of 50 years if he survives this period while a person aged 50 will have to pay for a maximum
period of 35 years (i.e. not till age 80 but also beyond if he survives beyond age 80). With this benefit
extended to all policies including those issued by the previous Insurers, the Corporation has no whole life
assurance contract whereunder premiums are payable indefinitely throughout life.

(b) Whole Life Assurance by Limited Premiums: Under this type of policy, it can be arranged
that premiums cease at retirement age so that the difficulties of maintaining the premiums in
old age are removed. When the premium cease, the policy becomes fully paid-up. “With
 profits” policies continue to participate in profits till the claim arises even though the
premiums have ceased.

2. Endowment Policy

This is undoubtedly the most popular form of assurance at the present time. Under this class of
contract, the sum assured is payable at the expiration of a fixed term of years or at death should that occur
previously.

This type of policy is really a combination of Life assurance and investment. In the case of
policies running for long terms the assurance element predominates while in the case of assurances
maturing at the end of comparatively shorter terms the actual cost of the life assurance is very small the
bulk of the premium being required for the investment portion.

3. Joint Life Endowment Policy

Under this plan, two lives are simultaneously insured and the sum assured is payable on the
expiry of the term or/on the death of one of the assured lives during the endowment period. The
premiums are payable throughout the endowment period or till the prior death of either of the lives
assured. It should be noted that one payment of the sum assured is envisaged even though two lives are
insured; two payments on two deaths are not contemplated as the first death will determine the contract.

4. Family Protection Policy

Many different names are given to describe policies such as “Family Protection”, “Family
Safeguard”, “Planned Protection” etc., but most of them incorporate the idea of protecting or safeguarding
the family while the family members are young. The policy provides that when the assured die during a
fixed period, from the outset annual instalments or yearly income usually 10% to 12% of the basic sum
assured shall be paid for the balance of the period. In addition the basic sum assured is paid either at the
time of death or at the expiration of the fixed period or in varying proportion at both points of time. In the
event of the life assured’s surviving the specified term, only the basic sum assured is payable either at
death or at maturity depending on the main plan of assurance. Premiums under this plan are generally
payable for a fixed term of years or till death.

5. Multipurpose Policy

Under the multi-purpose policy the basic assurance is a type of family income policy under the
endowment assurance scheme. The following benefits can be taken under the policy by paying
appropriate extra premium:

(i) School Education Provision

(ii) College Education Provision

(iii) Marriage Provision for Daughter

6. Convertible Whole Life Policy

 This plan is essentially a whole life assurance with the option to convert after 5 years from
commencement, into an endowment assurance effective from inception.

This plan is suitable for a young man earning a modest income for the time being but with good
prospects of higher income after a short period. The object is to provide maximum assurance protection
at minimum immediate cost and at the same time to offer a flexible contract which can be altered to an
endowment assurance at the end of 5 years from the commencement of the policy by which time it is
expected that there would be a rise in his income which would enable him to pay the larger premium
payable after conversion.

If the conversion option is not exercised the policy would continue as whole life assurance.

7. Money Back Policy

This plan is suitable for those who besides providing for their old age and family, need lump sum
benefit at periodic intervals. The sum assured is paid in suitable instalments. Yet throughout the period of
assurance, the dependents are guaranteed the benefit of the full sum assured protection in the event of the
death of the assured, irrespective of the instalments that might have been paid. The policy is available for
4 terms – 12 years, 15 years, 20 years and 25 years to suit one’s best convenience. No loan is granted
under this plan.

fire insurance

The law relating to fire insurance in India is contained in the Insurance Act, 1938 and the General
Insurance Business Nationalisation Act, 1972. The general insurance business was nationalised in 1971.

A contract of fire insurance is a contract whereby the insurer undertakes, in consideration of the
premium paid, to make good any loss or damage caused by fire during a specific period. The contract
specifies the maximum amount which the assured can claim in case of loss. This amount is fixed by the
parties at the time of the contract. It is, however, not the measure of the loss. The loss can be ascertained
only after the fire has occurred. The insurer is liable to make good the actual amount of loss not
exceeding the maximum amount fixed by the parties.

characteristics of fire insurance contract

1. It is a contract of indemnity. The assured can, in the event of loss, recover the actual amount of loss
from the insurer. This is subject to the maximum amount for which the subject-matter is insured.

2. It is a contract of uberrimae fidei. The assured and the insurer have to disclose everything which is
in their knowledge and which will affect the contract of insurance.

3. The assured must have insurable interest in the subject-matter both at the time of insurance and at the
time of loss. The insurable interest must be capable of valuation in terms of money.

4. The risk covered by a fire insurance contract is the loss resulting from fire or some cause which is the
proximate cause of the loss.
5. It is subject to the principles of subrogation and contribution.

6. It is a contract from year to year. It comes to an end after the expiry of the year. It can, however, be
renewed if the assured pays the premium during the days of grace.

formation of contract

A contract of fire insurance is entered into by the process of a proposal by one party and its
acceptance by the insurer. The proposal is made in writing by filling up a printed form, and paying the
premium or a part of it to the insurer. On receipt of the proposal and premium, the insurer issues a
deposit receipt usually called a cover note. Subsequently if the proposal is accepted, the insurer issues a
regular policy.

average clause in fire policy

The subject-matter of the fire insurance may be over-insured or under-insured. Over-insurance is

automatically checked. In case of loss, the insurer is liable to pay the actual amount of loss, subject to the
maximum amount for which the policy is taken. For example, where a building worth Rs.5,00,000 is
insured for Rs.8,00,000 and is completely destroyed by fire, the insurer is liable to pay only Rs.5,00,000.

Where the fire causes only a partial loss to the property insured, the assured is entitled to recover
the full amount of loss provided that amount is covered by the policy. For example, where a building
worth Rs.2,00,000 is insured for Rs.1,00,000 and half of it is destroyed by fire, the assured can recover
Rs.1,00,000, since it is covered by the amount of the policy.

To save premium, people generally under-insure their property. It is rare in case of fire to
property that the whole of it would be completely destroyed. Thus whereas the insurer would fix a
relatively small premium he would have to pay the full extent of loss in case of partial loss. To protect
themselves against under-insurance, the insurers usually insert a ‘subject to the average clause’ in the fire
policy. The effect of this clause is that the assured can only recover such proportion of the actual loss
suffered as the sum insured bears to the total value of the insured property. The assured in such a case is
considered his own insurer for the difference in the actual value of the subject-matter and the value for
which it is insured.

Example: Property worth Rs.1,00,000 is insured for Rs.80,000. The policy contains an average
clause. If half of the property is burnt down, the assured can recover only Rs.40,000. This is worked out
as follows:

Value of the policy

Sum to be recovered = --------------------------------- x Actual loss

Full value of subject-matter

80,000

= ---------- x 50,000 = Rs.40,000.

 1,00,000

But for the average clause in the policy, the assured could recover the full amount of Rs.50,00 (i.e. half of
Rs.1,00,000).

insurable interest

In case of fire insurance, the assured must have insurable interest in the subject-matter both at the
time of the contract and at the time of the loss. Every person has insurable interest in the goods or
property equal to the pecuniary interest he has in it.

The following persons have insurable interest in the subject-matter of insurance in the case of fire
policy: (a) owner, (b) mortgagee or pledgee, (c) insurer, (d) pawn-broker, (e) Office Receiver or
Assignee in insolvency, (f) warehouseman as regards goods of the customer, (g) wharfinger, (h) common
carrier, (i) commission agent, and (j) trustee.

causa proxima

In actions on fire policies, if the proximate cause of loss is fire, the loss is recoverable. If it is not
fire, but some other cause remotely connected with fire, the loss is not recoverable unless specifically
provided for. Thus loss caused by explosion is not covered by a fire policy unless explosion actually
causes ignition which spreads into fire. A fire policy usually covers loss by explosion incidental to fire.
But the insurer may specifically exclude his liability in which case he cannot be sued if a fire occurs after
explosion and causes damage.

The following losses are causes proximately by fire:

(1) Loss which is the necessary consequence of fire in the sense that if there had been no fire it would
not have happened.

(2) Loss which is a reasonable consequence of fire in that it results in the ordinary course of events
from the happening of fire.

(3) Loss caused by water used to extinguish fire destroying property or loss caused due to the efforts
made to arrest or extinguish fire.

(4) Loss arising as a consequence of removal of the property from the building in which fire is raging
with the intention of saving it, or loss due to theft during the confusion caused by the fire.

rights of insurer

The insurer under a fire policy has the following rights:

1. Right of avoiding the contract for no-disclosure or concealment of any material fact.

2. Right of control over the property.

3. Right of entering the property.

4. Right of subrogation.

5. Right to salvage.

6. Right of reinstatement.

7. Right of contribution.

types of fire policies

1. Specific Policy

It is a policy which covers the loss of the assured up to a specific amount which is less than the
real value of the property. Specific policy is a case of under-insurance. To check under-insurance, the
insurers usually insert average clause in the policy in which case the policy is known as average policy.

2. Comprehensive Policy

It is a policy which covers losses against risks like fire, theft, burglary, third party risks, etc. Such
a policy is also known as “all-in-one” policy. It may also cover loss of profits during the period the
business remains closed due to fire.

3. Valued Policy

It is a policy in which the amount payable in case of loss is fixed at the time the policy is taken.
In the event of loss, the fixed amount is payable irrespective of the actual amount of loss. A valued policy
can be legally challenged because it is not a contract of indemnity.

4. Floating Policy

It is a policy which covers property at different places against loss by fire. It might, for example,
cover goods lying in two warehouses at two different places. It is always subject to average clause.

5. Replacement or Reinstatement Policy

In order to prevent fraudulent devices by the assured, the insurers usually insert a clause in the
policy, called the re-instatement clause, whereby the insurer undertakes to pay the cost of the replacement
of the property damaged or destroyed by fire.

marine insurance

The law relating to marine insurance is codified in the Marine Insurance Act, 1963. Marine
Insurance Contracts are governed by the Indian Contract Act,1972, the Insurance Act, 1938, the General
Insurance Business (Nationalisation) Act, 1972 and largely by the Marine Insurance Act, 1963.
 A contract of marine insurance is a contract whereby the insurer undertakes to indemnify the
insured, against marine losses, that is to say, the losses incidental to marine adventure. It is a contract of
indemnity. It is a contract ‘uberrimae fidei”. It must have insurable interest. The doctrine of
subrogation applies to it.

Marine Adventure: There is a marine adventure when –

(1) any ship, goods or movable property(i.e. insurable property) is exposed to maritime perils;

(2) the earning or acquisition of any freight, passage money, commission, profit or other pecuniary
benefit, or the security for any advances, loans or disbursements is endangered by the exposure of
insurable property to maritime perils;

(3) any inability to a third party maybe incurred by the owner of, or other person interested in, insurable
property by reason of maritime perils.

‘Insurable property’ means any ship, goods or other movables which are exposed to maritime perils.

Maritime Perils: Maritime perils mean the perils consequent on, or incidental to the navigation
of the sea. In other words, they mean perils of the sea, fire, war perils, pirates, rovers, thieves, captures,
seizures, restraints and detainments, jettisons and barratry, and any other perils which are either of the like
kind or may be designated by the policy. In simple words, ‘perils of the sea’ mean all perils and
misfortunes of a marine character or incidental to a ship which the underwriter in a marine insurance
takes upon himself.

The following losses are covered by the perils of the sea:

(1) A loss by a vessel striking upon a sunken rock.

(2) A loss by foundering, owing to a ship coming into collision with another ship, even when the
collision results from the negligence of that other ship.

(3) A loss brought about by negligent navigation.

(4) Damage caused to insured against fire and perils of the sea by heading due to the closing of
ventilators to prevent the incursion of sea waterin rought weather.

(5) Damage caused to cargo by rats making a hole in the bottom of a ship and sea water entering the
ship through the hole.

insurable interest

A person has an insurable interest if he is interested in a marine adventure in consequence of

which he may benefit by the safe arrival of insurable property, or be prejudiced, by its loss, damage or
detention. The assured must be interested in the subject-matter insured at the time of the loss, though he
need not be interested when the insurance is effected.

kinds of marine policies

1. Time Policy: It insures the subject matter for a certain specified period, not exceeding twelve
months.

2. Voyage Policy: It insures the subject-matter for a certain voyage only i.e, journey from one fixed port
to another fixed port.

3. Valued Policy: It specifies the agreed value of the subject-matter insured. Insurers are liable only
for the loss not exceeding the value mentioned in the policy.

4. Unvalued or Open Policy: It does not specify the value of the subject-matter. The value is to be
ascertained subsequently at the time of actual loss.

5. Mixed Policy: It insures the subject-matter for a specified voyage and for a particular period.

6. Floating Policy: It describes the general terms of insurance, leaving other particulars such as the
name of the ship etc. to be declared subsequently.

7. Wagering or Honour Policy: It is also known as “policy proof of interest” or “Interest or no interest
policy”. In this case, the insurer does not have insurable interest in the subject-matter of the contract.
It resembles a wager and hence void. Losses are indemnified depending on the honour of the insurer.

A marine insurance policy contains the following particulars:

1. Name of the ship.

2. Name of the parties.

3. The time of commencement and duration of the risk.

4. “Lost or not lost” clause whereby the insurer is made liable whether the goods were in existence or
not at the time when the insurance was effected, except when the insured knew that the goods were
destroyed already.

5. “Touch and Stay” clause which mentions the various parts which the ship touches and the period of
its stay at these parts.

6. Accepted perils for which the insurer undertakes to be liable.

7. “Free from capture and seizure” clause which exonerates the insurer from his liability for the loss
arising out of the capture and seizure of the ship.

8. “Free from particular average” or “Free from all average” clause whereby the insurer is exempted
from his liability for any particular average loss or for all average loss caused to the subject-matter of
the contract.

9. “Barratry” clause relates to the liability of the insurer for the loss arising out of the wrongful act of
the master or any of the crew of the ship.
10. “Sue, Labour and Travel” clause which entitles the insured to minimise the loss and claim for
expenses from insurer and to recover the goods lost by falling overboard accidentally.

11. “Collision or running down” clause whereby the owner of an insured ship shall indemnify the owner
of another ship if the former ship collides negligently with the latter.

12. “Inchmaree” clause which protects the insured against any latent defect in the machinery of the ship.

13. “Expected Perils” clause which specifies the risks not covered by the insurance policy.

A marine policy is thus a formal document signed by the insurer. It must be stamped. It contains the
terms of the insurance as explained above. It is an actionable claim and can be transferred by means of an
assignment.

warranties in a contract of marine insurance

A warranty in a contract of marine insurance is substantially the same as a condition in a contract

of sale of goods. It gives the aggrieved party the right to avoid the contract.

A warranty may be (1) express, or (2) implied.

Express Warranties:

An express warranty is one which is expressly stated in the policy of insurance. It must be
included in, or written upon, the policy, or must be contained in some document incorporated by
reference into the policy.

There is no limit to the number of express warranties but the following express warranties are
generally included in a marine policy:

(1) The ship is seaworthy on a particular day.

(2) The ship will sail on a specified day.

(3) The ship will proceed to the destination without any deviation.

(4) The ship is neutral and will remain so during the voyage.

Implied Warranties:

Implied warranties are conditions which are not incorporated in a policy but which are assumed
to have been included in the policy by law, custom or general agreement. These warranties are:

1. Seaworthiness

(1) In a voyage policy there is an implied warranty that at the commencement of the voyage the ship is
seaworthy for the purpose of the particular adventure insured. It includes the following:
• that the ship is properly constructed

• that its machinery is in proper working order

• that it has sufficient and efficient crew and master

• that it is sufficiently provided with the necessities of the voyage

• that it is not overloaded or badly loaded

• that it is sound as regards her hull and that it is properly stowed

(2) In a voyage policy, where the voyage is to be performed in stages, the ship must be seaworthy at the
commencement of each stage.

(3) Where a voyage policy attaches while the ship is in port, there is an implied warranty that she shall,
at the commencement of the risk, be reasonably fit to encounter the ordinary perils of the port.

(4) In a voyage policy on goods or other movables, there is an implied warranty that at the
commencement of the voyage the ship is not only seaworthy as a ship, but also that she is
reasonably fit to carry the goods or other movables to the destination contemplated by the policy.

2. Legality of Voyage:

There is an implied warranty that the adventure insured is a lawful one, and that, so far as the
assured can control the matter, the adventure shall be carried out in a lawful manner.

3. No-deviation:

There is an implied warranty that the ship shall not deviate from its prescribed or the usual
customary route. If it does, the insurer shall not be liable unless the deviation is lawfully excused.

voyage

The voyage to be performed by a ship must be described in the policy. The ship must follow the
course specified in the policy. If the course is not specified, it must follow the usual and customary
course. Where the place of departure is specified in the policy, and the ship, instead of sailing from that
place, sails from any other place, the risk does not attach. The risk also does not attach where the
destination is specified in the policy, and the ship instead of sailing for that destination, sails for any other
destination.

deviation of voyage

If a ship proceeds by an unusual course, or takes the ports of call by an order different from the
one mentioned in the policy, there takes place a deviation of voyage.

Where a ship, without any lawful excuse, deviates from the voyage contemplated by the policy,
the insurer is discharged from liability as from the time of deviation and it would not make any difference
even if the ship regains her route before any loss occurs. But the insurer is liable for any loss which might
have occurred prior to the deviation.

When Deviation is Excused:

A deviation or delay in prosecuting the voyage as specified in the policy is excused –

(1) Where it is authorised by any special term in the policy;

(2) Where it is caused by circumstances beyond the control of the master and his employees, e.g.
deviation caused due to rough weather, storm, cyclone etc.

(3) Where it is reasonably necessary in order to comply with an express or implied warranty;

(4) Where it is reasonably necessary for the safety of the ship or the subject-matter insured;

(5) Where it is necessary for the purpose of saving human life or aiding a ship in distress, where human
life may be in danger;

(6) Where it is reasonably necessary for the purpose of obtaining medical or surgical aid for any person
on board the ship;

(7) Where it is caused by the barratrous conduct of the master or crew if barratry is one of the perils
insured against.

(8) Where the vessel is blown out of her course by violent gales or is ordered during war by the Naval
Authorities to deviate from her ordinary course in order to avoid the danger of sub-marines.

The ship must resume her course with reasonable dispatch, as soon as the causes which excuse deviation
or delay cease to operate.

LOSSES

Unless the policy otherwise provides, the insurer is liable for any loss proximately caused by a
peril insured against. A loss may be either total or partial. Any loss other than a total loss is a partial
loss.

total loss

A total loss may be either (1) an actual total loss, or (2) a constructive total loss.

1. Actual Total Loss: An actual total loss occurs –

(a) Where the subject-matter is actually destroyed or irreparably damaged; or

(b) Where the subject-matter ceases to be a thing of the kind insured, or where it ceases to exit in
specie.

(c) Where the assured is irretrievably (irrecoverably) deprived of the subject-matter.

 (d) Where the subject-matter is lost to the owner by a decree of a Court, in consequence of a peril
insured against.

An actual total loss may be presumed if a ship is missing, and after a reasonable time no news of her has
been received.

2. Constructive Total Loss

A constructive total loss occurs where the subject-matter insured is reasonably abandoned
because its actual total loss appears to be unavoidable, or because the expenditure to prevent an actual
total loss would exceed the value of the subject-matter when saved.

In particular, there is a constructive total loss –

(a) Where the assured is deprived of the possession of his ship or goods by a peril insured
against, and it is unlikely that he can recover the ship or goods, as the case may be, or the cost
of recovering the ship or goods would exceed their value when recovered;

(b) In the case of damage to a ship by a peril insured against, where the cost of repairing the
damage would exceed the value of the ship when repaired; or

(c) In the case of damage to goods, where the cost of repairing the damage and forwarding the
goods to their destination would exceed their value on arrival.

Examples of Constructive total loss:

Constructive total loss occurs where –

• a ship on fire is abandoned in mid-stream,

• a ship is sunk in deep water and cannot be raised without expenditure in excess of its value,

• a ship is so damaged that the cost of its repairs will exceed its value after repair,

• the cargo is so damaged that the cost of reconditioning it would be more than its value after its
reconditioning.

Unless a different intention appears from the terms of the policy, an insurance against total loss includes
constructive, as well as an actual, total loss.

Abandonment

Where there is a constructive total loss, the assured may treat the loss as a partial loss or abandon
the subject-matter insured tot he insurer and treat the loss as if it were an actual total loss. Where the
assured treats the loss as an actual total loss, he must give, after the receipt of the information of the loss,
notice of abandonment to the insurer. If he fails to do this, the loss will be treated as a partial loss.

Abandonment means surrendering all proprietary rights in whatever remains of the subject-
matter. In case of its loss, to the insurer in order to claim the total loss from him. If the insurer accepts
the abandonment, he pays the total loss to the assured and recovers whatever he can from the sale of the
abandoned property.

3. Partial Loss

Partial loss may be either (i) particular average loss, or (ii) general average loss.

1. Particular Average Loss: The three interests risked during the course of a sea voyage are: (a) the
ship, (b) the cargo, and (c) the freight.

As a general rule any loss which any of these interests sustains must be borne by that interest alone; this is
known as particular average loss and is to be borne by the interest incurring it. If, for example, one of
the ship’s boat is carried away in a storm, this is a particular average loss and must be borne by the ship-
owner alone.

A particular average loss is a partial loss of the subject-matter insured, caused by a peril insured against,
and which is not a general average loss. It gives no right of contribution from the other parties interested
in the adventure. It can be recovered from the insurers if it is caused by a peril insured against.

Wherever damage is caused by accident or otherwise to property in a marine adventure by the perils of
the sea and the damage is not one suffered for general benefit, it is called a particular average loss.

2. General Average Loss: Where extraordinary sacrifices are made or expenditure is incurred
voluntarily and reasonably in time of peril for the benefit of the whole adventure, the loss is known as
a general average loss and is borne by all interested in the common adventure.

There is a general average loss when:

a ship is scuttled to avoid destruction of the whole of the ship, or forced to cut away a part of her
rigging as a consequence of collision, or forced to return to a port to execute certain repairs as a
consequence of collision, or stranded and a part of the cargo is jettisoned, or

a part of the cargo is sold to pay for repairs to enable the ship to continue her voyage, or thrown
overboard to save the ship from the storm, or

a cargo is damaged while being unloaded for the purpose of executing repairs to the ship necessitated
by the collision of the ship with another ship, or

wages are paid to non-members of the crew for pumping out the water from the ship.

Where there is a general average loss, the party on whom it falls is entitled to rateable contribution from
the other parties interested and such contribution is called a general average contribution.
review questions

1. What are the general principles of Contract of Insurance?

2. What are the types of Life Insurance Policies?

3. What is the purpose of Fire Insurance? State the types of Fire policies.

4. What is Marine Insurance? What are the kinds of Marine polices?

5. What is meant by deviation of voyage in marine insurance? When is it excused?

6. What is meant by actual total loss and constructive total loss in marine insurance?

7. What are express and implied warranties in a contract of marine insurance?

8. What is meant by general average loss and particular average loss?

LESSON – 16

COMPANIES ACT, 1956

The word company ordinarily means an association of a number of persons for some common
purpose. In its legal form a company is an artificial person created by law.

Section 3(1) (i) of the Companies Act, 1956 defines a Company as, “A company formed, and registered
under this act or an existing company”. ‘An existing company’ means a company formed and registered
under any of the former Companies Act. This definition does not give the meaning of company.

Haney’s brief definition brings out clearly many of the characteristics of a company. He defines, “A
company is an incorporated association which is an artificial person created by law, having a separate
entity with a perpetual succession and a common seal”.

From the above it could be understood that a Company is a voluntary association of persons
formed for some common purpose with capital divided into parts known as shares which are freely
transferable and with a limited liability. It is an artificial person created by law with perpetual succession
and a common seal.

essential characteristics of a company

1. Registration and Legal Entity

A company must be registered. It is an artificial person created by law. A company is a distinct

legal entity and distinct from its members.

2. Limited Liability

The liability of the members of a company having share capital is limited to the extent of the
nominal value of the shares held by them. Shareholder can not be called upon to pay more than the
unpaid value of his shares, whatever may be the level of indebtedness of the company. In the case of a
guarantee company, the liability of members is limited to such amount as the members may undertake to
contribute to the assets of the company.

3. Separate Property

A company has every right to acquire as well as transfer property in its own name, as it is a legal
person. No shareholder has any legal or equitable interest in the property of the company.

4. Perpetual Succession

A company has a perpetual succession. Inspite of a change in the membership of the company its
continuity is not affected. It is said, ‘men may come and go, but the Company goes for ever’.

5. Common Seal
 The company being an artificial person cannot sign its name on a contract. The common seal is
used as a substitute for its signature. The common seal bears the name and place of the company, and
date of its incorporation engraved on it.

6. Transferability of Shares

The shares of a company are freely transferable except in the case of a private company.

7. Capacity to sue and be sued

As a legal person it can sue and be sued in its own name.

concept of corporate personality

A company is a legal person, since in the eyes of law it is capable of having legal rights and
obligations just like a natural person. Like any other person it can acquire and own property, transfer
property, enter into contracts and sue and be sued in its own name. Being a legal person, a company has a
separate legal entity, a personality distinct from its members or shareholders.

The concept of separate entity of a company was established in the celebrated case of Salomon Vs
Salomon & Co. Ltd. The facts of the case are that one Salomon, a boot manufacturer, formed a company
with himself, his wife, and daughter and four sons as the sole shareholders. Salomon took 20,000 shares
of £1 each, debentures worth £10,000 secured by the assets of the company and the balance in cash. His
wife, daughter and four sons took the company and the balance in cash. His wife, daughter and four sons
took up one £1 share each. The personal business assets of Salomon were taken over by the company for
£38,782. The company contracted debts and went into liquidation. The unsecured creditors claimed
payment of their dues before the secured debentures held by Salomon on the ground that Salomon and the
company were one and same person and the company was a mere ‘alias’ or agent for Salomon. It was
held by the House of Lords that the company, being a legal person and having existence quite distinct
from its members, could not be regarded as an agent or ‘alias’ for Salomon. As such, Salomon being a
secured creditor of the company is entitled to payment out of the assets of the company in priority to the
unsecured creditors. In the words of McNaghten, L.J –

“The Company is at law a different person altogether from the subscribers to the memorandum; and,
though it may be that after incorporation the business is precisely the same as it was before, and the same
persons are managers, and the same hands receive the profits, the company is not in law the agent of the
subscribers or trustees for them. Nor are the subscribers, as members, liable, in any shape or form, except
to the extent and in the manner provided by the Act.”

Lifting or Piercing the Corporate Veil

Ordinarily, the Courts recognise the separate legal entity of the company and consider themselves
bound by the principle laid down in the case of Salomon Vs Salomon & Co. Ltd. But in reality there is no
such separation between the economic interested of the company and its members. In exceptional cases,
the Courts may disregard the concept of corporate entity to look at the persons behind the company. They
may lift the corporate veil to probe into the economic realities behind the scene. This is known as the
‘lifting or piercing the corporate veil’.
 In general the Courts have made a departure from the principle of corporate entity when there was
reason to suspect that the veil of corporate personality had been used to conceal fraudulent or improper
conduct or for doing things against public policy or public interest. Lifting of the corporate veil may also
become necessary in cases where the directors or members of a company are held personally liable for
violation of statutory provisions under the Companies Act.

Some of the exceptional cases necessitating the lifting of the corporate veil may briefly be
indicated below:

1. In the Interest of Revenue: Where it appears that a company has been formed or is being used for the
only purpose of evading taxes or for avoiding tax liability, the Courts may ignore the separate entity
of the company and lift the veil to look into the persons responsible for tax evasion.

2. Avoidance of Welfare Legislation: Where it appears that the company has used the ‘veil of
incorporation’ as a means of avoiding social welfare legislation, it is the duty of the Court to lift the
corporate veil and discover the true state of affairs.

3. For checking fraud or improper conduct: Where it appears that the company has been formed for
some fraudulent purpose or to conceal the real identity of the owners, the Courts will lift the corporate
veil to find out the real owners of the company.

4. Against Public Policy: Where the principle of separate entity conflicts with public policy the Court
may lift the corporate veil in defence of the public policy.

5. Avoidance of Legal Obligation: The Court will also disregard the legal personality of a company
where the corporate veil is being used to avoid legal obligation.

6. Under Companies Act, 1956: The following instances necessitate lifting of corporate veil to identify
the persons responsible for such acts:

• Reduction in membership below the statutory minimum.

• Fradulent conduct of business.

• Failure to refund application money.

• Contracts made in personal names of directors.

• Mis-statements in Prospectus.

• Ultra vires acts.

kinds of companies

I On the Basis of Incorporation

1. Chartered Companies: Companies set up as a result of a royal charter granted by a king or queen of
a country are known as chartered companies. Example: East India Company, the Bank of England
etc.

2. Statutory Companies: Companies set up by Special Acts of Parliament or State Legislatures are
called Statutory Companies. Example: Reserve Bank of India, Life Insurance Corporation of India,
Unit Trust of India etc.

3. Registered Companies: Companies registered under the Indian Companies Act, 1956 or under any
of the previous Companies Acts are called registered companies. Most of the companies in India
belong to this category.

4. Licenced Companies: Companies established for the promotion of arts, science, religion, charity or
any other similar objects can obtain licence under Sec.25 from the Central Government and enjoy
certain privileges.

5. Foreign Companies: A company incorporated outside India under the law of the country of
incorporation but having established its business in India is called a foreign company.

II On the Basis of Liability

1. Companies with Limited Liability: It is a company where the liability of the shareholder remains
limited to the nominal value of the shares held by him.

2. Companies Limited by Guarantee: In a guarantee company the liability of a shareholder is limited

to the amount he has voluntarily undertaken to contribute towards the assets of the company to meet
out any deficiency at the time of it winding up. Such a company may or may not have a share capital.

3. Unlimited Companies: Here the liability of its members is unlimited. In other words, their liability
extends to their private properties also. Unlimited companies are almost non-existent these days

III On the Basis of Number of Members

1. Private Company: As per Section 3(1) (iii), a private company means a company which by its
Articles restricts the right to transfer its shares if any, and limits the number of its members to fifty
and prohibits invitation of shares from the public.

2. Public Company: According to Section 3(1) (iv), a public company means a company which is not a
private company.

IV On the Basis of Control

1. Holding Companies: A company exercising control over another company is called a holding
company. [Sec.4(4)].
2. Subsidiary Companies: The company so controlled is called a subsidiary company. [Sec.4(1)].

V On the Basis of Ownership

1. Government Company: Definition (Sec.617): A Government company means any company in

which not less than 51% of the paid up share capital is held by the Central Government or by any
State Government or Governments, or partly by one or more State Governments and includes a
company which is a subsidiary of a Government company.

government company

A Government Company means any company in which at least 51 percent 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.

Rules Applicable to Government Companies

1. The auditor of a Government company shall be appointed by the Central Government on the advice
of the Comptroller and Auditor-General of India.

2. The auditor of a Government company shall submit a copy of his audit report to the Comptroller and
Auditor-General of India who shall have the right to comment upon, or supplement, the audit report.
Any such comments upon, or supplement to, the audit report shall be placed before the annual general
meeting of the company.

3. The annual report shall be laid before both Houses of Parliament together with a copy of the audit
report, and any comments upon, or supplement to , the audit, made by the Comptroller and Auditor-
General of India.

Where in addition to the Central Government, any State Government is also a member of a Government
company, the State Government shall cause a copy of the above documents to be laid before the House or
both Houses of the State Legislature.

4. The Central Government may, by notification in the Official Gazette, direct that any of the provisions
of the Companies Act shall not apply to any Government company, or shall apply to any Government
company, with such exceptions, modifications and adaptations, as may be specified in the
notification.

foreign company

Foreign Company means any company incorporated outside India which as a place of business in
India.

Rules Applicable to Foreign Companies

(1) Every foreign company shall file with the Registrar the following documents:

• A certified copy of the Memorandum and Articles of the company.

• The full address of the registered or principal office of the company.

• A list of the directors and secretary of the company.

• The names and addresses of any person or persons resident in India, authorised to accept on behalf of
the company service of processes and any notices required to be served on the company.

• The full address of the principal place of business in India.

(2) The books of account to be kept by a company shall apply to foreign company also.

(3) A foreign company shall conspicuously exhibit on the outside of every office or place where it
carries on business in India the name of the company, together with the name of the country where
it is incorporated in English and in one of the local languages.

(4) The provisions relating to the registration of charges, annual returns, special audit in certain cases,
audit of cost accounts, power of Registrar to call for information, in so far as they apply to its Indian
companies shall apply to foreign companies also.

privileges and exemptions enjoyed by private companies

1. A private company can be registered with a minimum of two members.

2. It is entitled to commence business immediately after incorporation.

3. It is not required to issue a prospectus.

4. It is not required to hold a statutory meeting.

5. It can proceed to allot shares before minimum subscription is received.

6. Restrictions on further issue of capital do not apply to private companies.

7. The minimum number of directors of a private company is two only.

8. It is not necessary for the directors to file a written consent to act as directors, to the Registrar.

9. It is not necessary for directors to take up qualification shares.

10. It is not required to maintain a separate Index of Members.

11. Two members present can form a quorum in any meeting of a private company.
12. The directors are not liable to retirement by rotation.

13. The restrictions regarding remuneration of directors are not applicable to the private company.

14. Restrictions regarding appointment of Managing Director for more than five years at a time are not
applicable.

incorporation of a company

A company is said to have been incorporated or registered when it gets the Certificate of
Incorporation from the Registrar of Companies. Certain steps have to be taken and necessary legal
formalities completed for that purpose. The steps and formalities required for incorporation of company
vary according to the type of the company concerned.

Steps for the Incorporation of a Public Company limited by Shares

1. Application for approval of name: The first step is that of obtaining approval of the Registrar of
Companies for the proposed name with which the company is to be registered. A company may
adopt any name which is not prohibited under the Emblems and Names (Prevention of Improper Use)
Act, 1950 and which is not identical with or does not closely resemble the name of a company already
registered.

2. Preparation of Memorandum of Association: The next step is the preparation of the Memorandum
of Association of the company. It is the constitution of the company which defines the objects and
scope of the company’s activities and its relation with the outside world.

3. Preparation of Articles of Association: It is the document containing the rules and regulations
relating to the internal management of the company.

4. Printing, Signature and Stamping of Memorandum and Articles: The next step is to arrange for
the printing, signature and stamping of the Memorandum and Articles.

5. Preparation of other Documents:

(a) Power of Attorney

(b) Preliminary Agreements, if any.

(c) Consent of the Directors in Form No.29.

(d) Particulars of Directors in Form No.32.

(e) Notice of Registered Address in Form No.18.

(f) Statutory Declaration.

6. Filing of Documents for Registration:

 The following documents are to be filed with the Registrar along with registration fee for Registration of
the Company:

(i) Memorandum of Association printed and duly stamped.

(ii) Articles of Association printed and duly stamped.

(iii) Name availability letter received form the Registrar of Companies.

(iv) The consent is to be given in Form No.29.

(v) Notice of the situation of the registered office is to be given in Form No.18.

(vi) Appointment of Director, Manager or Secretary to be filed in Form No.32.

(vii) Power of Attorney empowering the attorney of the promotors.

(viii) A declaration that all the requirements of the Companies Act, 1956 and the rules thereunder have
been complied with in respect of registration and matters precedent and incidental thereto shall be
filed with the Registrar.

7. Certificate of Incorporation

When the requisite documents are filed with the Registrar, the Registrar shall satisfy himself that
the statutory requirements regarding registration have been duly complied with. If the Registrar is
satisfied as to the compliance of statutory requirements, he retains and registers the Memorandum, the
Articles and other documents filed with him and issues a ‘Certificate of Incorporation’, i.e. of the
formation of the company. A company comes into existence as a legal person upon the issue of the
certificate of incorporation.

MEMORANDUM OF ASSOCIATION

The Memorandum of Association is the charter of the company, and provides the foundation on
which the structure of the company is built. It defines the scope of the company’s activities as well as its
relation with the outside world.

Section 2(28)of the Companies Act defines a Memorandum as “the memorandum of association
of a company as originally framed or as altered from time to time in pursuance of any previous Company
Laws or of this Act”. Section 13 of the Act specifies the contents of the memorandum.

The importance of the Memorandum is that it lays down the ambit of the powers of the company,
the area within which the company can operate and beyond which it cannot go.
 The purpose of the Memorandum is to enable the shareholders, creditors and those who deal with
the company to know what is its permitted range of enterprise.

The Memorandum of Association must be (a) printed, (b) divided into paragraphs, numbered
consecutively, and (c) signed by each subscriber.

contents of the memorandum

(1) Name Clause

The Memorandum of every company must state the name of the company with the word
“Limited” as the last word of the name in the case of public limited company and with “Private Limited”
as the last words of the name in the case of private limited company.

(2) Domicile (or) Situation Clause

This clause mentions the name of the State in which the registered office of the company will be
situated. This determines the jurisdiction of the Court and indicates the domicile and nationality of the
company. The full address of the company should be communicated to the Registrar within thirty days
from the date of registration.

(3) Objects Clause

The Memorandum must include under this clause statement of (a) the main objects of the
company and objects incidental or ancillary to the main objects, and (b) any other objects. The objects
clause lays down the scope of activities of the company and defines the extent of its powers. It “states
affirmatively the ambit and extent of powers which are given to the company by law”.

(4) Liability Clause

A limited company has the liability of its members limited to the face value of the shares held by
them. The liability clause of the Memorandum contains a clear statement to this effect. The effect of
this clause is that no member can be held liable for debts of the company beyond the amount which he has
agreed to contribute to the share capital of the company. If the shares held by a member of the company
are fully paid-up, his liability in the debts of the company will be nil. Similarly, in the case of a company
limited by guarantee, the liability of the member is limited to the amount of guarantee given by him.

(5) Capital Clause

In the case of a limited company having share capital, the Companies Act requires that the
Memorandum shall state the amount of share capital with which the company is to be registered and the
division thereof into shares of a fixed amount [Sec.13(4)]. This is the maximum amount of share capital
that the company is authorised by the memorandum to raise. Hence, it is called the ‘authorised’,
‘registered’ or ‘nominal’ capital.

(6) Association Clause

 Under this clause, subscribers to the Memorandum express their assent to form a company and
signify their agreement to associate for that purpose. The statement of agreement to form a company also
mentions the ‘subscribers’ consent to take the number of shares shown against their respective names.

doctrine of ultra vires

‘Ultra’ means beyond and ‘vires’ means powers. The term ultra vires a company means that the
doing of the act is beyond the legal power and authority of the company. The doctrine of ultra vires is
important in defining the limits of the powers conferred on the company by its Memorandum of
Association. According to this doctrine, the vires (power) of a company to enter into a contract or
transaction is limited by the ambit of the Objects Clause of the Memorandum and the provisions of the
Companies Act. Whatever is not permitted by the Objects Clause and the Act, is prohibited by the
doctrine of ultra vires. If a company engages in any activity or enters into any contract which is ultra
vires (outside the power conferred by) the Memorandum or Act, it will be null and void so far as the
company is concerned and it cannot be subsequently ratified or validated even if all the shareholders give
their consent. Thus under this doctrine, a company has powers to engage in only such activities or enter
into such transactions:

• which are essential to the attainment of the objects specified in the Memorandum;

• which are reasonably and fairly incidental to the main objects; and

• which are permitted by the provisions of the Companies Act.

The doctrine of ultra vires was first enunciated in the celebrated case Ashbury Railway Carriage and Iron
Co. Ltd., vs Riche. The company was registered with the following objects:

to make, and sell, or lend on hire, railway carriages and wagons;

to carry on the business of mechanical engineers and general contractors;

to purchase, lease, work and sell mines, minerals, land and buildings.

The directors contracted with M/s. Riche to purchase a concession for laying a railway line in Belgium.
The contract was ratified by a special resolution. Later, the contract was repudiated by the company on
the ground of its being ultra vires and Riche brought an action on the ground of breach of contract.

It was held by the House of Lords that the contract was ultra vires the company so void ab initio.
It was also held that, not even the assent of the whole body of shareholders can ratify such a contract, as
the contract was ultra vires the objects clause.

Effects of Ultra Vires Transactions

If a company enters into transactions, which are ultra vires, it will have the following effects:

(1) Injunction: Whenever a company goes beyond the scope of the object clause, any of its members can
get an injunction from the court to restrain the company from undertaking the ultra vires act.
(2) Personal Liability of Directors: If the transaction is ultra vires, for instance, if the funds of the
company are misapplied, the directors will be held personally liable.

(3) Ultra Vires Contracts: Contracts entered into by a company, which are ultra vires, are void ab initio
and unenforceable.

(4) Property Acquired Ultra Vires: If a company acquires any property under an ultra vires transaction, it
has the right to hold the property and protect it against damage by other persons.

(5) Ultra Vires Torts: A company is not liable for torts committed by its agents or employees in the
course of ultra vires transactions.

alteration of memorandum

1. Alteration of Name Clause

A company may change its name by a special resolution and with the approval of the Company
Law Board (CLB) signified in writing. But a change of name which merely involves the deletion or
addition of the word ‘Private’ on the conversion of a private company into a public company or vice versa
does not require the approval of the CLB.

If through inadvertence or otherwise, a company is registered by a name which, in the opinion of

the CLB, is identical with, or too nearly resembles, the name of an existing company, the company –

(a) may change its name, by ordinary resolution and with the previous approval of the CLB.

(b) shall change its name if the CLB so directs within twelve months of its first registration or registration
by its new name, as the case may be.

Where a company changes its name, the Registrar shall enter the new name in the Register in the place of
the old name and issue a fresh certificate of incorporation with the necessary alterations embodied therein
to the company.

2. Alteration of Situation Clause

This may involve:

(a) Change of registered office from one place to another place in the same city, town or village.

(b) Change of registered office from one town to another town within the State.

(c) Change of registered office from one State to another State.

In case of change of registered office from one place to another place in the same city, a notice is to be
given within thirty days after the date of the change to the Registrar who shall record the same.

In case of change of registered office from one town to another town within the State, a special
resolution is required to be passed at the general meeting of the shareholders and a copy of it is to be filed
with the Registrar within thirty days. Then within thirty days of shifting of the office, a notice has to be
given to the Registrar of the new location of the office.

In case of change of registered office from one State to another State, a special resolution is
required to be passed at the general meeting of the shareholders and a copy of it is to be filed with the
Registrar within thirty days. The alteration shall take effect only when it is confirmed by the CLB. A
certified copy of the order confirming the alteration shall be filed by the company with the Registrar of
each of the States and the Registrar of each State shall register the same. All the records of the company
shall be transferred to the Registrar of the State in which the registered office of the company is
transferred.

3. Alteration of Object Clause

By Sec.17(1), the objects of a company may be altered by special resolution so as to enable the
company –

 To carry on its business more economically or more efficiently.

 To enlarge or change the local area of its operations.

 To carry on some business which under existing circumstances may conveniently or advantageously
be combined with the objects specified in the Memorandum.

 To restrict or abandon any of the objects specified in the Memorandum.

 To sell or dispose of the whole, or any part, of the undertaking, or of any of the undertakings, of the
company, or

 To amalgamate with any other company or body of persons.

4. Alteration of Liability Clause

A company limited by shares or guarantee cannot change its Memorandum so as to impose any
additional liability on the members or to compel them to buy additional shares of the company unless all
the members agree in writing to such change.

5. Alteration of Capital Clause

The procedure for alteration of capital and the power to make such alteration are generally
provided in the Articles of Association of a company. If the power and procedure are not laid down in the
Articles the company must alter the Articles by passing a special resolution. If so authorised by the
Articles, a company may alter its share capital so as to –

 increase the amount of its share capital;

 consolidate and divide its share capital into shares of higher denomination;
 subdivide the existing shares into shares of lower denomination; however, the proportion between the
amount paid and the amount, if any, unpaid on each reduced share must be the same as it was for the
share before reduction;

 cancel the unissued capital;

 convert all or any of its fully paid shares into stock and reconvert stock into shares.

ARTICLES OF ASSOCIATION

The rules and regulations which are framed for the internal management of a company are set out
in a document known as the Articles of Association. The articles are framed to enable the company to
carry out the aims and objects of the company set out in the Memorandum of Association.

Contents of Articles

The regulations and bylaws laid down in the Articles relate to the following:

• Share capital and its subdivision into different classes of shares, rights of shareholders and their
variation;

• The procedure for making allotment, calls on shares and transfer, transmission, forfeiture and
surrender of shares, including lien on shares;

• Alteration and reduction of capital;

• Borrowing powers;

• Appointment of Manager, Managing Director, Secretary;

• Declaration of dividend;

• Procedure for convening, holding and conducting different kinds of meetings, voting rights and
methods;

• Maintenance of books of account and their audit;

• Share Certificates and Share Warrants, conversion of shares into stock;

• Seal of the company;

• Winding up.

Alteration of Articles

The Articles of Association can be altered or added to by passing a special resolution in the extra-
ordinary general meeting, provided –

the alteration is not contrary to the provision of the Act;

it is not inconsistent with or beyond the provisions of the Memorandum; and

it does not increase the liability of a member without his written consent by compelling him to take
more shares than he had held prior to the alteration.

Any alteration made in the Articles should be in the interest of the company as a whole, should not be
such as to cause a breach of contract and should not be such as to constitute a fraud by the majority on the
minority shareholders.

doctrine of constructive notice

The Memorandum and Articles, on registration, assume the character of public documents. The
office of the Registrar is a public office and documents registered there are open and accessible to the
public at large. Therefore, every outsider dealing with the company is deemed to have notice of the
contents of the Memorandum and Articles. This is known as Constructive Notice of Memorandum and
Articles.

Under the doctrine of ‘constructive notice’, every person dealing or proposing to enter into a
contract with the company is deemed to have constructive notice of the contents of its Memorandum and
Articles. Whether he actually reads them or not, it is presumed that he has read these documents and has
ascertained the exact powers of the company to enter into contract, the extent to which these powers have
been delegated to the directors and the limitations to such powers. He is presumed not only to have read
them, but to have understood them properly. Consequently, if a person enters into a contract which is
ultra vires the Memorandum, or beyond the authority of the directors conferred by the Articles, then the
contract becomes invalid and he cannot enforce it, not-withstanding the fact that he acted in good faith
and money was applied for the purposes of the company.

doctrine of indoor management

The doctrine of indoor management follows from the doctrine of ‘constructive notice’ laid down
in various judicial decisions. The hardships caused to outsiders dealing with a company by the rule of
‘constructive notice’ have been sought to be softened under the principle of ‘indoor management’. It
affords some protection to the outsiders against the company.

According to this doctrine, after satisfying themselves that the proposed transaction is intra vires
the memorandum and articles, persons dealing with the company are not bound to enquire whether the
internal proceedings were correctly followed. They are entitled to assume that the internal proceedings
relating to the contract are regular as per the memorandum and articles.

When an outsider enters into a contract with the company, he is presumed to have knowledge of
the provisions of memorandum and articles as per the doctrine of constructive notice. But he is not
required to go beyond that and to enquire whether the internal proceedings required by these documents
have been regularly followed by the company. They need not enquire whether the necessary meeting was
convened and held properly or whether necessary resolution was passed properly. They are entitled to
take it for granted that the company had gone through all these proceedings in a regular manner. This is
known as the Doctrine of Indoor Management.

The doctrine of indoor management was first propounded by Lord Hatherlyin the celebrated case
Royal British Bank vs. Turquand [(1856) 6E. & B.327]. The directors of the Bank had issued a bond to
Turquand. The company was empowered by its Articles to issue such bonds provided it was authorised
by a resolution of the company in general meeting. In this case no such resolution had been passed. It
was held that Turquand could recover the amount of bond from the company on the ground that he was
entitled to assume that the necessary resolution had been passed by the company.

Exceptions to the Doctrine of Indoor Management

No benefit under the doctrine of indoor management can be claimed by a person under the
following circumstances:

♦ Where a person dealing with the company has actual or constructive notice of any irregularity in the
internal proceedings of the company.

♦ Where a person did not in fact consult the Memorandum and Articles of the company and
consequently did not act on knowledge of these documents.

♦ Where a person dealing with the company was negligent and, had he not been negligent, could have
discovered the irregularity by proper enquiries.

♦ Where a person dealing with the company relies upon a forged document or the act done by the
company is void.

♦ Where a person enters into a contract with an agent or officer of the company and the act of the
agent/officer is beyond the authority granted to him.

PROSPECTUS

Sec. 2(36) defines a prospectus as, “any document described or issued as a prospectus and
includes a notice, circular, advertisement or other document inviting deposits from the public or inviting
offers from the public for the subscription or purchase of any shares in or debentures of a body
corporate”.

Thus any document inviting the public to buy its shares or debentures comes under the definition
of prospectus. It also applies to advertisements inviting deposits from the public.

contents of the prospectus

part i of schedule ii – matters to be specified

I General Information
1. Name and address of Registered Office of the Company.

2. (a) Consent of the Central Government for the present issue.

(b) Letter of content/industrial licence. Declaration of the Central Government about non-responsibility
for financial soundness on correctness of statements.

3. Name of Stock Exchanges where the present issue is to be listed.

4. Declaration about refund of the issue if minimum subscription of 90 per cent is not received within 90
days from the closure of the issue.

5. (a) Date of opening of the issue.

(b) Date of closing of the issue.

6. Date of earliest closing of the issue.

7. Name and address of auditors and lead managers.

8. Whether rating form CRISIL or any other rating agency has been obtained for the proposed
debenture/ preference share issue. If yes, the rating should be indicated.

9. Names and addresses of the underwriters and the amount underwritten by them and declaration of the
board that the underwriters have sufficient resources.

II Capital Structure of the Company

1. Authorised, issued, subscribed and paid-up capital.

2. Size of present issue giving separately reservation for preferential, allotment to promoters and others.

3. Paid-up capital after the present issue.

III Terms of the Present Issue

1. Terms of payments.

2. Rights of the instrument holders.

3. How to apply, availability of forms, prospectus and mode of payment.

4. Any special tax benefits for company and its shareholders.

IV Particulars of the Issue

1. Objects.

2. Project cost.

3. Means of financing including contribution of promoters.

V Company Management and Project

1. History and main objects and present business of the company.

2. Subsidiaries of the company, if any.

3. Names, addresses and occupations of Manager, Managing Director and other Directors including
nominee Directors, whole-time directors.

4. Location of project.

5. Plant and Machinery, technology, process etc.

6. Foreign collaboration.

7. Infrastructure facilities.

8. Schedule of the implementation of the project and progress so far made.

9. Nature of products, marketing set up and export possibilities and export obligation, if any.

10. Future prospectus – expected capacity utilisation during the first three years, from the date of
commencement of production and the expected year when the company would be able to earn cash
profit and net profit and stock market data.

VI. Particulars in regard to the company and other listed companies under the same management within
the meaning of Sec.370 IB which made any capital issue during the last three years.

VII (a) Outstanding litigation of the company.

(b) Particulars of default, if any, in meeting statutory dues, institutional dues, and towards instrument
holders like debentures, fixed deposits and arrears of cumulative preference shares etc.

(c) Any material development after the date of the latest balance sheet, and its impact on performance
and the prospects of the company.

VIII Management Perception of Risk Factors

For example, sensitivity to foreign exchange rate fluctuations, non-availability of raw materials,
cost time overrun etc.

part ii of schedule ii

A. General Information

1. Consent of directors, auditors, advocates, managers to issue, registrar of issue, bankers to the
company, bankers to the issue.

2. Expert opinion, if any.

3. Change, if any, in directors and auditors during the last three years and reasons thereof.
4. Authority for the issue and details of resolution passed for the issue.

5. Procedure and time schedule for allotment and issue of certificates.

6. Name and address of the company secretary, legal adviser, lead managers, auditors, bankers to the
company, banker to the issue and brokers to the issue.

B. Financial Information

1. Report by Auditors

A report by the auditors of the company with respect to –

(a) its profit and loss and assets and liabilities, and

(b) the dividends paid by the company during the five financial years immediately preceding the issue of
the prospectus.

2. Report by Accountants

(a) A report by the accountants who shall be named in the prospectus on the profits or losses of the
business for the preceding five financial years, and on the assets and liabilities of the business to be
acquired on a date which shall not be more than one hundred and twenty days before the date of the
issue of the prospectus.

(b) A similar report on the accounts of a body corporate by an accountant who shall be named in the
prospectus if the proceeds of the issue are to be applied in the purchase of shares of a body corporate
so that it becomes a subsidiary of the acquiring company.

(c) Statutory and other information:

1. Minimum subscription

2. Expenses of the issue

3. Underwriting commission and brokerage

4. Details of previous public or right issue

5. Issue of shares otherwise than for cash

6. Debenture and redeemable preference shares and other instruments, issued by the company
outstanding and terms of issue.

7. Option to subscribe

8. Details of purchase of property

9. Details of directors, whole-time directors, managing directors, as to their appointment, remuneration,

interest of directors, borrowing powers, qualification shares etc.
10. Rights of members regarding voting, dividend, lien on shares.

11. Restriction if any on the transfer or transmission of shares or debentures.

12. Revaluation of assets if any.

13. Material contracts and inspection of documents.

part iii of schedule ii

Provisions applying to Parts I and II of the Schedule.

(1) In the case of a company which has been carrying on business for less than five financial years,
reference to five financial years means reference to that number of financial years for which business
has been carried on.

(2) The report shall make any adjustments as respect of the figures of profits or losses or assets and
liabilities and indicate that such adjustments have been made.

(3) There should be a declaration that all the relevant provisions of the Companies Act, 1956 and the
guidelines issued by the Government have been complied with and no statement made in prospectus
is contrary to the provisions of Companies Act, 1956 and rule made thereunder.

voluntary disclosure

The prospectus is the window through which an investor can look into the soundness of the
company’s venture. The prospective buyer of shares is entitled to all true disclosures in the prospectus. It
should not conceal any matter which ought to be revealed. In a nutshell, the prospectus should tell the
truth, the whole truth and nothing but truth. This ruling is called ‘the golden rule’ for framing a
prospectus. This ruling as laid down by V.C. Kindersley in New Brunswick and Canada Railway and
Land Company vs. Muggeridge.

liabilities for mis-statement in prospectus

Under Sec.65 of the Companies Act, a prospectus will be deemed to contain an untrue statement,
if –

(a) the statement included in the prospectus is misleading in the form or in the context in which it is
included; and

(b) there is an omission from the prospectus of any matter which is calculated to misled [Sec.65(1)].

Liabilities for Mis-statement in Prospectus

Civil Liability Criminal Liability

Against the Company Against the Directors,

Promoters and Experts

To Rescind Claim for Compensation Damages for Damages under

the Contract Damages non-compliance General Law

under Sec.56

For Innocent For Fradulent

misrepresentation misrepresentation

Civil Liability for Mis-statement

Civil liability arises when there is a mis-statement or misrepresentation of fact in a prospectus or

an omission of material fact calculated to misled, and such a statement or omission has induced a
shareholder to buy shares on the faith of such statement. Every director or promoter of a company, and
all other persons including an expert who has authorised the issue of such prospectus are liable for such
misstatement or misrepresentation to the allottee of shares. The shareholder who has purchased shares on
the faith of such mis-statement has remedy in a civil action against the company, as well as directors,
promoters, experts etc. for any loss or damage suffered by him.

Remedies against the Company

For mis-statement or misrepresentation in a prospectus, the remedies available to a shareholder

against the company are: (i) rescission of the contract, and (ii) damages for deceit. Any person who takes
shares on the faith of statements contained in a prospectus, can apply to the Court for rescinding or setting
aside the contract on the ground that the statements are false or fraudulent or that some material
information has been withheld.

Remedies against Directors, Promoters etc.

Against the directors, promoters, experts and other persons, the remedies available are: (i)
damages for fraudulent misrepresentation under the general law; (ii) compensation for loss or damage
under Sec.62 of the Act; and (iii) damages or loss suffered due to omission of statement under Sec.56 of
the Act.

(1) Under the General Law, a shareholder can hold persons responsible for the issue of a prospectus
(directors, promoters etc.) liable for damages for any fraudulent misrepresentation or misstatement in
the prospectus, if he was deceived by reason of acting on the faith of such prospectus. But the
directors (or promoters etc.) will not be held liable for such mis-statement, if they honestly believed
what they said in the prospectus to be true.

(2) Compensation under Sec.62. If a person purchases shares or debentures of a company on the faith of
statements made in the prospectus and thereby suffers any damage or incurs loss, he is entitled to
claim compensation for the loss or damage in a civil action against the directors, promoters, and all
other persons who have authorised the issue of the prospectus [Sec.62(1)].

(3) Damages under Sec.56. If there is an omission from the prospectus of any matter required to be
included by Sec.56, any subscriber for shares who has suffered loss due to the omission can bring
action for damages, even if such omission does not make the prospectus false or misleading.

Criminal Liability for Mis-statement

Knowingly including an untrue statement in the prospectus or fraudulently inducing a person to

invest money in shares, gives rise to criminal liability on the part of the persons authorising the issue of
such a prospectus. Section 63 and 68 of the Companies Act provide for heavy punishment for such
criminal liability.

If a prospectus contains any untrue statement, every person who has authorised the issue of the prospectus
is punishable with imprisonment for a term which may extend to two years, or with fine which may
extend to five thousand rupees, or with both.

The Act has also laid down that if a person knowingly or recklessly makes any statement,
promise or forecast which is false, deceptive or misleading, or dishonestly conceals material facts, and
thereby induces or attempts to induce another person to subscribe to the shares of a company, he shall be
punishable with imprisonment for a term which may extend to five years, or with fine which may extend
to ten thousand rupees, or with both (Sec.68).
 LESSON - 18

COMPANY MEETINGS

A ‘Meeting’ may be defined as any gathering, assembly or coming together of two or more
persons for the transaction of some lawful business of common concern. Like any other association, a
company must also hold meetings for its proper functioning. The shareholders or members of a company,
who are the real owners, must have the opportunity to collectively discuss the affairs of the company and
to exercise their ultimate control over the management of the company. Similarly, the directors, in whom
the management of the company is vested, must come together periodically to function as a team and take
collective decisions regarding the business policy of the company and to exercise overall supervision over
the management. Thus, the management of a company is really carried on through meetings of
shareholders and directors and the resolutions adopted therein.

kinds of company meetings

Broadly speaking, company meetings may be classified as follows:

1. Meetings of Shareholders or Members: This against may be of four types:

(i) Statutory Meeting

(ii) Annual General Meeting

(iii) Extraordinary General Meeting

(iv) Class Meetings

2. Meetings of Directors

(i) Meetings of Board of Directors

(ii) Meetings of Committees of Directors

3. Meetings of Creditors, Debenture holders and Contributories.

requisites of a valid meeting

If the business transacted at a meeting is to be valid and legally binding, the meeting itself must
be validly held. A meeting will be considered to be validly held, if –

It is properly convened by proper authority and by a proper notice.

It is properly constituted with requisite quorum of members and by duly elected Chairman.

It is properly conducted, i.e. according to rules.

Proper Authority to Convene Meeting

 A meeting must be convened or called by a proper authority. Otherwise it will not be a valid
meeting. The proper authority to convene general meetings of a company is the Board of Directors. The
decision to convene a general meeting and issue notice for the same must be taken by a resolution passed
at a validly held Board meeting.

notice of meetings

A meeting in order to be valid, must be convened by a proper notice issued by the proper
authority. It means that the notice convening the meeting be properly drafted according to the Act and the
rules, and must be served on all members who are entitled to attend and vote at the meeting.

Length of Notice:

For general meeting of any kind at least 21days notice must be given to members. A shorter
notice for Annual General Meeting will be valid, if all members entitled to vote give their consent.

The number of days in each case shall be clear days, i.e. the days must be calculated excluding
the day on which the notice is issued, a day or so for postal transit, and the day on which the meeting is to
he held.

Contents of Notice:

Every notice of meeting of a company must specify the place and the day and hour of the
meeting, and shall contain a statement of the business to be transacted thereat.

(1) Place of Meeting: Every annual general meeting of a company must be held either at the registered
office of the company or at some other place within the same city, town or village in which the
registered office of the company is situated.

(2) Day of Meeting: Every annual general meeting of a company must be held on a day that is not a
public holiday.

(3) Time of the Meeting: Every annual general meeting shall be called for a time during the business
hours of the company.

quorum

Quorum is the minimum number of members who must be present at a meeting as required by the
rules. Any business transacted at a meeting without a quorum is invalid. The main purpose of having a
quorum is to avoid decisions being taken at a meeting by a small minority which may be found to be
unacceptable to the vast majority of members.

The number constituting a quorum at any company meeting is usually laid down in the Articles of
Association. In the absence of any provision in the Articles, the provisions as to quorum laid down in the
Companies Act, 1956 (under Sec.174) will apply. The Articles may provide for a larger quorum, but it
cannot provide for a smaller quorum than that laid down in the Act. Sec.174 of Companies Act provides
that the quorum for general meetings of shareholders shall be five members personally present in case of a
public company; and two members personally present for any other company.

agenda

The word ‘agenda’ literally means ‘things to be done’. It refers to the programme of business to
be transacted at a meeting. Agenda is essential for the systematic transaction of the business of a meeting
in the proper order of importance. It is customary for all organisations to send an agenda along with the
notice of a meeting to all members. The business of the meeting must be conducted in the same order in
which the items are placed in the agenda and the order can be varied only with the consent of the meeting.

proxy

The term ‘proxy’ is used to refer to the person who is nominated by a shareholder to represent
him at a general meeting of the company. It also refers to the instrument through which such a nominee
is named and authorised to attend the meeting.

chairman of a meeting

‘Chairman’ is the person who has been designated or elected to preside over and conduct the
proceedings of a meeting. He is the chief authority in the conduct and control of the meeting.

A chairman is usually a member of the body over which he is to preside. He may be either
appointed or designated before hand as chairman by the rules or elected at the meeting itself according to
rules. In the case of a company, the Articles usually designate the Chairman of the Board of Directors to
preside over the general meetings of the company. Where the rules do not designate a chairman or the
designated chairman is absent at the commencement of the meeting, the meeting itself elects a pro tem
(temporary) chairman to preside over the meeting.

Powers and Duties of the Chairman

Powers:

(1) To maintain order and decorum.

(2) To decide points of order.

(3) To decide priority of speakers.

(4) To maintain relevancy and order in debate.

(5) To adjourn a meeting.

(6) To exercise a casting vote.

(7) To ascertain the sense of a meeting and declare the result of voting.

Duties:

1. To see that the meeting is properly convened and duly constituted.

2. To see that the proceedings of the meeting are conducted according to rules.

3. To see that no discussion is allowed unless there is a specific motion.

4. To maintain order and decorum in the meeting.

5. To see that all members, including the minority, get equal opportunity to express their views.

6. To see that the sense of the meeting is properly ascertained on each and every motion.

7. He should see that the poll is taken properly according to the provisions of the Act.

8. He must exercise his casting vote bonafide in the interest of the company.

9. He must exercise correctly his power of adjournment.

statutory meeting

This is the first meeting of the shareholders of a public company. It must be held within a period
of not less than one month nor more than 6 months from the date at which the company is entitled to
commence business. It is held only once in the lifetime of a company. A private company and a
company limited by guarantee and not having a share capital need not hold such a meeting.

The purpose of the statutory meeting with its statutory report is to put the shareholders of the company in
possession of all the important facts relating to the new company, what shares have been taken up, what
moneys received etc. This also provides an opportunity to the shareholders of meeting to discuss the
whole situation, the management and prospects of the company.

The Board of Directors must, atleast 21 days before the day on which the meeting is to be held,
forward a report, called the ‘statutory report’ to every member of the company. This report contains all
the necessary information relating to formational aspects of the company for the information of the
shareholders.

Contents of Statutory Report

(1) The total number of shares allotted, distinguishing those allotted as fully or partly paid up otherwise
than in cash, the extent to which they are partly paid up, the consideration for which they have been
allotted and total amount received in cash;

(2) An abstract of the receipts and payments under distinctive heads upto a date within seven days of
the date of report;

(3) An account of estimate of the preliminary expenses of the company.

(4) The names, addresses and occupations of the managing director, director, and also its secretary and
auditors of the company;

(5) The particulars of any contract which, and the modification or proposed modification of which, are
to be submitted to the meeting for approval;
(6) The extent to which underwriting contracts, if any, have not been carried out and the reason
therefor;

(7) The arrears, if any, due on calls from directors, managing director or manager; and

(8) The particulars of any commission or brokerage paid, or to be paid, in connection with the issue or
sale of shares to any director, managing director or manager.

Certification and Filing of Statutory Report

The Statutory Report must be carried as correct by not less than two directors of the company
including the managing director, if there is one. After the statutory report has been certified by the
directors, the auditors of the company must also certify the report in respect of the number of shares
allotted, cash received on such shares and the receipts and payments of the company upto a date within
seven days of the report. After the statutory report has been sent to the members along with the notice, a
certified copy of the report must be filed with the Registrar of Companies for registration forthwith.

Consequences of Default

If a company makes default in holding the statutory meeting within the prescribed period or in
issuing and filing the statutory report according to the provisions of Sec.165 of the Act, every director or
other officer of the company in default will be liable to pay fine which may extend to Rs.500. Moreover, a
company may be wound up by the Court, if default is made in delivering the statutory report to the
Registrar or in holding the statutory meeting.

annual general meeting

Every company must in each year (i.e. calendar year) hold, in addition to any other meetings, a
general meeting as its annual general meeting and must specify the meeting as such in the notices calling
it. A period of not more than 15 months should pass between the date of one annual general meeting of a
company and that of the next. The company may, however, hold its first annual general meeting within a
maximum period of 18 months form the date of its incorporation.

Importance of Annual General Meeting

It is only at the annual general meeting a company that the shareholders can exercise any control
over its affairs. The shareholders also get an opportunity to control over its affairs. The shareholders also
get an opportunity to discuss the affairs and review the working of the company.

Time and Place for holding AGM

Every annual general meeting of a company must be held –

 during business hours

 on a day that is not a public holiday, and

 either at the registered office of the company or at some other place within the city, town or village in
which the registered office is situated.
Business Transacted at AGM

The annul general meeting can transact both ordinary and special business.

Ordinary Business:

Under Sec.173 of the Act, the following are considered to be ordinary business.

Consideration and approval of the accounts and balance sheet and Auditor’s Report thereon.

Consideration and approval of the Annual Report of Directors.

Declaration of dividends, if any.

Appointment of directors in place of those retiring by rotation.

Appointment of the auditors and fixing their remuneration.

The ordinary business transacted at the annual general meeting requires an ordinary resolution which can
be passed by a simple majority.

Special Business:

If the annual general meeting wants to transact any other business, other than those mentioned
above, that must be treated as ‘special business’.

Consequences of Default

If a company makes a default in holding the annual general meeting in accordance with the
provisions of Sec.166 of the Act, the Company Law Board may, on the application of any member of the
company, call the meeting or direct the company to call the meeting. The Company Law Board may also
give any other direction as it thinks fit, which may even include a direction that one person present in
person or proxy shall constitute the annual general meeting.

If a company fails to hold the annual general meeting as per Sec.166 of the Act or fails to comply
with the directions given by the Company Law Board under Sec.167, then the company and every officer
of the company in default shall be liable to be fined up to Rs.5,000 and also to a further daily fine for a
continuing default which may extend to Rs.250 for every day after the first, during which the default
continues.

extraordinary general meeting

Any general meeting other than an annual general meeting is called an extraordinary general
meeting (Art.47 of Table A, Schedule I). It is called for transacting some urgent or special business
which cannot be postponed till the next annual general meeting.

Extraordinary general meetings are required for transacting different types of business. Example:

• Alteration of the Memorandum and Articles of Association;

• Alteration of the share capital;

• Removal of director before the expiry of his term.

Authority for Convening Extraordinary General Meeting

An Extraordinary General Meeting may be called or convened:

(a) By the Board of Directors: The Articles usually empower the Board of Directors to call an
extraordinary general meeting, whenever it thinks fit.

(b) By the Board of Directors on the Requisition of Members: Section 169 of the Companies Act also
empowers the members to requisition or demand the convening of an extraordinary general meeting.
The requisition must be signed by (i) members holding atleast one-tenth of the paid-up capital
carrying voting power; or (ii) members enjoying one-tenth of the total voting power of all members
entitled to vote on the matter in view.

On receipt of the requisition, the Board of Directors must call, within 21 days on the deposit of the
requisition, an extraordinary general meeting as per requisition to be held at a date not later than 45 days
of the deposit of the requisition.

(c) By the Requisitionists: If the Board fails to call the meeting within 21 days and the meeting is not
held within 45 days of the requisition, the requisitionists themselves may call the meeting within 3
months of the date of requisition.

(d) By the Company Law Board: The Company Law Board can also order an extraordinary general
meeting to be called, held or conducted, if for any reason it is not practicable to call or hold such a
meeting. The Company Law Board may pass order for calling such a meeting on its own initiative or
on the application of any director of any member entitled to vote at the meeting.

class meetings

These are meetings held by a particular class of shareholders (e.g. Equity or Preference
Shareholders) for the purpose of making changes in the Articles of the company as regards their rights
and privileges or for the purpose of conversion of one class of shares into another. These meetings can be
attended by the shareholders or that class only. The Articles usually provide for the holding of class
meetings and lay down the rules and procedure for convening and holding such meetings.

meetings of debenture holders and creditors

These meetings are required for the purpose of:

compromising a disputed matter with creditors or compounding of debts; or

securing the consent of the creditor to any scheme of re-organisation, reconstruction or

amalgamation; or

securing the consent of creditors and debenture holders at the time of winding up.
In each case, the purpose is to secure the support and approval of the creditors and debenture holders to
any scheme of rearrangement or for saving the company from financial difficulty.

Meetings of debenture holders are called by the company with the purpose of (i) varying the
terms of the security, or (ii) modifying the rights of debenture holders. These meetings are usually held
by a company to enable it to issue fresh debentures or to vary the rate of interest payable to existing
debenture holders.

meeting of board of directors

The directors are required to meet frequently to discuss and decide upon policy matters, to take
decision on matters relating to the management of the company and to review its progress. These
meetings are called Board Meetings. The Board of Directors is also usually empowered by the Articles to
appoint committees of directors for specific purposes and to help the Board in its decision-making
process. Meetings of such committees have also to be held as and when required.

requisites of board meetings

The meeting must be convened by the proper authority, by a proper notice, by the proper person
in chair, and the requisite quorum must be present. The rules regarding the holding and conduct of Board
Meetings are laid down by the Act and the Articles.

According to the provisions of the Companies Act, a Board meeting must be held at least once in
every three calendar months, and atleast four such meetings must be held in every year. However, Board
meetings may be held more frequently if the circumstances so demand.

Notice of Board Meeting

Section 286 of the Companies Act provides that, notice of every meeting of the Board of directors
of a company must be given in writing to every director for the time being in India, and at the usual
address.

Usually a week’s notice is considered sufficient. However, if the Articles provide that Board
meetings will be held on fixed days of every month or where the directors are duly informed that in future
all meetings of the Board will be held on a fixed day of every month it will be sufficient compliance with
the statute.

Board meetings must be held at anyplace other than the registered office of the company and
outside business hours and even on a public holiday, according to the convenience of the directors.

Quorum of Board Meetings

According to the provisions of Section 287 of the Companies Act, the quorum for a meeting of
the Board of directors shall be one-third or two directors, whichever is higher.

General Powers of the Board to be Exercised in the Board Meeting

♦ Determination of management policy, trading policy, etc.

♦ To appoint Managing Director

♦ Appointment, promotion and dismissal of staff

♦ Issue of shares and debentures

♦ Allotment of shares

♦ Calls on shares

♦ Forfeiture and re-issue of shares

♦ Transfer and transmission of shares

♦ Convening meeting of shareholders

♦ Determination of rates of dividend

♦ Entering into contracts with third parties

♦ Investment of company funds

♦ Borrowing on behalf of the company

♦ Filing of statutory returns

♦ Maintenance of statutory and other books of the company

minutes of the board meeting

Every company is required to have the minutes of all Board meetings. The pages of the Minutes
Book must be consecutively numbered and each page must be signed and the last page of the book must
be signed by the Chairman of the meeting.

MOTIONS AND RESOLUTIONS

A ‘motion’ is a definite proposal put before a meeting for its consideration and adoption. A
‘resolution’ on the other hand is the formal expression of the decision of a meeting. When a motion has
been duly voted upon and passed by a majority, with or without amendment, it is called a ‘resolution’. A
resolution once adopted and recorded in the minutes becomes the official decision of the meeting and
cannot be rescinded or revoked except by the consent of two-thirds majority in a meeting specially called
for the purpose.

kinds of resolutions

(1) Ordinary Resolution

 (2) Special Resolution

(3) Resolution requiring Special Notice

1. Ordinary Resolution

A resolution which is passed by a simple majority of votes cast by members present in person or
by proxy is called ‘ordinary resolution’. Simple majority means that the votes cast in favour of the
resolution must be at least one more than 50 per cent of the votes cast.

An ordinary resolution must satisfy the following conditions:

(a) It must be moved at a general meeting of which due notice has been given

(b) The voting may be on show of hands or by poll

(c) Voting must be by members who are entitled to vote in person or by proxy, if allowed; and

(d) The votes cast in favour of the resolution, including the casting vote of the chairman, if any,
must exceed the votes, cast against the resolution.

Usually, ordinary resolutions are required to transact ‘ordinary business’. In addition, ordinary
resolutions are sufficient to transact following types of special business:

 Adoption of statutory report

 Removal of director from office before the expiry of his term

 Alteration of share capital

 Issue of shares at a discount

 Appointment of sole selling agents.

2. Special Resolution

A special resolution is one which is required for transacting special business and is required to be
passed by a three-fourths majority of members present and vote in the meeting.

A special resolution in order to be valid under the law must satisfy the following conditions:

The notice of the general meeting must have been duly given as required under the Act;

The intention to propose the resolution as a special resolution must have been duly specified in the
notice calling the general meeting or other intimation of such intention must have been given to
members;

The voting may be on show of hands or on poll;

Votes are cast by members who are entitled so to do, either in person or by proxy; and

Votes cast in favour of the resolution are not less than three times the number of votes, if any, cast
against the resolution.

Special resolution is required to transact the following types of business:

 To change of name of the company

 To change of the domicile of the company

 To change the object clause

 To alter Articles of Association

 To create reserve capital

 To Reduce share capital

 To pay interest out of capital

 To decide winding up of the company

resolutions requiring special notice

Section 190 of the Companies Act, 1956 provides as follows:

(1) Where by any provision contained in this Act or in the Articles, special notice is required of any
resolution, notice of the intention to move the resolution shall be given to the company not less than
14 days before the meeting at which it is to be moved, exclusive of the day on which the notice is
served or deemed to be served and the day of the meeting.

(2) The company shall, immediately after the notice of the intention to move any such resolution has
been received by it, give its members notice of the resolution in the same manner as it gives notice
of the meeting, or if that is not practicable, shall give them notice thereof, either by advertisement in
a newspaper having an appropriate circulation or in any other mode allowed by the Articles, not less
than seven days before the meeting.

The Companies Act has specified certain types of business where such a resolution is required. If a
member wants to move such a resolution, he must give special notice to the company of his intention to
move such a resolution at least 14 days before the date of the meeting. On receipt of such notice, the
company must give notice of the resolution to its members at least 7 days before the meeting, in the same
manner as it gives notice of the meeting. If it is not practicable, notice must be given through
advertisement in newspapers or any other mode allowed by the Articles. The resolution proposed to be
moved may be an ordinary resolution or special resolution.

According to Companies Act, a resolution requiring special notice is required to transact the
following types of business:

(i) Removal of a director before the expiry of his term or to appoint another director in place of a director
so removed.
(ii) Appointment as auditor of a person other than the retiring auditors or deciding that retiring auditor
shall not be re-appointed.

Articles may provide for additional matters for which special notice is required.

MINUTES

‘Minutes’ have been defined as the written record of the business done at a meeting. The minutes
comprise the official record of the proceedings and decisions of a meeting. They constitute a clear,
concise, accurate and permanent record of the decisions and actions of a constituted body. Once
approved and signed by the chairman, they are acceptable as evidence of the proceedings in a court of
law.

Provisions of the Companies Act regarding Minutes

Section 193 of the Companies Act makes it obligatory for every company to maintain minutes of
the proceedings of every general meeting and meetings of the Board of Directors and its Committee. It
has also been laid down that minutes of company meetings kept in accordance with the provisions of this
section will be recognised as evidence of the proceedings recorded therein. Entries must be made in the
minutes book within thirty days of the conclusion of such meetings and the pages of the minutes book
must be consecutively numbered.

The minutes of each meeting must contain a fair and correct summary of the proceedings. In the
case of Board meeting, the names of the directors present and those dissenting in any resolution must also
be mentioned in the minutes.

The minutes need not include any matter which, in the opinion of the chairman, is or may be
considered to be defamatory or irrelevant or immaterial or is detrimental to the interests of the company.
The chairman will have absolute discretion in deciding whether any matter should or should not be
included on the above grounds.

Each page of every minutes book must be initialed or signed and the last page of the book must
be dated and signed by the Chairman of the same meeting.

Any default in complying with these provisions will make the company, and every officer of the
company in default, liable to fine as per the provisions of the Act.

Sec.196 of the Companies Act provides that the minutes of the proceedings of every general
meeting of the company must be kept at the registered office of the company and must remain open for
inspection by any member, free of charge, subject to any reasonable restrictions that the company may
impose by its Articles or in general meeting.

review questions:

1. What are the characteristics of a company?

2. What is a Government company? What are its features?

3. List out the documents to be filed for getting Certificate of Incorporation.

4. What is Memorandum of Association? What are its contents?

5. Describe the procedure involved in alteration of Memorandum of Association.

6. What is Articles of Association? What are its contents?

7. What is Prospectus? What are its contents? What are the consequences of mis-statements in
prospectus?

8. What is Doctrine of Ultravires? What are the effects of Ultravires transactions?

9. Explain the concept of Doctrine of Indoor Management.

10. What are the different methods of appointment of Directors?

11. What are the powers and duties of Directors?

12. What are the requisites of valid meeting?

13. What is a Statutory meeting? What are the contents of statutory report?

14. What is the Annual General Meeting? What are the usual business that are transacted in the AGM?

15. What is Extraordinary General Meeting? Who can convene it?

16. What are the different kinds of resolutions?

17. What do you understand by the Minutes? What are the provisions of the Act regarding maintenance
of minutes of the meeting?
LESSON – 17

COMPANY MANAGEMENT

A company, though a legal entity in the eyes of the law, is an artificial person, existing only in
contemplation of law. It has no physical existence. It has neither soul nor a body of its own. As such, it
cannot act in its own person. It can do so only through some human agency. The persons who are in
charge of the management of the affairs of a company are termed as directors. They are collectively
known as Board of Directors.

directors

The Companies Act defines a ‘director’ as “any person occupying the position of a director by
whatever name called” [Sec.2(13)]. This is however, an inadequate definition.

In the absence of a precise definition, we can only determine whether a person is a director or not
a director by referring to the nature of his office and functions. According to the functions performed by
him, a director may be defined as a person who directs, conducts, manages and supervises the affairs of a
company.

Only Individuals can be Directors

A body corporate, association or firm cannot be appointed director of a company. Only an

individual can be appointed as directors.

Number of Directors

Every public company shall have atleast 3 directors and every other company shall have atleast 2
directors. Subject to this statutory minimum limit, the Articles of a company may prescribe the maximum
and minimum number for its Board.

Share Qualification of Directors

The Articles of a company usually require its directors to hold a certain number of shares. Such
shares are called qualification shares. The nominal value of the qualification shares should not exceed
Rs.5,000. He should obtain his qualification shares within 2 months after his appointment as director.

Number of Directorships

A person cannot hold office at the same time as director in more than 20 companies. Where a
person already holding the office of director in 20 companies is appointed as a director of any other
company, the appointment can take effect only when such person has, within 15 days of his appointment,
effectively vacated his office as director in any of the companies in which he was already a director.

disqualification of directors

The following persons are disqualified for appointment as directors of a company:


A person of unsound mind.

An undischarged insolvent.

A person who has applied to be adjudicated as an insolvent and his application is pending.

A person who has been convicted by a Court of any offence involving moral turpitude and sentenced
to imprisonment for a minimum period of 6 months and a period of 5 years has not passed from the
date of expiry of the sentence.

A person whose calls in respect o shares of the company held by him have been in arrear for more
than 6 months.

A person who is disqualified for appointment as director by an order of the Court under Sec.203 on
the ground of fraud or misfeasance in relation to a company.

vacation of office of directors

The office of the director of a company becomes vacant, if –

 he fails to obtain within 2 months of his appointment or at any time thereafter ceases to hold the share
qualification;

 he is of unsound mind;

 he applies to be adjudicated an insolvent;

 he is adjudged an insolvent;

 he is convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof
to imprisonment for at least 6 months.

 he fails to pay any call in respect of shares of the company held by him within 6 months from the last
date fixed for the payment of the call;

 he absents himself from 3 consecutive meetings of the Board of directors;

 he accepts a loan without the approval of the Central Government;

 he fails to make disclosures to the Board of directors with regard to any contracts with the company
in which he is directly or indirectly interested;

 he becomes disqualified by an order of the Court for guilty of fraud;

 he is removed before the expiry of his period of office by an ordinary resolution;

appointment of directors

First Directors
 The first directors are usually named in the articles of association of the company. If not, they
shall be determined in writing by the subscribers of the memorandum. If this also is not done, all the
subscribers of the memorandum shall be deemed to be the first directors of the company.

Appointment of Directors by the Company

According to Sec. 255, directors are appointed by a company in a general meeting. While one-
third of the directors can be appointed permanently, the remaining two-thirds are liable to retire by
rotation. Of these, only one-third are liable to retire at any annual general meeting. Retiring directors are
also eligible for re-appointment.

Appointment of Directors by the Board of Directors

(a) As Additional Directors: (Sec.260). The Board of Directors may appoint additional directors within
the maximum strength fixed by the articles. Such additional directors hold office only upto the date
of the next annual general meeting of the company.

(b) In a Casual Vacancy: (Sec.262). Causal vacancy can be filled up by the board if the articles permit it.
A casual vacancy may arise due to reasons such as death, resignation, disqualification or failure of an
elected director to accept the office or due to any other reason. The director appointed in a causal
vacancy shall hold office only upto the date on which the director whose place has been filled up was
to retire.

(c) As an Alternate Director: (Sec.313). The Board of Directors if authorised by the articles or by the
company’s resolution at the general meeting may appoint an alternate director. Such an alternate
director is to act for the original director during his absence for a period of more than three months
from the State in which the meetings of the company are held. The alternate director can continue as
director only for the period for which the original director was eligible. Further on the return of the
original director, the alternate director must vacate the office of directorship.

Appointment of Directors by Third Parties (Sec.255)

Sometimes the articles may give a right to financial institutions, debenture holders and banking
companies which have lent money to the company to nominate directors on the board of the company
with a view to ensuring that the funds advanced by them are used by the company for the purpose for
which they are borrowed. The number of directors so nominated should not exceed one-third of the total
strength of the board and they are not to retire by rotation.

Appointment of Directors by the Central Government

The Central Government may appoint such number of directors of the board of a company as the
Company Law Board may by an order in writing specify as being necessary to effectively safeguard the
interest of the company, its shareholders or the public interest. They are appointed to prevent oppression
of the minority shareholders or to prevent mismanagement of the company or in the public interest. They
are appointed for a maximum period of three years. They are not required to hold qualification share and
are not liable to retire by rotation but they can be removed by the Central Government at any time and
other persons may be appointed by it in their place.
powers and duties of directors

The powers of the Directors can be broadly divided into two:

(i) Statutory Powers

(ii) Managerial Powers

statutory powers

These powers are laid down in the Companies Act, 1956. They confer upon the Board of
Directors is the right to exercise all such powers and do all such acts as the company itself has the
authority to exercise and do. Thus, the powers of the directors are provided in the Companies Act.

Powers to be exercised only at Board Meeting: Sec.292 of the Companies Act provides that the Board
of Directors shall exercise the following powers by means of resolutions passed at a meeting of the
Board:

• the power to make calls on shares;

• the power to issue debentures of the company;

• the power to borrow money otherwise than on debentures;

• the power to invest the funds of the company; and

• the power to make loans.

Powers to be exercised by the Board only with the consent of the Shareholders in the General
Meeting:

 sell, lease or dispose the whole or part of the company’s undertaking,

 remit or allow time for repayment of debt due by a director,

 invest any amount received on the acquisition of any property or under-excess of the maximum laid
down in the Act,

 appoint a sole selling agent for more than 5 years,

 issue bonus shares, and

 reorganise the share capital of the company.

Other Powers to be exercised at Board Meetings

 The power to appoint Additional Directors,

 The power to fill-up causal vacancy in the office of Director,

 The power to accord sanction to a Director to enter into certain specified contracts with the company.

 The power to appoint as Managing Director.

 The power to invest in any shares of any other body corporate.

 The power to make declaration of solvency in the case of members voluntary winding up.

managerial powers

(a) Power to make contracts on behalf of the company.

(b) Power to decide the terms of issue of additional shares and debentures.

(c) Power to issue, allot, forfeit and transfer shares of the company.

(d) Power to appoint Directors to fill-up any casual vacancies, Additional Directors or Alternate
Directors.

(e) Power to set organisational objectives and formulate major policies.

(f) Power of determining the organisational structure of the company.

duties of the directors

general duties

• To establish the general objectives and to determine the business of the company;

• To issue directions for the implementation of these policies and to review and check up the
performance;

• To delegate powers to any committee or the chief executive or others, if permitted by the Articles;
and

• To appoint officers and other employees, including managerial personnel, of the company.

statutory duties

 To disclose interests in contracts or arrangements proposed to be entered into by the company

(Sec.299).

 To disclose particulars of shares held in other companies (Sec.308).

 To disclose names, addresses, occupations etc. for entry in the Register of Directors.

 To determine minimum subscription and issue prospectus.

 To hold statutory and annual general meetings and lay before these meetings the reports, accounts,
returns etc. required by the Act.

 To convene extraordinary general meeting if requisitioned by members.

 To circulate and file with the Registrar the resolutions, reports accounts etc. required by the Act.

 To issue, allot, forfeit and transfer shares.

 To recommend declaration and payment of dividends as per the Act.

 To maintain books and registers required under the Act and the Articles.

 To do all other acts required under the Act and the Articles.

fiduciary duties

As agents of the company, the directors hold a position of trust in relation to the company. They
are duty bond (a) to exercise their powers honestly and bonafide for the benefit of the company as a
whole; and (b) not to place themselves in a position where there is a conflict between their duties to the
company and their personal interests.

Thus, the first duty of the directors is to act honestly and with utmost good faith. They exercise
their powers bonafide for the benefit of the company and must not use it for their own personal interests.
If they make any profit by the use of their powers, as directors, they must account for the same to the
company.

Duty of Care and Skill

The directors have a common law duty to exercise reasonable care and skill in the discharge of
their duties. If they fail to do so, they will be liable for damages under the common law.

Duty not to Delegate

directors are expected to perform his functions personally and not to delegate them to someone
else who is not a director.

Duty to Disclose Interest

Directors of a company are duty bound to disclose their interests in contracts or arrangements
proposed to be entered into by the company. This safeguard is necessary to prevent any conflict between
the personal interests of the director and his duty to the company.

remuneration of directors

The remuneration payable to the directors of a company, including any managing or whole-time
director, is determined either by the Articles of the company, or by a resolution passed by the company in
general meeting. The Articles may also require that a special resolution is to be passed for the purpose.
The amount of remuneration and its mode of payment, must be in accordance with the provisions of
Secs.198 and 309.

Overall Maximum Managerial Remuneration:

The total managerial remuneration to the managing/ whole-time directors and/or manager of a
public company or a private company which is a subsidiary of a public company in respect of any
financial year must not exceed 11 per cent of the net profits of the company for that financial year. The
percentage aforesaid shall be exclusive of any fees payable to directors for attending meetings of the
Board of directors or any committee thereof.

removal of directors

Directors may be removed by –

1. Shareholders (Sec.284)

The shareholders may, by passing an ordinary resolution at their general meeting, remove a
director before the expiry of his period of office.

2. Central Government (Secs.388-B to 388-E)

The Central Government may exercise this power where in its opinion there are circumstances
suggesting –

(a) that the director concerned in the conduct and management of the affairs of the company is or
has been guilty of fraud, misfeasance, persistent negligence or default in carrying out his
obligations and functions under the law, or breach of trust; or

(b) that the business of the company is not or has not been conducted and managed by the
director in accordance with sound business principles or prudent commercial practices; or

(c) that the company is or has been conducted and managed by the director in a manner which is
likely to cause, or has caused, serious injury or damage to the interest of the trade, industry or
business to which such company pertains; or

(d) that the business of the company is or has been conducted and managed by the director with
intent to defraud its creditors, members or any other person or against public interest.

3. Company Law Board (Sec.402)

Where, on an application to the Company Law Board for prevention of oppression or mis-
management, the Company Law Board finds that the relief ought to be granted, it may by an order
provide for the termination, setting aside or modification of any agreement between the company and the
director. When the appointment of a director is so terminated or set aside he cannot sue the company for
damages or compensation for loss of office.

liabilities of directors
 The following are the liabilities of directors –

1. Liability to Third Parties

This may arise –

(1) Under the Act: Liability of directors to third parties may arise in connection with the issue of a
prospectus which contains mis-statements.

They may also incur such liability –

♦ where they fail to repay application money if minimum subscription has not been subscribed;

♦ where the allotment of shares has been irregular;

(2) Independently of the Act: Directors are personally liable while signing a negotiable instrument
without mentioning the company’s name and if they act in their own name.

2. Liability to the Company

(1) Ultra vires acts: Directors are personally liable to the company in respect of ultra vires acts.

(2) Negligence: A director may incur liability for negligence in the exercise of his duties.

(3) Breach of trust: They must discharge their duties as trustees in the best interest of the company.
They are liable to the company for any loss resulting from breach of trust.

(4) Misfeasance: Directors arealso liable to the company for misfeasance which means ‘misconduct’ of
directors for which they may be sued in a Law Court.

3. Liability for Breach of Statutory Duties

If directors fail to perform the statutory duties, they render themselves liable to penalties.

4. Criminal Liability

Apart from civil liability under the Act or under the general law, directors of a company may also
incur criminal liability under common law, as well as under the Companies Act and other statutes.

managing director

Section 2(26) of the Companies Act defines a managing director as, “a director who, by virtue of
an agreement with the company, or of a resolution passed by the company in general meeting, or by its
Board of Directors, or by virtue of its Memorandum or Articles of Association, is entrusted with
substantial powers of management which would not otherwise be exercisable by him, and includes a
director occupying the position of a managing director, by whatever name called.”

From the above definition it is clear that a managing director is also a director, but he enjoys
substantial powers to act as the chief executive under the control and supervision of the Board. Thus, he
is both a director and manager. As a director he takes a seat in the Board meeting and participates in the
policy-making function. As a manager or chief executive, he is responsible for the day-to-day
management of the company.

appointment of managing director

Usually the Articles of most companies empower the Board to appoint one of their member as
managing director by a resolution of the Board and under a separate service agreement setting out the
terms and conditions of his service. Only an individual can be appointed as a managing director.

No person can act as managing director of more than two companies at a time. No company can
appoint a person as managing director for a term exceeding five years at a time. A managing director can
be re-appointed for further periods not exceeding five years at a time.

rights, powers and duties

A managing director has two fold function – he is both a director and a manager. As a director he
takes a seat in the Board meetings and helps in the formulation of policy matters. As a manager or chief
executive he is responsible for the routine management of the company’s business. But compared to
other directors, he enjoys substantial powers of management under the control and supervision of the
Board.

The managing director derives his powers from the Memorandum and Articles of the company or
from the resolution of the general meeting or the Board or from the service agreement entered into by him
with the company. He enjoys substantial powers of management delegated to him by the Board. Thought
the Act excludes certain routine administrative acts from his substantial powers of management, he can
exercise these powers provided the Board authorises him. He also derives certain powers from the
service agreement between him and the company.

The managing director, being essentially a director, has all the rights and duties of a director. In
addition, he enjoys some other rights and has to perform many other duties in the day-to-day management
of the company. These additional rights and duties are usually provided for in the Articles and conferred
on him by the Board. The service agreement defines the limits of his powers and duties.

remuneration

A managing director may be remunerated either by way of a monthly payment or at a specified

percentage of the net profits of the company or partly by one way and partly by the other. But such
remuneration must not exceed 5% of the net profits without the sanction of the Central Government.
Where there are more than one such managing directors, the remuneration must not exceed 10 percent of
the net profits without sanction of the Central Government.
 MODEL QUESTION PAPER
Paper 1.5: BUSINESS LAWS
Time: 3 Hours Max. Marks: 100

SECTION - A (5 x 8 = 40)
Answer any Five questions
All questions carry equal marks
1. Define offer. State the legal rules relating to valid offer.
2. Define consideration. What are the legal rules relating to consideration?
3. Distinguish between the contract of indemnity and contract of guarantee.
4. Distinguish between sale and agreement to sell.
5. State the procedure of redressal of grievances under Consumer Protection
Act.
6. What is the test for partnership?
7. What are the kinds of fire policies?
8. What is corporate veil? When is it lifted?

SECTION - B (4 x 15 = 60)
Answer any Four questions
Question No.15 is compulsory.
9. What are the essentials of valid contract?
10. What are the implied conditions and warranties under Sales of Goods Act?
11. What are the different methods of discharging the contract?
12. What are the rights and duties of an agent?
13. What are the general principles of insurance?
14. What are the different methods of appointment of Directors?

15. Attempt the following Cases:

1
1. A invites B to a dinner at his house on a Sunday, B hires a taxi and
reaches A’s house at the appointed time, but A fails to perform his
promise. Can B recover any damages from A?
2. A forced B to enter into a contract at the point of pistol. What remedy is
available to B, if he does not want to be bound by the contract?
3. At a meeting of a company only 15 shareholders were present, 9 voted for
a special resolution and 2 against, and 4 did not vote at all. Is this a valid
resolution?
4. What are the rules laid down in the case, (a) Royal British Bank Vs
Turquand, (b) Salomon Vs Salomon?
5. The captain of a ship, which was on the point of capture, threw overboard
a quantity of dollars lest it should fall into enemy hands. Can he claim
general average contribution?