Bora Institute of Management Sciences

Study Notes on
Business Law
NMBA-022

Submitted By:
Sanjoli Kedia

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 Business Law
Unit -1, 2,3,4,5
Most of the business transactions are based on promises to be performed at a later date. These
promises whether made by businessmen or by others create certain rights and obligations and if these
rights and
Obligations are not enforceable; the business world would be paralyzed.
It is with the enforcement of these promises that the law of contract is concerned. The contract Act
does not lay down the list of obligations that would be enforceable by law but lays down the rules
subject to which rights or duties created by the parties would be enforced. The parties to the contract
can make whatever rules they want, if these rules are not inconsistent with the provisions of the Act,
they would be enforced by courts of law.
Meaning: Sec.2 (h) An agreement enforceable by law is a contract.Therefore, a contract has two
important elements, one is the agreement, and the other is the obligation which is enforceable by law.
Agreement: Agreement is the outcome of the consensus between the parties who enter into a
contract, i.e., the promise made between them, represents concurrence of their minds. (Sec.13). these
would not be an agreement if the parties do agree but not on the same thing in the same sense, i.e.,
consensus is not sufficient. There has to be consensus ad idem.
Sec.2 (e) defines an agreement as Every promise or every set of promises forming consideration for
each other. A proposal when accepted becomes a promise.
Example: A received Rs.10, 000 from B and promises to supply him 10 bags of rice after 10 days. It
is a promise. It shall be a set of promises if a promises to supply 10 bags of rice after 10 days and B
promises to pay him Rs.10, 000 after the rice is supplied. Thus, Agreement = Offer + Acceptance.
Offer (Proposal): Offer [(proposal) (Sec.2 (a)] When one person signifies to another his willingness
to do or to abstain from doing anything with a view to obtaining the assent of the other to such act or
abstinence, he is said to make a proposal.
Acceptance: Acceptance has been defined u/s (Sec.2 (b)) 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.
Example: A lost his Cell Phone and announced that anybody who brought his cell phone back home
would receive Rs.500 as reward. B heard the announcement and brought the Cell Phone back home.
He is said to have accepted the proposal by doing the act required by A and hence he can recover the
reward.
Promisor: A person who makes the promise is called the Promisor or Offeror. And the person to
whom the proposal is made is known asPromisee or Offeree.In case an agreement is a set of
promises; then a person becomes a promisor and promisee. Thus if there is an offer, acceptance and
consensus ad idem between the parties, there is an agreement. However, this agreement does not
become a contract unless there is a corresponding obligation, i.e., enforceability at law.

Obligation (Sec.10): It is the legal duty of a person to carry out what he has promised to do or not to
do. All agreements are contracts if they are made by the free consent of the parties competent to enter
into contract, for a lawful consideration and with a lawful object and not hereby expressly declared to
be void. Therefore, a person becomes legally bound to do what he has promised to do only if the
following conditions are fulfilled.
1. Capacity of the Parties: Only those persons who are competent to enter into a contract can create
valid obligations. A minor, a lunatic, a drunkard etc., suffer from flaw in capacity to Contract and
therefore the contract made with them cant be enforced against them.
2. Free Consent: Absence of consent does not create a legal obligation. For an agreement to become
a contract the parties to an agreement should give their consent to the agreement out of their own free
will. It should not be induced by coercion, undue influence, fraud, misrepresentation, etc.

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Absence of Free Consent

Coercion (Sec. 15)

Undue Influence (Sec. 16)
Misrepresentation
Mistake
Fraudulent (Sec 17)
Mistake of Law Mistake of Fact

3. Lawful Consideration and Object: Consideration means something in return, i.e., quid pro quo.
E.g. A promises to give his bike to B for no money, here, there is no consideration, hence no
obligation.
Without consideration a promise cant be enforceable by law. However, consideration need not be in
money or in kind. It may be of an act, abstinence, a promise to do, or not to do something.
Consideration should be lawful.
Example: A promises to pay a sum of money to B if B smuggles the object proposed by A. In this
case, there is no lawful object.
5. Intention to create Legal Relationship: Social obligation cant bring legal relationship. For
example: Father promised his son to pay Rs.100 per day for pocket expenses, however, later on, did
not pay the said amount. Therefore, if the parties do not intend to be bound by law at the time they
make promises, nothing can bind them to their promises, later on.
6. Possibility of Performance: Example: A promised B that he would make Sun rises in the West if
B pays him Rs.1 lakh. And B agreed to it, this agreement does not create any legal obligation as it
would not be enforceable by law.
8. Legal Formalities (If required): An agreement to make a for natural love and affection should not
only be in writing but registered also (Sec. 25). In the absence of any such specific requirement an
oral agreement is as enforceable as a written agreement.
9. Agreements not declared Void: Indian Contract Act has specially declared some agreements to be
not enforceable at law e.g.
Agreements in restraint of trade, Agreements in restraint of marriage, wagering agreements etc
Kinds of Contracts
1. Valid Contract: It is an agreement which fulfils all the essentials of enforceability and can be
enforced by either of the parties at the courts of law.
2. Voidable contract: Sec 2(i) lays down that An agreement which is enforceable by law at the
option of one or more of the parties thereto, but not at the option of the other or others, is a Voidable
Contract.
this arises where the consent of one of the parties to the contract is not free. Ex., A, at the point of
pistol makes B agree to sell his bicycle for Rs.500. Here Bs consent is not free.
Circumstances in which a contract is voidable are:
(A) At the conception
1. Consent caused by fraud (Sec.14, 17 and 19)
2. Consent caused by coercion (Sec. 14, 15 and 19)
3. Consent caused by misrepresentation (Sec. 14, 18 and 19)
4. Consent caused by undue influence (Sec. 14, 16 and 19A)
5. When one party induces another to enter into an agreement the object of which is unlawful though
it is not known to the other party.
(B) By Subsequent Default
1. Where offer of performance is not accepted (Sec. 38)
2. When one party prevents performance of reciprocal promise (Sec. 53)
3. When a party fails to perform at the time fixed, if time is the essence of the contract (Sec. 55)
Consequences of Recession of Voidable Contract
B. As regards the other party, he need not perform his promise.
3. Void Contract: [Sec 2(j)] A contract which ceases to be enforceable by law becomes void when it
ceases to be enforceable E.g A agrees to sell his car to B for Rs.10, 000. All essentials of a contract
are fulfilled.

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If A refuses to sell his car, B can go to the court and the court would enforce As promise. But if,
before the delivery the car is destroyed by Tsunami, the court cannot enforce anything and hence this
contract becomes unenforceable i.e void. Thus, void contract is one which was a valid contract when
it was made but becomes void later on. Those agreements which are void ab initio (from the very
beginning) are called Void Agreements and those which become void later on are called Void
Contracts.
Following circumstances will transform a valid contract into a void contract.
A. Contingent contract: A contingent contract to do or not to do something on the happening of an
uncertain future event becomes void, when the event becomes impossible (Sec 32).
B. Repudiation of a voidable contract: When a voidable contract is rescinded by the party at whose
option it is voidable, the contract becomes void.
C. Subsequent impossibility (Sec. 56): A contract which becomes impossible to perform, after it is
made, becomes void.
D. Subsequent illegality (Sec. 56): A contract becomes void if it becomes illegal after it is made.
Consequences of a Void Contract: Sec. 65 lays down that when a contract becomes void, the party
who has received any advantage under such agreement should restore it or make compensation for it
to the party from whom he received it.
4. Void Agreement: An agreement not enforceable by law is called a void agreement. If any of the
essentials of obligations (enforceability), other than free consent, is missing the agreement cannot be
enforced at Courts of Law.
Invalidating Causes
In the following circumstances an agreement is void- ab - initio.
i. If a party to the contract is incompetent to contract (Sec.10, 11 & 12)
ii. If the agreement is without consideration (Sec. 10, 25) barring certain
Exceptions
iii. If the consideration or object is unlawful (Sec. 23)
iv. If the meaning of the contract is uncertain (Sec. 29)
v. If the agreement is to does an impossible act (Sec. 56)
5. Illegal Agreement: An illegal agreement is one which is forbidden by law i.e. it is entered into
with the intention of violating the law.
Example: A agrees to steal furniture for B for a consideration of Rs.1, 00,000. It is illegal and
therefore it is void. It also attracts the penal provisions of the law it is violating.
While all illegal agreements are void, all void agreements are not illegal. Parties to an illegal
agreement cannot get any help or protection from law courts.
7. Unenforceable Contract: Contracts which have all the essentials of enforceability but cannot be
enforced due to certain technicalities like insufficiency of stamp, etc. are termed as unenforceable
contracts.
8. Express Contract: It is one where the intention of parties is stated in words either written or
spoken. Example: A goes to Bs shop and asks him to supply 10 boxes th Rs.20per box. B tells him
that he is ready to supply the boxes at the mentioned rate. This is an Express Contract.
9. Implied Contract: The evidence of an implied contract is to be deduced from the acts or conduct
of the parties. No exchange of words either written or spoken takes place, but the manifestation of
their intentions is inferred from their respective acts or conduct.
10. Quasi Contracts: These are those obligations which are imposed by the Contract Act and do not
arise from a consensus between the parties. Example: A, a tradesman, leaves goods at Bs house by
mistake. B treats the goods as his own. B is bound to pay A for them; the obligation is imposed by
law.
11. An Executed Contract: It is one where both the parties to a contract have discharged their
respective responsibilities by performing them. All transactions of Cash sales are the examples of
Executed Contracts.
12. An Executory Contract: It is one where one or both the parties are yet to perform their respective
promises. It is partly Executed and partly Executory.
13. Unilateral Contract: It is one where at the time when the contract is made one party has already
performed his obligation and the obligation on the part of the other party only, is outstanding.

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Example: A goes to a bus stand ticket counter and buys a ticket for journey. A has performed his duty
under the contract i.e., to pay the scheduled fare. But the bus authority is yet to perform his promise
i.e., of carrying him from one point to another. This is a Unilateral Contract.
14. Bilateral Contract: As against Unilateral Contract, a Bilateral Contract is one where at the time
of entering into the contract both the parties to the contract are yet to perform their respective
promises.
Offer and Acceptance
As seen earlier the first step in making a contract starts with making an offer. We shall, therefore,
discuss as to what constitutes a lawful offer.

Offer or Proposal

Offer and Proposal are synonymous terms. According to sec. 2(a),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 Promisor and the person to whom the offer is made is called the Promisee [Sec.2 (c)]
Example: offers to pay Rs.100 to B if B washes his cloths. A is the promisor and B is the promisee for
the promise to pay Rs.100.
A is the promisee and B is the promisor for washing his clothes. It is important to note that the offer
must be made with the object of obtaining the assent of the other party.
Rules Regarding a Lawful Offer
A valid offer must be in conformity with the following rules:
1. Terms of an offer should be definite or should be capable of being made definite.
2. Offer should be made with an intention to create legal relationship: In the absence of such
intention no obligation can arise. Absence of such intention may be express or implied.
Example: Where A proposes to sell his Television to B for Rs.10000 but tells him that the breach of
promise by either party would not create legal rights, no binding contract would arise in that case even
if the agreement is in writing.
3. There is no valid offer where:
i. It is mere statement of intention:
Example: A gives an advertisement in the television that he would dispose of his building by auction
on 5th June at 8 a.m. in the lawns of his bungalow. B, who saw this advertisement, travels a distance
of 200 kilometers and reaches As bungalow at the given time and date and ends that auction has been
cancelled. A cannot be held liable because his advertisement to hold auction did not constitute an
offer; it was merely an intention to hold an auction where bids would be received.
ii. It is an invitation to offer:
Where A puts his building to public auction he is inviting offers from the bidders and he accepts the
offer by falling the hammer or by any other customary method. The actual offer is the bid made at the
auction and the auctioneer accepts it.
4. Offer must be communicated: Offer must be brought to the knowledge of the person to whom it
is made. If an offer is not communicated to the offeree, the latter cannot accept it.
103
5. Offer should not contain a term the non-compliance of which would amount to acceptance.
Example: A writes to B I shall buy your furniture for Rs, 10,000, if you do
Not reply I shall assume that you have accepted my offer. This is not a valid offer.
6. Offer may be express or implied: An offer is express when it is stated in words, written or
spoken.
7. An offer may be general or specific: When an offer is made to a specific person it is called a
specific offer and it can be accepted only by that person but when an offer is addressed to an uncertain
body of individuals i.e. the world at large, it is a general offer and can be accepted by any member of
the general public by fulfilling the condition laid down in the offer.

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Lapse of an Offer

An offer once made cannot be continued for ever. Liability of the party making the proposal cannot be
continued for all times to come. An offer becomes invalid i.e. comes to an end in the following
circumstances.
1. When the stipulated or reasonable time has expired: Example:
Offers to sell his modern table to B for Rs. 5000 and tells him that B must communicate his
acceptance within three days. On fourth day B brings Rs.5000 to buy the table. A refuses. A is not
bound because the offer has lapsed on the third day.
2. Where the offer becomes illegal after it is made: Example: X of Mumbai offers to buy Peanuts
from Y of Chennai. Next day Central Government prohibits inter-state transfer of Peanuts. Offer
lapses by subsequent illegality.
3. Where the offerer or offeree dies or becomes insane before the offer is accepted: Example:
offerer to sell his cow to B. Before B could accept the offer, A dies. B cannot accept the offer.
4. Where the offeree does not accept the offer in the mode the offerer had prescribed: Example:
A writes to B that he wants to sell his furniture to B for Rs.10, 000. He also writes to B that if B wants
to buy the furniture, he (B) should send him (A) a telegram accepting the offer. B writes a letter to A
accepting the offer. If A keeps silence over it, this is a valid acceptance. But if A informs B that he is
not treating this letter as acceptance because the offer has not been accepted by a telegram, then this
letter would not result in acceptance.
5. An offer lapses by counter offer by the offeree: Example: A tells B, I want to buy your land for
Rs. 10,000. B says, I shall sell my land for Rs.15, 000. A refuses to buy it for Rs. 15,000. Then B
insists that A should buy it for Rs. 10,000. A refuses to do so. A is not bound by his offer because the
statement of B that I shall sell my land for Rs. 15,000 is not acceptance of As offer but a counter
offerer. When
a counter offer is made the original offer lapses and there is nothing for the offeree to accept. But an
enquiry should not be mistaken for a counter offer.
6. An offer comes to an end when the offerer revokes his offer before it is accepted.
Tender (standing offer)

ACCEPTANCE: When the person to whom the proposal is made signifies his assent thereto the
proposal is said to be accepted. A proposal once accepted becomes a contract. Where two parties
make offers to each other with identical terms, without knowing each others offer. These offers are
calledCROSS OFFERS.
Who can accept? Where an offer is made to a specified person, only that specified person can accept
it and nobody else. But where the offer is made to an uncertain body of persons, anybody can accept
the offer.
Rules Regarding Acceptance
1. Acceptance must be absolute and unqualified: the offeree must accept unconditionally all the terms
of the offer without any change in any of them.
2. The Acceptance must be expressed in some usual and reasonable manner, unless the proposal
prescribes a manner in which it is to be accepted
3. Acceptance by performing conditions or receiving consideration: Example: A offers to pay Rs.
100 to B, if B throws the ring ball into the basket in first attempt. B immediately throws the ball into
the basket in first attempt. By the performance of this condition B is said to have accepted the offer.
4. Acceptance must be communicated: Unless acceptance is communicated it would not turn the
offer into a contract. However, If the offeree posts the acceptance but it does not reach the offerer, it
Would be deemed to be communicated. But the offerer cannot frame His offer in such a way that the
silence of the offeree would become his acceptance.
5. Acceptance should be given within stipulated time and before the offer is revoked: If the offer
lapses before acceptance are given, the acceptance would not result into a contract. But where no time
limit is stipulated the offer should be accepted within a reasonable Time.
6. Where an offeree accepts an offer knowing that it has been made by the Offeror under a
mistake, the contract is not binding upon the Offeror.
Consensus Ad Idem

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According to sec. 13, Two or more persons are said to consent when they agree upon the same thing
in the same sense. But where the circumstances lead one party to believe that the other would have
understood the terms of the agreement, law may imply unenforceable agreement. Because it is not
what a party thinks in his mind but what he expresses or does that binds him to the contract.
Communication of Offer and Acceptance

Problem of communication arises when the parties to the contract are not face to face with each other.
It arises in the following cases:
(A) Contracts through Telephones: (B) Contracts through Post: Offer and acceptance are
generally made through letters and telegrams, advertisements, notices, circulars, etc., are also used to
make an offer. the rules of communication regarding them are as follows:
(1) The communication of a proposal is complete when it comes to the knowledge of the person to
whom it is made (sec. 4)
(2) .The communication of an acceptance is complete
I. as against the proposer, when it is put in a course of transmission to him, so as to be out of the
power of acceptor; and
ii. As against the acceptor, when it comes to the knowledge of the proposer (Sec.4) from the
above, it is clear that an offer may be revoked at any time before the acceptance is put in course of
transmission to the proposer.
Revocation of Proposal and Acceptance
A proposal may be revoked at any time before that communication of its acceptance is complete as
against the proposer, but not afterwards.
Communication of Revocation
The communication of a 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.
Agreement to Agree in Future
Agreement to enter into an agreement upon terms to be settled afterwards between the parties is a
contradiction in terms. It is absurd to say that a man enters into an agreement till the terms of
agreement are settled; until those terms are settled, he is perfectly at liberty to retire from the bargain.
Consideration and Competence to Contract
Consideration is one of the elements of obligation. An agreement becomes enforceable only if it is
supported by consideration. (Sec. 10) All agreements are contracts if they are made for a lawful
consideration it clearly shows that consideration is an important pre-requisite of a valid contract.
(Sec.25) An agreement made without consideration is void hence the rule is No Consideration,
No Contract.
Essentials of Consideration
(A) Based on Definition
An analysis of the above definition reveals the following essentials of consideration.
1. Consideration must move at the desire of the promisor
2. It may move from promisee or from any other person on behalf of promisee.
Stranger to Contract
It is a general rule that a person, who is not a party to a contract, cannot sue on the contract even
though the contract is for his benefit i.e. unless there is privity of contract, the relationship is not
enforceable.
3. Consideration may be past, present or future
4. Consideration must be real and not illusory
5. Consideration may consist of an act, abstinence or promise

(B) Based on other provisions

In addition to the above essentials of consideration that emerge from the definition, the others are as
follows:
1. Consideration must be lawful: (Sec. 10) All agreements are contracts, if they are made for a lawful
consideration the consideration of an agreement is unlawful, if (i) it is forbidden by law, or (ii) it is
of such a nature that, if permitted, it would defeat the provisions of any law, or (iii) it is fraudulent or

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(IV) it involves or implies injury to the person or property of another or (v) the court regards it as
immoral or opposed to public policy (Sec. 23).
2. Consideration need not be adequate to the value of the promise: (Sec. 25) An agreement to which
the consent of the promisor is freely given is not void merely because the consideration is inadequate,
but the inadequacy of the consideration may be taken into account by the court in determining the
question whether the consent of the promisor was freely given.
Exceptions to the Rule of Consideration (Sec. 25) In the following cases the agreement would be
enforceable even though they are made without consideration.
(1) Love and affection:
An agreement without consideration is enforceable, if
A. it is made out of love and affection;
B. the love and affection is natural because the parties are so related to each other;
C. the agreement is in writing;
D. the agreement is registered under law.
(2) Compensation for voluntary services: If it is a promise to compensate, wholly or in part, a
person who has already voluntarily done something for the promisor or something which the promisor
was legally compellable to do.
(3) Promise to pay a time barred debt: If it is a promise, made in writing and signed by the debtor
or his agent to pay wholly or in part a debt which is barred by the limitation.
(4) Contract of Agency: Sec. 185 provides No consideration is necessary to create an agency.
(5) Gift already Made: (Sec. 25) Nothing in this Section shall affect the validity, as between the
donor and done, of any gift actually made.
Unlawful Agreements
According to the Indian Contract Act (Sec. 23), the consideration or object of an agreement is lawful,
unless it is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of
any law; or is fraudulent; or involves or implies injury to the person or property of another;
or the court regards it as immoral, or opposed to public policy. Let us see the provisions of Sec. 23
which make an agreement unlawful.
1. Forbidden by law: If the object of the agreement or the consideration of the agreement is the doing
of an act which is forbidden by law, the agreement is void.
2. If it is of such a nature that, if permitted, it would defeat the provisions of any law: i.e. it
would indirectly lead to a violation of the law.
3. If it is fraudulent: Any agreement whose object is to defraud others is void.
4. If it involves or implies injury to the person or property of another:
5. If the Court regards it as immoral.
6. f the Court regards it as opposed to public policy: the following agreements have been held to be
against public policy:
a. Trading with Enemy:
b. Agreements for stashing prosecution: An agreement to suppress criminal charge is void because if a
person has committed a crime, public policy requires that he should be prosecuted
c. Agreements interfering with the Course of Justice: An agreement entered into with the object of
exercising improper in sequence on judges or officers of justice is bad in law as opposed to public
policy.
d. Agreements tending to an abuse of legal process: there may be two types of agreements under this
head, one is Maintenance and the other is Champerty.
e. Agreement to vary the period of limitation: An agreement that reduces or increases the period of
limitation as laid down by the law of limitation is opposed to public policy.
f. Traffic in Public Offices: An agreement whereby an appointment to a public office is procured for
monetary consideration is against public policy because it would cause corruption in administration of
the state.
g. Agreement creating an interest opposed to duty
h. Agreements restraining personal freedom
i. Agreements opposed to parental rights and duties: Father is supposed to be the guardian of his
children and in the absence of the father their mother acquires this right as well as responsibility and
this right cannot be bartered away.

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j. Marriage Brokerage Agreements: Agreement to pay reward to a person for negotiating marriage is
opposed to public policy. The following agreements are also opposed to public policy.
i. Agreements in restraint of marriage.
ii. Agreements in restraint of trade.
iii. Agreements in restraint of legal proceedings.
Competence to Contract

Competence to contract is one of the essential elements of enforceability of an agreement. According

to Sec. 10 All agreements are contracts if they are made by the parties competent to
Contract..As regards the meaning of competence, Sec.11 of the Contract Act states that Every
person is competent
to contract who is of the age of majority according to the law to which he is subject, and who is of
sound mind, and is not disqualified from contracting by any law to which he is subject. The following
persons are incapable of entering into a contract:
1. A person who has not attained the age of majority i.e. A person who is still a MINOR.
2. A Person who is not of sound mind i.e. A person of unsound mind.
3. A Person who is disqualified by any other law to which he is subject (i.e., other disqualifications.)
Minor A minor is a person who has not completed 18 years of age on the date of the contract. But in
the following two cases the minority would continue up to the completion of 21 years of age:
"Where a guardian to the person or property of a minor is appointed by the court.
"When the minor is under the guardianship of the court of Wards, i.e. Minors property is looked after
by the Court of Wards
.
Rules Relating To an Agreement With A Minor
1. Agreement is void ab initio: According to Sec. 10, an agreement made by a person incompetent to
contract is void. Hence an agreement made by a minor is void. the agreement is void ab initio
i.e. Void from the very beginning .However, Sec. 68 of the Contract Act lays down if a person,
incapable of entering into a contract or any one whom he is legally bound to support, is supplied by
another
person 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.
2. Minor can be a promisee: An agreement is void as against a minor but a minor can derive benefit
under a contract. The privilege of minority is available to the minor only. Other person cannot avoid
the contract because the promisee is a minor. Thus the minor can enforce the agreement against the
other party.
3. A Minors Agreement cannot be ratified : Since an agreement with a minor is void- ab- initio,
i.e. It does not exist in the eyes of law, it cannot be ratified by a minor after completing the age of
majority.
4. No Compensation is payable by a minor: though an agreement with a minor is void, the minor
would not be called upon to refund any benefit which he has received, under such an agreement (i.e.
Sec.
64 and Sec. 65 would not apply to a minor).
5. The rule of Estoppel does not apply to a minor i.e. A minor can misrepresent his age and enter
into an agreement and can still plead infancy to avoid that agreement.
6. No recovering back the money paid: Where an infant has paid money under a void or voidable
contract he cannot recover it, unless there has been a total failure of consideration.
7. A minor can be sued in tort. If what the infant has done lies right outside the terms of the
contract, the infant can be made liable.
8. Agency. A minor acting as an agent cannot be held liable even for those acts for which other agents
would incur personal liability.
9. Negotiable Instrument: A minor can also make and deliver negotiable instruments and can
negotiate them making all other persons except himself liable on them.
10. Partnership: An agreement with a minor is void. But a minor can be admitted into the benefits of
partnership with the consent of all the partners (Partnership Act). This means that the losses of the
firm

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can be recovered only from his share in the firm but unlike other partners his personal property would
not be liable for firms losses.
11. Insolvency: A minor cannot be adjudicated insolvent.
12. Joint Agreement: Where a minor and another person make a joint promise, the promisee cannot
enforce the agreement against the minor but he can enforce it against the other person.
13. Guardianship: though an agreement made by a minor is void but an agreement made by the
guardian of a minor is binding on the minor if it is for the benefit of the minor.
14. Minors Parents: Agreements made by a minor are not enforceable against his parents, even
though they are for the necessaries supplied to the minor.
Persons of Unsound Mind
According to Sec.11 only a person of sound mind can make a contract. Sec. 12 further defines the
term sound mind in these words, 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
judgment as to its effect upon his interest. Thus two essentials of Sound Mind emerge from this
definition:
(1) Capacity to understand: and
(2)Capacity to make a rational judgment there must be free and full consent of the parties so as to bind
them to the contract. Consent is an act of reason accompanied by deliberations. It is due to the
absence of rational and deliberate consent that conveyance and contracts of persons of unsound mind
are deemed to be invalid. A person of unsound mind may be divided into two broad categories:
1. Idiots: An Idiot is one who has lost mental powers completely, i.e., his brain has not developed
enough to enable him, at all to understand the contract or of forming a rational judgment of its effects
upon his interest. Hence an agreement with him is always void. However, he can be sued for
necessaries of life supplied to him or to anybody dependent upon him.
2. Lunatic: Lunacy arises from the illness of the brain or mental or bodies distress. The essential
element of lunacy is that the mental powers of the lunatic are so deranged that he cannot make a
rational judgment of any subject the period of lunacy.
Effects of agreements made by persons of unsound mind
An agreement made with a person who is suffering from lunacy at the time of entering into the
contract, is void (Sec. 10).
Other Disqualifications
1. Alien Enemy: A citizen of a foreign country is known as an alien.
2. Foreign sovereigns and their Ambassadors. Foreign sovereigns and their Ambassadors in India
can enter into contracts with Indian citizens and can sue them in Indian courts but no suit can be filed
against them in local courts unless the permission of the Central Government to this effect has been
obtained.
3. Corporation: A corporation is an artificial person created by law. Being a legal person only, it
cannot act by itself. It has to act through some agent. Its contractual capacity suffers from the
following limitations:
(a)Natural Limitation: (b) Legal Limitation:
4. Insolvents: When a person is adjudged insolvent, he loses contractual powers over his property.
5. Convicts: A person against whom a sentence of imprisonment is passed loses the capacity to
contract.
6. Married women: A married woman used to suffer from certain disabilities with regard to making
of contracts under English Law before 1935. A woman, married or single, in Indian Law, is under no
disability as regard, entering into contracts with regard to the property that belongs to her (e.g.
Stridhan of a married women). Her contracts can be enforced against her husbands property if he has
failed to provide necessaries of life to her and the contract relates to necessaries of life.
Free Consent
The term free consent consists of two requirements viz.: (i) there should be consent: and (ii) Consent
should be free.
Consent: the term consent is defined by Sec. 13 as 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 section 15, or:

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(2) Undue influence as defined in section 16, or:
(3) Fraud, as defined in section 17, or:
(4) Misrepresentation, as defined in section 18, or:
(5) Mistake subject to the provisions of sections 20, 21 and 22.
Consent is said to be so caused when it would not have been given but for the existence of such
coercion, undue influence, fraud, misrepresentation or mistake. (Sec.14)
Coercion
Coercion is the committing or threatening to commit any act, forbidden by the Indian Penal Code 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 agreement.(Sec.15) " Coercion is committing
any act forbidden by the Indian Penal Code with the intention of causing any person to enter into an
agreement.
Coercion is the threatening to commit any act forbidden by the Indian Penal Code, with the
intention of causing any person to enter into an agreement.
Coercion is the Unlawful detaining of any property to the prejudice or any person, whatever, with
the intention of causing any person to enter into an agreement.
Coercion is the threatening to detain, unlawfully, any property, to the prejudice of any person
whatever, with the intention of causing any person to enter into an agreement.
Effect of Coercion: Sec, 19 states When consent to an agreement is caused by coercion the
agreement is a contract voidable at the option of the party whose consent was so caused i.e. the
aggrieved party at its option, may set aside the contract or may insist that the contract shall performed.
Sec.72 further states, A person to whom money has been paid, or anything delivered under
coercion, must repay or return it.
Undue Influence [Sec. 16 (1)] A Contract is said to be induced by undue influence where the
relations subsisting between the parties are such that one of the parties is in a position to dominate the
will of the other and uses that position to obtain an unfair advantage over the other. three conditions
should be fulfilled:
"The relation between the contracting parties should be such that one party is in a position to
dominate the will of the other; and " Such party has used that dominant position to enter into a
contract with the latter; and "Such party has obtained an unfair advantage over the other.
Effect of Undue Influence: [Sec. 19 (A)] When consent to an agreement is caused by undue
influence the agreement is a contract voidable at the option of the party whose consent was so caused.

Pardanashin Women: A pardanashin woman is susceptible to undue influence and therefore, the law
throws around her a Special cloak of protection i.e. Where such a woman signs a sale, mortgage,
gift or release, the person obtaining her signatures has to prove that the transaction was not only
explained to her but also that she had understood the transaction and that no undue influence was
exercised on her.
Difference Between Coercion And Undue Influence. Coercion Undue Influence
1. The consent is obtained under the threat of an offence. The consent is obtained by a person who is
in a position to dominate the will of another.
2. Coercion is mainly of a physical character. It involves mostly use of physical or violent force.
Undue influence involves use of moral force or mental pressure to obtain the consent.
3. There must be intention of causing physical harm to any person to enter into an agreement. Here
the influencing party uses its position to obtain an unfair advantage over the other party.
4. It involves a criminal act. It involves unlawful act.

Fraud
Fraud means and includes any of the following acts committed by a party to a contract, or with his
connivance or by his agent with intent to deceive another party thereto or his agent or to induce him to
enter into the contract:
"The suggestion, as a fact, of that which is not true by one who does not believe it to be true;
"The active concealment of a fact by one, having knowledge and belief of the fact;
"A promise made without any intention of performing it;
"Any other act fitted to deceive;

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"Any such act or omission as the law specially declares to be fraudulent (Sec. 17)
Can silence be Fraudulent? (Sec. 17) Silence as to facts likely to affect the willingness of a person
to enter into a contract is not fraud unless the circumstances of the case are such that regard being had
to them it is the duty of the person keeping silence to speak or unless his silence is in itself
equivalent to speech.
Exception: Silence would amount to Fraud if
a. It is the duty of the person keeping silence to speak. These are called uberrimae fidei contracts;
b. His silence is, in itself, equivalent to speech:
Effect of Fraud
"Where Fraud is the cause of the contract:(i)Voidable Contract:(ii) Damages
"Where Fraud is not the cause of contract: An attempt at deceit, which does not deceive, is no fraud.
Misrepresentation
Misrepresentation, better known as Innocent misrepresentation has been defined by Sec. 18 as:
Misrepresentation means and includes
a. The positive assertion in a manner not warranted by the information of the person making it, of that
which is not true, though he believes it to be true;
b. Any breach of duty which, without an intent to deceive, gains an advantage to the person
committing it, or any one claiming under him, by misleading another to his prejudice or to the
prejudice of any one claiming under him;
c. Causing, however innocently, a party to an agreement to make a mistake as to the substance of the
thing which is the subject of the agreement.
Effect Of Misrepresentation
When consent to an agreement is caused by misrepresentation, the agreement is a contract
voidable at the option of the party whose consent is so caused.
Distinction Between Fraud And Misrepresentation
Fraud: Intention to deceive that there is no intention to deceive, fraud to recover damages not
available in case of misrepresentation.
Misrepresentation: the aggrieved party loses the right to rescind the contract if it could discover the
truth with ordinary diligence. In Fraud, this exception does not apply.
Mistake
Salmond has described these contracts as error in Causa. As error in consensus i.e. There is no
consensus ad idem; because of some misunderstanding, called Mistake, parties do not agree upon
the same thing in the same sense. According to Indian Contract Act, Mistake is of two types, (1)
Mistake as to law and (2) Mistake as to fact.
Mistake Of Law (Sec. 21): A contract is not voidable because it was caused by a mistake as to any
law in force in India, but a mistake as to a law not in force in India has the same effect as mistake of
fact. The reason of this rule lies in the legal maxim Ignorance of law is no excuse.
Mistake Of Fact: (Sec 20:) Where both the parties to an agreement are under a mistake as to a
matter of fact, essential to the agreement, the agreement is void.
Essentials: (1) Mistake must be mutual; (2) Mistake must relate to a fact: (3) Fact should be
essential:
Type of Mistakes: Mistake of fact can be divided into the following categories:
A. Bilateral Mistakes: (1) Mistake as to the subject Matter: (i) Mistake regarding existence of subject
matter: (ii) Mistake regarding identity of the subject matter i.e. The two parties understand different
things to be the subject matter: (iii)Mistake regarding quantity of subject matter:(iv) Mistake
regarding title of the subject matter: Where both the parties believe that the seller has the right to sell
the goods but unknown to both, the seller has no title to the goods.(v) Mistake regarding the price of
the subject matter.(vi) Mistake regarding the quality of the subject matter.

(2) Mistake as to the possibility of performance of the agreement: if both the parties to the agreement
believe that the agreement is capable of being performed though it is not, the agreement is void.
B. Unilateral Mistake: In the following circumstances, even unilateral mistake will make the
contract voidable.

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1. Mistake as to the nature of transaction: This is an exception to the rule that mistake must be
mutual. When one of the parties to a contract, without any fault of his own, is made to commit a
mistake as to the nature of transaction the agreement would be void.
2. Mistake as to the person contracted with: When the identity of the person is essential to the
contract and a mistake is committed regarding that, the contract can be avoided.

Void Agreements
Following are those contracts, which may not lack any of the essentials, discussed so far, still the law
has specifically declared them void, they are:
1. Agreement in Restraint of Marriage
2. Agreement in Restraint of Trade
Following agreements are not in Restraint of Trade
i. Restraint during the term of service
ii. Agreements which promote business and do not restrain it
iii. Trade Combinations
3. Agreement In Restraint Of Legal Proceedings (Sec. 28) Every agreement, by which any party
here to is restricted absolutely from enforcing his rights under or in respect of any contract by the
usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus
enforce his rights, is void to that extent.
Exceptions-Arbitration Agreements: An agreement to refer all future as well as present disputes in
connection with a contract, to arbitration is valid.
"Uncertain Agreements: (Sec. 29) Agreements the meaning of which is not certain or capable of
being made certain, are void.
"Agreement By Way Of Wager:(Sec. 30) Agreements by way of wager are void, and no suit shall
be sought for recovering anything alleged to be won on any wager, or entrusted to any person to
abide by the result of any game or other uncertain event on which any wager is made.
Agreements Collateral to Wagering
Agreements However transactions collateral or incidental to a wagering agreement are not void as
per Sec. 30.
Lotteries: A lottery is a game of chance and is a wagering agreement.
Cross-ward Puzzles: Cross-word puzzles are of two types:
"One in which any person solving the puzzle would be awarded, therefore it is a game of skill and not
of chance and is not a wagering agreement.
"The other type of cross-word puzzle is one in which the prize would be awarded to that competitor
whose solution corresponds to the solution kept with the editor of the newspaper.

Contingent Contracts
(Sec. 31) A contingent contract is a contract to do or not to do something, if some event, collateral to
such contract does or does not happen. Thus it is a contract, the performance of which is dependent
upon, the happening or non-happening of an uncertain event, collateral to such contract.
Example: X contracts to pay Y Rs.30, 000, in consideration of Y paying Rs. 100 monthly premium, if
Ys factory is burnt. This is a contingent contract.
Example: A agrees to pay B a sum of money if B marries C.
Contracts of insurance and contracts of indemnity and guarantee are popular instances of contingent
contracts.
Rules Relating To Contingent Contracts
1. Contingent on the act of party to the contract: If the performance of the promise is contingent upon
the pleasure and will of the promisor, it is not a contract at all.
2. Contingent upon the act of a third party: where the performance of a contract is conditional upon
the act of a third party, it is a valid contract.
3. Contingent on the happening of an event: (Sec.32) Contingent contracts to do or not to do
anything, if an uncertain future event happens cannot be enforced by law unless and until that event
has happened.
4. Contracts contingent on the non-happening of an event: (Sec.33)

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Contingent contracts to do or not to do anything, if an uncertain future event does not happen, can be
enforced when the happening of that event becomes impossible, and not before.
5. Contracts contingent on the happening or not happening of a specified event within fixed time
(Sec.35). Contingent contracts to do or not to do anything if a specified uncertain event happens
within a fixed time, becomes void if at the expiration of the time fixed, such event has not happened
or if, before the time fixed, such event becomes impossible.
6. Contracts contingent on impossible event: (Sec. 36-)Contingent agreement to do or not to do
anything if an impossible event happens, are void, whether the impossibility is known or not to the
parties to the agreement at the time when it is made.
Difference Between A Contingent Contract And Wagering Agreement
The main points of distinction between the two are as under:
"A contingent contract is a valid contract but wagering agreement is absolutely void.
"Parties have real interest in the occurrence but non-occurrence of the event e.g., insurable interest in
the property insured. Parties are not interested in the occurrence of the event except for the winning or
losing the bet amount.
"Future uncertain event is merely collateral: uncertain event is the sole determining factor of the
agreement.
Quasi Contracts

A quasi contract is an obligation or a right created by law. A quasi contract is based on the principle
that no person can enrich himself unjustly, at the expense of another. If he obtains a benefit which
under the circumstances he ought, equitably to pay for it, the law would compel him to make the
payment even though there is no contract requiring payment.
Following relations created by law, resemble those created by contract:
"Necessaries Supplied To A Person Incapable Of Contracting:
Example: X supplies Y, a lunatic, with necessaries suitable to his conditions in life. X is entitled to be
reimbursed from Ys property.
"Payment Of Money Due By Another: (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.
"Non-Gratuitous Act For Anothers Benefit: (Sec.70) Where a person lawfully does anything for
another person or delivers anything to him not to do so gratuitously and such other person enjoys the
benefits, thereof the latter is bound to make compensation to the former in respect of, or to restore the
things due or delivered. Example: A Businessman leaves goods at Bs house with the intention of
persuading B to buy them. B treats the goods as his own. He is bound to pay A for them.
"Finder Of Lost 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.
"Money Paid By Mistake Or Under Coercion: (Sec.72) A person to whom money has been paid
or anything delivered by mistake or under coercion must repay or return it. Example: X and Y jointly
owe Rs. 1000 to Z. X alone pays the amount to Z and Y, not knowing the fact pays Rs.1000 over
again to Z. Z is bound to repay the amount to Y.
"Suit Upon Quantum Meruit: The phrase Quantum Meruit means as much as earned or in
proportion to the work done. This is a general rule, usually invoked where there is no agreement to
pay for the work done.(Sec. 70

Performance and Discharge of Contracts

Performance of Contracts refers to the fulfillment of their respective legal obligations, created under
the contract, by both the parties. It is a natural and normal mode of discharging a contract. The various
aspects relating to performance are discussed below:
A. Actual Performance
The parties to a contract must either perform, or offer to perform their respective promises, unless
such performance is dispensed with or excused under the provisions of this Act of any other law....

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Example: X bought goods from Y and promised to pay Rs.1000 to Y on 10th June. X went to Y on
10th June to give Rs.1000 in cash but Y did not accept it. Though X may not be discharged from the
payment of Rs.1000, he would not be liable to pay interest thereon from 10th June onwards.
For a tender to become legally valid it must fulfill the following conditions:
i. It should be unconditional (Sec. 38): The promisor while offering to perform his promise must do
it unconditionally.
ii. Offer must not be of a part only (Sec. 38): The offer must be of whole payment or performance.
A creditor is not bound to accept less than what is actually due and would not lose his right to interest
on that portion.
iii. Proper time and place (Sec. 38): The offer must be made at a proper time and place.
iv. Able and willing (Sec. 38): It must be made under such circumstances that the person to whom
it is made may have a reasonable opportunity of ascertaining that the person by whom it is made is
able and willing there and then to do the whole of what he is bound by his promise to do.
v. Reasonable opportunity (Sec. 38): If the offer is an offer to deliver anything to the promisee,
the promisee must have a reasonable opportunity of seeing that thing offered is the thing which the
promisor is bound by this promise to deliver. Thus, buyer must have reasonable opportunity to
ascertain that the goods offered are contracted for.
vi. Tender of money: A tender of money must be in legal tender money, and not in any foreign
currency, promissory note or cheque
vii. Joint Promisees: (Sec. 38) An offer to one of several joint promises has the same legal
consequences as an offer to all of them.
B. Refusal To Perform (Sec.39)
When a party to a contract has refused to perform, or disabled himself from performing, his promise
in its entirely, the promisee may put an end to the contract, unless he has signified, by words or
conduct, his
acquiescence in its continuance.
C. Who Can Demand Performance?
It is only the promisee who can demand performance of the promise under a contract, for the general
rule is that a person cannot acquire rights under a contract to which he is not a party.
D. By Whom Contracts Must Be Performed
"By the promisor himself: (Sec. 40) If it appears from the nature of the case that it was the intention
of the parties to any contract that any promise contained in it, should be performed by the promisor
himself, such promise must be performed by the promisor generally where personal skill, taste
etc. Are involved, it is presumed that the promisor would himself perform the contract.
"By promises representative: (Sec. 37) Promises bind the representatives of the promisors in the
case of death of such promisors before performance, unless a contrary intention appears from the
contract.
Example: A promises to deliver goods to B on a certain day on payment of Rs.10,000. A dies before
that day. As representatives are bound to deliver the goods to B, and B is bound to pay Rs.10,000 to
As representatives.
E. Offer To Perform (Tender)(Sec 37)
A party who has not already performed his obligation must offer to perform the same. (Sec. 38)
Where a promisor has made an offer of performance to the promisee, and the offer has not been
accepted, the promisor is not responsible for non-performance, nor does he thereby lose his rights
under the contract. Example: A promises to paint a wall for B. A must perform this promise
personally.

F. Devolution Of Joint Rights And Joint Liabilities (Joint Promises)

When two or more persons make a joint promise to other or others, they are known as joint promisors
e.g. A and B sign a promissory note, they are joint promisors. When a promise is made to two or more
persons, they are Joint Promisees. Following rules govern such promises:
(1)All promisors must jointly fulfill the promise:
(2)Any one of the joint promisors may be compelled to perform:
(3) Right of contribution between joint promisors:
(4) Effect of release of one joint promisor:

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Example: A, B and C Jointly promise to pay D Rs. 5000. D may compel either A or B or C to pay him
Rs. 5000.
G. Time And Place For Performance
"Within a reasonable time: (Sec 46)Where a promisor is to perform his promise without
application by the promisee, and no time for performance is specified, the engagement must be
performed within a reasonable time. The question what is a reasonable time is, in each particular
case, a question of fact.
"During usual hours of business: (Sec.47) When a promise is to be performed on a certain day, and
the promisor has undertaken to perform it without application by the promisee, the promisor may
perform it at any time during the usual hours of business on such day and at the place at which the
promise ought to be performed.
"Promisees duty to apply for performance: (Sec. 46) When a promise is to be performed on a
certain day, and the promisor has not undertaken to perform it without application by the promisee, it
is the duty of the promisee to apply for performance at proper place and within the usual hours of
business.
"Promisor should apply for fixing a reasonable place: (Sec.49)
When a promise is to be performed with application by the promisor and no place is fixed for the
performance of it, it is the duty of the promisor to apply to the promisee to appoint a reasonable place
for the performance of the promise, and to perform it at such place.
"In the manner prescribed by promisee: (Sec. 50) The performance of any promise may be made
in any manner, or at any time which the promisee prescribes or sanctions.
H. Performance Of Reciprocal Promises
[Sec. 2 (f )] Promises which form the consideration or part of the consideration for each other are
called reciprocal promises. Rules regarding the performance of reciprocal promises are:
"When promises are to be performed simultaneously: When a contract consists of reciprocal
promises to be simultaneously performed no promisor need to perform his promise unless the
promisee is ready and willing to perform his reciprocal promise.
"In the order, which the nature of transaction requires: (Sec. 52)
Where the order in which reciprocal promises are to be performed is expressly fixed by the contract,
they shall be performed in that order; and where the order is not expressly fixed by the contract, they
shall be performed in that order which the nature of the transaction requires.
"When the performance of a promise is dependent upon other:
(Sec. 54) When the contract consists of reciprocal promises, such that one of them cannot be
performed or that its performance cannot be claimed till the other has been performed and the
promisor of the promise last mentioned fails to perform it, such promisor cannot claim the
performance of the reciprocal promise, and must make compensation to the other party for any loss
which such other party may sustain by the non-performance of the contract. These are known as
mutual and dependent promises.
"When one party prevents the other from performing his promise:
(Sec.53) When a contract contains reciprocal promises, and one party to the contract prevents the
other from performing his promise the contract becomes voidable at the option of the party so
prevented.
"Where the promise is partly legal and partly illegal: (Sec.57)
Where persons reciprocally promise, firstly, to do certain things which are legal, and secondly, under
specified circumstances, to do certain other things which are illegal the first set of promises is a
contract, but the second is a void agreement.
I. Time Of Performance
"When time is the essence of the contract: (Sec.55) When a party to a contract promises to do
certain thing at or before a specified time, or certain things at or before specified times, and fails to do
any such thing at or before the specified time, the contract, or so much of it as has not been
performed, becomes voidable to the option of the promisee, if the intention of the parties was that
time should be the essence of the contract.
"When time is not the essence of the contract: If it was not the intention of the parties that time
should be the essence of the contract, the contract does not become voidable by the failure to do such

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thing at or before the specified time, but the promise is entitled to compensation from the promisor for
any loss occasioned to him by such failure.
"Condition for compensation when contract is voidable and goods are accepted: If in case of a
contract voidable on account of the promisors failure to perform his promise at the time agreed, the
promisee accepts performance of such promise at any time other than that agreed, the promisee cannot
claim compensation for any loss occasioned by the non-performance of promise at the time agreed
unless, at the time of such acceptance, he gives notice to the promisor of his intention to do so.
(Sec.55)
Discharge Of A Contract
A contract is discharged, terminated when the rights and obligations created by it come to an end. A
contract is terminated in the following ways:
I. By Performance (Sec. 37): When the parties to a contract perform their respective promises, the
contract comes to an end. Nothing remains to be performed
II. By Tender (Attempted Performance): When a promisor makes an offer of performance tender
and the offer is not accepted, the promisor is not responsible for non-performance, i.e. He is
discharged from his obligations under the contract. But he does not lose his rights under the contract
i.e. The promisee is not discharged from his obligations.
III. By Supervening Impossibility: Impossibility is of two types:
i. Impossibility at the Time of Contract: (Sec.56) An agreement to do an act impossible in itself is
void. Example: A agrees with B to discover gold by magic. The agreement is void.
ii. Subsequent Or Supervening Impossibility Where a contract originates as one capable of
performance but later due to change of circumstances its performance becomes impossible, it
becomes void by subsequent or supervening impossibility (section 56). In English law this is called
Doctrine of Frustration. Example: A and B contract to marry each other. Before the time fixed for
marriage, B becomes mad. The contract becomes void. Supervening impossibility may arise in any of
the following ways:
1. Destruction of the subject matter:
2. When the foundation of the contract ceases to exist: If in a contract, it is deemed that the parties had
assumed certain state of things to continue and that state of things ceases to exist, the contract would
come to an end.
3. Change of Law: A contract which becomes illegal after it is made, becomes void and the parties to
the contract will be discharged from their respective obligations.
4. Death or personal incapacity: Where the contract is of personal nature the death or incapacity of the
promisor would discharge the contract.
5. Declaration of war: A contract entered into with an alien enemy before the war breaks out is either
suspended or discharged after the declaration of war if it does not aid the enemy in the pursuit of war,
it is suspended and would be performed after the war is over, otherwise it is terminated and the parties
to the contract are discharged from their respective obligations.

Exceptions to the Principle of Supervening Impossibility

Impossibility As a Rule Is No Excuse for Non-Performance:
Following are some of the circumstances in which nonperformance of a contract was held not to be
excused.
iii. Difficulty of performance: If a contract becomes difficult to perform but not impossible the
promisor would not be discharged on that account.
iv. Commercial Impossibility would not discharge of a contract. A contract would not be deemed to
be impossible because it does not remain profitable to the promisor or would make the promisor to
incur losses.
v. Action of a third party: If a man chooses to answer for the voluntary act of a third person, there is
no reason in law or justice why he should not be held for his inability to procure that act.
vi. Strikes, lock-outs, civil disturbances and riots do not discharge a contract unless there is a
clause in the contract to that effect.
vii. Partial impossibility: Where a contract is entered into for more than one purpose, the contract
would not become impossible, if one of the objects has become impossible to achieve.
Consequences of Supervening Impossibility

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Supervening impossibility makes a contract void. The parties are discharged from their respective
obligations under the contract (Sec. 65).
The party who has received any advantages under it should restore it to the other party.
IV. Mutual Agreement
A contract is created by the parties to it, therefore, it can also come to an end by their mutual
agreement. Termination by mutual agreement may occur in any one of the following ways.

1. Novation: When a new contract is substituted for an existing contract, either between the same
parties or between different parties, it is called Novation.
2. Alteration: When one or more of the terms of a contract are changed, it is called alteration. In case
of alteration, parties to the contract do not change. Example: A agrees to supply to B 20 readymade
pants, 10 of the size 32 and 10 of the size 34. Later on B requests A to supply all 20 pants of the size
32 only. A agrees to it. The old contract comes to an end.
3. Rescission: When both the parties to a contract agree to put an end to the contract, without
performing it, the contract is said to be rescinded by mutual agreement. Example: A promises to
supply to B 20 shirts on 15th January and B promises to pay Rs 5000 on the same day after delivery,
On 10th January, both the parties agree that the contract would not be performed. Parties are said to
have rescinded the contract.
4. Remission: When a party to a contract accepts, from the other party, a performance lesser than
what he had contracted for, he is deemed to have remitted the remaining performance, and the
contract is discharged. Example: A owes B Rs.500 rupees but pays on by Rs. 200, and B accepts at in
satisfaction of the whole debt. The whole debt is discharged.
5. Waiver: When a party to a contract abandons his right under the contract, the other party is
released from his obligations. Example: A pays Rs 1000 to B to paint a wall for him. Later on A
forbids B
to paint the picture. B is no longer bound to perform the promise.
6. Merger: When a superior right and an inferior right coincide and meet in one and the same person,
the inferior right vanishes into the superior right. This is known as merger. Example: A has taken a
house on lease from B for 10 years. After one year A buys the house from B. His rights of a leasee
vanish into his rights of ownership and the contract of lease comes to an end.

V. By Lapse of Time
The Limitation Act provides the time limit in which certain rights can be enforced. If that time limit
expires, the promisee cannot enforce the promisor and promisor is discharged. Example: A owes Rs
10,000 to B. The last date for the repayment of the loan has expired and B does not file a suit against
A for two years. B loses the right to recover the money back.
VII. By Operation Of Law This covers the following cases:
1. Death: If a contract involves personal skill or ability, death of the promisor would terminate the
contract.
2. Insolvency: When a person is adjudged insolvent and hands over all his property to the official
receiver/assignee, he is supposed to have the right to earn his livelihood in the ordinary way and
therefore the courts, under certain circumstances and subject to certain conditions, discharge him from
all debts which were payable in insolvency but remain unpaid. He does not remain liable to pay those
debts.
3. Merger:
4. Material alteration: A change which affects or alters, in a specific manner, the rights and
liabilities of the parties is called material alteration. A material alteration made in a written document
or contract by one party without the consent of the other, will make the contract void, e.g. An
endorsee of a promissory note/ altering the amount of note.
VIII. By Breach Of Contract
Breach is the non-performance of the promise by the promisor. It entitles the promisee to rescind the
contract. It, therefore, operates as a mode of discharging a contract.
Contract Of Agency
Definition Of Agent And Principal

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(Sec. 182) An agent is a person employed to do any act for another or to represent another in dealing
with third persons. The person for whom such act is done or who is so represented, is called the
principal.
Test of Agency: The true test of agency is the authority that one person possesses to create contractual
relationship between the person he is representing and the person to whom he represents. Where a
person is in the habit of advising another in business dealings he does not become the agent of the
other.
Agent and Servant
A servant is a person who acts under the direct control and supervision of his master while an agent
does not. A principal has the right to direct what the agent has to do; but a master has not only that
right but also the right to say how it is to be done An agent is, therefore, sometimes described as
Superior Servant. An agent binds the principal with the third parties but a servant does not create
relations between his master and third persons.
Who may employ agent?
(Sec. 183), Any person who is of the age of majority according to the law to which he is subject, and
who is of sound mind, may employ an agent. Whatever a person can do personally he can do
through an agent. Thus a guardian of a minor can appoint an agent for the minor.
Who may be an agent?
A minor or even a person of unsound mind can act as agents but they would not be responsible to the
principal or to the third parties in cases where a person competent to contract would have been
responsible.
Consideration for the contract of agency: (Sec. 185) No consideration is necessary to create an
agency. Principals agreement to be represented by the agent is deemed to be sufficient detriment to
support the promise by the agent to act as such and be liable to the principal for negligence.
Creation of Agency
The relationship of principal and agent may be created in any of the following ways:
1. By Express Agreement: The authority of an agent may be expressed or implied. (Sec. 186) An
authority is said to be expressed when it is given by words spoken or written. (Sec. 187): Example: A
asks B to sell his cow for a commission of 10% on sales. B agrees to do so. Agency has been created.
The agreement need not be in writing. But in certain cases, law requires the agreement to be in
writing. For sale or purchase of land, the law requires the agent to be appointed by executing a formal
power of attorney.
2. By Implied Agreement Sec. 187: An authority is said to be implied when it is to be inferred
from the circumstances of the case, and things spoken or written, or the ordinary course of dealing
Example: A owns a shop. The shop is managed by B, and he is in the habit of ordering goods from C
in the name of A for the purposes of the shop, and of paying for them out of As funds with As
knowledge. B has an implied authority from A to order goods from C in the name of A for the
purposes of the shop.
i. Agency by Estoppel (Sec. 237): When an agent has without authority done acts or incurred
obligations to third persons on behalf of his principal, the principal is bound by such acts or
obligations, if he has, by his words or conduct, induced such third persons to believe that such acts
and obligations were within the scope of the agents authority. Example: A starts manufacturing
plastic products. A, B and C are sitting together. B in the present of A tells C that A has appointed
him (B) as selling agent of his product. A does not contradict this statement, though he had not
appointed him as his agent. Later on C enters into a contract with B on the presumption that B is As
agent. A would be bound by this transaction. A would be precluded from denying that B is his agent.
ii. Agency by holding out: The principle of holding out is a part of the law of Estoppel. But agency
by holding out requires some positive or affirmative conduct by the principal. Example: A sends his
servant to buy goods from B on credit. B gives the goods to As servant and A pays for them. Later on
As servant, without As asking for it, buys goods from B on As credit and runs away. A would be
liable to pay for the goods, thought a servant is not an agent, but by paying for the credit purchases
made by his servant, A held out that his servant was his agent also and as such he would be liable for
the purchases made by his servant.
iii. Agency of Necessity: If a person protects the property or interest of another where such property
or interests are in imminent danger and the instructions of the owner cannot be obtained, the former

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would be deemed to be an agent of the latter so as to make the latter liable for whatever he has done
provided the former has acted bona fide in the interests of the latter.
The principle of necessity also extends to cases where an agent exceeds his authority if the following
conditions are fulfilled (i) The agent was not in a position to communicate with the principal. (ii) The
agent takes reasonable and necessary course in the circumstances. (iii) The agent acts bona fide.
Example: A sends some bananas to B with the instructions that B should send them to C. When B
takes delivery of the bananas, he finds that the bananas are not in a condition to sustain the journey to
Cs place and would perish before reaching B, therefore, sells them at the best possible price. A would
be bound by this sale under agency by necessity.
In cases of accident and emergency a master of a ship can sell or pledge the goods in order to save
their value and such sale or pledge would be binding on the owners of the cargo.
3. Agency By Ratification: A person may become anothers agent after having done some work for
the latter, if the latter ratifies the act. When a person adopts or accepts an act done on his behalf but
without his authority he is said to have ratified it. Example: A, without authority, buys goods for B.
Afterwards B sells them to C on his own account; Bs conduct implies a ratification of the purchase
made for him by A. Implications of Ratification:
(i) Ratification relates back to the date of the act. It is tantamount to prior authority. This means that
the agency comes into existence not from the time when the act is ratified but from the time when the
act was done. I.e. (Ratification is equivalent to an antecedent authority).
(ii) No Authority for future: The ratification of an act done without authority does not confer authority
to do similar acts in future.
Conditions of a Valid Ratification
Ratification is enforceable only when the following conditions are fulfilled.
Must contract as agent: The agent must contract as agent for principal in contemplation; or the agent
should not make the contract for himself.
"Only named principal can ratify: Only that principal who was named or was identifiable at the
time of the contract, can ratify the contract. He can do so, even if the agent never intended that he
should do so. Example: A makes a contract with B on behalf of his uncle, D. Later on C, As elder
brother want to have the benefit of the contract and wants to ratify the same. C cannot do so. D, when
comes to know of the contract, wants to ratify the same; he can do so and enjoy the benefit of the
contract even if A does not want it.
"The principal should be in existence: Mere contemplation at the time of the contract is not
sufficient. If the principal was not in existence at the time of the contract, he cannot ratify such
contract.
The Principal must be competent to contract at the date of the contract as well as at the date of
ratification. Thus, a minor cannot ratify a contract made on his behalf after becoming a major.
The principal must have full knowledge of the material facts (Sec. 198): No valid ratification can
be made by a person whose knowledge of the facts of the case is materially defective.
The principal must ratify the whole transaction (Sec. 199).
The principal must ratify the contract within a reasonable time after the contract is made.
The act to be ratified should not be void or illegal, though ratification can be made of voidable
contracts or even of tortuous acts.
Ratification of unauthorized act cannot injure third person.
Ratification by Govt: Acts done by public servant in the name of the Government may be ratified by
subsequent approval in the same manner as private transaction.
Extent Of Agents Authority It is necessary to know all dimensions of his (agent) authority. They are
as follows:
"Actual Authority: Actual authority is one which is conferred on the agent by the principal. It may
be express or implied.
(1) Express Authority: An authority is said to be express when it is given by words spoken or written
(2) Implied Authority: (i) An authority is said to be implied when it is inferred from the circumstances
of the case. (ii) An agent having authority to do an act has authority to do every lawful thing which is
necessary in order to do such act.
Ostensible or Apparent Authority: Apparent or ostensible authority is that authority which an agent
appears to be possessing, though, in fact, he may not have.

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" Authority in Emergency: An agent has authority, in an emergency, to do all such acts for the
purpose of protecting his principal from loss as would be done by a person of ordinary prudence, in
his own case, under similar circumstances.
Delegation of Authority by Agent
An agent cannot lawfully employ another to perform acts which he has expressly or impliedly
undertaken to perform personally subagent may not enjoy the confidence of the principal [A sub-
agent is a person employed by, and acting under the control of, the original agent in the business of
the agency.
Exceptions: In the following circumstances delegation made by an agent to sub-agent would be
proper:
(1) Nature of agency:
(2) Custom of Trade: Where it is a custom of trade that an agent appoints a sub-agent.
(3) Ministerial Acts: Where the acts to be done are purely ministerial and do not involve the exercise
of discretion, or personal or professional skill.
(4) Express Delegation: Where the principal has expressly permitted delegation.
(5) Implied Permission: Where the principal impliedly permits delegation i.e. from act or conduct it
may be inferred that he has allowed delegation of authority.
(6) In emergency: In case of emergencies an agent can always delegate the authority to a sub-agent.
Duties of an Agent
1.To follow principals directions or customs
2. Skill and diligence to work.
3. To render proper account: An agent is bound to render proper accounts to his principal on demand.
He should always be ready to produce them to the principal.
4. To communicate with the principal
5. Not to deal on his own account:
6. To pay sums received for principal
7. Not to delegate authority
8. On Principals death or insanity

Rights of an Agent
1. Right to Remuneration: Every agent is entitled to receive the remuneration agreed upon with the
principal.
2. Right of retainer
3. Right of Lien
4. Right of indemnity

Rights and Duties of Principal towards Agent Rights of Principal

(1)He can enforce the various duties of an agent. (2) He can recover compensation for any breach of
duty by the agent. (3) He can forfeit agents remuneration where the agent is guilty of misconduct in
the business of agency. (4) Principal is entitled to any extra profit that the agent has made out of his
agency. This includes illegal gratification, if any. (5) Principal is entitled to receive all sums that the
transactions, entered into, by the agent, on behalf of the principal were void or illegal.
Duties of Principal
1. To Pay Remuneration.
2. Duty to Indemnify.
3. Compensation for injuries.
4. Should not prevent the agent from earning remuneration.
Principals Liabilities to Third Parties for the Acts of the Agent
1. Liability for acts done by agent within authority.
2. Ratification of acts beyond the scope of his authority.
3. When an agent commits fraud or misrepresentation.
Agent and Third Parties
In the absence of any contract to that effect, an agent cannot personally enforce contract entered into
by him on behalf of his principal nor is he personally bound by them If there is no contract

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providing for, or relieving the agent from, personal liability the agent would be liable in the following
cases:
1. Foreign Principal
2. Unnamed Principal
3. Undisclosed Principal
4. Incompetent Principal
5. Where the agent exceeds his authority
6. Where agents authority is coupled with interest
7. Custom of Trade
8. Money received by mistake or fraud
Termination of Agency
The contract of agency would come to an end in any of the following circumstances:
1. By Agreement
2. By Revocation by the principal:
3. Renunciation by the Agent
4. Completion of business
5. Death or Insanity
6. Insolvency of the principal
7. Expiration of Time
8. Destruction of the subject matter
9. Dissolution of a company
10. Principal or agent becoming alien enemy

Partnership Act 1932

The law relating to partnership is contained in the Indian partnership Act, 1932. The Act came into
force with effect from October 1, 1932. Prior to enactment of the aforesaid Act, partnership business
used to be governed by the Indian Contract Act, 1872. Section 4 of the Indian Partnership Act, 1932
defines partnership as follows: a business carried on by all or any of them acting for all.
Essential elements of partnership:
1. Association of two or more persons,
2. Existence of a contract,
3. Carrying on a business,
4. Sharing of profits and
5. Prevalence of mutual agency.
But a partnership firm cannot create another partnership as it does not enjoy the status of the artificial
legal person. There must exist a contract between persons who have agreed to form partnership. Such
a contract may, however, be expressed or implied, written or oral.
Partnership Deed: Partnership Deed is the document that defines the rights and obligations of
partners. Besides names, address and occupation of partners, it lays down the duration of partnership,
nature of business, profit sharing ratio, right to interest, salary, commission etc.
Registration of Firms
The registration of partnership firm is discretionary. The provisions relating to registration of
partnership firm are contained in Chapter 7, Sections 56 to 71 of the partnership Act.
Effect of Non-registration (Sec. 69)
An unregistered firm and its partners suffer from the following disabilities:
1. No Suit against other partners and firms
2. No suit against third parties
3. No claim of set off
Duration of Partnership
Partnership may, from the point of view of its duration, be categorized into the following two classes:
(1) Partnership for a fixed term or particular partnership (2) Partnership at will.
Kinds of Partners

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There may be different kinds of partners in a partnership firm. The important classification of partners
is given below:
1. Actual or active partners,
2. Dormant or sleeping partner,
3. Nominal partner,
4. Partner in profits only,
5. Sub-partner,
6. Partner by estoppel or by holding out.
1. Actual or active partners: Partners actively engaged in the conduct of the business are known as
active or actual or ostensible partners.
2. Dormant or sleeping partner: The nominal partner is one who lends his name to the partnership
firm without any real interest in terms of investing money in the firm or sharing in profits.
3. Nominal partner: The nominal partner is known to the outsiders and does not share the profits of
the firm.
4. Partner in profits only: A person who does not want to take risk of loss may agree to become a
partner in profits only.
5. Sub-partner: When a partner agrees to share his share of profit in a partnership firm with the
outsiders, such an outsider is called a Sub-partner.
6. Partner by estoppels or by holding out: If a partner, by his words or conduct holds out to another
that he is a partner, he will be stopped from denying that he is not a partner. Such a partner neither
contributes any capital nor participates in the management. He is only liable to third parties.
Minor As a Partner
According to Indian Contract Act an agreement of a minor is void, as void; as such he cannot enter
into an agreement of partnership. Section 30 of the Partnership Act provides that a minor may be
admitted to the benefits of partnership with the consent of all the partners.
Rights of Minor Partner
A minor admitted to the benefits of a Partnership has the following rights:
1. Right to share the profits.
2. Right to have the access to do the inspection
3. Right to file a suit for accounts or demand his share of property or profits.
4. Right to exercise option on attaining the age of majority, whether or not to continue in the
firm.

Liabilities of Minor Partner

The liability of a minor is limited to the extent of his share in the firm and therefore, unlike other
partners, he is not personally liable.
If the firm is declared insolvent, his share in the firm vests in the official receiver or assignee but a
minor cannot be declared insolvent.
Rights, Duties and Liabilities of Partners
Rights:
1. Right to take part in the conduct of business
2. Right to be consulted
3. Right of access to the books
4. Right to share profits
5. Right to interest on capital
6. Right to interest on advances
7. Right to indemnity
8. Right to act prudently in emergency
9. Right to give consent for admission of a new partner
10. Right to retire
11. Right to carry on competing business after retirement.
Duties:
A. Qualifying
1. To attend his duties diligently
2. To work without remuneration

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3. To contribute to losses
4. To indemnify for willful neglect
5. To use firms a property exclusively for the firm
6. To account for private profits [Sec.16 (a)]
B. Others
1. Duty to carry on business for the common advantage
2. To indemnify for loss caused by fraud
3. To give full information
4. To render true accounts
5. To be just and faithful
Liabilities
1. Liability of partner for acts of the firm: 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
2. Liability of the firm for wrongful acts of the partner: Where, by the wrongful act or omission of
a partner acting in the ordinary course of the business of a 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 therefore to the
same extent as the partner (Section 26).
3. Liability of the firm for misapplication by partners: (i) When a partner acting within his
apparent authority receives money or property from a third party and misapplies it, or (ii) A firm in
the course of its business receives money or property from a third party, and the money or property is
misapplied by any of the partners while it is in the custody of the firm, the firm is liable to make good
the loss (Sec. 27).
4. Liability for the loss caused by his own fraud
5. Liability for the loss caused by his own willful neglect.
Authority of a Partner
A. Express Authority
B. Implied Authority The act of partner which is done to carry on, in the usual way, business of the
kind carried on by the firm, binds the firm. Thus the authority of a partner to bind the firm is called
Implied authority.
C. Authority in an Emergency: 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, and such acts bind the firm.
142
Reconstitution of a Firm
A change in the constitution of the firm occurs when a new partner is admitted or an old partner
retires or dies. The partnership is reconstituted on:
1. Admission
2. Retirement
3. Expulsion
4. Insolvency
5. Death of a partner
6. Transfer of interests by a partner.
Dissolution of a Firm
Dissolution of a firm means an end of the firm. The Indian Partnership Act distinguishes between:
Dissolution of firm
Dissolution of partnership.
Section 39 provides that the dissolution of partnership between all the partners of a firm is called the
dissolution of the firm.
Modes of Dissolution
A firm may be dissolved in any of the following modes
I. By Agreement (Sec. 40)
II. by Notice (Sec. 43)
III. on the Happening of Certain Contingencies (Sec. 42)
1. Expiry of fixed term
2. Completion of adventure or undertaking

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3. Death of a partner
4. Insolvency of a partner
IV. Compulsory (Sec 41): A firm is dissolved in the following circumstances:
1. Insolvency of all partners or all except one
2. Business becoming unlawful

V. Dissolution by the Court (Sec 44): Section 44 provides that the dissolution of a firm may take
place on a suit filed by a partner on any of the following grounds, namely:
1. Insanity of a partner
2. Permanent incapacity
3. Misconduct
4. Persistent breach of agreement
5. Transfer of interest
6. Continuous losses
7. Just and equitable causes
Consequences of Dissolution
The consequences of dissolution are as follows:
1. Continuous liability if fails to give a public notice
2. Continuous authority of partners for purposes of winding up
3. Right to have the business wound up
4. Right to return of premium
5. Rights where partnership contract is rescinded for fraud or
Misrepresentations
6. Rights to impose restrictions
7. Liability to share personal profits
Settlement of Accounts upon Dissolution
1. Treatment of goodwill
2. Meeting losses
3. Order of applications of assets
4. Losses arising from insolvency of a partner
5. Payment of firms debts and separate debts

Public Notice
The Partnership Act requires that a public notice must be given in each of the following
cases:
1. On Minor Attaining Majority:
2. Retirement of a partner:
3. Expulsion of a partner:
4. Dissolution of the firm.

Limited Liability Partnership Act, 2000

The Limited Liability Partnerships Act 2000 came into force on 6 April 2001. Its main purpose and
effect was to introduce a new form of legal entity known as a limited liability partnership (LLP). The
pressure for the change was largely to resolve problems arising out of the nature of traditional
partnerships for larger professional practices, but the use of LLPs is not restricted to them.

These practices, usually accountancy or law firms, can have partners world-wide who may be
concerned about the fact that they have been subject to joint personal liability on matters over which
they had little control.
Membership of the LLP is initially those who subscribed to the incorporation document. A person
may become a new member of an LLP with the agreement of existing members and cease to be a
member with their agreement as well. As with a normal partnership a partner of an LLP is not
regarded as being employed by the LLPthey are self-employed. The relationship between members

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is governed by agreement between the members. If such an agreement does not exist the act provides
that regulations may be made specifying the default form of such an agreement.
As with normal partnerships the members of an LLP are agents of the LLP, and the LLP is liable for
the actions of a member when that member acts in a wrongful way or makes an omission. However
unlike a normal partnership the members of an LLP are not jointly and severally liable for the actions
of another member. This is because the LLP itself has legal personality separate from its members. If
the membership of an LLP changes then the registrar must be informed within 14 days and if a
member changes address the registrar must be informed within 28 days.

The LLP Act 2000 has made a small amendment to the IHT legislation by directing (under s.11 LLP
Act 2000) that a new paragraph (IHTA84/S267A) should be inserted after IHTA84/S267. The effect
of this paragraph is that we look through LLPs so that they will be treated in the same way as
traditional partnerships. The result of this is that:
Where a traditional partnership incorporates itself as a LLP, a partners period of ownership for the
purposes of qualifying for business (or agricultural) relief will not be regarded as being interrupted.
The normal reliefs and exemptions available to partners in a traditional partnership will also be
available to members of a LLP. In particular, IHTA84/S10 (which provides an exemption for
dispositions not intended to confer gratuitous benefit) will apply.
A further change is that an interest in a LLP is deemed to be an interest in each and every asset of the
partnership, while an interest in a traditional partnership is a 'chose in action', valued by reference to
the net underlying assets of the business.

Thus, in the case of an LLP investing in unquoted shares in trading companies, it would be
inappropriate to allow relief on the basis that the underlying assets constitute business property: the
true position is that the nature of the business conducted by the LLP falls within IHTA84/S105 (3) so
that relief is not available.

Incorporation of an LLP

An LLP is formed pursuant to a limited liability partnership agreement which means any written
agreement between the partners of the limited liability partnership or between the limited liability
partnership and its partners, which determines the mutual rights, and duties of the partners and their
rights and duties in relation to that limited liability partnership.

For an LLP to be incorporated, at least two persons must subscribe their name to a document called an
incorporation document, which must then be submitted to the Registrar of companies.

Lesson - 3 Sale of Goods Act 1930

The law defining their respective rights and obligations is contained in the Indian Sale of Goods Act,
1930. Before 1930, law relating to sale of goods was contained in the Indian Contract Act, 1872. The
departures made by the Sale of Goods Act are in regard to the consideration, implied conditions and
warranties etc.
Essentials of a Contract of Sale of Goods
A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property
in goods to the buyer for a price. [Sec. (4) 1]. Important features of a contract of sale
Two Parties:
Mutual Consent: Just the presence of two parties is not sufficient. The parties must agree on the
transfer of property.
Transfer of Property: What a contract of sale stipulates is the transfer of property i.e. the
ownership of the goods and not the possession of the goods.
Goods: Goods means every kind of movable property other than actionable claims and money. But it
includes stock and shares, growing crops, grass and things attached to or forming part of the land
which are agreed to be severed before sale or under the contract of sale. [Sec 2(7)]. Since the price of

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the goods is expressed in terms of the money, money itself cannot be bought, and hence, money is not
considered as goods.
Price: Under a contract of sale, property in the goods is transferred to the buyer for a price. Price is
the money consideration for the goods.
Varied requirement as to delivery and payment: The contract may provide for the immediate
delivery of goods or immediate payment of the price or both.
Requires no formalities:
Sale, barter and exchange: If the goods are exchanged for goods only it is called barter and not
sale. If money is exchanged for money (say ft 10 for Rs.450) it is called EXCHANGE only. But
where goods are exchanged for a money consideration, it is called a sale. If the consideration consists
partly of money and partly of goods, it would be a contract of sale. Hire purchase and Agreement
to sell: In a contract of sale there is an agreement to buy, but in hire purchase, hirer has the option
to buy the goods, if he pays all the installments. Hence, if he does not exercise his option, the owner
cannot sue for breach of contract but can take his goods back. In an agreement to sell, if the buyer
refuses to buy the goods the seller can sue him for breach of contract.
Kinds of Goods
The goods are classified by sec 6, as follows:
A. Existing goods
B. Future goods
C. Contingent goods
A. Existing goods: Existing goods are those which are owned or possessed by the seller at the time of
the contract of sale. Existing goods may be further classified into,
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.
Ascertained goods: These are the goods which become ascertained subsequent to the formation of a
contract of sale.
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.
B. Future Goods: Future goods mean goods to be manufactured or produced or acquired by the seller
after the making of the contract of sale. [Sec.2 (6)], Example: A agrees to sell to B the entire crop of
Onion, that his land would yield, at Rs.10, 000 per ton. This is a contract for the sale of future goods
because goods are still to be produced.
C. Contingent goods: Contingent goods are those the acquisition of which by the seller depends upon
a contingency which may or may not happen [Sec. 6(2)]. Example: A agrees to sell the cow to B if A
inherits Cs property including the cow. C donates the entire property to a trust. The contract becomes
void.
Perishing Of Goods
After a contract of sale is made the subject matter of the contract may be destroyed or it may be found
that the subject matter had already been destroyed before the date of making the contract, the effect of
the two cases would be different.
A. Goods perishing before the contract of sale (Sec.7) provides, where there is a contract for the
sale of specific goods, the contract is void, if the goods without the knowledge of the seller have, at
the time when the contract was made, perished or become so damaged as no longer to answer to their
description in the contract.
B. Goods perishing after the contract of sale are made
i. Perishing before sale but after an agreement to sell: unless otherwise agreed, the goods remain
at the sellers risk, until the property therein is transferred to the buyer
ii. Goods perishing after sale: In sale, goods are destroyed after sale. The loss arising from the
destruction or damage of the goods would be borne by the buyer. (Sec.26)
The Price
A. Meaning: Price means the money consideration for a sale of goods [Sec.2 (10)].
B. How to fix the price?
A. By the contract: The price is a contract of sale may be fixed by the contract between the parties
B. In an agreement
c. Valuation by third party: The price may be left to be fixed by a third party.

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D. By the course of dealings: Where the price is neither expressed in the contract nor any manner of
fixing the price is agreed, the price would be determined by the course of dealings between the
parties.
e. Reasonable price: What is a reasonable price is question of fact depending on the circumstances of
each case. Generally the market price on the date of supply is taken to be a reasonable price.
C. Earnest or deposit: The money so paid is called earnest or deposit. If buyers commit a breach of
the contract and seller files a suit for damages, the amount of damages shall be reduced by the amount
of earnest money forfeited.
D. Taxes imposed after the contract of sale [sec.64 (A)]: Any tax, is imposed or increased after
making of the contract of sale of such goods, then the seller can recover the same from the buyer.

E. Payment of price a concurrent condition with that of delivery (sec.32): The seller shall be
ready, and willing to give possession of the goods to the buyer in exchange for the price, and the
buyer shall be ready and willing to pay the price in exchange for possession of the goods.
Time as Essence of Contract
A contract of sale of goods may stipulate the time for the payment of the price and also the time for
delivery of goods.
Regarding payment: unless a different intention appears from the terms of the contract, stipulations
as to time of payment are not deemed to be the essence of a contract of sale.
Regarding delivery: as regards stipulation relating to the time of delivery of goods.

INDIAN SALE OF GOODS ACT, 1930

INTRODUCTION
The law relating to sale of goods is contained in the Sale of Goods Act, 1930 which came into
force on 1st July 1930.
The act contains 66 sections.
The Act extends to whole of India except the State of J&K.
A few minor amendments in the Act were made by Sale of Goods (Amendment) Act, 1963.
DEFINITION OF CONTRACT OF SALE
Section 4(1) of the Sale of Goods Act defines a contract of sale of goods as
A contract whereby the seller transfers or agrees to transfer the property in goods to
the buyer for a price.
ESSENTIALS OF A CONTRACT OF SALE
The definition reveals the following essential features of contract of sale:
1. Two parties:
There should be two distinct parties to a contract of sale i.e. a buyer and a seller.

However, there is an exception where a person may buy his own goods. Where a persons goods are
sold for execution of a decree, he may himself buy them, so as to save them from transfer of
ownership to someone else.

2. Transfer of property(ownership):

In a contract there is transfer of ownership from seller to buyer, as against transfer of mere possession
or limited interest as in case of bailment or pledge.

3. Subject matter of contract must be goods:

Goods means any movable property other than actionable claims and money.----

The sale of immovable property is not covered under Sale of Goods Act.

4. Price is the consideration of the contract of sale:

The consideration for contract of sale must necessarily be money (i.e. legal tender
money), it may be in the form of cash, cheque, or through credit card)

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SALE VS AGREEMENT TO SELL

Transfer of property:

In sale the property in goods passes to the buyer at the time of making the contract and immediately
seller ceases to be the owner and buyer becomes the actual owner of goods. It creates a jus in rem i.e.
gives right to the buyer to enjoy goods as against the whole world.

In case of agreement to sell there is no transfer of property at the time of contract. The conveyance of
property takes place later so that the seller continues to be the owner until to agreement to sell
becomes a sale either by expiry of certain time or the fulfillment of some condition. An agreement to
sell is jus in persona i.e. it gives right either to buyer or seller against the other for any default in
fulfilling his part of agreement.

Risk of loss:

In case of sale the risk of loss passes with property (ownership) to the buyer (unless otherwise
agreed). Thus if the goods are destroyed the loss falls on the buyer even though the goods never came
into his possession because the property in goods has already passed to buyer

On the other hand in case of agreement to sell where the ownership of goods is yet to pass from the
seller to the buyer, such loss has to be borne by the seller even though the goods are in the possession
of buyer.

Consequences of breach:

In case of sale if the buyer wrongfully neglects or refuses to pay the price of goods,
the seller can sue for the price, even though the goods are still in his possession.

In case of agreement to sell, if the buyer fails to accept and pay for goods the seller
can only sue for damages and not for the price, even though the goods are in the
possession of buyer.

Right of resale:

In sale the property is with buyer and the seller (in possession of goods after sale)
cannot resell the goods.

If he does so , the subsequent buyer having knowledge of previous sale does not
acquire the title of goods.

The original buyer can sue and recover the goods from the third person as owner, and
can sue the seller for breach of contract as well as tort of conversion.

The right to recover goods from third person is lost if the subsequent buyer had
bought them bonafide without notice of previous sale.

In agreement to sell the property in goods remains with the seller and as such he can
dispose of goods as he likes and the original buyer can sue him only for breach of
contract.

KINDS OF GOODS

Goods form the subject-matter of a contract of sale. Goods may be classified into the
following types:

1. Existing goods;

2. Future goods; and

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 3. Contingent goods

1.Existing goods.

Goods which are physically in existence and which are in sellers ownership and /or
possession, at the time of entering the contract of sale are called existing goods.

Where seller is the owner, he has the general property in them.

Where seller is in possession, say, as an agent or a pledgee, he has a right to sell

them.

Existing goods may again be either specific or unascertained.

(a)Specific goods.

Unascertained goods.

The goods which are not separately identified or ascertained at the time of the making of the
contract are known as unascertained goods.

2. Future goods.

Goods to be manufactured produced or acquired by the seller after the making of the
contract of sale are called future goods [Sec. 2(6)].

These goods may be either not yet in existence or be in existence but not yet acquired
by the seller.

It is worth noting that there can be no present sale of future goods because property
cannot pass in what is not owned by the seller at the time of the contract.

So even if the parties purport to effect a present sale of future goods, in law it
operates only as an agreement to sell (Sec. 6(3)].

3.Contingent goods.

Goods, the acquisition of which by the seller depends upon an uncertain contingency
are called contingent goods (Sec. 6(2)].

Obviously they are a type of future goods and therefore a contract for the sale of
contingent goods also operates as an agreement to sell and not a sale so far as the
question of passing of property to the buyer is concerned.

It is important to note that a contract of sale of contingent goods is enforceable only if

the event on the happening of which the performance of the contract is dependent
happens, otherwise the contract becomes void.

The Price

The money consideration for a sale of goods is known as price [(Sec. 2(10)].

We have already seen that the price is an essential element in every contract of sale of goods,
that is, no valid sale can take place without a price.

The price should be paid or promised to be paid in legal tender money, unless otherwise
agreed.

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 It may be paid in the form of a cheque, hundi, bank deposit etc. For it is not the mode of
payment of a price but the agreement to pay a price in money that is requisite to constitute a
valid contract of sale.

Modes of fixing the price

According to Section 9 the price may be fixed by one or the other of the following modes:

1. It may be expressly fixed by the contract itself.

2. It may be fixed in accordance with an agreed manner provided by the contract.

3. It may be determined by the course of dealings between the parties.

CONDITIONS AND WARRANTIES

A condition is a stipulation essential to the main purpose of the contract, the breach of
which gives the aggrieved party a right to repudiate the contract itself [12(2)].

A warranty is a stipulation collateral to the main purpose of the contract, the breach of
which gives the aggrieved party a right to sue for damages only, and not to avoid the contract
itself [12(3)].

Section 12(4) lays down to the same effect, thus whether a stipulation in a contract of sale is
a condition or a warranty depends in each case on the construction of a contract.

ILLUSTRATIONS.

(a) A man buys a particular horse which is warranted quite to ride and drive. If the
horse out to be vicious, the buyers only remedy is to claim damages.

But if instead of buying a particular horse, a man asks a dealer to supply him with a
quiet horse and the dealer supplies him with a vicious one the stipulation is a
condition, and the buyer can return the horse and can also claim damages for breach
of contract (Hartley vs Hyman, 1920)

(b) P goes to R a horse dealer and says I want a horse which can run at a speed of
30 kms per hour. The horse dealer points out a particular horse and says, This will
suit you. P buys the horse. Later on P finds that the horse can run only at a speed of
20 Kms per hour. There is a breach of condition. P can repudiate the contract, return
the horse to R and get back the price.

The above illustrations are a clear proof of the fact that an exactly similar term may be a
condition in one contract and a warranty in another depending upon the construction of the
contract as a whole.

Conditions and Warranty Distinguished

1. As to value.

A condition is a stipulation which is essential to the main purpose of the contract,

whereas a warranty is a stipulation which is collateral to the main purpose of the
contract. [Sec. 12(2)(3)]

2. As to breach.

The breach of condition gives the aggrieved party the right to repudiate the contract
and also to claim damages, whereas the breach of warranty gives the aggrieved party
a right to claim damages only.

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 3. As to treatment.

A breach of condition may be treated as a breach of warranty. But a breach of

warranty cannot be treated as a breach of condition.

When Breach of Condition is to be treated as Breach of Warranty (Sec 13)

1. Voluntary waiver by buyer.

Although on a breach of condition by the seller, the buyer has a right to treat the
contract as repudiated and reject the goods, but he is not bound to do so.

He may instead elect to waive the condition, i.e., treat the breach of condition as a
breach of warranty and accept the goods and sue the seller for damages for breach of
warranty.

ILLUSTRATION.

A agrees of supply B 10 bags of first quality sugar @Rs. 625 per bag but supplies only second quality
sugar, the price of which is Rs. 600 per bag. There is a breach of condition and the buyer can reject
the goods. But if the buyer so elects, he may treat it as a breach of warranty, accept the second quality
sugar and claim damages @Rs. 25 per bag.

2. Acceptance of goods by buyer.

Where the buyer has accepted the goods and subsequently he comes to know of the
breach of condition, he cannot reject them, but can only maintain an action for
damages.

This case does not depend upon the will of the buyer but the law compulsorily treats a
breach of condition as a breach of warranty.

Acceptance of only part of the goods.

If the buyer has accepted only part of the goods and the contract is indivisible, he will
have to treat the breach of condition as a breach of warranty and accept the remaining
part also.

But in case of divisible contracts, he can repudiate as regards remaining goods, if he

has accepted only part thereof. Indivisible contracts are those where price for a lot,
consisting goods of different qualities, as such is fixed and not fixed per unit or per
bag or per ton, etc.

Meaning of acceptance.

Taking possession or delivery of the goods does not by itself amount to acceptance.

According to Section 42, the buyer is deemed to have accepted the goods:

when he intimates to the seller that he has accepted them; or

when he does any act in relation to goods which is inconsistent with the
ownership of the seller, e.g. consumes, uses, pledges or resells the goods or
puts his mark on them, etc.; or

when, after the lapse of reasonable time, he retains the goods without
intimating the seller that he has rejected them. On rejection of goods,
however, mere informing the seller is enough and the buyer is not bound to
return the rejected goods actually. (Sec. 43).

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Express and Implied Conditions and Warranties]\

Conditions and warranties may be either express or implied

They are said to be express when at the will of the parties they are inserted in the contract,

and they are said to be implied when the law presumes their existence in the contract
automatically through they have not been put into it in express words.

Implied conditions and warranties may however, be negatived or varied by express

agreement, or by course of dealing between the parties, or by usages of trade (Sec.
62).

This provision is merely an application of the general maxim of law, what is

expressly done puts an end to what is tacit or implied, and custom and agreement
over-rule implied conditions and warranties.

Implied Conditions:

Unless otherwise agreed, the law incorporates into a contract of sale of goods the following implied
conditions:

1. Condition as to title [Sec. 14 (a)].

In every contract of sale, the first, implied condition on the part of the seller is that in
the case of a sale, he has the right to sell the goods and that, in the case of an
agreement to sell he will have a right to sell the goods at the time when the property
is to pass.

Ordinarily, the seller has the right to sell the gods if either he is the owner of the
goods or he owners agent.

As a result of this condition, if the sellers title turns out to be defective the buyer is
entitled to reject the goods and to recover his price.

Notice that in the case of breach of condition as to title the buyer has no option to
treat the breach of condition as breach of warranty and accept the goods and sue the
seller for damages. In this case he must return the goods to the true owner. He can of
course recover the price from the seller because of a total failure of consideration.

ILLUSTRATION.

R purchased a motorcar from D and used the same for several months. D had no title
to the car and, therefore, R was compelled to return the car to the true owner. R sued
D to recover back the price which he had already paid. He was held entitled to
recover the whole of the price by him despite the fact that he had used the car for
some months (Rowland vs Diwall, 1923)

It may be noted that the implied condition as to title makes it obligatory upon the seller that he must
not only be the owner but also must be able to uphold the validity of the contract.

Thus if the goods sold bear labels infringing the trade mark of another, the seller is guilty of breach of
this condition although, he had full ownership of the goods.

2. Condition in a sale by description.

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 Where there is a contract of sale of goods by description, there is an implied
condition that the goods shall correspond with the description. (Sec. 15). Lord
Blackburn observed (in Browse vs Shand case, 1877). If you contract to sell peas,
you cannot oblige a party to take beans. If the description of the article tendered is
different in any respect, it is not the article bargained for, and the other party is not
bound to take it

It is important that the goods must correspond with the description whether it is a sale
of specific goods or of unascertained goods.

Further, the fact that the buyer has examined the goods will not affect his right to
reject the goods if the deviation of the goods from the description is such which could
not have been discovered by casual examination, i.e. if the goods show any latent
defects.

The description may be in terms of the qualities or characteristics of the goods e.g.
long staple cotton, Kalyan wheat, sugar C-30, basmati rice or may simply mention the
trade mark brand name or the type of packing etc.

ILLUSTRATIONS.

(a) Where there was a contract for the supply of new singer cars and one of the cars
supplied having already run a considerable mileage was not new, there was a breach
of condition on the part of the seller and the buyer was held entitled to reject the car
(Andrews Bros. vs Singer & Co., 1934).

(b) M agreed to supply to L 3,000 tins of canned fruit, to be packed in cases each
containing 30 tins. M tendered a substantial portion in cases containing 24 tins. It was
held that the mode of packing constituted a part of the description and, therefore, L
was entitled to reject the whole consignment (Re Moore & Co., and Landaure & Co.,
1921).

3. Condition in a sale by sample (Sec. 17).

When under a contract of sale, goods are to be supplied according to a sample agreed
upon, the implied conditions are:

(i) that the bulk shall correspond with the sample in quality;

(ii) that the buyer shall have a reasonable opportunity of comparing the bulk
with the sample.

(iii) that the goods shall be free from any defect, rendering them
unmerchantable, which would not be apparent on reasonable examination of
the sample; In other words, there should not be any latent defect in the goods.
If the defect is latent one, that is easily discoverable by the exercise of
ordinary care, and the buyer takes delivery after inspection, there is no breach
of implied condition and the buyer has no remedy.

ILLUSTRATIONS

(a) Two parcels of wheat were sold by sample. The buyer went to examine the bulk a
week after, One parcel was shown to him but the seller refused to show the other
parcel which was not there in the warehouse. Held, the buyer was entitled to rescind
the contract (Lorymer vs Smith,1822).

(b) Some mixed worsted coatings were sold by sample. The goods when supplied
corresponded to the sample but it was found that owing to a latent defect in the cloth,

[34]
 coats made out of it would not stand ordinary wear and were therefore unsalable. The
same defect exited in the sample also but could not be detected on a reasonable
examination. Held, the buyer was entitled to reject the cloth (Drummond & Sons vs
Van Ingen, 1887)

4. Condition in a sale by sample as well as by description (Sec. 15).

When goods are sold by sample as well as by description, there is an implied

condition that the bulk of the goods shall correspond both with the sample and with
the description.

If the goods supplied correspond only with the sample and not with the description or
vice versa, the buyer is entitled to reject the goods. The bulk of the goods must
correspond with both.

5. Condition as to fitness or quality [Sec. 16 (1)].

Ordinarily, in a contract of sale there is no implied condition or warranty as to quality

or fitness for any particular purpose of goods supplied; the rule of law being Caveat
Emptor that is, let the buyer beware.

But an implied condition is deemed to exist on the part of the seller that the goods
supplied shall be reasonably fit for the purpose for which the buyer wants them, if the
following conditions are satisfied:

(i) The buyer, expressly or impliedly, should make known to the seller the
particular purpose for which the goods are required; and

(ii) The buyer should rely on the sellers skill or judgment; and

(iii) The goods sold must be of a description which the seller deals in the
ordinary course of his business, whether he be the manufacturer or not.

The purpose must be made known expressly if the goods to be supplied can be used for
several purposes, otherwise the condition as to fitness will not be implied and the buyer will
have no right to reject the goods merely because they are unfit for the specific purpose he had
in mind.

ILLUSTRATION.

A buyer ordered for the hessian cloth, which is generally used for packing purposes,
without specifying the purpose for which he wanted the same. The cloth was supplied
accordingly. On receiving the cloth the buyer found that it was not suitable for
packing food products as it had an unusual smell. Held, that the buyer had no right to
reject the cloth as it was suitable for packing purposes alright. The buyer ought to
have disclosed his particular purpose to the seller in order to make him liable for the
breach of implied condition as to fitness (Re Andrew Yule & Co., 1932, AIR, Cal).

The purpose need not be told expressly if the goods are fit for one particular purpose only or
if the nature of the goods itself tells the purpose by implication. In such cases the purpose is
deemed to be made known t the seller impliedly.

ILLUSTRATIONS.

(a) A, a draper, who had no special knowledge of hot water bottles, went to the shop
of a chemist and asked for a hot water bottle. He was shown an American rubber
bottle which the chemist said would not stand boiling water, but was meant for hot
[35]
 water.A bought the bottle, after a few days, while being used, it burst and injured his
wife. it was found that the bottle was not fit for use as a hot water bottle. it was held
that since the bottle could be used only for one particular purpose, there was a breach
of implied condition as to fitness and the seller was liable to pay damages (Priest vs
Last, 1903).

(b) Where a buyer demands tinned fruit juice, it is implied from the nature of the
product itself that he wants it for consumption and if later on it is found to contain
poisonous matter, there is a breach of implied condition as to fitness and the seller is
liable in damages.

Sometimes the implied purpose may also be gathered from usage of the trade e.g., mobiloil
for a scooter implies two Ts mobiloil.

It is important that the implied condition as to fitness applies only in the case of sale of goods
to a normal buyer.

If the buyer is suffering from an abnormality; say, is allergic to particular foods, medicines,
dust, etc., and it is not made known to the seller at the time of sale, this condition does not
apply.

Sale under patent or trade name.

Provision to Section 16 (1) lays down that in the case of a contract for the sale of a
specified article under its patent or other trade name, there is no implied condition as
to its fitness for any particular purpose.

It is so because in such a case the buyer is not relying on the skill and judgment of the
seller but relies on the good reputation that the goods came to acquire and buys them
on the strength of that reputation.

The sellers duty is to supply the goods of the same trade name as demanded by the
buyer whether they are fit for any particular purpose or not, it not his concern.

ILLUSTRATION.

The buyer wrote to the seller: Send me your patent smoke consuming furnace for
fitting up in my brewery. The seller supplied the furnace according to the order but
the same was found to be not fit for the purpose of the buyers brewery. It was held
that the seller had performed his part of the contract by supplying his patented
furnace and so he was entitled to recover its price from the buyer (Chanter vs
Hopkins, 1838)

But the condition as to fitness will apply if the buyer relies on the sellers skill and judgment
as regards the suitability of the goods for a particular named purpose and makes known to the
seller that he so relies on him even though the article is described in the order by its trade
name.

6. Condition as to merchantability [Sec. 16(2)].

This condition is implied only where the sale is by description. We have already seen that there is an
implied condition in such cases, as per Section 15, that the goods should correspond with the
description. This subsection lays down another implied condition in such cases, that is, that the goods
should be of merchantable quality. But for making this condition applicable, not only that the sale
must be by description, but the following conditions must also be satisfied:

(i) The seller should be a dealer in goods of that description, whether he be the manufacturer or not;
and

[36]
(ii) The buyer must not have any opportunity of examining the goods or there must be some latent
defect in the goods which would not be apparent on reasonable examination of the same.

If the buyer had an opportunity of making the examination but he avoids to examine, or if the
has examined the goods, there is no implied condition as to merchantability as regards defects
which such examination ought to have revealed [Proviso to Sec. 16(2)].

The phrase merchantable quality means that the goods are of such quality and in such
condition that a reasonable man, acting reasonably, would accept them under the
circumstances of the case in performance of his offer to buy those goods, whether he buys
them for his own use or to sell again (S.S.Mendse vs Balkrishna Chettiar, 1963).

Stated briefly, in order to be merchantable the goods must be such as are reasonably saleable under
the description by which they are known in the market.

ILLUSTRATIONS.

(a) Where the underwears supplied contained certain chemicals which could cause
skin disease to a person wearing them next to skin, it was held that because of such a
defect the underwears were not of merchantable quality and the buyer was entitled to
reject the goods (Grant vs Australian Knitting Mills Ltd.,1936).

(b) Where a purchases a certain quantity of black yarn from B, a dealer in yarn, and
finds it damaged by white ants, the conditions as to merchantability has been broken
and A is entitled to reject it as unmerchantable.

(c) R ordered for some 600 motor horns of varying description. Some of the horns
were dented and badly polished and R rejected the whole of the consignment, Held,
the defects in the horns had rendered them unmerchantable and therefore the buyer
was justified in rejecting the whole consignment as the contract is indivisible
(Jackson vs Rotax Motor and Cycle Co.,1910).

(d) A wanted to purchase some glue. The glue was stored in the sellers warehouse in
barrels. Every facility was given to A for its inspection but he did not have the barrels
opened and simply looked at the outside for the barrels. The glue was found to have
defects which would have been found out if A had inspected the contents of the
barrels. It was held that there was no breach of any implied condition as to
merchantability and as such A was not entitled to any relief (Thornett vs Beers,
1919).

7. Condition as to wholesomeness.

This condition is implied only in a contract of sale of eatables and provisions. In such
cases the goods supplied must not only answer to description and be merchantable but
must also be wholesome. i.e., free from any defect which render them unfit for human
consumption.

ILLUSTRACTIONS.

(a) F bought milk from A, a dairy owner. The milk was contaminated with germs of
typhoid fever. Fs wife, on taking the milk, became infected and died of it. A was
held liable in damages (Frost vs Aylesbury Dairy Co., Ltd.1905)

Implied Warranties

Unless otherwise agreed, the law also incorporates into a contract of sale of goods the following
implied warranties:

1. Warranty of quiet possession [Sec. 14(b)].

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 In every contract of sale, the first implied warranty on the part of the seller is that the
buyer shall have enjoy quiet possession of the goods.

If the quiet possession of the buyer is in any way disturbed by a person having a
superior right than that of the seller, the buyer can claim damages from the seller.

Since disturbance of quiet possession is likely to arise only where the sellers title to
goods is defective, this warranty may be regarded as an extension of the implied
condition of title provided for by Section 14(a).

ILLUSTRATION.

The plaintiff, a lady purchased a second hand typewriter from the defendant. She
thereafter spent some money on its repair and used it for some months. Unknown to
the parties the typewriter was a stolen one and the plaintiff was compelled to return
the same to its true owner. She was held entitled to recover from the sellers for the
breach of this warranty damages reflecting not merely the price paid but also the cost
of repair (Mason vs Burningham, 1949). [Notice that the decision in the instant case
would not change if we treat it as a case of breach of condition as to title under Sec.
14(a)].

2. Warranty of freedom from encumbrances [Sec. 14(c)].

The second implied warranty on the part of the seller is that the goods shall be free
from any charge or encumbrance in favour of any third party not declared or known
to the buyer before or at the time when the contract is made.

If the goods are afterwards found to be subject to a charge and the buyer has to
discharge the same, there is breach of warranty and the buyer is entitled to damages.

It is to be emphasized that the breach of this warranty occurs only when the buyer in
fact discharges the amount of the encumbrance, and he had no notice of that at the
time of the contract of sale.

If the buyer knows about the encumbrance on the goods at the time of entering into
the contract, he becomes bound by the same and he is not entitled to claim
compensation from the seller for discharging the same.

3. Warranty of disclosing the dangerous nature of goods to the ignorant buyer.

The third implied warranty on the part of the seller is that in case the goods sold are
of dangerous nature he will warn the ignorant buyer of the probable danger.

If there is breach of this warranty the buyer is entitled to claim compensation for the
injury caused to him.

ILLUSTRATION.

C purchases a tin of disinfectant power from A.A knows that the lid of the tin is
defective and if it is opened without special care it may be dangerous, but tells
nothing to C. C opens the tin in the normal way whereupon the disinfectant power
flies into her eyes and causes injury. A is liable in damages to C as he should have
warned C of the probable danger.

DOCTRINE OF CAVEAT EMPTOR

The maxim of caveat emptor means let the buyer beware.

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 According to the doctrine of caveat emptor it is the duty of the buyer to be careful, while
purchasing goods of his requirement and, in the absence of any enquiry from the buyer, the
seller is not bound to disclose every defect in goods of which he may be cognizant.

The buyer must examine the goods thoroughly and must see that the goods he buys are
suitable for the purpose for which he wants them. If the goods turn out to be defective or do
not suit his purpose, the buyer cannot hold the seller liable for the same, as there is no implied
undertaking by the seller that he shall supply such goods as suit the buyers purpose.

If therefore, while making purchase of goods the buyer depends upon his own skill and makes
a bad choice, he must curse himself for his own folly, in the absence of any misrepresentation
or fraud or guarantee by the seller.

ILLUSTRATIONS.

(a) A purchases a horse from B. A needed the horse for riding but he did not mention
this fact to B. The horse is not suitable for riding but is suitable only for being driven
in the carriage., Caveat emptor being the rule, A can neither reject the horse not can
he claim any compensation from B.

(b) Certain pigs were sold by auction with all faults. The pigs were suffering from
typhoid fever and all of them but one died. They also infected a few of the buyers
own pigs. It was held that the seller was not bound to disclose that the pigs were
unhealthy. Caveat emptor being the rule. the buyer could not claim damages from the
seller (Ward vs Hobbs, 1878)

Exceptions.

The doctrine of caveat emptor is subject to the following exceptions:

1. Where the seller makes a mis-representation and the buyer relies on it, the doctrine of
caveat emptor does not apply. Such a contract being voidable at the option of the innocent
party, the buyer has a right to rescind the contract.

2. Where the seller makes a false representation amounting to fraud and the buyer relies on it,
or where the seller actively conceals a defect in the goods so that the same could not be
discovered on a reasonable examination, the doctrine of caveat emptor does not apply. Such a
contract is also voidable at the option of the buyer and the buyer is entitled to avoid the
contract and also claim damages for fraud.

3. Where the goods are purchased by description and they do not correspond with the
description (Sec. 15). (See implied condition in a sale by description discussed earlier).

4. Where the goods are purchased by description from a seller who deals in such class of
goods and they are not of merchantable quality the doctrine of caveat emptor does not apply.
But the doctrine applies, if the buyer has examined the goods, as regards defects which such
examination ought to have revealed [Sec. 16(2)]. (See implied condition as to
merchantability discussed earlier).

5. Where the goods are bought by sample, the doctrine of caveat emptor does not apply if the
bulk does not correspond with the sample, or if the buyer is not provided an opportunity to
compare the bulk with the sample, or if there is any hidden or latent defect in the goods (Sec.
17). (See implied condition in a sale by sample discussed earlier).

6. Where the goods are bought by sample as well as by description and the bulk of the goods
does not correspond both with the sample and with the description, the buyer is entitled to
reject the goods (Sec. 15). (See implied condition in a sale by sample as well as by
description discussed earlier).
[39]
 7. Where the buyer makes known to the seller the purpose for which he requires the goods
and relies upon the sellers skill and judgment but the goods supplied are unfit for the
specified purpose, the principle of caveat emptor does not protect the seller and he is liable in
damages [Sec. 16(1)]. (See condition as to fitness or quality discussed earlier).

8. Where the trade usage attaches an implied condition or warranty as to quality or fitness and
the seller deviates from that, the doctrine of caveat emptor does not apply and the seller is
liable in damages [Sec. 16(3)].

TRANSFER OF PROPERTY

INTRODUCTION

The phrase transfer of property in goods means transfer of ownership of the goods.

Property in goods is different from possession of goods.

Possession refers to the custody over the goods.

So the property in goods may pass from the seller to the buyer but the goods may be in
possession of the seller either as unpaid seller or as a bailee for the buyer.

In other cases the property in goods may still be with the seller although the goods may be in
possession of the buyer or his agent or a carrier for transmission to the buyer.

IMPORTANT ELEMENTS

1. Risk prima-facie passes with property.

As a general rule the risk of the loss of goods is prima-facie in the person in whom
property is.

Section 26 provides to the same effect, thus, Unless otherwise agreed, the goods
remain at the sellers risk until the property therein is transferred to the buyer, but
when the property therein is transferred to buyer, the goods are at the buyers risk
whether delivery has been made or not.

Thus, if after the contract the goods are destroyed or damaged the question who is to
bear the loss is to be decided not on the basis of possession of the goods but on the
basis of ownership of goods. Whosoever is the owner of the goods at the time of loss
must bear the loss.

ILLUSTRATION.

A buys goods from B and property has passed to him, but the goods remain in Bs
warehouse. Before delivery of goods to A, there is a fire in Bs warehouse and all the
goods are destroyed. A must bear the loss and pay the price of goods to B, if he has
not paid to so far.

The provision to Section 26 also lays down an exception to the rule that risk follows
ownership.

It provides that where delivery of the goods has been delayed through the fault of either buyer
or seller, the goods are at the risk of the party in fault as regards any loss which might not
have occurred but for such fault.

ILLUSTRATION.

[40]
 A contracted to purchase 30 tons of apple juice from B.B crushed the apples and
filled 30 tons of juice in casks and kept them ready for delivery. After a few casks
had been delivered A refused to take further deliveries. The juice became putrid and
had to be thrown away. Held although the property in good was still with B, yet the
loss had to be borne by A (Demby Hamiltion & Co. Ltd. vs Barden, 1949).

2. Action against third parties.

If after the contract of sale, the goods have been damaged by a third party, it is only
the person in whom the property vests who can take action against the wrongdoer.

3. Suit for price.

Generally speaking the seller can only sue for the price if the property in goods has
passed to the buyer.

4. Insolvency of the seller or the buyer.

In the event of insolvency of either the seller or the buyer, the answer to the question
whether the Official Receiver or Assignee can take over the goods or not, shall
depend upon whether the property in goods was with the party who has become
insolvent.

For example, if the seller becomes insolvent before giving delivery of the
goods but the property in goods has already passed to the buyer who has paid
the price, the Official Receiver can have no claim against the goods.

RULES REGARDING TRANSFER OF PROPERTY

Two Divisions:

(1.) Transfer of property in specific or ascertained goods.

(2.) Transfer of property in unascertained and future goods.

(1.) Transfer of property in specific or ascertained goods.

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.

It is only when the intention of the parties cannot be judged from their contract or conduct or
other circumstances that the rules laid down in Sections 20, 21, 22 and 24 apply [Sec. 19(3)].
These rules are as follows:

When goods are in a deliverable state (Sec. 20).

Where there is an unconditional (i.e., not subject to any condition precedent to be

fulfilled by the parties) contract for the sale of specific goods in a deliverable state,
the property in the goods passes to the buyer as soon as the contract is made, and it is
immaterial whether the time of payment of the price or the time of delivery of the
goods, or both are postponed.

ILLUSTRATIONS

[41]
 (a) A buys a bicycle for Rs 300 on a months credit and asks the shopkeeper to send it
to his house. The shopkeeper agrees to do so. The bicycle immediately becomes the
property of A.

(b) P buys a table for Rs 100 on a weeks credit and arranges to take delivery of the
table the next day. A fire broke out in the furniture mart, the same evening and the
table is destroyed. The property in the table has passed to P and he is bound to pay the
price.

The goods are said to be in a deliverable state when they are in such a state that the buyer
would, under the contract, be bound to take delivery of them [Sec. 2(3)]. For example, in
illustration (b) above, if the seller has to polish the table to make it acceptable to the buyer, it
is not in a deliverable state until it is so polished, and the buyer does not acquire property at
the time of the contract.

When goods have to be put into a deliverable state (Sec. 21).

Where there is a contract for the sale of specific goods and the seller is bound to do
something to the goods for the purpose of putting them into a deliverable state, the
property does not pass until such thing is done and the buyer has notice thereof.

The word something here means as act like packing the goods, or loading them on
rail or ship, or filling them in containers or polishing them in order to give finished
shape, etc.

3. When the goods have to be measured etc., to ascertain price (Sec. 22).

Where there is a contract for the sale of specific goods in a deliverable state, but the
seller is bound to weigh, measure, test or do some other act or thing with reference to
the goods for the purpose of ascertaining the price, the property does not pass until
such act or thing is done and the buyer has notice thereof.

ILLUSTRATION.

A sold to B 289 bales of goat skins, each bale containing five dozens, and the price
was for certain sum per dozen skins. It was the duty of A to count the goat skins in
each bale. Before A could do the same, the bales were destroyed by fire. Held, that
the property in the goods had not passed to the buyer (i.e., B) as something still
remained to be done by the seller (i.e., A) for ascertaining the price, and as such the
loss caused by fire had to be borne by the seller (i.e., A) (Zagury vs Furnell, 1809).

ILLUSTRATION.

A contracted with B to sell him 975 maunds of rice, the whole content of a certain
golah. B paid the entire price but agreed to remove the rice after weighing (for his
own satisfaction) before a certain date. After delivery was taken of a part of the rice
the other part was destroyed by fire. Held, the ownership had passed to the buyer
because nothing remained to be done by the seller to ascertain the price, and
therefore, B the buyer, must suffer the loss (Shoshi Mohun Pal vs Nobo Kristo
Paddar, 1878).

When goods are delivered on approval (Sec. 24).

When goods are delivered to the buyer on approval or on sale or return, or on other
similar terms, the property therein passes to the buyer:

[42]
 When he signifies his approval or acceptance to the seller or does any other
act adopting the transaction, e.g., uses the goods, pledges the goods or resells
them;

If he does not signify his approval or acceptance to the seller but retains the
goods, without giving notice of rejection, beyond the time fixed for the return
of goods, or if no time has been fixed, beyond a reasonable time.

ILLUSTRATIONS.

(a) A delivered a horse to B on the terms of sale or return, within 8 days, The horse
died on the third day without any fault on the part of B. Held, A was to bear the loss
as the horse was still his property when it perished (Elphick vs Bares, 1880).

(b) A delivered a horse to B on trial for 8 days. B continued to retain the horse even
after the expiry of 8 days without giving notice of rejection to A. B had
automatically become the owner of the horse on the expiry of 8 days.

(2.) Transfer of property in unascertained and future goods.

The rule relating to transfer of property in unascertained and future goods is

contained in Section 18 and 23.

These Sections provide that where goods contracted to be sold are not ascertained or
where they are future goods, the property in goods does not pass to the buyer unless
and until the goods are ascertained or unconditionally appropriated to the contract so
as to bring them in a deliverable state.

RULE OF TRANSFER OF TITLE ON SALE

The general rule relating to the transfer of title on sale is that the seller cannot transfer to the
buyer of goods a better title than he himself has.

If the title of the seller is defective the buyers title will also be subject to the same defect.

Section 27 also lays down to the same effect and provides that where goods are sold by a
person who is not the owner thereof and who does not sell them under the authority or with
the consent of the owner, the buyer acquires no better title to the goods than the seller had...

This rule is expressed by the maxim, nemo det quod non habet, which means that no one
can give what he has not got.

TRANSFER OF TITLE BY NON-OWNERS

1. An unauthorized sale by a mercantile agent (Sec. 27)

Mercantile agent having an authority to sell goods conveys a good title to the buyer.

But by virtue of this provision (proviso to sec.27) a mercantile agent can convey a
good title to the buyer even though he sells goods without having any authority from
the principal to do so, provided the following conditions are satisfied:

He should be in possession of the goods or documents of title to the goods in

his capacity as mercantile agent and with the consent of the owner,

he should sell the goods while acting in the ordinary course of business,

[43]
 the buyer should act in good faith without having any notice, at the time of
the contract, that the agent has no authority to sell.

2. Transfer to title by estoppel (Sec. 27).

In the words of Lord Halsbury. Estoppel arises when you are precluded from
denying the truth of anything which you have represented as a fact, although it is not
a fact.

When the true owner of the goods by his conduct or words or by any act or omission
leads the buyer to believe that the seller is the owner of the goods or has right to sell.
The buyer in such a case gets a better title than that of the seller.

ILLUSTRATION.

M, the owner of a wagon allowed one of his employees K, to have his name painted
on it. M did so for the purpose of inducing the public to believe that the wagon
belonged to K. C purchased the wagon from K in good faith. C acquires a good title
as M is estopped from denying Ks authority to sell (O Connor vs Clark)

3. Sale by a joint owner (Sec. 28).

If one of several joint owners of goods has the sole possession of them by permission
of the co-owners, the property in the goods is transferred to any person who buys
them from such joint owner in good faith without notice of the fact that the seller has
no authority to sell.

It may be noted that in the absence of this provision (i.e., Sec. 28) the buyer would
have obtained only the title of the co-owners and would have become merely a co-
owner with the other co-owners. Hence the provision constitutes an exception to the
rule no one can give what he has not got.

ILLUSTRATION.

A,B and C are three brothers. They own a cow in common. B and C entrust the work
of looking after the cow to A and leave the cow in As possession. A sells the cow to
D.D purchases bonafide for value. D gets a good title.

4. Sale by person in possession under voidable contract (Sec. 29)

When a person has obtained possession of the goods under a voidable contract and he
sells those goods before the contract has been rescinded, the buyer of such goods
acquires a good title to them provided the buyer acts in good faith and without notice
of the sellers defect of title.

ILLUSTRATION.

A by misrepresentation induces B to sell and deliver to him a cow. A sells the cow to
C before B has rescinded the contract. C purchases the cow in good faith and without
notice of the sellers defective title. C acquires a good title.

It is to be noted that his Section (Sec. 29) does not apply unless there is a contract. Thus it
does not apply to a contract originally void or where goods have been obtained by theft.

5. Sale by Seller in possession after sale [Sec. 30(1)].

Where a seller, after having sold the goods, continues to be in possession of the goods
or of the documents of title to them and again sells or pledges them either himself
orthrough a mercantile agent, he will convey a good title to the buyer or the pledgee
[44]
 provided the buyer or the pledgee acts in good faith and without notice of the
previous sale.

For the application of this exception it is essential that the possession of the seller must be as seller
and not as hirer or bailee.

6. Sale by buyer in possession after agreement to buy [Sec. 30(2)].

Where a buyer has agreed to buy the goods and has obtained possession of the same or the documents
of title to them with the consent of the seller, resells or pledges the goods either himself or through a
mercantile agent, he will convey a good title to the buyer or the pledgee provided the person receiving
the goods acts in good faith and without notice of any lien or other right of the original seller in
respect of those goods.

ILLUSTRATIONS.

(A) A buys some furniture and agrees to pay for that in two monthly installments, the ownership to
pass to him on payment of the second installment. Having obtained possession of the furniture. A,
sells the furniture to B before paying the second installment. B buys the furniture bonafide.
Subsequently, A does not pay the second installment. The furniture dealer cannot take back furniture
from B, who obtains a good title to the same. The dealer can, of course, sue A for the breach of the
contract and claim damages.

(b) A agreed to buy a car and pay for it, if his solicitor approved. A obtained possession of the car
and sold the same to B. But the solicitor subsequently disapproved of the transaction. It was held
that B, the bonafide buyer, got a good title, because A agreed to buy (Marten vs Whale, 1917).

7: Resale by an unpaid seller [Sec. 54(3)].

Where an unpaid seller who has exercised his right of lien or stoppage in transit, resells the goods (of
which ownership has passed to the buyer), the subsequent buyer acquires a good title thereto as
against the original buyer, even though the resale may not be justified in the circumstances, i.e. no
notice of the resale has been given to the original buyer.

(d) Under the Negotiable Instruments Act, a holder in due course gets a better title than what his
endorser had. In other words, a person who takes a negotiable instrument in good faith and for value
becomes the true owner even if he takes it from a thief or finder.

RIGHTS OF UNPAID SELLER

MEANING

The seller of goods is deemed to be an unpaid seller (a) when the whole of the price has not
been paid or tendered; or

(b) Where a bill of exchange or other negotiable instrument has been received as a conditional
payment, i.e., subject to the realization thereof, and the same has been dishonored.

The definition emphasizes following characteristics of an unpaid seller:

1. He must sell goods on cash terms and not on credit, and he must be unpaid.

2. He must be unpaid either wholly or partly. Even if only a portion of the price,
however small, remains unpaid, he is deemed to be an unpaid seller. Where the price
is paid through a bill of exchange or other negotiable instrument, the same must be
dishonored.

[45]
 3. He must not refuse to accept payment when tendered. If the price has been
tendered by the buyer but the seller wrongfully refuses to take the same, he ceases to
be an unpaid seller.

RIGHT OF AN UNPAID SELLER

An unpaid seller has two-fold rights

(1.) Rights of unpaid seller against the goods, and

(2.) Rights of unpaid seller against the buyer personally

(1.) Rights of unpaid seller against the goods

(a) Right of lien (Sec. 47)

Lien is the right to retain possession of goods and refuse to deliver them to the buyer
until the price due in respect of them is paid or tendered. An unpaid seller in
possession of goods sold is entitled to exercise his lien on the goods in the following
cases:

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:
Where the buyer becomes insolvent, even though the period of credit may not have yet expired.

When the goods are sold on credit the presumption is that the buyer shall keep his credit good. If,
therefore, before payment the buyer becomes insolvent, the seller is entitled to exercise this right and
hold the goods as security for the price.

This right of lien can be exercised only for the non-payment of the price and not for any other
charges, e.g., maintenance or custody charges, which the seller may have to incur for storing the
goods in exercise of his lien for the price.

This right of lien extends to the whole of the goods in his possession even though part payment for
those goods has already been made.

In other words the buyer is not entitled to claim delivery of a portion of the goods on payment of a
proportionate price.

Further, where an unpaid seller has made part delivery of the goods, he may exercise his right of lien
on the remainder.

Also, the lien can be exercised even though the seller has obtained a decree for the price of the
goods [Sec. 49(2)].

When lien is lost?

As already observed, lien depends on physical possession of goods. Once the possession is lost, the
lien is also lost.

Section 49 accordingly provides that the unpaid seller of goods loses his lien thereon in the following
cases:

(a) When he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer
without reserving the right of disposal of the goods; or

(b) When the buyer or his agent lawfully obtains possession of the goods; or

[46]
(c) When the seller expressly or impliedly waives his right of lien. An implied waiver takes place
when the seller grants fresh term of credit or allows the buyer to accept a bill of exchange payable at a
future date or assents to a sub-sale which the buyer may have made.

It may be noted that right of lien, if once lost, will not revive if the buyer redelivers the goods to the
seller for any particular purpose. Thus where a refrigerator after being sold was delivered to the buyer
and since it was not functioning properly, the buyer delivered back the same to the seller for repairs, it
was held that the seller could not exercise his lien over the refrigerator.

(b) Right of Stoppage of Goods in Transit

The right of stoppage in transit means the right of stopping further transit of the goods, while
they are with a carrier for the purpose of transmission to the buyer, resuming possession of
them and retaining possession until payment or tender of the price. Thus, in a sense this right
is an extension of the right of lien because it entitles the seller to regain possession of the
goods.

When can this right be exercised? (Sec. 50).

The buyer becomes insolvent.

The property has passed to the buyer. If property has not passed to the buyer then this right is
termed as the right of withholding delivery [Sec. 46(2)]; and

The goods are in the course of transit. This means that goods must be neither with the seller
nor with the buyer nor with their agent. They should be in the custody of a carrier as an
independent middleman (i.e. in his own right as a carrier) e.g. railways and common carriers
whose business is to transport goods of others.

The carrier must not be either sellers agent or buyers agent. Because if he is sellers agent
the goods are still in the hands of seller in the eye of law and hence there is no transit, and if
he is buyers agent, the buyer gets delivery in the eye of law and hence question of stoppage
does not arise.

How right of stoppage is exercised (Sec. 52).

The unpaid seller may exercise his right to stoppage in transit either:

by taking actual possession of the goods, or

by giving notice of this claim to the carrier or other bailee in whose possession the
goods are

Such notice may be given either (a) to the person in actual possession of the goods, or

(b) To his principle.

It is the duty of carrier after receiving due notice, not to deliver the goods to the buyer but to redeliver
them to, or according to the directions of the seller.

If by mistake he delivers the goods to the buyer, he can be made liable for conversion. The expenses
of redelivery are to be borne by the seller.

Duration of transit (Sec. 51).

[47]
Since the right of stoppage in transit can be exercised only so long as the goods are in the course of
transit, it becomes necessary to know as to when the transit begins and when it comes to an end.
When the transit comes to an end the right of stoppage cannot be exercised.

The transit is deemed to be at an end and the seller cannot exercise his right of stoppage in the
following cases:

When the buyer or his agent takes delivery after the goods have reached destination.

When the buyer or his agent obtains delivery of the goods before their arrival at the
appointed destination.

When the goods have arrived at their destination and the carrier acknowledges to the
buyer or his agent that he holds the goods on his behalf.

When the goods have arrived at their destination but the buyer instead of taking
delivery requests the carrier to carry the goods to some further destination and the
carrier agrees to take them to the new destination;

When the carrier wrongfully refuses to deliver the goods to the buyer or his agent.

When part delivery of the goods has been made to the buyer with an intention of
delivering the whole of the goods, transit will be at end for the remainder of the
goods also which are yet in the course of the transit.

(2.)Rights of Unpaid Seller against the Buyer Personally

The unpaid seller in addition to his rights against the goods as discussed above, has the following
three rights of action against the buyer personally:

(a) Suit for Price (Sec. 55).

Where property in goods has passed to the buyer, or where the sale price is payable on a day certain
although the property in goods has not passed; and the buyer wrongfully neglects or refuses to pay the
price according to the terms of the contract, the seller is entitled to sue the buyer for price, irrespective
of the delivery of goods.

Where the goods have not been delivered the seller would file a suit for price normally when the
goods have been manufactured to some special order and thus are unsalable otherwise,

b)Suit for damages for non-acceptance (Sec. 56).

(c) Suit for special damages and interest (Sec. 61)

This Section entitles the seller to sue the buyer for special damages also for such loss which the
parties knew, when they made the contract, to be likely to result from the breach of it.

In fact the Section is only declaratory of the principle regarding special damages laid down in
Section 73 of the Indian Contract Act.

The Section also recognizes unpaid sellers right to get interest at a reasonable rate on the total unpaid
price of the goods sold, from the time it was due until it is actually paid. (Telu Ram Jain vs Aggarwal
& Sons,1991)

Negotiable Instrument Act, 1881

[48]
INTRODUCTION
The law relating to negotiable instruments is primarily contained in the Negotiable
Instruments Act, 1881.
The word negotiable means transferable from one person to another
The term instrument means any written document by which a right is created in favor of
some person.
Thus, the negotiable instrument is a document by which rights vested in a person can be
transferred to another person in accordance with the provision of the Negotiable Instruments
Act, 1881.
FEATURES OF A NEGOTIABLE INSTRUMENT
An instrument is to be called negotiable if it possesses the following characteristic features:

Freely transferable- Transferability may be by (i) delivery, or (ii) by endorsement and

delivery
Holders title free from defects- The term negotiability means that not only is the
instrument transferable by endorsement and/or deliver, but that its holder in due course
acquires a good title notwithstanding any defect in a previous holders title.
A holder in due course is one who receives the instrument for value and without any notice as
to the defect in title of the transferor.
The Holder can sue in his own name-Another characteristic feature of a negotiable instrument
is that its holder in due course can sue on the instrument in his own name.
A negotiable instrument can be transferred infinitum, i.e., can be transferred any number of
times till its maturity.
A negotiable instrument is subject to certain presumptions.

PROMISSORY NOTE
A promissory note is an instrument in writing (not being a bank note or a currency note) containing an
unconditional undertaking, signed by the maker to pay a certain sum of money to or to the order of a
certain person or the bearer of the instrument. (Sec. 4)
Examples of Promissory Notes
The following are the illustrations of Promissory Notes:
A sings instruments in the following terms-
I promise to pay B or order Rs. 500.
I acknowledge myself to be indebted to B in Rs. 1000
But, the followings are Not Promissory Notes:
Mr. B, I.O.U. (I owe you) Rs. 1000.
I am liable to pay you Rs. 500.
I promise to pay B Rs. 500 and all other sums which shall be due to him.
I promise to pay B Rs. 500, first deducting thereout any money which he may owe
me.
I promise to pay B Rs. 1500 on Ds death, provided he leaves me enough to pay that
sum.
I promise to pay B Rs. 500 seven days after my marriage with C.
I promise to pay B Rs. 500 and to deliver to him my black horse on 1st January
next.
Essentials or Characteristics of a Promissory Note
In writing: A promissory note must be in writing. Writing includes print and typewriting.
Promise to pay: It must contain an undertaking or promise to pay. Thus a mere
acknowledgement of indebtedness is not sufficient.
Also, a receipt for money, if it does not contain express promise to pay is not a promissory
note. But if the receipt is coupled with a promise to pay, it shall be a promissory note.
Example

[49]
 We have received a sum of Rs. 9000 from Shri R.R. Sharma. This amount will be
repaid on demand. We have received this amount in cash.
Held: This is a promissory note [Surjit Singh v. Ram Ratan, AIR (1975) ]
However, notice that the use of the word promise is not essential to constitute on instrument
as promissory note.
Unconditional The promise to pay must not be conditional. Thus, instruments payable on
performance or non-performance of a particular act or on the happening or non-happening of
an event are not promissory note.
Example A promises to pay B Rs. 5000 provided C leaves sufficient money in favor
of A after Cs death, is not a promissory note,
Signed by the maker: The promissory note must be signed by the maker, otherwise it is of
no effect.
Even if it is written by the maker himself and his name appears in the body of the instrument,
it shall not constitute a valid promissory note, if it is not signed by the maker.
Signature means the writing of a persons name in order to authenticate the contract
contained in the instrument.
Certain parties. The instrument must point out with certainty the maker and the payee of the
promissory note, e.g. son of ..resident of .etc. The identification of a
payee by description does not invalidate the promissory note. For example, the note drawn
payable to the General Manager of HDFC Ltd.
Certain sum of money. The sum payable must be certain or capable of being made certain.
Where rate of interest is specified, the sum shall be deemed to be certain.
But, expressions like market rate of interest do not make the amount certain since market
rate may vary with the source of borrowing, purpose of borrowing, financial standing of the
borrower, and so on.
However, a promissory note containing an undertaking to pay the amount 2% above the bank
rate shall be valid. Its because there is only one bank rate (i.e. the rate at which RBI lends
to commercial banks) at a given point of time.
Promise to pay money only. If the instrument contains a promise to pay something in
addition to money, it cannot be a promissory note. For e.g.I promise to pay B Rs. 50,000 and
also deliver him a Maruti 800, is not a promissory note
Number, place date etc. These are usually found in a promissory note but are not essential in
law. If a promissory note does not bear a date, it is deemed to have been made when it was
delivered.
It may be payable in installment .
It may be payable on demand or after a definite period: Payable on demand means
payable immediately or any time till it becomes time-barred. A demand promissory note
becomes time barred on expiry of 3 years from the date of bears.

SPECIMEN OF PROMISSORY NOTE

Rs. 10,000 New Delhi-110016

Oct. 10, 2006
Six months after date I promise to pay X or order the sum of Rupees Ten Thousands only for value
received.

Stamp
Sd/-
To X
Address _______________________
_______________________

BILL OF EXCHANGE

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A bill of exchange is defined by Section 5 as an instrument in writing, containing an unconditional
order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the
order of, a certain person, or to the bearer of the instrument.
Characteristic Features of a bill of exchange
1. It must be in writing
2. It must contain an order to pay and not a promise or request. Words, like Please pay Rs.
10,000 to A and oblige, do not constitute the instrument a bill of exchange.
3. The order must be unconditional.
4. There must be three parties, viz. drawer, drawee and payee. However, one person may
assume the role of two parties e,g, a person may draw a bill of exchange in his own favour,
i.e. he may be a drawer as well as a payee. He cannot however, be a drawer as well as a
drawee because that will render the instrument a promissory note.
5. The parties must be certain.
6. It must be signed by the drawer.
7. The sum payable must be certain or capable of being made certain.
8. The order must be to pay money and money alone.
9. It must be duly stamped as per the Indian Stamp Act. Accordingly all bills of exchange other
thandemand bill must bear the adhesive stamps of the requisite amount and the same must
have been affixed either before or at the time of execution and also cancelled .
10. Number, date and place are not essential. Oral evidence may be obtained as to date and place
of execution.

SPECIMEN OF A BILL OF EXCHANGE

Rs. 10,000 New Delhi-110016
Oct. 13, 2006
Six months after date pay to A or order the sum of Rupees Ten Thousands only for value received.

Stamp

Sd/-

To X

Address _______________________

_______________________

The specimen given above is of a usance bill, payable after a specified period of time. A bill
exchange may be drawn payable at sight, i.e. on demand or payable after certain time after
DISTINCTION
sight. BETWEEN PROMISSORY NOTE AND BILL OF EXCHANGE

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 Promissory Note
1. There are only two parties the maker
(debtor) and the payee (creditor)
2. A note contains an unconditional promise
by the maker to pay the payee.
3. No prior acceptance is needed.
4. The liability of the maker or drawer is
primary and absolute.
5. No notice of dishonor need be given.
6. The maker of the note stands in
immediate relation with the payee.
CHEQUE
Cheque as a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand.
Features of a Cheque
Thus, a cheque is a bill of exchange with two added features viz.
a) It is always drawn on a specified banker,
b) It is always payable on demand and not otherwise. Being a bill of exchange a cheque
must be
In writing,
a) Contain an unconditional order to pay
b) Drawn on a specified banker
c) For a certain sum of money
d) The payee must be a definite person,
e) Amount must be written both in figures and words,
f) It must be dated.
DISTINCTION BETWEEN CHEQUE AND BILL OF EXCHANGE
Cheque
It must be drawn only on a banker.
The amount is always payable in
demand.
The cheque is not entitled to days of
grace.
Acceptance is not needed.
A cheque can be crossed.
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Bill of Exchange
1. There are three parties the drawer, the
drawee and the payee although any two
of these capacity may be filled by one
and the same person.
2. It contains an unconditional order to the
drawee to pay according to the drawers
directions.
3. A bill payable after sight must be
accepted by the drawee or his agent
before it is presented for payment.
4. The liability of the drawer is secondary
and conditional upon non-payment by the
drawee.
5. Notice of dishonor must be given by the
holder to the drawer and the intermediate
endorsers to hold them liable thereon.
6. The maker or drawer does not stand in
immediate relation with the acceptor or
drawee.
Bill of Exchange
It can be drawn on any person including
a banker.
The amount may be payable in demand
or after a specified time.
A Bill of Exchange (time)bill is entitled
to three days of grace.
A bill payable after sight must be
accepted.
Crossing of a bill of exchange is not
possible.

Notice of dishonor is not necessary. The
parties thereon remain liable, even if no
notice of dishonor is given.
A cheque is not to be noted or protested
in case of dishonor.
The protection given to the paying banker
in respect of crossed cheques is peculiar
to the instrument.
Notice of dishonor is necessary to hold
the parties liable thereon. A party who
does not receive a notice of dishonor can
generally escape its liability thereon.
A bill is noted or protested to establish
dishonor.
No such protection is available is the
case of bills

HOLDER AND HOLDER-IN-DUE-COURSE

According to Section 8, a holder of a negotiable instrument is a person entitled in his own

name to the possession thereof and to receive to recover the amount due thereon from the
parties thereto.
Thus, a person who has obtained the possession of an instrument by theft or under a forged
endorsement is not a holder as he is not entitled to recover amount of the instrument.
A holder in-due-course, on the other hand, is a person who for consideration became the
possessor of a promissory note, bill of exchange or cheque, if payable to bearer, or the payee
or endorsee thereof, if payable to order before the amount mentioned in it becomes payable
and without having sufficient cause to believe that any defect existed in the title of the person
from whom he derived his title (Section 9).
Thus where a person receives a negotiable instrument without consideration, he may be
holder, but will not be called as a holder in due course.
Besides, the title of holder of a negotiable instrument is always subject to the title of its
transferor whereas a holder in due course acquires a better title than that of its transferor.
So where a lost negotiable instrument is transferred to a person who takes it, say, without
consideration and thus becomes the holder will not be entitled to enforce his claim against its
real owner.
But if he is a holder in due course as per Section 9, he will be able to establish his claim even
against the real owner of that instrument.

CHEQUE CROSSING

Written Instrument.
A cheque must be an instrument in writing. Regarding the writing materials to be used, law does not
lay down any restrictions and therefore cheque may be written either with (a) pencil or pen (b)
typewriter or may be (c) printed.
Although there is no legal bar for cheques to be drawn with an ordinary lead pencil, yet bankers
should discourage this practice as alterations can be easily made and are difficult detect.
Unconditional Order.
A cheque must contain an unconditional order.
It is however not necessary that the word order or its equivalent must be used to make the document a
cheque.
Generally, the order to bank is expressed by the word pay.
If the word please precedes pay the document will not be regarded as invalid merely on this
amount.
On a Specified Banker Only.
A cheque must be drawn on a specified banker. To avoid any mistake the name and address of the
banker should be specified.
A Certain Sum of Money.
The order must be only for the payment of money and that too must be specified.
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 Thus, orders asking the banker to deliver securities or certain other things cannot be regarded as
cheques.
Payee to be Certain.
A cheque to be valid must be payable to a certain person.
Person should not be understood in a limited sense including only human beings. The term in fact
includes legal persons also.
Thus, instruments drawn in favor of a body corporate, local authorities, clubs, institution etc. are valid
instruments being payable to legal persons.
Payable on Demand.
A cheque to be valid must be payable on demand and not otherwise. Use of words on demand or
their equivalent is not necessary.
When the drawer asks the banker to pay and does not specify the time for the payment the instrument
is payable on demand (Section 19).
Amount of the Cheque.
Amount of the cheque must be clearly mentioned. The amount should be written both in words as
well as figures so as to avoid mistakes.
Moreover, the amount should be so written as to leave no blank space before or after the words and
figures specifying the amount.
In case, he does so, though innocently and his banker pays the forged amount because the forgery is
not noticeable in spite of reasonable care, the banker would be justified in debiting customers amount
with the amount actually paid.
Dating of Cheques.
The drawer of a cheque is expected to date is before it leaves his hands. A cheque without a date is
considered incomplete and is returned unpaid by the banks.

CROSSING OF CHEQUES
Crossing is a unique feature associated with a cheque affecting to a certain extent the
obligation of the paying banker and also its negotiable character.
It is a peculiar method of modifying the instrument to the banker for payment of the cheque.
Crossing on a cheque is a direction to the paying banker by the drawer that payment should
not be made across the counter. The payment on a crossed cheque can be collected only
through a banker.
Thus, crossing of a cheque is effected by drawing two parallel transverse lines with or without
the words and company or any abbreviation thereof.
A cheque having the cross mark such as X is not generally regarded as a crossed cheque.
A cheque that is not crossed is called an open cheque.

TYPES OF CROSSING
General Crossing
Special Crossing
General Crossing
The term general crossing implies the addition of two parallel transverse lines.
Section 123 in this regard provides Where a cheque bears across its face an addition of the
words and company or any abbreviation thereof, between two parallel lines or of two
parallel transverse lines simply, either or without the words not negotiable that addition
shall be deemed a crossing and the cheque shall be deemed to be crossed generally
Special Crossing
Special Crossing implies the specification of the name of the banker on the face of the
cheque.
Section 124 in this regard, reads: Where a cheque bears across its face, an addition of the
name of the bank, either with or without the words not negotiable that addition shall be
deemed a crossing and the cheque shall be deemed to be crossed to that banker.
Drawing two parallel lines is not necessary in case of a specially crossed cheque

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 The object of special crossing is to direct the drawee banker to pay the cheque only if it is
presented through the particular bank mentioned therein.
Thus it makes the cheque system still safer.

Account Payee Crossing (A/c Payee Crossing)

An A/c payee crossing signifies that the drawer intends the payment to be credited only to the
payees account and in none else.
The addition of A/c payee to a crossing has no legal sanctity and the paying banker may
ignore such a direction without being liable for any damages in National Bank v. Lilke
(1981), a cheque with the crossing Account of J.F. Moriaty Essq., National Bank, Dublin,
was held to be negotiable.
It was observed in Atlanta Mines Ltd. Vs. Economic Bank that such crossing is a mere
direction to the collecting banker as to how the money is to be dealt with after receipt.
In practice, however, the collecting banker sees to it that such instruction is carried out and
usually refuses to accept A/c payee crossed cheque with any endorsement thereon.
Not negotiable , A/c Payee Crossing
The Council of the Institute of Chartered Accountants in England and Wales has suggested
the combination of not negotiable and A/c payee crossing as the safest form of crossing.
It has double advantage. The instrument is rendered not negotiable (making the paying
banker responsible to see that payment is made to the person who is entitled to receive it)
plus A/c payee crossing directs the collecting banker to collect it for the payee only and warns
that if the amount is collected for someone else, he may be held liable for damages.
Who can Cross a Cheque
The drawer of a cheque.
The holder of a cheque. Where a cheque is issued uncrossed, it may be crossed generally or
specially by its holder. If the cheque is already crossed generally he may convert it into
special crossing by addition the name of a particular bank. Further, a holder may add the
words not negotiable in case of both the types of crossing.
The banker, in whose favor the cheque has been crossed specially may again cross it specially
in favor of another banker. The latter bank in such a case acts as the agent of the former.
Opening of Crossing
A cheque once crossed need not remain so forever.
The drawer has the right to cancel the crossing by writing the words pay cash and putting
his full signatures.
It should be noted that if a holder writes the words pay cash and forges the drawers
signatures, the paying banker is not protected.
The reason is that paying banker is excepted to know the drawers signatures and therefore,
forgery of drawers signatures does not entitle him to any protection.
MARKING OF CHEQUES
Where the payee is not likely to part with his goods in return for a cheque drawn by a party
not well known to him, the banker on whom the cheque is drawn may be approached to mark
or certify the cheque as good for payment.
Marking or certification is a method adopted when the paying banker verifies the customers
account and indicates thereon that there are enough funds in his Account to meet that cheque
The marking of a cheque may be done at the instance of the drawer or at the instance of the
payee. The effect of marking is different in the three cases.
1. Marking at the Instance of the Drawer
a. In case of cheques marked or certified by the banker at the request of the drawer, the
banker acquires a right to retain money to meet such a cheque.
b. Thus if any cheque is presented subsequently and the balance remaining after
providing for the marked or certified cheque, is insufficient, the banker will rightfully
dishonor these subsequent cheques for want of money.
c. Besides, in such a case, the drawer loses his right of countermanding the payment on
that cheque. Moreover, even the death or bankruptcy of the drawer, before actual
payment, does not stop the payment on that cheque.

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 d. However, a bank is under no obligation to certify a cheque and it may refuse to do so
for any reason. This does not amount to dishonor of a cheque and thereby the banker
does not incur any liability.
e. Marking only certifies the genuineness of the drawers signature and the sufficiency
of funds and not the endorsements.
2. Marking at the Request of the Payee or Holder
a. Where the payee or holder of a cheque requests the drawee bank to mark a cheque, it
constitutes nothing more than an intimation that, at the time of marking, the bank has
a sufficient balance to the credit of the drawer.
b. Thus, in such a case, there is no appropriation by the banker and customer can
exercise his right of countermanding the payment.
MATERIAL ALTERATIONS
Sometimes, cheques are altered between drawing and presentation period without authority
from the drawer.
Some alterations are material and some are immaterial.
An alteration is material if it alters materially or substantially the operation of the instrument
and thereby the rights and liabilities of the parties
It should be noted that the legal effect of the alteration is not changed, even if the alteration
made is for the benefit of the party bound by the instrument.
Examples of material alteration are:
date;
the time of payment;
the place of payment;
the sum payable;
the number of parties;
the relationship between parties;
legal character of the instrument;
opening a crossed cheque;
Converting an order cheque into a bearer cheque.
It is immaterial as to who makes the alteration. An alteration made by an outsider or stranger
to the instrument will be considered as an alteration made by the holder himself as it is the
duty of the holder to preserve the instrument, free from such forgeries.
Effect of Material Alteration
According to Section 87 when a cheque is altered, it ceases to be a cheque altogether and a
banker who makes payment cannot debit the customers account.
Thus, if the alteration is not under the full signature of the drawer, the cheque should be
returned with the remarks Alteration requires full signature of the drawer.
Section 89, however, grants protection to the paying banker where the alteration is apparently
not noticeable and the payment is made in due course as per Section 10.
Examples of Alterations which are Not Material
filling blanks of the instrument (Section 20);
conversion of blank endorsement into endorsement in full (Section 49);
crossing of cheques (Section 125);
altering a general crossing into a special crossing; addition of the words account payee or
not negotiable to a crossing; and where a cheque is crossed specially, the banker to whom it
is crossed, crossing it specially to another banker, his agent for collection;
cancelling the word bearer and making the cheque payable to order; and
alteration made with the consent of the parties.
FORGERY
No protection is granted to paying banker for making payment of cheques bearing forged
signature of the customer, Payment of a cheque bearing forged signature of the customer is
deemed to be a payment without the authority of customer and hence constitutes breach of the
implied contract between banker and the customer. The banker is not absolved of this liability
even where the signatures are so cleverly forged that it is difficult to detect with reasonable
care.

[56]
 However, the banker can debit his customers account where the loss is caused directly by the
conduct or negligence of the customer. For instance, where the customer has asserted that
signature on the cheque is genuine, the banker cannot be held liable for paying such a cheque,
if later the signature is proved to be forged one.
In case of a joint account, all signatures must be genuine. If any signature is a forged one,
payment should not be made thereon, otherwise the banker shall be liable.

CHEQUE NEGOTIATION & ENDORSEMENT

NEGOTIATION
According to section 14 when A promissory note, bill of exchange or cheque is transferred
to any person, so as to constitute that person the holder thereof, the person is said to be
negotiated.
Thus negotiation implies a transfer of negotiable instrument so as to constitute the transferee a
holder thereof, who should be entitled in his own name to sue on the instrument and recover
the amount due thereon.
When a negotiable instrument is transferred by negotiation, its transferee, if holder in due
course, gets a better title than its transferor.
On the other hand, when the transfer is made by way of assignment, the assignee has only
those rights which the assignor possessed.
Thus, although law does not prohibit transfer or negotiable instruments by means other than
negotiation, transfer by negotiation has certain advantages.
Distinction between Transfer by Negotiation and Transfer by Assignment
1. Negotiation can be effected by mere delivery if the instrument is a bearer one and by
endorsement and delivery in case it is an order instrument; Assignment requires a written
document signed by the transferor no matter whether the instrument is bearer or order.
2. In Assignment the title of the transferee is always subject to the title of its transferor even
though he took the assignment for value and in good faith. In case of Negotiation, a holder
in due course gets a better title than its transferor.
3. Consideration is always presumed in case of negotiable instruments; in case of Assignment
the transferee must prove consideration for the transfer.
4. An assignment does not bind the debtor unless a notice of the assignment has been given to
him and he has expressly or impliedly assented to it. But no information of the transfer of a
negotiable instrument has to be given to the debtor.
Modes of Negotiation

1. Negotiation by Mere Delivery

Section 47 provides that a bill or cheque payable to bearer is negotiated by mere delivery of the
instrument.
It does not require signature of the transferor and the transferee becomes the holder thereof by mere
possession.
The transferor of bearer instrument is not liable on its dishonor because by not sighing as endorser he
has not added his credit to the instrument.
Delivery may be actual or constructive. Actual delivery means change of actual possession. It is a
constructive delivery when the possession is given to the transferees agent, clerk or servant on his
behalf.

ILLUSTRATION
(a) A, the holder of negotiable instrument payable to bearer, which is in the hands of As banker, who
is at the same time the banker of B also, directs the banker to transfer the instrument to Bs credit in
the bankers account with B. the banker does so, and accordingly now possesses the instrument as Bs
agent. The instrument has been negotiated, and the B has become the holder of it.
(b) A, endorses a promissory note in favor of B and holds it, on Bs request, as Bs agent. There is
constructive delivery by A to B.
1. Negotiation by Endorsement and Delivery

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 o Instruments payable to a specified person or to the order of a specified person can be
negotiated only by endorsement and delivery.
o If an instrument payable to order is transferred without endorsement, it is merely
assigned and not negotiated and the holder thereof shall not be entitled to the rights of
a holder in due course.
o Where the instrument is delivered with some condition attached to it is called a
conditional delivery. In such case the negotiation is not valid i.e. the property in
instrument does not pass to the transferee, till the condition is fulfilled.
o However, if it is subsequently negotiated to a holder in due course, he will get a good
title to it and all prior parties shall be liable to him in spite of initial conditional
delivery.
Illustration
P delivers a bearer cheque to Q on the condition that Q will not encash or negotiate the cheque unless
he supplies him with the goods. There is a conditional delivery by P to Q and the property in the
cheque will pass to Q only on supplying the goods. If the endorsee i.e. Q encashes the cheque before
supplying the goods , P can recover the money so paid to him.
ENDORSEMENT / INDORSEMENT MEANING
An endorsement according to Section 15, is When the maker or holder of a negotiable
instrument signs the same otherwise than as such maker, for the purpose of negotiation, on the
back or face thereof or on a slip of paper annexed thereto. he is said to endorse the same
and is called the endorser. The person to whom the instrument is endorsed is called the
endorsee.
The word endorsement is said to have been derived from Latin in which means upon and
dorsum meaning the back. Thus, usually the endorsement is on the back of the instrument;
though it may be even on the face of it. Where no space is left on the instrument, the
endorsement may be made on a slip of paper attached to it. This attached slip of paper is
called Allonge.
Essentials of a Valid Endorsement
1. The endorsement must be of the entire instrument. A partial endorsement, that is to say, an
endorsement which purports to transfer to the endorsee a part only of the amount payable, or
which purports to transfer the instrument to two or more endorses severally (i.e., separately),
does not operate as a negotiation of instrument.
2. Where a negotiable instrument is payable to the order of two or more payees or endorsees
who are not partners, all must endorse unless the one enforcing has authority to endorse for
the others.
3. Where in a negotiable instrument payable to order, the payee or endorsee is wrongly
designated or his name is mis spelt, he should sign the instrument in the same manner as
given in the instrument. Though, he may add, if he thinks fit, his proper signature.
4. Where there are two or more endorsements on an instrument, each endorsement is deemed to
have been made in the order in which it appears on the instrument until contrary is proved.
5. An endorsement may be blank or full. It may also be restrictive.
Kinds of Endorsements
1. Conditional endorsement
2. Endorsement in blank
3. Endorsement in full
4. Restrictive endorsement
5. Endorsement Sans Recourse
6. Facultative endorsement
7. Partial endorsement

Effect of Endorsement
An unconditional endorsement of a negotiable instrument followed by its unconditional
delivery has the effect of transferring the property therein to the endorsee. The endorsee
acquires a right to negotiate the instrument to anyone he likes and to sue all parties whose
names appear on it.

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 The effect of an endorsement in blank and delivery of an instrument originally made, drawn,
payable to order is to convert it into one payable to bearer and transferable by mere delivery.
The effect of restrictive endorsement is to prohibit or exclude further negotiation.
In case joint payees or endorsees, all of them must endorse the instrument, otherwise the
endorsement is rendered as invalid, even if it is made in favor of the other payee.
Forged Endorsement
In case an instrument is endorsed in full, it cannot be further endorsed or negotiated except by
an endorsement signed by the person to whom or to whose order the instrument is payable.
Thus, if such an instrument is negotiated by way of a forged endorsement, the endorsee will
acquire no title even though he be a purchaser for value and in good faith, because the
endorsement is nullity.
But where the instrument has been in blank, it can be negotiated by mere delivery and the
holder derives his title independent of the forged endorsement and can claim the amount from
any of the parties to the instrument.

Module 4
COMPANY LAW
The word company is derived from a Latin word `companies`
it means a group of persons who took their need together.
In India law relating to companies is contained in The companies Act 1956.
Meaning and definition
A company is a voluntary association of persons formed for some common purpose with capital
divisible into parts known as shares .
Justice Lindlay defines company as an association of many persons who contribute money or
moneys worth to a common stock and employ it in some trade or business and who share the profits
arising there from
According to companies act a company means a company formed and registered under companies act.
Features of a Registered company
1. Voluntary Association
A company is voluntary association of persons who have come together for a common object which
generally is to earn profit.
The activities of this association are governed by the law and are limited by its memorandum of
association
2. Incorporated association
A company comes into existence on incorporation or registration under the companies act. Minimum
number of persons required for the purpose of incorporation is seven in case of a public company and
two in case of a private company.
3. Separate legal entity
On incorporation company gets personality which is separate and distinct from those of its members.
Company is an artificial person created by law.
4. Separate property
The company can own , enjoy and dispose off its property in its own name.

5. Legal restrictions
The formation, working and winding up of a company are strictly governed by laws, rules and
regulations
6. Perpetual succession
unlike a person a company never dies. Its existence is not affected in any way by the death or
insolvency of any shareholder. Members may come and members may go , but the company continues
its operations until it is wound up.
7. Common seal
As a company is an artificial person it cannot sign its name on a contract. So it function with the help
of seal. All contract entered into by the members will be under the common seal of the company.
8. Share capital

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 A company mobilizes its capital by selling its shares. Those persons who buy these shares become its
share holders and thereby become members in it
9. Limited Liability
In case of limited companies liability of members will be limited to the amount unpaid on the shares.
10. Transferability of shares.
Members can freely transfer and sell their shares .The right to transfer share is a statutory right of
members.
Ownership and management
The owners of a company are its share holders.
The affairs of the company are managed by their representatives known as Directors
Type of companies
Companies can be classified on the basis of ;
A. Incorporation
B. Liability of members
C. Number of members
D. Ownership
A. Incorporation
1. Chartered company
2. Statutory company
3. Registered company

1. Chartered company
The company which have formed and incorporated under a special charter granted by the king or
queen.
Eg East India company.
Bank of England.
2. Statutory company
These are companies which are created by means of a special Act of Parliament or any state
legislature.
Eg RBI, Railway
3. Registered company
Company formed and registered under companies Act 1956 is called Registered companies.
B. Liability of members

1. Limited company
2. Company limited by guarantee
3. Unlimited company
1. Limited company or company limited by share
Majority of registered companies will be company limited by shares. In case of limited companies
liability of members will be limited to the amount unpaid on the shares.
2. Company limited by guarantee
Here liability of each member is limited by the memorandum to such amount as he may guarantee by
the memorandum to contribute to the assets of the company in the event of its winding up.
Such companies are formed for the promotion of art science, culture, sports etc.
3. Unlimited company
A company not having any limit on the liability of its members is termed as unlimited company.
The members are liable for the debts of the company at the time of winding up
C. Number of members
1. Private company
2. Public company
1. Private company
A private company is a company
Which restricts the right to transfer its shares.
Limits the number of its members to 50.
Prohibits any invitation to public to subscribe its shares.
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 2. Public company
A public company means a company which is not a private company
E. Ownership

1. Government Company
2. Foreign company
3. Holding and subsidiary company
1. Government company
A company is said to be government company when 51% of the paid up capital is held by the central
government or by any state government or partly by central govt or partly by one or more state govt.
2. Foreign company
A foreign company is a company incorporated outside India and having a place of business in India.
3. Holding and subsidiary company
company which controls another company is known as the holding company and the so controlled
company is known as subsidiary company.
One Man Company
This is a company in which one man holds practically the whole of the share capital of the company,
and in order to meet the statutory requirement of minimum number of members some dummy
members like his wife and son holds one or two shares each.

Distinction between Public company & Private company.

No. Private Co. Public Co.

1. Minimum no of members is 2 Minimum no of members is 7

2. Maximum no members is 50 No maximum limit

3. Minimum paid up capital is Rs 1 lakh Minimum paid up capital is 5 lakh

4. Name must end with the word Pvt Ltd Name must end with the word Ltd

5. Can commence business immediately after It shall have to wait until it receive the
incorporation certificate for commencement of
business.

6. It cannot invite public to subscribe its shares It can invite public to subscribe its
and debentures shares and debentures

7. Minimum subscription is not required for Minimum subscription is required for

allotment of shares. allotment of shares.
9
8. Need not hold statutory meeting of the It has to hold a statutory meeting and
members. file a stat: report.

9. Quorum required for a meeting is 2. Quorum required for a meeting is 5

10. There is restriction of transfer of shares Shares can be freely transferred.

11. Not required to issue prospectus. Must issue prospectus.

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 13. Two directors Three directors

Formation of a company
The procedure or formation of a company may be divided into four stages;
1. Promotion
2. Incorporation
3. Raising of capital
4. Commencement of business
I. Promotion
It is the first stage in the formation of a company.
In this stage the idea of carrying on a business is conceived by a person or a group of persons called
promoters. They make detailed investigation about the workability of the idea, amt of capital required,
operating expense etc etc..
Before a company an be formed, there must be some persons who have an intention to form a
company and who take the necessary steps to carry that intention into operation. Such persons are
called promoters.
The promoter is the person who brings a company into existence.
II. Incorporation
A company is said to be incorporated when it is registered with the registrar under the companies act.
The certificate of incorporation is the birth certificate of the company. A company comes into
existence from the date mentioned in the certificate.
Procedure for registration
The promoter has to first decide the proposed form of company as whether it is to be a public
company or a private company.
They may form the company with limited liability , unlimited liability or limited by guarantee.
They have to decide the name of the company agreeable and desirable to all. For eg if the name
proposed is identical with or closely resembles the name of an existing company , it is undesirable.
For getting registration an application has to be made to the registrar. The application shall be
accompanied by the following documents:
1. Memorandum of association
2. Articles of association
3. A statement of nominal capital
4. A notice of address of the registered office of the company.
5. A list of directors and their consent to a act signed by them
6. A declaration that all the requirements of the act have been complied with. Such declaration shall be
signed by an advocate of high court or supreme court or a chartered accountant who is engaged in the
formation of company
Certificate of incorporation
If the registrar is satisfied that all the requirements of the act have been complied with he shall register
the company and issue a certificate of incorporation.
Conclusive proof
Once a company is registered incorporation cannot be challenged subsequently. The certificate of
incorporation is a conclusive evidence of the fact that-
1. all the requirements of the act have been complied with.
2. company is duly registered.
3. company came into existence on the date of certificate.
Advantages of incorporation
1. Transferability of shares
2. Separate legal entity
3. Perpetual succession
4. Common seal
5. Separate property
6. Capacity to sue
III. Raising of capital
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After incorporation a company can raise capital by issuing shares. A private company cannot issue
shares to public.
In case of public company a copy of prospectus is filed with the registrar and it will be issued to the
public. Those who are intended in purchasing share are required to send their application money to
company's banker.
On the last date fixed for the receipt of application if the company has received application equal to
minimum subscription the directors will start with allotment of shares.
IV. Commencement of business
A private company may commence its business immediately after incorporation.
But a public company cannot commence business immediately after incorporation but it has to obtain
a certificate of commencement from the registrar.
MEMORANDUM OF ASSOCIATION
Memorandum of association for a company is like the constitutional law for a country. It is the
document which contains the rules regarding constitution and activities of the company. It is a
fundamental charter of the company.
It defines the extent of powers of the company, beyond that it cannot go. It is a document filed at the
time of incorporation.
It is a public document ie any interested public can get a copy on payment of prescribed fees.
Contents of memorandum
1. Name clause
2. Registered office clause
3. Object clause
4. Liability clause
5. Capital clause
6. Association clause or subscription clause.
1. Name clause
The first clause of memorandum requires a company to state its name
Rules:-Should not adopt identical with or resembles that of an existing company. Ltd for public
company and Pvt Ltd for private company. Should not use a name prohibited by the Name and
Emblems Act.
2. Registered office clause
The memorandum must specify the state in which the registered office of the company is to be
situated.
3. Object clause
This is the most important clause of the memorandum of association. It defines the object of the
company and the extent of its powers. The object of the company must be state very clearly and a
company cannot do anything beyond object clause. The objects of the company shall not be illegal or
against public policy.
4. Liability clause
This clause state the nature of liability of members.
5. Capital clause
This clause contains the total amount of capital with which the company is registered. This capital is
known as authorized capital or nominal capital or registered capital.
6. Association clause or subscription clause
The memorandum concludes with subscription clause. The memorandum must be subscribed by at
least 7 persons in case of public company and 2 in case of private company. Each subscriber must
sign the document and write the number of shares taken by him.
ALTERATION OF MEMORANDUM
The alteration of the memorandum is possible only by strictly following the procedure laid down in
the Act
1. Alteration of a name clause
The name of a company can be changed by passing a special resolution and with approval of central
govt. If a company is registered with a name which is in the opinion of central govt is identical with or
too closely resemble to the name of an existing company, it can be changed by passing an ordinary
resolution but with the approval of central govt .

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2. Alteration of registered office clause
If the shift of office is within local limits, ie from one place to another place in the same city , town or
village that can be done by giving a notice of change to registrar.
If the shift is outside local limits, a special resolution has to be passed.
If the shift is from the jurisdiction of one registrar to another's the special resolution should be
confirmed by the regional director of the state. (New sec 17 A Amendment Acts 2000)
3. Alteration of object clause
The alteration of object clause is subject to so many restrictions. A company may change its objects
for the following purposes;
1. To carry business more economically or more efficiently.
2. To attain its main purposes by new or improved means.
3. To enlarge or change local area of operation
4. To restrict or abandon any of its objects specified in the memorandum.
5. To amalgamate the company with any other company.
6. to sell or dispose of the whole or any part of the undertaking of the company.
A special resolution and approval of company law board is necessary for alteration.
4. Alteration of liability clause
Liability clause cannot be altered so as to make the liability of members unlimited.
5. Alteration of capital clause
Alteration can be made to
1. To increase share capital
2. To convert fully paid share to stock
3. Cancellation of shares etc
Doctrine of ultra vires
Memorandum contains the rules regarding constitution and activities of the company. It is a
fundamental charter of the company. It defines the extent of powers of the company, beyond that it
cannot go.
A co can act and function within the limits of memorandum. Any act which is beyond the
memorandum is ultra vires the company. Such acts are void .
Ultra means beyond and vires means powers. So ultra vires means beyond powers.
The purpose of this doctrine is to helps the shareholders , creditors and every third person dealing
with the company to ensure that their investment are not diverted to unauthorized objects.
ARTICLES OF ASSOCIATION
Articles of association are the internal regulations of the company and are for the benefit of
shareholders. These are the rules and regulation relating to the internal management of a company.
The article defines the mode and form on which the business of the company is to be carried on.

The Consumer Protection Act,1986

Introduction
The consumer protection act 1986 is one of the most beneficent legislation of the modern days of
technological and scientific developments
Importance
The act is intended to protect the interest of a very large number of populations.
The consumer protection act is promulgated to promote the interest of all consumers whether big or
small. In one way or other we all citizens/residents of Indian territory are the consumers,
Aims and objectives
1. The main objectives of the act provide necessary measures for better safe guarding and
protection to the interest of consumers.
2. Setting of the consumers council and other authorities.
Important terms used under the Consumer Protection Act
1. Consumer: A consumer means any persons who buys goods for any consideration which
has been or promised to pay or making payment under any system of deferred payment like
payment in periodical installment or hire purchase.
2. Defect in goods: It means any fault, shortcoming etc or imperfection of any kind in respect of
quality, quantity potency, purity.
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 3. Deficiency in series: It means any fault, shortcoming etc or inadequacy in the quantity,
nature and manner of performance which is required to be maintained (facilities which
include): banking, financial, insurance and transportation.
Redressal Mechanism
The consumer protection provides for three disputes redressal procedure which covers the areas at
distinct state and national levels. In other words act provides for establishment of the following
consumer dispute redressal agencies
1st Stage- District forum for cases dealing upto Rs.20 lakhs.
2nd Stage-State commission for dealing cases of Rs more than 20 lakhs but less than 1 crore.
3rd Stage- National commission for cases involving Rs. more than 1crore and the appeals against the
orders of state commission.
District forum
The district forum shall include:
A person who is or has been is qualified to be a district judge nominated by the state
government who shall be its President.
Two other members one who shall be the woman.
Not less than 35 years of age.
Person have judicial background
Passes graduation degree from recognized university
The forum shall pass orders for the following actions and relief to the consumers
To remove the defect in goods or deficiencies in the services
To replace the goods with new goods of similar values
To return the prices paid by the consumer
To pay for compensation of the loss or damage caused to the consumers
To discontinue the unfair trade practices
To cease manufacturing of hazardous product
To allow payment of a lumpsum amount to consumer
To publish correct advertisement
To provide adequate cost to the parties

State Commission
Each state commission shall consist of:
A person who is or has been judge of a high court appointed by the state government who
shall be its president.
Two other members who shall be persons of ability, integrity and standing and having
adequate knowledge and experience of or have shall be persons dealing with problems
relating to Economics, law, commerce, Accountancy, Industry, Public Affairs or
Administration.

Authority and power of state commission:

The state commission constituted under the provisions of this Act is a judicial authority and the
proceeding carried out before the commission is legal proceeding.
Jurisdiction of state commission
a) Legal Jurisdiction:
To entertain appeal against the orders of district forum within the state.
To call the consumer dispute which are pending or has been decided by the district forum in the state
b) Territorial Jurisdiction: The state where the causes of compliments wholly or in part arises.
National Commission
The national commission can entertain complaints where the value of goods and services and the
compensation if any exceeds Rs. 1crore.
Jurisdiction
To entertain
Complaints where value of goods and services exceeds Rs.1crore.
Appeals against the order of any state commission.
To call for the records and pass appropriate orders in any consumer dispute which is pending.
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Power of machinery
To pass written orders authorities any officer to exercise power of entry and search of any premises
where these books papers, commodities are kept if there is ground to believe to believe that these may
be destroyed altered and falsified.
To issue remedies orders to the opposite party.
To dismiss frivolous complaints to make payment of costs, not exceeding Rs.10000 to the opposite
party.

Unit -5
Information Technology Act,2000
The advent of computer use of e-mail service in the field of commerce trade, business, industry and
exchange of data. It is the process of conducting business operation through the medium of internet.
The Indian Information Technology, 2000 came into force into effect from Oct 17, 2000. To the
extent are conducted through the modern technology of internet, e-commerce would be said in use.

Increasing use of internet in all walks of life and the growth of e-commerce necessitated the creation
of relevant cyber law and effective regulatory mechanism.

The information technology act, 2000 is the regulatory resume in the field of internet use in India.
Digital Signature
Digital signature means authentication of any electronic method or procedure in accordance with the
provisions of section 3.
Section 3 provides that any subscriber may authenticate an electronic record by affixing his digital
signature.
Electronic Governance
E-Governance is the application of information and communication of information and
communication technologies to transform the efficiency, effectiveness transparency.
Governance literally means the exercise of political authority. To accept this transition process the
communities need to be trained and educated.
Objectives and Significance of Electronic Governance
Record keeping and reduction in files
Automation of processes
Effective supervision coordination and integration
Elimination of Hierarchy and Delay
Change towards transparent and accountable administrative culture
Better quality and effective delivery of public services
Helps in taking decisions at appropriate time

Attribution, Acknowledge and Dispatch of Electronic Records

According to section 2(1)(t) of information technology act, 2000 electronic record received or sent in
an electronic form or micro film.
1) Attribution of electronic records
2) Acknowledgement of receipt
3) Time and place of dispatch and receipt of electronic record
4) Usual place of resident
Regulation of certifying Authorities
Section 17 to 34 makes provisions as regards regulation of certifying authorities.
Section 17 provides that the central government may by notification in the official gazette appoint a
controller of certifying authorities for the purpose of this act.
Digital Signature Certificates
The purpose of a digital signature certificate is to authenticate and the identity of an individual. It
ensures that the purported sender in fact that person who sent the message.

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It is signed digitally by the certifying authority.
Duties of subscribers
1) Generating key pair
Where any digital signature certificate, the public key of which corresponds to private key.
2) Acceptance of digital signature certificate
A substance shall be deemed to have accepted a digital signature certificate if he publishers or
authorities its publication
a) To one or more persons
b) In a repository
3) Control of private key
Every subscriber shall exercise reasonable care to retain control of the private key
corresponding to public key.
Penalties and Offences
1. Tampering with computer source documents(section 65)
2. Hacking with the computer system(Section 66)
3. Publishing of information which is obscene in electronic form(section 67)
4. Power of controller to give Direction (section 68)
5. Directions of controller to a subscriber to extend facilities to Decrypt information(section 69)
6. Protected system(section 70)
7. Penalty for misrepresentation(section 71)
8. Penalty for breach of confidentiality and privacy(section 72)
9. Penalty for publishing digital signature certificate false in certain particulars(section 73)
10. Publication for fraudulent purpose (section 74)
11. Act to apply for offense or contravention committed outside India (section 75)
12. Confiscation (section 76)
13. Penalties or confiscation not to interfere with other punishment (section 77)
14. Power to investigate offences (section 78)
15. Penalty for damage to computer system etc.
16. Penalty for failure to furnish information return etc.
17. Residuary penalty

Right to information act, 2005

The right to freedom of information or the publics right to know is embedded in the provisions
guarantees fundamental right under the constitution. The act defines right to access information
accessible under the act which is held or the under the act which is held the control of public
authority.
It includes:
1. Inspection of document, work etc
2. Taking notes, extracts and certified copies of document and records
3. Taking certified samples of material
4. Obtaining information in the form of diskettes, floppies, tapes, video cassettes or in other
electronic mode or through printouts.
Obligation of Public Authority
Maintain records catalogued and indexed computerization networking
Publish certain particulars within 120 days.
Publish relevant facts while formulating policies/decisions affecting public
Provide reasons for administrative/quasi judicial decisions to affected persons
Suo motu provides information
Form of dissemination easily accessible
In 100 days designate PIO and APTOs
Information should be free or at cost of medium only

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Public Information Officer (PIO)
PIO provides information to the persons information to the persons requesting information under the
act.
Designation of PIO
1. Designation of PIO by PA (public authorities) in their administrative units/offices within 120
days.
2. Designate at sub-divisional level APIOs. to receive application for forwarding to PIO or
AAS
3. Every PIO shall deal with requests and render assistance for the person seeking
4. PIO may seek the assistance of any others for discharge duties
5. The person whose assistance is sought shall provide: requests for information to PIO/APIO
6. May seek by writing or in electronic format with requisite information accompanying fees
oral requests to be reduced in writing
7. No reason for information is required and his personal details except address
8. Transfer the application to the PAs concerned within five days and informs the applicant.
9. Request should be in Hindi, English official language of the area.
Duties of PIO
1. Deal with requests for information
2. Offer reasonable assistance to applicant
3. Provide access enabling assistance into sensorily enabled
4. Seek assistance from any other officer as considered necessary
5. Initiate inquiry if reasonable grounds exists
6. It enjoys the same power as that of a civil court such as Enforce Attendance, inspection of
document
7. Details of the fees calculated and amount of fees which the applicant has to submit.

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