i

BACHELOR OF ACADEMIC LAWS

FIRST YEAR
LAW OF CONTRACTS
SYLLABUS
LESSON – 1
Introduction – Basis and nature of contract – Development of specialised
contract.
Definition and classification of contracts. Void-voidable and unenforceable
contracts. Express and implied contracts – Essential elements of contract – Theory
of consensus.
Formation of contract – offer – invitation to offer. Communication of offer-cross
offers-revocation of offer intention to create legal obligations – elements of.
LESSON – 2
Acceptance – Manner of acceptance – Acceptance in case of tender –
Communication of acceptance – in person, by telephone, telegraph etc. revocation
of acceptance.
Terms of contract – Warranty Condition Fundamental obligation – Ticket
cases.
LESSON – 3
Lawful consideration – Definition. Sec. 10 & 25 of the Contract Act Stranger to
the contract – Adequacy and reality of consideration. Executed, Executory and
Past-Performance of existing duty- Consideration in discharge of contract – Rule in
Pinnel’s case. High Trees case-composition with creditors.
LESSON – 4
Capacity of Parties – Minor – Lunatic – alien enemy – Corporations – Foreign
sovereign and Ambassadors – Married women. Infants and necessaries – Basis of
such contracts – Infant Relief Act, 1874 – Beneficial contracts of service. Equitable
doctrine of restitution.
LESSON – 5
Free consent – coercion – Duress – undue influence
LESSON – 6
Fraud – Misrepresentation – innocent or fraudulent – can silence amount to
representation. Effect of representation – representation which is a term of contract
– of mere representation – Limits of fight to rescind.
LESSON – 7
Mistake – of fact and law – As to identify as to title as to quality as to written
contract – Error in Verbis – error in causa – in consensu – Difference between
English and Indian law.
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LESSON – 8
Unlawful agreement – unlawful consideration – Maintenance & Champerty –
Agreement which tend to affect the freedom and security of Marriage – immoral
agreement – ousting jurisdiction of courts restraints of trade – Wagering contracts –
Restraint of personal liberty of paternal right – consequences of illegality.
LESSON – 9
Discharge of contracts – By performance. Tender – By express agreement –
accord and satisfaction. Bilateral and unilateral discharge - under the doctrine of
frustration – Theories of frustration – operation of the Indian law – by breach actual
and anticipatory breach.
LESSON – 10
Quasi-contracts Definition – Historical basis – Quantum meruit – obligations
resembling those created by contract under the Indian Contract Act.
LESSON – 11
Recovering possession of property
LESSON – 12
Specific performance of contracts. Contracts which can be specifically enforced
Contracts which cannot be specifically enforced – Discretionary power of the court.
LESSON – 13
Rectification of Instruments – Recission of contracts – cancellation of
instruments.
LESSON – 14
Declaratory decree
LESSON – 15
Preventive Relief – Injunctions generally – perpetual injunction and Mandatory
injunction.
LESSON – 16
Sale of goods – Definition of sale and agreements to sell – Distinction between
sale and agreements to sell – Contract of work and labour – Hire purchase
agreement – Bailment Exchange – gift.
Definitions – goods – specific goods – future goods – Mercantile Agent –
Document of title to goods.
How is sale made – Rules for fixing price and effect of goods getting damaged
or perished in a contract of sale.
Stipulation as to time and other stipulations Conditions and warranties, effect
of breach – Ex post facto warranty – when condition is treated as warranty.
Implied conditions and warranties in a contract of sale – exemption clauses –
effect of fundamental breach.
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LESSON – 17
Rules as to passing of property.
Sale by non – owners – Exceptions to Nemo dat quod non habet.
Rules as to delivery.
Unpaid vendor – His rights of lien and stoppage in transit.
Remedies available to seller and buyer – ‘Auction sales’
LESSON – 18
Agency – Definitions of contract of Agency – creation of agency – Kinds of
agency.
Distinction between Agent and servant and independent contractor. Who may
be an agent – kinds of agents – Authority of different kinds of Agents – Authority of
agents – Ostensible and emergency – Delegations of authority – Delegatus non
potest delegare – subagent substituted agents.
LESSON – 19
Essentials of ratification and its effect.
Effect of notice to agent – Necessary conditions to bind principal.
Principal and third parties – The doctrine of undisclosed principal and
concealed principal.
Termination of agency and when it becomes irrevocable.
LESSON – 20
Partnership – Define partnership – Essentials of partnership – test of
partnership.
Distinction between partnership and co-ownership – joint Hindu family.
Incorporated companies – contract of service – legal notion and mercantile
notion.
Kinds of partners and duration of partnership.
Minor as a partner – difference in English Law.
Rights of legal representative and surviving partners.
Mutual rights and duties of partners.
LESSON – 21
Authority of partners – Implied and emergency.
Liability of the partner for the acts of the firm and for the wrongful acts of
other partners – nature of liability. Principles of agency in partnership.
Partnership property – tests
Settlement of accounts – Goodwill its disposal – Distribution of assets.
Retirement of partners.
Dissolution of firm – modes and circumstances.
Effect of non-registration of firm.
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LESSON – 22
Negotiable Instruments – Definition – Promissory Note
Bill of Exchange – Cheque – Negotiable Instrument – Ambiguous instrument
Payee – Drawee in case of need. Acceptor for honour – Holder – Holder in due
course – Inchoate instrument – Indorsement payment in due course – and Foreign
instrument.
Distinction between promissory note, bill of exchange, cheque Negotiability
and assignment – Holder in due course.
Minor in relation to negotiable instrument and negotiable instruments
executed in a representative capacity.
LESSON – 23
Liability of drawer – maker – Acceptor and indorser.
Consideration in negotiable instrument – accommodation bills Kinds of
indorsement and their effect.
Effect of fraud and forgery in negotiable instrument. Rules of presentment for
acceptance and payment – presentment when unnecessary.
Different – modes of discharge including material alteration.
LESSON – 24
Dishonour of bills and notice of dishonour. Nothing protect for better security.
Acceptance for honour and reference in case of need.
Rules as to payment of compensation.
Special rules of evidence – presumption and estoppel.
Crossing of cheques – kinds of crossing and their effect – marking of cheques.
LESSON – 25
Protection to paying and collection bankers.
Bills in sets – Nature and incidents.
Rules of International law governing Negotiable Instruments
Books Recommended
1) Krishna Nair – The Law of Contracts.
2) E. Venkatesan – Contracts.
3) Subramania and Singhal. The Law of Contracts Vol: II
4) Bhashyam and Adiga. The Negotiable Instruments Act.
5) The Indian Contract Act, 1872.
6) The Sale Goods Act, III of 1930.
7) The Indian Partnership Act, III of 1930.
8) The Negotiable Instruments Act XXVI of 1881.
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BACHELOR OF ACADEMIC LAWS

FIRST YEAR
LAW OF CONTRACTS

CONTENTS
LESSON PAGE
LESSON
NO. NO.

1. GENERAL FEATURES 1
2. ACCEPTANCE 18
3. CONSIDERATION 33
4. CAPACITY OF PARTIES 43
5. FREE CONSENT 52
6. FRAUD AND MISREPRESENTATION 61
7. MISTAKE 73
8. UNLAWFUL AGREEMENTS 84
9. DISCHARGE OF CONTRACTS 105
10. QUASI CONTRACTS 123
11. SPECIFIC RELIEF ACT, 1963 135
12. SPECIFIC PERFORMANCE OF CONTRACTS 143
13. RECTIFICATION OF INSTRUMENTS 158
14. DECLARATORY DECREE 166
15. PREVENTIVE RELIEF 172
16. SALE OF GOODS ACT, 1930 189
17. SALE OF GOODS (CONTD) 209
18. AGENCY 235
19. AGENCY (CONTD) 250
20. PARTNERSHIP 259
21. PARTNERSHIP (CONTD) 271
22. NEGOTIABLE INSTRUMENTS 287
23. NEGOTIABLE INSTRUMENT (CONTD) 302
24. NEGOTIABLE INSTRUMENTS (CONTD) 323
25. PROTECTION TO PAYING AND COLLECTING BANKER 340
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LESSON – 1

GENERAL FEATURES
STRUCTURE
1.1 Introduction
1.2 Nature of a contract
1.3 Definition of contract
1.4 Classification of contract
1.5 Unilateral and bilateral contract
1.6 Express implied & quasi contract
1.7 Valid, void and voidable contracts
1.8 Essential elements
1.9 Consensus ad-idem
1.10 Formation of contract
1.10.1 The offer must be certain
1.10.2 Invitation to offer
1.10.3 Auction sales
1.11 General offers
1.12 Communication of offer
1.12.1 Cross offers
1.13 Revocation of offer
1.14 Intention of create legal relations
1.15 Suggested Questions

1.1 INTRODUCTION
In the early days the development of the law of contract was influenced by two
factors viz., moral and economic factors. This will be clear from the fact that be
behind the law of contract lies the moral principle that a person should fulfil his
promise and stand firm by his agreements The development of the general law of
contract took place under the pressure of business or economic factor. The need
for the law of contract was felt all the more after the economic development of
societies. The division of labour propounded by Adam Sith in his Wealth of Nations
create a demand for the transfer of property from some members of the society to
others. After the institution of credit developed people has to rely more on
promises. The law of contracts will help those people to realize their rights. That is
why Roseoe Pound the great Jurist observed “Wealth in a commercial age is made
up of promises. A study of the general principles of the law of contracts is useful to
the laymen and the learned since we come across this branch of the law in the day
today life.
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A contract is an agreement giving rise to obligations which are enforced or

recognized by law. The making of contracts is an incident in the day of day life of
every person. This observation is likely to puzzle a layman because of the
preconceived notion that a contract is a technical or complicated document
prepared by the lawyers. In reality it is not so. When a person purchase a radio or
piece of shirting cloth he is making a contract of sale of goods Similarly when he
purchases a ticket and travels in a train he is making another type of contract.
Though there is nothing in writing transactions like these are contracts in the eye
of law.
Before the passing of the Indian Contract Act, 1872, English law of contracts
with suitable modifications was applied in the three presidencies of Madras,
Bombay and Calcutta. In other areas where English law is not applicable the
courts arrived at a decision by applying the principles of justice, equity and good
conscience’. Where the contract Act is silent, the courts in India have been guided
by rule of English common law applicable to contracts. The expressions “justice
equity and good conscience” have been interpreted to mean the rules of English
common law as are applicable to the Indian conditions. Where the contract Act is
not exhaustive or the terms of the Act do not apply, the principles of English law
are applicable as rules of justice equity and good conscience.
The Indian Contract Act 1875 was moulded on the basis of English law of
contracts. The principles of the English law of contracts are the creditor of the
English courts. According to Blackstone, the law of contract was subdivision of the
law of property than an independent branch of law. The law of contract is different
from other branches of law in that will enforce. Rather it consists of certain
principles subject to which the parties may create rights and duties for themselves.
1.2 NATURE OF A CONTRACT
The law of contract may be defined as that branch of law which determines the
circumstances in which a promise shall be legally binding on the person making it.
A promise has been defined by Anson as ‘a declaration or assurance made to
another person, stating that a certain state of affairs exists or that the maker will
do or refrain from some specified act, and conferring on that other a right to claim
the fulfillment of such declaration of assurance’. So a promise involves two parties.
One making the promise is known as promisor and the other accepting the promise
known as promise. As the parties are ascertained persons, any rights arising out of
such promise are confined to these persons. A contract differs from a tort. While a
contractual right is a right in personem, available against a particular person, a
tortuous right is a right in rem available against all persons generally.
A promise imports a willingness on the part of the promiser to be bound to the
person to whom it is made. The intention of the parties is to create a legal
obligation between them. The promise must be accepted by the promise If it is not
accepted it has no legal effect. Therefore most contracts take the form of an
agreement. In other words a manifestation of mutual assent by each party to the
other is necessary.
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The scheme of the Contract Act is that is enacts the general provisions first
and then deals with particular kinds of contract such as sale, guarantee, bailment,
agency and partnership. Partnership and sale of goods are no longer parts of the
Contracts Act. As separate statues, (The Partnership Act and Sale of Goods Act)
have now been enacted. The Indian Contract Act is not a complete code dealing
with the law relating to contracts. As observed in Irrawady Flotilla & Co. Vs.
Baghavandas (1891 18. I.A.121 the Act purports to do no more than define and
amend certain parts of the law. As the Act is exhaustive it is not permissible to
import the principles of English Law dehors the statutory provisions.
Development of speciality contracts
Contracts are of two kinds namely simple contracts and contracts under seal.
The difference between the two being that a simple contracts require consideration
but consideration is not required for contracts under seal. Simple contracts mean
contracts which require a writing for their validity or as evidence. Oral contracts
are made by word of mouth. A contract under seal also known as a deed or a
specially contract must be in writing and must be signed sealed and delivered. But
in the present day requirements of a deed is treated with some leniency. The seal
that is affixed before execution may be printed or written on the document. The
seal may consist of a small water which is available with a stationer. The deed
must be signed by the party intending the be bound by it.
Two forms of action, known as debt and define were recognized in the early
days for enforcing the contractual rights. Debt was a part of composite writ known
as debt detinue which relates to a real contract (relating to a thing) The plaintiff
has to allege that the defendant is detaining unlawfully something of value from
him Debt was used for the recovery of a specific chattel. These two actions covered
a very considerable area of informal contract sale of goods, bailment, loans of
money. But there was no action for breach of an informal agreement.
The remedy for the enforcement of informal contract was developed out of two
actions, action of trespass and action of deceit. The action for trespass lie for injury
to the person and property of the plaintiff but will not lie in the case of negligent
wrongdoing. Later actions were brought where in plaintiff relied in his writ on an
allegation that the defendant undertook (assumpsit) to do some thing in return for
a reward But the defendant had negligently performed causing damage. This form
of action on the case came to be called the action of assumpsit, derived from the
allegation in the pleading that he understood (assumpsit) At first assumpsit was
available for misfeasance, for doing something badly but not for non feasance,
doing nothing at all. But later the principle was extended to nonfeasance as well.
For example where a carpenter convenants to make a house and does nothing an
action will be on this nonfeasance as much as if he had been guilty of misfeasance.
(building it wrongfully)
The Govt of King’s Bench in English allowed assumpsit to be brought in place
of Debt. This was decided in Slades Case. Slade had sold wheat to Morley. And
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Morley agreed to pay $ 16. On his failure Slade filed the suit on an assumpsit. The
jury decided in favour of the plaintiff and held that there was no other promise or
assumption except the actual bargain itself. It was further held that every contract
executory imports in itself as Assumpsit, for when one agrees to pay money or to
delivery any thing thereby he assumes or promises to pay or deliver it”.
A new form of assumpsit was evolved which came to be known as indebitatus
assumpsit where the plaintiff averred that the defendant was indebted to him
(indedeitatus) in a certain sum and had promised to pay it. The details of the
transaction generating the debt shall be mentioned in a summary form in an action
of indebitatus assumpsit viz. the “defendant is indebted for the price of goods sold
and delivered” “for money lent” and for “services performed”. In the case of special
assumpsit the pleading sets out in detail (specially) the transactions. The
development of indebitatus assumpsit led to the procedure whereby, in the guise of
promissory liability any obligation to pay money might be enforced. The courts also
developed a form of special assumpsit which rests on agreements to pay reasonable
price or remuneration viz, action on quantum merit.
1.3 DEFINITION OF CONTRACT
The definition of the American Restatement of Contracts is accepted as the
most accurate. ‘A contract is a promise or a set of promises for the breach of which
the law gives a remedy, or the performance of which the law in some way recognizes
as a duty’. Pollack defines a contract as ‘a promise or a set of promises which the
law will enforce’. Anson describes the law of contracts ‘as the branch of the law
which determines the circumstances in which a promise shall be legally binding on
the person making it’. Blackstone in his commentaries defines a contract ‘as an
agreement upon a sufficient consideration to do or not to do a particular thing”.
The definition given in the Halsbury’s Laws of England is extracted below. “A
contract is an agreement made between two or more persons which is intended to
be enforceable at law, and is constituted by the acceptance by one party of an offer
ade to him by the other party to do or to abstain from doing some act”. Section 2(h)
of the Indian Contract Act, 1872, defines a contract as follows: “An agreement
enforceable by law is a contract”. An agreement is defined by Section 2(e) “as every
promise and every set of promises forming the consideration for each other”. In
other words an agreement is a promise or a set of reciprocal promises. A promise is
formed by the acceptance of a proposal. There must be a promisor who makes the
proposal and promise who accepts it. In the case of reciprocal promises each party
is promisor as to the promise he makes and promise as to that which he receives;
he is the proposer as well as the acceptor, proposing to become liable and accepting
the other’s liability. The mutual proposal of both the parties becomes promises by
mutual acceptance.
1.4 CLASSIFICATION OF CONTRACT
The traditional classification of contracts is (i) contracts of record (ii) contracts
under seal and (iii) simple or parol contracts. A contract of record has nothing to
do with the law of contracts. These are obligation incurred by judgement or
 5

recognizance of a court of record. They are called as contracts because they were
enforceable by a similar action as that of other contractual cases.
A contract under seal is a written promise or a set of promises which derives
its validity from the form of the executing instrument. The deed should be signed,
sealed and delivered. Such contracts are therefore classified as formal contracts.
They are also called deeds. A deed is known as an escrow when it is delivered
subject to a condition or until a certain time has elapsed, and than it takes effect
only on the fulfillment of that condition or the expiration of that time.
All other contracts are known as simple contracts which may be made orally or
in writing or implied from conduct or custom. Simple contracts are also called
parol contracts because they can be entered into by word of mouth. The nice
distinction between formal contracts and simple contracts is not recognized.
Exception to Section 25 of the Indian Contracts Act deals with an instance of
speciality contract. Where an agreement is made in writing out of love and affection
and is duly registered it is valid even though made without consideration.
A contract shall be in writing. The latter half of Section 10 states; “Nothing
herein contained shall affect any law in force in India and not hereby expressly
repealed by which may contract is required to be made in writing or in the presence
of witness or any law relating to the registration of documents.
1.5 UNILATERAL AND BILATERAL CONTRACT
Another method of classifying the contract is to divide into bilateral and
unilateral contracts. In a bilateral contract a promise or a set of promises on one
side, is exchanged for a promise or a set of promises on the other side. Examples of
bilateral contracts are contracts of sale, where the buyer promises to pay the price,
the seller promises to deliver the goods. In a unilateral contract a promise is
exchanged for an act (or a forbearance) on the other side. An example of
unilateral, contract is a promise of a reward for finder of lost property followed by
the actual finding of property. The distinction between the two bring that in a
bilateral contract both parties are equally bound to perform their promises,
whereas in a unilateral contract the promisor is bound to do something. In reward
cases nobody is bound to search for the lost property but if the property is found
and returned the promisor has to pay the reward offered. Then there are reciprocal
promises each promise forming consideration for the other. Each party will in turn
be a promisor and promises.
1.6 EXPRESS, IMPLIED & QUASI CONTRACTS
Another classification of contracts is express, implied and quasi-contracts.
Express and implied contracts belong to one class, while quasi-contracts belong to
a different category. The difference between express and implied contracts lies in
the fact that in the former case the intention of the parties has been expressed in
words, while in the latter case it has to be inferred from their conduct and general
circumstances. Section 10 of the Indian Contract Act defines express and implied
contract as follows: “In so far as the proposal or acceptance of any promise is made
 6

in words, the promise is said to be express. In so far as such proposal or

acceptance is made otherwise than in words, the promise is said to be implied.
Quasi contracts were connected with ordinary contracts because the procedure
followed in both types of actions was the same. Quasi-contracts were referred as
contracts implied in law”. Genuine contracts were said to be contracts implied in
fact.
1.7 VALID, VOID AND VOIDABLE CONTRACTS
Another method of classifying the contracts is based on their legal effect. It
can be distinguished between valid, void, voidable, illegal and unenforceable
contracts. A valid contract is a contract of full force and effect not vitiated in any
way. Section 10 of the Contract Act defines it as follows. “All agreements are
contracts if they are made by the free consent of parties competent to contract, for
a lawful consideration and with a lawful object, and are not expressly declared to be
void by law”.
A contract without any legal effect is a void contract. It is a nullity in the eye
of law No property would pass under such a contract. It may be void from the
beginning or subsequently. Section 2 (g) of the Act defines it as “an agreement not
enforceable by law is said to be void”. Where a third party purchased goods which
has been subject of a void contract he would acquire no title to the goods and will
have to deliver the goods to the true owner as in Cundy Vs. Lindsay 1878
3.App.Cases 459.
A voidable contract is a contract which is valid and capable of producing the
results of a valid contract, but which may be avoided at the option of one of the
parties. Section 2 (i) defines it as 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. Until it is rescinded it is valid and binding. Section
19 of Contract Act provides that “When consent to an agreement is a contract
voidable at the option of the party whose consent was so caused”. Similarly the
first portion of section 19 A states that 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. The distinction between a void and voidable
contract is this. While in a void contract no property passes to a third party who
has purchased the goods, a contract obtained by fraud is a typical example of
avoidable transaction. Such a contract becomes void and unenforceable when it is
avoided by the party.
An illegal contract means a contract contrary to criminal law. An example of
an illegal contract is an agreement to commit a crime or tort to defraud the revenue
or to lend money to an alien enemy. While a void contact is not necessarily illegal
an illegal contract is often void. A contract may well be illegal without contravening
the criminal law because certain acts the law does not prohibit but nevertheless
regards as contrary to public interest is “No court will lend its aid to a man who
founds his cause of action upon an immoral or illegal act”. Sec.24 the Contract Act
calls these acts as unlawful contracts.
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An unenforceable contract is one which is good in substance though by reason

of some technical defect, one or both of the parties cannot be sued on it. It is only a
creature of procedural rather than substantive law. e.g. Debt barred by limitation.
A contract which is incapable of enforcement because it is not evidenced by
writing may be cured by subsequent execution of a written memorandum.
1.8 ESSENTIAL ELEMENTS
A contract is an agreement giving rise to obligations which are enforced or
recognized by law. The first qualification is that the law is often concerned with the
appearance of agreements. Thus the essential elements of a contract are:
(1) There must be an agreement. As a person cannot agree with himself the
law requires that there must be two parties to an agreement. One of them will
make the offer and the other will accept and there is an agreement (or consensus)
between the parties.
(2) The agreement must result in legal relations. If one of the parties fails to
fulfil his part of the promise he will be answerable in an action brought by the other
party. Agreement which is purely social in Character or domestic arrangement will
not come within the definition or agreement which is enforceable by law.
(3) The law requires that there must be consideration or that the contract
should be under seal, (in writing)
(4) The parties must have the capacity to contract. In other words the parties
must be of full age and competent understanding.
(5) The contract must not be vitiated by any factors which render the contract
unenforceable, void, voidable or illegal.
According to English law the intention to create legal relation is an important
element necessary for the formation of a contract What matters is not what they
had in mind when concluding the contract, but whether reasonable persons would
draw the conclusion that they want to be legally bound.
Under the Indian Contract Act Section 10 gives the necessary elements of a
contract. It states “All agreements are contracts if they are made by the free
consent of parties competent to contract, for a lawful consideration and with a
lawful object, and are not hereby expressly declared to be void.
The first requirement of valid contract is that there must be free consent of
parties. What is free consent is defined by Section 13 as follows “Two or more
persons are said to consent when they agree upon the same thing in the same
sense”. Such a meeting of the minds is usually referred as consensus ad idem.
The consent must not be affected by any flaw or vitiating element. In other words
an agreement between two persons upon the same sense is known as true consent
or consensus ad idem and is an important element for the formation of a contract.
The test of an agreement is objective and not subjective. In other words we are not
concerned whether the parties have really agreed in their minds, but only whether
their conduct and the words we are not concerned whether the parties have really
 8

agreed in their minds but only whether their conduct and the words used would
lead reasonable people to believe that they have agreed. If we apply this rule it
may appear that the decision in the case of Bardell Vs Pickwick (Charles Dicken’s
The Pickwick papers) was correct because Mr.Pickwick’ language was capable of
being understood as an offer of marriage. In fact he has no such intention at that
time. That is why it is often mentioned that a genuine agreement or a meeting of
minds consensus ad idem-was necessary for the formation of a contract.
The second essential element necessary to constitute a contract is the capacity
of the parties to enter into a binding contract. According to Section 11 of the
Contract Act 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, and who is of
sound mind and is not disqualified from contracting by any law to which he is
subject” But some class of persons like alien enemies may be disqualified by law
from entering into a contract. In order to enter a contract a person must be of
sound mind. According to Section 12 a person is said to be of sound mind for the
purpose of making a contract if at the time when he makes it, he is capable of
understanding it and of forming a rational judgement as to its effect upon his
interests.
Another important element is the presence of consideration which is said to be
the price for the promise. It must be lawful consideration is some benefit received
by a party who receive a promise or some detriment suffered by a party who
receives a promise section 2 (d) defines the word consideration as follows. “When at
the desire of the promisor the promisee or any other person has done or abstained
from doing or does or abstains from doing or promises to do or abstain from doing
something, such act or abstinence or promise is called a consideration for the
promise”. The essential thing in a case observes Prof A.L.Goodheart is that the
offeror should state a price which the offeree should pay if he wishes to purchase a
promise.
The next essential element of a contract is the presence of lawful object. The
object will be unlawful if it is forbidden by law or if permitted would defeat any
provision of law or is fraudulent or causes injury to the person and property. It is
also unlawful if the object is immoral or opposed to public policy. In other words
the parties must contract for a lawful object.
Lastly, the contract must be one which is not expressly declared to be void by
any law in force. Examples of this case are agreements in restraint of marriage, in
restraint of trade, in restraint of legal proceedings or by way of wagering contracts.
Agreements may also be declared void because of uncertainty.
In addition to other requirements an intention to enter into legal relations
must be proved before a valid contract can be made under the English law. In
other words an agreement per se is not a binding contract unless it is intended to
have legal effect. There is no corresponding provision in the Indian Contract Act,
 9

requires that an offer should be made with intention of creating legal relations. The
case of Balfour Vs. Balfour and Jones Vs. Padavatton may be cited in support of
the English law:
1.9 CONSENSUS-AD-IDEM
When offer and acceptance correspond in every respect the parties have
reached agreement of there is consensus ad idem. A valid contract has come into
existence, provided the other requirements like, free consent, capacity, lawful
consideration, lawful objects and objects not declared to be void are present. The
terms of the contract are settled by the parties themselves in their agreement. This
is called the doctrine of freedom of contract.
Section 13 of the Contract Act deals with the fundamental doctrine of
consensus ad idem or identity of minds on which the law of contract depends.
Section 13 is as follows: “Two or more persons are said to consent when they agree
upon the same thing in the same sense”. If the parties do not agree upon the
“same thing in the same sense” there is no real contract. The result is that no
agreement is formed. In RAFFLES Vs. WICHEL HAUS. 133, R 853 it was observed
as follows: It is essential to the creation of a contract that both the parties should
agree to the same thing in the same sense. Thus if two persons enter into an
apparent contract concerning a particular person, or ship and it turns out that
each of them misled by a similarity of name, had a different person or ship in his
mind, no contract would exist between them”.
The concept of freedom of contract postulates that contracts were based on
mutual agreement. A contract comes into existence as a result of free choice. But
due to reasons of convenience a contract may be concluded when the parties are
not in agreement. When a letter of acceptance is posted contract comes into
existence even though a letter of revocation was already sent, but not reached.
Thus there is no consensus in this case.
But the objectives theory did not place any reliance on the meeting of the will
or the consensus. According to it if a man so conducts himself that a reasonable
man would believe that he was consenting to the terms of the other, the man thus
conducting would be bound by the terms. This is based on commercial
convenience and much inconvenience will be caused if the party is allowed to rely
on his real intention. If the conduct and language are such that would lead a
reasonable man to assume that they have agreed, then there is a contract. The law
may hold that there is a contract although there was not even the objective
appearance of an agreement. Though the doctrine of consensus ad idem cannot be
seen in practice, yet it is basic principle which control the formation of a contract.
Thus the presence of the defences like fraud, mistake, duress, undue influence and
illegality show the dependence upon the subjective theory of contract. According to
the subjective theory of contract a contract was the result of the meeting of the wills
of the parties. “An agreement was “necessarily the outcome of consenting minds In
CUNDY Vs LINDSAY 1878, 3 App cases 459 it was observed that there must be
‘consensus of mind to lead to a contract”.
 10

1.10 FORMATION OF CONTRACT

For the formation of a contract the law requires the presence of two parties.
One party should have made an offer and the other party should have accepted the
offer. Pollock refers to this aspect in his book on contracts as follows; “One party
proposes his terms; the other accepts, rejects, or meets them with a counter
proposal; and thus they go on till there is a final refusal and breaking off or till one
of them names terms which the other can accept as they stand”.
Anson defines an offer “as an intimation by words or conduct of a willingness
to enter into a legally binding contract and which in its terms expressly or impliedly
indicates that it is to become binding on the offer or as soon as it has been accepted
by an act, forbearance or return promise on the part of the person to whom it is
addressed”. The American Restatement of Contracts defines an offer as “the
manifestation of mutual assent always invariably takes the form of an offer
proposed by one party and accepted by the other. Section 2(a) of the Contract Act
states as follows. “When one person signifies to another his willingness to do or to
abstain from doing anything with a view to obtaining the assent of that other to
such act, or abstinence he is said to make a proposal”. Under Section 2 (b) 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. The word
‘proposal’ used in Section 2 (a) of the Act is synonymous with the word ‘offer’ used
in English law.
In other words an offer is a promise by the offeror to do or abstain from doing
something, provided that the offeree will accept the offer and pay or promise to pay
the price of the offer. The price may be money or a mere promise to pay the price
Thus offer indicates the willingness of the party to be bound and a statement of the
price required by him. An offer may be expressly made by words written or spoken.
An offer may be equally implied from the offerors language or inferred from his
conduct. Similarly an acceptance of an offer may be made expressly or impliedly
according to Section 9. An example of an implied agreement is the case of a person
who boards a bus or who hires a taxi who undertakes to pay the fare to his
destination even though he makes no express promise to do so. If the contract
assumed less simple form the inference from the conduct may not be clear as in the
case of Clarke Vs Earl of Dunraven (The ‘Satanita’ 1897 A.C.59. The owner of a
yacht, the ‘Saranita’ entered his boat in a boating race organized by a yacht club.
The rules of the race provided that the competitors are liable to make good the loss
caused by fouling: The ‘Satanita’ caused damage to Volkyrie another boat which
entered the competition and sank it. It was held that as the rules provided that the
competitors would be liable for damages done by fouling, they were bound to each
other by rules. The owner of Volkyrie could recover damages from the owners of
‘Satanita’ In the case of Upton-on-severn R.D.O. Vs. Powell. The defendants called
Upton fire brigade for free service. After the fire was put out turned out that the
defendants firm was not within the free service zone of Upton. So the Upton fire
brigade sued to recover payment for the services rendered. It was held that the
 11

services were rendered on an implied contract and the defendant was bound to
remunerate them for their services.
1.10.1 The offer must be certain
According to Section 29 of the Contract Act, ‘Agreement the meaning of which
is not certain or capable of being made certain, are void’. So the proposal or offer
by offeror must be certain. The law will not make a contract on behalf of the parties
if the terms are indefinite or uncertain. Nor will the court undertake to supply
defect or remove ambiguities according to its own notions. Thus if a person agrees
to sell 100 bags of rice the agreement is void, because the agreement is silent about
the kind of rice intended to be purchased.
In the English case of Scammell Vs Ouston (1941) A.C. 251 a condition for the
purchase of a motor van to be party paid on “hire purchase terms” over a period of
two years was held to be indefinable and too vague to constitute a binding contract.
It is for the parties and not the court to define them. Similarly an agreement to pay
a certain amount, after deductions as would be agreed upon between the parties is
void for uncertainty.
1.10.2 Invitation to offer
An offer may be distinguished from a mere invitation to do business or an
invitation to treat. Where the shopkeeper displays goods in the shop window at a
price or a bus company advertising to carry passengers from A to Z is only an
invitation to treat and not an offer. The issue of a catalogue or circular of goods for
sale even with a price list attached does not usually amount to offer. Similarly in
Partridge Vs.Crittenden 1968. I.W.L.R. 1204 it was held that an advertisement in a
periodical that the advertiser has ‘Bramble finch cocks and hens’ for sale is not an
unlawful offer for sale of live wild bird but is an invitation to treat. An
announcement inviting tenders is not an offer. It is an attempt to ascertain
whether an acceptable offer can be obtained i.e. it is an invitation to treat. An
advertisement that a person has houses to let will not result in an offer. Such
advertisement are ‘offers to negotiate offers to receive offers to chaffer”. In
Pharmaceutical Society of Great Britain Vs. Boots Cash chemists (Southern) Ltd
1953 I.Q. B 431 it was held that shopkeeper who places goods upon the shelves in
a self service shop does not bind him to sell at that price. His display is merely an
invitation to treat”. It is for the customers to offer to buy the goods and the
shopkeeper may accept or refuse the offer.
A statement of fact made merely to supply information cannot be treated as an
offer. In Harvey Vs.Facie 1893 A.C.552. The plaintiff telegraphed to the defendant
will you sell us Bumber Hall Pen (a plot of land) Telegraph lowest cast price, to
which the defendant replied ‘Lowest Price for Bumber Hall Pen 900 pounds. The
plaintiff telegraphed to the defendant agreeing to buy it at 900 pounds and asked
for the title deeds. But he has not heard thereafter anything from the plaintiff. It
was held that there was no contract as the second telegram was not an offer but
only an indication of the minimum price. The third telegram was only an offer
which was not accepted by the other.
 12

This decision has been followed in Mcpherson Vs.Appana A.I.R. 1951 S.C 184
by the Supreme Court of India. In this case the plaintiff offered to purchase a
building belonging to the defendants for Rs.6000/- He was even willing to pay a
higher price if it is reasonable. The plaintiff inquired the agent of the defendant
whether his offer was accepted. The defendants agent replied that he will not
accept less than Rs.10,000/- Though the plaintiff accepted this the sale could not
be completed. So he filed a suit for specific performance. It was held that the
defendant was merely inviting offers. As there was no assent to the offer of
Rs.10,000/- There was no concluded contract and the suit will not lie.
1.10.3 Auction Sales
Auction sales present another kind of problem. The question may arise
whether an announcement of an intended sale bind the seller. The announcement
that an auction will be held does not constitute an offer capable of being accepted
because no reasonable person would regard the seller as binding himself to hold
the sale. He may accept a private offer before the sale. The auctioneer is only
inviting the public to make offers. The contract is completed by the fall of the
hammer or signifying the acceptance in some other way.
In Harris Vs Nickerson (1873) L.R.8.Q B 286 the plaintiff failed to recover
damages for loss suffered in traveling to the advertised place of an auction sale
which was ultimately cancelled. The plaintiff’s claim was declared as an
advertisement by an auctioneer is not an offer but an Invitation to treat.
Two principles emerge from the foregoing discussion (1) An advertisement by
an auctioneer informing the public, about a sale does not bind him nor is he liable
to indemnify persons who have incurred any expense over it. (2) When an auction is
held the bid is only an offer which can be withdrawn at any time before the fall of
the hammer.
If an auctioneer announces that a sale will be held without reserve the sale is
not concluded until the auctioneer withdraws the goods before auction there is no
right of action on any contract of sale.
Similarly a prospectus to subscribe to the shares to debentures of a company
is often in the nature of an invitating to make an offer. The application made for
purchasing the shares or debentures is the offer and the allotment by the company
is the acceptance.
The next question that arises for our consideration is whether a railway
company by issuing the time table is liable to any member of the public if it does
not run the train according to the schedule. Though at one time it was thought
that a railway company might be making an offer merely by issuing a time table,
the present view is that this is merely an intimation of the company’s intention to
run their trains in accordance with the time tables. In the case of buses the offer is
made by the bus company by running the buses and the offer is accepted by
passenger boarding a bus.
 13

1.11 GENERAL OFFERS

An offer may be made to a definite person to the world at large or to some
definite class of persons. An offer to a definite person can only be accepted by that
person and by no one else. An offer to the world at large can be accepted by anyone.
An offer to some definite class can be accepted by a member of that class. Where
the offer of reward is publicly made to any person who gives information leading to
the conviction of a criminal, or who return lost property the offer is regarded as a
definite indication of willingness to be bound to any person who performs the
necessary act. On the other hand we may come across an instance of an other
capable of acceptance by a number of persons, which is signified by performance of
its terms. In Carlill Vs. Carbolic Smoke Ball Co (1893) I.Q.B 256 the Carbolic
Smoke Ball Company offered by advertisement a reward of 100 pound to any one
who contracts the increasing epidemic a influenza after having used the smoke ball
as prescribed. It was added that they had lodged 1000 pounds with the Alliance
Bank, showing our sincerity in this matter. Mrs.Carlill used the Smoke Ball as
required but, nevertheless contracted influenza. She sued company for the
promised 100 pounds. It was held that the company was bound to pay. On the
plea that this was an offer made to the public it was held that an offer made to all
the world will ripen into a contract with anybody who comes forward and performs
the condition. The second plea on the company that the offer of 100 pounds was
merely an advertisement puff not intended to create legal relations was rejected by
the court on the ground that the company had declared it had lodged 100 pounds
to meet its obligation. The other contention that Mrs.Carlill had not notified the
company about her acceptance was not accepted as the court held that
performance of the condition was a sufficient acceptance without notification. The
last contention that the promise to pay 100 pounds was not supported by
consideration failed because the inconvenience of applying the Smoke Ball to one’s
nostrils as prescribed was sufficient consideration.
Section 8 of the Contract Act states as follows. Performance of the conditions
of a proposal or the acceptance or any consideration for a reciprocal promise which
may be offered with a proposal is an acceptance of the proposal”.
The principle in the Smoke Ball’s Case was followed in our country in Har
Bhajan Lal Vs. Har Charan Lal A.I.R. 1926 All 539 when a young boy ran away
from the house his father offered a reward of Rs.500 to the person who finds trace
of the boy. The plaintiff traced the boy, took him to the Railway Police Station and
sent a telegram to the boy’s father. On a claim for the reward of Rs.500 it was held
that the hand bill was an offer to the world capable of acceptance by any person
who fulfilled the condition and the plaintiff having performed the condition was
entitled to the amount offered.
Standing offer or Tender
An offer is usually directed towards the formation of a single contract. It may
sometimes happen that an offer made which is in effect a series of offers each of
which is capable of being converted into a contract by a distinct acceptance. This is
 14

known as standing offer An announcement inviting tenders is normally an offer;

unless accompanied by words indicating that the highest or lowest tender will be
accepted it is a mere attempt to ascertain whether an acceptable offer can be
obtained i.e. it is an invitation to treat. Where an individual or a corporation invites
tenders for the supply of goods over, a period the acceptance of the tender converts
it into a standing offer A contract arises only when an order is placed on the basis
of the tender.
In G.N. Railway Vs. Witham (1873) L R 9, C.P. 16 A Railway company invited
tenders for the supply of certain articles. As W’s tender was accepted some time
latter goods were ordered. But after some time he refused to execute an order
given. It was held that as W’s tender had been accepted he could not refuse to
supply goods.
If the person who invited the tender gives no order for, does not order the full
quantity of goods set out in the tender there is no breach of contract. In Percival
Ltd Vs L:C:C; (1918) 87 L, J, K, B 677 P tendered for the supply of goods of London
Council P’s tender was accepted L,C,C did not order the estimated amounts. When
P claimed that he was entitled to supply the full amount of goods, it was held that
the L, C, C were under no obligation to order any goods, but that P was bound to
deliver goods as and when they were ordered.
1.12 COMMUNICATION OF OFFER
An offer must be communicated to the offeree before it can be accepted. In
most cases it is obvious, but in the reward cases it gives rise to the question
whether a person who has performed the necessary action can claim the reward
even if he was unware that it had been offered. In Gibbons Vst Proctor (1891) 64L,
T, 594 it was held that a police officer was entitled to claim a reward for information
given to the Superintendent of Police although he did not know about it before he
gave the information. But on the contrary in Fitch Vs. Snedaker (1868) 38 N, Y,
248 it was laid down that a reward cannot be claimed by one who did not know
that it had been offered.
According to Section 4 of the Contract Act. The communication of a proposal
is complete when it comes to the knowledge of the person to whom it is made”. The
principle in Fitch Vs. Snedaker was followed in Lalman Vs. Growi Dutt 1913. 11 All
D.J. 489. The plaintiff, a servant of the defendant was sent in search of defendant’s
nephew. Later defendant by hand bills offered a reward of Rs.501/- to anyone
discovering the boy. The plaintiff having traced the boy before the knew about the
reward brought an action Held that there could be no acceptance unless there was
knowledge of the offer.
In Williams Vs. Carwardine 1833. 4 B & Ad 621 a woman gave information
leading to the conviction of a criminal ‘to ease her conscience’. It was held that she
was entitled to the reward on proof she knew of offer. Where the act for which the
reward is promised is done in ignorance of the promise of the reward, the latter
cannot be claimed because there can be no acceptance without knowledge of the
 15

offer. In R.Vs. Clarke (1927) to C.L.R. 227 the Government of Australia offered a
reward of 1000 pounds for information to the arrest and conviction of the
murderers of two police officers. Clarke saw the offer and being an accomplice gave
the information in the hope of getting a free pardon. It was held Clarke was not
entitled to the reward as he had no idea about the reward being concerned with the
free pardon.

1.12.1 Cross offers

To constitute a contract there must be an offer and unreserved acceptance of
the offer. If the offer is rejected there may be a counter offer but that puts an end
to the original offer. The offeree cannot revert to the original offer and purport to
accept it. Similarly if the offer is accepted but a new term (price) is introduced the
original offer is destroyed and cannot be accepted unless renewed. The American
Restatement supports the view that two cross-offers do not make a contract. “Two
manifestations of willingness to make same bargain do not constitute a contract
unless one is made with reference to the other. This is also made clear by the case
of Tinn Vs. Poffmann & Co (1873) 29 L.T. 271. The defendants wrote to the plaintiff
offering to sell him 80 tons of iron at 69 shillings per ton with a further quantity at
the same price. The plaintiff on the same day wrote to the defendants offering to
buy 800 tons at 69 shillings with a further quantity at a lower price. The letters
crossed in post. When the plaintiff filed the suit it was held that the defendant
would not be bound as a result of the simultaneous offers, each being made in
ignorance of the other.

1.13 REVOCATION OF OFFER

According to Section 5 “a proposal may be revoked at any time before the
communication of its acceptance is complete as against the proposer ‘but not
afterwards’. The communication of an acceptance is complete as against the
proposer, when it is put in a course of transmission to him so as to be out of the
power of the accepter. An offer may be revoked, i.e. withdrawn, at any time before
it is accepted, even if the offeror has promised to keep the offer open for a specified
time. As such a promise is gratuitous it is not binding owing to the absence of
consideration.
The notice of revocation should reach the offeree. Until he receives it he is
entitled to treat the offer as continuing and capable of acceptance. A revocation
sent by post is not effective until it reaches the offeree. An acceptance posted after
a revocation has been posted, but not received is valid. In Byrne Vs Van Tienhoven
(188) S.C.P.D 344 an offer to or acceptance was dispatched on 11th October. In the
meantime on 8th October the offeror posted a letter withdrawing his offer but the
letter reached only on 20th October. It was held that the dispatch of the telegram of
acceptance completed the contract though the letter of revocation was already
posted.
 16

1.14 INTENTION TO CREATE LEGAL RELATIONS

In addition to the other requirements an intention to enter into legal relations
must be proved before a valid contract can be made. In other words an agreement
as such is not a binding contract unless it is intended to have legal effect. There is
an offer and acceptance should be made with an intention to create legal
obligations.

In Rose and Frank Co.Vs.J.R. Crompton & Bros (1923) 2. K.B 201 two
business firms made an agreement for the supply of goods by one to the other. It
was expressly declared not to be a legal contract, but binding in honour alone. The
House of Lords held that the agreement was not a legal contract.

There are occasions in which agreements are commonly made without any
thought of creating legal obligations. Some of the instances are social engagement
family arrangements and agreements which from their nature admit of being
regarded as business transaction. In Balfour Vs. Balfour (1919).K.B.571 a
husband employed in Ceylon went to England on leave. The wife was unable to
return to Ceylon due to her ill health. The husband promised to make an
allowance of $ 30 a month until she rejoined him. When he failed to pay she sued
him. The court of appeal dismissed the suit and held that these arrangements do
not result in contracts at all even though there may be what as between other
parties would constitute consideration for the agreement.

The parties to a transaction may state that they do not intend to enter into any
legal relations. Secondly the question of an intention to affect legal relation is
relevant in cases where legal contracts are not normally made. In the case of
domestic or social engagement, the presumption is that no such intention is
present though there may be mutual promise, and passing of consideration. In
Jones Vs. Padavation (1969) 1 W.L.R. 328 a mother living in Trinidad wanted her
daughter who is employed in an embassy in New York, to study for the bar and
practice as a lawyer in Trinidad The mother bought a house in London for the
daughter to reside during her studies. Later when differences arose between
mother and daughter the mother claimed possession of the house. It was held that
the arrangements in relation to the house were made without contractual intent
and that the mother was entitled to possession of the house.

The question whether or not the parties intended to create legal relation is
question of fact. Thus in Simpkins Vs. Pays (1955) 3, All E. R 10 the parties a
widow, her grandmother, and two widows, lodger agreed to share the winnings of a
football pool entry published in a newspaper. It was held that they intended to
create legal relations and that the recipient of the prize money had to share it with
others. Similarly in Merrit Vs. Merrit (1970) t W.L.R. 1211 the husband having
developed illicit intimacy with another woman agreed to transfer the matrimonial
 17

home to his wife if she clear off a mortgage on the house. When the wife paid the
mortgage and asked for the transfer the husband refused. It was held that the rule
in Balfour Vs. Balfour did not apply as the agreement in that case was made when
they lived in amity. But in the this case since they decided to separate reasonable
persons would regard their agreement as intended to be binding in law.

According to Prof Williston the American jurist the separate element of

intention to create legal relations is foreign to the common law, imported from the
continent by academic influence. He wrote in his book on contracts as follows:
“The common law does not require by positive intention to create a legal obligation
as an element of contract. A deliberate promise seriously made is enforced
irrespective of the promisor’s view regarding his legal liability”.

Though the Contract Act does not mention about the intention yet courts in
India follows the English rule about the intention to create legal obligation as a rule
of justice equity and good conscience.

1.15 SUGGESTED QUESTIONS

1. What is meant by contract and what are its essentials.
2. “A contact consist of an actionable promise or promises” comment.
3. Distinguish between Contract and Quasi contract.


 18

LESSON – 2

ACCEPTANCE
STRUCTURE
2.1 Acceptance
2.2 Both offer and acceptance must correspond
2.3 Indian law
2.4 Manner of acceptance
2.5 Acceptance of tenders
2.6 Communication of acceptance
2.7 Oral acceptance
2.8 Acceptance through “telex”
2.9 Telephones
2.10 Acceptance of contract
2.10.1 Revocation of acceptance
2.10.2 Termination of offer
2.10.3 Revocation
2.10.4 Rejection
2.10.5 Lapse
2.11 The terms of contract
2.12 Conditions and warranties
2.12.1 Implied terms
2.12.2 Standard form contracts
2.12.3 Notice of printed terms
2.12.4 The notice must be contemporaneous with the contract
2.12.5 Ticket cases
2.12.6 Fundamental breach
2.12.7 Unreasonable terms
2.12.8 Exemption clauses and third parties
2.13 Limitations
2.13.1 Express undertaking
2.13.2 Fraud or misrepresentation
2.14 Suggested Questions
 19

2.1 ACCEPTANCE
Acceptance may be defined as the general expression by words of conduct of
assent to the term of the offer by the person to whom the proposal is made. In
order to be a valid acceptance the assent must be communicated to the offeror.
The acceptance of a proposal is an act which completes the formation of a proposal
is an act which completes the formation of a contract. Till an offer is accepted,
there is nothing but a revocable offer which binds nobody. After acceptance there
is a completed contract which binds both the parties. The acceptance contains two
elements namely, the acceptance of the offerors proposal and either the promise
requested by the offeror or the performance of the act required.
Acceptance must be absolute and unconditional. An acceptance which seeks
to add to, or vary some of the terms of the offer is no acceptance at all though such
acceptance can be treated as a counter offer which by itself is capable of
acceptance. A counter offer amounts to a rejection of the original offer which then
ceases to be capable of acceptance.
Sec. 2 (2) of the Indian Contract Act defines the word acceptance as follows:
“When the person to whom the proposal is made signifies” his assent thereto the
proposal is to be accepted. A proposal when accepted becomes a promise. A
common instance of an act amounting to acceptance is the fall of the hammer in an
auction sale. There must be some overt act of acceptance. A mere mental
determination to accept unaccompanied by any external indication will not be
sufficient.
2.2 BOTH OFFER AND ACCEPTANCE MUST CORRESPOND
Some difficult may arise in determining whether or not the acceptance is
conclusive. The acceptance may be rejection and counter offer of an acceptance
with some variation or an acceptance which is equivocal or which is qualified by
reference to the subsequent terms.
A counter offer cannot constitute an offer. As it amount to a rejection of the
offer, it operates to bring it to an end. In Hyde Vs. Wrench (1840) 3-Beav 335. A
person offered to sell a farm to another for 959 pounds. The vendor refused. He
agreed to give 1000 pounds. The vendor declined to adhere to his original offer.
The purchaser tried to obtain specific performance of the contract. It was held that
an offer to by at 959 pounds in response to an offer to sell for 1000 pounds was a
refusal followed by a counter offer. No contract has come into existence An enquiry
whether the offeror will modify his terms of the contract, does not necessarily
amount to a counter offer.
The acceptance may fail to take effect as an acceptance because it attempts to
vary the terms of the offer. An offer to sell 1200 tons of iron is not accepted by a
reply asking 800 tons. Similarly an offer will not be accepted by a reply which
introduce some new term. Such a reply is not an acceptance but a counter-offer.
In Jones Vs. Danieal 1894 2 Ch 322 A offered 1450 pounds for property belonging
to B.B. accepted offer and enclosed a letters of acceptance which contained various
 20

terms as to deposit and dates of completion. It was held that there was no
contract.
The acceptance must be unequivocal and without qualification as to the terms
of the offer. An acceptance may be effective although the acceptor asks for some
indulgence like asking for time to pay, so long he is prepared to perform the terms
of the offer even if his request is refused.
2.3 INDIAN LAW
Section 7 of the Contract Act provides “In order to convert a proposal into a
promise, the acceptance must be absolute and unqualified. A conditional or
qualified acceptance or an acceptance with a variation is no acceptance at all. In
Winn Vs Bull 1817 8. Ch.D. 29 the plaintiff agreed with the defendant to lease
certain property, subject to the preparation of the contract Though the solicitor of
the plaintiff prepared a contract it was not accepted by the defendant. When the
plaintiff sued for specific performance it was held that there was no binding
contract.
In Perala Krishnayyam Chettiar Vs. Padmanathan Chettiar A.I.R. 1917 Mad 13
the defendant wrote to the plaintiff in Palghat to send 15 or 29 bags of arecanuts at
once and added that the plaintiff should attend to other business after sending the
consignment. Due to plague the plaintiff left palghat and wrote later that he would
send the goods within 15 or 29 days. The defendant did not reply. When the
plaintiff sent the goods the defendant refused to take delivery. It was held that
neither the first proposal nor the counter one was accepted by the parties so as to
establish a binding counter. So the refusal of the defendant to take delivery was
not wrongful
In Badri Prasad Vs State of M.P. A.I.R. 1970: SC 706 the plaintiff entered into
a contract with a Jagirdar K with respect to the cutting of the trees in the forest and
the plaintiff deposited a sum of Rs.17000/- Afterwards the forests vested with the
State Government by a notification. The Forest officer wrote to the plaintiff to
deposit a further sum of Rs.17000/- deposited with the Jegirdar. The government
rejected the request of the plaintiff. Where the plaintiff filed a suit for specific
performance it was held that the alleged acceptance of the offer made was
conditional and qualified and hence the suit for specific performance is liable to be
dismissed.
Thus according to Section 7 in order to convert a proposal into a promise the
acceptance must be absolute and unqualified. If the terms of the offer is refused or
varied the acceptance operates as a counter offer and there cannot be any
agreement between the parties.
2.4 MANNER OF ACCEPTANCE
The acceptance shall be effected in the manner or method indicated by the
offeror. An acceptance given in any other manner is not effective. In the proposer
chooses to require that goods shall be delivered at a particular place, he is not
bound to accept delivery tendered at any other place. If the proposer asks for
 21

acceptance in writing, an oral acceptance will not bind him. The rule is particularly
strict where the offer is contained in an option. Ellason Vs. Henshaw 1819. 4 ch
225 E offered to buy flour. H requesting that an acceptance should be sent by the
wagon which brought the offer. The acceptance by H was sent by post thinking that
it will reach quickly. But the letter arrived after the arrival of the wagon. It was
held that E was not bound by the acceptance. According to Anson a reply sent in a
different mode which is more expenditious method may be treated as sufficient for
an acceptance unless the offeror has stipulated that acceptance shall be made in
that way only and in no other manner.
Section 7 of Indian Contract Act deals with the manner of acceptance. In
order to convert a proposal the acceptance must be expressed in some usual and
reasonable manner, unless the proposal prescribes the manner in which it is to be
accepted. If the proposal prescribes the manner in which it is to be accepted and
the acceptance is not made in such manner, the proposer may, within a reasonable
time after the acceptance is communicated to him insist that his proposal shall be
accepted in the prescribed manner, and not otherwise; but if he fails to do so, he
accepts the acceptance”.
Section 7 (2) throws on the proposer the burden of notifying to the acceptor
that an acceptance which is not in the prescribed manner is insufficient and he is
bound if he fails to insist on the required manner of acceptance. In Surendranath
Vs. Kedaranath 1936 A.I.R. Cal. 80 offer made was as follows: “I intend to sell my
house for Rs.7,000. If you are willing to have it write to F at his address”. The
purchaser instead of writing to F sent an agent in person to F and agreed to
purchase the property. It was held that the letter had to be read in a reasonable
and in a sensible manner. The purchaser is not precluded from putting himself
into direct communication with F and the defendant was bound by the acceptance.
Where the manner of acceptance is not prescribed the acceptance must be
signified in any reasonable manner. It can be done by post. In English law where
the offer is received by post, the acceptance may be communicated by post. Under
the Contract Act acceptance by post may be used as a mode of communication in
all cases where it is reasonable except where the offeror prescribes any other form
of communication. The communication of an acceptance is for the benefit of the
offeror So he can prescribe any mode which will be effective for that purpose. If the
offeror has neither prescribed the manner of acceptance nor dispensed with
communication of the acceptance the offeror can make his acceptance in some
usual and reasonable manner.
2.5 ACCEPTANCE OF TENDER
Where a tender is submitted acceptance will normally create a binding
contract unless it is stipulated that certain formal documents have to be executed.
But if the tender is made to supply goods as may be ordered, the person to whom
the tender is submitted does not incur any liability to accept it. He becomes liable
only when he places an order for the goods. The acceptor of a tender; has right to
refuse to place any offer.
 22

In Manickam Chettiar Vs. State of Madras A.I.R. 1971, Mad 221, the Director
of Medical services invited tenders for the supply of articles of diet etc. to the city
Hospitals for one year. After the tender was accepted, the defendant wrote to
director of Medical services that because of the delay in acceptance he is unable to
supply hand pounded rice, After the Director drew the attention of the defendant to
the clause which provided for the cancellation of the agreement and the claim for
damages defendant addressed a letter to the plaintiff (Director) that he will supply
the articles and returned it to the respondents marking with the words “approved”.
The respondents put it in a drawer. When a dispute arose the appellant contended
that he was not bound by the agreement. Though the fact of putting the paper in
the drawer will not constitute acceptance the subsequent ordering and acceptance
of coal by the respondents will show that the parties had entered into a contractual
relationship based on the draft agreement. Therefore it was held that the appellant
was bound by the contract.
Mere acquiescence or mental acceptance does not constitute acceptance. Until
it is communicated to the offeror the acceptance is not complete. In Powell Vs Lee
(1908) 99 L.T 284 the board of managers of a school decided to appoint the plaintiff
as Headmaster. One of the managers informed the plaintiff but the managers later,
rescinded the resolution. The plaintiff’s claim for damages failed. As there was no
communication from the whole body of managers there was no completed contract.
Section 9 of the Contract Act lays down that in so far as the proposal or
acceptance of any promise is made in words, the promise is said to be express. In
so far as such proposal or acceptance is made otherwise than in words, the promise
is said to be implied. The proposal and the acceptance may be expressed in words
either spoken or written or it may be implied from the conduct of the parties
Section 8 provides that the performance of the condition of a proposal or the
acceptance of any consideration for a reciprocal promise which may offered with a
proposal is an acceptance of the proposal.
The doctrine of consensus at idem or identity of mind requires that the offer
made by the offeror should come to the knowledge of the offeree before he could
accept the offer. Secondly the fact of acceptance should come to the knowledge of
the offeror. Though such mutuality produces consensus ad idem yet in practice the
theory has been modified Where an offer contains a number of terms it is not
possible that the offeree shall have knowledge of the terms of every one of the offer.
So the law imputes knowledge to the offeror whenever he has done all that is
reasonable possible to draw the attention of the offeree to the existence of such
terms and the offeree also purports to accept such offer.
2.7 ORAL ACCEPTANCE
Acceptance has to be made in the manner prescribed by the offeror. An
acceptance given in any other manner may not be effective when the offeror insists
that the acceptance shall be made in the prescribed manner.
When an offer is orally made by an reply oral even a nod or other act which
signifies acceptance may be sufficient. If the parties are not in the presence of each
 23

other and the offeror has not prescribed the mode of acceptance insistence upon
communication of acceptance of the offeror by the offeree would be inconvenient
when the offer is made by post.
In Entores Ltd Vs. Miles Far East Corporation 1955.2 All E.R. 493 it was held
that in case of oral communication or by telex or telephone an acceptance is
communicated when it is actually received by the offeror. The rule is sound
because the oral acceptance may be drowned the noise of an aircraft flying
overhead or the telephone line goes dead or is so feeble and indistinct that it is not
heard. Consequently there is no contract.
Acceptance by Post If the parties are at a distance communication will have to
be effected through messenger or by post. There is one exception to the
requirement that the acceptance must actually reach the offeror. That is when the
acceptance is despatched by post. The rule is that the acceptance is deemed to be
complete when a letter, property stamped and addressed is posted. This rule
extends to acceptances by telegram, but not to acceptances by telephone nor to
acceptances by telex. The law relating to the acceptance by telephone or telex are
governed by the rule that acceptance is only effective from the time of receipt.
In Adam’s Vs Lindsell (1818) I B & Aid 681 the defendants wrote a letter to the
plaintiff offering to sell certain quantity of wool, calling upon the plaintiff to reply by
post. The plaintiff accepted the offer and posted the letter of acceptance which was
received after a delay of one week. In the meantime the defendants sold the goods
to another person, after the letter of acceptance was posted, but before it was
received by the defendants. When the plaintiffs sued for breach of contract it was
held that the defendants that there was no contract between the parties until the
letter of acceptance was actually received was negatived. The Court observed “For if
the defendants were not bound by their offer when accepted by the plaintiff until
the answer was received then the plaintiff ought not to be bound till after they had
received the notification that the defendants had received their answer and
assented to it. This rule was approved by the House of Lords in Dunlop Vs. Higgins
(1848) I, H, L, C, 38 D offered to sell iron to H. On the same day a letter of
acceptance was posted which was received after a delay. In the meantime the
defendant refused to supply as the prices had risen up. It was held that as the
letter of acceptance was duly posted the acceptor was not responsible for any delay
in transist. Accordingly the defendant was held liable.
In Household Fire and Carriage Accident Insurance Co Ltd Vs. Grant (1879) 4,
Ex,D, 216 the defendant offered to buy shares in the plaintiff’s company. The
company’s secretary posted a letter of allotment which never reached its
destination, When the company became insolvent the defendant denied his liability
to pay for the shares. It was held that the defendant was nevertheless liable as a
shareholder.
In Hentharn Vs. Fraser (192) 2, ch, 27 a written offer delivered by hand was
accepted by post. It was held that the contract was concluded from the moment of
such acceptance.
 24

Under English law the contract is completed the moment the letter of
acceptance is posted though it never reaches its destination. Section 4 of the Act
states when a communication is complete. The communication of a proposal is
complete when it comes to the knowledge of the person to whom it is made The
communication of an acceptance is complete as against the proposer, when it is put
in a course of transmission to him so as to be out of the power of the acceptor as
against the accepter when it comes to the knowledge of the proposer”. In India the
acceptor is not bound by posting the letter of acceptance. He is bound by the
contract only when his letter of acceptance is received by the proposer.
Similarly in India posting a letter of acceptance completes the acceptance as
against the offeror. The offeror can revoke it by a telegrame. The offeror is not
prejudiced thereby as he is not aware of the acceptance till he receives the
communication.
2.8 ACCEPTANCE THROUGH “TELEX”
By the Telex system each party could get into direct almost in spontaneous
communication with the other through a teleprinter machine installed in their
respective offices. In Entores Ltd Vs. Mills For East Corporation (1955) 2, B, D, 327
the plaintiff made an offer from London by Telex to defendant’s agent in Amsterdam
which was accepted by another Telex received in London. When the plaintiff filed a
suit for damages on a breach of contract it was held that the contract was complete
when the acceptance was received by the offeror. “The contract was made at the
place where acceptance was received.
“In the case of a telephonic conversation the contract is complete when the
answer accepting the offer was made. The same rule applies in the case of contract
by Telex”.
2.9 TELEPHONES
In the United States of America the rule is that in the case of Telephones and
telex the contract is made in the place where the acceptance is spoken. But in
India the law is different. In Bhagwandas Goverdhandas Kedia Vs. Giridhall
Parshotttandas & Co. 1966, S, C, R, 656. One G made an offer to B from
Ahmedabad to Khamgaon through a long distance telephone all which was
accepted by B through telephone. When the defendants failed to supply the goods
a suit was filed in Ahmedabad. On the question of the jurisdiction of court in
Ahmedabad it was held that as the acceptance of the offer was intimated in
Ahmedabad, the Ahmedabad court has jurisdiction to try the suit.
The rule is regard to telegraphs is the same as in the case of letter sent by
post. The acceptance is complete when the letter is sent in the post or the telegram
is handed for dispatch to the telegraph office.
Acceptance through the process of court
An interesting question as to whether an acceptance can be effected by means
of presenting a plan arose in the case of Visweswaradas Gokuldas Vs B.K. Narayan
Singh A.I.R. 1969 SC 1157. Defendant agreed to sell to a plainfill certain quantity
 25

of iron lying in a mining area by assigning his leasehold rights. Later defendant
posted a letter revoking the earlier agreement, and the letter reached two months
later. In the meantime suit for declaration and possession was filed by the plaintiff.
The High Court dismissed the suit for lack of necessary approval of the government.
Later another suit out of which the present appeal has arisen, was filed by the
plaintiff for enforcing the specific performance. It was contended that after the
completion of the contract the defendant failed, to get the necessary consent from
the Government. The question that arose for consideration was whether there was
any concluded contract of assignment of lease. It was held that there was neither
acceptance or nor was it communicated to the defendant. There was no concluded
contract.
2.10 ACCEPTANCE OF CONTRACT
Acceptance may be held to have been made even though it has not yet come to
the notice of the offeror, by the conduct of the offerree. In Hindustan Co-operative
Insurance Society-Vs. Shyam Sundar A.I.R. 1952 CAL 691 an insurance company
informed the proposer orally that if he sent the proposal form and the premium it
will be accepted. Accordingly he sent a cheque. Though the company cashed the
cheque it had not replied to the proposer. In the meantime the proposer died. On
the question whether the company by cashing the cheque had accepted the
proposal, it was held that by cashing the cheque the company accepted the
proposal.
When communication is not necessary
Since communication is for the benefit of the proposer he may waive it or agree
that an un communicated acceptance will be sufficient. Where the proposer
intimates a particular method of acceptance as sufficient it is necessary that the
other person follows the specified mode of acceptance. “If the proposer intimates
that it will be sufficient to act on the proposal without communicating acceptance
of it himself performance of the condition is a sufficient acceptance without
notification”.
Another instance of waiver will be the impossibility of the acceptor to express
his acceptance otherwise than by performance of the contract as in the case of an
offer made to the world at large. The waiver of communication may be express or
implied. In unilateral contracts the offer takes the form of a promise to pay money
in return for an act In such case the performance of the act will usually be deemed
as sufficient notice.
Can silence or inaction operate as an acceptance
In some cases it may so happen that an offeree fails to reply to an offer. In
such cases can his silence of inaction operate as an acceptance In Felthouse Vs.
Bindley (1862) I I C.B.N.S. $ 869 the plaintiff wrote to his nephew offering to buy
his horse at 30-15s and added that if he heard no more about him he would
consider the horse is his. The nephew did not reply but told the auction or not to
sell the horse as he reserved it for his uncle. The auctioneer (defendant) sold the
horse by mistake. When the plaintiff sued it was held When the horse did not
 26

belong to the uncle as the nephew had never communicated his acceptance of the
offer.
2.10.1. Revocation of acceptance
In English Law an acceptance once made is irrevocable. According to Anson
“Acceptance is to offer what a lighted matchstick is to a train of gunpowder Under
Indian Law acceptance is revocable. Section 5 provides that “an acceptance may be
revoked at anytime before the communication of acceptance is complete as against
the acceptor but not afterwards”. So what the law requires is that the notice of
revocation should reach before the letter of acceptance reaches the other person.
In Indian law acceptance is generally revocable. As against the person who revokes
an acceptance communication of it would be complete as against the person who
makes it when it is put in transmission to the persons to whom it is made so as to
be out of the power of the person who makes it.
2.10.2 Termination of Offer
If an offer is not turned into a contract by acceptance it may be terminated by
rejection, revocation, or will lapse by the passing of time or will lapse on the death
of the offeror. Section 6 of the Indian Contract Act declares “A proposal is revoked”.
1. by the communication of notice of revocation by the proposer to the other
party;
2. by the lapse of the time prescribed in such proposal for its acceptance or if
no time is so prescribed, by the lapse of a reasonable time without communication
of the acceptance;
3. by the failure of the acceptor to fulfill a condition precedent to acceptance;
4. by the death or insanity of the proposer, if the fact of his death or insanity
comes to the knowledge of the acceptor before acceptance.
2.10.3 Revocation
An offer may be revoked before it is accepted. According to Section 5 of the
Contract Act “a proposal may be revoked at any time before the communication of
its acceptance is complete as against the proposer, but not afterwards”. It is vital
that notice of revocation should reach the offeree. If not he can treat the offer as
continuing one and capable of acceptance In Byrne Vs. Vantien Hoven (1880) 5
C.P.D 344 a letter posted on 1st October offering to sell some goods was received
and telegrame accepting it was sent on 11th October. In the meantime the offeror
withdrew the offer on 8th October which was received on 20th October. The
revocation was communicated on 20th October and the contract was already
completed, by the acceptance. Held the revocation was of no effect until it reached
the offeree and the contract was made when telegrame was sent. A bid may be
retracted before the fall of the hammer.
2.10.4 Rejection
The offer may be rejected directly or indirectly. When the acceptor has not
fulfilled the conditions precedent to the acceptance the offer will be terminated A
counter-offer is tantamount to rejection. In Hyde Vs. Wrench (1840) 3 Bear 334 an
 27

offer to sell an estate for 1000 pounds was met by a counter-offer to buy for 950
Pounds. When the counter offer was rejected, the buyer wrote that he was
prepared to pay 1000 pounds. It was held that there was no contract as the
counter-offer amounted to a rejection of the original offer.
2.10.5 Lapse
An offer may be terminated by lapse of time. If an offer is not accepted,
rejected or revoked, it may lapse through effluxion of time. If any period is fixed for
accepting the offer, it must be within that time. If not the offer will be open for a
reasonable period and then it will lapse. In Ramsgate Victoria Hotel Vs. Montiflore
(1866) L.R.I. Ex. 109 the defendant Montifiore applied in June for shares in the
company No answer was received until November when he was informed that
shares were allotted to him which he refused to accept. It was held that the offer
lapsed by reason of the delay is notifying their acceptance.
2.10.6 Death of instanity
An offer will lapse on the death of insanity of the offeror provided the fact
comes to the knowledge of the offeree before he accepts. Section 6 (4), of the
Contract Act declares that a proposal is revoked by the death or insanity of the
proposer, if the fact of his death or insanity comes to the knowledge of the acceptor
before acceptance. The offer is determined by the death of the offeree. His personal
representatives could not accept the offer on behalf of his estate. If insanity of the
offerors is known to the acceptor there would be no contract at all.
2.11 THE TERMS OF CONTRACT
In many instances a contract consists of number of contractual terms. In this
lesson we will consider the nature and importance of these terms. The promises
and undertaking contained in a contract are known as the terms of the contract.
They have to be distinguished from representations. A representation is a
statement, or assertion, made by one party to the other before or at the time of the
contract.
The contents of a contract depend on the words used by the parties. These
make up the express terms of the contract. Little difficulty exists in ascertaining
these express terms. Whether the parties consider a term as so obvious and fail to
mention it in their contract, it becomes necessary to imply a term in their
contractual intention. These implied terms may be terms implied in fact, and terms
implied in law and terms implied by custom.
2.12 Conditions and Warranties
The terms of a contract are classified into conditions and warranties. A
condition is a vital term of the contract going to the root of the contract. Its failure
entitles an innocent party to rescind the contract and to claim damages. In
Maredelanto Compania Naviera S.A. Vs. Bergbau-Handel Gmbh the Mihalis Angelos
(1971) I.Q.B. 164 Owners of the Vessel Mihalis Angelos let it to charterers for a
voyage from Haiphong to Hamburg. The ship was expected to be ready about 15-
17-1965. On the date of charter she was in the Pacific on her way to Hong Kong
 28

where she had to discharge the cargo and must have a survey lasting two days.
She did not complete the discharge at Hongkong until 23.7.1965. On July 17,
1965 the characters cancelled the charterparty. It was held that the clause that the
ship was ready to load about 1.7.65 was a condition and the characters were
entitled to cancel the contract on 17.7.1965 on the ground that the ground was
broken.
In Behn Vs. Burness (1863) 3. B & S 751 a ship was described in a
chatterparty as “nowin the port of Amsterdam”. When in fact she was elsewhere. It
was held that the charterer was entitled to rescind. The statement was a condition.
Similarly a statement that a ship will sail on a certain day has been treated as a
condition in a charterparty.
A warranty has been defined as “an express or implied statement of something
which the party undertakes shall be part of a contract and though part of the
contract, yet collateral to the express object of it”. In other words a “warranty is not
a vital term in a contract, but one which is merely subsidiary a breach of which
gives no right to rescind but only an action for damages for the loss which he has
suffered”. In Bettini Vs. Gye (1876) I.Q. B.D. 183 singer was engaged for the season
in theatres and at concerts. He undertook to appear six days before for rehearsals.
He arrived only three days before and the defendant sought to terminate this
contract. It was held that the rehearsal clause was subsidiary but not a condition.
Though he can claim compensation he cannot treat the contract at an end. The
question whether a term in a contract is a condition or a warranty depends upon
the intention of the parties which can be deduced from the surrounding
circumstances.
2.12.1 Implied terms
In certain cases the law will imply into a contract terms which the parties has
not expressly inserted. The parties due to forgetfulness or because of bad drafting
fail to include in the contract certain terms. In such case the court may imply such
terms for business proposes which are necessary. The terms implied must be
necessary to give that efficacy to the contract which the parties intended. In ‘The
Moorcock” that owners of the ship “The Moorcock”, agreed with the wharfingers
that the vessel should be discharged and loaded at their wharf and for that purpose
should be moored at a jetty which belonged to the wharfingers. When ‘the
Moorcock’ was lying there, the tide ebbed and she came to rest on a ridge of hard
ground and sustained damage. It was held that the contract contained an implied
undertaking on the part of the wharfingers that it was reasonably safe for the vessel
to be berthed at the jetty.
2.12.2 Standard Form of Contracts
A recent development in the law of contract is the appearance of standard form
of contract or ‘contract of adhesion’. In these days when even a person travels by
train or bus or takes the clothes to the drycleaners he will receive a standard form
contract given by the supplier. The person who receives must act the whole of it or
 29

go without it. In reality he has ‘no alternative but to accept; he does not negotiate
but merely adheres”. The insurance companies issuing the policies and the
contract of carriage by the Railways are further illustrations of the standard form of
contract.
The standard contracts contain large number of terms and condition excluding
the liability under the contract. An individual having no capacity to bargain which
a huge organization has to accept the offer whether the likes it or not. The customer
does not read the printed conditions. If ever he tried to read the printed conditions
he would have missed the train or the boat.
If any customer has signed such a standard form he will be bound by the
contract even if he is not aware of the contents of the contract. In L Estrange Vs.
Graucob Ltd. (1934) 2 R.B 394 Mrs L signed an agreement for purchasing a
cigarette vending machine without reading the agreement. The agreement excluded
the liability for all kinds of defects in the machine. The machine proved faulty and
the plaintiff purported to terminate the contract for breach of condition. It was held
that she could not do so as the exemption clause excluded all liability on the part of
the seller. The consumer has to be protected by the courts against the exploitation
by the dominant party. Several ingenious attempts have been made by the court to
mitigate against unreasonable exemption clauses in standard form contracts.
2.12.3 Notice of Printed terms
The person delivering the document must give notice of the printed terms to
the offeree. In the absence of a notice the acceptor will not be bound by it. In
Parker Vs. South Eastern Railway (1877) 2 C.P.D. 416 it was held that a person
relying on a ticket as a contractual document must show that he gave sufficient
notice to the other party and the document or the ticket in fact contained
contractual terms and was intended to be part of the offer. In Chapelton Vs. Barry
U.D.C (1940) I.K.B 532 the plaintiff hired a deck-chair from the defendants for use
at a beach. A ticket bought from the attendant contained a clause excluding
liability for damage or injury. The chair collapsed and the plaintiff was injured In
an action by the plaintiff for damages it was held that this clause formed no part of
the contract as the plaintiff had simply pocketed the ticket without reading it and
no reasonable person would have assumed the ticket to be anything but a receipt.
It was observed in Thornton Vs. Shoe Lane Parking Ltd (1071) All E.R. 686 that he
notice must “be printed in red ink with a read hand pointed to it” so that the
conditions would become part of the contract. In this case the plaintiff parked his
car in an automatic car park and received a ticket from an automatic machine.
When he went to collect his car he was injured When he brought an action it was
pleaded that the defendant was exempted by the conditions printed on the ticket. It
was held that he was not bound by the conditions printed on the ticket; the
contract was concluded when the car was driven to the entrance of the garage.
2.12.4 The Notice must be contemporaneous with the Contract
In order that a term should be binding notice of it should be given to the other
party before the contract is made. In other words an exemption clause cannot be
introduced into the contract unilaterally after it is made. Thus a hotel proprietor,
 30

agreeing at the reception desk to accommodate a guest cannot rely on an exemption

clause displayed in a bedroom, stating that the proprietor shall not be responsible
for articles stolen unless handed to him for safe custody.
2.12.5 Ticket Cases
It is well established that where a person buys a ticket for a railway or sea
journey, he should know that the ticket is bound to contain certain conditions. The
question arises whether he has been given sufficient notice of the conditions. In
other words the notice must be reasonably sufficient. In Parker Vs. South Eastern
Railway Co (1877) 2 C.P.D. 416 the plaintiff deposited a bag in a railway station
belonging to the defendant. A ticket issued contained the words on its face “see
back”. On the back of the ticket a number of conditions were printed including the
one which restricted the liability for any package to 10 pounds. A bag valued at
pounds 24, 10 belonging to the plaintiff was lost. When sued it was held that there
was sufficient notice for ordinary travelers the class to which the plaintiff belonged.
2.12.6 Fundamental Breach
This is a method of controlling the consequences of sweeping exemption
clauses. According to the doctrine of fundamental breach “every contract contains
terms which were fundamental” the breach of which amounted to a non
performance of the contract. The party will be guilty of breach of contract even if
an exemption clause is inserted In. Suisse Atlantique Societe D Armement S.A. Vs
NV Rotterdon Sche kole Centrale 1967 AC 3 1 the defendant chartered the
plaintiff’s ship for two years for carrying coal. It provided for demurrage charges at
the rate of 1000 Pounds per day for delay in loading, When delay occurred for
which the appellants alleged the defendants/responsible but allowed the
respondents to continue the use of the ship for the remaining period. At the end of
the term appellant sued for damages in excess of the demurrage clause. It was held
that there was no fundamental breach. Nor was the provision for demurrage a
“limiting term” it was a statement of agreed damages in the event of delay. With the
result the plaintiff must fail. Where a breach of contract is not deliberate out is due
to an honest error, it will not normal constitute fundamental breach of contract.
In Harbutt’s Plasticine Ltd Vs. Wayne Lank And Pump Co Ltd. (1970) I.Q.B.
447 the defendant contracted to design and install a storage tank for the plaintiff
for storing heavy wax. The plastic pipe used by the defendants sagged and cracked.
With the result it was (in a molten state) escaped an ignited. The contract provided
that the total liability to the plaintiffs property should be limited to the value of the
contract which was 2330 Pounds. The loss sustained by the plaintiff due to the fire
amounted to 146.581 pounds. It was held that the defendants were in
fundamental breach having regard to the quality and consequences of contract.
Consequently the clause limited the defendant’s liability did not apply and the
defendants were liable for the whole loss which amounted to 146, 581 Pounds. In
the Suisse Atlantique case the delay did not operate as a fundamental breach but
in Harbut’s Plasticine Case the supply of unsuitable materials destroyed the basis
of contract.
 31

2.12.7 Unreasonable Terms

Another method of protecting the individual from the exploitation of the
clauses in the standard form contracts is to exclude the unreasonable terms from
the contract. Denning L.J. expressed the opinion in John Lee and son (Grantham)
Ltd Vs. Railway Executive (1959) 2 All E.R. 581, that an unreasonably onerous
term in a standard form contract would not be enforced by the courts, for “there is
the vigilance of the common law, which while allowing freedom of contract watches
to see that is not abused”. In Lilly White Vs. Munuswamy the plaintiff gave her new
saree of washing. The receipt issued by the dry cleaners contained the condition
that only 50% of the market price of the article will be paid in case of loss. When
the plaintiff sued for the full value of lost saree it was observed that the defendant
is liable to pay “the full value of the saree. It was observed that “the court will not
enforce a term which is not in the interest of the public and which is not in
accordance with public policy. It may be putting a premium upon the abstraction
of clothes, which may be committed by an employee of the firm, intent on private
gain though the firm itself may be blameless with regard to the actual loss”.
2.12.8 Exemption clauses and third parties
The fundamental rule of the law of contract is one who is not a party to a
contract cannot acquire rights under it. This may be equally applicable to standard
form contracts also.
In Cosgrove Vs. Horsfall (1945) 62 T.L.R. 140 the plaintiff an employee of a
public transport was given a free pass to travel in their omnibus. There was
condition attached to the pass that “neither the Board nor their servants were liable
to the holder for any injury caused. When the plaintiff suffered injuries as a result
of the negligence of the driver of the bus, he sued the driver. Since he has no right
to sue the Transport Board he sued the driver. It was held that the defendant was
liable as he could not claim the benefit of exemption clause, because he was not a
party to the agreement.
A departure from the rule that a stranger cannot claim the protection of
exemption clause was made in the case of Elder, Dempster and Co Vs. Paterson
Zochonis & Co. The ship belonging to the plaintiff was chartered to carry a cargo of
oil casks. They chartered another ship who loaded the oil casks in another West
African Port. The Cargo having got causal loss to the plaintiff. The plaintiff sued
both the ship owner and charterer for the loss. It was held that both the
defendants were protected.
In Hasoldine VS CA Daw & Sons 1941 2 K. B 343 the owners of a plot
employed the defendants a firm of engineers to maintain and repair a lift in the
building. Because of the negligence of the engineers in repairing the lift, the
plaintiff a visitor to the premises were injured when the lift fell to the bottom. It
was held that the defendants were liable for the tort of negligence. The argument
that it is not right that a repairer like the defendants who has stipulated with the
owner absolving liability in respect of accidents to third party be made liable. In
answer to this argument it was held that the duty towards the third party does not
arise out of contract, but independently of it.
 32

The principle in Cosgrave S Horsefall (1945) T.L.R. that the bus driver was
personally liable for the injury caused and cannot avail the exemption clause was
discarded in the case of Scruttons Ltd Vs. Midland Silicones, Ltd 1962 A. C 446.
There a drum of chemicals was shipped from New York to London consigned to the
defendants upon a bill of lading which exempted the carriers from liability in excess
of $ 500 (pounds 179) per package. In the course of being handled at a warehouse,
the drum was damaged by the negligence of the appellants a firm a stevedores
employed by the carrier and the damage amounted to 598 pounds. Although the
appellants were not a party to the bill of lading, nor expressly mentioned there in
they claimed to be entitled to the benefit of the clause limiting liability. The
majority of the judges rejected the principle of vicarious liability and reasserted the
doctrine of privity of contract.
2.13 LIMITATION
The operation of the exemption may be limited by an express undertaking and
by fraud and misrepresentation.
2.13.1 Express undertaking
In Webster Vs. Higgins a hirer was able to enforce a collateral warranty under
a hire-purchase agreement, as to the condition of the goods hired even though
there were exemption clauses in the contract.
2.13.2 Fraud or misrepresentation
In Curtis Vs Chemical Cleaning and Dying co (1951) I. K. B 805 a lady put her
satin wedding dress for cleaning. She signed a receipt which contained a clause
exempting for defendants from all liability to article cleaned. When the plaintiff
enquired as to why her signature was required he was told that the defendants
would not accept liability for certain risks. After cleaning it was found that the
dress was completely stained. It was held that the defendants were not entitled to
rely on the exemption clause in respect of damage because the clause was inserted
to the contract due to fraud or misrepresentation. That is why it was observed “Any
behaviour by words or conduct is sufficient to be a misrepresentation if it is such
as to mislead the other party about the existence or extent of the exemption. If it
conveys a false impression, that is enough. So it can be stated that exemption
clause cannot exclude the liability for the personal fraud committed by a person.
Similarly an unreasonably onerous term in a standard form of contract cannot
be enforced by the court. For it is observed in John Lee and Sons Ltd Vs. Railway
Executive 1949 2. All E.R. 581 that “there is vigilance of the common law which
while allowing freedom of contract watches to see that is not abused.
2.14. SUGGESTED QUESTION
1. “Acceptance is to offer what a lighted match is to a train of gun power”
Discuss.
2. “In order to convert a proposal into a promise the acceptance must be
absolute and unqualified” – illustrate this rule.

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 33

LESSON - 3

CONSIDERATION
STRUCTURE
3.1 Definition
3.2 Agreements made without consideration
3.3 Executory, executed and past consideration
3.4 Exceptions
3.5 Adequacy and reality of consideration
3.6 Consideration must be real
3.7 Forbearance and compromise as consideration
3.8 Performance of a public duty
3.8.1 Performance of a duty owned to the promisor
3.8.2 Contractual duty to third party
3.8.3 Consideration in discharge of contract; rule in pinnel’s case, High
trees case.
3.9 Exceptions to the rule in pinnels case.
3.9.1 Promissory estoppel or quasi estoppel
3.9.2 Composition with creditors
3.10 Privity in consideration & privity of contract.
3.10.1 Privity in consideration
3.10.2 Privity of contract
3.10.3 At the desire of the promiser
3.10.4 Bailments
3.11 Suggested Questions.
3.1 DEFINITION
Section 2 (d) of the Indian Contract Act defines consideration as follows:
“When at the desire of the promisor the promise or any other person has done or
abstained from doing or does or abstains from doing or promises to do or to abstain
from doing something, such act or abstinence or promise is called a consideration
for the promise”. Black stone in his commentaries defines it as follows:
“consideration is the recompense given by the party contracting to the other”. In
Curie Vs Misa (1875) L. R 10 Ex. 153 it was defined as follows: “A valuable
consideration in the sense of the law may consist either in some right, interest
profit or benefit accruing to the one party, or some forbearance, detriment, loss, or
responsibility, given suffered, or under taken by the other”. Gratuitous promises
are unenforceable in English law. Under the Indian Contract Act any kind of act or
abstinence which is done or undertaken to be done as desired by the promiser will
be a sufficient consideration.
 34

Pollack defines consideration as “an act or forbearance of one party, or the

promise thereof is the price which the promise of the other is bought, and the
promise thus given for value is enforceable”. Under the Act consideration is
essential It is expressed in the Latin Maxium “Ex nudo pacto non oritur action (no
action arises from a nude agreement).
3.2 AGREEMENTS MADE WITHOUT CONSIDERATION
An agreement made without consideration is void. A gratituous promise is not
enforceable in law based on the maxim, “Ex nudo pacto no oritur actio”. Section 10
requires the presence of lawful element in consideration as an essential
requirement.
There are certain exceptions to the rule that an agreement made without
consideration is void. They are given by Section 25 of the Act An agreement made
without consideration is void unless:
1) It is expressed in writing and registered under the law for the time being in
force for the registration of document and is made on account of natural love and
affection between parties standing in a near relation to each other; or unless.
2) It is a promise to compensate whole or in part, a person who has already
voluntarily done something for the promiser something which the promiser was
legally compilable to do; or unless.
3) It is a promise made in writing signed by the person to be charged
therewith, or by his agent generally or specially authorized in that behalf, to pay
wholly or in part a debt of which the creditor might have enforced payment but for
the limitation of suits.
In any of these cases, such an agreement is a contract.
Sec. 25 (1) deals with an agreements without consideration. The agreement
comes into existence due to natural love and affection and is in writing. Hence it is
enforceable without consideration.
In Bhiwa Mahadshet Vs. Shivaram Mahadshet (1899) IBom L.R. 495 A sued B
to recover half share from him claiming it as ancestral property. The said suit was
dismissed on a special oath taken by B that the property was not ancestral. The
present suit was based on a registered document under which B had agreed to give
a half share. It was held that the agreement must be held to have been made for
natural love and affection and Section 25 (1) will apply.
Under Sec. 25 (2) a promise to pay for past voluntary service is binding. For
attracting this provision the service should have been voluntarily. Illustration (d) to
Section 25 gives an examples of past voluntary service done. “A supports B’s infant
son. B promises to pay A’s expenses in so doing”. This is a contract.
A promise to pay a time barred debt is enforceable if it is in writing signed by
the promisor is a person who would be liable for the debt if not time barred and
does not cover promises to pay time barred debts of third parties. An
acknowledgement of liability before the limitation period will revive the period of
limitation.
 35

3.3 EXECUTORY, EXECUTED AND PAST CONSIDERATION

Consideration may be classified into two categories, executory and executed.
It is called when the defendants promise is made in return for a counter promise
from the plaintiff. An agreement between seller and a buyer for the sale of goods for
future delivery on credit is an example. It is called executed consideration when it
is made in return for the performance of an act. The offer of a reward for an act
done is an example for the executed consideration. Under section 2 (d) of the Act
consideration may consist of a past, present or a future act.
Consideration must always be present at the time of making the promise, and
there is no such thing as a past consideration. In other words if the act has been
done before any promise is made it is called past consideration and a past
consideration is no consideration according to English Law.
3.4 EXCEPTIONS
1) A past consideration will support a subsequent promise if the consideration
was given at the request of the promiser. In Lampleigh Vs. Brathwait (1615) Hob.
105 the defendant requested the plaintiff to obtain for him a free pardon from the
king. For this purpose the plaintiff incurred defendant subsequently promised to
pay him 100 pounds for expenses and the trouble. When the defendant refused to
pay the plaintiff sued him. It was held that as the services were rendered at the
previous request of the defendant the agreement to pay was enforceable.
2) The existence of a precedent is a sufficient consideration for a subsequent
promise to pay the debt. If a debt barred by limitation is acknowledged by the
debtor, the creditor can sue, though the consideration for the acknowledgement
appears to be past.
3) A valuable consideration for a bill of exchange may be constituted by an
antecedent debt or liability.
Under the Act a past consideration is valid. It should move at the desire of the
promiser. In Sindha Vs. Abrakam (20 Bom. 755) it was laid down that past services
rendered to a minor at his request, which were continued after his attaining
majority were good consideration for his promise to pay. A past voluntary service is
convered by Section 25 (2) Under that Section “a promise to compensate wholly or
in part a person who has already voluntarily done something for the promisor was
legally compellable to do’ can be enforced.
3.5 ADEQUACY AND REALITY OF CONSIDERATION
Consideration need not be adequate to the promise but it must be some value
in the eye of law. The courts will not inquire into its adequacy. Lord Blackburn
observed in Bolton Vs. Madden (1873) L.R. 9 Q B 35. The adequacy of
consideration is for the court when it is sought to be enforced”. In Baiobridge Vs.
Firmstone (1838) 8A & E. 743. Bainbridge who owned two boilers for allowed.
Firmstone to weigh them provided they were restored in the same condition as they
were lent. Firmstone dismantled the boilers for weighing them and returned them
in that state. When Bainbridge sued. Firmstone pleaded the absence of
 36

consideration. It was held that there was detriment to the plaintiff from his parting
with the possession for a short time. (Which constituted consideration)
In De la Bere Vs Pearson (1908) I. K. B 280 the defendants offered to give
advice relating to investment. The questions and answers will be published in their
newspaper. The defendant on plaintiff request, recommended a stockbroker who
was an un discharged insolvent. The money sent by the plaintiff was
misappropriated. The defendant when sued by the plaintiff raised the plea of
sufficient consideration. It was held that publication in the paper have a tendency
to increase the sale of the paper. The possibility of this benefit was a good
consideration for their offer.
3.6 CONSIDERATION MUST BE REAL
Though consideration need not be adequate, it must be real and have some
value in the eye of law. In Thomas Vs. Thomas (1842) 2 Q B 851 it was laid down
that a desire to carry out the wishes of the deceased, did not amount to
consideration.
The consideration in a contract must be certain and lawful. Where a
consideration for the contract is illegal the contract will become illegal. Under
Section 10 of the Contract Act the presence of lawful consideration is essential for
enforcing an agreement. Section 24 provides that if any part of a single
consideration for one or more objects, or any one or any part of any one of several
consideration for a single object, is unlawful the agreement is void.
3.7 FORBEARANCE AND COMPROMISE AS CONSIDERATION
A forbearance to sue, may be consideration for a promise, even if there is no
waiver or compromise of the right of action. In Alliance Bank Ltd Vs Broom (1864)
62 E. R. 631 a debtor whose account was overdrawn wrote to the Bank promising
to deposit certain deeds as security for overdraft. When the bank sued for specific
performance it was held that the fact that the bank forbere to press the debtor for
payment for a certain time was good consideration for the promise.
A bonafide compromise of disputed rights cannot be attacked on the ground of
lack of consideration. If A alleges that B owes him Rs.100/- and B disputes the
debt but later promises to pay A Rs.50 in full satisfaction, this compromise is valid
and binding on both the parties. It may be that B had not owed anything to A or B
owed the full amount Rs.100. If this were not so no compromise would be worth,
for a party can always allege the absence of consideration. Compromise of a claim
arising out of an illegal contract is insufficient as consideration.
3.8 PERFORMANCE OF A PUBLIC DUTY
Where a person promises to do something which he is already bound to do
according to a duty imposed by law such as giving evidence in answer to a
subpoena, it is said that the consideration is insufficient. If the promise under
takes to do more than he is legally bound, it may be consideration. Thus in Glas
Brook Brothers Vs. Glamorgan Country Council the policy sued for sum of 2200
Pounds promised to them against a colliery company for providing a stronger guard
 37

than was necessary during a strike. It was held that they can claim the amount on
the promise.
3.8.1 Performance of a duty owned to the promisor
Where a person complies with the legal obligation imposed by a contract with
the promisor it cannot be consideration for the promise. In Ramachandra
Chinatman. Vs. Kalu Raju (1877) 2 Bom 262 a vakil having accepted a vakalath
situpulated for a special reward from the defendant if he was successful. When the
successful defendant fail to pay as agreed a suit was filed by the vakil. It was held
that there was no consideration proceeding from the plaintiff (vakil) when he
obtained the agreement.
3.8.2 Contractual duty to third party
The question of consideration may arise where performance of an existing
contract with a third party is to be treated as consideration for the contract. In
Shadwell Vs. Shad well (1860) 9 C.B 159 an uncle of the plaintiff wrote a letter
about the plaintiff’s intended marriage agreeing to provide 150 Pound to him per
annum till he earns 600 guineas as a barrister. After marriage the plaintiff had
never earned 600 guineas and he sued to recover the arrears of annuity. Held,
there was sufficient consideration to sustain the promise.
3.8.3 Consideration in discharge of contract; Rule in pinnel’s case, High trees case.
The rule is that full and exact performance will act as a valid discharge. If the
performance is only partial and offered in return for a promise to accept it as full
satisfaction of the duty it will not be a sufficient consideration and the promisor
may insist that the contract be completely performed A promise to pay less than
what is due under the contract cannot be regarded as a consideration. But if the
thing done or given is different from that which the recipient was entitled to
demand it will be sufficient consideration for the promise to discharge. In Pinnel’s
case (1602) 5 Co Rep 117. Pinnel brought an action against Cole for enforcing
payment of pounds 8.10s on 11.11. 1600 Cole pleaded that at the instance of
Pinnel he had paid pounds 5 2s 2d on 1st October in full satisfaction of the debt.
Pinnel had also accepted it. It was held that “payment of a lessor sum in
satisfaction of a greater sum was no satisfaction of the whole. But the gift of a
horse. Hawk or robe etc. in satisfaction is good. For it shall be intended that a
horse, hawk or robe etc. might be more beneficial to the plaintiff than the money in
respect of some circumstance, or otherwise the plaintiff would not have accepted it
in satisfaction”.
The rule in Pinnel’s case was, reaffirmed by the House of Lords in Foakes Vs.
Eeer (1884) 9 App Cas 605. In that case Dr. Foakes was indebted to Mrs. Beer sum
of 2,090 pounds. As agreed Foakes paid 500 pounds in cash and the balance in
instalments. Held, she was entitled to the payment of the judgement debt and to
interest till the date of final payment. Since Mrs Beer accepted a lessor sum in
satisfaction of the whole, there was no consideration for her promise to accept
anything less than the sum to which she was entitled.
 38

Though the Law Revision Committee in 1937 recommended for abolishing the
rule in Pinnel’s case, it has not yet been abolished. But the courts by applying the
principle of equity tried to neutralize the effect of the rule.
3.9 EXCEPTIONS TO THE RULE IN PINNELS CASE
3.9.1 Promissory Estoppel or Quasi – Estoppel
The principle of promissory estoppel was succinctly stated by Lord Cairns in
High Trees Case. “It is the first principle that if parties who have entered into
definite and distinct terms involving certain legal results afterwards by their own
act enter upon a course of negotiation which has the effect of leading one of the
parties to support that the strict rights arising under the contract will not be
enforced, or will be kept in suspense, or held in abeyance, the person who other
wise might have enforced those rights will not be allowed to enforce them where it
would be inequitable having regard to the dealings which have thus taken place
between the parties”. The principle behind the doctrine of estoppel is that a person
who makes to another a representation intended to be acted upon, and which is
acted upon to his detriment by the person to whom such representation is made
will be prevented from going back on or acting inconsistently with the
representation.
In Central London Property Trust Ltd Vs. High Trees House Ltd (1917) K.B.
130 the plaintiff in 1937 leased to the defendants a block of flats for a period of 99
years at a rent of 2500 pounds a years in 1940 due to war the defendants were
unable to let the flats. The plaintiffs agreed to reduce the rent to 1250 pounds. In
1945 the flats were again full. A receiver for the debenture holders of the plaintiff
company brought an action to recover the full rent under the original lease. The
suit was decreed in favour of the plaintiff. The reductions of rent was only a
temporary measure. So the full rent was payable for the last two quarters of 1945.
The plaintiff having agreed to forego the rent and the defendant acting upon it the
plaintiff were estopped from want of consideration for the promise.
In Hughes Vs. Metropolitan Railway Co (1877) 2 App. Cas. 409 a landlord gave
notice to the tenant to repair the building within 6 months. Failure to comply with
the notice will lead to forfeiture of lease. Subsequently the parties entered into
negotiations for the sale of land to the tenant. As the negotiations continued during
the notice period of six months no repairs was carried out. When the negotiations
for the sale failed to materialize the landlord filed a suit for possession claiming to
have forfeited the lease. It was held that the landlord (appellant) promised to
suspend the notice previously given. The tenant has acted upon this promise by
doing nothing to repair the premises. Hence it was held that the appellant
(landlord) was not allowed to take advantage of the forfeiture and the six months
period was to run only when the negotiations broke down.
The principle of promissory estoppel applies to the modification of discharge of
an existing obligation but not to the formation of a new contract. In Combe Vs.
Combe 1951 2 K. B. 215 a husband on divorce promised to pay 100 pounds as
 39

allowance to his wife. Based on this the wife did not proceed in a Court for
maintenance. When the husband failed to pay the wife sued him. It was held “that
there was no consideration for the promise as the wife’s forbearance was not in
return for the promise made to her; nor could the wife rely on promissory estoppel”.
If there is any variation in the mode, time or place of payment the variation
may be a good consideration for a promise to waive the rest of the debt. Thus a
debt may be discharged by the debtor agreeing to accept in full satisfaction
anything other than money. A book, a canary or a peppercorn may be accepted in
full satisfaction and the Courts will not go into the question of inadequacy of
consideration.
3.9.2 Composition with creditors
In addition to the principle of promissory estoppel it has long been recognized
that a debtor’s composition agreement with his creditor’s is binding even though
there is no consideration. A composition with creditors is an agreement whereby
each creditor undertakes to accept a lesser sum than is due to him in satisfaction
of a greater. As between the creditors there is consideration for the promises but
the debtor supplies none. However the agreement is binding on all parties and can
be pleaded by a debtor in an action by a creditor. The aim of a composition with
creditors is equal treatment of all the creditors.
Another exception is that payment of a part of a debt by a third party will
discharge the debt if it is accepted in full satisfaction even though the debtor is not
a party and supplies no consideration for it. In Hirachand Punamchand Vs. Temple
(1911) 2 K. B. 350 “the father of debtor wrote to the creditor offering to pay part of a
debt due on a promissory note in satisfaction of a whole by enclosing a draft for
that amount. After cashing the draft the plaintiff sued for the balance. It was held
that the creditors must be deemed to have accepted, the draft in full satisfaction
and the sons’ debt was extinguished”.
It is well established in English law that ‘consideration may be executory or
executed but not past. Under Indian law past consideration is valid, Sec. 2 (d)
states “when at the desire of the promisor the promisee or any other person has
done or abstained from doing…”
In English law it is necessary that consideration must move from the
promissee. The Act by Sec. 2 lays down that consideration may move from the
promisee or even from a stranger. In view of this provision the English rule that a
stranger to a consideration cannot sue has no application in India.
3.10 PRIVITY IN CONSIDERATION & PRIVITY OF CONTRACT
3.10.1 Privity in consideration
The English Case of Tweedle Vs. Atkinson (1861) 21. E.R. 762 laid down the
rule that a stranger to the consideration cannot sustain an action on the promise
made between two persons unless he has in some way intervened in the agreement.
Under the Indian law consideration may be furnished by the promisee or any other
person. In Chinnayya Vs. Ramayya 1881. 4 Mad 137 a lady by a registered deed
 40

gave her property to her daughter stipulating that an annuity of Rs.653 should be
paid to the plaintiff who was the brother of the old lday. The defendant (daughter)
executed an agreement in favour of the plaintiff promising to pay the annuity.
When she failed to pay the plaintiff sued to recover it. On the plea that the uncle
being a stranger to the consideration he could not sue it was held that
consideration might move under the Act from any person.
In Tweedle Vs. Atkinson 1861: 121. E.R. 762 an agreement between the
fathers of bride and bridegroom provided that each of them shall pay to the plaintiff
a fixed sum. When the bride’s father died without paying the amount an action
was brought against the executors of his estate for recovering the fixed sum. It was
held that no stranger to the consideration can take advantage of a contract
although made for his benefit.
Though under the Act consideration may proceed from a third party it does not
follow that a third party can sue on agreement. In English law in the case of
negotiable instrument it is not necessary that the person enforcing it should have
furnished the consideration. What the law requires that, consideration has at some
time been given. The American writer Williston observes. “The rule that
consideration must move from the promise is somewhat technical and in a
developed system of contract law there seems no good reason why A should not be
able for a consideration received from B to make an effective promise to C.
Unquestionably he may in the form of a promissory note, and the same result is
generally reached in this country in the case of an ordinary simple contract”.
3.10.2 Privity of Contract
It is a general rule of English law that a contract cannot confer any rights on
one who is not a party to the contract even though the object of the contract is to
benefit him. In other words a stranger to a contract cannot sue or rely for
protection on its provisions. This doctrine which prevents a third party to enforce a
contract operates with equal logic to prevent the contracting parties to enforce
obligations against a stanger. So that a contract between A & B cannot impose
liability upon C. The leading case on the doctrine of privity of contract is Dunlop
Tyre Co Vs. Selfridge Co 1915 A.C. 847 where it was held that an action will not lie
as the parties to the contract were Dew & Co and Selfridge & Co. The Dunlop
company could not sue on a contract to which they were not a party. (More about
this rule we will discuss it in a later lesson).
The doctrine of privity of contract has been considered once again by the
House of Lords in the case of Beswick. Vs. Beswick. 1958 A.C 58. In this case one
Mr. Peter beswick who was coal merchant was assisted by his nephew John in the
business. In 1962 he entered into an agreement with the said John for selling away
his business. This was done in consideration of a promise by John to employ Mr.
Peter Beswick as consultant and in the event of his death Mr. John agreed to pay
an annuity of 5 pounds per week to his widow. In pursuance of the said agreement
the business was taken over by John. On the death of Mr. Peter Beswick in
 41

November 1963, John failed and neglected to pay the agreed sum of 5 pounds to
the widow. The widow in the proceeding claimed arrears of the annuity and
claimed for the specific performance of the contract. She claimed this right on the
ground that she had locus standi to file the suit as a beneficiary and also as the
administratrix of Peter’s estate. It was held by the House of Lords that though the
widow of Mr. Peter Beswick is not entitled to enforce the obligation in her personal
capacity as she was a stranger, she could obtain specific performance of the
contract on the capacity of the personal representative of Mr. Peter.
This doctrine of privity of contract is subjected to various exceptions which will
be considered later. This doctrine is applicable under Indian law. The law in
general is that a stranger to the contract cannot sue, though under the Indian law a
stranger to consideration can sue.

3.10.3 At the Desire of the Promisor

The act constituting the consideration must have been done at the desire or
request of the promisor. Any act done at the desire of third party is not a
consideration. Some times a question may arise as to whether thing done by a
person claiming under a promise was in fact done at the desire of the promiser. In
Kedarnath Bhattacharji Vs. Gorie Mahomed 1886 I. L. R. 14 cal 64 the defendant
agreed to subscribe. Rs. 100/- to a fund for the construction of a Town Hall in
Howrah. The plaintiff, Vice-Chairman of the Municipality entered into a contract
with a contractor for building the Town Hall. When the defendant failed to pay
Rs.100/- as agreed, a suit was filed. It was held that the promise was enforceable.
The act of the plaintiff in entering into a contract with the contractor may be said to
have been done at the desire of the defendant which will constitute consideration.

In Doraswamy Ayyar Vs. Arunachala Ayyar A.I.R. 1936 Mad 135 money was
raised for the repair of a temple. The defendant put himself down in the list
agreeing to subscribe Rs.125. When he committed default an action was brought
against him. It was held that a promise to pay a subscription in order to meet a
liability already incurred was unenforceable, since it could not be said that there
was any request by the promisor to the promisee to do something in consideration
of the promised subscription.

In N.S. Society Vs. Kunjukrishna Pillai A.I.R. 1964 Ker 265 it was held that “a
promise to pay Rs.10,000/- for starting a College become enforceable when steps
were not taken for the starting of the college”.
3.10.4 Bailments
Difficulties arise in the case of bailments as to the presence of consideration.
The question came before the court in the case of Coggs Vs. Bernard 1703 2 L.R.
909. The defendant has undertaken to remove several containers of brandy from
one place to another. Some quantity of brandy was lost because of the careless
manner in which the work was done. When sued for the loss the defence was that
 42

there was no consideration. But it was held that the owner trusting him with the
brandy is a sufficient consideration to oblige him to a careful management.
Cheshire observes, ‘confusion will be avoided only if it is remembered that bailment
is a relationship sui generic and that, unless is sought to increase or diminish the
burden imposed upon the bailee by the very fact of the bailment; it is not necessary
to incorporate it into the law of contract and to prove consideration’.

A question normally arises whether loss resulting due to improper or negligent

performance can be recovered by the person even though it is a gratituous service.
In Delabere Vs. Pearson 1908. I. K. B. 280 the defendant advertised in their
newspaper offering to given advice relating to investments. The plaintiff wrote and
asked the name of a good stock broker. The defendant recommended a stock
broker who was an undischarged insolvent. The money sent by the plaintiff were
misappropriated. The plaintiff sued to recover the sums from the defendant. The
court of appeal held that he was entitled to. The possibility of an increase in the
circulation of the paper, because of the publication of this advice in the letter form
in their newspaper was a good consideration for their offer.

3.11. SUGGESTED QUESTIONS

1. “Past consideration is no consideration” comment.
2. Define consideration state the exception to the rule that an agreement
without consideration shall be void
3. Distinguish between executory, executed and past consideration.
4. “A stranger to consideration cannot sue” state the exceptions to the said
rule.

 43

LESSON - 4

CAPACITY OF PARTIES
STRUCTURE
4.1 Capacity of parties
4.1.1 Introduction
4.1.2 Indian law
4.1.3 Minority
4.2 Contracts for necessaries
4.3 Other beneficial contracts
4.4 Contracts of marriage by or on behalf of a minor.
4.5 Contracts of apprenticeship and contracts of service.
4.6 Estoppel
4.7 Infant relief Act, 1874.
4.8 Restitution
4.9 Delictal liability
4.10 Ratification
4.11 Lunatics or persons of unsound mind
4.11.1 Drunken persons
4.11.2 Capacity of married woman
4.11.3 Alien enemy
4.11.4 Foreign sovereigns and Ambassadors
4.11.5 Corporation
4.11.6 Natural possibilities
4.11.7 Legal possibility
4.12 Suggested Questions

4.1.1 INTRODUCTION
Certain persons are incapable of binding themselves wholly or partially by a
promise or of enforcing an agreement made to them. They are infants, insane
persons, corporations and other persons.
Infancy – English Law
The age of majority at common law was 21 year which was reduced to 18 years
by the Family Law Reform Act, 1969. All persons below the age are known as
infants. Under common Law a contract made by an infant is voidable at his option
if it belongs to any one of the two types.
 44

(a) Such of those contracts are binding on the infant unless avoided by the
infant.

Certain contracts in which the infant acquired an interest of a permanent or

continuous nature will come under this category. (e.g.) acquiring shares in a
company or an interest in it.

b) Contract which are not binding on the infant until he ratifies them on
attaining majority. In this category will fall other contracts which were not
continuous in their operation (e.g) a promise to pay for goods supplied other than
necessaries.
4.1.2 Indian Law
Under Section 10 of the Contract Act the parties to a transaction must be
competent to contract. Under Section 11 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.
4.1.3 Minority
A person attains majority under the Indian Majority Act, 1875 as soon as he
completes 18 years. Where a guardian of a minor’s person or property is appointed
by a court such person attains majority on his completing 21 years.
4.2 CONTRACT FOR NECESSARIES
The only class of contracts which is not voidable at the option of a minor is a
contract ‘for necessaries’. The term necessary is not restricted to things which are
required to maintain a bare existence such as bread and clothes, but includes
articles which are reasonably necessary to the minor having regard to his status in
life. A watch or transistor radio may be considered to be necessaries but not
articles of luxury like a diamond ring or necklace. In Ryder Vs. Wombwell (1858)
L.R. 3 Ex 90 the defendant, a minor son of a deceased baronet having on income of
500/- pounds a year purchased from the plaintiff a pair of crystal, ruby and
diamond solitaires and a goblet in silver gilt. When sued for the price it was held
that neither of these articles could be considered as necessary. Similarly in Nash
Vs. Inman (1908) 2 K.B.I.I a minor who was an undergraduate at Cambridge
bought eleven waistcoats from N. It was proved that the minor was provided with
sufficient clothes. It was held that the waistcoats were not necessaries and It, was
not liable to pay for any of them.
In our country a person supplying necessaries to a minor is entitled to be
reimbursed from the property of minor. This is provided by Sec 68 of the Contract
Act which is given below. “I 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 on life, the person who has furnished such
supplies is entitled to be reimbursed from the property of such incapable person”.
While the liability in English law is personal, in Indian Law the minor’s property is
made liable for the necessaries supplied
 45

In Nash Vs. Inman (1908) 2. K. B. I two conditions were laid down for making
the estate of a minor liable for the supply of necessaries to him. (1) Goods
necessary for his station in life were supplied 2) The minor has not sufficient supply
of these necessaries.
The liability does not depend upon the minor’s consent. The liability arises
because of the supply of necessaries and is quasi contractual in nature.
4.3 OTHER BENEFICIAL CONTRACTS
Other contracts like contracts of service and apprenticeship, entered by the
minor are binding on him provided they are beneficial to him. In Halsbury’s Law of
England it is stated as follows “At common law an infant’s contracts are in general
voidable at the instance of the infant though binding upon the other party.
Exceptions to this rule are contracts for necessaries, and certain other contracts
such as contracts of service and apprenticeship, it they are clearly for the infant’s
benefit such contracts are good and binding upon an infant. Contracts which are
obviously prejudicial to an infant are wholly void”.
In Chaplin Vs. Leslie Frewin (Publishers) Ltd 1966 cht 71 the plaintiff an
infant, son of Charlie Chaplin assigned to the publishers (defendant) the right to
publish an autobiography of himself which was to be written by unknown writers.
Plaintiff alleged that the work on completion showed aim as a deprived person and
sought to repudiate the contract, it was held that as the contract is binding on him
as it enabled him to earn money as an author and it was a beneficial contract.
In India, a Full Bench of the Madras High Court in Raghavachariar Vs
Srinivasa (1917) 40 Mad 308. (F B) it was laid down that a mortgage in favour of
minor who has paid the consideration money is not void and it is enforceable by
him or any other person on his behalf. In Rajani Vs Prem Adib A.I.R 1949 Bom 215
a film producer entered into an agreements with a minor girl to act in a film. The
agreement was entered between the father of the girl with the producer. On a
breach of the contract the minor sued through her father. It was held that the
agreement with the father was void since the consideration moving from the father
was the minor’s promise to act, and as the minor could not promise there was no
consideration.
But where an infant has paid for something and consumed if he cannot
recover it in a court of law. In Valentini Vs. Canali (1890) 24, R.B.D. 166 a minor
agreed to take lease of a house and agreed to pay 100 pounds for the house. He
paid a part of it and executed a promissory note for the balance. When the minor
having used the furniture for some time filed a suit for recovery of the amount paid
by him, it was held that he cannot recover the money so paid unless there has been
a total failure of consideration.
4.4 CONTRACTS OF MARRIAGE BY OR ON BEHALF OF A MINOR
A contract of service or apprenticeship, which is for the benefit of the infant
can be enforced against the infant whether the contract was entered into by the
infant or on behalf of the infant. A contract of apprenticeship entered into by the
 46

guardian is protected by the Apprentices Act, 1961. In the English Case of Roberts
Vs. Grav (1913) I.K.B 520 an infant entered into an agreement to go on a billiards
playing tour. It was held that the education which a billiards player of the receptive
capacity as the infant would get from playing continually month after month with
John Robert, (Professional) was very valuable. As such the minor could not
repudiate to contract since it was for the benefit of the infant.
In Doyle Vs. White city Stadium Ltd. 1933 I.K.B. 110. boxer who was an
infant agreed to be bound by the rules of the licensing authority (Boxing board) for
getting a licence. A sum of 3000 pounds was with held from him by the Boxing
Board because he was disqualified in a contest for hitting below the belt. It was
held that the agreement was binding as the licence enabled him to become
proficient in his profession.
Legal effect of minor’s agreement
Under Section 11 of the Contract Act a minor is incompetent to contract.
Generally a minor’s agreement is void. On the other hand it may be enforceable
against the other contracting party, but not against the minor.
4.6 ESTOPPELS
Even if a minor misrepresents about his age a minor is not estopped from
disclosing his true age in a litigation. In Mohori BiBi Vs. Dharma Doss Ghose
(1903) 30 Cal 5 39 P.C a minor plaintiff for whom a guardian was appointed
executed a mortgage for Rs.20,000 in favour of a money lender. Who paid only
Rs.8000/-. The minority of the plaintiff was known to the defendant. When the
minor sued for setting aside the mortgage on the ground of his minority the
defendant (money lender) contended that the contract is only voidable and the sum
borrowed must be refunded. Rejecting the argument it was held that the minor’s
contract was void from its inception and the question of refunding the amount
under Section 65 of the Contract Act will not arise.
This ruling been followed in the case of Mir Sarwarjan Vs. Fakruddin. 1912.
39 cal 232 P.C. In that case a contract for the purchase of immovable property was
made by the guardian of a minor. When the minor filed a suit for specific
performance it was held that as the minor was not bound by the contract, it lacks
mutuality. Hence the suit for specific performance was dismissed. In Arumugham
Vs. Doraisingh 1914 37. Mad 28, a minor after attaining majority give a promissory
note as renewal of an earlier promissory note executed during his minority. It was
held that the fresh promissory note was unenforceable as the consideration for the
pro-note was the note executed during minority.
4.7 INFANT RELIEF ACT, 1874
Section 1 provides that all contracts entered into by minors
a) for the repayment of money lent or to be lent; or
b) for goods supplied or to be supplied; (other than necessaries) and
c) all accounts stated with minor shall be absolutely void.
 47

In Courts Co Vs. Browne Lecky, 1947 K B 104 a minor had an overdraft with a
bank which was guaranteed by X and Y. The bank sued X and Y for repayment. It
was held that as the loan by the bank to B was void, X and Y could not be made
liable.
Contracts under the English Act cannot be ratified after attaining majority
even if there is a fresh consideration Sec. 2 reads as follows: “No action shall be
brought whereby to charge any person upon any promise made after full age, to pay
any debt contracted during infancy, or upon any ratification made after full age, of
any promise or contract made during infancy, whether there shall or shall not be
any consideration for such promise or ratification after age”.
A minor may make a new contract after attaining full age. It is a fresh
contract and is not a ratification of the old contract. If a minor has taken the
benefit of a void contract he cannot retain the goods and seek to recover the money
paid for them. Valentini Vs. Canali (1889) 24, Q.B.D. 166 it was held that the
minor could not recover the money paid for something which he had used. But
money paid by a minor under void contract can be recovered if there is a failure of
consideration. If a minor obtains goods by the exercise of fraud he may be ordered
by court to return the goods as are in his possession. The question arises whether
a minor can recover the price of non-necessary goods on its return to the seller. It
is doubtful whether any right of recovery exists under void contract. There is right
of recovery only when there is a total failure of consideration.
The next question is whether the property in non-necessary goods passes to
the minor under a contract. Though, the contract is absolutely void the better view
is that the property does pass to the minor at all events where he has paid the price
of the goods.
4.8 RESTITUTION
Under this doctrine the minor will be ordered to restore non-necessary goods
to the person whom he has defrauded provided the goods are in his possession. The
equitable remedy of restitution is available where a minor has fraud …..
represented himself to be of age. He can be compelled to restore the property to the
person deceived, provided it is identifiable and still is in his possession. But it is
not possible to make him repay a loan obtained by fraud which is spent
subsequently. It was observed Restitution stops where repayment begins”. In
Leslie (R) Ltd Vs. Shell (1914) 3 K.B. 607 a money lender having given two loans of
200 = pounds each to a minor (totaling 400 pounds) sued to recover it. At the time
of the loan the minor falsely represented that he was of full age. It was held that no
action could be maintained for recovering the money. It was further observed.
“Equity required him to restore the ill-gotton gains or to release the party deceived
from obligations or acts in law induced by fraud but scrupulously stopped short of
enforcing against him a contractual obligations entered into while he was an
infant”.
 48

In Stocks Vs. Wilson, (1963) 2, L. B 235 the defendant falsely representing as

a major induced the plaintiff to sell some furniture, which are not necessary to him,
for 300 pounds He subsequently sold some of the goods for 300 pounds and gave a
bill of sale for the remainder as security for the sum of 100 pounds lent to him by
another person. The same goods were later sold by him. The plaintiff claimed in
equity the value of goods. It was held the plaintiff cannot recover the value of the
goods as this would be to enforce a void contract.
In Mohori Bibi Vs. Dharmadas Ghose 30. Cal 539, (facts already stated) it was
held that the relief of cancellation had to be granted as the plaintiff was entitled to
it under Specific Relief Act. The creditor’s request that the minor should repay a
part of the amount advanced on the mortgage was negatived. Section 64 of the
Contract Act applies only to voidable contracts and cannot apply to the agreement
of a minor which is void. Similarly Section 65 of the contract is not applicable. The
court held that justice did not require that money advanced with full knowledge of
infancy must be returned.
4.9 DELICTAL LIABILITY
Though an infant is generally liable for his torts, a breach of a contract may
not be treated as a tort so that a minor may be made liable. The tortious act
complained of must be more than misfeasance in performing a contract. It must be
separate from and independent of it. In Jennings Vs. Rundall (1799) 8. A minor
hired a mare and due to over riding injured her. It was held that he could not be
made liable by framing an action arising out of contract as an action in tort.
In Ballet Vs. Mingay (1943) I. K. B. 281 a minor who hired an amplifier and a
microphone parted with it to X in breach of the contract. When sued for non-
return it was held that the infant was liable, because his parting with the amplifier
set was outside the contract altogether. In Bunard Vs. Haggis (1863) 4 C. B. N. S
an infant who hired horse, for riding with instructions not to use her jumping. He
lent her to a friend who jumped and killed her. It was that the infant was liable.
The Calcutta High Court in Hari Mohan Vs. Dalamiya (1934) 61 cal: 1075 has
refused to hold a minor liable in tort for money lent on a bond.
4.10 RATIFICATION
Ratification relates back to the date of making a contract, Since a minor’s
agreement is void, there can be no question of ratifying it. Upon the same principle
a promissory note given by a person on attaining majority in settlement of an
earlier one signed by him as a minor cannot be enforced in law. Such a note is void
for want of consideration. In Suraj Narain, Vs. Sukhu Ahir 51 All. 164 a minor
borrowed money and executed a second bond after attaining majority the respect of
the original loan and the interest due on it. When the creditor sued it was held that
a suit on a second bond was not maintainable as the bond was without
consideration and did not come under Sec. 25 (2) of the Contract Act. (Promise to
compensate for something done voluntarily for the promisor)
 49

In Arumugam Chetti Vs. Duraisinga Thevar 37 Mad 38 it was held that there
can be no ratification of a transaction which is void owing to the promisor
possessing no contractual capacity at the time. Nor can a void deed from a good
consideration for a fresh contract made by the minor on attaining majority.

4.11 LUNATIES OR PERSONS OF UNSOUND MIND

Under the English law a lunatic’s contract is not void, but voidable at his
option. In India a person of unsound mind is incompetent to contract. The supply
of necessaries to lunatics is governed by Section 68 of the Act. Illustration (a) to
that section will make the position clear. ‘A supplies B, a lunatic with necessaries
suitable to his condition of life. A is entitled to be reimbursed from B’s property”.
What is a sound mind for the purpose of a contract is dealt in Section 12. “A
person is said to be of sound mind for the purpose of making a contract if, at the
time when he makes it, he is capable of understanding it and of forming a rational
judgement as to its effect upon his interest A person who is usually of unsound
mind, but occasionally of sound mind, may not make a contract when he is of
unsound mind”.
In Inder Singh Vs. Parameshwar Dhan Singh (1957) A.P. 491 a congential idiot
agreed to sell a property worth Rs.25,000/- for Rs.7,000/- His mother sued to set a
side the agreement on the ground that he is an idiot, Holding the sale to be void it
was observed, “A man incapable of judging the consequences of his act should not
be held to be bound by his contract”.
The second of the section states that a person who is usually of unsound mind
may make a contract when he is of sound mind. But, where a committee or a
manager of the estate of a lunatic is appointed, under the Indian Lunacy Act, 1912,
no contract can be entered into by a lunatic in respect of his property, even though
at the time of the contract he may be in a lucid interval.
4.11.1 Drunken persons
An agreement by a drunken person is void. The provision is similar to an
agreement made by a minor and lunatics. Illustration (b) to section 12 makes it
clear. “A sane man who is so drunk that he cannot understand the terms of a
contract or form a rational judgement as to its effect on his interest, cannot
contract while such drunkenness lasts. Mere drunkenness is no ground for
resisting a suit to enforce a contract. But where his capacity to judge is affected by
drink the court will refuse specific performance.
In English law a contract by a drunken person is voidable. He can avoid it or
affirm it in which case it is binding on him. In Mathews Vs. Baxter (1873) L.R. 8 Ex
132 a drunken person agreed to purchase a house and land. When he became
sober he affirmed the contract, but later repented the bargain. When sued, he
pleaded this drunkenness as a defence: It was held that though the contract is
voidable since he ratified while he was sober, he was liable.
 50

4.11.2 Capacity of married woman

The contract of a married woman was void before 1882. Under the common
law, Husband and wife are one person. On marriage, her property vests with her
husband. She had no property with which to contract. After the passing of the
Married Woman’s Property Act, 1882 the disability has been removed.

In our country a married woman is not disqualified from entering into a

contract. Marriage does not take away or destroy any capacity possessed by her in
that respect. A married Hindu woman cannot bind her husband without his
authority. She is liable on a contract to the extent of her Stridhanam property.
4.11.3 Alien enemy
Contracts with alien enemies are illegal in times of war. Though a person can
contract with an alien he cannot do so after the commencement of hostilities. It is
unlawful to perform a contract during war though it is concluded before the war
broke out. The reason is that such detrimental contract tend to benefit the enemy
country or to disturb the good relation of a country with a friendly country. All the
subjects are warned by the declaration of war, not to have any dealings with the
enemy. The test of an alien enemy does not depend upon his nationality, but upon
his place of residence or business. A contract entered during peace time may
become unlawful after the war and its performance may be suspended or dissolved.
It may even become void because of the long delay and impossibility of
performance.
4.11.4 Foreign Sovereigns and Ambassadors
Under English Law foreign sovereigns and Ambasadors have the legal capacity
to enter into a contract in England. But proceeding can be initiated against them
only if they voluntarily submit to the jurisdiction of local courts (English Courts).
In our country the same rule is applicable. In Mighell Vs. Sultan of Johore 1894 I.
Q. B. 149 a foreign sovereign. Sultan of Johore, residing in England made a
promise to marry the appellant herein. When sued for a breach of promise it was
held that the foreign sovereign is immune from civil proceedings in England.
4.11.5 Corporation
A Corporation is an artificial person created by law which is distinct from
individual persons who are members of the corporation. Under English law there
are two categories of associations Viz. Incorporated and unincorporated association.
An example of the former is companies which are registered under Companies Act,
and of the latter is a partnership. Another classification is corporation aggregate
(Registered company). A corporation is a legal person which can own property and
can sue and be sued in its own name.
4.11.6 Natural Personalities
The contractual capacity of a corporation is limited by natural personalities
and by legal personalities. A corporation being an artificial person can only
contract through an agent. As such it cannot enter into any contract of a strictly
personal nature. It cannot act as solicitor, doctor or an accountant. It cannot
 51

enter into any personal contracts like contracts to marry. A corporation cannot be
made liable for an intentional or fraudulent act.
4.11.7 Legal Personality
The doctrine of Ultravires. In the case of a company, incorporated under the
Companies Act it is bound by the objects listed in the memorandum and articles of
association, If it makes any contract which is inconsistent with it, the contract is
void and unenforceable as being ultravires the company.
The leading case on this doctrine is Ashbury Railway Carriage Co Vs. Riche
1875. 7. H.L. 653. The company was incorporated with the object of making and
selling wagons and carriages, and rolling stock and to carry on the business of
Engineers and to work and sell mines. It contracted to assign to another company
a concession it has bought for contracting a railway in Belgium. It was held that
the contract relating to the construction of railway as opposed to railway stock was
ultravires the objects and hence void. Even a ratification made subsequently by
the shareholders could not make the contract binding on the company.
The general rule is that contracts entered by company must bear its seal. But
routine matter which occurs frequently did not require a seal. The primary object
of the doctrine ultravires is to protect the interests of creditors and investors in the
company. In our country if a contract has to be concluded in writing on behalf of
the company it must be signed by any person acting under its authority expressly
or impliedly.
But the doctrine of ultravires has of late been criticized, because of the
hardship caused by its application in modern times. That is why the European
Communities Act provides that a person having transactions with a company which
is decided by the directors shall be deemed to be free from any limitation prescribed
by the memorandum of association. Any person involved in such transaction is
not bound to enquire into the capacity of the company to enter into and such
transaction or to any such limitation or letter on the powers of the directors. They
are further deemed to have acted in good faith.
4.12 SUGGESTED QUESTIONS.
1. ‘Comment on the contractual capacity of minors with reference to
leading cases.
2. Certain person are by law incapable, wholly or in part of binding
themselves by a promise or of enforcing a promise made to them’
Discuss.
3. Discuss the capacity to contract in the case of aliens and foreign
soverign’s

 52

LESSON – 5

FREE CONSENT
STRUCTURE
5.1 Free consent, coercion and undue influence
5.1.1 Coercion
5.1.2 Economic pressure
5.2 Undue influence
5.3 Indian law
5.4 Different forms of influence
5.5 Menal distress
5.5.1 Presumption of undue influence
5.5.2 Transaction with women
5.5.3 Unconscionable bargains
5.6 Rescission
5.7 Suggested Questions

5.1 FREE CONSENT, COERCION AND UNDUE INFLUENCE

Introduction
According to Section 10 of the Contract Act all agreements are contracts if they
are made by the parties. Thus we see that free consent is one of the essential
element of a contract. According to Section 14 of the Act consent is said to be free
when it is not caused by coercion, undue influence, or fraud or misrepresentation
or mistake.
5.1.1 Coercion
A contract entered into under duress or undue influence is voidable at the
option of the party coerced or influenced, because the consent to contract is not
freely given.
Section 15 of the Act defines coercion as follows: 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 an
agreement”.
The corresponding component in English law is known are ‘duress” At
common law, duress consists, in actual threatened violence or imprisonment. To
constitute duress, the act or threat must be aimed at the life or liberty of the other
party to the contract or the members of his family, Under the Contract Act, the act
or threat may be aimed against even a stranger. The duress must be applied to
man’s person and not to his goods alone. Under the English law the threat or the
act must proceed from one of the parties to the contract or his agent. Under the
 53

Indian Contract Act the threat or the act may proceed from any other person. It
may even proceed from a third party to the contract.

What constitutes an act forbidden by the Indian Penal Code has to be decided
by a civil court. In Ranga Nayakammal Vs. Alwar chetty. (1889) 13, Mad 214, it
was not held that an adoption by a Hindu widow aged 13 years was not binding on
her. In that case it was found that the relatives of the adoptee boy obstructed the
removal of the corpse of her husband from her house until she consented to the
adoption.
In Chikka Ammiraju Vs. Chikkam Seshamma A.I.R. 1918 Mad 414 a Hindu
induced his wife and son, by the threat of suicide, to execute a release in favour of
his brother with respect to certain properties which they claimed as their own. It
was held by the majority through a threat to commit suicide was punishable under
the Indian Penal Code, it must be deemed to be forbidden as an attempt to commit
suicide was punishable under Sec 306 of the Penal Code., The minority judgement
seems to favour the other view namely that unless an act is made punishable it
cannot be said to be forbidden.
Compulsion of law is not coercion under Section 15 of the Contract Act in
Andra Sugars Ltd. Vs. State of Andra Pradesh 1968. A. SC. 599 it was held a cane
grower is not bound to sell the cane to the factory of his area, but if he does, the
factory is bound to accept it. It is an agreement not caused by coercion undue
influence, fraud, misrepresentation or mistake. It is neither void nor voidable. It is
a contract. When a person threatens another that a criminal prosecution will be
launched against him it is not an act forbidden by the Indian Penal Code. Such an
act could be forbidden by the Penal Code if it amounts to filing a false charge. In
Askari Mirz Vs Bibi Jai Kishori 1912. 16. I.C. 344 a minor borrowed on two
mortgage deeds. He agreed for a compromise though the mortgage were void. Later
he put up the plea that the compromise was entered, because he was threatened
with the prosecution for falsely misrepresenting his age, and that amounted to
coercion. It was held that it is not correct to say that a contract is vitiated by a
more threat to bring a criminal charge If the charge was a true one, the plaintiffs
case comes to an end for a threat to bring such a charge is not an act forbidden by
the Penal Code.
5.1.2 Economic Pressures
In D & C Builders Ltd Vs. Rees (1933) 2 Q. B. 671 it was held that promise by
the defendant to guarantee payment of certain promissory notes was voidable,
because the promise had been extorted by implied threats that the defendants son
would be prosecuted for forgoing the defendant’s signature. It is suggested that the
concept of economic duress should be recognized in relation to the renegotiation of
a contract and it should be recognized in the law of contract.
A threat by a party to prosecute the other for a criminal offence will be a
ground for relief in equity though it would not be effective in common law. In
Williams Vs. Bayley (1886) L.I.R. H. L. 200 a father filed a suit for the recission of a
 54

mortgage which was executed in favour of a banker. His son gave promissory
notes to the banker forgoing the father’s signature. The banker stated to the father
without any threat that he will prosecute the son for forgery. To avoid this the
father executed a mortgage in return for the delivery to him of the promissory
notes. It was held that the mortgage should be set aside. In another case also it
was held that a guarantee obtained due to threat to prosecute was held
unenforceable. In Mutual Finance Co Ltd Vs. John Wetton & Sons Ltd 1037 2 K. B.
339 a company was sued on a contract of guarantee. It was proved that the
contract was obtained as a result of a threat to prosecute one of the family (the
defendant company was a family undertaking) for forging a previous guarantee.
When the coercion was applied the plaintiffs knew that the father of the alleged for
getter was ill and that the shock (of forgery) might kill him It was held that the
guarantee could not be enforced. But in Cooper Vs Crane (1891) P.O. 399 a
mortgage contracted under the threat of suicide was held not vitiated by coercion,
as no force or threat was exercised against the other party.
5.2 UNDUE INFLUENCE
The term undue influence has been used to describe the doctrine of coercion.
It is also referred to as “equitable fraud”. It may arise in case “where the parties
stand to one another in a relation of confidence which puts one of them in a
position to exercise over the other an influence which may be perfectly natural and
proper in itself, but is capable of being unfairly used”. Undue influence in deemed
to be present in two instances. 1) Where a person exercised undue influence in the
sense of domination over another person (2) Where there is an abuse of a duty of
care and condense imposed by one on the other, because of a relationship emerging
from their association. In these words the existence of a confidential relationship
between the parties leads to the presumption that undue influence would have
been exercised. The relationship is presumed in the following cases 1) Parent and
child 2) Guardian and ward (3) Lawyer and client 4) Spiritual head and his disciple
5) Doctor and his patient.
In the case of fiduciary relationship between two parties, the nature of the
relationship must be such, so that is can justify the presumption of undue
influence. But this presumption of undue influence will not arise, if a gift is made
by the father to son or by the mother to her daughter. The presumption of undue
influence can be rebutted, if it is shown that the agreement was a result of a
transaction between two free and independent persons. If it is provided that the
person has received independent advice from outside, before the completion of the
contract it is sufficient.
In Smith Vs. Kay (1859) H. L. C. 750 a young man has incurred liabilities to
the appellant because of the influence of an old man who had strong influence over
him. The old man profess to help the Youngman in a career of extravagance. In
the subsequent proceeding it was held that the young man is entitled to the
protection of the court. In Tufton Vs. Sperni (1952) 2 T.L.K 516 a committee
consisting of the plaintiff and the defendant, induced to form a Muslim Cultural
 55

Centre in London, the plaintiff providing the funds. The defendant induced the
plaintiff to purchase his house for the purpose of establishing a cultural centre,
The price paid by the plaintiff for exceeded its market value. The contract was set
aside.
In Powel Vs. Powell (1900) L. ch. 243 a young woman executed a settlement
under the influence of her stepmother, sharing her property with the children of the
stepmother of second marriage. Though she received independent advice from a
solicitor it was found later, that he was also acting for the other parties also.
Though the solicitor expressed disapproval of the transaction he had not withdrawn
his services. When the plaintiff sued to set aside the settlement it was held that the
settlement should be rescinded. In Allcard Vs Skinner (1887) 36 Ch. D. 145 the
plaintiff was introduced by her spiritual advisor to the defendant a lady superior of
a protestant community. Later she became a member of that community and in
pursuance of a vow of poverty transferred her property to the protestant
community. Due to the rule of obedience she could not get outside advice before
the transfer of her property. She made a will in favour of the defendant. When she
left the sisterhood she revoked the will, but no steps were taken for six years to get
back the property. It was held that by her inactivity she had acquiesced in the gift
made to the sisterhood. Accordingly her claim to get back the property was barred
by her act.
A transaction which is result of an undue influence can be set aside the
person who exercises the influence, It can also be set aside against a person
having notice of the fact that undue influence was used. Where, money or property
was transferred due to the transaction, it can be recovered from such person.
5.3 INDIAN LAW
Section 16 of the Contract Act defines undue influence as follows. “A contract
is said to be induced by undue influence, where the relations subsisting between
the parties are such that one of the parties is in a position to dominate the will of
the other and uses that position to obtain an unfair advantage over the other”.
In particular and without prejudice to the foregoing principle, a person is said
to be able to dominate the will of another.
a) Where he holds a real or apparent authority over the other or where he
stands in a fiduciary relation to the other; or
b) Where he makes a contract with a person whose mental capacity is
temporarily or permanently affected by reason of age, illness or mental or bodily
distress”.
“Where a person who is in a position to dominate the will of another, enters
into contract with him, and the transaction appears, on the face of it or on evidence
adduced, to be unconscionable, the burden of proving that, such contract was not
induced by undue influence shall lie upon the person in a position to dominate the
will of the other”.
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Nothing in this Section shall affect the provisions of section III of the Indian
Evidence Act, 1972.
The doctrine of undue influence is also referred in common law as equitable
fraud. Where one person exercises over another certain undue pressure, it is
presumed to be present. Where like existence of confidential relationship is proved,
between the parties, the exercise of undue influence by one party over another will
be presumed. It is not every relationship that raises the resumption of undue
influence. The relationship must be one of a limited class which is regarded as
suggesting undue influence. The relationship between parent and child solicitor an
client, doctor and patient, guardian and ward raises the presumption of undue
influence. In Tate Vs. Williamson (1866) L.R.2 Ch App.55. T an under graduate in
Oxford having been indebted to sum of $ 1000/- asked his great uncle to advice
him as to how he can find the means to pay the debt. The uncle being deputed his
nephew the defendant to do the needful. In the course of the conversation T wished
to sell part of his estate. The defendant, offered to buy it for 7000 pounds though
surveyor’s report obtained by defendant put the value at 20000 pounds. Without
disclosing this fact the defendant purchased the property. After one year T died.
When sued it was held that purchase has to be set aside.
When it can be said that one party is able to dominate the will of another. In
cases where trust and confidence is reposed by the parties or where the parties are
not equally placed the presumption of undue influence arises. Illustration (a) to
Section 16 makes the position clear. A having advanced money to his son B, daring
his minority, upon B’s coming of age obtains, by misuse of parental influence, a
bond from B for a greater amount than the sum due in respect of the advance. A
employs undue influence.
The ingredients of Section 16 are two in number; they are:
1) One of the contracting parties dominates the will and mind of another one of
the parties to a contract has a real or apparent authority over the other or stands in
fiduciary relationship to the other.
2) The dominating party has taken an unfair advantage over the other party,
whose mental capacity is affected by reason of age or illness. In other words one of
the parties is strong enough upon whom the other person has to depend, because
of certain mental or bodily infirmity, If the two elements are present in a contract
the transaction is unconscionable. The doctrine of undue influence does not
protect persons who voluntarily agree to the terms of a contract out of foolishness
or lack of foresight. A plea of undue influence can be raised only by party to a
contract and not by a third party.
5.4 DIFFERENT FORMS OF INFLUENCE
Sub section (3) of Section 16 makes division of the subject matter based on the
origin of the relation of dependence which makes undue influence possible. The
relationship may arise (a) from a special authority or confidence committed to the
donee or from feebleness in body or mind of the donor. In Subhas Chandra Vs.
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Ganga Prasad (1967) I.S.C.R. 331 it was laid down that a special presumption that
a person is deemed to be in a position to dominate the will of another is raised
where he holds a real or apparent authority over the other or where he stands in a
fiduciary relation to another or where he enters into a transaction with a person
whose mental capacity is temporarily or permanently affected by reason of age
illness or bodily distress.
A person in authority may dominate the will of another over whom the
authority is held. The authority may be real or apparent. A magistrate or police
officer in relation to the accused person can exercise such influence. Fiduciary
relationship existing between two persons may also be a cause of undue influence.
In M.A. Abdulmalie Sahib Vs. Mohamad Yousuf Sahib 1961 A.M. 190 the Madras
High Court has held that the mere existence of fiduciary relationship raises the
presumption of undue influence. In this case the donor under the influence of his
mother had given away all his property to her and transaction was held to be
improvident. In Ramchandar Vs. Sital Prasad 1948 A.P. 130 a daughter’s
paramour stayed in the house along with her and her father. The father gave away
the property to the paramour. It was held that the gift was result of undue
influence.
In Wajid Khan Vs. Evaz Ali 1891 18 cal 545, the Privy Council set aside a deed
of gift executed by an old illiterate Mohmedan lady in favour of her confidential
managing agent. In Palanivelu Vs. Neelavathi 1937 A.P.C. A.P.C. 50 two sisters
were living with their elder sister and her husband. They executed a promissory
note after attaining majority in favour of the sister’s husband. It was held that the
case will come under Section 16 and that the payee ought to prove good faith in the
transaction.
Age and capacity are important elements in determining free consent. Where a
property is purchased from a poor and ignorant man far below its value the court
will set aside the transaction. The law requires that the vendor in such
transaction, must have independent advice before its completion so the transaction
will be binding on the parties. But mere reading of the document and explanation
does not mean that the donor received independent advice. In Inchenoriah Vs.
Shaik Ali binomar 1929 A.C. 127 a feeble old woman who was unable to leave her
house made a gift to her nephew on whom she was dependant for everything. She
was completely in the donee’s hands. In such a case it was held that the
presumption of undue influence arises. In Ladli Parshad Vs. Karnal Distillery Co.
A.I.R. 1963 S.C. 1279 an action was brought by a member of the Hindu Joint
family under the Companies Act, against the defendant who were brothers. It was
claimed by the plaintiff that a particular meeting of the Board of directors and the
resolution passed were not binding on him. The plea of the defendants was that
the prior resolution passed by the board was vitiated by undue influence. But
there was no evidence to support the view that the plaintiff was standing in the
relationship of a parent as the eldest brother received a larger remuneration than
the defendants before the later resolution did not justify an inference that there was
lamination of the defendants by the plaintiff.
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5.5 MENTAL DISTRESS

A state of fear in the mind of the person does not constitute undue influence.
The person’s mental capacity is temporarily or permanently affected by old age or
illness, or due to any other cause. When a contract is made with such a person
suffering from mental distress, taking advantage of his state of mind the contract is
voidable, because of undue influence. In Ranee annapurni Vs. Swaminatha (1910)
34 Mad. 7 a Hindu widow borrowed Rs.1500/- from a money lender agreeing to
pay interest at 100% for establishing her right of maintenance. The High Court
allowed interest at 24% because it is a case of undue influence exercised upon a
person in distress. Merely because a criminal proceeding is pending it cannot be
presumed that the plaintiff was in a position to dominate the will of defendant. An
urgent need on the part of the borrower is not sufficient evidence of mental distress.
A contract which is the result of compulsion cannot be regarded as one made
undue influence.
5.5.1 Presumption of undue influence
It was observed in Lakshmi Amma Vs. Narayana A.I.R. 19 0, S C. 1367 that
the presumption of undue influence will “arise only if it is established by evidence
that the party who had obtained the benefit of a transaction was in position to
dominate the will of the other and that the transaction is shown to be
unconscionable. If either of these two conditions is not fulfilled the presumption of
undue influence will not arise and burden will not shift”. The court has to consider
certain factors for ascertaining the causes of undue influence. 1) Whether a
transaction is a thing which a right minded person might be expected to do 2)
Whether it is improvident as to suggest that the donor was not the master of
himself and not in a state of mind to weight what he was doing 3) Whether the
matter requires legal advice. 4) The intention to make a gift originated with the
donor.
5.5.2 Transaction with Pardanashin Women
The term Pardanashin woman denotes a woman living in complete seclusion
by reason of the custom. In case of sale, gift, release etc. executed by a
pardanashin woman it must be shown that the transaction was fully understood by
her. Though it is desirable that the pardanashin woman should have independent
advice, such advice is not essential. In Moonshee Buzloor Ruheem Vs. Shum
Soonissa begum (1876) II M.I.A. 551 case a Muslim lady sued her husband for the
value of the company’s paper which she had handed over to him for collecting
interest. The husband pleaded that he had purchased them from his wife.
Although the wife has failed to prove her case, the husband was bound to prove
something more than endorsement and delivery of the paper as she was a
pardanashin. Since the husband failed to discharge the onus of proof laid on him it
was held that the husband has to return the paper to his wife, the respondent
herein. The plea of pardanashin lady cannot be pleaded by one who goes to courts
regularly or one who fixes rents with tenants and collects the rent.
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In Afsar Shaikh Vs. Solemam Biti A.I.R. 1976 S.C. 163 case it was held that
although the terms undue influence, fraud and misrepresentation may overlap in
some cases yet they are distinct in law. It must be pleaded separately. In
Rajamani ammal Vs. Bhoorasami (A.I.R) 1974 Mad 35. the defendant, who is no
other than the brother of the plaintiff obtained a release deed from her. Though the
plaintiff was a major, she was not educated, unmarried and looked after by the
defendant. She alleged that because of his influence he made her to sign the
release alleging that it was a joint family property. She was not aware of the
contents at the time when she signed it. It was held that there was undue
influence on the part of the defendant because of his fiduciary relationship to the
plaintiff. What the law requires to be proved is that the parties to the contract
because of their relationship to each other was able to dominate the other. If the
influence is fairly exercised such presumption of undue influence may be negatived
as in the case of Subhas Chandra Vs. Ganga praseddas A.I.R. 1967. S.C. 887. An
elderly person made a gift of certain agricultural lands to his grandson excluding
his son. Though he was aged he was taking active interest in managing the
property. After his death the aggrieved son sued to set aside the gift to the
grandson on the ground of undue influence. It was held that the donee was not in
position to dominate the will of the donor. It was further held that a gift of certain
immovable property by a grandfather to his grandson due to love and affection
could not be held to be an unconscionable transaction.
5.5.3 Unconscionable Bargains
Another class of cases similar to undue influence is called “unconscionable
bargains”. If one of the parties to a contract is able to dominate the will of the other
the contract can be held to be unconscionable (unfair), and it is presumed that the
consent was obtained as a result of undue influence. The onus of proof lies on the
stronger party to prove that he was not in a position to dominate the will of the
other person. Illustration (c) of Section 16 is an example of unconscionable
bargain. “A being in debt to B, the money lender of his village, contracts a fresh
loan on terms which appear to be unconscionable. It lies on B to prove that the
contract was not induced by undue influence”. In such a case the presumption is
raised that the borrower’s consent was not free. It is not an instance of fraud but a
case of unconscionable use of superior power. The principle of unconscionable
bargain has been called “catching bargains, that is to say when the parties ‘meet
under such circumstances to give the stronger party dominion over the weaker”.
In Far Vs. Lanc 1880 30 ch.d 312 a person purchased a property from a poor
and ignorant person at a much cheaper price. The vendor being ignorant and not
having independent advice the transaction was held to be unconscionable. The
court was justified in setting aside such a transaction. In Ranee Annapurni Vs.
Swaminatha 1910 34 Mad 7 a Hindu widow having no means borrowed from a
moneylender at 100% rate of interest to establish her right of maintenance. It was
held that the presumption of undue influence was raised.
Though we come across the instances of unconscionable bargains more often
in money-lending transactions the principle is not confined to such transaction
alone. In Bhimbat Vs. Yeswantrao (1900) 25 Bombay 129 an indigent farmer who
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was unable to repay a loan executed a sale deed in favour of his creditor. When it
was found that the values of the property was three times the value of the debt the
sale was set aside and the farmer was allowed to pay the debt within a fixed period.
In these transactions the money lender was “in a position to dominate the will” of
the borrower and the bargain was unconscionable. But where the parties are on
equal footing merely because one of the parties is holding securities for a greater
sum than the money actually advanced will not be sufficient to make the court hold
that the transaction is unconscionable. Merely because the rate of interest is too
much it is no ground for setting aside a transaction under this Act unless it is
shown that the money lender is in a position to dominate the will of the borrower.
The basis of unconscionable bargain is the use of superior power. The
question is not of fraud, but of the unconscionable use of superior power. Under
Section 25 (2) though inadequacy of consideration will not avoid a contract, it has
great weight as evidence that the contract was not freely made A plea of undue
influence can be raised only by a party to the contract and not by a third part. The
onus of proof that the bargain was not unconscionable will be upon the person who
was in a position to dominate the will of another person.
5.6 RESCISSION
Generally a contract which is vitiated by undue influence may be rescinded
under 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
not caused. Any such contract may be set aside either absolutely or if the party
who was entitled to avoid it has received any benefit there under upon such terms
and conditions as to the court may seem just”.
A plea of undue influence can be raised by party to the contract and not by a
third party. A contract which is the result of undue influence may be rescinded on
being sued as it is voidable. But in such cases the court may call upon the party
rescinding to make compensation to the other party which justice may require.
The right to rescind may be lost by affirmation. As soon as the undue
influence ceased the action or inaction of the party influenced will be construed as
affirming the transaction. In a case a patient made a gift to her doctor. When she
decided to abide by her gift to her doctor. When she decided to abide by her gift
after the confidential relationship ceased to exist it was held that the gift could not
be questioned in a court of law. Similarly in Allcard Vs. Skinner (1887) 36 ch D
145 (already referred to ) it was decided that by her inaction the lady had
acquiesced in the gift to the lady superior of the protestant community and her
claim to get back the protestant community and her claim to get back the property
after a period of six years was barred by this acquiescence.
5.7 SUGGESTED QUESTIONS
1. When consent said to be not free. What is the legal effect of contracts entered
into without free consent?
2. Give the circumstances in which a contract is said to be induced by under
influence.

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LESSON – 6

FRAUD AND MISREPRESENTATION

STRUCTURE
6.1 Fraud and misrepresentation
6.2 Ingredients of fraud
6.3 Section 17
6.4 Mere silence is no fraud
6.4.1 Exceptions duty to disclose
6.4.2 Contract of uberrimae fidel
6.4.3 Altered circumstances
6.4.4 Misrepresentation
6.4.5 Basis of the law
6.5 Essentials of Misrepresentation
6.5.1 Representation must induce the contract
6.5.2 Fraudulent Misrepresentation
6.5.3 Innocent Misrepresentation
6.5.4 Negligent misrepresentation
6.6 Indian law
6.7 Unwarranted assertion
6.7.1 Distinction between fraud and misrepresentation
6.7.2 Rescission
6.7.3 Affirmation
6.7.4 Right of third parties
6.7.5 Restitution
6.7.6 Damages
6.8 Suggested Questions

6.1 FRAUD AND MISREPRESENTATION

An act of fraud is committed when a person induces another to act on a false
belief by a representation which he does not himself believe to be true. Lord
Herschell in Derry Vs. Peek (1889) 14 App. Case 337 observed as follows; Fraud is
proved when it is shown that a false representation has been made knowingly or
without belief in its truth or recklessly careless whether it be true or false”. For
ascertaining the fraud, the test of honest belief is subjective. The question in such
circumstances is not whether the belief that the statement was true could be
entertained, but the test is whether the person who made the statement believed it
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to be true in the sense in which he understood it albeit erroneously when it was

made.

6.2 INGREDIENTS OF FRAUD

1) An act must be done by a party with an intention to deceive.
2) The act may be done by the party himself or by his agent or by someone
acting with his connivance.
3) It is done by suggesting a falsehood, or by suppressing the truth which is
the duty of the party to disclose.
4) Such act must be done under a false promise.
5) It may be any act or omission which the law declares as fraudulent.
The result of a fraudulent act is a complete misunderstanding on the part of
the deceived person about the transaction. When such a fraudulent act occurs the
contract is voidable. Fraud is committed when a person fraudulently misrepresents
a fact. In other words intentional misrepresentation is the essence of fraud. In
Derry Vs. Peek (1889) 14 App case 337 a company obtained permission to run
trams by animal power or with the consent of the Board of Trade by steam power.
The directors believed that Board of Trade would give its consent A prospectus was
issued inviting the public to apply for shares saying that the company had the right
to run trams by steam or mechanical power. When the Board of Trade refused its
consent to the use of steam, the company was wound up. The respondent who
took up shares in the company on the faith of the representation sued in tort for
deceit. It was held that as the directors honestly believed the statement in the
prospectus, they were not guilty of fraud. It was pointed out that making a false
statement because of want of care falls short of fraud. If a representation be made
knowing it to be false, the fact that it was made from an honest motive will not
prevent it from being a fraud. In this case it is established that a negligent
misrepresentation will not amount to deceit, however gross negligence may be.
In Polhill Vs. Walter (1339) 3. B. & Ad 114 of defendant accepted a bill of
exchange drawn in favour of another, though he had no such authority, he honestly
believed that acceptance would be sanctioned and the bill paid by the person. It
was dishonoured on maturity. An endorsee who had paid the value of the bill
based on defendant’s representation sued him for deceit. It was held that the
defendant was liable as the representation was known to be false.
6.3 SECTION 17
Fraud means and includes any of the following acts done with intent to deceive
or to induce a person to enter into a contract.
1) The suggestion that a fact is true, when it is not true and the person
making the suggestion does not believe it to be true;
2) Active concealment of a fact by person who has knowledge or belief of the
fact;
3) Promise made without intention of performing it;
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4) Any other act fitted to deceive

5) Any such act or omission as the law specially declares to be fraudulent.
According to Sec 17 (1) fraud may be committed by an active concealment.
Concealment of fact may be active or passive. Passive concealment means mere
silence as to material facts. Active concealment of a fact is an instance of fraud;
Fraud is said to be committed under the Act, when there is fraudulent
misrepresentation. Misrepresentation may be either innocent or fraudulent. If it is
fraudulent, it gives a right to the party to rescind the contract. If the injured party
affirmed the contract he can also bring suit for damages for deceit. It is an act of
fraud for a person to give a false impression and induce a person to act upon it
even though the fact mentioned therein may be true. A liability will arise for
suppressing the truth, which even though it did not amount to allegation of
falsehood at least amounted to suggesting a falsehood.
According to Section 17, where a person suppresses the truth he is placed on
the same footing as a person making a false statement. Sub section 3, 4 and 5 of
Sec.17 includes misrepresentation of fact. If promise is made without any intention
of performing it, it may be stated that the promise though it is not merely a
representation of the promisor’s intention to perform it, includes a representation to
the effect. In subsection (4) the words ‘any other act fitted to deceive’ means an act
done with the intention of committing. As for example, where a person persuaded
his illiterate wife to sign certain documents representing that he was going to
mortgage two lands. In fact he mortgaged four lands of the wife. It was held that
he was done with the intention of deceiving her. In certain cases the law requires
the disclosure of certain kinds of facts Non-compliance with this provision may be
Transfer of Property Act, the seller of an immovable property has to disclose “any
material defect in the property or in the seller’s title thereto of which the seller is
and the buyer is not aware, and which the buyer could not and with ordinary care
discover”. Also the buyer has to disclose the seller “any fact as to the nature or
extent of the seller’s interest in the property of which the buyer is aware but of
which he has reason to believe that the seller is not aware and which he has reason
to believe that the seller is not aware and which materially increases the value of
such interest. Any ‘omission to make such disclosure is fraudulent’ even if the
omission is due to oversight. In English law also a similar duty to disclose exists.
Failure to make such disclosure will give to the aggrieved party a right to recind the
contract. If the failure is not willful the omission will not be construed as
fraudulent.
Section 17 (5) deals with a case where the law declare an act of omission as
fraudulent. According to Companies Act and the Insolvency Acts certain kind of
transactions will amount to fraudulent preference. It was held in a case that delay
in payment of money due on building contract or withholding of money is not fraud.
A condition in the provident fund rules of a company that on insolvency of a
member the amount to his credit shall be forfeited to the Fund was held to be
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invalid as a fraud on the law of insolvency. In Venkatasubbaiah Vs. Subbamma

1956. A.A.P. 195 it was held that a third party cannot plead that a deed of gift was
obtained by fraud or misrepresentation and should therefore not be given effect to
6.4 MERE SILENCE IS NO FRAUD
The general rule of common law is that mere silence is not a
misrepresentation. Generally a contracting party is not bound to disclose to the
other person material facts which will influence him. Even if the other party is
ignorant of some facts, or the other party is under some misapprehension he is
under no duty to disclose the facts. But there are special duties of disclosure in
certain cases (insurance) But there is no general duty to disclose facts which are or
might be equally within the knowledge of both parties. As the explanation to
Section 17 states, silence as to such facts is not fraudulent. Where a part of the
facts are suppressed, the rest of the statement though true mislead, and may
amount to a falsehood. The statement is really false, but the suppression of a part
of it makes it fraudulent. In the case a duty to disclose the defects may be imposed
by trade usage.
6.4.1 Exceptions: Duty to Disclose
On occasions when silence may become deceptive a party is duty bound to
disclose all material facts even though he was not asked. An illustration will make
the position clear. When a party makes a representation which is true at the time
when it was made, but becomes untrue before the contract is concluded then the
party has to correct the statement eventhough he was not asked about it.
Secondly where a party discloses part of the facts and the undisclosed part
makes the disclosed part as untrue, a duty is cast upon the disclose the facts. For
example a party knowing about the secured decree of an insolvent after
suppressing it, induces the official assignee to assign it to him at 20% of the face
value of the decree. He represented that the decree cannot be realized. He has no
duty to disclose the security. Yet as he had made a statement that the decree was
not realisable, with intent to deceive the Official Assignee he was liable for having
committed a fraud.
6.4.2 Contract of Uberrimae Fidei
Another class of cases were the law requires a duty to disclose is in the case of
contracts of utmost good faith or contracts uberrimae fidei. It is exception to the
general rule that silence does not amount to misrepresentation. Examples of
contract made in good faith are insurance contracts, contract to allot shares in a
company, family arrangement, contract for the sale of land and contract of
suretyship. In the case of insurance contracts an obligation is imposed on the
assured to disclose facts which would influence the insurer to accept the risk and
to fix the premium. Any failure on the part of the assured renders the contracts
voidable at the option of the insurer. Similarly the prospectus issued by the
Companies Act. Any omission to disclose these matters may render the person
issuing the prospectus liable in damages. Similarly in other contracts of good faith
also the material factors have to be disclosed.
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Where silence is deceptive, the person who keeps silence is guilty of fraud.
Where the buyer of a land knows about the value of the land than the seller, but he
keeps quiet, the seller may avoid the sale. Similarly in a marriage contract in the
executory stage, the contract may be rescinded if it is found that one of the parties
had not disclosed material facts. So if one of the parties to the marriage contract
suffers from any disability the other party can avoid it and no suit for recovery of
the expenses will lie as the presence of fraud was not proved.
6.4.3 Altered Circumstances
Though a statement is true when made it may turn out to be false acted upon
by the person later. In those circumstances it is the duty of the representee to
inform about the changed conditions. In Rajagopal Iyer Vs. The South Indian
Rubber Works (1942) 2 M.L.J 228 a prospectus issued by a company stated that a
certain named person would be the directors of a company. Though this was true
at the time of the publication of the prospectus, some directors retired before
allotment of shares. It was held that this change was sufficient to entitle an allottee
to avoid the allotment.
In With Vs. Flanagan (1936) I. All. E.R. 727 the defendant in the course of the
negotiations for the sale of his medical practice represented that his income was $
1000/= per annum and he had a panel of his patients. In the course of the
negotiations which lasted 5 months the defendant fell ill and could not attend to
the medical profession. The resultant loss of the practice was known to the
purchaser only after the sale was completed. When the plaintiff sued to rescind the
contract, it was held he was entitled to do so. Therein it was observed that it is
made but which subsequently becomes false to his knowledge i.e. is bound to
disclose the change in circumstances to the other party.
6.4.4 Misrepresentation
The conclusion of a contract may be preceded by negotiations between the
interested parties, which may or may not be smooth. A statement made by one
party to the other in the course of negotiations to induce the other to enter into the
contract is known as a representation. If the statement is false it will amount to
misrepresentation. A misrepresentation is made before the contract is concluded,
for the purpose of inducing one of the parties to accept the contract. According to
Anson all “operative misrepresentation consists in a false statement of existing or
past fact made by one party before or at the time of making the contract, which is
addressed to the other party and which induces the other party to enter into the
contract.
The English common law, recognizes general duty note to make statements
which are in fact nature with the intention that the person to whom they were
made shall act upon them causing damage to the person acting and without any
belief that they are true.
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6.4.5 Representation
In the course of the contract certain misleading statements may be made
which are intended to form part of the contract. The party making the statement
guarantees about its veracity. Though such statements are not intended by the
parties to enter into a contract, it may nevertheless affect one of the parties to a
contract. These statements are known as representations or mere representations.
If they are held to be false the aggrieved person cannot claim damages, but can
obtain the relief available in the law of misrepresentation. (Rescission)
6.4.6 Basis of the law
The rules of common law and equity on misrepresentation have been modified
by the Misrepresentation Act 1967 and the decision in Hedlea byrne & Co Ltd Vs.
Heller partners Ltd (1964) A.C. 465. Under English law there is no general duty
imposed on one party to a contract to apprise the other party of facts unknown to
him which might affect his inclination to enter into a contract. The English Act
divided misrepresentation into categories viz., negligent misrepresentation and
misrepresentation which is not negligent. It equates negligent misrepresentation to
fraudulent misrepresentation. Once there is misrepresentation it is presumed that
it was negligently made and the onus of proving that it was not negligent is upon
the defendant. The liability in damages is imposed upon a representator who has
failed to exercise due care in making misrepresentation.
In Hedley bynot & co Ltd Vs. Hellers partners Ltd, (1964) A.C. 465 the court
extended the liability in damages to negligent misstatement by holding that a duty
of care could exist where there was a special relationship between the persons
making the statement.
6.5 ESSENTIALS OF MISREPRESENTATION
The representation must be of a material fact made before the contract is
concluded. It is made with the object of inducing the party to enter into the
contract. The representation is false and has been acted upon by the person. We
will discuss these requirements of misrepresentation more elaborately.
The representation must be one of the fact and not of opinion. A mere
expression of opinion which is unfounded will not invalidate a contract. Mere
puffing or commendatory, expressions such as advertisement that a soap power
washes whiter than white or that a brand of cigarette give lasting satisfaction” are
no representations of fact. The misrepresentation is made before the conclusion of
the contract for the purpose of inducing the party to enter into the contract. Such
a representation has to be distinguished from a statement. In a contract which is
one of the terms of a contract. The representation must be made with the intention
that it should be acted upon by the person to whom it is addressed in Peek Gurney
Vs. 1873 L.R. 6 H.L. 377 the appellant who purchased the shares of a company
believing the statements contained in a prospectus issued by the directors sued
them. The shares were not allotted to the appellant at the time of the formation of
the company. He had purchased the shares later from a subscriber and hence he
was not within the class intended to be misled by the prospectus. (He was not a
original subscriber). So he could not maintain an action.
 67

Based on a representation a person was induced to enter into a contract. But

if the person whom such representations are made does not believe it, he cannot
bring an action on a court of law. But merely because the party who has been
misled had the means of ascertaining the truth or falsehood of the statement but
did not avail of it, is no reason to deprive him of his right to allege that he was
deceived. But having investigated about the veracity of the representation if a
person did not rely upon the misrepresentation his action will fail.
If a representation is not a term of the contract it is generally called a mere
representation. As it creates no obligation the representee has no remedy. In
Banaerme. Vs. white (1861) 142 E.R. 685 the defendant agreed to buy hops from
the plaintiff on the understanding that no sulphur had been used. It was later
found that sulphur has been used on five acres of land. Though the presentation
by the plaintiff was innocent misrepresentation the court held that the assurance
was intended to be a term of the contract, the breach of which discharged. White
from liability.
6.5.1 Representation must induce the contract
The representation must induce the party to whom it is made. Where he was
induced by such representation or not is always a question of fact. If the
representation though false did not induce him to enter into a contract it will not
amount to misrepresentation. In horsefall vs. Thomas (1862) I H & C 90 T. bought
a cannon the defect by putting a metal plug T never inspected the insertion of a
metal plug. It was held that as he did not examine the gun before the see it
previous condition did not affect him. If the party misses had occasion and time to
investigate about the truth or falsity of the representation he cannot allege that he
was deceived by such representation.
Even though there is no positive act of representation in a person is found
suppressing a vital factor to the contract, the contract is voidable. As for example
where a person suppressed a material fact to marriage contract that the prospective
bride is suffering from epilepsy, the contract was held to be voidable. Similarly a
statement was made in prospectus, that the company was making good profit. In
fact there was no profit, but the divident is being paid from wartime accumulations.
It was held that suppressing this fact amounted to misrepresentation.
6.5.2 Fraudulent Misrepresentation
If the person who made the statement did not honestly believe it to be true, the
misrepresentation was fraudulent. If misrepresentation is proved, the next step is
to ascertain the state of the mind of the party making the representation. A
contract is not only vitiated by fraudulent misrepresentation, but also an action for
damages will lie. A statement is only fraudulent, if made with knowledge of its
falsity or without belief in its truth, or recklessly not caring whether it is true or
false. In other words a statement is fraudulent, if it is made without honest belief
in its truth. The essence of the decision in Derry Vs. Peek 1889 14 Appcus 337 is
that mere negligence is not dishonestly. However negligent a person may be in
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making a false statement, he is not liable for fraud, if he honestly believed his
words to be true. Negligence however gross is not equivalent to fraud. Although
negligence cannot amount to fraud, gross negligence may be evidence of fraud. If
misrepresentation was made fraudulently the injured party will be entitled to
recover damages in respect of the loss suffered by him as a result of the fraud.
Where contract is vitiated on the ground of fraud, the party guilty of fraud or
the person deriving title from him cannot ask for refund of money paid. A party to
a fraud cannot be allowed to plead his own fraud. It is fraud to give false
impression by inducing a person to act upon even though the fact may be literally
true. A liability arises for suppressing the truth which although does not amount
to a false allegation, at least amounts to suggestion of falsehood. The remedies for
fraudulent misrepresentation are affirmation of contract and damages or rescission
of contract.
6.5.3 Innocent Misrepresentation
If the person who made the statement honestly believed it to be true the
misrepresentation was innocent. Innocent misrepresentation means a
representation in which no element of fraud or negligence is present. A person who
enters into a contract due to an innocent misrepresentation is entitled to the
remedy of rescission, but cannot obtain damages the reason being that at common
law no remedy is available for innocent misrepresentation. In order to succeed in a
claim based on innocent misrepresentation it must be shown that:
1) The language relied upon does contain a representation of some material facts
2) The representation is untrue
3) The plaintiff in entering into the contract was induced so to do in reliance
upon it;
In Lamare Vs. Dixon 1873 L.R.6 H.L 414 the plaintiff induced the defendant to
agree to take a lease of cellars by promising that they would be made dry. They
turned out to be damp, When Lamare declined to continue to occupy the premises.
Dixon sued for specific performance. It was refused as the plaintiff had made no
attempt to perform the promise. The dryness of the cellars though not a term of the
contract was material to the agreement.
A contract may be rescinded by a party who was misled by the
misrepresentation. In Redgrave Vs. Hurd 1881. 20 Ch-D. If a person was induced
to buy a solicitors practice and house by an innocent misrepresentation as to the
value of the practice. He was allowed to rescind even though he had the
opportunity of examining the accounts of practice. The defendant was allowed to
recover his deposit.
6.5.4 Negligent Misrepresentation
A misrepresentation is negligent, if made carelessly and in breach of a duty
owed by the representor to the representee to take reasonable care that the
representation is accurate. A duty arose only where the relationship between the
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representator and the representee is one of fiduciary relationship. In Hedley Byrne

& Co. Vs. Heller & Partners Ltd (1964) A.C. 465 the House of Lords rejected this
narrow view. In that case the plaintiff suffered loss, because of this giving credit to
a firm called Easipower Ltd. They were induced to give credit by careless reference
given by Easipower’s bank. They knew the purpose of the reference. It was held
that the bank was not liable, because the reference was given without
responsibility. The bank would have owed some duty, had the reference not
contained any express disclaimer of responsibility.
Under Section 2 of the English Misrepresentation. Act 1967 damages can be
claimed in case of misrepresentation. Where a person has entered into a contract
after a misrepresentation has been made to him by another party there to and as a
result thereof he has suffered loss, then if the person making the misrepresentation
would be liable to damages in respect thereof had the misrepresentation been made
fraudulently that person shall be so liable notwithstanding that the
misrepresentation was not made fraudulently, unless he proves that he had
reasonable ground to believe and did believe upto the time the contract was made
that the facts represented were true.
6.6. INDIAN LAW
Section 18 of the Indian Contract Act dealing with Misrepresentation reads as
follows:
Misrepresentation means and includes:
1) The positive assertion, in a manner no warranted by the information of the
person making it of that which is not true, though he believes it to be true.
2) 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.
3) 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.

6.7 UNWARRANTED ASSERTION

Sub-section (1) deals with an instance of a positive assertion of a fact which is
not true though the person believes it as true. This is an instance of
misrepresentation. Mere silence is not misrepresentation. It is enough if the wrong
statement is made to a third person to that the party will become aware of it. The
oceanic steam navigation Co Vs. Soonderdos Dhurumsey 1860 14. In Bom 241 the
defendants chartered a ship on the averment of the plaintiff that the ship was not
more than 2800 tonnage register. Actually the registered tonnage was 3045 tons.
The defendants refused to accept the ship. It was held that they were entitled to
avoid the charterparty by reason of the erroneous statement as to tonnage.
Section 18 (2) is intended to cover all cases of constructive fraud in which the
intention to receive is absent, but the circumstances make the party who derives a
benefit is made answerable as if he had been actuated by motives of fraud or a
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deceit. The basis of duty of care is the existence of special relationship between the
parties. The words breach of duty, includes in it contracts imposing a duty on the
party to disclose all material facts e.g contracts of insurance, a contract of sale and
allotment of shares by a limited company. In Oriental Banking Corporation Vs.
John Fleming (1879) 3 Bom 242 the plaintiff having no time to read the contents of
a document believed the representation of the defendant that it contained only
formal matters and signed it. In fact it was a release deed. It was held that since
the plaintiff placed confidence in the defendant he was allowed to set aside the
deed.
Under Section 18 a misrepresentation may be innocent where a person
believes his assertion to be true and has not intention of deceiving the otherparty.
In case an agreement to deliver a boiler was held to be voidable at the defendant’s
option, because the defendant represented about the existence of a road all the
way. But in fact there was a suspension bridge at one part of the road which is not
capable of bearing the weight of the boiler. It was held that the contract was
voidable. Misrepresentation may arise due to suppression of facts when it leads the
other party to make a mistake about the subject matter of the agreement.
It may be further stated that because of the misrepresentation a person was
induced to give his consent. If the misrepresentation did not cause the consent of
the party he cannot complain.
6.7.1 Distinction between fraud and misrepresentation
Both these doctrine have many things in common. For example both render
the contract voidable at the option of the parties. The main difference between
fraud and misrepresentation is that in one case the person making the statement
does not believe it to be true, while in the other case it is a misstatement of fact
which misleads the promise. Fraud renders the contract voidable and also a suit
for damages can be filed. Section 75 of the Contract Act also recognizes this right
and enables the partly rescinding the contract to recover damages, because of the
non-fulfillment of the contract. In fraud intention to deceive is essential where as
in misrepresentation it is not necessary. In misrepresentation the contract cannot
be avoided of the party whose consent was caused had the means of discovering the
truth with ordinary diligence. In the case of fraud the person responsible for
perperating the fraud ‘anoo’ say that his ‘victim was too easily deceived’. The law is
there to protect such persons.
6.7.2 Rescission
When a person has been persuaded to enter into a contract by
misrepresentation or fraud, the contract is not void, but the aggrieved person is
given the right to avoid it or affirm it. Section 19 provides as follows “When consent
to an agreement is a contract voidable at the option of the party whose consent was
so caused”. A party to a contract whose consent was caused by fraud or
misrepresentations may if he thinks fit, insist that the contract shall be formed and
that he shall be put in the position in which he would have been, if the
 71

representation made had been true. The exception need careful attention as they
mark the limits within which a contract may be held as voidable.

Exception to Section 19. If such consent was caused by misrepresentation or

silence, fraudulent within the meaning of Section 17 the contract nevertheless, is
not voidable, if the party whose consent was so caused had the means of
discovering the truth with ordinary diligence.
Explanation A fraud or misrepresentation which did not cause the consent to
contract of the party on whom such fraud was practiced, or to whom such
misrepresentation was made, does not render a contract voidable.
The party misled may affirm the contract or set aside the voidable contract. If
he affirms it, he can require the performance of the whole or in default he can claim
damages for non-performance.
6.7.3 Affirmation
According to Anson there are five limitation on the right to rescind.
When a party becoming aware of the misrepresentation and of his right to
rescind affirms the contract he will love his right of rescission.
In Long Vs. Lloyd (1958) I.W.L.R.753, the plaintiff was induced by the
defendant to purchase his lorry, who represented that it was in ‘excellent
condition’. On the very first journey the lorry broke and the plaintiff discovered
many defects. On being informed the defendant offered to pay half the cost of
repairs. On the next journey the lorry broke down completely. The plaintiff
claimed rescission of contract. It was held that plaintiff having knowledge of the
false representation of the defendant when the lorry broke down on the first
occasion instead of rescinding the contract undertook the second journey. This act
extinguished his right of rescission. In Ningawa Vs. Byrappa A.I.R. (1968). S.C 926
it was held that if the party defrauded has affirmed the contract his election is
determined forever. But the party who was defrauded by keeping the question open
so long as he does nothing to affirm the contract.
Lapse of time
In some cases delay on the part of the aggrieved party would disable him from
rescinding the contract. In Leaf Vs. International Galleries (195) 2 K.B. 86 a
purchaser of a picture wanted to rescind the contract after waiting for five years. It
was held that it was too late for him to rescind and it would be very unreasonable
to do so. Similarly where shares where allotted on misleading a person, the person
cannot rescind the contract after waiting for five months. The unexplained delay
precluded him from getting the relief of rescission.
6.7.4 Right of third parties
As a contract is voidable the right of rescission is lost, when third parties
acquire right bonafide in the subject matter of the contract. For example a
shareholder who wants to rescind the contract to take up the shares in a company
has to do so before the winding up proceedings commence. Once winding up
 72

proceedings are started the creditors of the company stand in the position of
bonafide purchasers. If goods are obtained as a result of fraud the person who
acquires the goods in good faith (before rescission) from the fraudulent person
cannot be displaced by the defrauded party. In Official receiver Vs. Jugal kishore
A.I.R. 1963 All 459 F.B. the plaintiff received through bank railway receipts for
purchase of certain goods and paid Rs.15000/- to the bank. After the amount was
sent to the seller, but before the amount was received by him the plaintiff
discovered that the railway receipts were bogus. He informed the bank, not to part
with the amount. Before he could file a suit insolvency court ordered the bank not
to part with the amount to either party. The plaintiff filed a suit for a declaration
that he was entitled to the money. It was held that though the money came into
the insolvent’s account, the plaintiff had defeated by calling upon the banker to
stop payment. The contract was rescinded because he had done nothing to affirm
the contract.
6.7.5 Restitution
A person may lose the right to rescind, if he has changed the subject matter
that he cannot restore what he obtained under the contract. Section 64 provides.
The party rescinding a voidable contract shall if he has received any benefit there
under from another party to such contract restore such benefit so far as may be to
the person from whom it was received’s. The buyer of an animal who has
slaughtered it cannot rescind it on returning the corpse. Even where the property
has deteriorated or declined in value without any fault the court may allow
rescission of a contract. In equity a person who can make a restitution can rescind
it if he returns the subject matter of the contract in the altered state and accounts
for any profits received from it.
6.7.6 Damages
Where the representation is negligent or innocent, but not fraudulent damages
in lieu of rescission may be awarded. The reason behind this rule may be that in
some cases rescission is too drastic a remedy. The power to award damages in lieu
of rescission is discretionary. The measure of damage to be awarded under the
English Misrepresentation Act is based on the loss suffered by the representee as a
result of the refusal to allow recission of the contract.
6.8 SUGGESTED QUESTIONS
1. Discuss the circumstances in which fraud will vitiate a contract.
2. “Mere silence may amount to fraud”. Comment
3. Distinguish between Fraud and Misrepresentation.

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LESSON – 7

MISTAKE
STRUCTURE
7.1 Mistake
7.2 Mistake as to the existence of fact
7.3 Non-existence of the subject matter
7.4 Mistake as to quality and substance
7.5 Error in cause of error in consensu
7.6 Mistake of law
7.7 Mistake assumption going to the root of contract
7.8 Mistake as t the identity of the person contracted with
7.9 Contract inter praesetes
7.10 Mistake as to the nature of the contract itself non est factum
7.11 Serious mistake necessary
7.12 Rectification
7.13 Suggested Questions

7.1 MISTAKE
A contract though valid in all respects may be questioned on the ground that
the consent given is affected by some vitiating factor. It may be duress, undue
influence, misrepresentation, fraud or mistake. According to Section 13 of the
Contract Act consent is defined as follows: “Two or more persons are said to
consent when they agree upon the same thing in the same sense”. In other words
true consent or consensus ad idem is the basis of every contract. Mistake will arise
when the parties have not meant the same thing or one or both though meant the
same thing may have drawn false conclusions as to some fact in the agreement.
Mistake may be of three kinds. They are (1) Common mistake where both parties
are mistaken about some vital fact although both parties ad idem. This contract is
void. Section 20 of the Contract Act deals with common mistake of fact. (2)
Unilateral mistake where one party is mistaken The contract is void if the other
party knows the mistake of another party e.g. A picture believed to be a Constable,
but is really a copy, (3) Mutual mistake may arise where the parties misunderstand
each other and are at cross purposes. As there is no consent the contract is also
void.

Section 20 is concerned with common mistake of fact and no mutual mistake.

The ingredients of Section 20 are (1) Both parties to an agreement are mistaken
(2) Their mistake is as to a matter of fact; and (3) The fact about which they are
mistaken is essential to the “agreement. Under Section 21, a contract is not
 74

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 India has the same effect as a mistake of fact”.

7.2 MISTAKE AS TO THE EXISTENCE OF FACT

Though both parties are ad idem contract on an assumption which proves to
be false it is a mistake. In Bell Vs. Lever Brothers Ltd (1932) A.C. 161 Bell and
Snelling were appointed as directors to the board of subsidiary company of Lever
Brothers, Ltd for a period of 5 years. It was also agreed that in case of their
retirement within the service period the company will pay compensation of $
50000/- to both of them. During their service as directors it was found that both of
them had secretly entered into speculative transactions which would have entitled
the respondent company to dismiss them without compensation. But this was
unknown to the company at the time when $ 50000/- was paid. The company
sought to rescind the contract and recover the money on the ground that the
money had been paid under mistake of fact. It was held that the company could
not recover the money as there was no mistake on either side as to the contracts
which were being released, that the company could have obtained a release on
much cheaper terms did not in the absence of fraud or breach of warranty render
the contract void. The mutual mistake related not to the subject matter but to the
quality of the service contract.
In Solle Vs. Butcher 1950 I. K. B. 671 the respondent granted to the appellant
on lease a flat at an annual rent of $ 250/- The parties erroneously assumed that
the flat was not subject to rent control. When the tenant claimed that the lease
was governed by the Rent Acts and asked for the return of rent overpaid the
landlord claimed the rescission of the lease on the ground of common mistake. It
was held that the lease was subject to rent control. The common mistake of the
parties was one of fact and not of law and the lease was voidable at the instance of
the landlord. In Magee Vs. Peanine Insurance Co Ltd. 1969 2 Q.B. 50 a claim was
made against an insurance company under a motor insurance policy. It was
compromised by the company agreeing to pay $ 385. This was entered in the belief
that the policy was binding when it was in fact voidable, because of innocent
misrepresentation. It was held that though the compromise was valid at law, it was
voidable in equity so that the company was not liable to pay the $ 385. A common
misapprehension either as to the facts or as to the party’s respective rights will not
make the contract void, but only voidable provided that the misapprehension was
fundamental.
In Kalyanpur Lime Works Vs. State of Bihar (1954) S.C.R. 958 a state
government granted the lease of a hill to K & Co for limestone quarrying with the
condition that it cannot be assigned to another without the government’s approval.
When the company went into liquidation the liquidator assigned the lease to
another without governments approval. The state cancelled the lease and gave it to
the plaintiff for 20 years. On a suit by K & Co, the Privy Council held that the
forfeiture was invalid and possession was restored to it. After II years the term of
 75

lease expired. Then the plaintiff claimed the lease according to the agreement. The
State instead of allotting to the plaintiff, allotted it to another person. When the
plaintiff sued it was held that the agreement was not void by reason of any mistake.
It is open to the plaintiff to repudiate the contract, but the defendant could not
plead that the contract is void on the ground of mistake and refuse to perform the
agreement. There was no mistake of fact, but there was a mistake of law.
The intention of the parties was to make their agreement condition on the
existence of some facts which turn out not to have existed on the date of the
agreement. Where the object of sale was not existing or which has ceased to exist,
the result is easily apprehended, because there was nothing to buy and sell.
7.3 NON EXISTENCE OF THE SUBJECT MATTER
Unknown to the parties, if the subject matter of the contract ceased to exist
the contract may be void for mutual mistake. As distinguished from common
mistake mutual mistake arises where the promissor and the promisee
misunderstand each other’s intention, though neither of them realized about the
misunderstanding.
Where the promissory and promisee are mistaken as to a fact which is
fundamental basis of the contract, the contract is vitiated by common mistake. In
Couturler Vs. Hastie (1855 5-H-L-C. 673) there was a sale of a cargo of about 1180
quarters of Salonika Indian Corn to a port in United Kingdom. Before the time of
the sale and unknown to this buyer or seller the cargo had become overheated. The
seller nevertheless claimed the price. The buyer contended that as the cargo of
corn was not in existence, he was not bound to pay the price. It was held that the
purchaser was not liable to pay for the corn. In Mcrae Vs. Common Wealth
Disposals Commission (1951) 84 C.L.R. 377 the defendants purported to sell the
wreck of an oil tanker lying on the Jourmand Reef and invited tenders. The
plaintiff’s tender was accepted and he fitted out an expedition to salvage the tanker.
There was no tanker and there is no such reef as Jourmand Reef. The plaintiff
brought an action against the commission claiming damages in respect of the loss
sustained in fitting out the expedition. The High Court of Australia held that the
defendant had impliedly undertakes that there was a tanker there and that for the
breach of this undertaking they were liable in damages. In Barrow Lane and
Ballard Ltd Vs. Phillips and Co Ltd. (1929) I.K.B. 574 it was observed “Where the
contract relates to specific goods which do not exist the case is not to be treated as
one in which the seller warrants the existence of those specific goods but as one in
which there has been failure of consideration and mistake.

Res Extincta
Where the subject matter of the contract is not in existence the contract will
not come into existence. This is usually called by the term res extincta. If the true
construction of the contract is that the parties entered into in the assumption that
 76

the subject matter was in existence and that neither of them was responsible if this
was not so, the contract is void for mutual mistake.

Res sual
Where a person agrees to purchase or take a lease of property which unknown
to himself and the seller is his own already, the contract may be void.
7.4 MISTAKE AS TO QUALITY AND SUBSTANCE
The parties may be mistaken as to the existence of some fact or facts forming
an essential element of the subject matter. In Sheikh bros Ltd. Vs Ochener (1957)
A.C. 1367 (P.C) the appellant contracted with the respondent to grant a licence for
cutting and processing of all sisal grown in a forest. The respondent deposited a
sum of money and undertook to deliver the appellants 50 tons of sisal fibre per
month. It was found that the estate was not capable of producing the stipulated
quantity of sisal. Following Bell vs lever bros it was held that the contract was void.
A distinction has to be drawn between a mistake as to substance and a
mistake as to quality (or attributes). A mistake as to substance will avoid the
contract. A mistake as to quality will not avoid the contract.
In Kennedy vs. Panama, Newzealand and Australian Roya mail co. Ltd (1857)
LR 2. Q. 580 the plaintiff took shares in the defendant company relying on the
prospectus that the new capital was required to carry out a contract with the New
Zealand Government for carrying mails. Though a contract was made with an
agent of the Government it was found out later it was made without authority and
the Newzealand Government refused to ratify it. As a result of it the value of shares
fell and the plaintiff sued to recover back the money. It was held that the shares
which he had received were not different in substance from those which the
company contracted to deliver. If there be misapprehension as to the substance of
the thing there is no contract. It there is a difference in some quality even though
the misapprehension may have been the actuating motive to the purchaser yet the
contract remains binding.
In Harrison & Jones Ltd. Vs. Bunten & Lancaster Ltd, (1953) I.Q.B 646 H
bought a quantity of Calcutta Kapak, Sree brand from B. The sale is by sample but
both parties believe that the brand is pure Kapok where as it in fact contained an
admixture of cotton When Kapek of the “Sree” brand was delivered it was proved to
be unsuitable. It was held that the mistake did not affect validity of the contract.
A mistake as to quality of the subject matter is distinguished from its
substance will not render the agreement void. In Smith Vs. Hughes (1871) L.R 6
Q.B 597, S sold a quantity of oats, a sample of which S had shown H. Then oats
were new oats, but H who had inspected the sample erroneously thought that he
was buying old ones. He kept the sample for 24 hours and then placed an order for
the oats. When part of it was delivered it was found that they were new and so
rejected them. It was held that his mistake was irrelevant unless S positively knew
that H wanted to buy old oats only. Though the two minds were not ad idem as to
the age of oats they were ad idem in respect of the sale and purchase of them.
 77

In Leaf Vs. International galleries, (1950) 2 KB 86, L in 1844 bought from I a

picture of Salisbury Cathedral represented by I to be by Constable. It was found in
1949 that the picture was not by Constable and L claimed to rescind the contract
and recover the price it was held: There was no mistake at all about the subject
matter of the sale. It was a specific Salisbury Catherdral. The parties were agreed
on the same terms on the same subject – matter and that was sufficient to make a
contract”.
7.5 ERROR IN CAUSA & ERROR IN CONSENSUS
Owing to mistake on the part of one party an offer may be accepted in a
different sense other than that in which it was intended by the offeror. In such a
case one of the parties will say that he did not attach the same meaning to the
terms as the other party. The contract will be void because of the lack of
coincidence of offer and acceptance. In Raffles Vs. Wichelhaus 1863 2. H & C 906.
A agreed to buy a cargo of cotton from B to arrive at “expeerless” from Bombay.
There were two ships called “Peerless” sailing from Bombay, While the defendant
meant “Peerless” which sailed in October the plaintiff a “Peerless” which, sailed in
December.
In the case of unilateral mistake only one of the parties seeking to set aside a
contract was under a mistake. A type of unilateral mistake is one of mistaken
motive. i.e. error in causa. The mistaken party cannot raise lack of common
intention or consensus ad idem. A contract is constituted by a declaration. But
the consent is based on some erroneous belief possessed by the party about the
existence of some fact.
Blackburn J referred to the Roman doctrine of erro in substantial by which
mistake as to the quality may make a contract void if they relate to the substance of
the subject matter of the contract. For example, the metal of which a thing is
made. In this connection it will be apt if we refer to a statement of Pothier the
French Jurist. “Whenever the consideration of the person with whom I am willing
to contract enters as an element into the contract which I am willing to make, error
in regard to the person destroys my consent and consequently annuls the contract.
On the contrary when the consideration of the person with whom I thought I was
contracting does not enter at all into the contract and I should have been equally
willing to make the contract with any person whatever as with him with whom I
thought I was contracting, the contract ought to stand”. Under Section 20 of the
Contract Act the mistake must be as to a matter of fact essential to the agreement.
It was observed in one case that it is not enough that there was an error “as to
some point, even though a material point, an error as to which does not affect the
substance of the whole consideration”.
The explanation to Section 20 lays down that “an erroneous opinion as to the
thing which forms the subject matter of the agreement is not to be deemed a
mistake as to a matter of fact.
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7.6 MISTAKE OF LAW

Under 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 fact as a mistake of fact. This is based on the latin maxim ignorantia juris
neminum excusat. In English law any ignorance about the existence of a private
right to property is a mistake of fact even if such ignorance results from a false
interpretation of the law. In Cooper Vs. Phibbs (1867) 2, HL 149 A agreed to take a
lease of fishery from D. Later it was found that the plaintiff himself was owner of it.
So he sued for the cancellation of the contract. It was held that the contract is
liable to be set aside as the contract was proceeded upon a common mistake. In
Ramachandar Vs. Ganesh Chandar 12 CW 404 A agreed to take a lease from B of
certain lands including minerals provided B makes out a good title. A make several
advances payments. Later when a Privy Council decision threw upon this
understanding. A refused to carryout the contract and sued B for the refund of
advances. Following Cooper Vs. phibbs it was held that the case was one of
common mistake and that the agreement was void under Section 20 and the
advance has to pay interest on the decretal amount, though not interest was
awarded by the decree is mistake of law and contract based on it is not voidable. In
Kochuwareed Vs. Mariappa 1950 A.I.R. Tra Co. 10 a property was sold during the
subsistence of a lease. According to law the lessee is entitled to receive the value of
improvement. But the agreement of sale did not contain any provision regarding
this right of lessee. When the buyer wanted to set aside the sale on the ground of
mistake it was held that there was no mistake. Even if there was a mistake it was
not a matter of fact which is essential to the agreement for sale.
In Allcard Vs. Walker 1996 2 ch. 381 it was observed that “it is not accurate to
say that relief can never be given in respect of a mistake of law. That is why it was
observed by Winfield ‘Where a mistake is so fundamental as to prevent any real
agreement from being formed” it is immaterial of what kind the mistake is.
Moreover it is highly difficult to draw an exact demarcation between mistake of fact
and that of law”.
7.7 MISTAKEN ASSUMPTION GOING TO THE ROOT OF CONTRACT
If the parties have made a contract on the mistaken assumption that there
exists a state of affirms which is of such fundamental importance to them that they
would not have made the contract had it not existed, the contract is void. In Scott
Vs. Coulson (1903) 3 ch. 246 G agreed to assign to H a policy of assurance upon
the life of L upon the basis of an erroneous belief shared by b the parties, that the
assured was still alive L had before the agreement was made. It was held that the
wonder was entitled to the return of the policy and also the money payable under it
In Sheikh Brothers Ltd Vs. Ochsner (1957) A.C. 136 (already referred to ) a case
decided under Sec. 20 of the Contract Act it was observed. 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”.
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In Galloway Vs. Galloway (1914) 30. T,L.R. (531) a separation deed between a
man and a woman who mistakenly thought that they were married to each other
was held void, because it purported to deal with a marriage which did not exist.
Likewise the purchase of an annuity is void if the annuitant has died at the time of
contract, so that the annuity no longer exists.
So if both parties believe the subject matter of the contract to be in existence,
but in fact at the time when the contract is made it is non existent, there is no
contract.
7.8 MISTAKE AS TO THE IDENTITY OF THE PERSON CONTRACTED WITH
Mistake as to identity occurs where one person represents himself to be some
other person other than what he really is. If ‘A’ intends to contract with B, but
finds he has contracted with C, there is no contract if the identity of B, was
materials element of the contract and C knows it. If A’s offer is addressed to B but
accepted by C who known that he cannot accept if there is no agreement. A person
cannot make a contract with one with whom he does not intend to contract. In
other words an offer can be accepted by the person to whom it is addressed. This
kind of mistake is called error in personam. In Cundy Vs. Lindsay 1878 3 A, C,
459 One Blenkarn, a fraudulent person giving his address as 37, Wood Street,
Cheapside offered to buy goods from the plaintiff. He imitated the signature of a
respectable firm named Blenkiron & Co. who carried on business at 125 Wood
Street, Lindsay thinking that he was dealing with the reputable firm of Blenkiron
and Co. sent the goods. The fraudulent person without paying for them sold the
goods to cundy. When the fraud was detected Lindsay sued Cundy for conversion
of the goods. It was held that the plaintiff was entitled to succeed. When the offer
was accepted Blenkarn knew that Lindsay thought that he was entering into a
contract with Blenkiron & Co. The contract was therefore void abinitio.
In Boulton Vs. Jones (1857) 2 H & N 464 the plaintiff had taken over the
business of one Brockiehurst with whom the defendant Jones had been dealing and
had running account. He was entitled to set-off in respect of sums owed by
Brocklehurst. When Plaintiff supplied goods without informing the change of
ownership. Jones refused to pay alleging that he intended to contract with
Brecklehurst, since he had a set-off against him. When Boulton sued for the price
it was held that Jones was not liable to pay for the goods. There could be no
contract since Boulton knew that the offer was intended for Brocklehurst, but not
for him.
A distinction has to be made between a person’s identity and his attributes. A
mistake about the attributes will not avoid the agreement. Mistake of identity
arises only when a person bearing a particular identity exists to the knowledge of
the plaintiff, and the plaintiff intends to deal with him only. In Kings Norton Metal
Co Vs. Edridge Merrett & Co (1897) 14. T.L.R.98 the plaintiff a metal manufacturer
received letters purporting to come from Hallam & Co asking for quotations for
metal wire. When the plaintiff replied Hallam & Co ordered for the wire. The firm
Hallam & Co consisted of a fraudulent person named Wallis. Wallis subsequently
 80

sold the wire to the defendants. The Plaintiff sued the defendants contending that
the contract with Hallam & Co was void and that the wire was therefore still their
property. It was held that the plaintiff had intended to deal with the person who
wrote the order. So the contract was not void for mistake, but only rendered
voidable for fraud. Since the contract had not been avoided at the time of the sale
to the defendants they had obtained a valid title.
7.9 CONTRACT INTER PRESENTES
It will be very difficult to resolve the question of mistaken identity where the
transaction takes place between the parties not at a distance, but before each
other’s presence In Philips Vs. Books Ltd one North entered the plaintiffs shop and
selected a ring and some poral worth £ 3000. He wrote a cheque stating “I am Sir
George Bullough” (a person known to the plaintiff). The Plaintiff after referring the
directory found that Sir George Bullough lived at the above address allowed North
to take away the ring which he pledged with the defendants for £ 350. The
defendants had not notice of fraud. When the plaintiff sued to recover the ring or
its value, it was held that the plaintiff intended to contract with the person present
before him. The contract was not void on the ground of mistake, but only voidable
on the ground of fraud, and the defendants had acquire a good title to the ring.
In Ingram Vs Little (1961) I.Q.B. 31 three ladies advertised their car for sale. A
person visited them and offered to purchase the car by issuing a cheque. The
plaintiff (three ladies) insisted on payment in cash. The rogue persuaded the
plaintiff to believe that he was one P.G.M. Hutchinson, a reputable businessman
living at an address in Caterham One of the plaintiff having not heard of the name
before went to the post office and verified the name in the telephone directory. After
verification the ladies sold the car to him for a worthless cheque. The rogue sold
the car to the defendant and absconded. The plaintiff sued the defendant for car or
its value. It was held that the contract between the plaintiff and ‘Hutchinson’ was
void for mistake as to the identity and the car was still their property. The
verification of the telephone directory in the post office indicated that it was with
Hutchinson that the plaintiff intended to deal and not with the person physically
present before them.
But in Lewis Vs Verny (1972) I.Q.B. 198 on similar facts it was held otherwise.
There the plaintiff a post graduate chemistry student advertised his car for sale. A
rough posing as Richard Greene, a famous actor offered to buy the car. After the
plaintiff accepted the offer, the rogue wrote a cheque and wished to take away the
car. Since the plaintiff was not willing to part with the car until the cheque had
been cleared the rogue produced proof that he was Richard Greene in the form of
special pass of admission to Pine Wood Studios bearing name of ‘Richard’ A.
Greene. On being satisfied the plaintiff allowed the rough sold the car to the
defendant a music student. It was held that the plaintiff intended to contract with
the person actually present before him. The contract was voidable for fraud and
the defendant acquired good title to the car as against the plaintiff.
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In Hordman Vs. Booth (1863) I.H.C. 803 the plaintiff intended to sell cloth to
Thomas Gandell & Co at whose office they negotiated with Edward Gandell who
was willing to buy. Edward Gandell obtained possession of the goods and sold it to
the defendants. The plaintiff sued for the return of the goods. It was held that
there was no contract between the plaintiff and Edward Gandell and that the
defendants were liable for conversion of the cloth. His intention had been to
contract with Gandell & Co and not with Edward Gandell. The contract was
therefore void. In Lake Vs. Simmons (1927) A.C. 487 a woman called Esme Ellison
told the plaintiff that she was married to one Van der Borgh (actually she was his
mistress) and that he wanted to give her a necklace and that he wished to see it for
approval. After entering it in his book the plaintiff gave the necklace to the woman.
Esme Ellison absconded with the necklace. The jeweler (appellant herein) was
insured with an insurance company against loss by theft with the exception of
jewellery entrusted to the customer. When the lady absconded with the necklace
the question arose whether the loss was covered by the insurance policy or came
within the exception clause. It was held that the loss was covered by the insurance
and that plaintiff had not entrusted the necklace to her as a customer within the
terms of an insurance policy. There was no contract since there was no consensus.
The plaintiff thought that he was dealing with a different person the wife of Van der
Borgh. He never intended to contract with the woman in question.
7.10 MISTAKE AS TO THE NATURE OF THE CONTRACT ITSELF NON EST FACTUM:
The general rule is that a person is bound by his signature to a document
whether he reads it or not. An exception to this rule was established in Thorough
good’s case by which if a person who could not read executed a deed after it was
read over to him incorrectly it will not bind him. He can successfully plead non est
factum, (it is not my deed). Under this plea a person who had attained majority
and of sound mind, who signs a document, evidently intended to have legal effect is
bound by his signature and cannot avoid it by claiming that he did not read the
document, or that the relied on the word of another, who read it over to him or
explained it. A person cannot rely upon the defence of non est factum merely
because he is too lazy or too busy to read through a document or it contains some
term the legal effect of which he is not aware.
This plea was divised to protect the illiterate person. Later it was extended to
cover all persons generally. Though Lord Denning’s view is that the doctrine should
not be applicable to persons who has attained majority and of sound mind the
House of Lords rejected it in Gallie Vs. Lee 1971. A.C.1004 So the doctrine of non
est factum is applicable to all blind and illiterate persons and also to persons with
low intelligence and senile persons.
7.11 SERIOUS MISTAKE NECESSARY
The plea non est factum can be pleaded only where the mistake is serious in
nature. In Gallie Ls Lee 1971. A.C. 1004 G, (plaintiff) a widow of 78 intended to
give her nephew Parkin her house on condition that he would allow her to live there
for life. She knew that her nephew wanted to raise money on the house Parkin
feared, that if he raised the loan his wife will be able to execute a decree of
maintenance. So he arranged Lee, an intermediary to raise money on the mortgage
 82

of this house. Lee and her nephew asked her to sign a document. As she had
broken her spectacles, she enquired about the document and was a gift deed in
favour of her nephew, She executed the document. Actually it was an assignment
of the house by G, the widow to Lee for £ 3000. The amount was never paid nor
intended to be paid. Lee mortgaged the house with the Anglia Building Society for
£ 2000. It was held that G could not plead non est factum and could not recover
the title deeds of the house. The doctrine of non est factum did not apply as the
widow’s mistake was not sufficiently serious.
The plea of non est factum was available if the person who signed the
document mistook it for another document. Thus in Foster Vs. Mackinnon. (1866)
L.R.4 C.P. Mackinnon an old man was induced (by a third party) to indorse a bill of
exchange for £ 3000 in the belief that it was a guarantee. It was a guarantee of a
similar nature to the one which Mackinnon had previously signed. The Bill of
Exchange was indorsed to Foster for value, who took it in good faith. It was held
that the plea of non est factum can be raised as Mackinnon never intended to make
such a contract and is not guilty of negligence.
The defence of non est factum is available to a person who signs a document
under a mistaken belief as to the capacity in which he signs. In Lewis Vs. Clay
(1898) 67. L.J.Q.B.225. One Lord Nevill approached the defendant and asked him
to witness some deeds. The deeds were covered by blotting papers in which there
were cut four openings. It was explained that it was a private matter. The
defendant believing that he was witnessing the Nevill’s signature signed in the
spaces. Later it was found that they were promissory notes to the value of £ 11000
in favour of the plaintiff who took them bonafide and for value. It was held that the
defendant was not liable, because his mind never went with the transaction, but
was fraudulently represented that he was merely witnessing a deed.
In Muskham Finance Ltd. Vs. Howard 1963. I.Q.B. 904 the hire purchaser of
a car wanted to transfer it to another person who also wanted to hire purchase it
from the same finance company. He signed a document believing that it was a
transfer of his right under the original hire purchase agreement. But it was an
indemnity form agreeing to indemnity, if the new hire purchaser commits default.
When the finance company tried to enforce the indemnity the original hire
purchaser pleaded non est fatcum even though his mind was applied to the
question of dealing with the car when he signed the indemnity form The Court
allowed the plea of non est factum is a plea which must necessarily by kept within
narrow limits”.
The principal of Foster Vs. Mackinnon 1869. L.R. C.P. 704 has been accepted
by the Supreme Court in Ningawa Vs. Byrappa (1969) 2 S.G.R. 797. In that case a
husband obtained the signature of his wife in a gift deed without making any
misrepresentation as to the character of the deed. He included two more plots of
land subsequently in the deed. When the wife sued to set aside it was held that the
transaction is only voidable and not void.
The effect of non est factum is that the transaction is not merely voidable
against the person who executed it, but is totally void in respect of all persons into
whose hand the document may come.
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In the case of mistake three remedies can be granted by Courts of Equity.

They are,
i) refusal of an offer of specific performance
ii) rectification of a written contract.
iii) Rescission.
The aggrieved person may repudiate a contract in case of mistake and resist a
suit of specific performance. When a contract is void the person who received any
advantage has to restore to the other party or pay compensation to the person from
whom he received it.
7.12 RECTIFICATION
If the parties were in agreement on all important terms, but wrote them
wrongly by mistake, rectification to the written document may be ordered. In Haji
Abdul Rahman Vs. The Bombay Steam Navigation Co. (1892) 16. Bom 561 the
plaintiff chartered a ship from the defendant for sailing to Jedda on 10.8.1892,
fifteen days after Haj. It was intended to transport the pilgrims to Bombay. The
date 19th July 1892 correspond with the 15th day after Haj. The characters sued to
rectify the mistake when it was found out. No rectification was allowed because the
mistake was only on the part of the plaintiff who mistakenly thought the date 10 th
August 1892 to be 14th day after the Haj. Even if there was a mistake by both the
parties the court cannot rectify but to cancel the instrument as the date was
material in inducing the agreement.
Before rectification can be availed of certain condition have to be fulfilled.
Firstly, the instrument which is sought to be rectified fail to express the intention of
the parties. Secondly, the party seeking rectification must adduce clear evidence
of mistake. Thirdly, though the intention as found in the agreement remained
unchanged at the time of the execution of the agreement literal disparity exists
between the two transaction. In Frederick E. Rose (London) Ltd, Vs. William H.
Imp. Jut & Co Ltd 1953 2 Q.B. 450 the plaintiff received an order for 500 tons of
Moroccan horse beans described as feveroles. The plaintiff not knowing what
feveroles were inquired the defendant who replied that they were horsebeans. The
plaintiff agreed to buy from the defendants horsebeans to meet the other.
Subsequently a written agreement was also drawn up. But it was later found that
feveroles were another type of bean different from horsebeans. So, the plaintiff sued
to rectify the agreement to include feveroles with the intention of claiming damages
after rectification. Rectification was refused since both the oral and written
agreement were only for horsebeans and there was no disparity between them. If
there was any mistake at all it was only in the minds of the parties.
7.13 SUGGESTED QUESTIONS
1. When mistake be pleaded in avoidance of contract What are the kinds of
mistake that are not sufficient to avoid a contract
2. Distinguish between the effect of a mistake of tax and the mistake of fact on
the function of contract.

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LESSON – 8

UNLAWFUL AGREEMENTS
STRUCTURE
8.1 Unlawful agreements
8.1.1 Forbidden by law
8.1.2 Defeat the provisions of any law
8.2 Fraudulent
8.3 Injury to person and property of another
8.4 Maintenance and champerty
8.4.1 Trading with an enemy
8.5 Void agreements
8.6 Agreements without consideration
8.6.1 Contract in restraint of personal authority and parental authority
8.6.2 Agreements which tend to affect the freedom and security of
marriage.
8.6.3 Contracts in restraint of trade
8.7 Exceptions to the doctrine of restraint of trade
8.8 Trade agreements
8.8.1 Agreements which interfere with the administration of justice
8.8.2 Uncertain agreements
8.9 Wagering contracts
8.9.1 Speculative transactions
8.10 Effects of illegality
8.10.1 Contract itself illegal
8.10.2 Illegal purpose not yet carried into effect
8.10.3 Parties not “pari delicto”
8.10.4 Severance of illegal parts
8.11 Suggested questions

8.1 UNLAWFUL AGREEMENTS

Under Section 10 of the Contract Act, an agreement is a contract which is
enforceable only if it is made for a lawful consideration and with a lawful object
Section 23 declares the kinds of consideration and objects which are not lawful.
Section 23 is extracted below.

“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
 85

law or is fraudulent; or involves or implies injury to the person or property of

another; or the court regards it as immoral as opposed to public policy”.

“In each of these cases the consideration or object to an agreement is said to

be unlawful. Every agreement of which the object or consideration is unlawful is
void”.
An illegal contract is void, illegality may be present in the formation of the
contract or in performance of the contract or in the consideration for the contract or
in the purpose for which the contract is made. Certain contracts are declared as
illegal, because they are forbidden by statute or because they are opposed to public
policy. In certain illegal contracts an elements of moral turpitude is present e.g.
agreement to commit a crime. In others such element is absent, e.g. contract in
restraint of trade.
8.1.1 Forbidden by law
An act is forbidden by law where it violates any prohibitory enactment passed
by the legislature or an unwritten law. In India any acts punishable under the
Indian Penal Code and acts prohibited by special legislation, or by regulation or
orders are forbidden by law. The nature of the statutory illegality may vary. A
statute may prohibit certain type of contract. In Re Mahmoud and Ispahani (1921)
2 K.B.716, it was forbidden during war time to deal in linseed oil without obtaining
a licence, from the Food controller. The plaintiff agreed to sell to the defendant
linseed oil and enquired from the defendants whether he possessed a licence. He
made false statement that he possessed a licence. Afterwards the defendant
refused to accept the oil as he had no licence. When sued by the plaintiff claiming
damages, it was held that the action cannot be entertained as there is an
unequivocal declaration by the legislature in the public interest that this particular
kind of contract shall not be entered into”.
If a contract is expressly or by necessary implications forbidden by statute or if
it is on the face of it illegal or both parties knew that though on the face of it legal
it can be performed by illegality the law will not help the party in any way either
directly or indirectly for enforcing the rights under a contract In Archbolds
(freightage) Ltd. Vs. Spanglett Ltd (1961) 2. W.L.R.170 A arranged with S to carry a
consignment of whisky in a van from Leeds to London docks. Unknown to him the
van had a licence to carry the owner’s goods and not the goods of others. The
goods were stolen in transit owing to the negligence of the driver of the van. In an
action for damages S’s van was not licensed to carry the goods. It was held that the
transaction exfacie neither illegal nor contrary to public policy. The court cannot
refuse its aid to the plaintiff who did not know that the contract would be
performed illegally.
In Marudamuthu Vs. Rangasami, 1900, 24 MAD. 401 a rule framed under the
Madras Abkari Act, 1886 prohibited, the holder of a licence for the sale of toddy
from being interested in the sale of arrack and the holder of a licence for the sale of
arrack from being interested in the sale of toddy. When disputes arose it was held
 86

that an agreement of partnership in the business of selling arrack and toddy

entered into between a holder of a licence for the sale of toddy and the holder of a
licence for the sale of arrack was void. Neither party could sue the other for the
recovery of the money due to him in respect to the partnership. In Velu padayachi
Vs. Sivasoorian Pillai 1950. A.M. 444 a Full Bench of the Madras High Court
pointed out that irrespective of the fact whether the contract for partnership was
entered into before the licence had been granted or subsequent to the issue of the
licence the result would be the same. The partnership must be deemed to be void
from the beginning.
A contract which is void and unenforceable is not forbidden by law within the
meaning of Section 23. A void contract cannot be equated with a contract which is
forbidden by law In Gherumal parekh Vs. Mahadeodas. 1959. A.S.C. 781 a
partnership was formed for the purpose of carrying on transactions which were
speculative and wagering contracts. When one of the partners sued to recover his
share for the loss incurred from the other partners the defence put up was that the
object is opposed to law and public policy and also immoral it cannot be enforced in
a court of law. It was held that transaction was not forbidden by law, or opposed to
public policy, neither was it immoral since immorality in legal parlance, had been
restricted to sexual immorality.
Under this heading of statutory illegality the method of performance adopted
by one of the parties may violate some statutory prohibition. In such cases the
party will not be able to sue on the contract. In Ashmore Benson Peare & Co Ltd
Vs. A.C. Dawson, Ltd (1873) I.W.L.R. 828 the defendants a road transport
company was engaged by the plaintiff to carry two 25 ton tube bank to a port. The
manager of the plaintiff watched tube banks being loaded on the lorries whose
maximum load capacity was 20 tons. When one of the lorries was toppled on the
road and damaged the plaintiff claimed from the defendants damanges for loss. As
the plaintiff’s manager was aware that the lorries were overloaded and having
participated in the defendant’s illegal performance of the contract the plaintiff’s
claim failed.
In Bhikanabai Vs. Biralal. (1960) 24. Bom 622 the question was whether an
agreement by a leasee of tolls from government to subject it was valid and binding
the party as according to the conditions of the lease subletting without the
permission of the collector was prohibited. In spite of it the lessee sub-let the tolls
to the defendant and sued him to recover the amount. The contention that sub-
lease was unlawful and so the amount of sub-lease could not be recovered was
negatived, as the Bombay Tolls Act, 1875 did not forbid the transaction, but merely
imposed a condition for administrative purpose.
8.1.2 Defeat the provisions of any law
The word ‘object’ in Section 23 is not used in the sense as consideration, but it
should be distinguished from consideration which means purpose or design. We
can divide this branch of the subject into three divisions according to the object or
 87

consideration of an agreement, which would defeat any provision of any law. The
object or consideration in an agreement is such as would defeat (1) the provision of
any legislative enactment or (2) the rule of Hindu and Mohammedan law; or (3) any
other rules of law for the time being in force in India.
Contracts forbidden by rules and regulations under the Defence of India Act
are illegal, Under the Companies Act a trading partnership consisting of more than
20 persons is illegal unless it is registered as a company. So it was held in Mewa
ram Vs. Ramgopal (1926) 48. All. 735 that a suit will not lie for the dissolution of a
partnership as it would defeat the provisions of the Companies Act. In Regazzoni
Vs. K.C. Sethia, (19 5) Ltd. (1958) A.C. 301 S agreed to sell and deliver jute bags to
R, both parties contemplating the goods would be shipped from India and will be
available in Geneva so that R might import them into South Africa. Under the Sea
Customs Act 1878, the Indian Government prohibited the export of goods to South
Africa. Both the parties knew that the jute bags were to be shipped to South Africa
in violation of Indian law. When the bags were not delivered an action was brought
by the appellant for non-delivery. It was held that as the contract required the
export of goods against the Indian law it could not be enforced in England even
though the law may be classified as a political law. The contract was illegal in
English law and so the appellant failed.
In Fateh Singh Vs. Sanwal Singh 1878 I. All 751 a suspect was ordered to
furnish security under the Criminal Procedure Code. He deposited the amount of
security with the surety. After the period of security was over he asked for the
return of the deposit. It was held that he could not recover the amount in a suit as
the effect of the agreement of deposit is to defeat the provisions of the Code of
Criminal Procedure as the surety was rendered a surety in name only.
Any agreement which is likely to defeat the provisions of personal law of the
parties will be declared as unlawful. Thus an agreement to give a son in adoption
in consideration of an allowance to the natural parent is unlawful. A suit to recover
such annual allowance will not lie though the adoption was already completed.
Similarly an agreement between Muslim husband and wife for future separation is
void. The wife cannot seek the help of the court for recovering maintenance from
the husband in accordance with the contract.
An agreement to commit a criminal offence or a civil wrong is illegal. Similarly
in W.H. Smith & son Vs. Clinton. (1980) 25 T.L.R. 34 it was held that an
agreement by a paper company to indemnity the printers against claims arising out
of libels published in the newspapaer is void. In Gray Vs. Barr (1971) 2. Q.B. 554
(CA) Gray had an affair with Barr’s wife. Being enraged Barr went to Gray’s farm
with a loaded gun. In the ensuing fight the gun went of accidentally and Gray was
killed. Though Barr was acquitted of murder, the administrator’s of Gray’s estate
claimed damages. Barr claimed indemnity from the insurance company under an
accident policy. It was held that Barr was liable for having caused the death of
Gray and the killing is not accidental within the meaning of the insurance policy.
Even assuming it as un accident, it was caused by a deliberate and unlawful act of
 88

Barr and it was therefore against public policy to admit a claim for indemnity
against the insurance company.
In Surasai Balani debi. Vs. Phaninder Mohan Mazumder A.I.R. 1965. S.C.
1864, one P a servant of the court of the wards carried on business in the name of
G, to whom he entrusted the business due to illness. When sued for possession, P
merely relied on his title and entrusted to G and refused to deliver possession,
when demanded. On proof of his ownership of business, P was entitled to enforce
his title as there is no title to defeat the provision of Income Tax Act but to
circumvent service rules. As a consequence P obtained the benefit of paying a
lower rate of tax, his income is not subject to income tax. As the service rules were
not statutory their violation did not render the business illegal. For enforcing his
ownership interest it was not necessary for him to rely on the illegal transaction. In
Jamqu rao Vs. appaya (1968) A.S.C. (1358) the plaintiff agreed to purchase lands.
If the lands sought to be purchased were included in the previous holding he would
hold lands in excess of the ceiling law. The agreement for purchase of other land is
not void and a suit for the enforcement of the contract cannot be resisted on the
ground that if permitted it would result in transaction of law.
8.2 FRAUDULENT
An agreement with the object of committing fraud is illegal. An agreement to
defraud the Tax authorities by evation is illegal and cannot be relied upon in a
court of law. Similarly an agreement to take share in a company for the purpose of
inducing the public fraudulently that there is a market for the shares is illegal. An
agreement to defraud creditors or to give a fraudulent preference to a creditor or to
defraud the investors of a company are illegal. An agreement between A and B to
purchase property at an auction in sale jointly and not to bid against each other, is
lawful.
A sale of land pending a suit against the vendors to recover a debt is not
invalid merely because the motive of the vendors may have been to prevent the land
from being attached and sold in execution. Section 53 of the Transfer of Property
Act provides that every transfer of immovable property made with intent to defeat or
delay the creditors of the transferor is voidable at the option of any person so
defeated or delayed. This provision shall not affect the rights of any transferee in
good faith and for consideration. This section declares that such a transaction is
voidable at the option of the affected party.
8.3 INJURY TO PERSON AND PROPERTY OF ANOTHER
The consideration or object of an agreement will be unlawful, if it involves
injury to the person and property of another. An agreement to commit a crime or a
civil wrong or to assault or beat another will fall under this category. An agreement
involving the publication of libel, deceit or the perpetration of a fraud will come in
this category.
Immoral contracts: Contracts relating to sexual immorality like agreement for
future illicit cohabitation are void. But contracts in considerations of past illicit
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cohabitation are valid. In the first case the consideration is future cohabitations
and in the latter it is past cohabitation. In the case of collateral contracts they will
become void if they are made knowingly for an immoral purpose. An agreement
though innocent at its inception will be vitiated if it is intended for furthering an
immoral purpose. In Pearce vs brooks (1866) L.R. I-Ex 212 a firm of coach builders
agreed with the defendant, a prostitute to hire to her an ornamental horse carriage
with the knowledge that it will be used by her in furtherance of her immoral trade.
When she failed to pay the hire charges it was held that they could not recover.
Therein it was observed “if articles are sold or something is hired to a prostitute for
enabling her to carry on her profession neither the price of the articles sold nor the
rent of thing hired cannot be recovered.
A landlord who let a flat to a women who is mistress of a certain man and the
rent is paid by such person cannot sue the woman for rent. Any agreement
between the parties which is likely to interfere with marital relations is unlawful.
But it was held by the House of Lords that a promise by a married man to remarry
was not illegal or invalid if given after a decree nisi dissolving his marriage was
obtained by the first wife. Therein Lord Atkin observes “the doctrine (of public
policy) should only be invoked in clear cases in which the harm to the public is
substantially incontestable and does not depend on the idiosyncratic inferences of a
few judicial minds. The contracts should be given the benefit of doubt”.
A promise to pay for future cohabitation is unenforceable. But a promise to
pay for past cohabitation is enforceable even where the circumstance rule out the
possibility of a continuing cohabitation. In Nagaratnama Vs. Kunakuvamayya
A.I.R. 1968 S.C. 250 certain properties belonging to the joint family were gifted by
the Karta of the family in consideration of past cohabitation. When a member of a
joint family sought to set aside the gift as not binding on the family it was held that
the Karta had no power to make a gift and therefore the gift was void, but they
recognized that past cohabitation may form a good consideration.

A promise to pay must be distinguished from a completed gift. In Ayerst vs

jenkins 1873, L.R. 16 FQ 275 a man settled property on a woman with whom he
was cohabiting. When his legal representatives sued to set aside it was dismissed
with these observations. “The voluntary gift of party of his own property by one
though a participant in a criminal act to another is in itself neither fraudulent nor
prohibited by law. In Feuder Vs. St. John mildmay (1938) A, C. I. A married man
met the plaintiff a nurse at an hospital and asked her whether she will marry him if
his wife divorced him. When she consented to the proposal they lived as husband
and wife. His wife filed a suit for divorce on the ground of husbands adultery and
the marriage was dissolved. The defendant (married man) committed a breach of
his promise by marrying another woman, When the plaintiff (nurse) sued him it was
held that she can recover damages. It was held that a contract made between
decree nisi and decree absolute for marriage after dissolution of the existing
marriage is valid.
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8.4 MAINTENANCE AND CHAMPERTY

Maintenance has been defined by Lord Denning as improperly stirring up
litigation and strife by giving aid to one party to bring or defend a claim without just
cause or excuse. Champerty is an arrangement whereby a promise is given to a
person of a share in the proceeds of an action in return for providing evidence of
financial assistance to the person who conducts the litigation. As the object of a
contract of maintenance and champerty does not given rise to criminal or civil
liability and contract aimed at these two activities are illegal.
In Hill Vs. archbold (1968) I.Q. B. 686 the word maintenance has been defined
as follows. “A person is guilty of maintenance if he supports litigation in which he
has no legitimate concern without just cause or excuse. In modern times when the
cause is supported by a trade unions or other association the concept of just cause
has been given a wider meaning. Thus in the above case an employer supported an
action for libel brought by an employee to protect his reputation. It was held that it
will come within the purview of maintenance. The court will look with disfavour
any champertous agreements between a solicitor and his client under which the
solicitor is to receive a share of the proceeds of his client’s litigation”. In Bhagwat
dayal singh Vs. Debi dayal sahu (1908) 35. Cal. 420 the Privy Council held that an
agreement champertous according to English law was not necessarily void in India;
it must be against public policy to render it void here. It was observed in a case
that agreement of this kind ought to be carefully watched and when found to be
extortionate and unconscionable so as to be inequitable against the party or to be
made, not with bonafide object of assisting a claim believed to be just and of
obtaining a reasonable recompense therefore, but for improper object, as for the
purpose of gambling in litigation or of injuring or oppressing others by abetting and
encouraging unrighteous suits so as to be contrary to public policy, effect ought
not be given to them”. A contract to assist a litigant so as to delay the execution of
a decree against him is opposed to public policy and cannot be enforced.
Public Policy
Even though a contract does not involve the commission of a legal wrong it
may be declared as illegal because of its tendency to bring out a state of affairs
which the law disapproves on grounds of public policy. It is illegal of injury to the
public is its probable and not merely its possible consequence. As early as 1824 it
was observed that public policy was ‘a very unruly horse, and once you get as to
vide it, you never know where it will carry you’. It may lead you from the sound
law. Lord Denning observes that with a good man in the saddle the unruly horse
can be kept in control. It can jump over obstacles. It can leap the forces put up by
fictions and come down on the side of justice. In Initial service Ltd Vs. putterill
(1908) I.Q.B. 399) the plaintiff’s former manager threatened to disclose to the
newspapers certain confidential information at a time when there was public
concern about increased prices and all forms of ‘price fixing’. The information was
that laundry companies were acting in concern to raise their prices. It was held
that an agreement by the manager not to disclose such information would probably
have been contrary to public policy.
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The head of public policy will include a wide range of topics as well. Any
agreements, like trading with the enemies (during times of war) or tending to
pervert or abuse justice, or imposing inconvenience or unreasonable restriction in
the choice of individuals in marriage, or affecting their liberty to carry on a lawful
trade or calling, maintenance and champerty will come within the definition of
public policy. A contract unduly fettering the liberty of the individual is void. But
where a father agreed to pay his son’s debts (who is a spend thrift) and the son
agreed not to go within 80 miles of London, it was held that contract can be
enforced because the subject of the restriction was to reform his son. (Denny’s
trustee Vs. dery) I.K.B. 583.
8.4.1 Trading with an enemy
An agreement which injure the relationship of the state with other states will
fall under two heads. They are: (1) Hostile dealings towards a friendly state 92)
Friendly dealings with a hostile State.
Contracts with an alien emeny during times of war are illegal. It is stated that
the kings subject cannot trade with an alien enemy. On the contrary any
agreement which contemplates action hostile to a friend by country is unlawful and
cannot be enforced. An enemy for this purpose is a person voluntarily resident or
carrying on business in enemy occupied territory. If the foreign law is repugnant to
local law, the courts will not enforce the same. If two persons knowingly contract to
break such a law they cannot seek the assistance of the court. (Refer to Regg Aoni
Vs. K.C. Sethia (1944) AC 301 already discussed.
In Re budische Co Ltd. (921) 2. Ch. 331 it was observed with reference to
contracts of trading with the enemy as follows: “Contracts made directly with
enemies as contracting parties are declared illegal on the ground of public policy
based upon one of two reasons, either that the further performance of the contract
would involve intercourse with the enemy, or that the continued existence of the
contract would confer upon the enemy an immediate or further benefit”.
8.5 VOID AGREEMENTS
Section 2 (g) defines a void agreement as follows. “An agreement not
enforceable by law is said to be void”. Under Section 24 of the Contract Act if any
part of a single consideration for one of more objects or any one or any part of any
one of several consideration for a single object is unlawful, the agreement is void A
promise made for unlawful consideration cannot be enforced.
8.6 AGREEMENTS WITHOUT CONSIDERATION
Section 25 provides that an agreements without consideration is void subject
to three exceptions which has already been discussed under the chapter on
consideration. Section 25 deals with cases in which consideration may be
dispensed with. A common example of an agreement without valuable consideration
is a gratuitous promise given and accepted. This section deals with the principle
that an agreement without valuable consideration (Nudum Pactum) is void and it
cannot be enforced. The Explanation provides that is some consideration even
 92

though inadequate, the agreement is valid. The consideration must be something

of value which affects a small change in the promissee’s position. Even the
inconvenience caused by the using of smoke ball as in Carlill Vs. Carbolic Smoke
Ball Co or the using of a special comb for a certain period may be sufficient.
That is why it is commonly referred that the consideration must be good
sufficient or valuable. An apparent consideration having no value is no
consideration at all. A promise or performance of this kind is called an “unreal
consideration”.
8.6.1 Contract in Restraint of Personal Authority and Parental Authority
Under English law, restrictions on the personal freedom of person are always
kept to a minimum. Contracts restraining this freedom are generally void. But
contracts of employment even if made for life are an exception to the general rule.
Such contracts should not contain servile incidents. So a contract, imposing any
unreasonable restrictions on a person’s right to live in a place, or to more about or
any of his other activities is void.
Transfer of Parental Authority: According to law a contract by a parent to
transfer parental rights is void. The father is the natural guardian of a minor. He
may in his discretion as guardian can entrust the custody and education of his
children to another. But a father cannot by contract … himself to his children or
their custody. An antinuptial agreement between husband and wife belonging to
different religion that boys shall be brought up according to the father’s religion and
girls in the religion of the mother is not binding on the parties. Merely because
there was a breach of contract between the parties no damages can be recovered.
The decision on this question will depend upon the question as to what is for the
welfare of the child.
8.6.2 Agreements which Tend to Affect the Freedom and Security of Marriage.
Contracts in general restraint of marriage are void. Similarly contracts
unreasonably affecting freedom of choice in marriage are void. But contracts
restraining marriage with a particular person or in partial restraint of marriage are
valid in English law. Section 26 provides that “Every agreement is restraint of the
marriage of any person other than a minor, is void. Under the Contract Act any
restraint from marrying for a fixed period or from marrying a particular person is
void. The only exception is in favour of a minor. Under Muslim law an agreement
by which the first wife is given the right to divorce the husband when he marries a
second time was held valid.
Marriage brokage contract, that is contracts to introduce men and women to
each other with a view to their subsequent marriage are void. Similarly an
agreement to introduce a person to others of the opposite sex with a view to
marriage is invalid. (as in the case of a Matrimonial bureau) A penalty upon
remarriage may not be construed as a restraint on marriage. A condition in a wakf
that the widow of the co-sharer would forfeit her right of maintenance if she
remarried is valid.
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8.6.3 Contracts in Restraint of Trade

A contract in restraint of trade is one which restricts a person wholly or
partially, from carrying his trade or business. All such contracts are void and will
be enforced only if they are reasonable under Sec. 27 “Every agreement by which
any one is restrained from exercising a lawful profession, trade or business of any
kind, is to that extent void. In Petrofina (Great Britain) Ltd Vs. Martin (1966) ch,
146 an agreement in restraint of trade has been defined as one in which a party
agrees with any other party to restrict his liberty in the future to carry on trade
with other persons not parties to the contract in such manner as he chooses. This
kind of agreement can be divided into two categories. (1) Agreement between an
employer and employee not to set up a business of his own on leaving the
employer’s service or to seek a job in a rival company, (2) An agreement to purchase
a business with its good will under which seller covenants not to carry on a
competitive business with that of the buyer. Exception 1 to Section 27 of the
Indian Contract Act embodies such a principle. This section has abolished the
distinction between partial and total restraints of trade.
In English law contracts to prohibit or restrain a person from pursuing any
trade at any time or at any place was construed to be against public interest. Later
it was found that public interest would not suffer if a man who sold the goodwill or
a business bound himself not to start a competitive business. Soon it became well
established that contract in general restraint of trade were invalid, but a contract in
partial restraint of trade if reasonable would be upheld.
The policy of the law in respect of restraint of trade was laid down by the
House of Lords in Nordenfenit Vs. maximum nordenfiet guns and ammunition Co.
Ltd (1894) A.C. 535. N was an inventor and manufacturer of guns and
ammunition. He sold his business to a company and agreed that for twenty five
years he would not manufacture guns or ammunition in any part of the world. He
expressly reserved the right to deal in explosives other than gun power, in
torpedoes, or in submarines. When N entered into the service of a rival company
dealing with guns and ammunition the respondent sought an injunction restraining
him from so doing. It was held that the restraint of itself did not mean that the
restraint was void. It was observed that restraints of trade and interference with
individual liberty of action many be justified by the special circumstances of a
particular case.
In Amoco Australia Pvt Ltd. Vs. Rocca bras. Motor engineering Co. Pte. Ltd.
(1975) AC 567 the appellant an oil company contracted with the respondent that
the latter should build service station on their land and lease it to Amoco who
would underlease it to Rocca. The underlease contained unreasonable restraint
relating to the supply of petrol. The headlease contained a clause that it should be
independent of any other agreement. Held that the convenants in restraint of a
trade in a lease had to be treated on the same principles as in contracts, and the
restraint in the underlease was not severable from other contracts the headlease
and underlease were part of a single transaction and the statement that the
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headlease was to be independent was not true. Consequently as the underlease

was invalid the headlease also was invalid the headlease also was invalid and could
not be severed from the underlease.
Section 27 of the Act aims at contracts wherein a person precludes himself for
a certain period of over a limited area from exercising his profession, trade or
business and not contracts which are entered into by the person with third parties
in the course of his profession trade or business. An agreement of service by which
an employee binds himself during the term of his agreement, not to complete with
his employer directly or indirectly is not in restraint of trade In Deshpande Vs.
Arvind mills Ltd 1946. A.B. 423 a person was employed as a weaving master for
three years and agreed not to serve anyone else in India during that period. After
one year he left the service and joined another mill as weaving master. The court
construed the prohibition as confined to the profession of weaving master. It was
held that the agreement was reasonable and issued an injunction against the
employee.
In Niranjan shankar golikari Vs. the Century spinning & manufacturing Co
Ltd 1967. A.S.C. 1098 the respondent entered into an agreement with a German
Company for transfer of their technical know how for the tyre cord yarn plant. It
provided that the company would keep it secret during the period the technical
knowledge. The appellant was appointed on condition that he should sign a
contract for 5 year covenanting during that period he would devote wholly all his
time and energy to the business and shall not engage in any business. If ever he
left the service early he shall not serve any Period, for any person in a similar
business carried on by the company and agreed to pay liquidated damages. Having
received the training he resigned and got employed in another company. When the
company sued for an injunction restraining the appellant from serving any other
company it was granted. In NaGle Vs. feilcen (1966) 2 Q.B 633 court took the view
that an injunction could be granted against the stewards of the Jockey club to
restrain them from applying a rule under which trainer’s licences were not granted
to women, since such a rule arbitrarily deprived woman of the right to work as a
race – trainers. The power of issue injunction may be restricted to cases in which
the right to works is threatened by a contract in restraint of trade.
8.7 EXCEPTIONS TO THE DOCTRINE OF RESTRAINT OF TRADE
The first exception to Section 27 deals with instance of a sale of goodwill in a
business under which the seller covenants with the buyer not to carry on a similar
business, within specified local limits, so long the buyer carries on the business,
provided the limits appear to be reasonable Covenants which do not protect the
business, but made with the object of restraining competition will not be upheld.
The object of the exception of Section 27 is to protect the interest of the purchaser
of the goodwill, it has been declined in a case as nothing more than the probability
that the old customer will resort to old ‘place’. Such restriction enables a person to
utilize his skill and money for the benefit of the public at large. In Van couyer malt
and sake Brewing Co Ltd Vs. Vancouver breweries Ltd (1934) A.C. 181 a
 95

manufacturer having brewers licence for beer, but carried on the manufacture of
rice spirit assigned his brewer’s licence to respondents and covenanted not to brew
beer for 15 years. It was held by the Privy Council that the covenant is void. Since
there was no brewing business to protect at the time of assignment the covenant
that the company will not brew beer for fifteen years was held to be void. Though a
total restraint of trade is void a partial restraint coming under exception I is valid as
it is not adverse to the public interest. In Chandra Kanta aas Vs. parasulla mullick
(1921) L.R. 48 I.A. 508 a ferry business was disposed off with a restraint on the
seller not to carry on trade for three years. It was held that the transaction
amounted to sale of goodwill and was enforceable. The agreement protecting the
goodwill must be reasonable and specify local limits of the restraint.
Another exception under the Partnership Act enables the partners during the
continuance of the business to restrict their liberty to carry on a similar business
as that of the partnership. Similarly an outgoing partner maybe restrained from
carrying on a similar business for a specified period within a specified local area.
Such agreements are lawful if the restraints imposed are reasonable. So long as
there agreement between the partners restraining one of them or some of them
carrying on a similar business specifies the time and local limits and is reasonable
it is valid and enforceable.
8.8 TRADE AGREEMENTS
A common feature of traders is to enter into agreements for regulating the
production and distribution of commodities manufactured by them. If their object
is to regulate business, but not in restraint of it, they are valid. The law will not
allow unreasonable restraint being imposed under the guise of trade regulations.
For example an agreement restricting the business of a mill within a zone is invalid.
In Fraser & Co Vs the Bombay inc manufacturing co. 1904. 29 Bom. 107 it was
held that a stipulation restraining the parties to a combination agreement from
selling ice manufactured by them at a rate lower than the rate fixed in the
agreement was not void under this section. Similarly a stipulation not to in cotton
or sell inc below a fixed rate does not amount to an unreasonable restraint. What
the stipulation intends to provide is that in the exercise of the business certain
terms shall be followed.
The thing to be consulted in such trade agreements is the interest of the
public. In English law the Restrictive Trade Practices Act, 1956 declares such
agreements as void unless they are shown to be in public interest. In the United
States the Sherman Act, 1890 provided a set of antitrust laws to eliminate restraint
on trade. In our country the Monopolies Commission having its office at the capital
is doing commendable work in preventing monopolies and restrictive trade
practices.
Exclusive dealing agreements (solus agreements) Under this agreement “a
person may enter into an agreement by which he undertakes to buy all that he
requires of a certain commodity from a single seller and from no other source, or to
 96

sell His whole output of a certain commodity to a single buyer and to no other”. In
other words a solus agreement is one where by owner of a petrol bunk binds
himself to buy all his petrol from an oil company is not necessarily in restraint of
trade because in view of the agreements for the distribution of petrol, the
prevalence of such arrangements to the necessity for oil companies to protect their
trade outlet such an agreement will be reasonable. In Ess petroleum Co. Ltd Vs.
Haiper’s garage (stocrhor Ltd ssl 1968) A.C. 279 the respondent into an agreement
in respect of garages. In the case of first garage they undertook to purchase from
the appellants all their requirements of petrol for a period of 4 years and 5 months.
Another clause provided that if they sold the garage, the respondent were bound to
procure the buyer to enter into similar agreement with the oil company. The
respondents were required to keep open the garage at all reasonable times for the
sale of petrol. In return they will get rebate on the petrol sold.
For a loan ₤ 7000/- the respondents entered into a mortgage of the garage
with the appellants and agreed to repay the loan during the next 21 years and not
to redeem it before that period. They also agreed that during the period of mortgage
they will follow the obligations similar to the agreement relating to the first garage.
When the respondents began to sell another brand of petrol the appellant sued for
enforcing the obligation. It was held that agreement for 4 years and 5 months
relating to the first garage was reasonable while the second agreement relating to
the garage for 21 years was unreasonable and was therefore unenforceable.
In petorofiua (great Britain) Ltd Vs Martin. 1966 Ch. 146 the respondent was
negotiating for the purchase of a garage. He signed a solus agreement with the
company as a condition of a sale. He signed a solus agreement with the company
as a condition of sale. He agreed to buy all petrol from P and sell no other brand or
petrol and he would advertise only P’s lubricating oil and use that oil in the garage.
The agreement also provided that he would not sell or otherwise dipose of the
garage without first giving P first refusal and then only to person willing to enter
into a solus agreement. The agreement would continue for 12 years though it can
be terminated by a three months notice once 600,000 gallons of P’s petrol had been
sold. It was held that as the agreement operated as a restriction on the way in
which M could carry on his trade in his own land P having no interest by way of
mortgage or lease in respect of that land the doctrine of restraint of trade was
applicable. Secondly the restrictions on the respondents power to dispose of the
property and the use of the lubricating oils in the garage were held to be
unreasonable. Lastly as these provision restraining the respondent are not
severable from the main agreement it was held that the agreement as a whole was
an unreasonable restraint of trade and was unenforceable.
The courts will not lend its aid to any agreement by which the buyer intends to
monopolies or corner the goods with the intention of selling it at a price fixed by
him. In Shaikh Kalu Vs. Bamsarah Blagat (1908) 80. W.N. 388 a person entered
into a agreement for the purpose of selling combs with all the manufactures of
combs at Patna, who undertook to sell all the combs produced to him and to his
 97

heirs but not to others. It was held that the agreements is void as it bound the
manufacturers from generation to generation to sell their combs and it was
intended to create the monopoly.
8.8.1 Agreements which interfere with the administration of justice
An agreement between two persons made with the object of interfering with the
administration of justice is void. Similarly an agreement to delay the execution of a
decree or an agreement to perform puja for ensuring success in a litigation it void.
An agreement which purports to out the jurisdiction of courts is void. But law
permits an agreements enable the parties to refer dispute for arbitration in the first
instance. But it cannot deprive the parties their right to have any point of law to be
decided by courts. An example of an agreement which ousts jurisdiction of the
courts is where a wife agrees not to apply to courts for maintenance in return for a
promise by the husband assuring to make her fixed allowance.
Contracts between parties for stifling prosecution are opposed to public policy.
The courts will not allow or give effect to an agreement which oust the jurisdiction
of courts and puts it in the hands of individuals. But Code of Criminal Procedure is
an exception in that it allows compromise agreements between persons in respect of
compoundable offences. Even under that statute compromise of a non
compoundable offence is not permitted. In Narasimharaju Vs. Gurumurthy raju,
A.I.R. 1964 S.C. 107 case were pending under Section 420, 465, 468 & 471 read
with Section 107 and 120-B of the Indian Penal Code. The parties entered into an
agreement to refer their dispute for arbitration. Some of the offences are non-
compoundable. The dispute was referred to arbitration after withdrawal. At the
time of enforcing the award of the arbitration it was contended that the reference to
arbitration was an agreement to stifle prosecution. It was held that the agreement
was invalid under Section 23 of the Contract Act as being opposed to public policy.
In Ouseph poulo Vs. Catholic Union bank, A.I.R. 1965 S.C. 166 a bank found that
the goods in its godown pledged to it were either overvalued or withdrawn in
collusion with bank officials. The debtors agreed to make good the loss by pledging
some more property. As there was some delay in the hypothecation the bank filed a
complaint which was later with drawn after the pledging was completed. It was
held that as the agreement was entered into before the complaint was filed it would
be unreasonable to suggest that the document in question was executed with the
object of stifling prosecution. It was observed, “In India, this doctrine (of stifling
prosecution) is not applicable to compoundable offences nor to offences which are
compoundable with the leave of the court where the agreement in respect of such
offence is entered into by the parties with the leave of the court”.
Where the parties agree that as between two courts having concurrent
jurisdiction the suit shall be filed in one of those courts and not in the other it does
not contravene the provisions of this section.
Exception to Section 28 applies to those contracts where the parties have
agreed that no action shall be brought until the question of amount has been first
 98

decided by a reference. For example the amount of damage sustained by the

assured in a marine or fire insurance policy has to be assessed before an action is
brought. The party’s hands are tied only for some period till the amount of money
has been ascertained.
Exception 2 saves the contract where in some question is already referred to
arbitration. A contract in writing by which two or more persons agree to refer to
arbitration any dispute between them which has already arisen or affects any
provision of law in force for the time being as to reference to arbitration will be
valid.
8.8.2 Uncertain Agreements
An agreement is not a binding contract if it lacks certainty, either because it is
too vague or because it is obviously incomplete. Under Section 29 agreements the
meaning of which are not certain or capable of being made certain are void”.
Section 93 of the Indian Evidence Act prohibits the admission of extrinsic evidence
to explain or amend the document when the language of the document is
ambiguous or defective illustration (f) to see. Sec 29 will make the position clear. “A
agrees to sell to B” my white horse for rupees five hundred or rupees one
thousand”. There is nothing to show which of the two prices was to be given. The
Agreement is Void. In Guthing Vs. Nlyn a horse was bought for a price coupled
with a price to give ₤ 5 more if it proved lucky. As the court had no method to
determine the good luck or bad luck of the horse the agreement was held to be void
for uncertainty.
Where the goods are sold but the price is paid subject to hire purchase
conditions or as agreed between the parties to contract is void for uncertainty as to
price. An exception can be found in Sec.9 (1) of the Indian Sale of Goods Act, 1930
under which when goods are sold without naming a price the bargain is understood
to be for a reasonable price. But were the price is left to be fixed by a third party
there is no uncertainty and the agreement will be enforceable. An agreement to pay
a certain amount after deductions as would be agreed upon between the parties is
void for uncertainty. But a term in an agreement that a dispute arising out of the
contract be settled by arbitration according to a specified association is not vague
or uncertain. An agreement to agree in future is not a contract. The law will
uphold a contract wherever possible test it should be blamed as the destroyer of
bargains. The law requires the parties to make their own contract. It will not
construct contract for the parties out of terms which are uncertain, indefinite or
unsettled.
An agreement may be so vague that no definite meaning can be given to it
without adding new items. In Scammel & Newphew Ltd Vs. Ouston. 1941. A.C. 251
it was laid down that an agreement to buy goods “on hire purchase” was too vague
to be enforced since there were many kinds of hire purchase agreements in widely
different terms and it was impossible to say on which terms the parties intended to
contract. In Hillas & Co Vs. Argos Ltd (1932) 147 L.T.503 the plaintiff entered into
 99

agreement with the defendants for the purchase of Russian softwood timber. An
option in the contract to purchase further timber in future gave no particulars as to
the kind or size or quality of timber. It was held that by referring as to previous
dealings there was sufficient intention to be bound. Even if the terms are uncertain
the option could be ascertained by reference to those contained in the original
contract and the practice followed in the timber trade. Thus vague phrases can be
interpreted in the light of what is reasonable.
The vagueness in a contract may be resolved by custom. An agreement which
is vague and uncertain may be binding, because one party to the contract may be
under a duty to resolve the uncertainty. But if any words or phrases used in a
contract are meaningless it can be ignored. Thus in Nicolence Ltd Vs. Simmonds
1953. I.Q.B.543 steel bars were purchased. The contract contained a clause that
the sale was subject to “the usual conditions of acceptance”. As there was no usual
conditions of acceptance it was held that the phrase was meaningless. The phrase
can be severed from the contract and it did not vitiate the contract.
8.9 WAGERING CONTRACTS
Sir William Anson defines a wagering contract as “a promise to give money or
money’s worth upon the determination or ascertainment of an uncertain event”
Cockburn. C.J. defines it “as a contract by A to pay money to B on the happening
of a given event in consideration of B paying to him money on the event not
happening. If one of the parties has the event in his hand, an essential ingredient
of wager is lacking. In a wager each side should stand to win or lose according to
the happening of an uncertain or unascertained event with reference to which a
risk is taken. If an agreement does not involve loss to either party it is not a wager.
Hawkins, J. definition of a wagering contract is more appropriate and also approved
in the latter cases. “A wagering contract is one by which two persons, professing to
hold opposite views touching the issue of a future uncertain event, mutually agree
that, dependent on the determination of the event, one shall win from the other,
and that other shall pay or hand over to him, a sum of money or other stake;
neither of the contracting parties having any other interest in that contract than the
sum or stake he will so win or lose there being no other real consideration for the
making of such contract by either of the parties. It is essential to a wagering
Contract that each party may under it either win or lose, whether he will win or lose
being dependent on the issue of the event, and therefore, remaining uncertain until
that issue is known. If either of the parties may in, but cannot lose, or may lose
but cannot win, it is not a wagering contract”. The law requires the existence of two
parties and mutual chances of gain and loss. Though an insurance contract
resemble a wagering contract in reality they are difference transaction. A wagering
contract is not illegal, but the law gives no assistance in enforcing it, and is
therefore a void contract.
A contract of insurance is a contract made in good faith. It protects the
assured from any loss caused to him. A wagering contract is not a contract of
indemnity. A contract of insurance is not a wagering contract though at times it
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may turn out to be a wagering contract. The law requires the sence of “insurable
interest” in a contract of insurance. Which distinguishes a genuine insurance
contract from a wagering contract. The Marine Insurance Act provides that a
contract of marine insurance shall be deemed to be a wagering contract if the
assured has no interest either actually or prospectively. In Alamai Vs. Positive
Government Security Life Insurance Co (1898) 23. Bom 191 the Bombay High
Court held that an insurance policy on the life of a person in whom the insurer had
no interest was void as a wagering contract. But a third party insurance policy
effected by the owner of a vehicle is not void though the registered owner was a
benamidar for the real owner. Since the registered owner had sufficient insurable
interest to effect the insurance it is not hit by Section 30 of the Act.
8.9.1 Speculative Transaction
In the case of contracts in stock exchanges, if the parties intend that no stock
or goods shall be delivered, but that differences alone shall be paid then the
contracts are void as being wagers. Though it is provided that either party may
require completion of the purchase the result would be the same. But if they
contract genuinely the transfer of goods, but instead carrying out the bargain the
parties pay the differences in price the contracts will nevertheless be enforceable.
Where the parties never intended actual transfer of goods, but only payment of
differences according to the market fluctuations, it is a wagering contract. Thus in
Doshi Talakshi Vs. Shah Ujanshi velsi (1889) 24 Bom. 227 a contract for the
purchase of Broach cotton was entered in a place where the cotton never found its
way. The rules framed by the merchants provided for the delivery of cotton in every
case and prohibited the gambling in differences. It was proved that in all the
dealings the difference between the contract price and market price on the vaida
(settlement) days was paid. It was held that the contracts are wagering contracts
falling within the purview of Section 30. In all cases the intention of the parties is
gathered from the surrounding circumstances. Thus in Kong Yee Lone Vs. Lowji
Nanjee (1901) 29. Cal. 461 a rice mill owner whose capacity will be around 69,000
bags per annum agreed to sell 199,000 bags of rice. Though it is possible to enter
into transaction beyond their capacity it is very unlikely in this case. The contract
was never completed. So it was held that the parties never intended completion.
So far we have seen that the parties to a wagering contract cannot enforce it.
In the case of an agent or broker he can maintain a suit against the principal to
recover the brokerage or commission in a wagering contract. Though a wagering
contract is void it is not forbidden by law. In Gherulal parekh Vs. Mahadeo. A.I.R.
1959 S.C 781 it was held that a partnership for the purpose of entering into
wagering transaction is not illegal and the partner who paid the loss on such
transaction can recover proportionate share from the other partners.
A crossword puzzle where prizes offered to a person submitting solution which
corresponds to the solution already set by the editor is a lottery because it is not
the best solution of the competitor, but the solution corresponds to the set solution.
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Similarly in Sesha Aiyer Vs.Krishna aiyar, A.I.R. 1936 Mad 225 it was held that a
KuriChit fund is a lottery. A contract to purchase a lottery not authorized by the
government is void as it is a wagering contract.
But if in a crossword competition (Puzzle) the skill of the competitor plays a
major role, it is not a lottery and it cannot be declared as a wager.
But under the exception to Section 30 betting on horses in a horse race or
towards any plate, prize or a sum of money to Rs.500/- or more are valid. Section
30 “shall not be deemed to render unlawful a subscription or contribution, or
agreement to subscribe or contribute, toward any plate, prize or sum of money of
the value of Rs.500/- or upwards to be awarded to the winner of any horse race”.
8.10 EFFECTS OF ILLEGALITY
The principle upon which the courts act when dealing with illegal contracts
was succinctly stated by Lord Mansfield long ago “The objection that a contract is
immoral or illegal as between plaintiff and defendant sounds at all times very ill in
the mouths of the defendant. It is not for his sake however that the objection is
ever allowed; but is founded in general principle of policy, which the defendant has
the advantage of contrary to the real justice as between him and the plaintiff by
accident if I may so say. The principle of public policy is this; er dolo mulo non
oritur actio. No court will lend its aid to a man who founds his cause of action
upon an immoral or an illegal act. If from the plaintiff’s own statement or the cause
of action appear to arise. Exturpi causa or the transgression of a positive law of
this country, there the court says he has no right to be assisted. It is upon that
ground the court goes not for the sake of the defendant, but because they will not
lend their aid to such a plaintiff. So if the plaintiff and defendant were to change
sides, and the defendant was to bring his action against the plaintiff, the latter
would then have the advantage of it; for where both are equally in fault, potior est
condition defendentis”.
The effect of illegality on a contract is to render it void, the maxim being
Exturpi causa non oritur Actio. The law will not give its assistance to the guilty
party. Consequently he cannot recover any money paid or goods supplied under
such an illegal contract. He cannot sue for damages or the price of the goods,
because he cannot rely upon his own illegality. In Berg Vs.Sadler (1937) 2.K.B. 158
the plaintiff was a retailer and the defendants were wholesalers in the tobacco
business. The plaintiff knew that the defendants would not supply him as he had
been on a stop list for price cutting. Concealing his identity and by means of an
agent he induced the defendant to sell him cigarettes and paid ₤ 195 for them.
Later the defendant suspected fraud and refused to deliver the cigaretters or to pay
back the price. A suit by the plaintiff for the return of the price failed because he
was engaged in an attempt to perpetrate a criminal fraud.
8.10.1 Contract itself illegal
An illegal contract cannot be enforced by either party. If the contract is illegal
it is immaterial that the parties are not aware of the illegality. In a recent case an
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English woman residing in France during the war borrowed money contrary to law.
(Payable in Sterling). Though they were aware of the emergency rule it was
provided that money should be paid when it was legal to do so. It was held that the
contract was illegal and void and the person who lent was unable to recover his
money.
In all illegal contract money or goods cannot be recovered even by a non
contractual remedy. But there are certain exceptions to this rule. Though a person
transferred his property under an illegal contract he can recover the goods if he
does not rely upon illegality to assist the case. The effect of illegality will always
depend upon the intention of the parties.
An innocent party can get relief from a court eventhough the contract is lawful
but one of the parties intends to use it for an unlawful purpose. If the innocent
party knew nothing of the illegal purpose, he is entitled to recover the money due to
him under the contract or can obtain damages in full.
Where the subject matter of the contract is illegal the innocent party cannot
compel the performance of the agreement though he can sue for damages if he was
ignorant of the facts constituting illegality. Similarly where a contract is performed
illegally the innocent party can sue for damages for breach. (Ref of Archibold’s
Freightage Ltd Vs. Spanglett Ltd). An exception to this rule is that where a party
though innocent has knowledge of the facts constituting illegality cannot plead that
he is ignorant of law. For the maxim is “ignorance of law is no excuse”. In I.M.
Allan Merchandising) Ltd Vs. Cloke 1953. 2 Q.B 340 a suit for money payable in
respect of an unlawful game “Rouletre Rayole” was filed by the plaintiff. The
parties were not a ware at the time of the contract about the illegality of the game.
So the plaintiff pleaded that he had no intention to break the law. It was held that
ignorance of law was no answer to the charge of illegality.

Where a contract is expressly and impliedly forbidden by law or by public

policy is void and cannot be enforced eventhough the parties are ignorant of the
facts. In Re. Mohammed and Ispahani 1921. 2.K.B. 716 the plaintiff having been
ignorant of the fact that defendant had no licence to sell linseed oil agreed to supply
him the said oil It was held that he cannot recover damages for non-acceptance in
face of a statutory prohibition. Similarly where a person enters into a transaction
with an alien enemy no cause of action will arise even though the party is ignorant
of the fact because the agreement with an enemy is prohibited and cannot be
enforced in a court of law.

Exceptions
The rule that the courts will not allow an action founded on an illegal contract
is subject to three exceptions. They are (a) Where the illegal purpose has not yet
been carried out (2) Where the parties are not in pari delicto (3) Where the plaintiff
does not have to rely on the illegality to make out his claim.
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8.10.2 Illegal purpose not yet carried into effect

Where the illegal purpose had not been carried out, one party to the contract
may repent his illegal purpose and if he does so before performance takes place the
law will assist him. If the non-performance of the contract is not due to his
repentance but to other causes the law will not help him. In other words where the
illegality is executory, the parties are given an opportunity for repentance or change
of mind. In Bigos Vs. Bousted 1951 I All E.R. 92 A wanted to send his wife to Italy
for improving her health. He agreed with B that B should provide here in Italian
currency to the value of ₤ 150/- in breach of the Exchange Control Act, 1957. He
deposited with B went to Italy but B failed to supply the currency. When A sued to
recover the share certificate it was held that as the contract was illegal and the
failure of the contract was B’s conduct and not A’s repentance the suit failed.
8.10.3 Parties not “pari delicto”
Where the parties are not in pari delicto the innocent party or the less guilty
may recover money paid or property transferred under the contract. For example
where a person was induced by a fraud to take some insurance policies on a life in
which he had no insurable interest, he can recover back the premiums he had paid
under the illegal contract. Similarly where a contract is rendered illegal by a
statute in the interest of a class of persons any money paid may be recovered.
Where a person is under a fiduciary duty to the plaintiff he cannot be allowed to
retain property or money received on the ground that the property has come into
his hands as proceeds of an illegal transaction (3) Party does not rely upon the
illegality: In a case of lease of bailment, owner can recover it from the lessee or
bailee if he does not claim under an illegal contract, but relies on his title to the
property. In Bowmakers Ltd Vs. Barnet instrument Ltd (1945) K.B.65 the defendant
agreed to hire purchase the tools of the plaintiff. Such an agreement was illegal
and the Government prohibited the sale of such machines without license from the
Minister of supply. The defendants failed to make the payment. They further sold
some tools. The plaintiff sued for damages. It was held that machine tools
delivered under an illegal sale can be recovered. In Surasai Balini Debi Vs.
Phanindra mohan majumdar A.I.R. 1965 SC 1364 it was held that a person can
recover possession of his property and business which he had made over to his
brother-in-law for evasion of taxes. In Mistry Amarsingh Vs. Kulubya (1964). A.C.
142 P.C. land was given to a non-African under a lease which is a breach of a law
in Uganda. When sued for recovery of possession the plea of illegality was raised.
The court observed it was sufficient for him to show that he was a registered
proprietor of the plots of land and that the defendant was in occupation without
possessing the consent in writing of the Governor for such occupation and
accordingly had no right to occupy.
8.10.4 Severance of illegal parts
If a part of the contract is illegal the contract will not be declared void so long
the illegal contract can be severed from the rest of the contract. But if the whole of
the contract is illegal the court will not make a contract for the parties by severing
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those portions which are illegal and given effect to the rest of the contract. The
court will sever an illegal contract by cutting words out of the contract. This is
known as the ‘blue pencil’ test. It will be possible to sever the contract by simply
running a blue pencil through the offending words. But the court cannot add or
rearrange the words or substitute one word for another. The blue pencil test may
restrict but does not determine, the scope of the doctrine of severance. The court
will not sever it, if the severance alters the whole nature of the contract.
The illegal promise must not from the main consideration for the contract. In
Bennett Vs. Bennent, a petition by wife for divorce was presented wherein she also
prayed for maintenance for herself and her son. Before the decree she agreed with
the husband not to apply for maintenance. In return the husband undertook to
pay an annuity and to give some property to her. When the husband failed to pay,
the wife sued. It was held that the covenant by the wife, not to claim for
maintenance was contrary to public policy. As this is main consideration for the
contract it could not be severed from the contract.
A court will not permit severance of a contract where it would alter the scope
and intention of the agreement. If severance of a contract alter the nature of the
contract, substantially and the parties are not willing to accept the contract after its
severance the court may order restitutio in integrum of benefits got under the
contract.
In cases of contracts in restraint of grade or legal proceedings the court sever
the objectionable clause of the agreement and allow the enforcement of the rest. In
Nordenfel. Vs. Maxim Nordenfelt Gums & Ammurition Co Ltd (1894) A.C. 535 it was
held that that part of a contract was not binding as it put an unreasonable
restraint on trade.
8.11 SUGGESTED QUESTIONS
1. What is wager? How does it differ from a Contract of Insurance.
2. Explain the law relating to agreements in restraint of trade.
3. Define a Contingent contract.
4. What is meant by maintenance and champerty?

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LESSON – 9

DISCHARGE OF CONTRACTS
STRUCTURE
9.1 Discharge of contracts
9.1.1 Performance
9.1.2 By agreement
9.1.3 Release
9.1.4 New agreement
9.1.5 Accord and satisfaction
9.2 Provision for discharge in the contract
9.3 Discharge by operation of law
9.3.1 Merger
9.3.2 Alteration or cancellation of a written instruments
9.4 By judgement of a court
9.4.1 Bankruptey
9.5 Frustration
9.5.1 Development
9.5.2 Becomes impossible
9.5.3 Commercial hardship
9.5.4 Justice basis of the doctrine
9.5.5 Implied terms theory
9.6 Foundation of the contract
9.7 Destruction of the subject matter of impossibility
9.7.1 Illegality
9.7.2 Death
9.7.3 Unavailability
9.7.4 Method of performance impossible
9.7.5 Change in the law
9.8 Effect of frustration
9.8.1 Rights accrued before frustration
9.8.2 Right not accured
9.8.3 Parties not “in pari delicto”
9.8.4 Contract becomes void
9.9 Limitations on the doctrine
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9.9.1 Self induced frustration

9.10 English law
9.10.1 Law reform (frustrated contracts) Act 1943
9.10.2 Breach of contract
9.10.3 Anticipatory breach
9.10.4 During performance
9.11 Acceptance of repudiation
9.12 Suggested Questions

9.1 DISCHARGE OF CONTRACTS

A contract may be discharged by the following ways Viz. (a) Performance
(b) Agreement (c) Acceptance of breach or (d) frustration.
9.1.1 Performance
Complete and proper performance of a contract will discharge the parties and
bring the relationship to an end. But an apparent performance of the contract may
not be a complete and proper performance. For example it may appear in a
contract of sale of goods, that the contract is performed when the price was paid
and goods delivered. But for a complete discharge the performance must be in
such a way that no ground of complaint i.e. for breach of condition or warranty
remains. Though defective performance may discharge a party in the sense that no
further performance can be required yet as he is liable in damages it is preferable
not to think in terms of the contract being wholly discharged.
9.1.2 By Agreement
A contract can be discharged by the parties calling off the contract by mutual
agreement. It can be discharged by agreement in any one of the following ways.
(1) Release (2) New agreement (3) By accord and satisfaction and (4) By a provision
for discharge contained in the contract.
9.1.3 Release
The right to performance of a contract may be abandoned by a release under
seal. If it is under seal it is immaterial that it is executed on one side, for the seal
dispenses with the need for consideration. A release not under seal requires
consideration. The agreement may be discharged by accord and satisfaction.
9.1.4 New Agreement
A contract may be rescinded by a new agreement between the parties at any
time before discharge by performance. Discharge by agreement can take place only
if there is some thing to be done by each party to the contract. If one party has
completely performed all his obligation under the contract, discharge must be
either by release under seal or by accord and satisfaction. But in the case of a bill
of exchange it can be discharged in writing and by delivering the bill to the
acceptor. The agreement for rescission may be either express or implied. Non-
performance for a long period tantamount to abandonment.
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A contract in writing may be rescinded or varied by an oral agreement. A

contract under seal may be rescinded or varied by a simple contract. But a
contract which in law has to be in writing can be rescinded but cannot be varied by
an oral agreement.
9.1.5 Accord and Satisfaction
Anson defines the term as follows: “Discharge of a contract in return for a
consideration which consists in some satisfaction other than the performance of the
original obligation is termed ‘accord and satisfaction’. Accord without satisfaction
is no discharge of a contract or a right of action arising from the contract. The
satisfaction may consist of a promise which is good consideration and an accord
supported by such consideration amounts to an enforceable agreement.
The agreement by a creditor to accept a smaller sum than is due under the
contract is accord without satisfaction. But an agreement by a creditor to accept a
smaller sum than is due in consideration of something to which he is not entitled
under the contract is a valid accord and satisfaction and is binding on the parties.
It was held in Pinnel’s case that payment of a smaller sum in lieu of a larger
sum is not a good discharge of a debt. But if the receipt by a person of some
satisfaction different in kind, or of a fixed instead of an uncertain sum or of a lesser
sum at an earlier date or in a different place than that required by the contract is
sufficient. Compromising, a disputed claim and composition with creditors and
payments by a third party are the exceptions to this rule.
9.2 PROVISION FOR DISCHARGE IN THE CONTRACT
A contract may provide for terminating it on the non fulfillment of a condition
or the happening of an event or one of the parties may exercise the power to
terminate it. The failure to fulfil a condition precedent enables a party to terminate
the contract. It may be that a contract contains a term releasing the parties from
the liability. Such term is known by the term condition subsequent. The contract
itself may give to the party the power to terminate it. For example, a contract of
hire, a contract of agency, a contract of employment, a lease or any other
agreement may be terminated. In some cases the discharge is automatic. In others
it may take place at the option of one of the parties as in HEAD Vs. TATTERSALL
1871. L.R. 7 Ex.7 where the buyer was given the option of returning the horse
bought if it did not come upto to the standard required. In both the cases the
contract contained the provision for discharge. Thus the contract may contain a
term which will provide for its termination on the non – fulfillment of a condition,
the happening of an event or on the exercise by one or either of the parties
exercising the power to terminate it. The non-fulfilment of such a condition
precedent gives a right to the party in whose interest the condition was imposed to
terminate it (Refer to the case of HEAD Vs. TATTER SALL).
A contract may also contain a term releasing the parties from liability on the
happening of a specified certain event. Such, a term in a contract is called a
condition subsequent. In GEIPEL Vs SMITH (1872) LR. 7.Q.B.404. Geipel
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chartered a vessal from Smith agreeing to load coal at Hamburg subject to the
exception clause “in the case of restraints of prices of rulers”. Due to war between
Germany and France the port at Hamburg was blockaded and S refused to load the
cargo as agreed. It was held that S was released by the exception clause in the
charterparty.
9.3 DISCHARGE BY OPERATION OF LAW
Apart from the above mentioned methods of discharge there are other modes
by which a contract will be discharged by operation. They are (1) Merger (2)
Alteration of a written instrument (3) By Judgement of a court and (4) By
bankruptcy or insolvency.
9.3.1 Merger
According to Anson if a higher security is accepted in place of a lower, the
security which is inferior merges and is extinguished in the higher. For it to take
place both the securities must be different in their legal operation and the subject
matter of the securities must be the same.
9.3.2 Alteration or cancellation of a written instrument
Where a contract is altered or erased it is discharged except as against the
person assenting to the alteration because ‘no’ man shall be permitted to take the
chance of committing fraud without running any risk of losing by the event when it
is detected’. The alteration must be made by a party or by one acting with his
consent and for his benefit. Alteration must be made in a material part. What
amounts to material alteration depends upon the character of the instrument.
In Halsbury’s Laws of England a material alteration is defined as follows: “A
material alteration is one which varies the rights, liabilities or legal position of the
parties as ascertained by the deed in its original state, or otherwise varies the legal
effect of the instrument as originally expressed”.
In KALIANNA GOUNDER Vs. PALANI GOUNDER (1970) I.S.C.C. 56 an
agreement of sale was executed under which a sum of Rs.2,000 was paid as
advance. The defendant refused to convey the land and put up the plea of material
alteration of the document by the inclusion of the words “clear the debts and
execute the sale free from encumbrances”. It was held that material alteration was
not proved and so the plea was dismissed.
9.4 By Judgement of a Court
A judgement of a competent court in favour of the plaintiff discharges the right
of action arising from the breach of contract. Plaintiff is estopped from bringing an
other action for the same cause. Damages resulting from the same cause of action
must be assessed and recovered once only, so that number of claims cannot be
made on the same cause of action.
9.4.1 Bankrupcy
A contract is not discharged by the bankruptcy of one of the parties to it. But
under the law of bankruptcy a statutory release is given from debts and liabilities
provable under that law.
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9.5 FRUSTRATION
Where the performance of a contract becomes substantially impossible without
any fault on either side the contract is dissolved by the doctrine of frustration. As
for instance in the case of TAYLOR Vs. CALDWELL a person contracted to let a hall
to the plaintiff for use for some concerts. When the hall was burnt before the
concert. It was held that the contract was dissolved by frustration. Similarly a
contract of personal service will be dissolved by the death of prolonged illness of the
servant.
An unexpected turn of event which does not create a fundamentally different
situation does not enable a party to refuse the performance of the contract on the
ground of frustration. Frustration cannot be pleaded because the performance of
the contract has become more difficult or more costly than expected or will result in
a loss rather than the anticipated profit. That is why it is observed “Frustration is a
doctrine very rarely relied upon with success. It is in fact a kind of last ditch and it
is a conclusion which should be reached rarely paid with reluctance”. In short the
discharge of a contract by frustration is the exception and not the rule.
Section 56 of the Indian Contract Act lays down that “an agreement to do an
act impossible in itself is void”. Illustration (a) to this section will make the position
clear. A agrees with ‘B’ to discover treasure by magic. The agreement is void. The
second paragraph of Section 56 contemplates a supervening impossibility or
illegality under which a contract is frustrated by intrusion or occurrence of an
unexpected event or a change of circumstances beyond the contemplation of the
parties. The event or the change should be fundamental as to strike at the root of
the contract. In order to arrive at the finding of Impossibility the court may rely
upon the belief, knowledge and intention of the parties.
9.5.1 Development
In PARADINE Vs JANE (1647) Aleyn 23; 82 E.R. 897 it was held that
supervening events provided no execuse for non performance. In that case a tenant
was sued for rent pleaded that he had been dispossessed for the last three years by
the kings enemies and refused to pay the rent. It was held that “where the party by
his own contract creates a duty, he is bound to make it good notwithstanding any
accident by inevitable necessity, because he might have provided against it by his
contract.
The rigour of this doctrine was modified by the courts later, in TAYLOR Vs.
CALDWELL (1863) 3 B & S 826 the defendants contracted to let the plaintiffs have
the use of a music hall on four days for giving concerts. The hall was burn down
before the performance. On a claim for damages by the plaintiff it was held that the
defendants were discharged from their obligation by the destruction of the hall.
This is an illustration of supervening physical impossibility.
A contract will be frustrated where the commercial object was frustrated. In
KRELL Vs. HENRY (1903) 2 K.B. 740 the defendant hired a flat in Pall Mall to view
the coronation procession of Edward VII. The contract was held to be frustrated
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when the procession were postponed because of the illness of the king. As the
object of the contract was to have a view of the coronation the taking place of the
procession was the basis of the contract. The object was frustrated by the non-
happening of the coronation.
9.5.2 Becomes Impossible
If performance of a contract becomes impracticable or unless having regard to
the object and purpose the parties had in view it must be held” that the
performance of the contract has become impossible.
The Supreme Court of India in GANGA SARAN Vs. RAMCHANRAN RAM
GOPAL 1952 A.S.C. 9 dealt with the doctrine of impossibility under Section 56 of
the Act In this case the defendants undertook to supply cloth manufactured by
Victoria Mills. The sellers will be sending the goods ‘as they are prepared” by the
Mills. When the Mills failed to supply the cloth defendant pleaded frustration. It
was held that the plea of frustration was unsustainable as the contract to supply
cloth prepared by the Mills was only descriptive of the goods and indicated the
process of delivery. The doctrine of frustration was unavailable when the non
performance was attributable to his own fault.
In SATYABRATA GHOSE Vs. MUGNEERAM BANGUR & Co 1954 A.S.C 44 a
company agreed to sell the land and undertook to construct drains and roads in the
new colony. Before the development began part of the land was acquired by the
Government for military purpose. The question was whether the agreement was
discharged by frustration. It was held that as the interruption was temporary the
parties were not discharged from complying with their obligations under the
contract.
Section 56 applies to legal and physical impossibility. It covers an agreement
to do an act which after the contract is made becomes impossible or unlawful and
the promisor was aware that the act impossible or unlawful. He must compensate
to the other party for the loss sustained by him through non-performance.
In PURSHOTAMDAS TRIBHOVANDAS Vs. PURSHOTAMDAS MANGALDAS
(1896) 21. BOMBAY 23 a Hindu father agreed to give his minor daughter in
marriage to the plaintiff, committed a breach because of the unwillingness of the
girl. The performance of the contract was not frustrated. The defendant had not
pay damages for the breach.
9.5.3 Commercial Hardship
Merely because a contract becomes economically unprofitable or more onerous
it cannot be declared as frustrated. The impossibility referred to in Section 56 does
not include commercial impossibility In DAVIES CONTRACTORS Ltd. Vs. FAREHM
URBAN DISTRICT COUNCIL (1956) 2 All E.R. 145 a contract to build houses for the
council could not be completed in time due to labour strikes and bad weather.
When it was completed after the delay the cost was much more than agreed. The
contractor claimed the discharge of the contract and he should be paid quantum
merit basis (actual cost to be paid). It was held that what had taken place was an
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unexpected turn of events which made the contract more onerous than had been
contemplated. But this did not operate to frustrate the contract. In SACHINDRA
NATH Vs. GOPALCHANDRA A.I.R. 1949 CALCUTTA 240, the defendant leased from
the plaintiff a restaurant at a higher rent because of the anticipated business due
to stationing of the British troops there. When the locality was declared out of the
bound of the British troops after certain months the question arose whether the
contract was frustrated, because a clause in the lease agreement provided that the
agreement of lease will remain in force so long as the troops remain in the town. It
was held that though it was possible that the defendant would not have paid such a
high rent apart from the expectation of deriving high profits from the British troops,
that was not sufficient to make out a case of frustration.
In ALOPI PARSAAD Vs. UNION OF INDIA (1960) 2 S.C.R. 793 the plaintiff
acting as agent of the Government of India purchased ghee for the use of the army
personnel. When the second world war intervened the price of ghee increased by
leaps and bounds. Though the plaintiff demanded revised rates they did not
receive any reply. After supplying the ghee the plaintiff claimed payment at
enhanced rates. It was held that they could not succeed as the ghee was supplied
under the terms of the contract and merely because the performance became more
onerous it cannot be held that the contract is frustrated.
9.5.4 Juristic basis of the doctrine
A number of theories have been put forward from time to time as the true
basis of discharge by frustration. Here we confine ourselves to three such theories
of frustration.
9.5.5 Implied terms theory
The first theory is that the contract is discharged, because it impliedly
provides that in the events which have happened it shall cease to bind. This theory
is put forward by Lord Loreburn in TAMPLIN STEAMSHIP Co Ltd.,
Vs.ANGLOMEXICAN PETROLEUM PRODUCTS Co. Ltd. (1961) 2 A.C. 397 A
Steamship F.A. Tamplin was chartered for 5 years from 4-12-1912 to 4-12-1917.
The ship was requisitioned by the Government in February 1915. Though the
charterers were willing to pay agreed freight under the charterparty the owners
claimed that the contract was frustrated as they wanted to obtain larger
compensation from the crown. It was held by the House of Lords that the contract
still continued. The interruption was for a short period and there will be many
months during which the ship would be available for commercial purposes before
the five years expired. It was observed. “In most of the cases it is said that there
was an implied condition in the contract which operated to release the parties from
performing it and in all of them I think that was at bottom the principle upon which
the court proceeded. It is in my opinion the true principle for no court has an
absolving power, but it can infer from the nature of the contract and the
surrounding circumstances that a condition which was not expressed was a
foundation on which the parties contracted. Where the altered conditions such
that, had they thought of them, they would have taken their chance of them or
 112

such that as sensible men they would have said, ‘If that happens, of course it is all
over between us’. In its purely have no common view at all as to the frustrating
event. Where a party is in a stronger position he would not agree to discharge while
the other would want it. Even where the parties agree as to the event, they would
not agree to a total unconditional discharge.
Though this theory was accepted by the courts as correct statement of law yet
it must be admitted that this theory is very unsatisfactory. In a subjective sense it
is difficult to see the parties providing for something which by hypothesis they
neither expected nor foresaw. Even if there is possibility of frustrating event
occurring the parties would not agree for the contract coming to an end. “They
would almost certainly on the one side or the other have sought to introduce
reservations or qualifications or compensation. Lord Sumner observes that
“Frustration is irrespective of individuals concerned, their temperaments and failing
their interests and circumstances. The discharges of a contract take place not by
act of the parties, but by operation of law.
Just and reasonable solution
The modern theory is that the court exercise a qualifying power in order to do
what is just and reasonable in the new situation. This theory suggests that the
court has an inherent jurisdiction to go behind the literal words of the contract and
to make such changes as it considers reasonable in the circumstances. This was
enunciated by Lord Denning in BRITISH MOVIETONEWS Ltd Vs. LONDON AND
DISTRICT CINEMAS Ltd. 1951. I.K. B. 190. In this case the plaintiff a film
distributor entered into a contract with the defendants for the supply of films. The
contract permitted the termination by either party after giving four weeks notice.
When a Government order in 1943 restricted the supply of films the parties entered
into a supplemental agreement. It was provided therein that the principal
agreement shall remain in force until the government order is cancelled. The order
was continued even after the end of the war. In 1948 the defendants gave four
weeks notice terminating the contract. The plaintiff refused to accept this notice
and sued for breach of contract. It was held that the words of the agreement were
clear and unequivocal and the defendants were bound by them. Therein Lord
Denning observed: “The day is one when we can excuse an unforeseen, injustice by
saying to the sufferer. “It is your own folly, You ought not to have passed that form
of words. You ought to have put in a clause to protect yourself. We no longer
credit a party with the foresight of a prophet or his lawyer with the draftsmanship
of a Chalmers, We realize that they have their limitations and make advances
accordingly”. On appeal this view was rejected by the House of Lords and they
reiterated the statement of Lord Loreburn that “no court has an absolving power”.
Lord Simon observed that it is not possible to release the parties from their
obligations because it is just and reasonable to do so. This might be the case when
the effect of the subsequent event had been to render the contract financially more
onerous than the parties anticipated. In view of the decisions of courts it cannot
now be said that this theory is legally acceptable as a basis for the doctrine of
discharge by frustration.
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9.6 FOUNDATION OF THE CONTRACT

Lord Haldane observes about his theory as follows: “When people enter into a
contract which is dependant for the possibility of performance on the continued
availability of a specific thing and that availability comes to an end by reason of
circumstances beyond the control of the parties, the contract is prima facie
regarded as dissolved. Although the words of the stipulation may be such that the
mere letter would describe what has occurred, the occurrence itself may yet be of a
character and extent so sweeping that the foundation of what the parties are
deemed to have had in contemplation has disappeared and the contract itself has
vanished with that foundation”. Lord Godard while dealing with the case of W.J.
TATEM Ltd Vs. GAMBOA regarded this as “the surest ground on which to rest the
doctrine of frustration” In this case the plaintiff chartered a ship to the defendant
during the Spanish Civil War, for 30 days. The ship was to be used for evacuation
of civilian population from Spain to French ports and the hire was at the rate of ₤
250 per day. The ship was seized in July 14 and detained till September 1 when
the plaintiff sued for the hire the defendant pleaded frustration. The rate of hire
showed the possibility of seizure of the vessel and it was contemplated by the
parties at the time of contract itself. Yet it was held that the seizure discharged the
contract.
So if a foundation of the contract goes by the destruction of the subject matter
or by the long interruption of the performance and the parties not having provided
for it in the contract, the performance of the contract is to be regarded as
frustrated.
All the theories discussed so far depends on the construction of a contract.
Blackburn J. observed in TAYLOR Vs CALDWELL 1863 3. B & S 826 that “the
contract is not to be construed as a positive contract, but subject to an implied
condition that the parties shall be excused in case, before breach, performance
becomes impossible.” The first duty of the court is to construe the contract. If the
terms of the contract so construed show that it cannot be held to apply to the
charged situation which has unexpectedly occurred, the contract is discharged.

Operation of the doctrine

We shall discuss here the circumstances in which the doctrine of frustration
operates.
9.7 DESTRUCTION OF THE SUBJECT MATTER OF IMPOSSIBILITIES
A simple case is where the performance of the contract is made impossible by
the destruction of the subject matter as in TAYLOR Vs. CALDWELL (1863) 3. B & S
826. The contract in this case related to the Survey Gardens and Music Hall” for
the purpose of entertainment. Before the day of performance the music-hall was
destroyed by fire suit for damages for breach of contract was filed. The defendant
was held not liable to pay though there was only a partial destruction of the subject
matter.
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In V.L. NARASU Vs. P.S.V.IYER I.L.R. 1953. Madras 831 a contract to exhibit
a film in a cinema theatre was held to have been frustrated when the rear wall
collapsed due to heavy rains. With the result the licence was cancelled until the
building was reconstructed. Even if the hall has to reconstructed it took time and
by that time the film have lost its appeal.
9.7.1 Illegality
Secondly the performance of a contract is sometimes made legally impossible
by a change of law or by a change in the operation due to new facts supervening.
Where the illegality affects a part of the contract two problems arise The first is
whether illegality frustrates the contract. In DENNYMOTT & DICKINSON Vs
JAMES. B FRASE & Co Ltd an agreement for the sale of timber over a period
provided that “to enable the aforesaid agreement to be carried out” the buyer
should let a timber yard to the seller and give him an option to purchase it. In
1939 dealings in timber were declared as illegal. The seller argued that the order
did not frustrate the option to purchase the yard. But the House of Lords held that
it frustrated the whole of the contract since the main object of trading in timber had
become illegal. But in CRICKLEWOOD PROPERTY INVESTMENT TRUST Ltd. Vs.
LEIGHTONS INVESTMENT TRUST Ltd. (1945) A.C. 221. It was held that temporary
wartime restrictions on building did not frustrate a 99 year building lease. The
illegality did not destroy the main object of the lease as there would probably be
ample time building after the wartime restrictions were removed.
The next question is whether illegality which affects some subsidiary obligation
excuses non performance though the main contract is not frustrated. For example
in an charter party the ship is expected to call at 12 ports. If one of them became
an enemy port the ship owner cannot be made liable for not calling there even if the
was physically capable of doing so.
9.7.2 Death
If a performance of a contract for personal service is rendered impossible by
the death or illness which incapacitates the promisor, it will be implied that
performance is conditional on the promisor’s continued capacity. A personal
contract such as a contract of employment, apprenticeship or agency or agency is
discharged by the death of either party. The same result will follow if one party is
incapacitated permanently from performing a contract. A contract to write a book
would be frustrated if the author became mad.
9.7.3 Unavailability
Where a thing ceases to be available, the contract is discharged e.g. seizure of
a ship. Discharge may be temporary unavailability of the thing or person, if
performance would be substantially different from that originally undertaken e.g. a
ship going around and undue delay in repairs. Similarly a charterparty is
discharged if the ship is seized, detained or requisitioned. A contract of service may
be discharged, if one of the parties falls ill or is interned or consonpted. A contract
for the sale of the goods may be discharged if the goods are requisitioned.
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The principle is also applicable in the case of time charterparties under which
ships are chartered for a fixed time. Thus in BANK LIN Ltd. Vs. ARTHUR CAPEL &
Co. a ship was chartered for 12 months. It was agreed that the period will run from
April 1915 to April 1916. Before delivery she was requisitioned. It was not released
till September 1915. The chatered sued for damages for non-delivery. It was held
that the charterparty was frustrated – in TAMPLIN STEAM SHIP Co. Ltd. Vs.
ANGLO MEXICAN PETROLEUM Co. 1919 A.C. 435 it was held that “the
requisitioning of a ship in 1915 did not frustrate a five year charter which still had
19 months to run”.
Where illness or any other reason interferes with a contract of personal service
the factor to be considered is the ratio between the probable length of the
interruption and the contract period in MORGAN Vs. MANSER (1948) I.K.S. 184 an
artist employed a manager for 10 years from 1938. In the year 1940 he was called
up for army service, but discharged in 1946. It was held that the contract was
frustrated as there was a likelihood that the artist would remain in the army for a
long period. But a long term commission agency will not be frustrated, if the agent
is detained, because the detention was not likely to last long and in fact it lasted
only for one month.
Where the seller agreed to get the goods booked and prepare the railway
receipt the non-availability of the wagons would frustrate the contract. Whereas in
SETH MOHAN LAL Vs. THE GRAIN CHAMBERS Ltd. 1968 A.S.C. 772 it was held
an order by Government restraining the railway administration from accepting gut
for transportation by rail is not an impossibility within the meaning of Section 56 of
the Indian Contract Act.
Another factor leading to frustration is undue delay in the performance. A
contract to play in concert is frustrated by the illness of the performer. But a long
term service contract is not frustrated by illness which does not permanently
incapacitate. Illness will frustrate where it is likely to put an end to the
performance of that contract.
9.7.4 Method of performance impossible
A contract may be discharged if it provides for a particular method of
performance which becomes impossible. A contract under which a person holds a
public office is discharged if the office is abolished by statute. Intervention of war
or warlike conditions in the performance of a contract will create difficult problems.
In SAKIROGLOU & Co Ltd. Vs. NOBLEE THORL G.M.B.H (1962) A.C. 93 it was held
that a contract for the sale of Sudanese groundnuts to be dispatched to Humburg
was not frustrated by the closure of Suaz Canal. But the contract did not say so.
Nor could any such provision could be implied as the route of shipment was
immaterial to the buyer. The appellants might have shipped the groundnuts
through the cape of Good Hope which did not make the contract fundamentally
different and there was not therefore frustration of the contract.
 116

In TWENTSCHE OVERSEAS TRADING Co. Ltd. Vs. UGANDA SUGAR

FACTORY Ltd. (945) A.P.C. 144 T. Co agreed to supply steel rails Krupp section to
U company. The contract did not specify the source of goods. When the company
failed to supply the rails suit for damages was filed by the supplier. The defence
that both parties were aware that the rails must come from Germany and as it has
become illegal to get the goods from Germany due to war, the contract was
frustrated or the contract having ceased to bind the parties. Similarly a contract
providing for alternative methods of performance is not frustrated merely because
one of them becomes impossible.
9.7.5 Change in the law
The performance of a contract may become impossible either by a change in
the law or by a change in the operation of law because of the intervention of new
facts. The change in the law must be such as strike at the root of the agreement
and not merely to suspend or hinder its operation. In BOOTHALINGA, AGENCIES
Vs. V.T.C. PERIASAMY NADAR 1969. 2. S.C. J. 31: A.I.R. 1969 S.C. 110 the
defendant had an actual users licence to import chicory powder for manufacturing
coffee powder. He agreed to sell the whole of the chicory powder. Before the shp
arrived the sale of such imported goods was banned. It was held that the contract
became void. It was observed that as the contract became was for the sale of
certain specific goods it was not open to the appellant to supply chicory of any
other description. A contract will be frustrated where the vendor of a land could
not execute a sale deed because he ceased to be the owner by operation of law.
In METROPOLITAN WATER BOARD Vs. DICK KERR & Co. Ltd. (1918) A.C.
119 K.R. & Co agreed to construct reservoir for the water Board within six years
After the lapse of two years. Minister of Munitions ordered them to cease work and
to sell their plant. The board sued claiming that the contract still continued. It
was held that the interruption was of such a character and duration as to make the
contract when resumed, in effect a different contract. The original contract was
therefore discharged.
9.8 EFFECT OF FRUSTRATION
Frustration determines the contract automatically at the time of the
frustrating event. Frustration determines the contract without any election by
either party. Frustration can be invoked by either party and not only by the party
likely to suffer from the frustrating event. A ship owner can claim that the
charterparty is frustrated by the requisition of the ship even if the charterer is
willing to pay the hire. When frustrating determines a contract rights accrued
before the frustrating event is enforceable. The right which is not yet accrued at
the time of frustration remains unenforceable.
9.8.1 Rights accrued before frustration
In CHANDLER Vs. WEBSTER (1904) I.K.B. 493 a contract for the hire of a
room overlooking the route of Edward VII coronation provided for payment of ₤
141.15 S in advance. The hire paid ₤ 100 and was held liable to pay the remaining
₤ 41-15 although the contract was frustrated. The rule was remainded in Fibrosa’s
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case which held that amount already paid could on frustration be recovered where
the consideration has failed. The money paid was recoverable in quasi contract. It
was held that the money paid to secure performance and if performance fails the
inducement which brought about the payment is not fulfilled. The case of
CHANDLER Vs WEBSTER was overruled in Fibrosa case 1943 A.C. 32 wherein an
English company agreed to sell machinery to a polish company for ₤ 4800, of which
₤ 1600 was to be paid in advance. When ₤ 1000 was paid the contract was
frustrated due to German occupation. It was held that the Polish company could
recover back ₤ 100 as the consideration for the payment had failed. No machinery
had been delivered.
All sums payable under the contract before discharge shall cease to be payable
on frustration All sums paid in pursuance of contract before discharge shall be
recoverable from the payee as money received by him to the use of the payer. If the
party to whom sums were paid in pursuance of the contract incurred expenses for
performance of the contract the court may allow him to retain or recover the whole
or any part of the sum so paid or payable. The court has a discretion as to the
amount of expenses awarded.
9.8.2 Right not Accrued
The effect of frustration is to release both parties from any further performance
of the contract while leaving in fact any legal rights already accrued or money
already paid, before the frustrating event occurred Rights not yet accrued at the
time of frustration remained at common law unenforceable. In APPLEBY Vs.
MYERS (1867) L.R. 2.C. P.651 the plaintiff agreed to erect machinery upon the
defendants premises. Before it was completed the premises and the machinery
already erected were wholly destroyed by fire. Since it was agreed that payment was
to be made on completion the plaintiff could recover nothing as the contract was
frustrated in CUTTER Vs. POWELL 1975. 6T.R. 320 a seaman was to be paid his
wages after the end of a voyage died during the voyage. It was held that his
executrix could recover nothing for the services he had rendered.
The first two paragraphs of Sec 56 state that the contract becomes void and is
not enforceable with regard to the rights not yet accrued, with reference to the
rights already accrued, we have to refer Sec 65 of the Contract Act. Under this
section where a contract becomes impossible the party who has received any
advantage is bound to restore it to the other party. This Section is not applicable to
a contract which the parties knew knew to be void at the time of the contract. The
object of Section 65 is to prevent a party to void contract to retain the benefits
received under it. The word discovered imply the pre-existence of thing which is
discovered later. It may be case of mistake. So if money is paid under a contract
for the goods which have already perished the money had to be refunded.
9.8.3 Parties not “in pari delicto”
Where the parties are in pari delicto the less guilty may recover the money or
property transferred under the contract. The doctrine was stated by the Rajasthan
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High Court in the following words. “The principle behind the doctrine of pari delicto
is that where each party is equally at fault the law favours him who is actually in
possession or that where both parties equally culpably, the law will leave them
where it finds them and will not engage itself to determine the rights as between
them. Thus there are certain exceptions in which the benefit passed under a void
contract can be recovered. So where the parties are not equally at fault, the less
guilty may recover the thing given to the other party under the contract, Similarly
where the illegal purpose is not executed the benefits passed under the agreement
may be recovered back.
9.8.4 Contract becomes void
The expression becomes void in Sec 65 includes contemplated under Sec 62
(contract to do an act which becomes impossible or unlawfull) The expression is
sufficient to cover the case of voidable contract which has been avoided. In
DHURAMSEY Vs. AHMEDBHAI (1898) 23 Bom. 15 the plaintiff hired a godown from
the defendant for 12 months and paid the whole rent in advance. The plaintiff
claimed the refund of the advance rent when the godown was destroyed by fire after
the lapse of 7 months. It was held that the plaintiff can recover the rent of the
unexpired part of the term. Similarly a contract becomes void when of the parties
disables himself from suing upon it by making an unauthorized alteration. In
CHIRANJILAL Vs. HANSRAJ 1961 A Punjab 437 the defendant had sold stolen
goods to the plaintiff. The said goods were recovered by the police. As the contract
was discovered to be void, the plaintiff is entitled to recover from the defendant the
moneys paid to him.
A corporation cannot be used upon a contract which is required to be under
seal, though the consideration has been executed for its benefit. Similarly it cannot
sue upon a contract though it has performed its part of the contract so that the
other party has had the benefit of it. For the first proposition we will refer to the
case of Dr. H.S. RICKY Vs. NEW DELHI MUNICIPAL COMMITTEE 19.2.3 S.C. R.
There it was held that a contract of letting of premises by the Municipality cannot
in the absence of formalities required by the statute for formation of the contracts
be created by a rent receipt to the tenant. In MOHAMAD EBRAHIM MOLLA Vs.
COMMISSIONERS FOR THE PORT OF CHITTAGONG 1927 A. Cal 456 the
commissioners sued for the money due towards the hire of a tug lent to the
defendant under a contract with him. The contract was not under seal as required
by law. As the act was imperative the plaintiff could not sue on the contract, It was
also laid down that the plaintiff was entitled to payment on quantum merit basis.
9.9 LIMITATIONS ON THE DOCTRINE
9.9.1 Self induced Frustration
It is well established that a party cannot rely on self induced frustration, that
is on frustration due to his own conduct or to the conduct of those for whom he is
responsible. The doctrine of frustration obviously does not protect a party whose
own breach of contract actually is the only one of the factors leading to frustration.
In MARITIME NATIONAL FISH Ltd. Vs. OCEANTRAWLERS Ltd. (1935) A.C. 524 the
 119

respondents chartered to the appellants a steam trawler fitted with an otter trawl.
The parties know that it was illegal to use an otter trawl without a licence from the
Government. Later the appellants applied for licences for five trawlers. Only three
licences were granted and the appellants were asked to state for which of the three
trawlers they desired to have the licences. Excluding the respondents trawler the
appellant named three trawlers and claimed that the charterparty is frustrated and
they were no longer liable. It was held that because of the appellant’s election the
contract failed and so there was no frustration.
In JOSEPH CONSTANTINE STEAMSHIP LINE Ltd. Vs. IMPERIAL SMELTING
CORPORATION Ltd. 1942. A.C. 154 the respondents chartered the appellants ship
Kingswood for loading Cargo at Australia. Before loading the boiler of the ship
exploded resulting in delay. Though the cause of explosion was not ascertained the
respondents alleged the appellants had to establish that the explosion occurred
without their fault, before they could rely on frustration. It was held that the
burden of proving that the event causing frustration is due to the act of a party lies
on the party alleging it. In this case the respondents having failed to satisfy the
court the contract was discharged.
Secondly the frustrating event should defeat the common intention of the
parties. There cannot be frustration on one side alone.
Whether the doctrine of frustration is applicable to leases?
This question has not yet been finally decided. In CRICKLE WOOD PROPERTY
AND INVESTMENT TRUST Ltd. Vs. LEIGHTONS INVESTMENT TRUST Ltd. (1945)
A.C. 221. a lease was obtained in 1936 for a period of 99 years for the erection of
shops. Because of restrictions imposed on building materials the contract could
not be carried out. When the lessor claimed rent, the lessees pleaded the
frustration of the lease and so they are not liable to pay the rent. It was held by the
House of Lords that the lease was not frustrated as the interruption was not long
enough to destroy the identify of the arrangement.
In RAJA DHRUVDEVHAND Vs. RAJA HARMOHINDER SINGH A.I.R. 1969 S.C.
1021 a lease of agricultural land was entered into for a period of one year and the
lessee was given possession. Before the exploitation of land there came the
partition of India which left land in Pakistan and the parties migrated to India. As
the lessee has paid the rent in advance he commenced an action to recover the
amount of rent paid. It was held that the amount already paid could not be
recovered. Para 2 of the Section 56 may apply to performance of a covenant in a
lease.
The frustrating event must defeat the common intention of the parties. There
cannot be frustration on one side alone In BLACKBURN BOBBIN Co Ltd Vs. ALLEN
(T.W) & SONS Ltd (1918) 2. K.B. 467 an agreement was concluded by the defendant
to sell timber to the plaintiff. Due to the outbreak of war they were unable to get
timber from Finland the source of their supply. The timber merchants did not hold
stocks in England. It was held that there was no frustration because though the
event was unforeseen that event was not provided in the contract. For the failure of
the contract there must be something which was the basis of the contract in the
intention of both the parties and it is not so in this case.
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9.10 ENGLISH LAW

9.10.1 Law Reform (Frustrated Contracts) Act 1943
The English Act was passed in 1943 for the purpose of improving the position.
The Act provides that where a contract governed by English law become impossible
of performance or been otherwise frustrated the parties thereto can be discharged
from further performance of the contract. The money paid or payable to a party
before discharge shall be recoverable as money had and received by him for the use
of the party by whom sums were paid. The provision to Section I of the Act adds
that if the party who received such sums incurred expenses for the performance of
the contract he can retain or recover the amount not exceeding the actual expenses
incurred.
Similarly under Sec. I (3) of the Act, where a party to the contract for
performing a contract obtained any valuable benefit before discharge, sum not
exceeding the value of the benefit shall be recoverable from the party obtaining the
benefit. So either party can recover the compensation for any valuable benefit
conferred upon the other party.
Certain types of contracts are exempted from operation of the law Reform
(Frustrated Contracts) Act, 1943. In a contract of carriage of goods by sea or a
charterparty the fright paid in advance under a voyage charter cannot be recovered
though the voyage is frustrated in the middle or is incomplete. Second exception to
this rule is a contract of insurance. Thirdly a contract for the sale of goods under
the Sale of Goods Act, 1893. (English Act) is exempted even though the contract is
frustrated by reason of the fact that the goods have perished.
9.10.2 Breach of contract
A breach of contract is committed when a party without lawful excuse refuses
or fails to perform or performs defectively or incapacitated himself from performing
the contract. Refusal to perform a contractual promise is prima facie a breach.
The failure to perform may take place when the time for performance has arrived or
even before that. So a breach of contract may be of two kinds. Viz.1) Anticipatory
and 2) actual.
9.10.3 Anticipatory Breach
One of the parties to a contract may before the date of performance state that
he will not perform or incapacitate himself from performing. Such conduct is called
anticipatory breach. The other party has a choice. He can keep the contract alive
by pressing for performance or he can accept the breach and rescind the contract.
In HOCHESTER Vs. DE LA TOUR (185.3) 2 E & B 678 the defendant agreed to
employ the plaintiff as courtier for 3 months from Ist June. The defendant
repudiated it before that date. The plaintiff was able to claim damages at once. It
was observed. It cannot be laid down as universal rule that where by agreement an
act is to be done at a future date, no action can be brought for a breach of the
agreement till the day for doing the act has arrived. Similarly If a man promises to
marry a woman on a future date, but before that date he marries another woman
he is liable in an action for breach of promise of marriage In FROST Vs. KNIGHT
(1872) L.R. 7 Ex 111 the defendant a bachelor promised to marry the plaintiff upon
his fathers death, but during his fathers lifetime he renounced the contract.
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Though the performance of the contract was contingent on the happening of an

event which might not happen, during the lifetime of the parties it was held that the
plaintiff was entitles to sue on the ground of anticipatory breach.
So In case of anticipatory breach the other party is excused from performance
or from further performance. It also entitles the injured party to an option to sue
immediately or to wait until the time for the performance of the contract in
condition upon the happening of a contingency an action for damages will lie
immediately, if before the happening of the contingency the promisor disables
himself from performing the contract.
9.10.4 During performance
If during performance of the contract one of the parties refuses to perform his
part of the contract the other party is released from further obligations and can
bring an action at once. In CORT Vs. AMBERGATE RAILWAY COMPANY (1851) 17
Q.B 127 the plaintiff agreed to supply to the defendants 3900 tons of railway chairs
at specified dates. After supplying 1787 tons the company requested not to deliver
anymore as they would not be wanted. The plaintiff obtained a verdict in his favour.
It was laid down that once the contract had been renounced he can maintain an
action without manufacturing and actually supplying the balance of the articles to
the defendant.
Indian Law
Section 39 of the Indian Contract Act deals with a breach of contract. It is as
follows. “When a party to a contract has refused to perform, or disabled himself
from performing his promise in its entirety, the promise may put an end to the
contract, unless he has signified, by words or conduct his acquiescence in its
continuance” illustration (a)A a singer, enters into a contract with B the manager of
a theatre to sing at his theatre two nights in every week during the next two months
and B engages to pay her 100 rupees for each nights performance. On the sixth
night A willfully absents herself from the theatre, B is at liberty to put an end to the
contract.
Under Section 39 the party is default must have refused altogether to perform
the contract. Such refusal must go to the whole of the contract, otherwise the other
party is not justified in putting an end to the contract. In SOOLTAN CHAND Vs
SCHILLER (1878) 4 Cal. 252 the defendants agreed to deliver to the plaintiff 200
tons of linseed, the price to be paid on delivery. After certain delivery and a
payment of Rs.1000, was made a large balance was due to the defendants in
respect of linseed already delivered. As the balance was not paid the defendant
cancelled the contract and refused to make further delivery. When the plaintiff
sued for breach it was held that the withholding of a part payment under a bona
fide claim cannot be regarded as a refusal to perform the contract in its entirety.
Section 39 is not confined to anticipatory breaches. It includes breaches
before as well as after time when the contract is to be performed. If the promise
takes action no a repudiation before the date it is open to the promisor to change
his mind and perform. A person who has refused to receive the goods on the
ground that they were tendered late cannot his mind later and rise an objection
that the goods were not according to the contract for the election to rescind once
exercised is conclusive.
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The words that the “Promisee may put an end to the contract” mean that the
promise refuses to perform his promise or he may reject the incomplete work and
refuse to pay the same or he may return the defective goods. Apart from his right to
rescind the promise he may treat the refusal as a breach of contract and can claim
damages. When the contract was put to an end the aggrieved party may commence
an action claiming damages for breach. In such a case he is bound to restore the
benefits under Section 64 to the other party. In MURLIDHAR CHATTERJEE Vs.
INTERNATIONAL FILM Co. A.I.R. 1943. P.C. 34 the defendants agreed with the
plaintiff to supply one film for every month for exhibition in theatre. A fixed rent of
Rs.2000/- and some other charges were to be paid by the plaintiff. One film was
supplied which was returned to the defendant before the period due to some
difficulties in exhibit it. Later another sum of Rs.2000/- was paid but no film was
supplied. A letter was written to the defendant that due to the delay in supplying
films and the breach of contract all transactions would be stopped. As the
defendants accepted the repudiation the plaintiff sued for refund of their money. It
was laid down that the money must be returned to the plaintiff under Section 64 of
the Contract Act. The words benefit and advantage do not include any profit nor
does it matter what the party receiving the money way have done with it. The Act
requires that a party must give back whatever he received under the contract. So a
person putting an end to the contract has to return any benefit he has received, but
he is entitled to claim damages for the defaulting party’s breach.
9.11 ACCEPTANCE OF REPUDIATION
Repudiation of a contract by one party does not discharge the contract. Only
when the repudiation is accepted the contract is discharged. In AVERY Vs.
BOWDEN 1856 6 E.B. 953 X chartered a ship to load a cargo of what on Y’s ship at
Odessa within fixed number of days. Before the day of performance of the contract
Crimean war broke out and performance became unlawful. Held Y cannot claim
anything from X, because he had refused to accept X’s breach of contract as a
discharge and the contract had become discharged from something beyond the
control of other party. It was open to the captain of the ship to accept the
renunciation and could have recovered damages. But as the captain insisted on
loading the ship the contract remained open and the outbreak of the war
discharged the contract by frustration and not by breach.
A minor breach of a contract such as a short delay in payment does not
amount to repudiation. The case would be quite different if the defendands
breaches had been such as reasonably to shatter the plaintiff confidence in the
defendant ability to pay for the goods. In the case of the contract it is always
question of construction of the contract whether the party repudiated is so entitle
the other party to treat the whole contract as discharged.
9.12 SUGGESTED QUESTIONS
1. Mention several methods by which a contract may be discharged.
2. What is meant by “novation”? How is it effected?
3. What is the effect of novation upon the liability of parties?

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LESSON-10

QUASI CONTRACTS
STRUCTURE
10.1 Quasi – contracts
10.2 Historical basis of quasi – contract
10.3 Instances of quasi – contract
10.3.1 Money paid to the defendants use
10.3.2 Defendant under a legal duty to pay
10.3.3 Discharge under compulsion
10.3.4 Payment at the request of the defendant
10.3.5 Action for the money had and received
10.3.6 Money paid by mistake
10.3.7 Mistake of fact-not of law
10.3.8 Money paid under an ineffective agreement
10.3.9 Money paid due to compulsion
10.4 Quantum meruit
10.4.1 Contractual claims
10.4.2 Quasi – contract claims
10.4.3 Interested in the payment of money
10.5 Quantum of compensation
10.6 Finder of lost goods
10.6.1 Money paid or thing delivered by mistake or coercion
10.6.2 Coercion
10.7 Suggested questions

10.1 QUASI – CONTRACTS

Definition
When one person has been enriched at the expense of another under such
circumstances which, calls for restitution the law imposes an obligation and such
person to make repayment. Such instances are called quasi-contracts because
even if there is no contract of agreement between the parties they are put in the
same position as if a contract existed between them. The object behind the doctrine
of quasi-contract is to prevent the “unjust” enrichment of one person at the cost of
another. This was so laid down in the earliest case or Moses Vs. Marferlan (1760) 2
Burr 1005 One Jacob Issued four promissory notes to Moses who indorsed them to
Macferain excluding his personal liability on indorsement. Yet Macferian sued
Moses on the indorsement. He was held liable despite the agreement. When Moses
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was compelled to discharge the liability which he had excluded, he sued to recover
back his money from Macferlian. He was able to recover it. It was observed that
the defendant upon the circumstances of the case is obliged by ties of natural
justice and equity to refund the money.
In Sinclair Vs. Brougham (1914) A.C. 398 a building society was also doing
banking business which is ultra vires to its objects. After the winding up of the
society and after paying outside credit a mixed sum of money belonging to
shareholders and depositors was left with the society. The amount was not
sufficient to pay both the shareholders and deposit. The depositors claimed the
quasi-contractual action and also priority for recovery of money. If it is other wise
the shareholders would be unjustly enriched. The court allowed rateable
distribution of mixed funds among the claimants but did not allow any remedy
under the quasi contract.
10.2 HISTORICAL BASIS OF QUASI – CONTRACT
There exist two views regarding the basis of liability in a quasi-contract. The
first view that quasi-contract tests upon a hypothetical contract implied by law.
Accordingly quasi-contract is a breach of the law of contract. A quasi contractual
obligation can arise only where a contract can be implied by law. The other view
which is more modern is that liability in a quasi-contract is not connected with
contract at all. The obligation under quasi-contract is imposed if the court comes
to the conclusion that one person has been unjustly enriched at the expense of
another. In English Law quasi-contracts are also called ‘implied contract’ and
constructive contracts. The Contract Act refers it as “certain relations resembling
those created by contract”.
The earliest instance of an action on quasi-contract is that of the action of
Account, which was used against, bailiff, receivers and guardians in socage. These
persons are called upon to account for money or goods entrusted to them. Later
certain cases under the quasi-contract were covered by the action of debt. As
mentioned already an action of debt can be commenced for recovering money paid
under a contract. The action was extended to cover situations already incurred by
the action of account. Later it was established that both Debt and Account would
lie where the defendant received money from a third party to his use later it was
held that an indebitatus assumpsit could be filed even in cases where debt was the
proper action, Still Later courts began to allow indebitatus assumpsit could be filed
even in the absence of any contract. Here the plea was an existing debt and a
subsequent promise to pay. Due to practical necessity indebitatus assumpsit came
to be used for a number of non-contractual cases.
The juridical basis of the action for money had and received was stated by
Lord Mansfield in Moses Vs. Macferlan as follows: This kind of equitable action to
recover back money, which ought not in justice to be kept, is very beneficial and
therefore much encouraged. It lies only for money which ex acque et bone (equity
and good conscience) the defendant ought to refund. It does not lie for money paid
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by the plaintiff which is claimed of him as payable in point of honour and honesty:
although it could not have been recovered from him by any course of law: as in
payment of a debt barred by limitation or contracted during his infancy”. Because
in all these cases the party may retain it with conscience though by law he was
barred from recovering. “But it lies for money paid by mistake: or upon a
consideration which happens to fail or for money got through imposition or
extortion or oppression. The gist of this kind of action is that the defendant, upon
the circumstances of the case is obliged by the ties of natural justice and equity to
refund the money. The ration behind the doctrine is that A should not be unjustly
enriched at the expense of B” It was observed by Kelly C.B; as follows “The principle
is clear and simple in the extreme. No man should by law be deprived of his
money, which he has parted with under a mistake and where it is against justice
and conscience that the receiver should retain it.
10.3 INSTANCES OF QUASI-CONTRACT
Generally in a quasi-contract the plaintiff seeks to recover from the defendant
a benefit conferred upon him at the plaintiff’s expense, and it is just for the
defendant to retain the benefit. In other words the court interferes in an action
when it comes to the conclusion that one person has been unjustly enriched at the
expense of another.
Benefits Conferred on the Defendant by the Plaintiff
An action under quasi-contract will be
a) For money paid by the plaintiff to the defendant’s use:
b) For money had and received by the defendant to the plaintiff’s use:
c) Quantum meruit.

10.3.1 Money Paid to the Defendants Use

A person having paid money in discharge of a legal duty owned to a third
party, which duty should have been discharged by the other person, can recover
the money paid. This rule has found expression in Section 69 of the Contract Act.
“A person who is interested in the payment of money which another is bound by
law to pay and therefore pays it is entitled to be reimbursed by the other. In Brooks
Wharf and Full Wharf Ltd Vs. Goodman Brothers 1937, I K. B. 534 a warehouseman
(plaintiff) undertook to store certain skins for the defendants when they were stolen
the plaintiff (warehouseman) was called upon to pay customs duty. Though the
primary duty to pay was upon the defendant, the plaintiff’s were under an Act of
1876 compelled to pay the duty. Having paid it the plaintiff sued to cover it from
the defendants. It was held that they can recover the duty paid.
But the law requires that the defendant must have been under a legal duty to
pay and the plaintiff’s payment must not be voluntary. Let us consider these
requirements in detail below.
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10.3.2 Defendant Under a Legal Duty to Pay

Once it is proved that the defendant is under a legal liability to pay it must be
shown that the payment of money by the plaintiff must operate to relieve him from
the liability. In Receiver for MetroPolitan Police District Vs. Croydon Corporation
1957 2 Q.B. 154 a police constable was injured by a lorry owned by the defendants
while on duty. As the constable was unable to work for some days and the receiver
paid ₤ 104 as sick pay during his incapacity. The receiver filed a suit to recover the
amount claiming that if he had not paid the amount the constable would have
recovered a similar sum from the defendant. The court rejected the plea and held
that the obligation of the defendants was to compensate the constable for the loss
suffered. They were under to liability to pay compensation for the hypothetical loss
of earnings which never happened. So the action was dismissed.
Secondly the plaintiff must be liable under law for the payment of money. If
he paid voluntarily for discharging the defendants liability he cannot claim
reimbursement.
10.3.3 Discharge Under Compulsion
Where a defendant’s duty to a third party is discharged due to compulsion or
threats of legal action the party discharging the liability will be able to recover an
equal sum as he had spent. An example is the seizure of plaintiff’s property in
distress. So if the plaintiff paid money in the discharge of another persons debt he
can recover from the defendant the money he had spent in the discharge of his
liability.
10.3.4 Payment at the Request of the Defendant
A person incurring liability at the request of the defendant by paying money to
a third party is entitled to recover the expense or liabilities so incurred. The
liability arises out of the contract and in most cases of this type this principle
applies. In some cases the plaintiff may base his claim on a quasi-contract and he
will succeed in such occasions. In Brewer Street Investments Ltd. Vs. Barclay’s
Wollen Co Ltd. (1954) I.Q.B. 428 the defendants while negotiating for a lease
requested the Landlords (plaintiff herein) to make certain alteration before they
occupy the building. The tenant (defendant) agreed to accept responsibility for the
work. When the negotiations fell down the defendants (tenants) refused to pay the
expenses to the landlords incurred by them in altering the premises. It was laid
down that the landlords were entitled to recover the expenses incurred by them.
Eventhough the claim could not be brought on contract because the work
(alteration) had not been completed yet the defendant is liable in quasi-contract for
money paid to the contractors at their request. The payment must be made
voluntarily.
10.3.5 Action for the money had and Received
The circumstances which given rise to a quasi-contract under this head are
many and we will see here some of them.
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10.3.6 Money Paid by Mistake

Payments made under a mistake of a fact can be recovered provided that the
party paying would have been liable to pay if the mistaken fact were true In Kelly
Vs. Solari 1941 9M & W54 a Director of an Insurance Company paid certain sums to
the respondent herein on her husbands policy which has lapsed for non-payment of
premiums. The company overlooked the lapse of policy at the time of payment.
The appellant a director seeks to recover it from the respondent, It was laid down
that the appellant was entitled to do so. The mistake referred must be fundamental
to such an extent that it prevents a person from forming an intention which is
essential to the transfer of the property. Nextly the mistake must be as to a fact
which if true would make the person paying liable to pay the money. It was
observed in Aiken Vs. Short 1856 I. H. & N. 210 as follows. “In order to entitle a
person to recover back money paid under a mistake of fact the mistake must be as
to fact which if true, would make the person, paying liable to pay the money, not
where, true, it would merely make it desirable that he should pay the money”. It
was approved in Morgan Vs. Ashcraft (1938) I K B 49 where a bookmaker overpaid
to the defendant due to the mistake of his clerk. An action was brought for the
recovery of ₤ 24 which was overpaid. The action failed on two grounds. Firstly, the
Gaming Act, 1845 prohibited the court from looking into the betting transactions.
Secondly even if the over payment is true the plaintiff would have been under no
legal liability to pay.
10.3.7 Mistake of Fact-Not of Law
Any amount paid under a mistake can be recovered by an action for money, if
the mistake is one of fact and not of law. So if any money is paid under a mistake
as to the effect of the provision of Rent Acts or the Income Tax Act such amount
cannot be recovered as one under a mistake of law.
10.3.8 Money Paid Under an Ineffective Agreement
Where money is paid by one person under an ineffective agreement he may
recover the money paid by him. For example where the defendant fails to perform
the contract money deposited or paid by the plaintiff can be recovered. The money
can be recovered back where the consideration for the contract totally failed. If the
contract has been partly performed he cannot recover the money which he had
paid.
Similarly any money paid under a void contract can be recovered. So also
money paid under a contract is opposed to public policy may be recoverable e.g.
money paid under a void bill of sale can be recovered. But if the contract is illegal
the money paid cannot be recovered under the maxim in pari delicto est condition
defendanits.
10.3.9 Money Paid Due to Compulsion
In English Law money paid under compulsion or duress can be recovered. The
duress or compulsion may be in the form of seizure or threatened seizure or by way
of distress of the plaintiff’s property. But an action to this rule is that money
cannot be recovered back where the compulsion was one of threatened litigation.
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Similarly under common law money paid under mistake or ignorance of fact may be
recovered back where the state of fact is such as to create a liability to pay the
money. In reality it is not due but a payment made under a mistake which does
not create any legal obligation and which cannot be recovered back.
But if money is paid due to improper pressure the plaintiff cannot recover it as
in the case of Twyford Vs. Manchester Corporation (1916) I. Ch 236 The plaintiff a
mason was working on the grave stones in the defendant’s cemetery. A small fee
was charged by the defendants. Later it was found that the defendants had no
right to collect such a fee. When the plaintiff sued to recover back the money which
he has paid it was held that he could not recover it back as there was no evidence
of threat or compulsion on the part of the defendants to make the plaintiffs to pay
the fees and so the money cannot be recovered.
10.4 QUANTUM MERUIT
Whenever there is a breach of contract the injured party instead of claiming for
damages may claim payment for what he has done under the contract. This right
to payment does not arise under the original contract but is based one an implied
promise by the other party. It arises from the acceptance of an executed
consideration. This is called as quantum meruit. The claim of quantum meruit
can also be put in another way. Where a work is done or services rendered by one
person for another in circumstances which entitled the person doing the work or
performing the services to receive a reasonable remuneration therefore a claim for
quantum meruit arises therein. Such a claim may be contractual or quasi
contractual. Though in most cases it is not particularly important to distinguish
between the two types of obligation in certain circumstances it will be useful to do
so.
10.4.1 Contractual Claims
Some of the quantum meruit actions are contractual. In the first case where a
person has rendered service under an implied agreement such service has to be
paid for though the remuneration is specified. In such circumstances a promise to
pay a quantum merit will be inferred i.e. paying reasonable sum for the services.
The principle is the same when the goods are brought and sold without an
agreement about the price.
Secondly where a new agreement is substituted in place of the old with no
price fixed a quantum merit claim may arises. But in this case each party must
have had the option to accept or reject the substituted agreement in other words a
new contract cannot be forced by one party upon the other without his consent.
10.4.2 Quasi-Contract Claims
When a contract is broken the other party may sue for the value of the work
done under the contract, instead of bringing an action for damages. Secondly
where necessaries have been applied to infant lunatics and drunken persons an
obligation is imposed upon such persons to pay their reasonable value. Nextly
where work is done under an invalid contract, a similar obligation is imposed by
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law for the work done or services rendered. In Craven – Ellis Vs. Canons Ltd. (1939)
2 K. B. 403 the plaintiff was a director of the defendant company. The company
executed an agreement to pay certain remuneration to the plaintiff. Under the
Articles of Association of the Company each of the directors has to obtain
qualification shares within two months. As neither the plaintiff nor the other two
directors who signed the resolution obtained the qualification shares the agreement
to pay the remuneration became invalid. The plaintiff brought an action for
recovering the remuneration. It was held that as the agreement was void he could
not claim any money under the contract through he could have sued on quantum
merit for the services rendered. Fourthly if a contract is frustrated and certain
benefits are conferred by one party upon the other he may recover from that other
person an amount not exceeding the value of the benefit conferred on the other as
is deemed just and proper by the court. The claim under this clause will constitute
another head of liability under quantum meruit.
Lastly a person who by his own effort improves the goods of another believing
in good faith that they are his own goods has to be compensated for the expenses
involved in the improvement. The liability to pay for the improvement is an
extention of the general rule that a person has to be compensated for the work done
or services rendered voluntarily.
Indian Law
Chapter V of the Indian Contract Act, 1872 deals with certain relations
resembling those created by contract. Though they will not come within the term
contract, yet they created certain obligations. As they are based on equity they
should be adequately compensated. So a person receiving a benefit must
compensate the person giving the benefit. The obligations will arise in the following
instances.
a) Supplier of necessaries to minors, lunatic, married woman etc.
b) Person paying moneys due by another
c) Person enjoying benefit of non-gratuitous act or quantum meruit.
d) Finder of goods.
e) Person receiving money or goods belonging to another under mistake or under
coertion.
Under Section 68 when necessaries are supplied to a person who is incapable
of contracting or to some one whom he is legally bound to support the person who
has furnished such necessaries is entitled to recover the price from the property of
such incapable person. As was held by the Privy Council in Mohori Bibi Vs.
Dhurmadas Ghose L.R. 30 I.A. 114 this section applies to minors and lunatics and
others. So costs incurred in defending a minors suit on behalf of a minor or loan
given to a minor to save his property from sale in execution of a decree and money
advanced for the marriage of a Hindu female or a Muslim girl will come within the
definition of necessaries. The expression “any one whom he is legally bound to
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support will cover cases of husband and wife. Illustration (b) to Section 68 will
make the position clear. A supplied the wife and children of B a lunatic with
necessaries suitable to their conditions in life: A is entitled to be reimbursed from
B’s property.

Section 68 of the Contract Act deals with an instance of reimbursement of

person paying money due by another in the payment of which he is interested.

10.4.3 Interested in The Payment of Money

For a liability to arise under this Act it is necessary that the plaintiff should be
interested in making the payment. Section 69 is wider than English law. But
English law does not cover a case where the plaintiff has made a payment operating
for the benefit of the defendant, but was not under a legal duty to pay and where
the defendant was not bound pay though the payment is to his advantage. The
payments made should be bonafide for the protection of his own interest. In other
words eventhough a person is interested in the payment, if he is not actuated by
protecting his interest in making payment he cannot recover the amount. It is
sufficient if he is able to show that he had an interest in paying the money at the
time of payment.
Secondly it is necessary that the plaintiff is not bound to pay. He is only
interested in making the payment for protecting his interest. If a person is jointly
liable along with others payment by him of others share would not give him a right
of recovery under Section 68 while dealing with the rights of privy Council in Ram
Tuhal Sing Vs. Bischswar Lal 1875. 15. B. L. R. 208 observed.
“It is not in every case in which a man has benefited by the money of another
that an obligation to repay that money arises. The question is not to be determined
by nice considerations of what may be fair or proper according to highest morality.
To support such a suit there must be an obligation express or implied to repay. It
is well settled that there is no such obligation in the case of a voluntary payment by
A of B’s debt.
Thirdly the defendant should have been bound by law to pay the money. The
liability need not be statutory. In Raghavan Vs. Alamelu Ammal (1970) 31. Mad. 35
the widow of a deceased person paid tax under protest though she object that she
is not liable as the outstanding were bequeathed to defendants. When she sued to
recover the amount of tax paid from the defendants it was held that she could not
recover the amount, as the defendants not being parties assessed were not “bound
by law” to the tax. So even if a person is morally bound to pay he cannot to legally
compelled to pay.
Lastly the payment by the plaintiff must be made to another not to himself.
In Secretary of State for India Vs. Fernanes (1970) 31 Mad 375 a land was held by
the Government at a certain rent as permanent tenant under a landlord. Arrears
of revenue were due from the landlord to the Government and the Government to
prevent the land being sold for the arrears paid as permanent tenant or rather
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retained the arrears due to itself. It was held that having made the payment to
itself the Government could not recover the sum from the landlord under the
section.
Liability to Pay for Non-Gratuitous Act done for another
Under Section 70 a liability is created for the benefits of an act which the
person did not intend to do gratuitously. A man is not bound to pay for that which
he has not the option of refusing. The Section is not applicable to acts done at the
request of another. So if client engages a counsel without fixing the fee the counsel
is entitled to reasonable remuneration though not under Section 70, but because
the request implies a promise to pay some required to establish a right of action to
a person who does anything For another. They are (1) one thing must be done
lawfully (2) must be done by a person not intending to act gratuitously and (3) the
person for whom the act is done must enjoy the benefit of it.
According to the first ingredient, thing must be done lawfully. In State of West
Bengal Vs. B. K. Mondel and Sons 1999 A. S. C. 779 while commenting on the
expression lawfully the Supreme Court observed as follows. “The word lawfully
indicates that after something is done or delivered to one person by another and the
thing accepted and enjoyed a lawful relationship arises between the two Section 70
is not intended to entertain claims for compensation made by persons who officially
interfere with the affairs of another or who impose on other services not desired by
them. It deals with cases where a person does a thing for another not intending to
act gratuitously and the other enjoys it.
Must be done by a person not Intending to Act Gratuitously
The person rendering service should not have intended to act gratuitously. In
Damodara mudaliar Vs. Secretary of state of India (1894) 18 mad 88 eleven villages
some of which were Zamindari Villages were irrigated by a tank. The Government
effected repairs to the tank but it was found that they did not intended to do so
gratuitously for the Zamindars who had enjoyed the benefit. It was held that the
Zamindars were liable to contribute the expenses of the repairs proportionately.
Similarly in another case a mortgagee threatened to sell the land mortgaged to him.
One of the co-sharers paid the mortgage debt to prevent the property from being
sold. It was laid that he was entitled to proportionate contribution from other co-
sharers. The person for whom the act is done must enjoy the benefit of it.
Thirdly the defendant must have derived a direct benefit from the payment or
services. In Governor-General in Council Vs. Madura Municipality (1949) 75 I. A. 213
the Provincial Government called upon the Railway Company to widen a culvert.
The company while stating that the Government had no power to request the
widening of the culvert agreed to do the work and charge either the Government of
the Municipality. After the completion of the work the Railway claimed
reimbursement from the Municipality. It was held that although the Railway
Company did not intend to do the work, gratuoiusly the Municipality did not benefit
from it and so this section could not be relied upon. In Krishna Menon Vs. Cochin
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Devaswom Board 4.1. R. 1963 Ker. 181 it was laid that if a contract is partly
performed the other party is not bound to pay unless it is shown that he has taken
benefit of the part performance under circumstances sufficient to raise an implied
promise to pay for the part performance.
10.5 QUANTUM OF COMPENSATION
It is necessary that services should have been rendered without any request.
For any services rendered at request reasonable compensation may be recovered.
In State of West Bengal Vs. B. K. Monda land sons A. I. R. 1962 S. C. 779 the
plaintiff (Respondent therein) constructed a road office, kitchen rooms for clerks
and storage sheds for the civil supplies department, at the request of an officier.
When sued to recover the cost the State denied liability on the ground that there
was no contract under Section 175. (3) of the Government of India Act (now Art
299 of the Constitution of India). It was held that the state was liable to pay. Once
the state accepted the storage sheds then Section 70 can be invoked. Thus under
Section 70 a person doing something for another cannot sue for specific
performance nor ask for damages because there is no contract between the parties.
If the services or goods are accepted then a liability to pay arises under Section 70.
In Piloo Sidhwa Vs. Poona Municipal Corporation (1970) A. S. C 1201 the
Corporation tried to escape liability for the price of motor spare parts supplied on
the ground that the contract was not made under the Bombay Municipal
Corporation Act. The Corporation was held liable under, Section 70 of the Act. It
was further held that compensation is usually at the market price of the goods
supplied. In B. R. Subramanian Vs. B. Thayappa (1961) 2. S. C. J. 12 it was laid
down that where a building contractor does extra work over and above the contract
work and which been accepted by the other party he would be entitled to be paid
compensation at the market rate for such extra work.
Quantum merit can be claimed only if the contract does not provide fixed price
or a consideration for the work done. Thus in Pannalal Vs. Deputy commissioner.
Bhandare (A. I. R. 1973 S. C. 1174) contracts were entered relating to three
Hospitals with the Deputy Commissioner who was not authorized to enter into
contracts. When the contractor sued to recover the payment, it was held that he
was entitled to recover at the enhanced rates under Section 70 of the Contract Act
from the Municipal Committee which owned one of the three and from the State of
Maharshtra which owned the other two Hospitals.
Lawfully
Services should have been rendered lawfully. The Supreme Court in State of
West Bengal Vs. B. K. Mondal observed that the use of the work ‘lawfully’ is not a
surplusage and must be treated as an integral part of Section 70. It indicates that
after some thing is done or delivered to one person by another and the thing
accepted and enjoyed a lawful relationship arises between the two.
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10.6 FINDER OF LOST GOODS

Section 71 provides that were person finds goods belonging to another and
takes them into his custody is subject to the same responsibility as a baillee. In
one case A picked up a ring, on K’s shop and handed over to K, to keep it till owner
appeared-Such a finder of goods is liable to try and find out the true owner and to
take due care of the goods. The finder is entitled to possessions of such goods
against all the world except the true owner. He is entitled to a lien and can retain
the goods against the owner until he is paid by the owner compensation for custody
and care though he is not entitled for such compensation.
10.6.1 Money Paid or Thing Delivered by Mistake or Coercion
Section 72 of the Act provides that where “a person to whom money has been
paid or anything delivered by Mistake or under coercion must repay or return it.
Under English Law money paid under mistake or ignorance of fact may be
recovered back where the supposed state of fact is such as to create a liability to
pay the money which in reality is not due”. There is no distinction between money
paid under mistake of fact and money paid under a mistake of law. the position
will be clear if we refer to illustration (a) to Section 72”.
A and B, jointly owe Rs. 100/- to C. A. alone pays the amount to C, and B’ not
knowing this fact, pays Rs. 100/- over again to C. C. is bound to repay the amount
to B”. Thus a plaintiff can seek to recover money paid by him to the defendant
when it has been paid under a mistake and where it is paid in pursuance of
coercion.

In Sri Shiba Prased Vs. Srish Chandra Nandi 1949 2 M. L. J. 657 P. C. it was
held that excess royalties paid under a mining lease under a mistaken belief that
they were due could be set off against royalties subsequently due the former being
treated as money paid under mistake. In this case the Supreme Court
distinguished between Section 21 and Section 72 of the Contract Act. “If a mistake
of law has led to the formation of a Contract, Section 21 enacts that the contract is
not for that reason voidable. If money is paid under the contract it cannot be said
that the money was paid under a mistake of law: it was paid because it was due
under a valid contract, and if it had not been paid payment could have been
enforced. Payment “by mistake in Section 72 must refer to a payment which was
not legally due and which could not have been enforced; the mistake is in thinking
that the money paid was due when in fact it was not due”. The Supreme Court in
Sales-tax Officer, Benares Vs. Kanhaiyalal A. I. R. 1959 S. C. 135 following this
decision has held that sales tax amount paid under a mistake of law was
recoverable. In this case sales tax was paid by a firm on its forward transaction.
Later the Allahabad High Court held that levy of tax on such transaction was ultra
vires. When the firm sued to recover the tax paid it was allowed to do so. In
Trilokchand Motichand Vs. Commissioner of Sales Tax A. I. R. 1970 S. C. 898 a
firm collected sales tax on transactions which were not liable to tax and paid it to
the state. The amount was ordered to be refunded. A cheque was given by the
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state with a condition that the firm must produce receipts from the customers
within one month for the return of the tax amount. As the firm failed to return it
was called upon by the State to refund the amount under a threat of recovery,
under the Revenue Recovery Act. A writ petition filed by the firm against this order
of the Government was dismissed. It paid back the amount. When the Act itself
was struck down the firm sought to recover the amount as money paid under a
mistake of law or coercion. The court negatived the plea and held that payment
made under coercion would have been recoverable under Section 72 had it not been
for the expiry of the period of limitation.
In Anath Bandhu Vs. Dominion of India A. I. R. 1955 Cal 626 it was laid down
that if money is paid voluntarily with the knowledge of the voidness of the contract,
there is no question of mistake of law or fact and such money cannot be recovered
back. Ignorance of law and a deliberate disregard of law would not amount to a
mistake a law. this rule that money cannot be recovered back will equal apply
where money is paid under a compromise of doubtful or disputed rights or claims.
If money is paid in execution of a court’s decree or such payment might be one
under coercion.
10.6.2 Coercion
The word coercion is use in the general sense and not as defined in Section 15
e.g. A who has obtained a decree against B, obtained an attachment order against
C’s property and took possession of it in satisfaction of the decree. On his ouster C
paid the amount under protest. As the money paid under coercion C was held
entitled to recover the sum. But a defendant having an opportunity to defend it has
not availed of it he cannot reopen the question in an action to recover the money.
The reason is that money paid under pressure of legal process cannot be recovered.
Under English Law where there are no threats or duress the plaintiff may not
be able to recover the money paid eventhough it could not have been lawfully
demanded from the plaintiff. But in India he can. Ref of Sales Tax Officer Vs.
Kanhaiyalal Saraf 1959 A. S. C. 35. Where money is paid to a dismissed employee
of the Government under Court’s order pending final disposal it is not money paid
under a mistake and Section 72 is inapplicable. But the Allahabad High Court held
that money is refundable by way Quasi Contract as unjust enrichment. The better
opinion seems to be that as money having been paid under compulsion-the orders
of court there is no reason why Section 72 should not be applicable.
10.7 SUGGESTED QUESTIONS
1. Quasi-contract which was in its origin an action of tort, was soon
transferred into an action of contract becoming afterwards a remedy where
there was neither tort nor contract” Elucidate.
2. Discuss the scope of an action for the recovery of property paid under
mistake or coercion.
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LESSON - 11

SPECIFIC RELIEF ACT, 1963

STRUCTURE
11.1 Specific Relief Act, 1963
11.1.1 Recovering possession of property
11.2 Points to be determined
11.2.1 Who can use
11.2.2 Mortgage
11.2.3 Co-shares
11.2.4 Limitation
11.3 Sui by or against government
11.4 Recovery of specific movable property
11.5 Suggested Questions

11.1.1 Recovering Possession of Property

An order for specific relief can be made by a court directing the defendant to
perform the contract which he has made according to the terms. The relief is
supplementary and discretionary. As it is supplementary to the common law
remedy of damages, it will not normally be granted where damages provide
sufficient relief. That is why it was observed in Rajan Vs. Mutual Tontine
Westminster Chambers Association (1893), I Ch. 126 as follows. “This remedy by
specific performance was invented and has been cautiously applied in order to meet
cases where the ordinary remedy by an action for damages is not an adequate
compensation for breach of contract. The jurisdiction to compel specific
performance has always been treated as discretionary, and confined within well –
known rules”.
In English law the Chancery Court used to grant a decree for specific
performance where the chattels sold possessed special beauty, rarity or interest. As
specific relief is a discretionary remedy it does not mean that the relief will be
granted because it is found that damages are inadequate. As the Court has a
choice in this matter it can in fairness of the transaction refuse the remedy in
certain circumstances. As for example the court can take into account the fact of
undue in fluence or misrepresentation exercised by the plaintiff. This is based on
the maxim. “He who comes to equity must come with clean hands”. The court can
refuse the relief on the ground that the granting of it would cause great hardship to
the defendant.
The law of specific relief as a form of judicial relief belongs to the law of
produce. The law relating to it was found in the Specific Relief Act of 1863. The
present law on this subject as contained in the Specific Relief Act. 1963 which came
into force on 1-3-1964 is an amending Act. Amending the law relating to specific
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relief. It is not an exhaustive enactment. Many changes were effected in the

present Act by incorporating certain expressions in the Act and certain omissions
are effected. It is called as specific relief, because the person gets the relief in
specie. It was observed by Whitely Stokes, “The remedies for the non-performance
of a duty enforceable by law are either compensatory or specific the compensatory
remedy is by the award of damages. The remedy is often useless or inadequate
where the person ordered to pay them is insolvent and inadequate when for
instance, the duty is to transfer particular immovable property or a movable to
which special interest is attached. The specific remedy is enforced by directing the
party in default to do or forbear, the very thing which he is bound to do or forbear
and in case of disobedience by imprisonment or attachment of his property or both.
The Act provides for specific relief by way of (1) Recovery of possession of property,
movable and immovable (2) Specific performance of contracts (3) Rectification of
instruments (4) Rescission of contracts (5) Cancellation of instruments (6)
declaratory decrees and preventive relief (i.e.) injunctions. The object of specific
relief is to compel the party in default to do something which he was bound to do or
forbear from doing it. But the object of preventive relief or injunction is to prevent
the invasion of or injury to one’s right by another. Apart from this Act other Acts
like Transfer of Property Act deals with the remedy available to a mortgagor or
mortgagee and the Partnership Act deals with specific remedies like dissolution of
partnership, taking of accounts etc. This Act in Chapter II deals with specific
performance of contracts alone. If the Act is silent in certain matters the principles
of English Law may be followed.
Definitions
Now let us see the definition for some of the words which is often repeated in
this Act. The word obligation is defined as a tie or bond which requires a person to
do or suffer something. It means any duty enforceable by law, and excludes social
and moral obligation and religious duties. Under Roman Law the term is confined
to duties between definite persons. Present day writers mostly use it in the sencse
it is used in Roman law. in Kar Vs. Singh I. L. R. (1966) 2. Punj 757 an injunction
was granted restraining her from calling herself as the wife of the plaintiff as the
status of wife involves legal rights and social duties. It involves not merely a social
status. Similarly in England a husband can be restrained from disclosing the
secrets of his former wife the reason being that law encourages confidential
communication between husband and wife must be kept in confidence.

Settlement
Settlement means an instrument by which properties are disposed of in favour
of two or more persons successively and not concurrently and the disposition
taking effect during the lifetime of the settler.
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Trust
This word is defined by the Trusts Act, 1882 as follows: “A Trust is an
obligation annexed to the ownership of property and arising out of a confidence
reposed in and accepted by the owner or declared and accepted by him, for the
benefit of another or of another and the owner.

Trustee
The word Trustee includes every person holding property in trust. A promoter
of a company is neither an agent nor a trustee and if he does certain things he
stands in a fiduciary capacity and the benefit passes to the company.
Section 3 of this Act does not take away the remedy of damages but only
enables the injured party to sue at his option for specific performance. That is why
it provides that nothing in this Act shall deprive the right of a person to avail any
relief other than specific performance which he may have under any contract. For
example Section 73 of the Contract Act provides for damages for breach of contract
while this provides for an additional remedy viz., specific performance.
Under Section 4 “Specific Relief can be granted only for the purpose of
enforcing individual civil rights and not for the mere purpose of enforcing a penal
law”. as the object of this Act is to protect the civil rights of the individual, it had
no jurisdiction over criminal matters. Where such criminal acts involve injury to
property the court can interfere. This is stated by Story in his book (on equity) as
follows. Specific Relief in the form of an order compelling discovery will not be
granted in aid of criminal prosecution or of a penal action or of a suit partaking of
that character.
Recovering Possession of Property
According to Section 5 a person entitled to the possession of a specific
immovable property may recover it in the manner provided by the Code of Civil
Procedure. The general rule is that the person having a right to the possession of
any specific immovable property may recover the same by filling a suit for ejectment
on the basis of his title.
Section 6 of this Act provides a special and quick remedy for a grievance - viz.,
to replace in possession a person who has been evicted from an immovable
property. Possession of the person who was evicted is sufficient evidence against a
trespasser. Even if the person ousting claims a superior title, the person
dispossessed shall be restored to possession, if he proves that he was in possession
and brings an action within 6 months from the date of dispossession. Sections 5 &
6 provides for recovery by a title holder and a mere possession. In Nair Service
Society vs. K. C. Alexander (1968), A. S. C. 1165 a suit was brought for possession
stating that the plaintiff was in possession for 70 years and forcibly dispossessed by
the defendants. Defendants contended that a suit for possession will not lie
without proving his title and a prior trespasser could not eject a later trespasser
after a lapse of 6 months. It was held by the High Court that plaintiff was in
possession before the suit and could maintain a suit based on prior possession
without proof of title and so could eject the defendants. The Supreme Court on
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appeal confirmed the High Courts’ decision. It was also held that the provisions of
the two Sections 5 and 6 are not mutually exclusive. Section 6 lays down the
principle that disputed rights are to be decided by due process of law and not other
wise and peaceful possession will be protected against disturbance. Under
common law, possession is attributed to the person exercising control in fact on his
own account provided it is exclusive control.
11.2 POINTS TO BE DETERMINED
The question of title is irrelevant. The points to be determined are (a)
Possession of the plaintiff over the disputed property (b) Within 6 months from the
date of suit (c) Whether the plaintiff was deprived of the possession by the
defendant not according to law. Even if the possession is without title it is
immaterial.
The plaintiff has to prove that he was in possession that he was dispossessed
and that it takes place without his consent. The said dispossession was against
law and it took place within 6 months before the filing of the suit.
Possession does not mean isolated acts of trespass, but it means acts of
dominion over the property. Dispossession means an actual ouster and it implies
that the person ousting is in actual possession. Loss of physical possession and
restoration thereof is contemplated.
11.2.1 Who Can Use
Only a person having a judicial possession may sue. So a trespasser or a
person claiming that he was in possession representing his father cannot sue under
Section 6.A tenant who is dispossessed by the landlord against law (otherwise than
in due course of law) is entitled to recover possession. A mortgagee who was
dispossessed forcefully by the mortgagor can recover it A tenant who is
dispossessed by the landlord other wise than in due course of law can recover
possession under Section 6. A landlord according to the Madras High Court cannot
sue in his owner capacity under Section 6 when the tenant in possession is
disposed by a third party. The landlord can sue as a co-plaintiff with the tenant. A
landlord getting possession from the tenant by collusion with the lessee’s agent is
liable to be sued under the old Section 9 (Section 6). In Neyveli Lignite Corporation
Ltd. Vs. Narayana Iyer 1965. A. M. 122 the lessor refused to extend the lease and
took possession at the termination of the lease and the lessee gave vacant
possession. It was held that the latter cannot sue under this section.
11.2.2. Mortgagee
A mortgagee can file a suit, if he has been forcibly dispossessed by the
mortgagor. It cannot be pleaded that the mortgage and possession were obtained
be the exercise of a fraud. It is not a defence to a suit by a tenant that the tenant
was holding over at the date of dispossession.
11.2.3 Co-Sharers
The plea that a court cannot give joint possession under Section 6 cannot
apply, if a co-owner dispossessed of his share by other co-owners. The reason is
that since dispossession relates to his share the only relief would be to restore the
ousted co-owner to that possession by giving him joint possession. In the second
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case where one of the co-owner is in exclusive possession of the joint property
under a lease from the other co-owners he can recover back that possession from
the other co-sharers if dispossessed by them.
When a plaintiff sues for possession on the basis of title and fails to establish
title he cannot recover possession under Section 6 even if he can prove possession
within six months before the date of dispossession. The Supreme Court approved
this principle in Nair Service Society vs. K. C. Alexander 1968 S. C. R. 163.
11.2.4 Limitation
A suit under this section should be brought within six months from the date
when dispossession occurs. The plaintiff has to prove only previous possession.
He has neither to allege nor prove title. In wise vs. Ameerunissa (1980) L. R. 7. I. A.
73 it was laid down that if the suit is brought after 6 months from the date of
dispossession the plaintiff cannot recover possession on the strength of previous
possession. He can recover only if he proves his title to the land. As against a
trespasser a person suing after six months of dispossession for a declaration of title
and possession can succeed only on the basis of his prior possession which has not
ripened into prescriptive title. In Ponnusami vs. Pappammal 1958 A. M. 497 it was
held that since acquisition of title by prescription being a lawful mode of acquiring
title a person in peaceful possession can retain possession against all except the
lawful owner. Such a right is heritable and transferable.
Possession and Dispossession
The Common Law attributes possession in law to the person exercising control
in fact on his own account whether for a greater or a lesser interest provided that
the control is intended to be exclusive. The plaintiff must prove that he exercised
acts which amounted to acts of dominion and that the act of dominion was
exclusive. Possession is manifested by the exercise of exclusive control as the
object is capable of. It need not always be complete or immediate visible control. If
the plaintiff entered into possession by permission of the defendant, he cannot sue
under Section 6 if he is subsequently ousted by the defendant.
According to Bahadur Ali vs. Secretary of State 61 I. C. 78 “dispossession
implies actual ouster and the essence of ouster is that the person ousting is in
actual possession”. Mere interference with rights of enjoyment of the property does
not constitute dispossession of immovable property. The mere cutting of a bundle
of grass does not amount to dispossession within the meaning of this section.
Passing over another person’s land in exercise of a right of way is not dispossession
thereof within the meaning of Section 6 of this Act. Similarly interfering with the
plaintiff’s right to collect cow-dung from the leased land does not amount to
dispossession. A suit will be where the plaintiff’s possession is disturbed partially.
This section affirms the rule that disputed rights are to be decided by due process
of law and not otherwise and existing possession will be protected against
disturbance without regard to the question of its origin.
Otherwise than in due course of law
A person is said to be dispossessed otherwise than in due course of law, if he
is dispossessed by another acting of his own authority. A matter may be said to
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have happened in due course of law if it is the result and operation of the law in
any judicial proceeding. Now we shall see some instances of dispossession in due
course of law. 1. An order under Section 145 Cr. P. dispossessing a person. 2. An
instance of dispossession otherwise than in due course of law is possession
obtained through an officer of court who is not authorized to act in that direction.
3. Dispossession by a mortgagor even though the mortgage obtained by fraud.
11.3 SUIT BY OR AGAINST GOVERNMENT
Where a Government files a suit under Section 6, it will be governed by Act
149 of the Limitation Act. A suit against the Government is barred by Section 6 (2)
(b).
Effect of Decree
1. The primary effect is to restore possession to the plaintiff.
2. The onus of proving title is shifted to the defeated party when he brings a
suit in ejectment.
3. The possessory decree serves as prima facie evidence until it is displaced by
a regular suit.
4. Mesne profits can be recovered for the period during which he was deprived
of possession. Where a decision is passed under Section 5 against a person
in possession he can file a suit for establishing his title and for an
injunction restraining the other from interfering with his possession.

Effect of an order made under Section 144 and Section 145 of the Criminal Procedure
Code
An order passed under Section 145 Cr. P. C. is no bar for instituting a suit
under Section 6 of this Act for recovering possession. An order passed under
Section 144 Cr. P. C. may prevent the exercise of right which a person in
possession would be entitled to exercise. If a person so prevented by an order
under Section 144 Cr. P. C. is disposed he can sue under this section.
11.4 RECOVERY OF SPECIFIC MOVABLE PROPERTY
Section 7 provides specific relief for wrongful taking or detention of movable
property, the relief is limited to the delivery of goods and any special damage for
their detention. It must be proved that the defendants not only hold the goods, but
also prevent the plaintiff from having the possession of them. The plaintiff must
therefore show that he demanded the goods from the defendant, but he refused to
deliver the same.
As the object of the section of the section is the recovery of specific movable
property, they must be ascertained and capable of identification. The words
“person entitled to possession” means that the person must have a right to
immediate possession. In case of a bailment, the property owner is not entitled to
immediate possession. But if a third party wrongfully deprives the bailee of the use
of possession of the goods bailed then either the bailor or the bailee may file a suit
for such deprivation against the wrongdoer. So a person may sue for the
possession of movable property under the Civil Procedure Code. Under the first
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explanation to this Section a trustee may sue for possession of the property vested
in him from a third party as he represents the persons beneficially interested.
Explanation 2 provides that a temporary right to possession is sufficient to support
a suit under this section. Thus a bailee, pawnee, an unpaid vendor and finder of
goods have a right to bring a suit under Section 7.
The decree for delivery of specific movable property shall state the amount of
money to be paid as an alternative if delivery cannot be had. The amount should be
fixed with reference to the value of the goods. When the value of the goods has been
improved by the act of the defendant the plaintiff is not entitled to the enhanced
value, but can only recover the amount at which the goods were valued at the time
of their passing into the hands of the defendants.
LIABILITY OF PERSON IN POSSESSION NOT AS OWNER TO DELIVER TO PERSON
ENTITLED TO IMMEDIATE POSSESSION
According to Section 8 of the Specific Relief Act, a person in possession of a
specific movable property has to deliver it to the person entitled in the following
cases.
i When the things is held by the defendant as agent or trustee of the
. plaintiff.
i When monetary compensation would not provide adequate relief, for the
i. movable property.
i When it would be difficult to ascertain the damages.
ii.
i When the possession of the thing claimed has been wrongfully
v. transferred from the plaintiff.
Specific delivery under this Section has to be distinguished from specific
performance of a contract. The right to recover possession is not based on contract
but on the right to possess. A person entitled to possession can sue for recovery of
possession or for compensation under Section 7. Under Section 8 the plaint should
state that no pecuniary compensation would be an adequate relief to the plaintiff of
the loss of the article. So a person who is entitled to immediate possession of any
specific movable property can compel any person who has possession or control as
servant or agent to deliver the same to him in the special cases mentioned in
Section 8.
DETINUE AND CONVERSION OR TROVER
In England two actions detinue and conversion could be brought against the
defendant who has movable property in his possession. In detinue the suit is for
the return of the chattel. In an action for trover or conversion damages equivalent
to the value of the chattel may be claimed on the allegation that the defendant has
converted the chattel to his own use by dealing with it wrongfully.
POSSESSION
A plaintiff is not entitled to a decree under Section 8 unless he alleges and
proves that the defendant is in possession. The right to sue for specific movable
property is governed by Sections 7 and 8. The defendant has to prove that he has
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control or possession of the property and possession must be alleged in the plaint.
Where the goods are in the possession of third parties who purchased them to suit
to recover it back will not lie against the defendant. A decree for recovering the
same cannot be given as the decree is not executable under the C.P, C. So the
plaintiff can claim damages only.
The word trustee as used in clause (a) includes every person holding expressly
or implication or constructively in a fiduciary capacity. In Subbarayalu Vs.
Annamalai AI.R 1945 Mad 281 Annamalai delivered to S a projector under a hire
purchase agreement which provided that the price should be paid in instalments
and ownership will pass only after the last instalment was paid. In case of default,
Annamalai can cancel the contract and can forfeit certain amount of deposit. When
there was a default Annamalai Demanded the return of the machine and forfeiture
of the deposit. He obtained a decree for the return of the machine. In execution
proceeding it was contended by S that he can retain the machine on payment of
value fixed by the court. It was held that the contract did not amount to a
purchase agreement and the title to the machine never passed to S and S held the
machine as trustee within the meaning of this Section, S had no right to retain it on
payment of its value.
Pledge
For a valid pledge under the Indian Contract Act, the possession must be
juridical possession of the goods and not mere custody. In a case the deceased wife
of P pledged the jewels with D without the knowledge of P. The jewels belonged to P
exclusively. When he sued to recover back the jewels it was held that P’s wife had
no such possession as would validate the pledge by virtue of Section 178 of the
Contract Act. Similarly a person is entitled to a decree for specific performance of
movable property, when the possession of a thing has been fraudulently or
dishonestly transferred from him. Similarly where a servant pledged the goods
entrusted to him by his mistress it was held that the custody of the servant will not
come within the definition of possession under Section 178 of the Indian Contract
Act and so an action will lie for its recovery.
As a general rule the court will not interfere in respect of movable properties
because damage will be an adequate relief. But in respect of certain goods like
unique articles works of art etc, monetary compensation is not sufficient relief as
those articles do not admit of valuation. Thus for example, heirlooms, rare Chine,
an idol, though they do not have any intrinsic value, it may be extremely valuable
to its owner. In such cases a suit for specific recovery of movable articles will be
granted. In such a suit for the recovery of specific movable property, the decree
ought to be a decree for delivery of the movable property. Such a decree has to
mention the amount of money to be paid by the defendant, alternatively if the
delivery of the specific thing cannot be had.
11.5 SUGGESTED QUESTIONS
1. Who can sue under Specific Relief Act?
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LESSON – 12

SPECIFIC PERFORMANCE OF CONTRACTS

STRUCTURE
12.1 Specific performance of contracts
12.2 Specific performance and equity
12.3 Jurisdiction is discretionary
12.4 Must come to court with clean hands
12.5 Laches
12.6 General principles relating to specific performance
12.7 Requisites for specific performance
12.8 Contracts which can be specifically enforced
12.9 Special defences in a suit for specific performance
12.10 Contracts which cannot be specifically enforced Sec.14
12.11 Contracts not capable of specific performance
12.12 Who may obtain specific performance Sec.15
12.13 Against whom contracts may be specifically enforced Sec 19
12.13.1 Discretion and powers of court
12.14 Discretion not to decree
12.14.1 Unfair advantage
12.14.2 Discretion to decree
12.14.3 Ancillary reliefs
12.14.4 Liquidation of damages is no bar
12.15 Suggested Questions

12.1 SPECIFIC PERFORMANCE OF CONTRACTS

The jurisdiction of chancery courts in England to specific performance was
founded on the want of an adequate remedy at law. later it became well settled that
in certain cases, the nature of the case itself was a good ground for the interference
of the court. So a contract for the sale or lease of land is a fit case for exercising
this jurisdiction. It is well known that the remedy of specific performance is
discretionary. The truth is that the plaintiff must be willing to perform his part of
the contract and that certain defences were available in equity which were not
available at common law for damages. Thus under the Contract Act several
defenses such as incapacity of parties, absence of a concluded contract, coercion,
fraud, misrepresentation, mistake, illegality or want of authority are available to a
defendant. The effect of this Section read with the Contract Act is to exclude all
void and unlawful agreements, all imperfect obligations not arising out of contracts,
such as moral social and religious obligations and all incomplete contracts.
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A contract which is not concluded (incomplete agreements) cannot be

enforced. Fry observed, “No proceedings in specific performance can be had unless
the contract has actually been concluded i.e. unless two persons have agreed on
the same terms and mutually signified to another their assent to them. If what
passed between them was but treaty or negotiation or an expectation of a contract
or an arrangement between them of an honorary nature, no specific performance
can be had”. The onus of proving that the contract is a concluded one is upon the
plaintiff.
12.2 SPECIFIC PERFORMANCE AND EQUITY
Specific performance is a form of relief which is based on equity. It is an
exceptional rule since the normal remedy for a breach of a contract is the recovery
of damages. As it is equitable relief we have to apply certain maxims of equity in
enforcing the relief.
12.3 JURISDICTION IS DISCRETIONARY
Under Section 20 of the Act the jurisdiction to decree specific performance is
discretionary and the court is not bound to grant such relief merely because it is
lawful to do so. The discretion of the court is not arbitrary, but must be sound and
reasonable. SubSec (2) of Sec 20 also gives instances in which the court may
property exercise discretion not to grant specific performance.
Another well known maxim in equity is; “He who seeks equity must do equity”.
Any person seeking the aid of a court of equity must himself do equity. Sec 12
dealing with specific performance also illustrates the maxim. According to that
Section a purchaser who claims specific performance of a contract must agree to
give up all claims to further performance.
He must also give up all claims to compensation either for deficiency or for the
loss or damage sustained by him, because of the default of the vendor.
The third maxim in this topic of specific performance is equity acts in
personem. This is well illustrated in the case of Penn vs. Baltimore 1950 IV 444.
There the scope of the jurisdiction of the Chancery court in granting specific
performance was considered. The plaintiff and the defendant residing in England
came to a settlement relating to the boundaries of two states in America and the
plaintiff sought specific performance of the contract. The defendant pleaded that
since the property was outside the jurisdiction of the court, it was not permissible
to sue for specific performance. It was held that the plaintiff may obtain a decree
for specific performance, because the court in such cases acts in Personem. In our
country the courts would assume jurisdiction for granting specific performance if
the relief can be obtained through personal submission of the defendant, if he
resides or carries on business within the jurisdiction of the court.
12.4 MUST COME TO COURT WITH CLEAN HANDS
The person seeking the aid of equity court must come to court with clean
hands. As specific performance being a discretionary remedy the parties seeking
the relief must come to court with clean hands. Any circumstance which would
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render the transaction as unfair or fraudulent may influence the court while
decreeing specific performance. In other words a person seeking relief from an
equity court must not be guilty of any conduct which would disentitle him from
getting the relief. Thus the court can take into account the fact that the plaintiff
has been guilty of undue influence or of misrepresentation or has tried to take
advantage of a mistake on the part of the defendant. The relief can be refused on
the ground that to grant it would cause great hardship to the defendant.
12.5 LACHES
Equity has always refused its aid to stale claims. A person seeking the specific
relief must show that he has acted with diligence. Delay which is sufficient to
deprive a person of his right to claim specific performance is known as ‘laches’.
This is made explicit by a pithy saying “Equity will not assist those who slumber
over their rights”. The plaintiff must show himself to be ready, desirous, prompt
and eager to assert his rights and even a short lapse of time may in certain
circumstances be fatal. So lapse of time will be a bar to a decree of specific
performance if it was stipulated originally or if it was implied from the nature of the
transaction. Even if time is not the essence of the contract specific performance
can be refused, because of delay if it is justified on equitable principle, the question
being whether the position of the parties have altered. But delay will be a ground
for refusing specific performance if.
a) The delay raises an inference that the plaintiff has waived or abandoned
his right.
b) There has been a change of circumstances, that the granting of specific
performance would prejudice the defendant.
c) The right of innocent third parties have interested.

Time-Whether essence of the contract

In Jamshed Kodaram Irani Vs. Arforji Dhanjbhal (1916) 43 I A 26 the Privy
Council laid down the principle as to when time is or is not of the essence of the
contract. The Supreme Court in Gomathinayagam Pillai vs. Palanisamy Nadar 1967
A. S. C. 868, has laid down the law. in that case A agreed to sell a piece of land to
B who paid part of this consideration as advance. An agreement to complete the
sale on a specified date was entered. The time was extended. When the balance
was not paid on the due date the vendor gave notice canceling the contract and
forfeiting the advance and sold the land to another. The suit by the purchaser for
specific performance was decreed as time was held not to be essence of the
contract. In Duraikannu vs. Saravana Chettiar 1963. A. M. 463 a purchaser paid
the initial deposit in an auction sale, but failed to pay the balance within time. A
portion of the balance was paid to the auctioneer. When the mortgagor attempted
to resell the property the auction purchaser sued for specific performance. It was
refused as time was the essence of the contract. The fact the mortgagee negotiated
with the mortgagor to sell the property to a third party or he declared his right to
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extend the time does not exclude the time not being the essence of the contract. If
the object of the contract is commercial in nature a court is inclined to hold that
time is essential to the contract e.g. an agreement to purchase land for the
construction of a factory.

12.6 GENERAL PRINCIPLES RELATING TO-SPECIFIC PERFORMANCE

Sec. 9 of this Act deals with cases in which the contract may be specifically
enforced. Under Sec 20 the jurisdiction to grant specific performance is
discretionary. The meaning of specific performance is given in by Halsbury’s Laws
of England Specific, performance is an equitable relief given by the court in cases of
breach of contract in the form of a judgement that the defendant does actually
perform the contract according to its terms and stipulations.
Specific performance will not be granted where damages are an adequate
remedy. The granting of it will depend within the discretion of the court.
12.7 REQUISITES FOR SPECIFIC PERFORMANCE
The plaintiff must prove that there was a concluded contract between himself
and the defendant. He had performed or was ready and willing to perform the
contract. That he was ready and willing to do all matters and things on his part
there after to be done. The onus of proving that the contract is a concluded one is
upon the plaintiff. But in the following cases it can be held that the contract is
incomplete for purposes of specific performance.
1) When there is no complete agreement as to the essentials terms that has
yet to be ascertained.
2) Where the parties agree that the agreement would not be completed until
it was embodied in a document.
3) The finality of the contract is contingent upon some event.
In a suit for specific performance the plaintiff must prove that he was ready
and willing to perform the contract from the date of the contract to the date of
hearing. It is enough if this is made clear from the recitals in the plaint. What
constitutes readiness to perform in each case is a question of fact. While this
Section enumerates contracts which can be specifically enforced Sec 14 specifies
contracts which are not enforceable at all.
12.8 CONTRACTS WHICH CAN BE SPECIFICALLY ENFORCED
A contract according to Sec 10 can be specifically enforced (a) when there
exists no standard for ascertaining the actual damage caused by the non-
performance of the act agreed or (b) when the act agreed to be done is such that
compensation in money for its non-performance would not afford adequate relief.
Clause (a) is based on an uncertainty of any calculation of damages, which must in
such cases depend upon mere conjecture. Under clause (b) specific performance is
not available where pecuniary compensation or damages are an adequate remedy
for nonperformance of the contract. Explanation (i) to this Section provides that
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damages would not be an adequate remedy in case of a breach of contract to

transfer and land. Only in exceptional cases a breach of such a contract to transfer
immovable properly can be adequate relived by compensation and those cases are
covered by Section 14 (1) (a) of this Act.

Contracts for transfer of movable property

As regards contracts for transfer of movables the presumption is that damages
would be an adequate remedy for breach, because the purchaser would be able to
purchase goods of the same quality and quantity with the damages obtained. But
there are exceptions to the above presumption. In those cases specific performance
would be granted. They are
i) Unique chattels or rare articles of beauty e.g. a picture by a dead
painter.
ii) Shares of a private company which is not traded in the market.
iii) Goods of special value or interest to the plaintiff.
An unregistered agreement for sale may be received as evidence of the contract
in an action for specific performance. An oral agreement for sale may be
enforceable against a subsequent purchaser when he had purchased under a
registered sale deed with notice of oral agreement.
Relief’s available in a suit
Where there is an agreement of sale the purchaser is obliged to pay the
purchase money and obtain a transfer deed and the vendor having received the
price has to execute the sale. But if the vendor refuses to complete the contract the
vendee may bring a suit for specific performance. Alternatively the purchaser may
claim for the refund of the purchase money with interest. When the purchaser
refuses to pay the money the vendor may sue directing the purchaser to pay the
money. A suit for the recovery of unpaid purchase money is a suit for specific
performance.
Contract which is connected with results
Specific performance may be granted when the act agreed to be done is in the
performance wholly or partly of a trust. But a contract by a trustee in excess of his
power cannot be enforced. The following contracts are not enforceable.
a) A lease which is in excess of the powers of the trustee lessor.
b) A compromise by administrator which is in excess of his authority.
c) A contract of sale by a defecto guardian of a Mohamedan minor’s
property.
d) A contract of sale by a Hindu father of the share of his minor’s share
without legal necessity.
e) A contract to grant a permanent lease by a Mohunt of a temple without
legal necessity.
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So it can be safely declared that specific performance of a contract may be

granted in the following cases.
1) An agreement to sell and transfer of immovable property.
2) Agreement to sell with a condition for repurchase.
3) Agreement for exchange of immovable property.
4) Agreement to lease.
5) Agreement to partition.
6) Agreement for a compromise of doubtful rights and family
arrangements.

12.9 SPECIAL DEFENSES IN A SUIT FOR SPECIFIC PERFORMANCE

The following defenses are available in a suit for specific performance.
i) The agreement is not valid.
ii) The plaintiff’s title is not free from doubt.
iii The circumstances when the contract was made gave the plaintiff an
) unfair advantage even though there is no fraud or misrepresentation.
iv The performance of the contract would involve hardship on the
) defendant which he could not foresee while its non-performance does
not entail any hardship to the plaintiff.
v) Such undue delay will lead to the inference that the plaintiff has
abandoned his rights.
vi The plaintiff has not performed or is not ready and willing to perform
) his part of the contract.
vi The plaintiff is not competent to sue for specific performance.
i)
vi The plaintiff has performed his part of the contract within the time
ii) where time is of the essence of the contract. In other cases he must
perform it within a reasonable time.
ix The contract be specifically enforced, because it depends on the
) personal volition of the parties or it may require constant supervision.
x) The plaintiff disentitled himself by his conduct or disable himself by
selling away the property after the contract.

Specific performance of part of the contract

The general rule is that a court cannot compel specific performance unless it
can enforce the whole contract. This rule was spread over in Sec. 17 of the Specific
Relief Act 1877. Sec.14 to 16 provided other exceptions as well. The present Sec 12
was enacted as a result of codification of these rules as recommended by the Law
Commission.
Sec. 12 (1) embodies the rule that specific performance of a part of a contract
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will not be decreed unless it comes under any of the exceptions contained it. The
question to be determined is whether the part left unperformed is small or
considerable. If the proportion be small and admit of compensation in money, the
court may direct specific performance and awarded compensations. The two
condition for the application of the provision are that (i) the part which must be left
unperformed is small and (ii) it admits of compensation. Sub-Sec (2) deals with a
case where the unperformed part bears only a small proportion of the whole sub-
Sec 3 deals with a case where the part unperformed bears a large proportion to the
entire contract. Two contingencies are dealt with by Sec 12(3) (i) The part
unperformed admits of compensation (ii) Where is does not admit of compensation
in money.
Sec. 12 enacts the principle that specific performance of a contract will not be
enforced against a purchaser where the subject matter is wanting. Specific
performance of the remaining part cannot be granted unless the plaintiff expresses
his willingness to pay the consideration stipulated for the entire contract for a
portion only of the property. An exception to general rule is provided by Sec. 12 (4).
Where the contract is divisible because it consists of two complete covenants, and
the one is good, the other bad, the former part may be specifically enforced, though
the latter part fails.
Sale or lease with imperfect title
The rights of a purchaser or lessee against a person having no title or
imperfect title are dealt with by Sec. 13. Where a person contracts to sell or let
property in which he has no title or an imperfect title but later on acquires interest
in it, he can make good the contract out of the interest acquired subsequently. In
Holroyd vs. Marshall it was observed that if the contract is good and fit to be
performed and the consideration has been received incapacity to perform it at the
time of its execution will be no answer, when the means of doing so are afterwards
obtained. Sec. 18 (i) (b) deals with the principle that “A vendor is bound to be
everything that he is able to do by force of his own interest and also by force of the
interest of others whom he can compel to concur in consequence. Where the
vendor declares that he is selling unencumbered property or he conceals
fraudulently and if it is found later that the property is mortgaged for a sum not
exceeding the sale price, the purchaser may compel the seller to obtain a
conveyance from the mortgagee, or he may pay off the encumbrance out of the
unpaid purchase money under Sec. 55 of the Transfer of Property Act. Even when
a suit for specific performance is dismissed due to want of title or imperfect title the
defendant has a right to the return of his deposit with interest thereon and costs.
He is entitled to a lien for such deposit over the subject matter of the contract.
12.10 CONTRACTS WHICH CANNOT BE SPECIFICALLY ENFORCED SEC. 14
Want of Mutuality
This principle is stated by Fry as follows: “A contract to be specifically enforced
by the court must as a general rule be mutual, that is to say, such that it might, at
the time it was entered into have been enforced by either of the parties against the
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other of them. When, therefore whether from personal incapacity to contract or the
nature of the contract, or any other cause, the contract is incapable of being
enforced against the party, that party is generally incapable of enforcing it against
the other, though it’s execution in the latter may be free from the difficulty
attending it’s execution in the former. Generally a court will not grant specific
performance to one party, when it could not do so at the suit of the other. So
specific performance in favour of one who has undertaken continuous duties
cannot be granted. Nor can an infant enforce a contract of specific performance.
Thus in Mir Sarwajian vs. Fakhruddin 1911, 39 I. A. 1 a contract by a manager of a
Muslim Minor was entered for the purchase of immovable property on behalf of a
minor. Suit claiming specific performance could not be granted as there was no
mutuality in such a contract. The doctrine of want of mutuality is abolished under
Sec 20 (4) of the new Act.
Contracts of personal service
A contract for personal service cannot be enforced at the suit of either party.
This is based on grounds of policy that it is improper to make a man serve or
employ another against his will. This is applicable to cases of agency, partnership
and apprenticeship. But a plaintiff may obtain injunction restraining the defendant
from performing a like personal service for other persons.
Contracts requiring constant supervision
No decree for specific performance will be granted to contracts for the
performance of which constant supervision would be required. In Ryan Vs. Mutual
Tontine Westminister Chambers Association, a lessor appointed a porter who should
perform certain function for the benefit of the tenants. It was held specific
performance could not be granted of the covenant as it was a contract which would
require constant supervision and the court was not prepared to undertake. Also
contracts appointing an arbitrator or to convey the good will of a business without
the business premises will not be enforced.
Indian Law Sec. 14
Sec. 14 of the Act enumerates instances which by their nature cannot be
specifically enforced. They are
a) A contract for the non performance of which compensation in money is
an adequate relief.
As specific performance is an equitable relief it can be granted only where
monetary compensation does not afford an adequate remedy. In the following
instances specific relief would be refused as compensation would be an adequate
a) A contract for sale of government stock.
b) An agreement to deliver certain buffaloes unless there is some thing
remarkable about the cattle.
c) An agreement to purchase a money claim is not specifically enforceable.
d) An agreement to supply specific movable article. But a contract for the
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delivery of particular coins is specifically enforceable.

Clause (b) A contract which runs into such minute or numerous details or
which is so dependant on the personal qualifications or volition of the parties, or
otherwise from its nature is such that the court cannot enforce specific
performance of its material terms.

Specific performance of contracts which involve continuous acts and require

the watching and supervision of the court cannot be granted. A court does not
order specific performance of a contract to build or repaid. There are certain
exceptions and a decree for specific performance of a contract to build will be made
in these. (a) The building work was defined by the contract between the parties.
(b) The plaintiff has substantial interest in the performance of the contract and he
cannot be adequately compensated in damages. (c) The defendant obtained
possession of the land, on which the work contracted is to be done.
Contracts dependent on personal volition
A contract of personal service cannot be specifically enforced by either the
master or the servant. The only remedy is to sue for damages. In Boolchand vs.
Kurukshetra University 1967 A. S. C. 292 it was held that courts do not grant
specific performance of contracts of service and therefore when there is a purported
termination of service contract. A declaration that the contract still subsisted
would rarely be made. In Dr. S. Dutt vs. University of Delhi 1958 A. S. C. 1050 an
arbitration award that Dr. Dutt a professor of the university was dismissed
wrongfully and mala fide and that it had no effect on his status and he continued to
be in service in effect directed the specific performance or a contract of service and
was therefore erroneous in view of Sec. 14 (1) (b). But a departure has been made
under certain specific enactments like the Bihar Shops and Establishments Act in
case of Industrial Disputes which has to be exercised without being arbitrary and
whimsical. The general rule as laid down in decisions like Ridge vs. Baldwin and
Vidyodaya University vs. D. Silva is that statutory provisions giving employees or
former employees a right to reinstatement may be ordered where the relationship is
not of an ordinary master and servant, but dismissal is from a public office. In
Beswick vs. Beswick 1968 A. C. 58 specific performance of a contract was ordered
for the performance of the sale of a goodwill without business premises at the suit
of the personal representatives of a vendor who had performed his part of the
contract.
A contract which is vague cannot be enforced even by an action for damages.
An agreement which is vague as to price, time and the person purchasing it cannot
be specifically enforced.
12.11 CONTRACTS NOT CAPABLE OF SPECIFIC PERFORMANCE
A suit for specific performance of a contract to give in marriage will not lie.
Only damages for breach can be obtained. Similarly a betro ceremony will not
amount to a binding contract of which the court would give specific performance.
Sec. 21 (g) of the old Act provided that specific performance will not be granted for
contracts involving the performance of duties extending over three years. Not in the
present Act the limitation is taken away and the test laid down is whether the
contract is such that the court cannot supervise its performance as it involves the
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performance of a continuous duty.

Sec. 14 (2) provides that no contract to refer present or future differences to
arbitration shall be specifically enforced except as provided by the Arbitration Act.
So if a person made such a contract refuses to perform it, sues to enforce the
existence of such a contract shall bar the suit. The rationable seems to be that
parties to a contract shall not be allowed to have their own tribunals unless the law
of arbitration permits them.
Under Sec. 12 (3) the court may enforce specific performance in the following
cases.
a) Where the suit is for the enforcement of a contract to execute a
mortgage or furnish security for securing repayment of any loan.
b) Agreement to take up and pay for any debentures of a company or a
suit for execution of a formal deed of partnership or the purchase of a
share of a partner in a firm. Though a contract to enter into a
partnership cannot be enforced yet there are certain excaptions.
1) Where the parties agreed to execute a formal deed, that deed may be
decreed to be executed even though the partnership might be dissolved.
2) Where the parties have entered on the partnership business the court
may enforce the agreement so as to compel the parties to execute a
formal deed.
The court does not order specific performance of a contract to build and repair.
Yet the decree for specific performance could be made in the following cases.
The building work is defined by the contract between the parties.
2) The plaintiff has substantial interest in the performance of the contract
which cannot be adequately compensated in damages.
3) The defendant has obtained possession of the land on which the work
contracted is to be done.

12.12 WHO MAY OBTAIN SPECIFIC PERFORMANCE – SEC. 15

Specific performance may be obtained by any party hereto or the
representatives in interest or the principal of any party thereto. The parties to the
contract are the proper persons. Where there is a joint contract all must join in
suing on the contract. Specific performance cannot be granted to some only of
several purchasers if others refuse to join in the suit. The parties can be indicated
by description instead of name provided the description is sufficient to preclude any
dispute as to identity. A receiver may sue for specific performance with the
permission of the court. In the absence of a contract to the contrary an agent
cannot personally enforce the contract entered into by him on behalf of the
principal. But a contract entered into by a solicitor for an unnamed client can be
specifically enforced.
A third party for whose benefit a contract is entered into is not entitled to
enforce the contract but as an administrator of the estate of a party to the contract,
he would be entitled to sue for specific performance in his own favour
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notwithstanding damages recoverable for the estate were nominal. Sec. 15 (c)
provides that when the contract is a settlement on marriage all persons beneficially
entitled there under are entitled to sue for specific performance although none of
them were parties to the original contract. A marriage settlement and a family
compromise form exceptions to the rule that only parties to the contract may
enforce a contract. So now any person who is beneficially entitled may seek specific
performance though he was not a party to the agreement.
Specific performance may be obtained where the contract has been entered
into by a tenant for life or a reversioner in possession, where the agreement is a
convenant entered into with his predecessor in title and reversioner is entitled to
the benefit of such a covenant. It can also be obtained by a reversioner is
remainder where the agreement is such a convenant and the reversioner is entitled
to the benefit thereof and will sustain material injury by reason of its breach.
Contract with promoters of a company
A contract by a person with the promoters of a company to take a certain
number of shares of the company when formed is not a contract for the purposes of
the company within the meaning of this clause. If nothing is done by him
amounting to an acceptance of the allotment it will not make him a shareholder or
enable the company to sue him for the unpaid calls on those shares. This clause
makes it clear that the contract of promoters is enforceable by the company, when
it has accepted the contract and communicated the acceptance to the other party to
the contract.
For whom Contracts cannot be specifically enforced Sec. 16
Specific performance of a contract cannot be enforced in favour of a person
who would not be entitled to recover compensation for its breach. The Section
should be read together with Sec. 236 of the Contract Act which provides “A person
with whom a contract has been entered into in the character of agent is not entitled
to require the specific performance of it if, he was in reality acting not as agent but
on his own account”.
Accordingly the person claiming specific performance should be entitled to
recover compensation. If he is not entitled, to claim compensation the contract
cannot be specifically enforced in his favour. Secondly the plaintiff cannot obtain
specific relief if he is incapacitated from performing the contract due to legal or
mental or physical incapacity e.g. insolvency. Also he cannot enforce it if he is
guilty of committing any fraud in relation to the contract. The plaintiff cannot
obtain specific relief’s unless he can aver and prove that he was always ready and
willing to perform the essential terms of a contract. Failure to allege and to prove
that the plaintiff has been continuously ready and willing to perform his part of the
contract will lead to the dismissal of the suit.
A contract to sell or let property by one who has no title at all by reason of
personal default cannot be enforced in favour of the vendor. It is applicable to a
party who, though he entered into the contract believing that he had good title at
the time of the completion of the contract.
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Specific performance with a variation

Sec. 18 provides that when fraud or mistake of fact or misrepresentation has
induced the defendant to sign an agreement that agreement can only be enforced
on the terms which the defendant intended to agree. The defendant can prove that
due to fraud. Mistake or misrepresentation the agreement does not contain the real
terms. A variation can be ordered only if there is fraud; mistake or
misrepresentation on the written contract. Where the defendant sets up variation
on the ground of fraud or mistake of fact, plaintiff cannot obtain specific
performance except with such variation.
12.13 AGAINST WHOM CONTRACTS MAY BE SPECIFICALLY ENFORCED SEC. 19
Specific performance can be granted against the parties to the contract or their
legal representative or a person who had purchased the property after the contract.
A contract can be enforced against any person who derives his title from a party
subsequently to the contract A bona fide transferee for value who has paid the sale
price in good faith and without notice of the contract is excepted. Equity will
enforce performance of the contract of sale against persons claiming under a title
which though prior to the contract and known to the purchaser, might have been
displaced by a conveyance by the vendor. In Pitchayya vs. Venkatakrishnayya A. I.
R. 1943 Mad 497 it was laid down the specific performance may be granted against
a person who is benamidar, for the contracting party. When a company has
entered into a contract and got itself amalgamated, the new company arising out of
such amalgamation can obtain specific performance.
12.13.1 Discretion and Powers of Court
According to Sec. 20 the jurisdiction to decree specific relief being
discretionary the court is not bound to grant such relief merely because it is lawful
to do so. The discretion should not be exercised arbitrarily and unreasonably and
it must be guided by judicial principles capable of correction by appellate court.
Mere delay would not be a ground for refusing specific performance unless time was
of the essence of the contract.
12.14 DISCRETION NOT TO DECREE
12.14.1 Unfair advantage
If the want of equality of fairness is lie to either unfair advantage, duress,
intimidation, mental weakness the court may in its discretion refuse to decree
specific performance. Every one who comes to a court of equity for relief was bound
to show that he had no remedy or no adequate remedy in the ordinary jurisdiction.
There may be circumstances which would render a transaction unfair and
avoidable as a fraudulent preference would materially influence the court in
decreeing specific performance. If at the time of entering into an agreement the
parties are not on equal terms and circumstances show that the plaintiff had an
unfair advantage over the defendant the court may in its discretion refuse specific
relief even though the contract was perfectly valid in law. In Ramakrishnan vs.
Palaniappa (1963) A. M. 17 the seller had no knowledge which the buyer had that
the digging of a channel would enhance the value of the land. Specific performance
was refused.
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Hardship on the defendant

A Court will not grant specific performance of a contract, if it will impose great
hardship on either of the parties. Thus in Lakshminarayana Reddiar vs.
Singaravelu 1663 A. M. 24 a judgement debtor in order to get the auction sale of his
property set aside agreed to sell his property for the amount of sale price plus the
amount required for court expenses which was neither the market price not a fair
price. When sued for specific performance it was refused by the court. The
hardship contemplated is that the transaction must be unconscionable. Specific
relief will not be refused merely because it is onerous. The hardship must be such
as the defendant could not foresee. The court will not lend its aid to the defendant
where the hardship has been brought out by the defendant himself. The hardship
must have existed at the time of the contract except where it has resulted from the
subsequent conduct of the plaintiff. In Narayanasamy vs. Dhanakoti Ammal 1967
A. M. 220 it was held that mere rise in price of the property agreed to be sold is not
a ground for refusing a discretionary relief in favour of the purchaser. What has to
be considered is the fairness of the contract at the time it was made and the
subsequent rise in price is not a matter to be taken into consideration.
Where specific performance would be inequitable
In some circumstances it would be inequitable to compel specific performance
though the terms of the contract are fair
1) Where the granting of specific performance will injure a third party.
2) Where a counter claim is made by the defendant to a suit for specific
performance.
3) The grant of a decree of specific performance would be a source of
constant trouble and friction. Specific performance will be refused
where the plaintiff is guilty of gross carelessness or negligence.

12.14.2 Discretion to decree

Under Sec. 20 (3) the court may exercise it’s discretion to decree specific
performance in any case where the plaintiff has done substantial acts or suffered
loss in consequence of the contract. In otherwords where a contract is partially
performed and acted up and the plaintiff has in consequence suffered loss the court
ought to grant a decree for specific performance provided the contract was one
capable of performance under the foregoing provisions of the Act.
Awarding compensation in certain cases
In a suit for specific performance the plaintiff may claim compensation for its
breach in addition to, or in substitution of such performance. If the court decides
that specific performance ought not to be granted, but the contract between the
parties has been broken by the defendant the plaintiff may be awarded
compensation. The conditions according to which damages may be awarded by the
court in addition to specific performance are laid down in Sec. 21 (3) They are. The
 156

court decides that specific performance ought to be granted, but the justice of the
case requires that not only specific performance, but also some compensation for
the breach of contract should be given to the plaintiff. The court cannot award
compensation in addition to specific performance unless it is satisfied performance
is not sufficient to satisfy the justice of the case.
The circumstances in which the court would award damages in lieu of specific
performance are.
1) Specific performance could have been granted, but in the circumstances
of the case the court in its discretion considers that it would be better to
award damages instead of specific performance.
2) Though specific performance is refused plaintiff is entitled to
compensation for breach of the contract.
No compensation shall be payable unless the plaintiff has claimed such
compensation in his plaint. After obtaining a decree the plaintiff discovers that the
defendant cannot perform the contract specifically he may apply for re-hearing
asking, that in lieu of the decree for specific performance a decree for damages may
be awarded. Such a relief can be granted by a court. The right to specific
performance or alternatively the return of earnest money should be determined in
one and the same suit. The plaintiff failing to obtain specific performance should
not be driven to a separate suit to recover back his deposit if he is entitled to a relief
in that form.
12.14.3 Ancillary relief’s
By Sec. 22 the court may grant the relief of possession, partition, refund of
earnest money etc. In a suit for specific performance the plaintiff may claim a
decree for possession even though the right to possession accrues only when
specific performance is decreed. Similarly where the vendor or lessor was a joint
tenant and the suit for specific performance is brought against the survivor in
possession the plaintiff is permitted to ask for partition as well possession in the
same suit. The court may in a suit for specific performance direct a refund of
earnest money while refusing specific performance if the facts disclose a case for
such a refund.
12.14.4 Liquidation of damages is no bar
Under Sec. 23 liquidation of damages shall not be a bar to specific
performance. A contract may be enforced specifically, though an amount is fixed as
payable in case of breach. A party committing the default is willing to pay the
amount. But the contract must be one which is specifically enforceable. This is a
rule of equity. The thing agreed to be done must be done though a penalty is
attached to secure, its performance. The principle underlying Sec 23 is also
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applicable in the matter of granting injunctions against non-performance of

contracts.
Alternative contracts are not within the scope of this section. Such contracts a
stipulation that one of two things shall be done at the option of the party who has
to perform the contract. Sec. 28 deals with, contracts stipulating that a certain act
shall be done with a sum annexed whether by way of penalty or damages for
securing performance. It seems that if the compensation in money is adequate,
specific performance need not be granted. In some cases the circumstances may
indicate that the parties agreed that in case of breach of contract only damages can
be awarded and not specific performance. But the plaintiff cannot have both
specific performance and the sum specified in the contract as damage.
12.15 SUGGESTED QUESTIONS
1. What are the essentials for specific performance
2. Who may obtain specific performance
3. Write a note on ‘laches’
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LESSON – 13

RECTIFICATION OF INSTRUMENTS
STRUCTURE
13.1 Rectification of instruments
13.2 Who may bring the suit
13.2.1 Conditions for application of the section
13.2.2 Mutual mistake
13.2.3 Unilateral mistake and mistake of law
13.2.4 Limits to rectification
13.3 Rescission of contracts
13.3.1 Voidable and terminable contract (sub-sec.1 (a))
13.3.2 Defendant is more to blame
13.3.3 Limits to the right of rescission
13.4 Rescission after decree
13.5 Cancellation of instruments (Sec.13.33)
13.5.1 Partial cancellation
13.5.2 Compensation on cancellation Sec 33.
13.6 Restitution of benefit by minor
13.7 Suggested Questions

13. 1 RECTIFICATION OF INSTRUMENTS

Sec 26 provides that due to fraud of one of the parties to a contract or other
instrument, or even if there is no fraud and the parties are innocent, but on
account of a mistake of fact or law of both the parties the contract or any other
instrument does not express the real intention which the parties had at the time of
it’s execution either party or his representative in interest may bring a suit for
rectification or correction of the contract or instrument. If it is proved that there
has been fraud or common mistake in framing the contract or instrument and that
it does not express the real intention of the parties the court may in its discretion
direct the correction of such instrument, so as to express the real intention of the
parties. The proviso adds that such a rectification or correction does not affect the
rights acquired by bonafide purchaser for value without notice. If there is no
allegation of fraud or mutual mistake of the parties, the suit is not one for the
rectification of contract and cannot come under this section.
Rectification means correction of an error in an instrument in order to give
effect to the real intention of parties. This remedy has to be distinguished from
other equitable remedies. It has to be distinguished from relief granted to a
defendant in a suit for specific performance by way of variation from the conduct on
the ground of fraud or mistake. The remedy of rectification applies to cases of
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mistake in expression only as distinguished from the contract itself. Rectification

can be obtained for a mistake of law and such is the English equitable doctrine. To
establish a right to rectification of a document it is necessary to show that there
has been either fraud or common mistake. Rectification will not be granted unless
it is distinctly claimed. Oral evidence is admissible to prove either fraud or
mistake. The mistake must be common to both parties. It is essential that the
parties should have the same intention on the point on which the document is
inaccurate.
13.2 WHO MAY BRING THE SUIT
A suit for rectification of an instrument maybe brought only by the parties
thereto or by their representatives in interest. Either party to the contract may sue
for rectification. Under the previous enactment it was laid down that the relief of
rectification may be obtained in other suits even without a prayer for rectification.
Any party to the deed may without bringing a suit for rectification file a suit for
recovering possession or for confirmation of possession or for enforcement of the
mortgage. Any representative in interest of either party may bring a suit. The relief
of rectification is not confined to cases of contract. It can be obtained in respect of
any other instrument in writing.
13.2.1 Conditions for application of the section
The relief may be granted when there is a completed agreement which is
sought to be rectified. There must be verbal written agreement which expresses the
final intention of the parties and an instrument which purports to embody that
intention. It must be proved that there was a concluded contract before the
execution of the document which is sought to be rectified. But due to mistake in
framing the writing this did not express or give effect to the agreement. It was
observed by Jenkins C. J. in Dagdu vs. Bhama (1894) 28 Bam 420 that “The
rectification consists in bringing the document in conformity with this prior
agreement and without such prior agreement there can be no rectification. If a
man relies upon a common mistake, he must establish a prior agreement and any
variance between that agreement and that terms into which it has been reduced”.
The evidence regarding the mistake of both the parties must be let by the party who
seeks rectification. Where fraud has led to a mistake as to the intention of the
parties it may be a ground for rectification.
The relief of rectification may be obtained in respect other instrument as well.
The word instrument has been defined in Sec 2 (14) of the Indian Stamp Act as
follows: Instrument includes every documents by which any right of liability is or
purports to be created, transferred, limited extended, extinguished or recorded.
Thus a decree or an acknowledgement under the Limitation Act may be rectified.
13.2.2 Mutual Mistake
The mutual mistake must be common to both the parties. It is essential that
the parties should have had precisely the same intention on the point on which the
document is inaccurate. A person who seeks rectification on the ground of mutual
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mistake, has to establish that the alleged intention to which he desires it to be

made conformable in the minds of all parties down to the time of its execution and
it must be set forth in the form to which the deed ought to be brought.
If a mistake creeps into a decree due to mutual mistake of the parties to a suit,
a suit will lie to set it aside. In Tirupathi Pillai vs. Gandhimathi Ammal (1966) 2, M.
L. J. 325 it was laid down that once a person executes a settlement deed the has no
right to revoke that deed because he has no title to the property. It is not necessary
for the settlee to ask for cancellation of the sale deed.
13.2.3 Unilateral mistake and mistake of law
Rectification is refused where there is an unilateral mistake. Thus a suit to
rectify a mortgage deed, because the mortgaged share has been wrongfully
described will not lie as the mistake is unilateral and not mutual.
An equity court will not grant in general relief against a mistake of law. but in
certain cases the court may grant the relief of rectification against mistake of law if
there is any equitable ground which makes it inequitable that a party benefited by
the mistake should retain that benefit. As the remedy is discretionary the courts
will not permit to be sued. This section allows the court to rectify an instrument to
bring the legal consequences into conformity with those intended by both parties.
13.2.4 Limits to rectification
There are certain limitations for rectification of an instrument. They are:
i) If third parties have acquired right in good faith and for value.
ii) A decree was already obtained upon an unrectified instrument and the
decree has been executed the concerned property or money has been
recovered.
Thus the words “so far as this can be done without prejudice to rights
acquired by third persons in good faith and for value” protects bonafide purchasers
for value without notice. So the relief of rectification will not affect the rights
acquired by third parties for value. But a person having knowledge of the mistake
purchases the property with the intention of taking advantage of the mistake is not
a bonafide purchaser for value without notice. But mere delay not be a ground for
refusing the relief of rectification unless the rights of third parties have intervened
already.

13.3 Rescission of Contracts

Rescission is available in the following cases.
a) Where the contract is voidable or terminable by the plaintiff under Sec
19 or 19-A of the Indian Contract Act.
b) Where the contract is unlawful for causes not apparent on its face and
the defendant is more to blame that the plaintiff. It may be granted in
case of unlawful agreements.
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c) Where a decree for specific performance of a contract of sale or of a

contract to make a lease has been made and the purchaser or lessee
makes default in payment of money or other sums which the court has
ordered him to pay.
The remedy by way of rescission is not confined to persons named as parties to
a contract. It is available for legal representatives and other assigns provided the
original party has not by his own conduct disentitled himself to relief which does
not affect the general rule. It is open to any person, who is interested in the
contract although he is not named as a party. In Ravji vs. Gangadharbhat (1880) 4
Bom 29 a manager of a Hindu joint family while selling the right to cut wood in a
forest belonging to the family for Rs. 4000/- made a collateral private bargain
according to which he was to receive Rs. 4000/- more. It was held that any
member of a joint family is entitled to rescind the contract entered into by the
manager whereby the former would be defrauded.
In Saravan vs. Kashiram 51 Bom. 533 it was laid down that a heir or other
legal representative may sue for rescission though the relief under Sec. 19 or 19-A
is available to the person who has suffered loss due to fraud and undue influence.
13.3.1 Voidable and terminable contract (sub-sec 1 (a))
“An agreement which is enforceable by law at the option of one or more of the
parties thereto. But at the option or others” is a voidable contract. According to
Sec. 19, 19-A and 20 of the Contract Act an agreement is voidable if it was caused
by coercion, fraud, misrepresentation undue influence, mistake. It may also
become void if a person refused to perform or disabled himself from performing his
promise when the contract. Contains reciprocal promises. The explanation to Sec.
25 of the former Act (Specific Relief Act 1877) will make the position clear. “A sells
a field to B. There is a right of way over the field of which A has direct personal
knowledge, but which he conceals from B. B is entitled to have the contract
rescinded. In Wilde vs. Gibson 1884 I A. L. C 605 the facts were similar to the
illustration above except that the vendor has no personal knowledge of the right of
way. It was held that the vendor could not rescind. This ruling was approved by
the Madras High Court in Delhi Gramani vs. Ramachandran 1953 A. M. 769. So
according to equity where a conveyance has been executed it will he set aside only
on the ground of fraud, and not for innocent misrepresentation.
A terminable contract is one, which contains a stipulation that on the
happening of a certain event, it may be terminated. For example if the contract
contains a stipulation that the vendor has to make out good title to the property,
the purchaser may rescind or avoid the contract, if the vendor cannot make a good
title.
13.3.2 Defendant is more to blame
Story in his book “on equity” explains the position thus: “Where although both
parties have participated in the guilty transaction yet the plaintiff has done so
under circumstances of oppression, impositions hardship, undue influence, of great
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inequality of age or condition so that in a moral as well as in a legal point of view,

his guilt may well be deemed for less dark in its character and degree than that of
the defendant”. If the plaintiff is a guilty party or the agreement which he seeks to
rescind is founded on illegality, immorality he may be left to take the consequences
of his own inequity. So one of the important ingredients for rescinding a contract is
that the defendant is more to blame than the plaintiff. The illegality spoken here is
due to causes not apparent on the fact of the contract. If the illegality is due to
cause which is patent the agreement would be void.
13.3.3 Limits to the right of rescission
There are certain limitations on the right of a person to rescind a contract
under this Act. They are
a) The plaintiff has expressly or impliedly ratified the contract. In other
words where the plaintiff having knowledge of the facts of his rights to
rescind proceeds with the contract or affirms the contract, he loses his
right to avoid the contract though he may have other available remedies
to him.
Mere lapse of time will not constitute affirmation. But where the lapse of
time is so great it may be treated as conclusive evidence of an election to
recognize the contract.
b) Where due to change of circumstances since the making of the contract
the parties cannot be substantially restored to the position in which
they stood when the contract was made. In otherwords restitution in
integrum is impossible in those cases, because the thing has been
destroyed. This principle cannot be applied where the change in the
circumstances is due to the act of the defendant.
c) The right to rescission is lost where third parties acquired rights in good
faith without notice and for value. In otherwords the right of rescission
is lost, if before the aggrieved party rescinds the contract a third party
acquires for value an interest in the subject.
d) The court may refuse to rescind the contract where only a part of the
contract is sought to be rescinded and that part is not severable from
the rest of the contract. In other words rescission of a part of a contract
may be allowed if that is severable from the rest.

13.4 RESCISSION AFTER DECREE

If a decree is made in a suit for specific performance by executing a
conveyance, but the purchaser defaulted in paying the purchase money in
accordance with the decree the court in the same suit may order cancellation of the
contract. Under Sec. 28 (4) a separate suit for rescission will not lie in such
circumstances.
Where the contract is rescinded the court may order restoration of possession
to the vendor or lessor if the vendor or lessee has obtained possession under a
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contract which is rescinded. It may direct the purchaser or lessee to pay to the
vendor or lessor all rents or profits from the date of taking possession till date of
restoration of possession. The earnest money or deposit may be refunded to the
purchaser or lessee if justice requires. But in Anandlal vs. Gunendra (1966) A. Cal
107 it was laid down that on rescission of a contract on default by a purchaser the
earnest money paid by the purchaser can be forfeited by the vendor in the absence
of an express stipulation to the contrary. Multiplicity of proceedings is avoided
under Sec 28 (3). So where the purchaser or lessee has paid the money the court
may order the further relief of execution of a conveyance and the delivery of
possession.
A plaintiff may also pray alternatively in a suit, for specific performance for
rescission of a contract, in Prem Raj vs. D. L. F. H. Co. Ltd (1968) A. S. C. 1355 it
was held that a party suing for specific performance may in the alternative sue for
rescission of the contract but the converse is not true and a person suing for
rescission cannot in the alternative sue for specific performance. Where a contract
is rescinded the court may call upon the party to whom relief is granted to make
any compensation to the other party which the justice of the case may require.
13.5 CANCELLATION OF INSTRUMENTS
The remedy of cancellation is not limited to cases of contract and it is open to
persons who are parties to a document. Cancellation may be ordered in the
following cases
a) Where the instrument is void or voidable.
b) Where the plaintiff has reasonable apprehension that the instrument if
not cancelled may cause injury.
c) Where the court in its discretion order it to be delivered up and
cancelled. In view of the undue delay or the conduct of the plaintiff the
court may in its discretion refuse to grant him relief.
The relief of rectification is not restricted to the parties to an instrument but
any person affected by it may sue. Thus one may sue on behalf of himself and all
other creditors to set aside a deed executed by his debtor by which the creditors are
defrauded defeated and delayed. The relief given under this Section is founded
upon the administration of protective justice for fraud. If there is no apprehension
of injury. Whether that exists or not must depend on the circumstances of a
particular case which the court has to deal.

Where the illegality is apparent on the face of the instrument the court would
not interfere under the present Section because in such a case there is no danger
that lapse of time may deprive the plaintiff of his defense. In Perumalsamy Naicker
vs. Srinivasaga 1962. A. M. 296 it was laid down that in a suit by minor for a
declaration that an alienation by his father or the joint family property is sham and
nominal. It is not necessary to pray for setting aside the sale. He can ignore the
same.
 164

As the relief of cancellation is discretionary, the court may follow certain

principles in exercising its discretion.
i) If the plaintiff is in a position to claim for possession he cannot be
permitted to obtain a mere decree for cancellation of an instrument.
The court may grant leave to the plaintiff to sue for possession.
ii) To do equity to the other party the court while granting the relief may
put the plaintiff on terms.
iii) If undue delay has altered the position of the defendant the relief may
be refused.
It is not obligatory for a person to sue for cancellation. Even if he omits to sue
he will not lose his rights for recovering possession of the property within the period
of limitation. Thus a void document need not be cancelled. In a suit for possession
it may be contended that the sale deed was void and inoperative.
13.5.1 Partial cancellation
According to Sec. 32, the court is not bound to cancel the whole of the
instrument. It may in its discretion allow partial cancellation and allow a part of it
to stand. In some cases the ends of justice will be met by canceling a part of it
where the plaintiff has no apprehension of serious injury from a part of the
document. Then the court may exercises to discretion by canceling a part of it
which needs cancellation. But where a part of it is not separate from the rest of it
the whole contract is void. The following illustration will make the position clear.
A executes a mortgage deed in favour of B. A. gets back the deed from B by fraud
and endorses on it a receipt for Rs. 1200/- purporting to be signed by B. B’s
signature is forged B is entitled to have the endorsement cancelled leaving the deed
to stand in other respects.
13.5.2 Compensation on Concellation Sec. 33
The general rule is that when a court passed a decree for rescission of a
contract it may direct payment of compensation to the defendant as the instance of
the case may require. While ordering the restoration of consideration money the
courts must have very strong circumstances to enable it to find equity in favour of
the defendant. No reasonable compensation need be paid where the contract is
without consideration.
Where a person advances a small sum of money to another and obtains from
the latter by fraud in repayment of the loan a deed of sale of property worth
considerably more than the amount of the loan, all that he is entitled to
cancellation of the deed is to be placed in the same position in which he would have
been had he obtained a deed of mortgage instead of a deed of sale. He is not
entitled to any allowance for repairs and improvements made by him to the
property the deed of sale having been obtained by fraud. In Varadarajulu vs.
Thavasi Nadar 1963 A. M. 413 A entered into a partnership with B and advanced
money for the purchase of a lorry which was in the name of the defendant. It was
held that the plaintiff was not entitled to the return of the money by way of
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equitable relief or on the doctrine of unjust enrichment. As this was an illegal

transaction Sec. 33 was held inapplicable.
13.6 RESTITUTION OF BENEFIT BY MINOR
Where a minor who has fraudulently misrepresented his age seeks to set aside
a sale the court may direct the refund of consideration received as a precondition
for cancellation or the deed. But the court will refuse its discretionary power where
the money was advanced by the defendant with the knowledge of his infancy.
Under Sec. 33 (2) a defendant who is minor or a lunatic at the time of the contract
may have to restore as far as may be any benefit whether proprietary or monetary,
which he has actually received under the contract. There is however no question of
any liability for making compensation in such a case. In Venkama vs. S. V. Chisty
1951 A. M. 399 it was laid down that even where a minor does not expressly ask for
cancellation of an instrument relying on its being a nullity, the court may make him
restore the benefit under this section.
If the deed is void the plaintiff need not for cancellation of the deed but may
sue for recovering possession. Normally compensation includes the return of any
money received as part of the transaction whether personally or through agent. It
will also include interest. If it is cancellation of a loan transaction with a minor, the
lender cannot recover interest as the minor is not bound by the contract.
13.7 SUGGESTED QUESTIONS
1. Who may bring the suit for Rectification of instruments.
2. What are circumstances in which Recission of Contract is possible.

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LESSON – 14

DECLARATORY DECREE
STRUCTURE
14.1 Declaratory decree
14.2 Explanation
14.3 Scope of the Section
14.4 When relief under this Section would be refused
14.5 Whether a decree merely declaratory can be made
14.6 Person entitled to any legal character
14.7 Different kinds of declaratory suits
14.8 Declaration as to service contracts
14.9 Suggested Questions

14.1 DECLARATORY DECREE

Section 34 of the Specific Relief Act deals with declaratory decrees. It is
extract below. “Any person entitled to any legal character, or to any right as to any
property may institute a suit against any person denying, or interested to deny his
little to such character or right and the court may in its discretion make therein a
declaration that he is entitled and the plaintiff need not in such a suit ask for any
further relief. Provided that no court shall make any such declaration where the
plaintiff being able to seek further relief than a mere declaration of title, omits to do
so.
14.2 EXPLANATION
A trustee of property is a “person interested to deny” a title adverse to the title
of some one who is not in existence, and for whom if in existence he would be a
trustee.
The object of this Section is to strengthen the evidence regarding the title of
the plaintiff so that adverse attacks upon it may not weaken it. If a cloud is case
upon the title or legal character the plaintiff is entitled to seek the aid of the court
to dispel the doubt”.
14.3 SCOPE OF THE SECTION
In a suit under this Section (1) the plaintiff must be a person entitled to any
legal character or to any right as to any property (2) the defendant must be a
person denying or interested to deny, the plaintiff’s title to such character or right
(3) the declaration sued must be a declaration that the plaintiff is entitled to a legal
character or to a light to property (4) where the plaintiff is able to seek further relief
than a mere declaration of title, he must seek such relief. If any of the first three
conditions is not fulfilled the suit should be dismissed. If those conditions are
fulfilled, but the fourth is not, the court shall not make the declaration sued for.
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14.4 WHEN RELIEF UNDER THIS SECTION WOULD BE REFUSED

The following circumstances must be mentioned in which the court may refuse
the relief. The court will not grant relief unless there is substantial injury. Where
the plaintiff’s claim is not denied by the defendant, declaration shall not be granted.
A declaration shall not be granted where the defendants conduct is fraudulent or if
he wants to evade the stamp law. no declaration can be granted of an abstract
right without any practical utility where the declaration may not bestow any benefit
to the party obtaining the declaration. No declaration could be made which will be
infractuous or useless. If the granting of it would be rendered nugatory or contrary
to law it cannot be granted. Unusual delay in bringing a suit may of itself be
sufficient to refuse the discretionary relief of declaration. A court may refuse to
grant this relief on the ground of non-joinder of necessary parties. If an alternative
remedy is more effective declaration may be refused e.g. a. suit to set aside a sale.
If a plaintiff is not able to establish the facts in support of a specific declaration he
is not entitled to a different declaration.
14.5 WHETHER A DECREE MERELY DECLARATORY CAN BE MADE
In Kutama Natchiar vs. Dorasinga 1875 2 I. A. 169 the Privy Council held that
courts had no power to make merely declaratory decree otherwise than under Sec
15 C. P. C. The same reasoning applies to cases arising after the passing of the
Specific Relief Act. Now the power of the civil court to grant declaratory decree is
recognized by Sec 34. Though a suit for declaration of right may not be within the
purview of Sec. 42 (Now 34) yet it is maintainable. In Ramaraghava Reddy vs.
Sheshu Reddy 1967 A. S. C. 436 a temple was declared as a public temple.
Defendants moved the court to set aside the order and for a declaration that certain
properties were private properties of the defendants. By a compromise decree the
temple was declared to be a public temple, but the properties were private
properties. A suit was brought for a declaration that the compromise decree was
not valid and binding. The Supreme Court held that (Sec. 42) (now Sec 34) is not
exhaustive of the cases where in declaratory decree may be made and such decree
can be given independently of Sec 42. So the worshipers (plaintiff herein) of a
temple can therefore maintain a suit for a declaration outside the purview of Sec.
42. (Now see. 34). But the worshipers of a temple being beneficiaries cannot sue for
possession as they do not exercise the power of the deity. Section 34 does not
apply to every form of declaration and the Supreme Court has held that the court
have power to grant declaratory decrees independently of this Sections. If the legal
character or proprietary right, belongs to another party but not to the plaintiff the
suit is not maintainable. The relief of declaratory decree is barred by some special
enactments. Where the plaintiff being able seek further relief than mere declaration
omits to do so the court will refuse to grant the declaration.
14.6 PERSON ENTITLED TO ANY LEGAL CHARACTER
Legal character means the something as status and includes characteristics
which the law attaches to a man in his individual capacity e.g. Adoption, divorce.
No suits maintainable under this section unless the plaintiff is a person entitled
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some legal character or to some right as to property and the declaration sought is
that he is entitled to such character or to such right. A plaintiff may under this
Section sue for a declaration that the defendant is not son or that the defendant is
not his adopted son, Conversely a person may sue for a declaration that he is the
legitimate child of a deceased person or that he is the son of A and not the son of B.
Similarly a woman may sue for a declaration that she is not the wife of the
defendant. In I. M. Lall vs. Secretary of State (1944) Lah 325 it was held that a suit
by a person for a declaration that an order of removal from the Indian Civil service
was illegal and that he was still a member thereof will lie. But in State Medical
Faculty vs. Kshiti Bhushan A. Cal 31 it was laid down that “a suit against a
University for a declaration that a candidate has passed an examination on for an
injunction compelling the University to promote him is not maintainable. That
would be an unwanted usurpation of the academic functions of the University”.
It is not necessary that the legal character of a plaintiff should be denied by
the defendant. It is enough that the claim hindered the plaintiff in the exercise of
his rights or that it will expose him to liability of the disregarded it. A rent payer
has an interest in the Municipal property and can maintain a suit against the
Municipality for declaration that a sale by the Municipal Committee was illegal and
in contravention of the statute. The right to pass along a street playing music is a
right which the court may recognize in the case of religious processions if an
inherent right is shown. In Sanat Kumar vs. Hemchandra 1961 A. Cal 411 it was
laid down that a suit which is not for a declaration of plaintiff’s right to property or
to his legal character, but is a suit to challenge the defendant’s pretensions to a
legal character or right to property is outside Sec. 42 old Act (New Sec. 34). In
Rambharosa vs. Smt Brinda devi 1956. A. P. 203 it was held that a suit lies for a
mere declaration that the plaintiff was not a signatory to a document and it was a
forgery. It would be immaterial if he averred that no consideration passed not
possession given.
Interested to deny
To entitle a person to a declaratory decree, it must be shown that the
defendant has denied or has some interest to his title to any legal character or to
any right with respect to any property. So the plaintiff has to prove to the
satisfaction of the court, some act done by the defendant which is hostile to and is
an invasion of his right. The existence of the person who is denying the character
or right of the plaintiff is essential. The plaintiff can maintain a declaratory suit
against a person who denies his right or even if he is interested in denying his right.
So a Hindu son can bring a suit challenging his father’s unsecured creditor to
proceed against his share in the joint family property. In Noor Jegan Begum vs.
Eugene Tischenko. 1942 A. Cal 325 the Calcutta High Court held that a suit for a
declaration that the marriage between the parties to the suit is dissolved is
maintainable, when the defendant is interested to deny the legal character claimed
by the plaintiff. Where the defendant admits the plaintiff’s right or the plaintiff’s
title to any property Sec. 34 will not apply.
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Where no legal character or rights to property involved

The general rule is that a decree under this Section is not available where no
legal character or right to property is involved. So no suit will lie for a declaration
that the plaintiff is not liable under a contract or that a contract still subsists
between the parties. The object of the proviso to this Section is to avoid multiplicity
of suits. Hence where the plaintiff is entitled to some consequential relief directly
flowing from the right of declaration, he cannot ask for a mere declaration without
asking for the consequential relief as well.
Further relief
A plaintiff cannot seek further relief if such relief is not available to him owing
to some statute. All that is provided in Sec. 34 is that the court shall not make a
declaration in the events specified in the proviso not that the court shall not grant
the relief that is prayed for. The further relief referred here is further in relation to
the legal character or right as to any property which any person is entitled to and
whose title to such character or right as to any property which any person is
entitled to and whose title to such character or right any person denies or is
interested to deny. Injunction is further relief within the meaning of the proviso.
So is cancellation. So a suit for a declaration and an injunction or for a declaration
and cancellation is a suit in which further relief is sought. A person suing for a
declaration of title to land ought to pray for payment of arrears of rent.
Possession
In a suit for declaration of title plaintiff must ask for possession, if the
defendant is in possession. Even if the defendant is a proprietor is in the
possession of a third party a mere prayer for an injunction restraining the
defendant from interfering with his possession is not sufficient. Where the plaintiff
seeks only confirmation of possession, but after it transpires that he was not in
possession he must be allowed to amend the plaint for recovering possession of
property. If the right to possession has been declared in an earliest suit a suit for
possession can be filed without seeking declaration. A person who was not a party
to a proceeding may sue for a declaration that the decree does not affect his title.
He need not ask any further relief. If the plaintiff was a party to an earlier
proceeding he must in such a suit ask for an injunction against execution.
This section enacts that a court shall not make a declaration in a suit in which
the plaintiff being entitled to sue for further relief omits to do so. But the court
cannot dismiss such a suit. Instead of dismissing such a suit the court should give
the plaintiff an opportunity to amend the plaint adding a prayer for consequential
relief. After having an opportunity if the plaintiff fails to amend the plaint there is
no alternative than to dismiss the suit.
14.7 DIFFERENT KINDS OF DECLARATORY SUITS
A suit that the plaintiff is the adoptive father of the defendant or that the
defendant is the adopted son of the plaintiff will lie. A suit lies for a declaration
that a person belongs to or does not belong to a particular caste. A suit by a
person, that he is elected as a director of a company according to law is
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maintainable. But a declaration that a valid contract subsists between the parties
cannot be given. A suit for a declaration that the execution of a registered
document has been obtained fraudulently by putting the executant under duress,
that it is not genuine and is invalid and inoperative, is maintainable. A difference
exists between a suit for cancellation of an instrument and a suit for a declaration
that the instrument is not binding. If the plaintiff is not a party to the deed he
cannot sue for cancellation. Instead he can sue only for declaration that the deed
is not binding on him and it would be a purely a declaratory suit.
Election
As a right to contest in a municipal election is a very valuable right, a suit to
declare that the defendants election is Void or to declare that a municipal election
is invalid or ultravires or to declare that the plaintiff’s election is valid and has been
wrongly set aside by the District Magistrate or to declare that the plaintiff has a
right to stand as a candidate is maintainable. An election may be challenged where
a right is denied to a person who is entitled to the same. But a rate payer who is
not eligible to vote has no right at all and there can be no question of any denial of
any right possessed by him.

14.8 DECLARATION AS TO SERVICE CONTRACTS

A contract for personal service cannot be enforced specifically. So a
declaration that the contract of service still subsisted would rarely be made and
would not be made in the absence of special circumstances. A suit for a
declaration of termination of service without a claim for further relief being invalid
is not maintainable. In Dr. S. Dutt vs. University of Delhi (already mentioned) 1959
S. C. R. 1236 it was laid down that a declaration that the dismissal of the University
professor was wrongful and malafide is nonetheless an effective dismissal though it
may give rise to a suit for damages. Therefore the relief that he continued to be a
professor is not a surplus age and is not severable. Termination of relationship of
master and servant will not entitle the servant to a declaration to the effect that the
service had not been validly terminated. The master can terminate the service for
no reason whatsoever, but there cannot be specific performance of service. In
Boolchand vs. University of Kurukshetra A. I. R. 1968 S. C. 292 appellant after his
compulsory retirement for the Indian Administrative Service was appointed as the
Vice-chancellor of the Kurukshetra University. But on his previous compulsory
retirement he was first suspended and then called upon to show cause why he
should not be removed from service in spite of his representation his services were
terminated. The writ petition filed by him in the High Court was dismissed. On
appeal it was confirmed by the Supreme Court. It held that a declaration that a
contract of service still subsisted would rarely be made and it would not be made in
the absence of special circumstances. But a court can decree a suit for arrears of
salary of a dismissed government employee though the prayer did not ask for
setting aside the order of dismissal. But the plaintiff should make all the necessary
allegations for setting aside the order of dismissal.
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There are certain well recognized exceptions to the general rule. They are
a) An order of reinstatement can be made by a Tribunal established under
a statute.
b) It there is any statutory of constitutional limitation on the employers
power to terminate the service a declaration that an order of
termination is void may be obtained where the limitation has been
violated.
A suit by a mortgagor in actual possession for a declaration that the mortgage
has been paid in full is maintainable. Similarly, a suit for a declaration that a
mortgage is good only to the extent of the amount paid is maintainable. A suit for a
declaration that a decree in a partition suit was obtained by fraud and to have the
property partitioned by the court is maintainable. But a suit by a minor for a
declaration that a partition was effected by him is not maintainable.
Religious Endowments and Wakf
A suit by a member of the public praying for a declaration that a particular
property is a wakf property and he is interested in it as a beneficiary is
maintainable without asking for a prayer for possession. Similarly a suit can be
filed by the worshipers of a deity for a declaration that certain lands were the
properties of the deity and that a sale effected for arrears of cess did not affect the
right, title and interest of a deity. Similarly a suit by a worshipers of a temple for a
declaration that an alienation by the trustee is invalid is maintainable. Worshipers
of a temple can commence an action praying for a declaration that a permanent
lease of temple property granted to the defendant in possession is invalid.
A suit will lie for a declaration of a customary right provided it is not against
public morals. A suit for a declaration that the plaintiff is a joint trustee with the
defendant is maintainable. Similarly a trustee may sue for a declaration of title of
trust property which was in possession of the tenants without asking for possession
where the tenants were entitled to continue under a statute. In Calcutta
Improvement Trustees Vs. Chandrakanta (1919) I. A. it was laid down that a suit for
a declaration that a statutory order is ultravires and an injunction restraining the
authority from giving effect to such ultravires order can be made.
Effect of declaration
Sec. 35 deals with the effect of declaration. “A declaration made under this
chapter is binding only on the parties to the suit. Persons claiming through them,
respectively and where any of the parties are trustees, on the persons for whom, if
in existence at the date of declaration, such parties would be trustees” A
declaratory decree would be binding between the parties in a subsequent suit even
if the first court had no pecuniary jurisdiction to try the second one. Even if a
declaratory decree in a former suit had been obtained under a mistake of law, it
must be held to be binding between the parties thereto and their representatives.
14.9 SUGGESTED QUESTIONS
1 What are different kinds of declaratory suits?
.
2 When the relief of declaratory decree is refused?
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.
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LESSON – 15

PREVENTIVE RELIEF
STRUCTURE
15.1 Injunctions generally
15.2 Temporary injunction
15.3 Principles in granting temporary injunction
15.4 Perpetual injunction
15.4.1 When granted (Section 38)
15.4.2 When refused (Section 41)
15.5 Injunction to perform negative agreement (Section 42)
15.5.1 Ingredients of Section 42
15.5.2 Mandatory injunction (Section 39)
15.5.3 Principles governing the issue of mandatory injunction
15.6 Damages in a suit for injunction (Section 40)
15.7 Suggested Questions

15.1 INJUNCTIONS GENERALLY

Chapter VII of Specific Relief Act deals with the granting of preventive relief.
The expression preventive relief means that kind of relief which is afforded by
preventing a party from committing that which he is under legal obligation not to
do. The preventive relief is granted by ordering temporary injunction or perpetual
injunction. Injunction is a specific order or command of the court preventing a
party from doing that which he is under a legal obligation not to do or directing the
performance of a particular act or thing.
For example if “A” the owner of a land is in possession of the same by doing
personal cultivation and “B” who has neither title to nor possession of the said land
threatens to dispossess “A” We have to see about the remedy of “A” If “A” is
powerful he can safeguard his possession by using violence and by sending “B”
back. But if “A” is not powerful or if “A” does not want to indulge in violence of
safeguard his possession he can approach the court of justice and request the court
to prevent “B” from dispossessing “A” from his land. As “B” is under legal obligation
not to dispossess “A” Such an order is called injunction. Further in some cases the
wrongdoer might have already begun to commit an act as against the rightful
owner. In such a case the court can prevent the wrongdoer from continuing the
wrongful act. For example if “B” has been unlawfully taking water from the well of
“A” the court can prevent “B” from taking water thereafter. In some cases the
wrongdoers would have already done a wrongful act towards the rightful owner and
in such a case the court can direct the wrongdoer to do some act to undo the act
already done by him. For example if “B” has constructed a wall in ‘A’s property
court can direct ‘B’ do demolish the wall at his expense.
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Thus it will be seen that the court can prevent a party from doing something or
from continuing to do something or the court can compel a party to do a thing. In
all these cases the order passed by the court is called injunction and in the above
first and second cases it is called perpetual injunction and in the third case it is
called Mandatory Injunction.
Therefore an injunction can be defined as a specific order of the court
forbidding the commission of a wrong threatened or the continuance of a wrongful
course of action already begun or in some cases when it is called a mandatory
injunction commanding active restitution of the former state of things.
The orders of injunction can be classified as temporary injunction and
perpetual injunction in respect of its duration and preventive injunction and
mandatory injunction in respect of its nature. Further temporary injunction is of
two kinds that is ad interim injunction till the disposal of the suit. Perpetual
injunction may also be called as permanent injunction and preventive injunction
can also be called as prohibitory injunction. The following diagram will illustrate
the classification.

INJUNCTION

Perpetual
Temporary
(Permanent)

Ad interim till Temporary

the disposal injunction
Prohibitory
of the till the Mandatory
(Preventive)
injunction disposal of
application the suit

Section 36 of Specific Relief Act gives discretion to the court to grant preventive
relief by temporary injunction or perpetual injunction. But it is judicial discretion
and it should not be used arbitrarily.
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15.2.1 Temporary Injunction

According to Section 37 temporary injunctions are such as are to continue
until a specified time or until the further orders of the court and they may be
granted at any stage of a suit and are regulated by Civil Procedure Code. 1908.
Therefore we have to look into Civil Procedure Code for the grant of temporary
injunction. Order 39 of Civil Procedure Code deals with temporary injunction.
Under Order 39 Rule I in the following cases temporary injunction till the
disposal of the suit may be granted.
1) Where any property in dispute in a suit is in danger of being wasted
damaged or alternate by any party to the suit or wrongfully sold in
execution of a decree the court can grant the temporary injunction to
restrain such act or make such other order for the purpose of staying
and preventing the washing, damaging alienation or sale until the
disposal of the suit or until further orders.
2) Where the defendant threatens or intends to remove or dispose of his
property with a view to defrauding his creditors the court may grant a
temporary injunction to restrain such act or make such other order for
the purpose of staying and preventing the removal or disposition of the
property until the disposal of the suit or until further orders.
3) Where the defendant threatens to disposes the plaintiff or otherwise
causes injury to the plaintiff in relation to any property in dispute in the
suit the court may grant a temporary injunction to restrain such acts or
make such other order for the purpose of staying or preventing the
dispossession of the plaintiff or otherwise causing injury to the plaintiff
in relation to any property in dispute in the suit until the disposal of the
suit or until further orders.
Order 39 Rule 9 confers power on the court to grant temporary injunction or
restrain repetition of continuance of breach. In any suit for restraining the
defendant from committing a breach of contract or other injury of any kind,
whether compensation is claimed in the suit or not the plaintiff may at any time
after the commencement of the suit and either before or after judgement apply to
the court for temporary injunction to restrain the defendant from committing the
breach of contract or injury complained of or any breach of contract or injury of a
like kind arising out of the same contract or relating to the same property or right.
The court may grant such injunction on such term as to the duration of the
injunction keeping an account giving security or otherwise as the court thinks fit.
The temporary injunction is necessary in order to restrain the status quo till
the disposal of the suit. For example if ‘A’ was in possession of a property on the
date of suit and ‘B’ threatened to disposes him. ‘A’ may file a suit to establish his
title and right to possession and the alone the court can grant him a perpetual
injunction restraining ‘B’ from interfering with the possession of ‘A’. Filling of a suit
and the trial of the same will take sometime and so ‘A’ can get perpetual injunction
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only after disposal of the suit after waiting for some time. But if ‘B’ would disposes
‘A’ during the pendency of suit the granting of perpetual injunction preventing ‘B’
from dispossessing ‘A’ will become infructous as ‘B’ would have already
dispossessed ‘A’ by that time during the pendency of the suit. Hence in order to
enable ‘A’ to maintain his possession during the pendency, of the suit the court will
direct ‘B’ not to disposes ‘A’ till the disposal of the suit and such injunction is called
temporary injunction. But it is to be noted that ‘A’ has to file a suit for perpetual
injunction and to file an interlocutory application in that suit for the grant of
temporary injunction till the disposal of the suit. The court can grant temporary
injunction only after hearing the objection of ‘B’ to the temporary injunction
petition the doing of which will take sometime. ‘B’ can disposes ‘A’ during, the
pendency of the temporary injunction petition. In order to prevent it the court can
direct ‘B’ not to disposes ‘A’ during, the pendency of the temporary injunction
petition. Such an order will be issued exparte without giving notice to the opposite
party (B) and without hearing the objecting of ‘B’. Such an order of injunction is
called ad interim injunction which will be in force till the disposal of temporary
injunction petition. Ad interim injunction will be granted only when the court
records the reason for its opinion that the object of granting the injunction would
be defeated by delay. The court should make on endeavour to finally dispose of the
application within 30 days from the date on which ad interim injunction was
granted and where it is unable to do so, it shall record the reason for such inability.
It is to be noted that the order of temporary injunction may be discharged
varied or set aside in view of the change of circumstances or causing of under
hardship to the opposite party. The temporary injunction order has to be obeyed by
the opposite party and its disobedience will make him liable to be detained to civil
prison for a term not exceeding three months.
15.3 PRINCIPLES IN GRANTING TEMPORARY INJUNCTION
The granting of temporary injunction is a matter of discretion which should be
exercised in accordance with the following principles.
1) The plaintiff must make out of Prima facie case of his title and
possession. He need not make clear legal title, but he must satisfy the
court that he has fair question to raise as to the existence of the legal
right which he sets up and that there are substantial grounds for
doubting the existence of the legal right, the exercise of which he seeks
to prevent.
2) The plaintiff should prove that in the absence of injunction he will
suffer irreparable loss or damage.
3) When the suit is one for perpetual injunction the court may grant
temporary injunction if the refusal to grant temporary injunction will
deprive the plaintiff of the relief of the suit for ever and defeat the object
of suit.
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4) If the plaintiff could not get perpetual injunction he cannot be given

temporary injunction also.
5) A temporary injunction can be granted only as against the parties to the
suit.
6) A temporary injunction can be granted in favour of either the plaintiff or
the defendant.
7) The court will not grant temporary injunction unless the balance of
inconvenience will be on the side of the plaintiff in case of the refusal to
grant temporary injunction.
8) The court can grant mandatory injunction only after the trial put in
exceptional cases the court can grant mandatory injunction by way of
temporary injunction also. The exceptional cases where the temporary,
mandatory, injunction may be granted are:
(a Where irreparable or irremediable injury would other-wise result.
)
(b Where defendant continues the act complained of after taking notice of
) injunction petition or after proceedings have commenced, but even in
such cases ad interim mandatory injunction cannot be granted, but
only temporary mandatory injunction can be granted after enquiring
both the parties.
Thus temporary injunction can be granted under the provisions of Civil
Procedure Code, but the granting of perpetual injunction is regulated by Specific
Relief Act.

15.4 PERPETUAL INJUNCTION

According to Section 37 (2) a perpetual injunction is one by which the
defendants is perpetually enjoyed, from the assertion of a right or from the
commission of an act which would be contrary to the rights of the plaintiff. As
already stated the granting of perpetual injunction is regulated by Specific Relief
Act. The perpetual injunction is also called permanent injunction.

The following points are to be noted in granting perpetual injunction.

(A) How Granted

A perpetual injunction can be granted only by the decree made at the hearing
and upon the merits of a suit. That is it cannot be granted during the pendency of
the suit.

(B) To Whom Granted

A perpetual injunction can be granted only in favour of the plaintiff that is
relief of perpetual injunction cannot be granted in favour of a defendant. But it is
to be noted that a temporary injunction can be granted either in favour of the
plaintiff or in favour of the defendant.
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15.4.1 When Granted (Section 38)

Section 38 deals with cases in which perpetual injunction may be granted.
They are as follows:
(a) The permanent injunction is granted to prevent the breach of an
obligation existing in his favour whether expressly or by implication.
It is to be noted that where the obligation in favour of the plaintiff arises
from contract the court should be guided by the chapter II of Specific Relief Act,
that is the principles governing the specific performance of contracts.
(i) ‘A’ lets certain land to ‘B’ and ‘B’ contracts not to dig sand or
gravel thereout. ‘A’ may sue for an injunction to restrain ‘B’ from
digging in violation of his contract.
(ii) The directors of a public company are about to pay a dividend out
of capital or borrowed money. Any other share holders may sue or
injunction to restrain them.
(iii) The Directors of a Fire and Life Insurance Corporation are about to
engage in Marine Insurance. Any other share-holders may sue for
an injunction to restrain them.
(iv) In the course of ‘A’s employment as an advocate certain papers
belonging to his client ‘B’ came into his possession. ‘A’ threatens
to make these papers public or to communicate their contents to a
stranger. ‘B’ may sue for an injunction to restrain ‘A’ from so
doing.
(v) ‘A’ is ‘B’s medical adviser. He demands money of ‘B’s which ‘B’
declines to pay ‘A’ then threatens to make known the effect of ‘B’s
communication to him as a patient. This is contrary to ‘A’s duty
and ‘A’ has an implied obligation in favour of ‘B’ not to do so and
so ‘B’ may sue for injunction to restrain him from so doing.
(b) When the defendant invades or threatens to invade plaintiff’s right to
or enjoyment of the property the court may grant a perpetual
injunction in the following cases.
(i) Where the defendant is a trustee of the property for the plaintiff
the perpetual injunction can be granted.

ILLUSTRATIONS
i) A trustee threated a breach of trust. His co-trustees if any should and
beneficial owners may sue for an injunction to prevent the breach.
ii) ‘A’ a trustee for ‘B’ is about to make an important sale of a small part
of the trust property. ‘B’ may sue for an injunction to restrain the sale
even though compension in money would have afforded him adequate
relief.
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2) Where there exists no standard for ascertaining the actual damage

caused or likely to be caused by the invasion perpetual injunction can
be granted.

ILLUSTRATIONS
i) ‘A’ the owner of two adjoining houses lets one to ‘B’ and after wards
lets the other to ‘C’ ‘A’ and ‘C’ begin to make such alteration in the
house let to ‘C’ as will prevent the comfortable enjoyment of the house
let to B. ‘B’ may sue an or injunction to restrain them from so doing as
damage cannot be ascertainined in case of invasion of ‘B’s rights for
comfortable enjoyment.
ii) ‘A’ rings bells and makes some other unnecessary noise so near a
house as to interfere materially with the physical comfort of the
occupant. ‘B’ may sue for an injunction restraining ‘A’ from making the
noise.
iii) ‘A’ pollutes the air with smoke so as to it interfere materially with the
physical comfort of ‘B’ and ‘C’ who carry on business in a neighbouring
house. ‘B’ and ‘C’ may sue for an injunction to restain the pollution.
iv) ‘A’ infringes ‘B’s patent ‘B’ can obtain an injunction to restrain the
infringement.
v) ‘A’ improperly uses the trade mark of ‘B’ ‘B’ may obtain an injunction
to restrain the user.
vi) ‘A’ a very eminent man writes letters on family topics to ‘B’. after the
death of ‘A’ ‘B’ ‘C’ who is ‘B’s residuary legatee proposes to make
money by publishing ‘A’ letters. ‘D’ who is ‘A’s executor has a property
in the letters and may sue for an injunction to restrain ‘C’ from
publishing them.
vii) ‘A’ carries on a manufactory and ‘B’ is his assistant. In the connection
of the business ‘A’ imparts to ‘B’ a secret process of value. ‘B’
afterwards demands money of ‘A’ threatening in case of refusal to
disclose the process to ‘C’ a rival manufacturer. ‘A’ may sue for an
injunction to restrain ‘B’ from disclosing the process.
Thus it will be seen that the word property has been given a wider meaning
as inclusive of trade mark, patent, cope right, easemantary right etc., and also
important letters and id the above said cases there is no standard for
ascertaining the actual damage caused or likely to be caused by the invasion of
the plaintiff’s right to or enjoyment of property.
3) Where the invasion is such that compensation in money would not
afford adequate relief perpetual injunction can be granted.
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ILLUSTRATIONS
(i) ‘A’, ‘B’ and ‘C’ are members of the Hindu family. ‘A’ cuts timber
growing on the family property and threatens to destroy part of the
family house and to sell some of the family utensils. ‘B’ and ‘C’ may
sue for an injunction to restrain him.
(ii) ‘A’ makes a settlement of an estate on ‘B’ and his children, ‘A’ than
contracts to sell the estate to ‘C’ ‘B’ or any of his children may sue for
an injunction to restrain the sale.
Thus any damage to immovable property or any sale or immovable property
will be considered to be an invasion which cannot be compensated in money. It is
to be noted that under explanation 1 to Section 10 the breach of a contract to
transfer immovable property cannot be adequately relieved by compensation in
money.
4) Where the injunction is necessary to prevent a multiplicity of judicial
proceedings permanent injunction may be granted.

ILLUSTRATIONS
(i) The inhabitants of a village claim a right of way over ‘A’s land. In a
suit against several of them ‘A’ obtains a declaratory decree that his
land is not subject to such right. Afterwards each of the other villagers
sues ‘A’ for obstructing his alleged right of may over the land. ‘A’ may
sue for an injunction to restrain ‘B’.
(ii) ‘A’ in an administration suit to which a creditor ‘B’ is not a party
obtains a decree for the administration of ‘C’ assets. ‘B’ proceeds
against ‘C’ estate for his debts. ‘A’ may sue for an injunction to
restrain them.
It is to be noted that under Section 41 injunction cannot be granted to restrain
any person from prosecuting a judicial proceeding pending at the institution of the
suit in which the right is sought unless such restraint is necessary to prevent the
multiplicity of proceeding.
15.4.2 D. When Refused (Section 41)
Section 41 deals with injunction that will be refused. An injunction cannot be
granted in the following cases.
(a) An injunction cannot be granted to restrain any person from
prosecuting a judicial proceeding pending at the institution of the suit
in which the injunction is sought unless such restraint is necessary to
prevent a multiplicity of proceedings.
That is a permanent injunction cannot be granted to stay judicial
proceedings pending in other courts at the time of the institution of suit in which
the relief of injunction is sought. But the injunction can be granted in such a
case only for preventing the multiplicity of proceedings. That is when by
granting the injunction a great number of suits pending in courts other than the
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Court in which the suit for injunction is brought can be suppressed, injunction
can be granted. It follows that only to stay the pending proceedings injunction
can be refused and injunction can be granted to restrain the institution of the
proceedings even without making out a case of multiplicity of proceedings.
Therefore a suit for injunction to restrain a person from executing a decree is not
maintainable unless it is to prevent the multiplicity of proceedings.
(b) An injunction cannot be granted to restrain any person from
instituting or prosecuting any proceedings in a court not subordinate
to that from which the injunction is sought.
Therefore a Sub-Court can grant injunction to stay proceedings in a
District Munsif Court, within its jurisdiction and similarly a District
Court can grant injunction in respect of proceedings pending before
Sub-Court or District Munsif’s Court within its jurisdiction. But an
interesting question arose as to whether a court can grant injunction
to restrain any proceedings pending in the same court. In Venkatesa
vs. Ramasamy (I. L. R. 18 Mad. 338) it was held that no injunction can
be granted as to the proceedings before the same court. But in
Ramadas vs. Mathura (1925 Calcutta 233) it was rightly observed as
follows to hold that injunction can be granted “My own view is that the
prohibition operates only in respect of courts which are not
subordinate in the sense that they are coordinate or superior and not
in respect of the court itself which always must be taken as competent
to regulate its own proceedings. An Indian court cannot issue an
order restraining any proceedings of foreign court by means of a
perpetual injunction. This prohibition will not apply to the grant of
temporary injunction.
(c) An injunction cannot be granted to restrain any person from applying
to any legislative body. On the ground of public policy the court
cannot injunct anybody from applying to Legislative Assembly or
Parliament for any matter.
(d) An injunction cannot be granted to restrain any person from
instituting or prosecuting any proceedings in a criminal matter. For
example if a wife obtains an order of maintenance against husband
under Section 125 Cr, P.C. the husband cannot file a suit for an
injunction to restrain the proceedings in the criminal court. But a
High Court has power to direct that the criminal proceedings in the
court of a magistrate should be stayed until the disposal of the civil
suit in which the question at issue in the criminal proceedings shall
have to be decided.
(e) Injunction cannot be granted to prevent the breach of the contract the
performance of which would not be specifically enforced.
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Chapter II of specific Relief Act gives the cases in which specific performance of
contract cannot be enforced. If a contract is not enforceable its breach cannot be
injected. Hence an injunction cannot be granted for the purpose of preventing a
breach of an agreement to employ certain person. A person dismissed from an
employment is not entitled to get an order of injunction restraining his employer
from dismissing him even if he can establish that his dismissal was wrongful. As
the contract involving personal service cannot be specifically enforced either by the
master or by servant under Section 14, 1 (b) of Specific Relief Act a suit for
injunction restraining a master from employing a third party other than the plaintiff
or from refusing to employ the plaintiff will not lie.
It is very important to note that the Section 41 (c) is subject to one important
exception contained in Section 42. Section 42 deals with the injunction to perform
negative agreement as follows.
15.5 INJUNCTION TO PERFORM NEGATIVE AGREEMENT (SECTION 42)
If a contract contains only affirmative agreement and the court is unable to
compel the specific performance of such affirmative agreement the court cannot
grant injunction also to prevent its breach. For example if an agreement contains
an affirmative agreement that ‘A’ will work under ‘B’ such contract cannot be
enforced at the instance of ‘B’. But if he same agreement contains a negative
agreement also like that, ‘A’ will not work under ‘C’ during that period injunction
can be granted to perform negative agreement. That is ‘A’ will be injuncted from
working under ‘C’. But in order to get an injunction to perform negative agreement
the plaintiff should not have failed to perform the contract so far as it is binding on
him. This Section embodies the principle laid down in Lumley vs. Wagner (21
L.I.C.H 898) in which the defendant entered into a contract with the plaintiff to sing
in his theatre and not to sing at any others. An injunction was granted restraining
the defendant from singing at any theatre other than that of the plaintiff although
the Court could not compel the defendant to sing in the plaintiff’s theatre. Thus
the inability of the court to compel the affirmative part of the agreement is not a
ground for refusing to enforce the performance of negative part by granting an
injunction.
The law has been stated in Halsbury as follows. “In the case of a contract
containing both positive and negative covenants, the court can and will in a proper
case restrain breaches of negative covenants with a view to the complete
performance of the contract. This jurisdiction will be exercised even where the
positive covenants are of such a nature as to be incapable of specific performance
as for example in the case of a contract for personal service or for the sale of
chattels provided that the negative part of the contract is capable of being
separated from the rest of the contract and where the contract is one related to the
personal services it is not unreasonable.
Another illustration is as follows: ‘A’ contracts to sell to ‘B’ for Rs. 1,000/- the
goodwill of a certain business unconnected with business premises and further
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agrees not to carry on that business in Calcutta. ‘B’ pays ‘A’ Rs. 1000/- but ‘A’
carries on the business in Calcutta. The court cannot compel ‘A’ to send his
customers to ‘B’ but ‘B’ may obtain an injunction restraining ‘A’ from carrying on
the business in Calcutta.
15.5.1 Ingredients of Section 42
(1) The agreement should contain an affirmative agreement to do an act.
(2) Such affirmative agreement is incapable of being enforced by court.
(3) Such agreement contains a negative agreement either express or
implied not to do an act.
(4) Plaintiff has performed his part of the contract.
It is to be noted that a negative agreement will not be enforced in all cases by
injunction and the court has discretion even to refuse it. It can order an injunction
only when the negative agreement is reasonable with reference to the interest of
contracting parties and with reference to the interest of the public. If the negative
agreement will amount to a restraint of trade and void no injunction will be issued.
A negative agreement in a service contract effective during the contract period, is
not restraint of trade unless the contract is unconscionable or excessively harsh or
one sided. If however the employee contracts not to do so elsewhere even after the
expiry of period of employment under the plaintiff the contract will be void being in
restraint of trade and no injunction will be available to restrain the employee from
taking employment elsewhere after the stipulated period of employment under the
plaintiff is over. Where in a contract of personal service there is an express or
implied negative covenant the court can also issue an injunction against a third
party restraining him from employing the person.
It is to be noted that the negative agreement may be express or implied. In
England negative agreement should be express in order to enable the court to issue
injunction, but in India it can be even implied. In Mac Laboratories Private Limited
vs. V. R. Nathan, Sole Proprietor of V. R. Nathan and Sons (199 1-M L. J. 353)
Alagirisamy J observed as follows. Under Section 57 of the Specific Relief Act of
1887. Notwithstanding Section 56 (f) where a contract comprises an affirmative
agreement to do a certain act coupled with a negative agreement express or implied
not to do a certain act the circumstance that the court is unable to compel specific
performance of these affirmative agreements shall not preclude it from gramting an
injunction to perform the negative agreement provided that the applicant has not
failed to perform the contract so far as it is binding on him. The argument that
where in a contract of service the covenant is wholly positive and not negative an
injunction cannot be issued, is untenable. Whatever may be the position in
England so far as India is concerned the courts have been prepared to proceed on
that basis that a positive agreement that a certain person would serve another
exclusively would imply a negative agreement not to serve any other person during
the period of the agreement with the 1st person which could specifically be enforced
under Section 57 of the Specific Relief Act. In this matter the servant has the same
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rights as the master so that a master who has agreed to employ a servant could be
prevented by an injunction from employing any other person as his servant”.
(Section 57 of S. R. Act 1877 corresponds to Section 42 of S. R. A. 1963 and 56 (f)
of 1877 Act with 41 (c) of 1963 Act).
Sec. 41 (C) of 1963 Act
The court has to infer implied covenant in certain circumstances. As stated
above in Mac Laboratory case a contract to render personal service to the plaintiff
for a specific period of time ipso facto involves a negative covenant not to serve
elsewhere. But no negative covenant not to employ a person other than the plaintiff
is implied from a simple contract of employment. Hence an employee cannot have
an injunction to restrain his employees from employing another person or from
discharging the plaintiff. If granting of compensation will be an adequate relief even
negative covenant will not be enforced by granting of an injunction. A stipulation
not to serve elsewhere in enforceable. Whether a particular covenant is
unreasonably wide has to be decided by the nature of the agreement the
qualification of the employee the service he has to render along with the place
where the employers can get alternative service of the same nature. A contract to
take the whole electrical energy required for a person’s premises implies a negative
covenant not to take from others. A contract to give a person a ‘first refusal’ or
property to plaintiff involves a negative contract not to transfer the property to any
one else without giving the first refusal to plaintiff and the defendant is liable to be
restrained.
(f) An injunction cannot be granted to prevent, on the ground of
nuisance, an act of which it is not reasonably clear that it will be a
nuisance.
That is no injunction can be granted when there is no nuisance or
interference with rights or apprehension thereof and the law does not
regard trifling and small inconveniences but only regards sensible
inconveniences as injuries which sensibly diminish the comfort,
enjoyment or value of the property.
(g) An injunction cannot be granted to prevent a continuing breach in
which the plaintiff has acquiesced.
Acquiesce means this “as soon as a man with full knowledge or atleast with
sufficient notice or means of knowledge of his rights and of all material
circumstances of the case freely and advisedly does anything , which amounts to
recognition of a transaction of acts in a manner inconsistent with its repudiation
or lies by for a considerable time and knowingly and deliberately permits another
to deal with the property or incur expenses under the belief that the transaction
has been recognized or freely or advisedly abstains for considerably lapse of time
from impeaching it there is acquiescence. Therefore a person cannot get an
order of injunction to prevent a thing which has been acquiesced.
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(h) An injunction cannot be granted where equally efficacious relief can

certainly be obtained by any other usual mode of proceeding except in
case of breach of trust.
If the plaintiff can be compensated by award of damage, injunction cannot
be granted. The alternative remedies must be equally efficacious and there
should be a certainty of obtaining such relief and such a remedy must be
available as a usual mode of proceeding. Then alone injunction can be refused.
In Chnnilin vs. Surat City Municipality (27). Bombay (403) the plaintiff instead of
proceeding by way of appeal from the order of Magistrate by which he was
aggrieved which procedure was prescribed by Section 86 of the Bombay District
Municipal Act, 1901 brought a suit for an injunction against the Municipality. It
was held that the injunction cannot be granted as the plaintiff had an equally
efficacious remedy by way of an appeal. But it is subject to an exception that
even if another efficacious relief is available in the case of breach of trust the
injunction can be granted and the plaintiff need not be driven out to pursue his
other remedy.
(i) Injunction cannot be granted when the conduct of the plaintiff or his
agents has been such as to disentitle him to the assistance of the
court.
The plaintiff should not be guilty of fraud, malpractices or dishonesty. In
order to seek the protection of court by way of discretion any injunction order.
This clause rests on the maxim that “he who seeks equity must do equity”.
Being an equitable remedy the injunction cannot be granted to a plaintiff who
has not come with clean hands and is guilty of fraud, unfair or improper conduct
which is discountenanced in equity.
(j) An injunction cannot be granted when the plaintiff has no personal
interest in the matter.
Unless the plaintiff suffers any injury by the conduct of the defendant he
cannot pray for an injunction. In a suit against Municipality it has been held
that even where the act of municipality is ultravires a person can obtain an
injunction to restrain the Municipality only if the plaintiff proves some special
damage or injury to his property of an infringement of his rights of easement or
nuisance. But the extent or quantum of interest is immaterial. Even tax payer
is directly interested in the application of Municipal fund and so any tax payer
can sue a Municipal fund and so any tax payer can sue a Municipality for an
injunction restraining it from misapplying its funds.

15.5.2 Mandatory Injunction (Section 39)

Injunction can be divided into two kinds as regards its nature preventive or
prohibitory and mandatory. In preventive injunction the defendant is restrained
from doing some act. But in some cases the defendant should be directed to do
some act. The injunction compelling the defendant to do some positive act is called
mandatory injunction.
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Section 39 deals with grant of mandatory injunction. If there is breach of an

obligation the court may grant an injunction to prevent the breach and it can also
direct the performance of an act in order or remedy the breach already done by the
defendant. Injunction compelling one to do an act is called mandatory injunction.
Illustrations

(i) ‘A’ constructs a new building and obstructs light to ‘B’s building and
‘B’ has got easementary right to light. ‘B’ may obtain an injunction to
restrain ‘A’ from going on with the building and also to pull down so
much of the building as obstructs ‘B’s light. Injunction ordering
pulling down is called mandatory injunction.

(ii) ‘A’ builds a house with eaves projecting ‘B’s land ‘B’ may sue for a
mandatory injunction to pull down so much of the eaves as so project.

(iii) ‘A’s is ‘B’ medical adviser. He demands money of ‘B’ which ‘B’ declines
to pay ‘A’ then threatens to publish ‘B’s communication written to him
as a patient. The court may grant a mandatory injunction directing
the destruction of all such letters.

(iv) ‘A’ improperly used the trade mark of ‘B’ ‘B’ can get mandatory
injunction compelling ‘A’ to destroy the trade mark used by him.

Mandatory injunction can be granted only to compel the act which is capable
of being enforced. They are assume a variety of forms like pulling down a building
pulling down the eaves destruction of letter, removal of trees on the defendant’s
land the roots whereof if allowed to grow would inevitably damage the plaintiff’s
building, the removal of over hanging branches, the closing of a door, demolition of
wall constructed by the defendant in the plaintiff’s land etc.
15.5.3 Principles Governing the Issue of Mandatory Injunction

1) It is the discretion of the Court to grant mandatory injunction.

2) As Section 41 applies to issue of mandatory injunction also.

Mandatory injunction will be refused in the cases mentioned in Section
41.

3) As a rule mandatory injunction will be granted to remove any work

interfering with the plaintiff’s rights which has been carried out after
an action to restrain its being carried out has been commenced or
notice has been received that if he continues carrying out the work an
action will be commenced.

4) Where however the work has completed before complaint was made or
action brought the court will not generally grant a mandatory
injunction to remove it except where the defendant is shown to have
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taken an unfair advantage of the plaintiff by carrying out the work in

such a way as to prevent the plaintiff having an opportunity of
applying in time for an ordinary injunction to restrain the defendant
from carrying it out or where it was not evident that the work would
interfere with the plaintiff’s right until it was completed.

5) Where the violation of plaintiff’s right is inevitable mandatory

injunction will be granted.

6) Where upon a balance of convenience damages will be an adequate

remedy mandatory injunction should not be granted.

7) A party who has not shown due diligence in applying to the court for
relief will be debarred from obtaining mandatory injunction.

8) If the act compelled is incapable of execution mandatory injunction

will not be granted. For example the court will not require a party to
undertake work of considerable engineering skill at considerable
expense of money, that is injunction to supply water at a certain
altitude.

9) If a person having a right to object acquiesces in the construction of

structures that encroach upon a partition wall, he is not entitled to
discretionary remedy of a mandatory injunction. But according to
Justice Ismail mere acquiescence is not enough to disentitled a
plaintiff to get a mandatory injunction and it should amount to
equitable estoppel. In Bodireddy vs. Appu Gounder (1970 II. M. L. J.
577) he observed when the owner of the land files a suit for recovery of
possession of his land from a trespasser who had built upon the land
with incidental prayer, for mandatory injunction directing the
defendant to demolish the building put by him the plaintiff (owner) is
entitled to succeed once he had established his title and the fact that
he has been in possession of the property within 12 years from the
date of the suit and is not prevented by the principle of equitable
estoppel from asserting his title to the suit property. Once the suit is
within time the doctrine of laches or acquiescence has no place to
defeat the right of the plaintiff to obtain the relief in the suit. Unless
acquiescence amounting to equitable estoppel is established the
plaintiff cannot be denied of possession which he had asked for”.
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But the above said view was not followed by Varadarajan J. in Palanivelu vs.
Varadhammal (1978) I. M. L. J. 212) where he observed “In this present case when
the trespassed was putting up a portion of his main building on a portion of the
trespassed property and sinking a major portion the well and doing other acts on
the trespassed property, he could not have done these things in a hurry. It must
have taken several months for the trespasser to complete the things which he had
done on the property. The court would therefore be justified in inferring
acquiescence on the owner. This is not a case for directing delivery of possession of
the trespassed portion to the owner, but a case where the owner has to be
compensated in money for the value of the trespassed portion. “In a recent case
Muthukrishna Gounder vs. Arunachalam (1980 T. L. N. J. 352) Varadharajan J. has
reiterated his earlier view and awarded only compensation instead of granting
mandatory injunction. He observed that “I hold that the plaintiff who resides about
a mile away from the suit property would have come to know about the defendant
putting up construction on a major portion of a suit property if he had cared to find
out and sincere. He has not done so and kept quiet until the 1 st defendant had
completed the construction which have been valued by the commissioner at
Rs. 15,000/- and had sent the notices only about 7 or 8 months later after
January, 1972 asserting his right to the suit property. I am of the opinion that the
principle of acquiescence had to be made applicable to the facts of the case and
that the plaintiff has to be given only a decree for compensation in respect of the
property namely market value of the suit property in lieu of the relief of vacant
possession of the property”.
15.6 DAMAGES IN A SUIT FOR INJUNCTION (SECTION 40)

Under Section 40 a plaintiff can claim damages in lieu of or in addition to

injunction as follows.

(1) The plaintiff in a suit for perpetual injunction or mandatory injunction

may claim damages either in addition to or in. Substitution for such
injunction and the court may if it thinks fit award such damages.

(2) The damages can be awarded only when there is a prayer for such
damages in the plaint and the plaint can be amended at any stage of
the proceedings for inclusion of such prayer.

(3) If a suit for injunction for breach of an obligation was dismissed the
plaintiff cannot sue for damages for such breach of the obligation
alleged to have been in existence in his favour.
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DISTINCTION BETWEEN TEMPORARY AND PERPETUAL INJUNCTION

(1) Temporary injunction is regulated by Civil Procedure Code

Perpetual injunction in regulated by Specific Relief Act.

(2) Temporary injunction will be in force till the disposal of the suit or
until further orders of the court. Perpetual injunction will be in force
permanently.

(3) Temporary injunction can be granted before the disposal of suit.

Perpetual injunction can be granted only after the disposal of the suit
and on the merit of the case.

(4) Temporary injunction will be prohibitory in nature.

Temporary Mandatory injunction will be granted only rarely.
Perpetual injunction may either be prohibitory or mandatory.

(5) Temporary injunction may be varied set aside or discharged by the

same court which granted the decree.
Perpetual injunction cannot be varied or set aside by the same court
which granted the same.

(6) Temporary injunction can be granted in favour of either the plaintiff or

defendant.
Perpetual injunction can be granted only in favour of the plaintiff.

15.7 SUGGESTED QUESTIONS

1 What are the types of Injunctions?

.

2 What are the essentials required for granting Mandatory injunctions?

.

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189

LESSON – 16

SALE OF GOODS ACT, 1930

STRUCTURE
16.1 Sale of Goods Act 1930

16.1.1 Definition of Contract of sale and Agreement to sell

16.1.2 Essentials of contract of sale
16.2 Distinction between Sale and agreement to sell
16.3 Hire purchase agreement
16.4 Effect of goods getting damaged or perished in a contract of sale
16.5 Implied Warranties
16.6 Suggested Questions

16.1 SALE OF GOODS ACT, 1930

Definition of sale and agreements to sell-Distinction between the sale and
agreements to sell-Contract of work and labour – Hire purchase agreement –
Bailment –Exchange and gift.
16.1.1 Definition of Contract of sale and Agreement to sell
Section 4 of the Sale of Goods Act, 1930 defines both a contract of sale and
contract of agreement to sell as follows.
Section 4 (1) 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. There
may be a contract of sale between one part-owner and another.
2) A contract of sale may be absolute or conditional
3) Where under a contract of sale the property in the goods is transferred from
the seller to the buyer the contract is called a sale but where the transfer of
the property in the goods is to take at a future time or subject to some
condition thereafter to be fulfilled the contract is called an agreement to sell.
4) An agreement to sell becomes a sale when the time elapses or the conditions
are fulfilled subject to which the property in the goods is to be transferred.
The essential object of the contract of sale is the exchange of property for a
money price.
Popatal Shah Vs.State of Madras A.I.R. 1953 S.C.274
There must be a transfer of property or an agreement to transfer it from one
party the seller to the other, the buyer in consideration of a money payment or a
promise thereof by the buyer.
State of Gujarat Vs. Ramanlal Sankalchand A I R 1965 (gui) 60
An allotment of goods among partners on a dissolution of partnership is not a
sale.
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16.1.2 Essentials of contract of sale

1) There must be two parties i.e. a seller and a buyer The parties must be
competent to contract. The seller and the buyer must be different persons.
One cannot sell his own goods to himself. In other words a man cannot buy
his own goods.
2) There must be some goods the property in which is transferred from the
seller to the buyer.
3) The goods which form the subject matter of the contract of sale must be
movable and not immovable.
4) The consideration for sale must be money. When goods are exchanged for
goods, it is not sale but a barter.
Aldridge Vs. Johnson (1857) 7 E & B 855 110 R.R. 875
If the exchange is made partly for goods and partly for a price the contract is
probably one of sale.

5) There must be a transfer of general property in goods from the seller to the
buyer.
6) All the essential elements of a valid contract must be present Section 3 of the
Sale of Goods Act 1930 says “The unrepeated provisions of the Indian
Contract Act. 1872 save in so far as they are inconsistent with the express
provisions of this Act, shall continue to apply to contracts for the sale of
goods. In other words contracts for the sale of goods are subject to the
general legal principles applicable to all contract, such as offer and its
acceptance, the capacity of the parties, free consent, consideration and the
legality of the object. The general provisions of the Indian Contract Act
continue to apply to contract for the sale of goods in so far as they are not
inconsistent with the express provisions of the Sale of Goods Act.
16.2 DISTINCTION BETWEEN SALE AND AGREEMENT TO SELL
SALE AGREEMENT TO SELL
1. There is a transfer of property in 1. There is no transfer of ownership.
goods from seller to buyer
2. There is a liability to sales tax. 2. There is no liability to sales tax.
3. It is an executed contract 3. It is an executory contract
4. It creates rights in rem 4. It creates rights in personam
5. Since ownership has passed even if 5. In case of its breach by the buyer
the goods remain in the possession the seller is only entitled to
of the seller, he can sue for the damages and not the price since
price. ownership has not passed to the
buyer.
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6. Ownership having already passed to 6. Since ownership has not passed to

the buyer the seller will be guilty of
conversion, if the goods are sold to
another; Moreover, the original
buyer can recover the identical
goods with whomsoever they be.
7. If the goods are destroyed by
accident when they are in
possession of the seller the buyer
has to bear the loss since the title
has vested with the buyer.
8. If they buyer pays the price and the
seller thereafter becomes an
insolvent, he can recover the
identical goods from the official
Assignee.
9. If the buyer becomes an insolvent
the ownership having passed the
seller will be bound to deliver the
goods to the Official Assignee except
when the seller has a lien over the
goods.
the buyer, the seller can effectively
convey title in the goods to another
person and the original buyer can
only claim damages.
7. If the goods, happen to be in the
possession of the buyer when they
are destroyed by accident the loss
has to be borne by the seller
because the ownership is still his.
8. If the buyer pays the price and the
seller thereafter becomes an
insolvent the buyer cannot claim a
retable dividend for the money
paid.
9. If the buyer becomes an insolvent
without paying the price since the
ownership has not passed to him
the seller can refuse to deliver the
goods to the Official Assignee
unless the price is paid by him.

Contract of work and labour

A contract of sale is different from a contract for work and materials in that
the former contemplates the delivery of goods, but in the latter the substance of the
contract is the exercise of skill or labour and the delivery of goods is only subsidary.
Lee Vs. Griffin (1861) 30 L. J. Q B 252 – A dentist agreed to make a set of
artificial teeth to fit the mouth of his patient The contract was held to be one of sale
of goods and not one for work and materials.
Robinson Vs. Crace (1935) K. B. 579 – A contract with an artist who agreed to
paint a picture for an agreed sum, on the canvas and with materials to be supplied
by the other party, was held to be contract for work and materials and not sale of
goods.
Madras State Vs G Dunkerly & Co A I R 1958 S C 560
A building contract provided that the contractor should construct the building
according to the specification contained in the agreement and in consideration
therefore receive the payment as provided therein. In such an agreement there is
neither a contract to sell the material, used in the construction nor does property
pass therein as movable Where the work to be executed is a house the construction
imbedded in the land becomes an accretion to it vests in the other party not as a
result of the contract but as the owner of the land.
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Marcel Furriers Vs. Tapper (1953) All E R 15

A contract for the sale of a fur coat of special design and colour to a customer’s
requirements is a sale of goods notwithstanding the degree of skills, work and
labour involved in its production.
Nenuram Vs. State of Rajastan A.I.R (1967) Raj 51
A contract of sale contemplates the delivery of goods whereas a contract for
work and material involves exercise of skill and labour by one pary in respect of
materials supplied by another the delivery of goods being only subsidiary or
incidental.
16.3 HIRE PURCHASE AGREEMENT
A hire – purchase agreement is an agreement for hire, with an option to
purchase. The owner lets out the chattel on hire and undertakes to sell it to the
hirer or his making a certain number of payments. A hire purchase agreement
partakes of the nature of a contract of bailment with an element of sale added to it.
In the case of hire purchase the title to the goods remains with the owner till all the
hire charges are paid or the hirer exercises his obtain to finalise the purchase on
payment of a sum nominal or otherwise. In other words if the hirer fails to pay the
last hire charges, the seller can take back the article which has been let out on hire
purchase since the ownership has not passed to the buyer To put it in nutshell in
the case of hire purchase the hirer becomes owner of the article let-out him when
he pays the last hire charges.
The following would help you to determine whether a contract is a sale or a
hire purchase.
Where a person has a right to terminate the agreement for hire at his will and
is not bound to pay the price of the goods it is termed as hire purchase system.
Here the hire purchaser must not be compelled to exercise the option.
Whereas in the case of contract of sale the buyer has no right to terminate the
contract and is bound to pay the price.
Helpy Vs. Mathew (1895) A.C. 471
B hired a piano from A on an agreement that B should pay Rs.100/- a month
as rent. The stipulation is that if he regularly pays the rent for 25 months, the
piano becomes his property at the end of 25th month Further stipulation is that B
can return the piano at any time and need not pay any more rent. This is hire
purchase agreement.
If however it is agreed that 25 month’s rent must be paid and that he cannot
return piano, the agreement is a sale and not hire purchase agreement. Such a
sale is better known as a sale on the instalment system. Please make a note that in
this case the property passes immediately on the completion of the agreement
whether any or all the instalments are paid or not.
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Belsize Motor Supply Vs. Cox 1914 I. K. B 244

In the case of hire purchase the hirer cannot dispose of the goods so as to give
a good title to the transferee, but if he is under an obligation to purchase, he can do
so.

SALE HIRE – PURCHASE AGREEMENT

1. Ownership is passed from the seller
to the buyer as soon as the contract
is entered into.
2. The position of the buyer is that of
the owner.
3. The buyer cannot terminate the
contract and as such is bound to
pay the price of the goods.
4. If the payment is made by the buyer
in instalments, the amount payable
by the buyer to the seller is
reduced, for the payment made by
the buyer to the seller is towards
the price of the goods.
1. Ownership is transferred from the
seller to the hire-purchaser only
when a certain agreed number of
hire charges is paid.
2. The position of the hire purchase is
that of the bailee.
3. The hire-purchaser has an option
to terminate the contract at any
stage and cannot be forced to pay
the further hire charges.
4. The instalments paid by the hire-
purchaser are treated as hire
charges and not as payment
towards the price of the goods till
option to purchase the goods is
exercised.

K.L. Johur & Co Vs. Deputy Commercial Tax Officer, A 1965 S.C. 1082
The intending purchaser remains a hirer so long as the option to purchase is
not exercised and the property does not pass when the agreement is made but only
passes when the option is finally exercised after complying with all the terms of the
agreement.
Bailment
In the case of the sale, as you all know the property in goods is transferred
from the seller to the buyer. Whereas in the case of bailment there is only transfer
of possession from the bailer to the bailee and not the ownership of the goods
bailed. In the case of sale, the delivery of the article is made against a price and
that the identical thing is not to be returned whereas in the case of bailment the
identical property which is the subject matter of the bailment is to be returned to
the bailer. Further in the case of the sale, the buyer can deal with the goods in any
way he likes. But the bailee can deal with the goods according to the directions of
the bailor.
Exchange
An exchange of goods for goods is not a sale but a barter. Where property in
goods is transferred from the seller to the buyer for a price it is called a sale.
Gift
Section 2 (xii) of the Gift Tax Act, defines gift “gift means the transfer by one
person to another of any existing movable or immovable property made voluntarily
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and without consideration in money or money’s worth and includes the transfer or
conversion of any property referred to in Section 4, deemed to be a gift under that
Section.
In the case of sale, it is only transfer of movable property from one person to
another with consideration. Sale of Goods Act does not deal with the transfer of
immovable property. Price or money is the important element in the sale.
(ii) Definition of goods, specific goods – Future goods – Mercantile Agent – Document
of title to goods:
Section 1 (1) of the English Sale of Goods Act, 1893 defines goods as “goods
includes all chattels personal (tangible movable property) other than things in
action, and money”.
Section 2 (7) of the Sale of Goods Act, 1930 defines goods means every kind of
movable property other than actionable claims and money and includes stock and
shares, growing crops, grass and things attached to or forming part of the land
which are agreed to be severed before sale or under the contract of sale”.
One would understand from the above definition that the Sale of Goods Act
deals with movable property alone please note that the Sale of Goods Act, does not
deal with immovable property. It is the Transfer of Property Act, 1882 which deals
with immovable property.
An actionable claim referred in the Sale of Goods Act, 1930, is one which can
be enforced only by taking action in Court of Law e.g.a debt.
You will also find that the Indian definition of goods is wider than English
definition. Stocks and shares are not included in ‘goods’ under English Law.
Section 3 (34) of the General Clauses Act defines movable property as
“Property of every description, except immovable property”.
Section 3 (25) of the General Clauses Act defines immovable property as “Land
benefits to arise out of land and things attached to the earth, or permanently
fastened to anything attached to earth”.
Section 3 of the Transfer of Property Act defines actionable claim as a claim to
any debt, other than a debt secured by mortgage of immovable property or by
hypothecation or pledge of movable property or to any beneficial interest in movable
property not in the possession, either actual or constructive of the claimant, which
the civil courts recognize as affording grounds for relief, whether such debt or
beneficial interest be existent, accruing, conditional or contingent”.
Goods may be specific or unascertained or future goods.
Section 2 (14) of the Sale of Goods Act, 1930 defines specific goods as “specific
goods means goods identified and agreed upon at the time a contract of sale is
made”.
When goods exist in bulk but the exact quantity to be transferred cannot be
identified separately then goods are said to be unascertained.
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Section 2 (6) of the Sale of Goods Act defines future goods as future goods
means goods to be manufactured or produced or acquired by the seller after the
contract of sale.
Future goods means to be manufactured or produced or acquired by the seller
after entering into the contract of sale. They may not be in existence at the time of
the contract.
Badri Prasad Vs. State of M.P.A.I.R. (1970) SC.706
Trees which are agreed to be severed before sale or under the contract of sale
are goods.
Mercantile Agent
Section 2 (9) of the Sale of Goods Act defines mercantile agent as “mercantile
agent” means a mercantile agent having in the customary course of business as
such agent authority either to sell goods or to buy goods or to raise money on the
security of goods.
Mercantile agent is a special type of agent. He has an authority from the
owner either expressly or impliedly, to deal with the goods in his possession in his
own name by way of sale pledge, or otherwise.
Auctioneer, Banker, Broker, Factor, Commission Agent, Delcredere agents are
all some of the important mercantile agents.
Document of title goods:
Section 2 (4) of the Sale of Goods Act defines document of title to goods as
“document of title to goods” includes a bill of lading dock warrant. Warehouse-
keepers certificate. Wharfingers certificate, railway receipt warrant or order for the
delivery of goods and any other document used in the ordinary course of business
as proof of the possession or control of goods or authorizing or purporting to
authorize either by endorsement or by delivery the possessor of the document to
transfer or receive goods thereby represented.
Tata Iron & Steel Co Ltd. Bombay Vs. S.R.Sarker & Ors A.I.R. 1961 S.C. 65
The test to determine whether a document is a document of title is whether the
document in question is used in the ordinary course of business as proof of
possession or control of goods or authorizing or purporting to authorize either by
endorsement or delivery the possession of the document to transfer or receive the
goods thereby represented.
T be a document of title to the goods the following conditions have to be
fulfilled.
1) It must be used in the ordinary course of business
2) The undertaking to deliver the goods to the possessor of the documents must
be unconditional
3) The possessor of the document by virtue of holding such document, must be
entitled to receive the goods unconditionally.
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The document of title, are regarded in law as equal to goods for the purpose of
transfer of property in the goods.
Scrutton on “Charterparties” in 18th edition, defines bill of lading as “a receipt
for goods shipped on board a ship signed by the person who contracts to carry
them or his agent, and stating the terms on which the goods were delivered to and
received by the ship”.
To put it in another way, a bill of lading is “a writing signed on behalf of the
owner of the ship in which goods are embarked acknowledging the receipt of the
goods and undertaking to deliver them at the end of the voyage subject to such
conditions as may be mentioned in the bill of lading.
J.V.Gokal & Co. Vs. The Assistant Collector of Sales Tax & Ors A.I.R. (1960 S.C. 596)
It is well settled in commercial world that a bill of lading represents the goods
and a transfer of it operates as a transfer of the goods.
Gurney Vs. Behrend (1854) 3 E & B. 622 at PP 633-40
In this case Lord Campbell C.J. has stated “A bill of lading is not like bill of
exchange or promissory note, a negotiable instrument which passes by mere
delivery to a bonafide for valuable consideration without regard to the title of the
parties who are the transferer. Although the shipper may have endorse in blank a
bill of lading deliverable to his assigns, his right is not affected by an appropriation
of it without his authority. If it be stolen from him or transferred without his
authority a subsequent bonafide transferee for value cannot make a title under it as
against the shipper of the goods. The bill of lading only represents the goods and
this instance the transfer of the symbol does not operate more than a transfer what
is represented.
To put it in a nutshell a bill of lading is a document which acknowledges the
receipt of goods on board a vessel and is signed by the captain of the ship or his
duly authorized representative.
A dock warrant is a document issued by a dock or wharf owner at a merchants
of a specific parcel of goods and declaring or certifying that the goods are held to
the order of the person named or his assignee by endorsement.
A warehouse-keeper’s or wharfinger’s certificate is a document which is issued
by a warehouse keeper of a wharfinger stating that the goods specified in the
document are in his warehouse. To be documents of title they must be in the
nature of warrant.
A railway receipt is a document issued by the railway to be presented by the
holder or consignee or endorsee at the destination to make delivery of goods. It is a
document of title to the goods covered by it and a transfer of the said document for
consideration effects a constructive delivery of goods.
Morvi Mercantile Bank Ld by official Liquidator Vs. Union of India A.I.R (1965) S.C.
1954
A valid pledge can be made by the owner by transferring the railway receipt
representing the said goods.
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A delivery order is a document containing an order by the owner of goods to a

person holding them on his behalf directing him to deliver them to the person
named in the document. It is a document of title to goods and the possessor of
such a document has the right not only to receive the goods but also to transfer it
to another by endorsement or delivery.
iii) How is a sale made – Rules for fixing price and effect of goods getting damaged
or perished in a contract of sale:
Section 5 of the Sale of Goods Act reads.
(1) A contract of sale is made by an offer to buy or sell goods for a price and the
acceptance of such offer. The contract may provide for the immediate
delivery of the goods or immediate payment of the price or both, or for the
delivery or payment by or both shall be postponed.
(2) Subject to the provisions of any law for the time being in force, a contract of
sale may be made in writing or by word of mouth or partly in writing and
partly by word of mouth or may be implied from the conduct of the parties”.
A contract of sale has to fulfill all the essentials of valid contract i.e (a) there
must be two parties, (b) the obligation must relate to definite act or acts, (c) the
obligation must relate to legal matters and not social affairs, (d) identity of mind
(consensus and idem) and (e) mutual communication.
Further a contract sale has to fulfill the requirements of a valid offer i.e.
a) An offer must contain terms which are definite or capable being made definite.
b) An offer must be one intended to give rise to legal consequences.
c) An offer must be distinguished from a quotation or an invitation to offer or
chaffer.
d) An offer may be to an individual or to the public at large, but no contract arises
until it has been accepted by an ascertained person.
Further a contract of sale has to fulfil the essentials of valid acceptance i.e.
a) Acceptance should be communicated in some usual and reasonable manner.
b) Communication of acceptance can be waived by the offeror.
c) Acceptance should be made before the offer lapses or is revoked or rejected.
d) Acceptance should be absolute and correspond with the terms of the offer.
The element of a contract of sale is the price. It must be expressed in money.
It is the consideration for the transfer of property (ownership) in goods from the
seller to the buyer.
Yet another element of a contract of sale is the delivery of goods from the seller
to the buyer.
District Board of Hoshiarpur Vs. F. Hira Singh Jagai Singh & ors A.I.R. (1963) Punj 289:
A sale can be complete even without effecting immediate delivery and
immediate payment.
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Another element of a contract of sale is good i.e. must be movable goods. It

may be either existing goods or future goods.
Section 6 of the Sale of Goods Act defines existing or future goods.
1) “The goods which form the subject of a contract of sale may be either existing
goods; owned or possessed by the seller or future goods.
2) There may be contract for sale of goods, the acquisition of which by the seller
depends upon a contingency which may not happen.
3) Where by a contract of sale the seller purports to effect a present sale of
future goods the contract operates as an agreement to sell the goods”.
Formerly, under the English Law, in case of goods of the value of ₤ 10 or
upwards, it was necessary to comply with the requirement of Section 4 of the Sale
of Goods Act, 1893 for the contract to be enforceable. This section was repealed by
the Law Reform (Enforcement of Contracts) Act of 1954.
On the other hand in India Section 5 (2) of the Sale of Goods Act, 1930 makes
it clear that the contract of sale may be in writing or by word of mouth or partly in
writing, or party by word of mouth or may be implied from the conduct of the
parties.
Rules for fixing price:
Section 9 of the Sale of Goods Act deals with the ascertainment of price
(1) The price in a contract of sale may be fixed by the contract or may be left to
be fixed in a manner thereby agreed or may be determined by the course of
dealing between the parties.
(2) Where the price is not determined in accordance with the foregoing
provisions, the buyer shall pay to the seller a reasonable price. What is
reasonable price is a question of fact depend upon the circumstances of each
particular case”.
Section 2 (10) of the Sale of Goods Act defines price as “Price” means the
money consideration for a sale of goods.
The price in a contract of sale must be expressed in money. It may be fixed by
the contract itself. It may be left to be fixed in an agreed manner. It may be
determined from the course of dealing between the parties, Where the price is not
determined as stated above, the buyer must pay the seller a reasonable price.
Raghubar Daya Vs State AIR (1953) All 691
Prices may be fixed by control orders
Section 10 of the Sale of Goods Act deals with agreement to sell at valuation.
(1) Where there is an agreement to sell goods on the terms that the price is to be
fixed by the valuation of third party and such third party cannot or does not
make such valuation the agreement is thereby avoided.
Provided that. If the goods any part thereof have been delivered to and
appropriated by the buyer, he shall pay a reasonable price thereof.
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(2) Where such third party is prevented from making the valuation by the fault
of the seller or buyer the party not in fault may maintain a suit for damages
against the party in fault.
When the price is to be fixed by the valuation of a third party and such third
party cannot or does not make such valuation the agreement is avoided. But if the
goods or any part of them have been delivered to the buyer or otherwise
appropriated by him he shall pay reasonable price. If the third party is prevented
from making the valuation by the fault of the seller or buyer such party will be
liable to pay damages to the other.
According to English Law an agreement that the goods shall be sold for a price
to be subsequently agreed, will not be a concluded contract but such a contract is
valid according to Indian Law.
Tew Vs. Harris (1847) 11 Q.B. 775 R. R.270
If a time is fixed by the contract for the appointment of a valuer, it is usually of
the essence of the contract, so that if the valuer is not appointed by that day, the
contract is avoided.
Ess. Vs. Trustcott (1837) 2 M & W 385 R. R. 630
If a particular person is named or appointed as a valuer the task of valuing
cannot be delegated to another.
16.4 Effect of goods getting damaged or perished in a contact of Sale
If the goods perished or are destroyed at the time of entering into the contract,
without the knowledge of the seller or subsequently, before the risk passes to the
buyer, without any fault on the part of the seller the contract is void.
Section 7 of the Sale of Goods Act deals with goods perishing before making of
contract.
“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”.
The following cases are self explanatory
Couturier Vs. Hustie (1856) 5 H. L. C., 673, 101 R. R. 329
A agrees to sell to B a specific cargo of goods on way from England to Bombay.
The Ship conveying the cargo had been last away and the goods last before the day
of the bargain. The parties were not aware of this fact. Held the agreement was
void.
Asfar & Co Vs. Blundell (1869) I. Q. B. 123
A cargo of dates was sold The dates were contaminated with sea water so as to
be unsaleable as dates though they could be used for making spirits Held the
contract was void as the dates no longer answered their description in the contract.
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Barrow Kane & Ballard Ltd. Vs. Phillips & Co. Ltd. (1923) I. K. B. 574.
A sold to B 700 bags to Chinese nuts indentified by marks and lying in a
named warehouse Unknown to A 199 bags had been stolen at time of the sale. A
tendered delivery of 501 bags. Held the sale was void and B could not be compelled
to take the remainder.
Sec 8 of the Sale of Goods Act deals with goods perishing before, but after
agreement to sell.
“Where there is an agreement to sell specific goods and subsequently the
goods without any fault on the part of the seller or buyer perish or become so
damaged as no longer to answer to their description in the agreement before the
risk passes to the buyer the agreement is thereby avoided”.
Howell Vs. Coupland (1876) I Q. B. R. 258
D Contracted to sell to P 200 tons of potatoes to be grown on his land. D
sowed sufficient land to grow more than 200 tons but due to some disease the crop
was substantially destroyed and D was able to deliver only 80 tons. Held the
agreement had become void.
Please make a note that Sec 7 & 8 of the sale of Goods Act would apply only to
specific goods not to unascertained goods. If the agreement is to sell a certain
quantity of unascertained goods, the perishing of even the whole quantity of such
goods in the possession of the seller will not relieve him of his obligation to deliver
the goods.
Stipulation as to time and other stipulation
Section 11 of the Sale of Goods Act deals with stipulation as to time.
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.
Whether and other stipulation as to time is the essence or not depends on the
terms of the contract”.
In the sale of goods time of performance is important where as stipulation as
to the time of payment are not deemed to be of essence of a contract of sale of
goods. Whether any other stipulation as to time is of the essence of the contract or
not depends on the terms of the contract.
In mercantile contracts stipulations as to time (except as regards time of
payment) are usually of the essence of contract.
In sale of immovable property generally time is not the essence of contract.
British Paints (India) Ltd Vs. Union of India A.I.R. 1971 Cal 393:
S.K. Chakravarti observed “in this case time was of the essence of the contract
and that the time was extended upto the 30th April 1953 by the mutual consent of
the parties and that the goods had not been obtained or delivery in time.
In a contract of sale the other stipulation may be either conditions or
warranties.
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Condition and Warranties effect of breach Expost facto warranty When condition is
treated as warranty:
Section 12 of the Sale of Goods Act defines conditions and warranty.
1) “A stipulation in a contract of sale with reference to goods which are the
subject thereof may be a condition or a warranty.
2) A condition is a stipulation essential to the main purpose of the contract the
breach of which gives rise to a right to treat the contracts as repudiated.
3) A warranty is a stipulation collateral to the main purpose of the contract the
breach of which gives rise to a right to treat the contract as repudiated.
4) Whether a stipulation in a contract of sale is a condition or a warranty
depends in a case on the construction of the contract. A stipulation may be
a condition though called a warranty in the contract”.
Wallis Vs. Pratt (1910) 2 K. B. 101 2:
Obligation which goes so directly to the substance of the contract or in other
words is so essential to its very nature that its non performance may fairly be
considered by the other party as a substantial failure to perform the contract at
all”.
The condition goes to the root of the contract. Its nonfulfilment may set aside
the contract. If there is a breach of condition the aggrieved party can treat the
contract as repudiated.
A condition may be a condition precedent or a condition concurrent or a
condition subsequent.
A condition precedent is one which is to be fulfilled before the main purpose of
the contract is performed. E.g. If an Official Receiver is appointed he has to furnish
securities. Furnishing securities is the conditions precedent for the appointment of
the official Receiver.
A condition concurrent is one which means that it is to be performed at the
same time of the main agreement e.g. cash sales. The goods are delivered, the
movement cash is tendered.
A condition subsequent is one which means that the condition that the
fulfillment of the contract or the occurrence an event will discharge the parties from
further liabilities on of the contract e.g. expected risk in the charter party. It is laid
down in that clause that in case of certain events occurring the shipowner will be
discharged or released from the responsibility of performance of the contract Please
make a note that the event should occur subsequent to the execution of the
contract.
Wallis Us. Pratt (1910) 2 K. B. 102:
Obligation which, though it must be performed, is not so vital that a failure to
perform it goes to the substance of the contract.
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If there is a breach of warranty the aggrieved party can only claim damages
and he has no right to treat the contract as repudiated.
Whether a stipulation in a contract of sale is a condition or a warranty
depends in each case on the construction of the contract. A stipulation may be a
condition though called a warranty in the contract.
A warranty in common practice is auxiliary promises or undertakings of which
the breach is not intended to avoid the contract, but only to give a remedy in
damages.
Effect of breach
In the case of breach of conditions, the aggrieved party may treat the contract
as repudiated and refuse to perform his own obligation and treat the contract as
cancelled. If he does not choose the above course, he may file a suit for breach of
contract or reject the goods which do not correspond to the stipulated condition.
Whereas in the case the breach of warranty the aggrieved party can only claim
damages.
Ex. Post facto warranty
A warranty is a stipulation which is collateral to the main purpose of the
contract.
In the case of breach of a warranty the aggrieved party can claim damages
only.
A breach of warranty cannot be treated as a breach of condition.
Bettini Vs. Gye 1876 1 Q. B. D. 183
The plaintiff an actor and a musician agreed to sing at concert and appears
under the direction of the defendant. One of the terms of the contract was the
plaintiff should be in London atleast six days before the commencement of the
engagement for the purpose rehearsals. The plaintiff actually arrived only two
days before the performance and the defendant cancelled the contract. Held that
the term was only a warranty.
When condition is treated as warranty
Section 13 of the Sale of Goods Act defines when a condition is to be treated as
warranty.
1) Where a contract of sale is subject to any condition to be fulfilled by the
seller, the buyer man waive the condition or elect to treat the breach of the
warranty and not as a ground for treating the contract as repudiated.
2) Where a contract of sale is not severable and the buyer has accepted the
goods or part thereof, the breach of any condition to be fulfilled by the seller
can only be treated as a breach of warranty and not as a ground for rejecting
the goods and treating the contract as repudiated, unless there is a term of
the contract express or implied to that effect.
3) Nothing in this section shall affect the case of any condition or warranty
fulfillment of which is excused by law by reason of impossibility or otherwise.
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If the buyer once decides to waive the condition, he cannot afterwards insist
on fulfillment.
The buyer must treat the breach of a condition as a breach of warranty where
the contract of sale is not severable and the buyer has accepted the goods or part of
them.
Once the condition is treated as warranty it cannot be a ground for rejecting
the goods so as treat to the contract as repudiated. But there must be a term of the
contract permitting such repudiation. It is left to the parties to enter into a
contract to exclude or vary their liabilities for breach of conditions or warranties.
If the condition or warranty is of such a nature that is impossible to fulfil them
they are exempted by law. In other words no one is bound to do impossible
conditions or warranties of a contract.
vi) Implied conditions and warranties in a contract of sale exemption
clauses – Effect of fundamental breach:
In a contract of sale of goods conditions and warranties may be express or
implied. Express conditions and warranties are those which are expressly provided
in the contract implied conditions and warranties are those which the law implies
into the contract unless the parties, stipulate to the contrary.
If there is no contract as to conditions and warranties in a contract of sale, one
has to follow the various implied conditions and warranties that are enumerated in
the Sale of Goods Act, 1930 under Sections 14 to 17.
Section 14 of the Sale of Goods Act, reads as follows.
“In a contract of sale, unless the circumstances of the contract are such as to
show a different intention, there is:
a) An implied condition on the part of the seller that, in the case of sale, he has
a 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.
b) An implied warranty that the buyer shall have and enjoy quiet possession of
the goods.
c) An implied warranty 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”.
Section 15 of the Sale of Goods Act defines sale by description as follows:
“Where there is a contract for the sale of goods by description there is an
implied condition that the goods shall correspond with the description and if the
sale is by sample as well as by description, it is not sufficient that the bulk of the
goods correspond with the sample, if the goods do not also correspond with the
description.
Section 16 of the Sale of Goods Act, defines implied conditions as to quality of
fitness as follows.
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“Subject to the provisions of this Act and of any other law for the time being in
force, there is no implied warranty or condition as to the quality for any particular
purpose of goods supplied under a contract of sale, except as follows:

1) Where the buyer, expressly or by implication, makes known to the seller the
particular purpose for which the goods are required so as to show that the
buyer relies on the seller’s skill or judgement and the goods are of a
description which it is in the course of the seller’s business to supply
(whether he is the manufacturer or producer or not) there is an implied
condition that goods shall be reasonably fit for such purpose.
Provided 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.
2) Where goods are brought by description from a seller who deals in goods of
that description (whether he is the manufacture or producer or not), there is
an implied condition that the goods shall be of merchantable quality.
Provided that, if the buyer has examined the goods, there shall be no implied
condition as regards defects which such examination ought to have revealed.
3) An implied warranty or condition as to quality or fitness for a particular
purpose may be annexed by the usage of trade.
4) An express warranty or condition does not negative warranty or condition
implied by this Act unless inconsistent therewith.
Section 17 of the Sale of Goods Act defines sale by sample follow:
1) A contract of sale is a contract for sale by sample where there is a term in the
contract, express or implied, to that effect.
2) In the case of a contract for sale by sample there is an implied condition.
a) That the bulk shall correspond with the sample in quality.
b) That the buyer shall have a reasonable opportunity of comparing the bulk
with the sample.
c) That the goods shall be free from any defect, rendering them
unmerchantable, which would not be apparent on reasonable examination of
the sample.
The conditions which are implied in every contract or sale in the absence of
any agreement to the contary, are as follows.
1) Condition that the seller has title to the goods:
Under Sec. 14 (a) of the Sale of Goods Act in every contract of sale of goods,
there is an implied condition that the seller has a right to sell the goods not
only at the time of entering into the contract, but also at the time of the
property.
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Rowland Vs. Divali (1923) 2 K. B. 500 C.A :

R bought a car from D and used it for four months. D had no title to the car
and consequently R had to hand it over to the true owner. Held R could recover the
purchase money.
Niblent Ltd. Vs. Confectioner’s Materials Co. Ltd (1921) 3 K. B. 387 C.A:
A brought 3,000 tins of preserved milk from the U.S.A. The tins were labeled in
such a way as to infringe the Nestle’s trade mark. As a result, they were detained
by customs authorities. To get the clearance certificate from the customs
authorities A had to remove the labels and sell the tins at a loss. Held the seller
had broken the condition that he had a right to sell.

2) Condition that the goods shall correspond with the description

It is a condition which goes to the root of the transaction and the breach
entitles the buyer to reject the goods.
Bowes Vs: Shand (1877) App. Cas. 455
“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”.
Vorley Vs. Whipp (1900) I. Q. B. 513
The seller agreed to sell a second hand reaping machine which the buyer had
not seen and which the seller stated was new and used to cut only 50 acres. The
buyer found, when it was delivered that it was old and had been mended. Held it
was sale of goods by description and the article not having satisfied the description
the buyer was entitled to reject.
Wallis Vs. Pratt (1911) A.C. 394
The agreement was for the sale of English Sainfoin seeds exhibited by a
sample. The sellers gave no warranty express or implied as to growth, description
or any other matter. The sample as well as bulk actually supplied, turned out to be
giant sainform, but not English sainforin. Held that the description of the goods not
having been satisfied, there was a breach of condition and the buyer could recover
damages.
3) Condition that the goods shall be fit for a particular purpose Section 16
(1).
The buyer, expressly, or by implication, makes known to the seller the
particular purpose for which the goods are required.
Priest Vs. Last (1903) 2. K. B. 148:
A brought a hot water bottle from B. B. informed A that it was suitable for hot
water but not for boiling water, When A’s wife used it, it burst and she suffered
injuries. Held B was liable for breach of implied condition that the bottle was fit for
purposes for which it was meant.
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Frost Vs. Aylesbury Dairy Co. (1905) I. K. B. 608

X a milk dealer supplied Y for consumption. The milk contained germs of
typhoid fever and Y’s wife was infected thereby and died. Held milk was not
reasonably fit for human consumption X had committed a breach of condition.
If the buyer relies on the skill or judgement of the seller the seller, is liable for
the implied condition as to fitness.
Baider Vs. Marshall (1925) I. K. B. 260
A told B, a meotor car dealer that he wanted a comfortable car suitable for
touring purpose. B recommended a Bugatti car and A thereupon bought one. The
car was uncomfortable and unsuitable for touring purpose. Held the mere fact that
A bought the car did not necessarily exclude the condition of fitness. Further A had
indicated to B that he relied on his skill and judgement that the car would be fit for
a particular purpose and as such he had not bought the car under its trade name.
An implied warranty or condition as to quality or fitness for a particular
purpose may be annexed by the usage of trade (Sec 16 (3))
Bombay Burma Trading Corporation Ltd. Vs. Aga Muhammed 34 Mad 453
Timber was purchased for the express purpose of using it as railway sleepers
and when it was found to be unfit for the purpose the court held that the contract
could be avoided.
4) Condition as to merchantable quality:
Section 16 (2) There is always an implied condition that the goods purchased
while answering the description, should also be of a merchantable quality i.e. a
quality that is ordinarily accepted in the market.
Merchantable quality means that the goods must be saleable the market as
goods of that description. Merchantable can also mean commercially saleable.
Merchantable mean the goods should be such as are reasonably under the
description by which they are known in the market at their full value.
Jackson Vs. Rotex Motor and Cycle Co Ltd. (1910) 2. K. B. 937.
It was held that where a substantial portion of motor horns delivered to the
buyer dented owing to bad packing while the rest were badly polished owing to
careless workmanship and consequently were not saleable the goods supplied were
not of a merchantable quality and that the buyer was entitled to reject the entire
consignment.
Jones Vs. Just (1869) L. R. 3 Q. B. 197
A firm of Liverpoole merchants contracted to buy from a London Merchant a
number of bales of Manila hemp to arrive from Singapore. The hemp was damaged
by see water and could not be marketed as Mainla hemp. Held the goods were not
merchantable quality.
In this case learned Judge observed “Where a manufacture or a dealer,
contract to supply an article which the manufacturer produces or in which he
deals, to be applied to a particular purpose, so that the buyer necessarily trust it in
the judgement or skill of the manufacture or dealer, there is an implied term or
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warranty that it shall be reasonably fit for the purpose to which it is to be applied,
in such a case the buyer trusts the manufacturer or dealer relies upon his
judgement and not upon his own. Where a manufacture under takes to supply
goods manufactured by himself or in which he deals, but which the vendee has not
to the opportunity of inspecting. It is an implied term in the contract that he shall
supply a merchantable article. In every contract to supply goods of a specified
description which the buyer has no opportunity to inspect the goods must not only
in fact answer the specific description, but must also be saleable or mechantable
under that description.
Grant Vs. Australian Knitting Mills (1936) A.C. 85
The buyer purchased some woolen underwears from a company dealing in
such goods and after wearing them contracted a skin disease due to the excessive
presence of chemicals on the garments. Held that company was liable to pay
damages.
5) Condition as to fitness of consumption:
In the case of the edibles and provisions in addition to the implied condition
as to merchanability there is yet another implied condition that the goods
shall be fit for consumption.
Chapropiere Vs. Mason (1905) 2. L. K. R. 633
A bought a bun for consumption. He ate and broke his teeth. Held he could
recover damages, since the bun was not fit for consumption or it was not
wholesome.
Condition that the bulk shall correspond with sample:
In the case of a contract for sale by sample there is an implied condition.

a) That the bulk shall correspond with the sample in quality.

b) That the buyer shall have a reasonable opportunity of comparing the bulk
with the sample.
c) That the goods shall be free from any defect, rendering them unmerchantable
which would not be apparent on reasonable examination of the sample.
Drunmond Vs. Van Ingen (887) 12 App. Cas 284:
There was sale by sample of mixed worsted coatings to be in quality and
weight equal to the sample. It was found that the goods owing to a latent defect will
not stand ordinary wear when made up into coats. The same defect was there in
the sample but could not be detected on a reasonable examination of the sample.
Held the buyer could reject the goods.
Lord Machaughten in this case observed “The object of the sample is to
present to the eye the real meaning and intention of the parties with regard to the
subject matter of the contract which owing to the imperfection of language, it may
be different or impossible to express in words”.
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16.5 IMPLIED WARRANTIES

There are two implied warranties in a contract of sale.
Implied warranty as to quiet possession: Section 14 (b) lays down that there is
in every contract of sale an implied warranty that the buyer shall have and enjoy
quiet possession of the goods. If the buyer is in any way disturbed in the
enjoyment of the goods in consequence of the seller’s defective title to sell, he can
claim damages from the seller.
2) Implied warranty against charges and encumbrances: Section 14 (c) lays
down that there is in “an implied warranty 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 buyer’s possession is
in any way disturbed by reason of the existence of any charge or encumbrance on
the goods in favour of any third party, the buyer shall have a right to claim
damages for breach of this warranty.
Exemption clause:
The seller may insert a clause in the contract of sale excluding the liability of
him for breach of any condition and warranties. Please make note that no
agreement could not made exempting the fundamental terms of the contract.
Effect of fundamental breach
This doctrine of fundamental breach is the result of several decisions made in
English courts. Anson remarked “it was said, in every contract certain terms which
were fundamental, the breach of which amounted to a complete non-performance of
the contract”.
While the performance of some of the terms would be essential’ the
performance of some other might only be incidental. The exemption clause would
not protect the party who has not performed the essential terms of the contract.
The following illustration is self explanatory.
If there was a contract for the supply of mahogany logs, the supply of
pinewood logs would be complete non-performance of the contract.
Karsales Ltd Vs. Wallis (1956) I.W.R. 936
There was a contract to sell a Buick motor car. There was a clause in the
agreement excluding the liability of the seller of breach of any condition and
warranties. The car supplied proved to be and was not in working condition. Held
that there was a breach of a fundamental term and the exemption clause would not
shield the party from the breach of contract.
16.6 SUGGESTED QUESTIONS
1. Distinguish between (i) a Contract of sale from Agreement to sell and (ii) a Hire
purchase agreement and a Contract of sale.
2. Differentiate condition and warranty with illustration.
3. What is meant by ‘Caveat Emptor’ What are all the exceptions?


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LESSON -17

SALE OF GOODS (CONTD)

STRUCTURE
17.1 Rules as to passing of property
17.2 The rule laid down in Section 27
17.2.1 Sale in market overt.
17.2.2 Sale by mercantile agent
17.2.3 Sale by co-owner.
17.2.4. Sale by Person with voidable title.
17.2.5 Sale by seller in possession of goods after sale.
17.2.6 Sale by buyer in possession of goods
17.2.7 Sale by an unpaid seller
17.3 Rules by an unpaid seller
17.4 Place as to delivery
17.5 Time of delivery
17.6 C.I.F. Contract
17.7 F.O.B. Contract
17.8 Ex Ship contract
17.9 Remedies available to seller and buyer.
17.10 Suggested questions
17.1 RULES AS TO PASSING OF PROPERTY
Transfer of property in goods from the seller to the buyer is the main object of
a contract of sale. Before the transfer of property could take place, goods must be
ascertained. Sec. 18 of the Sale of Goods Act reads:-
“Where there is a contract for the sale of unascertained goods, no property in
the goods is transferred to the buyer, unless and until the goods are ascertained”.
Seath Vs. More (1886) II App. Cas. 370, Dan Singh Vs. Jank Saran (1948) A.A. 396:
In this case Lord Blackburn observed it is essential that the article should be
specific and ascertained in a manner binding on both parties for unless that be so
(the contract) cannot be construed as a contract to pass the property in the article”.
Ascertained goods are those goods which are in a deliverable condition at the
time of sale or are put in a deliverable condition after sale and unconditionally
appropriated to the contract and the buyer asserts to the said appropriation or
notice of the said appropriation has been given to him.
P.S.N.S. Ambalavana Chettiar & Co. Ltd. Vs. Express Newspapers Ltd., Bombay A.I.R.
1968 S.C. 741:
Unless the portion is identified to the contract no property can pass to the
buyer.
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Sec. 19 of the Sale of Goods Act says:

1) “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.
2) For the purpose of ascertaining the intention of the parties regard shall be
had to the terms of the contracts the conduct of the parties and the
circumstances of the case.
3) Unless a different intention appears, the rules contained in Section 20 to 24
are rules for ascertaining the intention of the parties as to the time at which
the property in the goods is to pass to the buyer.
The rules relating to passing of ownership under a contract to sell goods, in
the absence of a contract to the contrary, are as follows.
1) Where there is an unconditional contract for the sale of specific goods in a
deliverable state the property in the goods passes to the buyer when 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, is postponed – Sec. 20 of the
Sale of Goods Act.
To put it in a nutshell, in the case of specific goods, in a deliverable state,
property in them passes at the time when the contract is made.
2) 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 there of – Sec. 21 of the Sale of Goods Act.
In other words in the case of specific goods to which something has to be done
by the seller to put them in a deliverable state, property passes only when such
thing is done and notice there of is given to the buyer.
3) 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 as
notice thereof. (Sec.22 of the Sale of Goods Act)
In the case of specific goods in a deliverable state when the seller is bound to
weight or measure etc. for ascertaining the price, the property passes when such
weighing etc is done and notice thereof given to the buyer.
Sashi Mohan Vs. Nobo Kristo (1879) 4 Cal 801
The contract was for sale of 975 maunds of rice being the contents of one gola
at a certain price per maund. The buyer paid the entire price, but agreed to remove
the rice after weighing the same before a certain date. After delivery was taken of
part of the rice, the other part was destroyed. Held the ownership had passed to
the buyer and hence he must bear the loss.
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4) Where there is a contract for the sale of unascertained or future goods by

description and goods of that description and in a deliverable state are
unconditionally appropriated to the contract either by the seller with the
assent of the buyer or by the buyer with the assent of the seller, the property
in the good, thereupon passes to the buyer. Such assent may be express or
implied and may be given either before or after the appropriation is made.
Where in pursuance of the contract the seller delivers the goods to the buyer
or to a carrier or other bailee (whether named by the buyer or not) for the purpose
of transmission to the buyer and does not reserve the right of disposal he is deemed
to have unconditionally appropriated the goods to the contract Sec. 23 of the Sale of
Goods Act.
In the case of unascertained goods sold by description, property passes when
goods of that description in a deliverable state are unconditionally appropriated by
the seller or the buyer with the consent of the other party. Delivery to a carrier of
other being for purpose of transmission, without the seller reserving the right of
disposal amounts to unconditional appropriation.
The appropriation may be made by the buyer or by the seller though the latter
is more common. But in either case the appropriation must be made with the
consent of the other party.
Atkinson Vs. Bell (1928) 108 E R. 1046.
The contract was for the sale of machines made by the seller. The seller
packed the machines and before sending them asked the buyer to name the
conveyance for transporting them. There was no reply from the buyer. Held there
was no appropriation as the buyer has not assented.
5) When goods are delivered to the buyer on approval or “on sale or return” or
other similar terms, the property therein passes to the buyer.
a) When he signified his approval or acceptance to the seller or does any other
act adopting the transaction.
b) If he does not signify his approval or acceptance to the seller, but retains the
goods without giving notice of rejection, then if a time has been fixed for the
return of the goods, on the expiration of such time, and if no time has been
fixed on the expiration of a reasonable time (Sec 24 of the Sale of Goods Act.)
In the case of goods delivered to buyer on approval or “on sale or return”
property passes when the buyer signified his approval or acceptance, or keeps the
goods for a time longer than want is fixed for such approval or till after the expiry of
reasonable time without giving notice of rejection.
Elphic Vs. Barnes (1880) 5 C.P.D. 3215
A horse was delivered to B on the condition of “sale or return within 8 days”.
The horse died within 8 days. Held the loss would fall on the seller as the property
in horse had not yet passed to B.
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6) Where there is a contract for the sale of specific goods or where goods are
subsequently appropriated to the contract, the seller may by the terms of
contract or appropriation reserve the right of disposal of the goods until
certain conditions are fulfilled. In such case, notwithstanding the delivery of
the goods to a buyer or to a carrier or other bailee for the purpose of
transmission to the buyer the property in the goods does not pass to the
buyer until the conditions imposed by the seller are fulfilled.
Where goods are shipped or delivered to a Railway Administration for carriage
by railway and by the bill of lading or railway receipt, as the case may be, the
goods are deliverable to the order of the seller or his agent, the seller is prima facie
deemed to reserve the right of disposal.
Where the seller of goods draws on the buyer for the price and transmits to the
buyer the bill of exchange together with the bill of lading or as the case may be, the
railway receipt, to secure acceptance or payment of the bill of exchange, the buyer
is bound to return the bill of lading or the railway receipt, if he does not honour the
bill of exchange and if he wrongfully retains the bill of lading or the railway receipt,
the property in the goods does not pass to him Sec. 25 of the Sale of Good Act.
The property in goods, whether specific or unascertained, does not pass to the
buyer, if the seller reserve the right of disposal of the goods i.e. just responded. For
example if it is a condition of the contract that the buyer is to pay for the goods
before delivery the seller reserves the right of disposal. In such a case, the property
in the goods does not pass to the buyer until the condition imposed by the seller is
fulfilled.
Further where goods are shipped or delivered to a railway for carriage and by
the bill of lading or railway receipt, they are deliverable to the order of the seller or
his agent.
Where the seller sends a bill of exchange for the price of the goods to the buyer
for his acceptance, together with the bill of lading or railway receipt, the property in
the goods does not pass unless he accepts the bill of exchange. The buyer must
return the bill of lading or railway receipt if he does not honour the bill of exchange;
and if he wrongly returns the bill of lading or railway receipt the property in the
goods does not pass to him.
Risk prima face passes with property. Sec 26 of the Sale of Goods Act reads.
“Unless otherwise agreed, the goods remain at the seller’s risk until the property
therein transferred to the buyer, but when the property therein is transferred to the
buyer, the goods are at the buyer’s risk whether delivery has been made or not:

Provided that, where delivery 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.
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Provided also that nothing in this section shall affect the duties or liabilities of
either seller or buyer as a baliee of the goods of the other party.

As a general rule the goods remain at the seller’s risk until the property in the
goods is transferred to the buyer, When the property in the goods is transferred to
the buyer the goods are at the buyer’s risk whether delivery has been made or not;
if delivery has been delayed through the fault of either the buyer or the seller, the
goods are at the risk of the party at fault.

Demby Hamilton & Co. Ltd Vs. Bardan (Endeavour Wines Ltd. (1949) I AII. E. R. 435.
The defendant contracted to purchase 30 tons of apple juice. The plaintiff
crushed the apples, but the juice in casks and kept it for delivery. The dependent
delayed taking delivery and the juice went putrid and had to be thrown away. Held
the defendant was liable to pay the price.
viii) Sale by non-owners. Exceptions to Nemo dat quod no habet
The general rule is “Nemo dat quod non habet” i.e no one can convey a better
title than what he has.
Sec 27 of the Sale of Goods Act reads “Subject to the provisions of this Act and
of other law for the time being in force, where goods are sold by a person who is not
be owner thereof and who does not sell them under the authority on with the
consent of the owner, the buyer acquires no better title to the goods than the seller
had unless the owner of the goods is by his conduct precluded from denying the
seller’s authority to sell;

Provided that, where a mercantile agent is with the consent of the owner, in
possession of the goods or of a document of title to the goods any sale made by him,
when acting in the ordinary course of business of a mercantile agent, shall be valid
as if he were expressly authorized by the owner of the goods to make the same
provided that the buyer acts in good faith and has not at the time of the contract of
sale notice that the seller has no authority to sell”.
17.2 RULE LAID DOWN IN SECTION-27 OF THE SALE OF GOODS ACT, EXCEPTIONS
17.2.1 Sale in market overt
In England a person acquires a valid title in the case of goods purchased by
him in market overt, (i.e a sale of goods of a kind which are usually sold by the
trader) at certain prescribed places between prescribed hours of the day, though
the seller has absolutely no title to them. Please make a note that this is peculiar
to England and does not apply to India.
17.2.2 Sale by mercantile agent
A mercantile agent can convey a wholesome title to goods, though he is not a
real owner, provided the following conditions are fulfilled.
1) He must be a mercantile agent.
2) He should be in possession of the goods, or documents of title to the goods.
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3) The possession of the mercantile agent must be with the consent of the
owner.
4) The mercantile agent must sell in the ordinary course of business as
mercantile agent.
5) The buyer must be in good faith.
6) The buyer should not have notice that the seller had no authority to sell.
17.2.3. Sale by co-owner:Sec.28 of the Sale of Goods Act says:
“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 of such joint owner in good faith and has not at the time of the
contract of sale notice that the seller has no authority to sell”.
To put it in another way A co-owner having sole possession of the goods with
the permission of the other co-owners passes a good title to buyer purchasing in
goods faith and without notice that the seller had no authority to sell.

17.2.4 Sale by person with voidable title

Section 29 of the Sale of Goods Act reads “When the seller of goods has
obtained possession thereof under a contract voidable under Section 19 or Section
19 A of Indian Contract Act, 1872, but the contract has not been rescinded at the
time of the sale, the buyer acquires a good title to the goods provided he buys them
in good faith and without notice of the seller’s defect of title”.

In other words a person who has obtained possession of goods under a

contract which is voidable on the ground of fraud, misrepresentation, coercion or
undue influence; can convey a good title to the buyer, acting in good faith and
without notice of the seller’s defective title, provided the sale takes place before the
voidable contract is set aside.
17.2.5 Sale by seller in possession of goods after sale:
The first part of Sec. 30 of the Sale of Goods Act deals with sale by seller in
possession of goods after sale.
Sec.30 (1) of the Sale of Goods Act says “Where a person, having sold goods,
continues in possession of the goods or of the documents of title to the goods, the
delivery or transfer by that person or by a mercantile agent acting for him, of the
goods or documents of title under any sale, pledge or other disposition thereof to
any person receiving the same in good faith and without notice of the previous sale
shall have the same effect as if the person making the delivery or transfer were
expressly authorized by the owner of the goods to make the same”.
To put it in a nutshell where a seller, having sold goods continues to be in
possession of the goods or of the documents of title to the goods and sells them
either himself or through a mercantile agent to a person who buys them in good
faith and without notice of the previous sale, the buyer gets a good title.
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17.2.6 Sale by buyer in possession of goods:

The second part of Sec. 30 of the Sale of Goods Act deals with sale by buyer in
possession of goods after sale.
Sec. 30 (2) of the Sale of Goods Act reads: “Where a person having bought or
agreed to buy goods obtains, with the consent of the seller in possession of the
goods or documents of title to the goods, the delivery or transfer by that person or
by a mercantile agent acting for him, of the goods or documents of title under any
sale pledge or other disposition thereof to any person receiving the same in good
faith and without notice of any lien or other right of the original seller in respect of
the goods shall have effect as if such lien or right did not exist”.
A buyer in possession of goods obtained by him with the consent of the seller,
under a sale or an agreement to sell can similarly convey a good title by way of sale,
or pledge to a person acting in good faith and without notice of any lien or other
right of the original seller in respect of the goods.
Lee Vs. Butler (1893) 2 Q. B. 318 C A.
A bought some furniture on hire purchase. A sold the furniture to B before
paying the last instalment. Held B having bought in good faith, had obtained a
good title to the furniture.
The third part of Section 54 of the Sale of Goods Act deals with sale by an
unpaid seller.
17.2.7 Sale by an unpaid seller
Sec 54 (3) of the Sale of Goods Act reads: “Where an unpaid seller who has
exercised his right of lien, stoppage in transit re-sells the goods, the buyer acquires
a good title thereto as against the original buyer, notwithstanding that no notice of
the re-sale has been given to the original buyer”.
Where an unpaid seller who has exercised his right of lien or stoppage in
transit re-sells the goods, the buyer acquires a good title as against the original
buyer even though no notice of the re-sale has been given to the original buyer.
8) In addition to above there are three more exceptions to Nemo dat quod
non hebet.
a) Under Sec. 169 of the Indian Contract Act a finder of lost goods can given a
valid title, “When a thing which is commonly the subject of sale is lost, if the
owner cannot with reasonable diligence be found, or if he refuses upon
demand, to pay the lawful charges of the finder, the finder may sell it:
1) When the thing is in danger of perishing or of losing the greater part of its
value or
2) When the lawful charges of the finder, in respect of the thing found, amount
to two thirds of its value.
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b) Under Sec. 176 of the Indian Contract Act, pawnee or pledge can make a
valid sale. “If the pawnor makes default in payment of the debt, or
performance at the stipulated time of the promise, in respect of which the
goods were pledged, the pawnee may bring a suit against the pawnor upon
the debt or promise and retain the goods pledged as a collateral security or
he may sell the thing pledged, on giving the pawnor reasonable notice of the
sale.
If the proceeds of such sale are less than the amount due in respect of the
debt or promise; the pawnor is still liable to pay the balance. If the proceeds of the
sale are greater than the amount so due, the pawnee shall pay over the surplus to
the pawnor.
c) Sale by an official Receiver or Official Assignee or Liquidator of Companies.
In all the above three cases even though the seller is not the owner of the
goods, the buyer gets a valid title.
17.3 Rules as to delivery
Sec.2 (2) of the Sale of Goods Act defines delivery as “Delivery means voluntary
transfer of possession from one person to another”.
Further Sec.-33 of the Sale of Goods Act reads “Delivery of goods sold may be
made by doing anything which the parties agree shall be treated as delivery or
which has the effect of putting the goods in the possession of the buyer or of any
person authorized to hold them on his behalf”.
The first part of Sec.39 of the Sale of Goods Act reads:
Sec.39 (1) where, in persuance of a contract of sale, the seller is authorized or
required to send the goods to the buyer delivery of the goods to a carrier, whether
named by the buyer or not, for the purpose of transmission to the buyer or delivery
of the goods to a wharfinger for sale custody, is prima facie deemed to be delivery of
the goods to the buyer”.
Delivery of goods may be effected in three modes (a) actual delivery (b)
symbolic delivery and (c) constructive delivery or delivery by attornment.
Actual delivery:
In this case, the physical possession of the goods is handed over by the seller.
Delivery of goods may also be made by doing anything which has the effect of
putting the goods in the possession of the buyer.
Acraman Vs. Morriee (1849) 8 C. B. 449
There was a sale of timber. It was the custom that the seller has to sever
portion rejected by the buyer at his own expense. The seller has not put them in a
deliverable state, Held ownership has not passed to the buyer.
Elmore Vs. Stone (1809) I Taunt 10 R.R.R. 578
There was a sale of a horse. The seller was requested by the buyer to separate
the horse from the lot. He kept the selected horse in a separate stable. Held this
was delivery of the horse.
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Symbolical delivery
When physical delivery is not possible, delivery is made by delivering some
symbol. Delivery of the key of the warehouse to buyer is symbolic delivery of the
goods to the buyer. This would carry with it the real possession or control over the
goods in the warehouse. Another example of symbolic delivery is the handing over
of a bill of lading or document of title duly endorsed.
In this kind of delivery there is neither a change of physical possession of
goods, nor delivery of symbol, but there is only an acknowledgement by the person
in possession that he holds them on behalf of another. Please make a note there is
only a change in the legal possession. This kind of delivery may be effected in three
ways.
1) Where the buyer, who is already in possession of goods as bailee of the seller,
holds them as his (buyers) own, after the sale.
2) Where the seller, who is in possession of goods, holds them as the bailee of
the buyer after the sale.
3) Where a third party, like a warehouseman, who was holding the goods as a
bailee of the seller, agrees after a sale, to hold them as the bailee of the
buyer.
2) Sec. 32 of the Sale of Goods Act reads:
“Unless otherwise agreed, delivery of the goods and payment of the price are
concurrent conditions, that is to say; the seller shall be ready and willing to give
possession of the goods to the buyer in exchange for the price and the buyer be
ready and willing to pay the price in exchange for the possession of the goods”.
The primary rule is that the payment of price and the delivery of goods are to
be concurrent.
3) Sec. 31 of the Sale of Goods Act says:
It is the duty of the seller to deliver the goods and of the buyer to accept and
pay for them in accordance with the terms of the contract”.
The general rule is that the contract of sale should be performed according to
the terms of the agreement between the parties.
4) Sec. 34 of the Sale of Goods Act reads:
“A delivery of part of goods, in progress of the delivery of the whole, has the
same effect, for the purpose of passing the property in such goods, as a delivery of
the goods with an intention of severing it from the whole does not operate as a
delivery of the remainder”.
In other words part delivery has the same effect for the purpose of passing of
property in the goods as delivery of the whole. But a delivery of part with an
intention of severing it from the whole, does not operate as a delivery of the
remainder.
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Hammond Vs. Anderson (1883) 1 – B & P.N.R. 96 S.R.R. 763

There was a sale of a quantity lying as a wharf. The seller gave an order to the
wharfinger to deliver the goods to the buyer who had paid the value of the goods.
The buyer subsequently weighed the goods and took away part of them. Held there
was delivery of entire goods.
Mitchell Reid & Co. Vs. Buldes Doss (1887) 15 cal – I
A sold 5 bales of goods to B.B paid only for one bale and refused to take
delivery of the others as they are not according to description. Held there was a
sale of one bale and not the entire lot of 5 bales.
5) Sec. 35 of the Sale of Goods Act says:
“Apart from any express contract, the seller of goods is not bound to deliver
them until the buyer applies for delivery”.
It is the foremost duty of the buyer of apply for delivery of the goods contracted
for.
6) Sec. 36 of the Sale of Goods Act reads:
1) “Whether it is for the buyer to take possession of the goods or for the seller to
send them to the buyer is a question depending in each case on the contract,
express or implied, between the parties. Apart from any such contract goods,
sold are to be delivered at the place at which they are at the time of the sale
and goods agreed to be sold are to be delivered at the place at which they are
at the time of agreement to sell, or if not then in existence, at the place at
which they are manufactured or produced.
2) Where under the contract of sale the seller is bound to send the goods to the
buyer, but no time for sending them is fixed, the seller in bound to send
them within a reasonable time.
3) Where the goods at the time of sale are in the possession of a third person,
there is no delivery by seller to buyer unless and until such third person
acknowledges to the buyer that he holds the goods on his behalf.
Provided that nothing in this section shall affect the operation of the issue or
transfer of any document of title to goods.
4) Deemed or tender of delivery may be treated as ineffectual unless made at a
reasonable hour. What is a reasonable hour is a question of fact.
5) Unless otherwise agreed, the expenses of and incidental to putting the goods
into a deliverable state shall be borne by the seller”
17.4 PLACE OF DELIVERY
Where the place of delivery is mentioned in the contract the goods must be
delivered at the place during business hours on a working day. If it is not
mentioned in the contract, the goods must be delivered at the place at which they
are at the time of contract of sale. It is future goods at the place they are
manufactured or produced.
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Goods in possession of a third party

Goods in possession of a third person can be delivered by the seller to the
buyer only after third person has acknowledged to the buyer that he holds the
goods on his behalf.
17.5 TIME OF DELIVERY
In the absence of contract to the contrary, the seller is bound to send them
within a reasonable time. Demand or tender of delivery should be made at a
reasonable time. What is a reasonable hour is question of fact.

Cost of Delivery
In the absence of contract to the contrary, cost of making delivery is to be
borne by the seller and of taking delivery by the buyer.

7) Sec. 37 of the Sale of Goods Act reads:

1) Where the seller delivers to the buyer a quantity of goods less than he
contracted to sell, the buyer may reject them but if the buyer accepts the
goods so delivered he shall pay for them at the contract rate.
2) Where the seller delivers to the buyer a quantity of goods larger than he
contracted to sell, the buyer may accept the goods included in the contract
and reject the rest, or he may reject the whole. If the buyer accepts the
whole of the goods so delivered he shall pay for them at the contract rate.
3) Where he seller delivers to the buyer the goods he contracted to sell mixed
with goods of a different description not included in the contract, the buyer
may accept the goods which are in accordance with the contract and reject
the rest or may reject the whole.
4) The provisions of this section are subject to any usage of trade, special
agreement of course of dealing between the parties”.
Delivery of wrong quantity:
Where the seller delivers to the buyer a quantity of goods less than he
contracted for, the buyer may reject the goods. If the buyer accepts them, he shall
pay them at the contracted rate.
Where the seller delivers to the buyer a quantity of goods larger than he
contracted for, the buyer may accept the whole, or reject the whole or accept the
quantity he ordered and reject the rest.
Where the seller delivers to the buyer the goods he contracted for mixed with
goods of different description, the buyer may accept the goods which are in
accordance with the contract and reject the rest or may reject the whole.
Please make a note the above provisions are subject to and usage of trade
special agreement or course of dealing between the parties.
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8) Sec. 38 of the Sale of Goods Act reads:

“Unless otherwise agreed, the buyer of goods is not bound to accept delivery
thereof by instalments.
“Where there is a contract for the sale of goods to be delivered by stated
instalments which are to be separately paid far and the seller makes no delivery or
defective delivery in respect of one or more instalments or the buyer neglects or
refuses to take delivery or pay for one or more instalments, it is a question in each
case depending on the terms of the contract and circumstances of the case,
whether the breach of contract is a repudiation of the whole contract, or whether it
is a severable breach giving rise to a claim for compensation, but not a right to treat
the whole contract as repudiated”.
Seller is not entitled to deliver by instalments, because the contract must be
performed as a whole and cannot be divided unilaterally. In otherwords the buyer
is not bound to accept delivery of goods in instalments unless agreed for.
Where a contract provides for delivery of goods in instalement and each
instalments is to be separately paid for and one of the parties makes default in the
delivery of any instalments or in the payment of instalment price, then the right
and obligations of the parties are to be determined as per contract agreed for. If the
default of any one of the instalments can be separated from the rest, the aggrieved
party will be entitled to claim compensation regarding the defaulted instalment. In
the absence of refusal by the aggrieved party, failure to pay or delivery of any
instalment will not generally discharge the other party from fulfilling his part of
contract.
Sec. 39 of the Sale of Goods Act says
1) Where in pursuance of a contract of sale, the seller is authorized or required
to send the goods to the buyer, delivery of the goods to a carrier, whether
named by the buyer or not, for the purpose of transmission to the buyer or
delivery of the goods to a wharfinger for safe custody is prima facie deemed to
be a delivery of the goods to the buyer.
2) Unless otherwise authorized by the buyer, the seller shall make such
contract with the carrier or wharfinger on behalf of the buyer as may be
reasonable having regard to the nature of the goods and the other
circumstances of the case. If the seller omits so to do and the goods are lost
or damaged in course of transport whilst in the custody of the wharfinger,
the buyer may decline to treat delivery to the carrier or wharfinger as delivery
to himself, or may hold the seller responsible in damages.
3) Unless otherwise agreed, where goods are sent by the seller to the buyer by a
route involving sea transit, in circumstances in which it is usual to insure,
the seller shall give such notice to the buyer as may enable him to insure
them during their sea transit and if the seller fails so to do the goods shall be
deemed to be at his risk during such sea transit”.
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Delivery to carrier or wharfinger

When the seller is authorized or required to send the goods to the buyer
delivery of the goods to a carrier or to a wharfinger for safe custody is prima facie
deemed to be a delivery of the goods to the buyer. The seller makes an agreement
with the carrier on behalf of the buyer, taking into account the nature of the goods
and other circumstances.
If the seller fails to do so and the goods are lost or damaged in course of transit
or while in the custody of the Wharfinger, the buyer may decline to treat the
delivery to the carrier as a delivery to himself or may hold the seller responsible for
damages.
In case of sea transit where it is customary for the buyer himself to insure, it is
the duty of the seller to give such notice of the shipment to the buyer so as to
enable him to insure the goods. If such notice is not given the risk does not pass to
the buyer.
17.6. C. I. F. Contract
The letter C.I.F indicate that the price mentioned in the contract includes the
cost of goods, insurance charges during transit to the buyer and freight. This kind
of contract is performed by the delivery of documents of the representing the goods
to the buyer through a bank. The documents of title are usually delivered by the
bank on payment or on acceptance of a draft. This protects both the seller and the
buyer. The seller continues to be owner of the goods until the buyer pays for the
goods and gets the documents of title from the bank. If the goods are lost in the
voyage, the seller can recover the amount from the insurer. If the goods are not as
agreed for, the buyer can reject them and recover the price paid by him.
The following are the duties of the seller in a C.I.F. contract.
1) The seller has to prepare the invoice of the goods shipped.
2) The seller has to ship at the port of shipment goods of the description
stipulated in the contract.
3) The seller has to procure a contract of affreightment under which the goods
will be delivered at the destination contemplated by the contract.
4) The seller has to arrange for an insurance upon the current terms in the
trade which will be available for the benefit of the buyer.
5) The seller has to tender, within a reasonable time after shipments the bill of
lading, the policy of insurance and the notice to the buyer so as to enable the
buyer to obtain delivery of the goods on arrival or to recover damages it they
are lost on the voyage.
The following are the duties of the buyer in C.I.F contract:
1) The buyer has to pay the price on delivery of the documents of title.
2) The buyer has to pay the cost of unloading at the port of destination.
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Arno’d Karberg & Co Vs. Blythe ect. (1916) 1 K. B95

Scrutton J observed a C.I.F sale is not a sale of goods, but a sale of documents
relating to goods.
Actually a C.I.F contract is a contract for the sale of insured goods lost or not
lost to be implemented by the delivery of proper documents of title.
17.7 F.O.B CONTRACT
The letters F. O. B mean ‘free on board’. The seller puts the goods on board a
ship at his own expense and the ownership passes at that moment to the buyer.
The seller does not insure the goods and the buyer has to do it, if he likes but seller
must give notice of putting the goods on board the ship to enable the buyer to
insure.
Colley Vs. Overseas Exporters (1921) 3 K. B. 302
The duty to the seller ends when he delivers the goods at his own expense to
the ship at the port of shipment.

The buyer must name the ship to which goods are to be delivered or he must
authorize the seller to select the ship.
If the seller fails to give notice of the shipment to the buyer the goods will be at
seller’s risk.
F. O. R. Contract
The letters F. O. R. mean ‘free on rail’. In F. O. R. contract the seller puts the
goods on rails at his own expense and the ownership passes at that moment to the
buyer. The letters F. O. R. may qualify the delivery or the place of delivery and may
qualify the price. The phrase F. O. R. when used to qualify the place, the place of
delivery means that the seller’s liability is to place the goods free on the rail at the
place of deliver. Once that is done the risk belongs to the buyer.
17.8 EX SHIP CONTRACT
The seller agrees to deliver the goods from a ship which has arrived at the port
of delivery. The seller has to pay the freight and other incidental charges to the
shipowner. The seller has to give the buyer a delivery order to enable him to obtain
the goods on arrival.

Yangtaze Insurance Association Vs. Lukmanjee (1918) A.C. 585

The seller may insure the goods for his own protection but he is not bound to
insure them on behalf of the buyer.

Unpaid vendor – His rights of lien and stoppage in transition;

Who is an unpaid seller or vendor? Sec. 45 of the Sale of Goods Act defines
“unpaid seller” as follows.

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

this Act.
a) When the whole of the price has not been paid or tendered
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b) When a bill of exchange or other negotiable instrument has been received as

conditional payment and the condition on which it was received has not been
fulfilled by reason of the dishonour of the instrument or otherwise.
2) In this chapter, the term “Seller” includes any person who is in the position
of a seller as for instance an agent of the seller to whom the bill of lading has
been indorsed or a consignor or agent who has himself paid or is directly
responsible for the price.
From the above definition it is clear that the seller can be deemed to be an
unpaid seller if the following conditions exist.

1) The seller must be unpaid or the price of the goods not paid.
2) The seller must have immediate right of action for the price.
3) A bill of exchange or other negotiable instrument was received, but the same
has been dishnoured.
Felse Vs. Wray (1820) East 93. 6 R. R. 551
The seller draws bill on the buyer for the price of the goods. The buyer accepts
it. On maturity the buyer fails to honour it. Held the seller is an unpaid vendor.
Hodgson Vs. Roy (1797) T.R. 440.4 R.R. 483
A partially paid seller is entitled to the rights of an unpaid seller.
A seller is not an unpaid vendor when the buyer has tendered the price and
the seller has refused to accept it. In such a case the seller loses all his rights
against the goods.
Edwards Vs. Brewer (1837) 2 M & W. 575. 46 R. R. 626.
The seller is unpaid vendor not only when the price has not been paid or
tendered in full, but also it has received bills of exchange or other negotiable
instruments as conditional payment and the buyer has failed to honour them at
maturity or has become insolvent during their currency.
Sec. 46 of the Sale of Goods Act defines unpaid seller’s rights as follows
1) Subject to the provisions of this Act and any law for the time being in force,
notwithstanding that the property in the goods may have passed to the
buyer; the unpaid seller of goods as such has by implication of law;
a) a lien on the goods for the price while he is in possession of them.
b) in case of the insolvency of the buyer a right of stopping the goods in transit
after he has parted with the possession of them.
c) a right of re-sale as limited by this Act.
2) Where the property in goods has not passed to the buyer, the unpaidseller
has in addition to his other remedies, a right of withholding delivery similar
to and co-extensive with his right of lien and stoppage in transit where the
property has passed to the buyer.
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An unpaid seller has the following three rights, notwithstanding the fact of the
property in the goods having passed to the buyer.
1. Lien
2. Stoppage in transit
3. Re-sale.
Sec. 47 of the sale of Goods Act defines seller’s lien.
1. Subject to the provisions of this Act; the unpaid seller of good who is in
possession of them is entitled to retain possession of them until payment or
tender of the price in the following cases namely.
a) Where the goods have been sold without any stipulation
b) Where the goods have been sold on credit, but the term of credit has expired.
c) Where the buyer becomes insolvent.
2. The seller may exercise his right of lien notwithstanding that he is in
possession of the goods as agent or bailee for the buyer.
The lien of an unpaid seller is a particular lien and it is a personal right which
can be exercised only by him and by his creditors. This right is also indivisible and
so the buyer is not entitled to claim delivery of a portion of the goods on payment of
a proportionate price.
Sec. 48 of the Sale of Goods Act defines part delivery.
“Where an unpaid seller has made part delivery of the goods he may exercise
his right of lien on the remainder unless such part delivery has been made under
such circumstances as to show an agreement to waive the lien”.
The seller’s lien is available so long as he holds any part of the goods.
Sec. 49 of the Sale of Goods Act deals with the termination of lien.
The unpaid seller of goods loses his lien thereon –
a) When he delivers the goods to a carrier or other bailee for the purpose of
transmission to the buyers without reserving the right of disposal of goods;
b) When the buyer or his agent lawfully obtain possession of the goods.
c) By waiver thereof.
The unpaid seller of goods having a lien thereon does not lose his lien by
reason only that he has obtained a decree for the price of the goods”.
A seller is deemed to retain the right of disposal, if goods are handed over to
the carrier, but sends the railway receipt to his own agent or to his own address at
the place of delivery. In this case the seller has not lost the right of lien, since he is
in possession of the railway receipt.
The right of lien being essentially possessory in nature the retention of
possession is essential for the exercise of the lien.
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The unpaid seller may waive his right to retain the goods or with-hold delivery
and he may do this either expressly or impliedly.
When the contract of sale provides in express terms, that the seller shall not
retain possession of the goods even if the price has not been paid or tendered, it is
an express waiver of lien.
Lien is waived by implication in the following circumstances.

a) When the seller sells the goods on credit, the lien is waived until the expiry of
the term of credit; The lien revives on the expiry of the term of credit.
b) When the seller takes a bill for the price payable at a future date, the lien is
waived till the maturity of the bill. The lien revives on the dishonour of the
bill.
c) When the seller assents to a sub-sale, the lien is waived.
Jacobs V. Latour (1828) 5 Bing 130:
If the seller hands over the goods to the Nazeer (the court officer in execution
of his decree.) he loses his lien.
The second remedy of the unpaid vendor is the right of stoppage in transit.
Sec. 50 of the Sale of Goods Act deals with right of stoppage in transit.
“Subject to the provisions of this Act; when the buyer of goods becomes
insolvent the unpaid seller who has parted with the possession of the goods, has
the right of stopping them in transit, that is to say he may resume possession of the
goods as long as they are in the course of transit ad may retain them until payment
or tender of the price”.
The right of stoppage in transit comes into existence only when the lien is not
available i.e. when the unpaid seller has parted with the possession of goods. The
goods are said to be ‘in transit’ when they are in the possession of a third party e.g.
carrier after the seller has parted with their possession and before the buyer has
acquired possession of them.
There are certain distinction between lien and the right of stoppage in transit.
a) Lien is available only when the goods are in the possession of the unpaid
vendor whereas the right of stoppage in transit is available only after the
vendor has parted with possession of the goods.
b) The right of stoppage in transit is available when the buyer becomes an
insolvent’ but not merely because he period for which credit was given has
expired. The right of lien available even when the buyer is not insolvent
provided the credit period has expired and the price has not been paid.
In order that the right of stoppage in transit may be exercised the following
conditions must be satisfied.

a) The seller must be unpaid.

b) The buyer must be insolvent.
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c) The seller must have parted with the possession of goods.

d) The goods must be in transit
If before the right of stoppage in transit has been exercised the buyer obtains
delivery of the document of title and assigns the same to a bonafide purchaser for
value, the right of stoppage in transit is lost.
Sec. 51 of the Sale of Goods Act deals with duration of transit.
1) Goods are deemed to be in course of transit from the time when they are
delivered to a carrier or other bailee for the purpose of transmission to the
buyer until the buyer or his agent in that behalf takes delivery of them from
such carrier or other bailee.
2) If the buyer or his agent in that behalf obtains delivery of the goods before
their arrival at the appointed destination; transit is at an end.
3) If after the arrival of the goods at the appointed destination, the carrier or
other bailee acknowledges to the buyer or his agent he hold the goods on his
behalf and continues in possession of them as bailee for the buyer or his
agent the transit is at an end and it is immaterial that a further destination
for the goods may have been indicated by the carrier.
4) If the goods are rejected by the buyer and the carrier or other bailee
continues in possession of them the transit is not deemed to be at an end,
even if the seller has refused to receive them back.
5) When goods are delivered to a ship chartered by the buyer, it is a question
depending on the circumstances of the particular case, whether they are in
possession of the master as a carrier or as agent or the buyer.
6) Where the carrier or other bailee wrongfully refuser to deliver the goods to the
buyer or his agent in that behalf the transit is deemed to be at end.
7) Where part delivery of the goods has been made to the buyer or his agent in
that behalf, the remainder of the goods may be stopped in transit, unless
such part delivery has been given in such circumstances as to show
agreement to give up possession of the whole of the goods.
G.I.P. Railway Vs. Hanumandas (1989) 14 Bom 57
Goods were delivered by the seller to a railway company for transit to the
buyer. The goods reached the destination, The endorsee of the railway receipt paid
the freight to the railway company and loaded the goods in his cart. Before the
compound of the railway station, the railway company received notice from the
seller requesting the railway company to stop the goods on the ground of the
buyer’s insolvency. Held that transit was at an end by the time the notice was
served consequently the right the stoppage in transit could not be exercised.
Sec. 52 of the Sale of Goods Act deals with how stoppage in transit is effected.
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1) The unpaid seller may exercise his right of stoppage in transit either by
raking actual possession of the goods or by giving notice of his claim to the
carrier or other bailee in whose possession the goods are Such notice may be
given either to the person in actual possession of the goods or to his
principal. In the latter case the notice to be effectual, shall be given at such
time and in such circumstances that the principal by the exercise of
reasonable diligence may communicate it to his servant or agent in time to
prevent a delivery by the buyer.
2) When notice of stoppage in transit is given by the seller to the carrier or other
bailee in possession of the goods be shall deliver the goods to or according to
the directions of the seller. The expenses of such re delivery shall be borne
by the seller.
U.S. Steel products Co. V.G.W.C. (1916) 1 A.C. 189
A railway company is in possession of goods as carriers where the seller gives
notice of stoppage in transit. A sum of money is due by the buyer to the railway
company. Held railway company is not entitled to claim priority over the right of
the seller.

Booth S.S. Co.Vs. Cargo flect iron co. Ltd. (1916) 2 K. B. 57 C.A.
An unpaid seller stops goods sent by sea at a port short of their destination.
He is liable for the freight, not only to the port where the goods were actually
landed, but also to the port of their ultimate destination.
The general rule is that the unpaid seller’s right of lien, or stoppage in transit
is not affected by any sale or other disposition of the goods which the buyer may
have made unless the seller has assented thereto.
To this rule the following is the exception
1) Where a document of the title to the goods has been issued or lawfully
transferred to any person as buyer or owner of the goods and that person
transfer the document to a purchaser in good faith and for valuable
consideration, the unpaid seller’s right of lien or stoppage in transit is
destroyed.
2) Where the buyer transfers the document of title to the goods by way of
pledge, the unpaid seller’s right of lien or stoppage in transit can only be
exercised subject to the rights of the pledgee.
The above points are clearly stated in Sec 53 of the Sale of Goods Act, as
follows.
1) “Subject to the provision of this Act the unpaid seller’s right of lien or
stoppage in transit is not affected by any sale or other disposition of the
goods which the buyer may have made, unless the seller has assented there
to.
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Provided that where a document of title to goods has been issued of lawfully
transferred to any person as buyer or owner of the goods and that person transfers
the document to a person who takes the document in good faith and for
consideration then, if such last mentioned transfer was by way of sale the unpaid
seller’s right of lien or stoppage in transit is defeated, and if such last mentioned
transfer was by way of pledge, or other disposition for value, the unpaid seller’s
right of lien or stoppage in transit can only be exercised subject to the rights of the
transferee.
Where the transfer is by way of pledge the unpaid seller may require the pledge
to have the amount secured by the pledge satisfied in the first instance, as far as
possible out of any other goods or securities of the buyer in the hands of the pledge
and available against the buyer’.
The third right of unpaid vendor is the right of re-sale of the goods. The rules
regarding the right of re-sale are stated under Section 54 of the sale of Goods Act.

1) “Subject to the provisions of this section, a contract of sale is not rescinded

by the mere exercise by an unpaid seller of his right of lien or stoppage in
transit.
2) Where the goods are of a perishable nature; or where the unpaid seller who
has exercised his right of lien or stoppage in transit gives notice to the buyer
of his intention to re-sell, the unpaid seller may if the buyer does not within a
reasonable time pay or tender the price, resell the goods within a reasonable
time and recover from the original buyer damages for any loss occasioned by
his breach of contract, but the buyer shall not be entitled to any profit which
may occur on the re-sale. If such notice is not given the unpaid seller shall
not be entitled to recover such damages and the buyer shall be entitled to the
profit, if any on the re-sale.
3) Where an unpaid seller who has exercised his right of lien or stoppage in
transit re-sellers the goods, the buyer acquires a good title thereto as against
the original buyer, notwithstanding that no notice of the re-sale has been
given to the original buyer.
4) Where the seller expressly reserves a right of re-sale in case the buyer should
make default and, on the buyer making default re-sells the goods, the
original contract or sale is thereby rescinded, but without prejudice to any
claim which seller may have for damages.
P.S.N.S. Ambalavana Chettiar & Co & Others Vs. Express Newspaper’s Ltd, Bombay
A.I.R. 1961 S.C. 741
The Supreme Court has said that the statutory power for re-sale under Section
54(2) arises if the property in the goods has passed to the buyer subject to the lien
of the unpaid seller. Where the property in the goods has not passed to the buyer,
the seller has not right of re-sale. The seller can claim as damages the difference
between the contract price and the amount realized on re-sale of the goods where
he has the right of re-sale of under this Section.
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17.9 Remedies available to seller and buyer

The first and foremost remedy of the seller is suit for price Sec. 55 of the sale
of Goods Act reads as follows.

1) Where under a contract to sale the property in the goods has passed to the
buyer and the buyer wrongfully neglects or refuses to pay for the goods
according to the terms of contract, the seller may sue him for the price of the
goods.
2) Where under the contract of sale the Price is payable on a day certain
irrespective of delivery and the buyer wrongfully neglects or refuses to pay
such price the sellers may sue him for the price although the property in the
goods has not passed and the goods have not been appropriated to the
contract.
Helps Vs. Winterbottom (1831) 2 B & Ad. 431; 36 R. R. 609
There was a contract of sale on credit. No action can be maintained for the
price until the expiration of the credit period.

If the ownership in the goods has passed to the buyer and the buyer neglects
or refuses to pay for the goods is the seller can sue him for the price.
The second remedy of the seller is suit for damages for non-acceptance of the
goods. Sec. 56 of the Sale of Goods, Act deals with damages for non-acceptance.
“Where the buyer wrongfully neglects or refuses to accept and pay for the
goods, the seller may sue him for damages for non-acceptance”.
The third remedy of the seller is suit for damaged for repudiation of contract
by the buyer before due date Sec. 60 of the Sale of Goods Act reads:
“Where either party to contract of sale repudiates the contract before the date
of delivery the other party may either treat the contract as subsisting and
delivery or her may treat the contract as rescinded and sue for damages for the
breach”.
This rule is known as the ‘rule of anticipatory breach of contract’. It can also
be stated as “a wrongful renunciation of the contractual relation into which he has
entered”.
The fourth remedy of the seller is suit for interest. Sec. 61 (2) (a) of the Sale of
Goods Act says;
In the absence of a contract to the contrary, the court may award interest at
such rate as it thinks fir on the amount of the price.
a) To the seller in a suit by him for the amount of the price from the date of the
tender of the goods or from the date on which the price was payable.
The fifth remedy of the seller is if he is an unpaid vendor he is entitled to the
right of a lien on the goods for the price while he is in possession of them; in case of
the insolvency of the buyer, a right of stoppage of the goods in transit when he has
parted with the possession of the goods and finally a right of re-sale.
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The sixth remedy of the seller is in cases where the property in the goods has
not passed to the buyer and the seller is an unpaid vendor, the seller has a right of
withholding delivery similar to and co-extensive with the right of lien, and stoppage
in transit.
The remedies of the buyer are as follows
1) The buyer can file a suit for damages for non-delivery of the goods under
Section 57 of the Sale of Goods Act.
“Where the seller wrongfully neglects or refuses to deliver the goods to the
buyer, the buyer may sue the seller for damages for non-delivery.
LongtonVs. Higgins 1859 4H & N. 402 118R. R. 515
If the seller wrongfully re-sells the goods, the buyer may sue the sellers in
trover and also the second buyer.
Ellinger Action Gesellschaft Vs. Armstrong
The damages is Prima facie the difference between the value of the article
contracted for at the time when it ought to have been delivered and the time when
it actually was delivered.
William Bros Vs. Ed. T.Agins Ltd (1914) C.A. 51
The measure of damages recoverable by the buyer is the difference between
the contract price of the goods and the market price, at the time when the goods
ought to have been delivered, if there is an available market. The sub contract
entered into by the buyer cannot as a general rule, be used to increase or minimize
his damages, as the sub contracts are incidental matters with which the seller has
nothing to do.
The other remedy of the buyer is suit for specific performance Sec 58 of the
Sale of Goods Act reads:
“Subject to the provisions of chapter II of the Specific Relief Act, 1877, in any
suit for breach of contract to deliver specific or ascertained goods, the court may, if
it thinks if on the application of the plaintiff, by its decree direct that the contract
shall be performed specifically, without giving the defendant the option of retaining
the goods on payment of damages. The decree may be unconditional or upon such
terms and conditions as to damages, payment of the price or otherwise, as the
court may deem just, and the application of the plaintiff may be made at any time
before the decree”.
This remedy, being discretionary will not be granted unless it is proved that
damages would not be an adequate remedy. In the case of goods generally available
in the market, specific performance will not be granted. If the goods or articles
agreed to be sold have special value or rare qualities e.g. a portrait by a dead artist,
or a literary work which is out of print, etc-specific performance may be granted.
Behnke Vs. Bede Shipping Co. (1927) I. K. B. 649
There was a contract to sell a ship to a German ship owner. The ship was an
old ship, but her engines and boilers were new and such as to satisfy the German
regulations and the buyer could have her registered immediately in Germany. IN
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view of these facts and the price, the ship was of peculiar value of the buyer and
there was only one other ship on the market which would suit his requirements.
The seller refused to perform his part of contract. The court granted specific
performance of the contract.
The another remedy of the buyer is suit for breach of warranty Sec. 59 of the
Sale of Goods Act deals with remedy for breach of warranty.
1) “Where there is a breach of warranty by the seller or where the buyer elects
or is compelled to treat any breach of a condition on the part of the seller as a
breach of warranty, the buyer is not by reason only of such breach of
warranty entitled to reject the goods but he may.
a) Set up against the seller the breach of warranty in diminution or extinction of
the price or
b) Sue the seller for damages for breach of warranty.
2) The fact that a buyer has set up a breach of warranty in diminution or
extinction of the price does not prevent him from suing for the same breach
of warranty if he has suffered further damage”
The measure of damages for breach of warranty is the estimated loss arising
directly and naturally from the breach which is prima facie the difference between
the value of the goods as delivered and the value they would have had if the goods
were according to the warranty.
Davis Vs. Hedges (1871) L R 6 Q. B. 687
If the damages exceed the amount of the price he may either counter claim for
the excess, or bring an independent action in respect of it; or he may, in all cases
pay the price and bring a distinct action for any damage sustained by reason of the
sellers’ breach.
Smith Vs. Green (1865) 1 C.P.D.C. 92
Where a farmer bought a cow warranted to be free from foot and mouth
disease. But in fact she was suffering from that disease. When kept with other cow
both the cow and others which infected died of the disease. Held he was entitled to
recover the whole of his loss and not merely the value of the cow which he bought.
Yet another remedy of the buyer is suit for damages for repudiation of contract
by the seller before due date Sec. 60 of the Sale of Goods Act deals with
repudiation of contract before due date Sec.60 has been stated in the third remedy
of the seller referred to above.
Where the seller repudiates the contract before the date of delivery the buyer
may either treat the contract as subsisting and wait till the date of delivery, or he
may treat the contract as rescinded and sue for damages for the breach As referred
earlier this rule is known as the ‘rule of anticipatory breach of contract’.
Further remedy of the buyer is suit for interest under Sec. 61(2) (b) of the Sale
of Goods Act.
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In the absence of a contract to the contrary, the court, may award interest at
such rate as it thinks fit on the amount of the price to the buyer in a suit by him for
the refund of price in case of a breach of the contract on the part of the seller from
the date on which the payment was made”.
Where there is a breach of contract on the part of the seller and with the result
the price has to be refunded to the buyer, the buyer has a right to claim interest on
the amount of the price.
Union of India Vs. Rallia Ram A.I.R. 1963 S.C. 1685
The buyer can only recover interest when he is entitled to recover the purchase
price, that is to say, when he can sue for the price prepaid as money had and
received, by reason of total failure for consideration. He cannot recover interest
when his only remedy is to sue for damages for instance, for a breach of warranty,
even though those damages may be sufficient to extinguish the price. Xii) Auction
Sales.
The law regarding auction sale is stated under Section 64 of the Sale of Goods
Act.
“In the case of a sale by auction.
1) Where goods are put up for sale in lots, each lot is prima facie deemed to be
the subject of a separate contract of sale;
2) The sale is complete when the auctioneer announces its completion by the
fall of the hammer or other customary manner and until such announcement
is made, any bidder may retract his bid.
3) A right to bid may be reserved expressly by or on behalf of the seller and
where such right is expressly so reserved, but not otherwise, the seller or any
one person on his behalf may subject to the provision hereinafter contained,
bid at the auction;
4) Where the sale is not notified to be subject to a right to bid on behalf of the
seller, it shall not be lawful for the seller to bid himself or to employ any
person to bid at such sale, or for the auctioneer knowingly to take and bid
from the seller or any such person and any sale contravening this rule may
be treated as fraudulent by the buyer.
5) The sale may be notified to be subject to a reserved or upset price.
6) If the seller makes use of pretended bidding to raise the price the sale is
voidable at the option of the buyer”
A sale by auction is public sale where any buyer can outbid each other. The
goods are knocked down to the highest bidder. The auctioneer is an agent of the
seller.
Linga Gounder Vs. The State of Madras, A. I. R. (1971) Mad 28
Before final acceptance of the bid or falling of the hammer, it is always open to
the bidder to withdraw his bid
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Denpant Vs. Skinner (1948) 2 K B. 164

A sold a car by auction. B is declared as the highest bidder. He took the car
on giving a cheque. B further agreed that the ownership of the car would not pass
to him until the cheque is cleared. B sold the car to C. The cheque is dishonoured.
Held the property passed on to B as soon as the fall of the hammer in his favour
and C had a goods title.
Railway V General Trading Co. (1921) I. K. B. 635 C.A
A combination between intending bidders to restrain from bidding against
each other, commonly known as a knock out has been held not to be illegal at
common law.
Mc Manns V Fortescne (1907) 2 K. B. I. C. A.
Where the sale is subject to a reserve price, every bid is accepted conditionally
on the reserve price being reached.
Sec. 64 A of the Sale of Goods Act provides for the increase or decrease of the
purchase price of goods by reason of the imposition increase or remission of
customs or excise duty. On the 22nd September 1963, this Section was amended to
cover sales and purchase tax in addition to customs and excise duty.
1) Unless a different intention appears from the contract, in the event of any tax
of the nature described in sub-section (2) being imposed, increased decreased
or remitted in respect of any goods after the making of any contract for the
sale or purchase of such goods without stipulations to the payment of tax
was not chargeable at the time of the making of the contract or for the sale or
purchase of such goods tax-paid where tax was chargeable at that time.
a) If such imposition or increase so takes effect that the tax or increased tax as
the case may be or any part of such tax, is paid or is payable the seller may
add so much to the contract price as will be equivalent to the amount paid or
payable in respect of such tax or increase of tax, and he shall be entitled to
be paid and to sue for and recover such addition; and
b) If such decrease or remission so takes effect that the decreased tax only, or
no tax as the case may be is paid or is payable the buyer may deduct so
much from the contract price as will be equivalent to the decrease of tax or
remitted tax and he shall not be liable to pay or be sued for or in respect of
such deduction.
2) The provisions of sub-section (1) apply the following
a) Any duty of customs on excise on goods
b) Any tax on the sale or purchase of goods
M/s Chotabhai Jethabbai Patel V Union of India A.I.R. 1962 S.C. 109
The object of the said provision was to provide that where price payable is
determined on the basis of existing rates of duty or tax, neither party shall be
prejudiced or benefited by reason of the increase or decrease of the duty.
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The operation of this Section is subject to any agreement the parties may
make.
Exchange Bank of India & Africa Vs. Laxmichand A.I.R. 1962 Bom – 222
This Section applies even if the price has been paid before the duty is
increased or remitted.
Narayanan Vs. Kadri Saheb A.I.R. 1960 Mad 606
The rule applies irrespective of whether delivery was made and price paid.
17.10 SUGGESTED QUESTIONS
1. “No one can pass a better title to goods than what he himself has” Explain and
discuss the exceptions to the above rule.
2. Discuss the nature and scope of a seller’s lien.
3. “Stoppage in transit is an extension of the right of lien” Discuss.


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LESSON – 18

AGENCY
STRUCTURE
18.1 Definition of contract of Agency – Creation of Agency-kinds of agency
18.2 Creation of Agency
18.3 Ratification
18.4 Authority of the different kinds
18.5 Ostensible Authority
18.6 Delegates Non Potest Delegare
18.6.1 Sub-Agent
18.6.2 Substituted Agents
18.7 Suggested questions
18.1 DEFINITION OF CONTRACT OF AGENCY – CREATION OF AGENCY – KINDS OF
AGENCY
The law of agency is based on the maxim “quir facit per alivm facit per se” what
a person does by another he does himself. In otherwords he who does through
another does it himself.
In English law, a contract of agency is defined as the employment of one
person by another; in order to bring the latter into legal relation with a third
person. There are two important ingredients in English law (1) There must be an
employment. (2) The employment is for the purpose of bringing the employer into
legal relations with a third party.
In Indian law Section 182 Indian Contract Act defines an agent and the
principal as;
“An agent is a person employed to do any act for another or to represent
another in dealings with third persons. The person for whom such act is done, or
who is so represented is called the principal”.
You will find from the above that the agency is the representation of one
person by another making an agent conduit pipe or a connecting link between his
principal and third person. The essential point about an agent’s position is his
power of making the principal answerable to third parties. The emphasis is on the
power of agent to represent his principal in dealings with third parties. It is the
agent’s representative capacity coupled with a power to affect the legal relations of
the principal with third person, create the contract of agency. To put it in a
nutshell, the essence of the contract of agency is that the principal authorizes the
agent to represent or act for him in bringing the principal into contractual relation
with a third person.
In Mohanlal Jain Vs. Swami Man Sinh (1962) A.I.R.S.C.73
It was held that a person performing ministerial act is not an agent.
In Krishna Vs. Ganapathi (1955) A.I.R. Mad. 648 Justice Ramaswami said that
in legal phraseology every person who acts for another is not an agent. A domestic
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servant renders to his master a personal service; a person may till another’s filed or
tend his flocks or work in his shop or factory or mine or may be employed upon his
roads or ways; one may act for another in aiding in the performance of his legal or
contractual; obligation to third person. In none of these capacities he is an agent
and he is not acting for another in dealings with third persons It is only when he
acts as a representative of the other in business negotiations that is to say, in the
creation, modification, or termination of contractual obligations between that other
and third persons that he is an agent. Representative character and derivative
authority may briefly be said to be the distinguishing feature of an agent”.
A person does not become an agent merely because he gives advice in matters
of business.
Please make a note that it is not mere employment that creates an agency but
employment for the purpose of bringing the principal into legal relations with a
third party.
18.2 CREATION OF AGENCY
Agency may be created in any one of five ways

1) By an actual authority to contract given by the principal to the agent.

2) By the principal’s ratification of a contract entered into by the agent on his
behalf but without his authority.
3) By an ostensible authority conferred by the principal on the agent event
though no actual authority has been given;
4) By a legal presumption in the case of a married woman cohabiting with her
husband;
5) By an implication of law in cases of necessity.
1. Actual Authority
This actual authority to contract may be of two types 1. Express 2. Implied. If
an authority is given by the principal to his agent it is an express authority
authorizing the latter to bind the former by acts done within the scope of that
authority. Express authority may be given in writing or by words alone.
In England in the following two cases, the express authority should be given in
a special form. In the first place if an agent makes a binding contract under seal, it
is absolutely necessary that he should receive his authority under seal. For
example, conveyances of land, must be made by deed so that any authority to
execute these transactions must also, be made by deed. Secondly it is stated to be
in the Law of Property Act, 1953 that any document purporting to be the creation
or disposition of any interest or interest in land should be in writing. With the
result if any authority is to be given to the agent it should also be in writing.
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In India if an authority is given to an agent to transfer or assign immovable

property, it should be given in writing and registered if an authority is given in
writing under seal, it is termed as power of attorney.

The authority of an agent may also be an implied authority. Implied agency

may be inferred from the conduct, situation or relationship of parties. For example,
master and servant, husband and wife. Implied authority may also be inferred
from the circumstances of the case or the ordinary course of dealings. A person
who employs a broker must be supposed to give him authority to act as other
brokerse do.
Section 186 Indian Contract Act 1872 says “The authority of an agent may be
expressed or implied”.
Appointment of an agent for registration under Sections 32 & 33 of the Indian
Registration Act, 1908 and appointment of pleader under schedule 1. order 3 Rule
4 of the Code of Civil Procedure 1908 are the examples of express authority.
Section 187 of the Indian Contract Act, 1872 gives the definition of express
and implied authority.
An authority is said to be express when it is given by words spoken or written.
An authority is said to be implied when it is to be inferred from the circumstances
of the case; and things spoken or written in the ordinary course of dealings, may be
accounted as circumstances of the case”.
The actual relationship of the parties must be determined from all the
circumstances and not merely from the use of the word “agent” or the expression
agency agreement.
Every agent has implied authority to act in accordance with the reasonable
customs and usages of the particular place, trade or market place where he is
employed for example Bombay stock exchange. Further if an agent is authorized to
conduct a particular trade or business or to perform certain duties, he has an
implied authority to do such acts as are usual in the trade of business or ordinarily
incidental to the due performance of the duties for example auctioneer. The
following illustration explains the implied authority.
A owns a shop in Cuddalore, residing in Pondicherry and visiting the shop
occasionally. The shop is managed by B and he is in the habit of ordering goods
from C in the name of A for the purpose of the shop and of paying for them out of
A’s funds with A’’s knowledge. B has an implied authority from A to order goods
from C in the name of A for purchase of the shop.
From the above illustration it is inferred that if a person by words or conduct
holds out another as having authority to act on his behalf he is bound as regards
third parties by the acts of such other as if he was his agent.
In the case of husband and wife it is a special and important case of implied
authority. The liability of a husband for a wife’s debt depends on the principle of
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agency and the husband can only be liable when it is shown that he has expressly
or impliedly sanctioned what the wife has done.
In England Lord Selborne has stated in Debenham Vs. Mellon (1880) 6. App.
Ca 24 at P.31 “the question whether a wife has authority to pledge her husband’s
credit is to be treated as one of fact, upon the circumstances of each particular
case, whatever may be the presumption arising from any particular state of
circumstances”.
A wife living with her husband has the implied authority of the husband to
buy articles of house hold necessity.
18.3 RATIFICATION
Where acts are done by one person on behalf of another but without his
knowledge or authority he may elect to ratify or reject such acts. For example A
may act as B’s agent though he has no prior authority from B. In such a case B
may subsequently either accept the act of A or reject it. If he (B) accepts the act of
A done without his consent he is said to have ratified that act and it places the
parties in exactly the same position in which they would have been if A had B’s
authority at the time he made the contract.
Wilson Vs. Tumman (1843) 6 M. & G. 236 per Tindal C. B. at p.242
That an act, done for another by a person not assuming to act for himself but
for such other person, though without any precedent authority whatever, becomes
the act of the principal, if subsequently ratified by him, is the known and well
established rule of law. In that case the principal is bound by the act, whether it be
for his detriment or his advantage, and whether it be founded on tort or on
contract.
Ratification tantamounts to prior authority and it “relates back, to the date of
the act ratified. The rule is expressed by the maxim; ‘omnis ratihabitio retrotrhitur
et priori mandato acquipratur’ i.e. every ratification of an act already done has a
retrospective effect and is equal to a previous request to do it.
An unauthorized acceptance may be ratified even though the offer has in the
meantime been withdrawn.
Boltop Partners Vs. Lambert (1888) 41 Ch. D. 295
The managing director of a company, purporting to act as agent our the
company’s behalf but without its authority, accepted an offer by the defendant for
the purchase of some sugar works belonging to them. The defendant then with
drew his offer, but the company ratified the manager’s acceptances. Held that the
defendant was bond. The ratification related back to the time of the agent’s
acceptance so prevented the defendants’ subsequent revocation.
The rules which govern ratification may be summarized as follows:
“The agent must contract as agent, for a principal who is in contemplation,
and who must also be in existence at the time for such things as the principal can
and lawfully may do”
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3) Ostensible Authority
The principal may, by words or conduct, create an inference that an authority
has been conferred upon an agent even, though no authority was ever given in fact.
In such a case, if the agent contract within the limits of his apparent authority
although without any actual authority, the principal will be bound to third parties
by his agent’s act. This doctrine of apparent authority or ostensible authority is
essentially an application of the principal of estoppel.
Where a person by his conduct or by words spoken or written leads willfully
another person to believe that a certain person is his agent he is estopped from
denying subsequently the fact of agency.
If A proclaims himself as the agent of B, and knowing the same does not
contradict it, and a third person C, enters into a contract with A, on the basis A is
B’s agent. B will be estopped from contending subsequently that A is not his agent.
4) Agency in the case of Cohabitation
Where a married woman is cohabitating with her husband there is a
presumption that she has implied authority to pledge his credit for necessaries in
all domestic matters ordinarily entrusted to a wife; as the reasonable supply of
goods and service for the use of the husband, his wife, children and household,
such goods and service being suitable in kind and sufficient in quantity and
necessary in fact according to the condition in which they live.
Debenham Vs. Mellon (1880) 6 A.C. 24
When a man and a woman are living together as husband and wife there is a
presumption that the wife is entitled to pledge his credit for necessaries which are
suitable to his style of living and which fall in the domestic department usually
assigned to the wife.
But this presumption may be rebutted in the following cases and the wife
cannot pledge her husband’s credit.
a) Where the wife is forbidden from purchasing on credit or from contracting
debts.
b) Where the goods purchased on credit are not necessaries:
c) Where the wife is given sufficient money for purchasing necessaries and
forbidden from pledging his credit (Morel Bros. Vs. West moreland (1940)
A.C.11) or
d) Where an adequate allowance is made to her or she has means of her own,
either in money or in earning capacity (Biberfield Vs. Berens (1952) 2 Q. B.
770)
e) Where the trader has been expressly warned not to give credit to his wife
Etherington Vs. Prraott (1703) I Salk 1 8
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5) Agency of Necessity
We have seen earlier that the authority given by a principal to his agent is an
express authority enabling the latter to bind the former by acts done within the
scope of that authority. In certain circumstances the law confers an authority on
one person to act as agent for another without any regard to the consent of the
principal. Such an agency is called an agency of necessity.
A wife’s agency of necessity was created not by the parties but soley by the
law.
In view of some emergency, the law confers upon one party authority to act for
another, or allows an agent to exceed the authority which has been conferred upon
him. For example a carrier of goods or a master of a ship, may under certain
circumstances in the interest of his employer pledge his credit or incur such other
obligation as is necessary and will be considered to have his authority to do so.
In order that this agency of necessity should arise, it must fulfil the following
conditions.
1) That the course taken was the only practicable one in the circumstances
(Prager Vs. Blastspiel, Stamp & Hencock, Ltd, (1924) I. K. B 566); Couturier Vs.
Hastie.
A master of a ship who finds that the cargo is perishing rapidly is entitled to
put into the nearest port and to sell the goods for the best price there
obtainable.
2) That he had no opportunity in the time available for communicating with his
principal (Springer Vs. Great Western Railway (1921) I. K. B. 257)
3) That he has acted honestly in the interest of his principal.
When the wife lives apart from the husband under justifiable circumstances
the husband would, in law, be liable to maintain her and he would be bound to pay
her bills for maintenance during that period. According to some jurists, the
authority of the wife is an instance of agency of necessity.
A principal has the right to direct what work the agent has to do A master has
the further right to direct how the work is to be done.
A servant acts under the control and supervision of his master and is bound to
conform to all reasonable orders given to him in the course of his work.
An independent contractor is independent of any control or interference by the
employer and employs his own means to produce that result.
An agent, though bound to exercise his authority in accordance with all lawful
instructions of the principal is not subject in its exercise to the direct control or
supervision of the principal.
An agent as such is not a servant but a servant is generally his master’s
implied agent, the extent of agency depending on the duties and position of the
servant. That is why an agent is called a superior servant.
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An agent is employed to bring the principal into legal relations with third
person. Whereas a servant does not ordinarily create legal relations between his
employer and third persons. An agent may work for several principals at the same
time, but a servant usually serves only one master. An agent is a conduit pipe or a
connecting link between his principal and third persons. He is a representative of
the principal. On the other hand a servant is not a representative of the principal
and he is not connecting link or conduit pipe between anybody.
ii) who may be an agent-kinds of agents-Authority of the different kinds of
agents – Authority of agents – ostensible and emergency – Delegation of authority
Delegatus non potest delegare sub-agent-sustituted agent:- who may be an agent:
Any person who authorized to act as such may be an agent.
FOREMAN VS. G.W. RLY (1877) 38 L.T. 851
An infant can be an agent, although his incapacity may shield him from
liability principal.
Section 184 of the Indian Contract Act defines an agent as follows “As between
the principal and third person any person may become an agent, but no person
who is not of the age of majority and of sound mind can become an agent so as to
be responsible to his principal according to the provisions in that behalf herein
contained”.
If a person who is not competent to contract is appointed as agent the
principal is liable to the third party for the acts of the agent,
One broad classification of agent is;
1) Mercantile or commercial agents.
2) Non-mercantile or non-commercial agents.
Another classification of agent is:
1) General agent;
2) Special agent;
3) Universal agent;
A general agent has authority to do all acts of some general class (e.g)
Managing director of a company.
A special agent is one with limited authority to do some particular act or enter
into some particular contract
A universal agent is one whose authority to act for the principal is unlimited.
The following are some of the important mercantile agents.
1) Auctioneer;
2) Banker;
3) Broker;
4) Factor;
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5) Commission agent;
6) Del credere agent;
The following are non-mercantile agents:
1) Estate Agent;
2) Solicitors.
18.4 AUTHORITY OF THE DIFFERENT KINDS:
1) Auctioneer:
An auctioneer is an agent appointed by the seller to sell goods by public
auction for a remuneration, generally in the shape of a commission. He is in
possession of the goods. He has authority to deliver goods only on payment of the
price. He has authority to receive the price of the goods sold. He can also use for
the price in his own name. he is primarily the agent of the seller, but after the sale
has taken place, he can become the agent of the purchaser also. He must obey the
instructions of his principal.
He has authority to sell, but not to give warranties as to the property sold,
unless expressly authorized by the seller.
The seller will be bound if the auctioneer acts within his ostensible authority
even though he disobeys instruction privately given.
If an auctioneer through inadvertence and contrary to instructions puts an
article for sale without reserve the seller will be bound by the sale.
Where there is a sale by auction with notice that it is subject to a reserve, the
auctioneer cannot reasonably be supposed to have authority to accept a bid at less
than the reserve fixed and so cannot bind the seller by doing so.
An auctioneer has a lien on the goods sold until the whole price is paid and if
he is not paid, can sue in his own name for the price.
An auctioneer has implied, authority to sign a contract on behalf of both buyer
and seller, an authority which does not however, extend to his clerk.
Authority to sell by auction does not imply an authority to sell by private
contract, in the event of the public sale proving abortive, though the auctioneer
may be offered a price in excess of the reserve.
An auctioneer has no implied authority to take a bill of exchange in payment of
the deposit or of the price of goods sold, though it is provided by the conditions of
sale that the price shall be paid to him.
He may take a cheque in payment of the deposit according to the usual
custom.
An auctioneer has no implied authority to rescind a contract of sale made by
him.
An auctioneer has no authority to deliver goods sold except on payment of the
price. Further he has no authority to allow the buyer to set off a debt due to him
from the seller.
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A banker is an agent of his customer. He has to pay money as directed by his

customer. He acts as custodian of their securities and valuables. He also collects
cheques and bills of exchanges of their customers. As agent he renders numerous
other services to his customers. He has particular lien for the charges due to him.

BROKER
A broker is an agent who is employed primarily to negotiate a contract between
the seller and the buyer. A broker is not entrusted with the possession of goods. A
broker is an agent of the seller as well as the buyer. He prepares sold note for the
seller and sends it for his signature. He also prepares bought note for the buyer
and sends it for signature. When both the seller and the buyer agree the contract
is concluded.
PURUSHOTTAM VS. AMRUTH GHEE CO. (1961) A.A.P. 143
After the broker brings the two parties together and receives his remuneration
for it, has nothing to do with the transaction.
SOUTHWELL VS. BOWDITCH (1876) I.C.P.D. 374
If the bought notes and sold notes differ, the entry in the broker’s book would
constitute the contract.
CROPPER VS. COOK 1868 L.R. 3 C.P. 194
The broker, when authorized to sell or buy, has an implied authority to act on
the usages of the market and bind his principal unless such usages are
unreasonable or unlawful.
He has no authority to sue in his own name. He has no right of lien since he
has no possession of the goods.
A broker is not liable on the contracts he enters into as a broker even though
the name of his principal is not disclosed in the contract note. A customer of the
market may, however make him liable.
A broker has no implied power to delegate his authority.
BOORMAN V. BROWN 1842 3 Q.B.511; 61 R. R. 287
A broker authorized to sell goods has implied authority to sell on reasonable
credit.
CAMPBELL V. HASSLE (1866) I STARK 233
A broker has implied authority to receive payment of the price, if he does not
disclose his principal.
XENOS V. WICKHAM (1866) L.R. 2 H. L. 296
A broker has no implied authority to cancel once both the principal and the
buyer agree with the terms of the contract, Blackburn V. Scholes (1810) 2 Camp
343; 11 R.R. 723
A broker has no implied authority to vary the contracts made by him.
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LINK V. JAMESON (1886) 2 T. L. R 209

A broker has no implied authority to receive payment of the price of goods sold
on behalf of the disclosed principal.
FACTOR
He is entrusted with the possession of goods. He has authority to sell them in
his own name. He has discretionary authority to sell the goods. He has authority
to sell the goods on credit. He has further authority to receive the price and give a
good discharge to the buyer. He has a general lien on the goods of his principal for
a general balance of account between him and the principal.
BARING VS. COWIE 1818 2 B & ALL 137. 143. 148
The factor is said to have a “Special property” in the goods consigned to him.
HAMMONDS VS. BARCLAY (1902) 2 EAST 227
A factor’s lien extends to all his lawful claims against principal as a factor,
whether for advances, or remuneration, or for the losses or liabilities incurred in
the course of his employment in respect of which he is entitled to be indemnified.
He has authority to raise money on the security of the goods.
ASTKEY INDUSTRIAL TRUST LTD VS. MILLER (1968) 2 ALL E. R. 386
Where a factor, is with the contract of the owner, in possession of the goods or
of the documents of title to the goods, any sale, pledge or other disposition of the
goods, made by him when acting in the ordinary course of business of a mercantile
agent is as valid as if were expressly authorized by the owner of goods.
DRINKWATER VS. GOODWIN (1775) COWP. 251
A factor has authority to receive payment of the price where he sells them in
his own name.
COMMISSION AGENT
He is an agent employed to buy or sell goods or transact business for a
remuneration called the commission. Sometimes he acts as agent for a foreign
principal and earns his commission for his labour. He buys on behalf of his
employer in his own name and receives a commission for his trouble. When he
agrees a price for a foreign principal with the seller, he is personally liable for the
payment of the price, If the foreign principal fails to pay the seller and the
commission agent has paid the seller he can sue the foreign principal for
indemnity. A commission agent for a foreign principal has no implied authority to
pledge his foreign principal’s authority.
DEL CREDERE AGENT
He is an agent who guarantees the solvency of the buyer. He is usually
appointed for selling goods to persons residing in foreign countries about whom the
principal knows nothing. To put it in otherwords a del credere agent is an agent
who, in consideration of an exatra remuneration called the de credere commission,
guarantees to his principal that the persons with whom he enters into contract
shall perform their obligations. A del credere agent occupies the position of a
guarantor as well as of an agent.
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ESTATE AGENT
An estate agent is a person employed by the owner of the property to find a
purchaser for the property.
MULLENS VS. MILLER (1882) 22 CH.D. 194
An estate agent has implied authority to make representations or to given
warranties relating to the property.
SOLICITORS
Solicitors are legal practitioners. They are engaged by merchants to conduct
their suits in connection with mercantile disputes.
WRIGHT VS. CASTLE (1817) 3 MER 12
A solicitor has implied authority to accept process and appear for a client, but
he is not entitled to commence an action without express authority.
AUTHORITY OF AGENTS
He has authority to do all things necessary for carrying out the particular
purpose for which the contract of agency is created.
Sec.188 of the Indian Contract Act defines the extent of agents’ authority as
follows.
“An agent having an authority to do an act has authority to do every lawful
thing which is necessary in order to do such act.
An agent having an authority to carry on a business has authority to do every
lawful thing necessary for the purpose or usually gone in the course of conducting
such business.
The authority of an agent means his right to bind the principal. The act of an
agent is the act of the principal. The authority of an agent may be express or
implied.
An authority is said to be express when it is given by words spoken or written.
An authority is said to be implied when it is to be inferred from the
circumstances of the case and things spoken or written in the ordinary course of
dealing may be accounted as circumstances of the case.
When a person is held out as an agent for a particular purpose or business,
person dealing with him are entitled to presume that he has authority to do all
such acts as are necessary or incidental to such a business. Such authority is
called ostensible authority of an agent. It is ostensible authority that determines
the scope of an agent’s authority.
If the act of an agent is in excess of his actual authority, but it is within the
scope of his ostensible authority, the principal will be bound by the act of the agent.
FERGUSON VS. UMACHAND BAID (1905) 33 CAL. 343
Where A appointed B as manager of his silk factory and executed to him a
power of attorney specifying his powers and authority. The document gave no
authority to B to borrow. Held A was not liable for money borrowed by B as
manager and attorney of A.
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MURUGESA VS. PROVINCE OF MADRAS (1947) A.M. 74:231 I.C. 76

Where an agent has been directed to take possession of land on the expiry of a
lease, he has no authority to accept payment of rent.
18.5 OSTENSIBLE AUTHORITY
Sec. 237 of the Indian Contract Act, 1872 reads:
“When an agent has, without authority done acts or incurred obligation to
third person 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 agent’s authority.
The principal should have by his conduct or words induced a third person and
third person was induced to act on the basis of such conduct or words.
The words or conduct on the part of the principal and inducement or belief in
third person thereby create an estoppel against the principal Vis-à-vis the third
person, This from of estoppel is called ostensible authority or apparent authority.
TRICKETT VS. TOMLINSON (1863) 13 C. B. N. S. 663
Where a principal wrote to a third person saying he had authorized the agent
to see him, and if possible to come to an amicable arrangement. He gave the agent
instructions not to settle for less than a certain amount. Held that he was bound
by a settlement by the agent for less than that amount the third person having no
knowledge of the verbal instructions.
When an agent is employed for a particular business, persons dealing with
him can presume that he has authority to do all such acts as are necessary or
incidental to such a business. Such authority of an agent is ostensible authority.
The scope of an agent’s authority is determined by his ostensible authority.
An undisclosed principal who employs an agent to conduct business on his
behalf is liable for any act of the agent which is incidental to or usual in that
business, although such act is forbidden by the principal.
EDMUNDS VS. BUSHEL AND JONES (1865)( L.R.Q.B. 97
J employed B as a manager of his business. It was incidental to the business
that the bills should be drawn and accepted from time to time by the manager. J
forbade B to draw and accept bills. B accepted some bills in breach of this
prohibition and J was used upon them. Held J was liable.
EMERGENCY:
Sec. 189 of the Indian Contract Act.1872 reads
“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 person of ordinary prudence,
in his own case, under similar circumstances.
The following illustration is self explanatory. A consigns provisions to B at
Calcutta with directions to send them immediately to C at Cuttack, B may sell the
provision at Calcutta, if they will not bear the journey to Cuttack without spoiling.
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The agent’s authority in an emergency is known as the rule relating to

“authority of necessity” in English law.
If goods are perishable and perishing the agent may deviate from his
instructions as to the time or price at which they are to be sold.
AUSTRALIAN STEAM NAVIGATION CO-VS. MORSE (1872) L. R. 4 P. C. 222
The master of a ship may sell the goods of an absent owner in case of necessity
when he is unable to communicate with the owner and obtain his direction.
The agency of necessity is aptly illustrated with the right of a wife to supply the
needs of herself and her children by pledging her husband’s credit for necessaries.
Usually this right arose when her husband had deserted her and her children or
when he was guilty of some misconduct which justified her leaving the conjugal
home. If he failed to support her and she had no sufficient means of her own, she
could pledge his credit for necessaries suited to her status. A wife’s agency of
necessity was created, not by the parties but solely by the law.
GREAT NORTHERN RAILWAY VS. SWAFFIELD (1874) L. R. 9 EX. 132
A horse was sent by rail. The owner did not take delivery. The station master
had to incur certain expenses for feeding the horse. Held the station master
became an agent of necessity and the owner was liable for the expenses incurred by
the former.

DELEGATION OF AUTHORITY
The general rule is that an agent is not entitled to delegate his authority to
another without the consent of his principal

Sec. 190 of the Indian Contract Act says when agent cannot delegate.

“An agent cannot lawfully employ another to perform acts which he has
expressly or impliedly undertaken to perform personally, unless by the ordinary
custom of trade a sub-agent may, or, from the nature of the agency, sub-agent
must be employed.”

An agent who has authority from another to do an act must do it himself and
cannot delegate his authority to third party. The reason is in the contract of agency
confidence in the particular person employed is at the root of the contract,
Auctioneer, factors, directors of companies brokers and other agents in whom
confidence is reposed, have no power to delegate their authority.

18.6 DELEGATUS NON POTEST DELEGARE

This maxim means that a person to whom authority has been given cannot
delegate that authority to another. In otherwords an agent, being a person enjoying
the confidence of his principal cannot delegate his duties to another.
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To this rule the following are the exceptions.

1) Where the duties of the agent did not require any skill of confidence and can
be satisfactorily performed by any one.
2) Where the custom prevailing in the trade or trade usage, as it is called,
permits delecation.
3) Where the principal knows that the agent intends to delegate.
4) Where the nature of the business requires delegation.
5) In unforeseen emergencies.
6) Purely ministerial acts which do not involve any special care and skill.
18.6.1 Sub-Agent
Section 191 of the Indian Contract Act, 1873 defines sub-agent as follows:
“A sub-agent is a person employed by and acting under the control of, the
original agent in the business of agency”.
A sub-agent can be appointed in two ways.
1) A sub-agent properly appointed.
2) A sub-agent improperly appointed.
Section 192 of the Indian Contract Act, 1872 deals with properly appointed
sub-agent.
“Where a sub-agent is properly appointed, the principal is, so far as regards
third persons, represented by the sub-agent and is bound by and responsible for
acts, as if he were an agent originally appointed by the principal.
The agent is responsible to the principal for the acts of the sub-agent.
The sub-agent is responsible for his acts to the agent, but not to the principal
except in case of fraud or willful wrong”.
Please make a note that there is no privity of contract between the principal
and sub-agent. Consequently the sub-agent is purely responsible to the agent and
not to the principal.
CALICO PRINTERS ASSOCIATION LTD. VS. BARCLAY’S BANK (1931) 145 L. T. 51
A sub-agent is not accountable to the principal but he is liable to account to
the agent.
New Zealand and Australian Land Co. Vs. Watson (1881) 7 Q. B. R. 374;
The principal cannot proceed against the sub-agent except in case of fraud or
willful wrong.

The sub-agent cannot sue the principal for remuneration and the principal
cannot sue the sub-agent for any moneys due from him. Each of them can procced
only against the agent.
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A sub-agent properly appointed can represent the principal entering into

contracts with third parties which will be binding on the principal as if they were
entered into by the agent.

18.6.2 substituted agents

Section 194 of the Indian Contract Act 1872 defines substituted agent as
follows:
“Where an agent holding an express or implied authority to name another
person to act for the principal in the business of the agency has named another
person accordingly, such person is not a sub-agent, but an agent of the principal
for such part of the business of the agency as is entrusted to him”.
The person so named is called the substituted agent. The substituted agent,
being an agent of the principal is bound to act under the principal’s control.
Sec. 195 of Indian Contract Act, 1872 says:
“In selecting of such agent for his principal, an agent is bound to exercise the
same amount of discretion as a man of ordinary prudence would exercise in his
own case and if he does this he is not responsible to the principal for the acts or
negligence of the agent selected”.
The duty of the agent ends with appointing or naming a particular person for
being appointed as a substituted agent. Once the substituted agent is named or
appointed privity of contract will be established between him and the principal. It
is the cardinal duty of the agent to exercise his care, in selecting a proper
‘substituted agent’. In properly selecting a substituted agent prudent man decision
is to be exercised.
RAMACHANDRA V. CHINNUBHAI (1943) 45 BOM. L. R. 1075; 214. I.C. 42; 1944, A. B. 76
Although an agent is not responsible for the negligence of a substituted agent,
he may revoke the power of the substituted agent in the interest of his principal.
18.7 SUGGESTED QUESTIONS
1. What are the various modes in which the relationship of Agency is created?
2. Who is credere agent?
3. ‘Delegatus non potest delegare’ Discuss the applicability of the maxim in the
law of agency, state the exception to the rule.

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LESSON – 19

AGENCY (CONTD)
STRUCTURE
19.1 Agency – Essential of Ratification and its effect
19.2 Termination of Agency
19.3 When Agency Becomes Irrevocable
19.4 Suggested questions
9.1 AGENCY
ESSENTIALS OF RATIFICATION AND ITS EFFECT
The ratification may occur in one of two ways.

1) A without having any authority of B, acts as B ‘s agent and enters into a

contract with C. If B ratifies or approves the acts of A, the contract will be
binding on B.
2) A was B’s agent, At the time of making a contract with C, exceeded his
authority which B had giving to him. If B ratifies or approves the acts of A,
the contract will be binding on B.
In these cases the person who acts as agent has either no authority at all or in
regard to a contract, he exceeds his authority. The principal on whose behalf the
agent contracts, can subsequently validate the contract by signifying his approval.
The contract would then be as valid as if it were done is pursuance of prior
authority and this kind of agency is called “expost facto agency” or ratification”.
The maxim omnis ratihabitio retrotrahitur et manato priori aequiparatur
means ratification relates back to and is equivalent to prior authority.
There can be no true ratification when an agent accepts an offer subject to
“ratification”. So also in a case where the other contracting party has knowledge of
the limitation of the agent’s authority.
BHAWANI SANKER VS. GORDHANDAS I.S.R. (1944) MAD. I (P.C)
Ratification may be express or implied from conduct.
An express ratification would be complete when it is communicated.
In the case of implied ratification, the principal should enjoy the benefit of the
transaction. For instance if A, without authority buys goods for B and B sells them
to C on his own account. B’s conduct implies a ratification of the purchase made
by A.
The person who has the right to ratify is the person in whose name or on
whose behalf the contract was entered into. A person cannot ratify an act unless it
was purported to be done on his behalf.
Sec. 196 of the Indian Contract Act 1872 reads:
“Where acts are done by one person on behalf of another, but without his
knowledge or authority. He may elect to ratify or disown such acts. It he ratifies
them the same effect will follow as if they had been performed by his authority”.
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The following are the essential or the requisities of a valid ratification.

1. The principal must have contractual capacity both at the time of contract
and at the time of ratification, e.g. “A minor, on whose behalf a contract was
entered into, cannot ratify the same after attaining majority.
FIRTH VS. HAINES (1897) 2 Q.B 70 AT. P. 75, PER WRIGHT
At the time the act was done the agent must have had a competent principal.
Ashbury Railway Carriage and Iron Co. Vs. Riche (1875), I. R. 7 H. L. 653 (Ultra
Vires Contract)
If an agent enters into a contract on behalf of a principal who is at the time,
incapable of making it no ratification is possible.
2) The agent must purport to act as agent for a principal who is in
contemplation.
KEIGHLEY MAXSTED & CO. VS. DURANT (1901) A.C. 240
A was authorised by B to buy wheat at a certain price. Acting in excess of his
authority A purchased wheat from C at a higher price in his own name. He did not
profess to buy on behalf of B subsequently B ratified the act of A but later refused
to take delivery of the wheat. C brought an action against E. Held, the contract
could not be ratified because A did not purport to act as an agent for B.
3) The principal must be in existence at the time of the contract Kelner Vs.
Baxter (1866) L. R. C.P.174
“Ratification can only be by a person ascertained at the time of the done and
by a person in existence either actually or in contemplation of law” Contracts
entered into by promoters of a company on its behalf cannot be ratified by the
company after it comes into existence.
4) Sec. 198 of the Indian Contract Act, 1872 says, “No valid ratification can be
made by a person whose knowledge of the facts of the case is materially
defective”.
In other words ratification must be made by a person possessing full
information of all material facts and with the intention of making himself liable as
principal.
5) Ratification cannot be made with regard to void or illegal acts. The act to be
ratified must be lawful. Some times voidable acts can also be ratified.
6) Ratification can be of the acts which the principal had power to do .e.g A
company cannot ratify the acts of the directors which are ultra vires the
power of the company.
7) Sec. 199 of the Indian Contract Act, 1872 reads.
“A person ratifying any unauthorised act done on his behalf ratifies the whole
of the transaction of which such formed a part”.
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A man cannot at his own choice ratify part of a transaction and repudiate the
rest.
8) Sec. 200 of the Indian Contract Act, 1872 says
“An act done by one person on behalf of another without such other person’s
authority, which if done with authority, would have the effect of subjecting a third
person to damage, or of terminating any right or interest of a third person cannot,
by ratification, be made to have such effect”.
To put it in a nutshell ratification should not put a third party to damages.
The following two illustration are self explanatory
a) A not being authorised thereto by B’ demands on behalf of B that the delivery
of a chattel, be ratified by B, so to make C liable for damages for his refusal
to deliver.
b) A hold a lease from B. terminable on three months notice C an unauthorised
person, gives notice of termination to A. The notice cannot be ratified by B,
so as to be binding on A.
9) Ratification must be done within a reasonable time.
10) Ratification must be communicated.
11) Ratification relates back to the date of the act of the agent.
EFFECT OF RATIFICATION
The effect of ratification is to under the acts done by one person (agent) on
behalf of another [principal), without his knowledge or authority as binding on the
other (principal) as if they had been performed by his authority.
Ratification is tantamount to prior authority. It relates back to the date when
the act was done by the agent. Ratification has got retrospective effect.

V) EFFECT OF NOTICE TO AGENT – NECESSARY CONDITIONS TO BIND PRINCIPAL

Sec.229 of the Indian Contract Act, 1872 deals with the consequences of
notice given to agent.

“Any notice given to or information obtained by the agent, provided it be given

or obtained in the course of the business transacted by him for the principal, shall,
as between the principal and third parties, have the same legal consquences as if it
had been given to or obtained by the principal.

It is generally said that “notice to the agent is notice to the principal. Further
it is also stated that knowledge acquired by agent while acting within the scope of
his agency is deemed to be the knowledge of principal.

BAWDEN VS. LONDON, ETC INSURANCE CO. (1892) 2 Q.B. 534

The principal is bound by the notice given to or information obtained by the
agent in the course of the business of agency.
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RAMPAL SINGH VS.BALBHADDAR SINGH (1902) 25 ALL. 117 L R. 29 I. A. 203

It is not a mere question of constructive notice or inference of art; but a rule of
law which imputes the knowledge of the agent to the principal or in otherwords the
agency extends to receiving notice on behalf of his principal of whatever is material
to be stated in the course of the proceedings.
VI) PRINCIPAL & THIRD PARTIES – THE DOCTRINE OF UNDISCLOSED PRINCIPAL &
CONCEALED PRINCIPAL.
When a principal endows an agent with actual authority to contract on his
behalf, he is bound, as regards third parties, by all acts of the agent; which are
done within the limits of that authority. This rule is stated as qui facit per allium
facit per se.
In other words when a principal given express authority to an agent to enter
into contract on his behalf, the principal will be bound by all acts of the agent, done
within the authority.
Sec. 226 of Indian Contract Act, 1872 reads:
Contracts entered into through an agent, and obligations arising from acts
done by the agent may be enforced in the same manner, and will have the same
legal consequences as if the contracts had been entered into and the acts done by
the principal in person”.
The principal is vicariously bound by all contracts and liable for all obligations
arising from the acts of the agent, as if he has incurred them personally.
Where a contract is entered into by a principal through his agent or an act is
done by a principal through his agent, the principal is bound by the same and they
can be enforced by or against the principal.
The contract or act of agent is one which, as between the principal and third
person, is binding on the principal.
HAMBRO VS. BARNARD (1904) 2 K. B. 10 & FAXAL ILAHI VS. EAST INDIA RAILWAY
CO. (1921) 43 ALL. 623.
The principal is bound though the contract may be entered into or act done
fraudulently in furtherance of the agent’s own interests and contrary to the
interests of the principal, provided the person dealing with the agent acts in goods
faith.
With regard to contracts and acts which are not actually authorised the
principal may be bound by them on the principal of estoppel, if they are within the
scope of the agent’s ostensible authority; but in no case is he bound by any
unauthorised act or transaction with respect to persons having notice that the
actual authority is being exceeded.
When the agent exceeds the authority, granted to him, the principal may ratify
such acts. But where they are not ratified and where a part of the act as is within
the authority, so much of the act as is within the authority will be binding upon the
principal.
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The following illustration is self explanatory.

A, being owner of a ship and cargo authorises B to procure an insurance for
Rs.4,600/- on the ship. B procures a policy for Rs.4000/- on the ship and another
for the like sum on the cargo. A is bound to pay the premium for the policy on the
ship but not the premium for the policy on the cargo.
Where such separation is not possible, the entire transaction will not be
binding upon the principal.
THE DOCTRINE OF UNDISCLOSED PRINCIPAL AND CONCEALED PRINCIPAL
Where an agent enters into a contract on behalf of the principal but without
disclosing his name, the third parties can, on discovering his name, proceed
against him for the contract entered into by the agent.
The agent cannot be made personally liable when he has not disclosed his
principal.
Sec. 233 of Indian Contract Act 1872 says.
“In cases where the agent is personally liable a person dealing with him may
hold either himself or his principal or both of them liable”.
According to English Law the third party cannot proceed against both the
principal as well as agent. He can choose any one of them.
The third party cannot sue the principal or the agent, where the third party
induces either of them to believe that he would not be made liable and the other
alone would be made liable.
If an agent makes a contract with a person to whom the fact of agency is not
known, the principal may require the performance of the contract.
The third party contracting with the agent has as against the principal, the
same rights as he would have had as against the agent, if the agent had been the
principal.
If the principal discloses himself before the contract is completed the other
contracting party will have the option to refuse to fulfil the contract. For this he
should show that; if he had known that the agent was not a principal, he would not
have entered into the contract.
If the principal requires the performance of the contract, he can obtain it only
subject to the rights and obligations subsisting between the agent and the other
party to the contract.
In cases where the agent is personally liable, a person dealing with him may
hold either himself or his principal or both of them liable.
If the principal allows a third person innocently to treat with the agent as
principal he cannot afterwards turn round and sue him in his own name.
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An undisclosed principal suing on the contract made by the agent must take
the contract subject to all equities; that is the third party may sue against the
principal any defence that would have availed him against the agent.

Where a contract is made by an agent for an undisclosed principal the

principal may enforce performance of it subject to this qualification, that the person
who deal with the agent shall be put in the same position as if he had been dealing
with the real principal and consequently he is to have the same right of set-off
which he would have had against the agent.

MONTAGUE VS. FORWOOD (1893) 2 V. B. 350

If a principal allowed his agent to appear in the character of a principal he
must take the consequences.

The ground of the rule is that the agent has been allowed by his undisclosed
principal to hold out himself as the principal and the third party has dealt with him
as such.

9.2 TERMINATION OF AGENCY AND WHEN IT BECOMES IRREVOCABLE

The authority of an agent comes to an end in the following cases.
1. Where the agency is for a fixed period on the expiration of that period.
2. By the principal revoking the authority.
3. By the agent renouncing his authority.
4. By the business of the agency being completed.
5. By the principal or agent dying or becoming of unsound mind.
6. By the business of the agency becoming impossible of being carried out
either on account of destruction of subject matter or by its being rendered
unlawful.
7. By the principal being adjudicated as insolvent under the provisions of
Insolvency Act.
8. By frustration of the agency or its objects such as disability misadventure,
literal impossibility.
The above categories can be broadly divided into two (a) by act of the parties
and (b) by operation of law.
The insolvency, frustration death, insanity, expiry of time performance of the
contract, destruction of subject matter, will come under the head “by operation of
law”.

Revocation by the principal and renunciation by the agent will be grouped

under the head “by act of the parties”.
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I LALLEE VS. DADABHAI (1916) 23 CAL L. J. 190. 202

1. Where an agent has been appointed for a fixed term, the expiry of the term
puts an end to the agency, whether the purpose of the agency has been
accomplished or not; consequently where an agency for sale has expired by
express limitation; a subsequent execution thereof is invalid unless the term
has been extended.
2. An agency may be terminated by the principal at any time by giving a notice
to the agent. If the agent is appointed to do a particular act; the authority
may be revoked at any time before the act is actually done.
WARWICK VS. SLADE (1811) 3 CAMP 127: 13 R. R. 772
Authority given to a policy broker to effect a policy at any time before the policy
is executed so as to be legally binding.

If the act is partly done, the authority can only be terminated subject to any
claim which the agent may have for breach of contract.

In the case of continues agency; notice of its termination should be given to

agent as well as to third parties.

READ VS. ANDERSON (1884) 13 V. B. DIV. 779, 783

If a principal employs an agent to do something which by law involves the
agent in a legal liability; the principal cannot draw back and leave the agent to bear
the liability, at his own expense.
VISHNUMUCHARYA VS. RAMACHANDRA (1881) 5 BOM. 253, 256
The principal is bound to make compensation to the agent whenever there is
an express or implied contract that the agency shall be continued for any period of
time. This would probably always be the case when valuable consideration had
been given to the agent.
An agency may also be terminated by an express renunciation on the part of
the agent after giving a reasonable notice to the principal. Where there is an
express or implied contract that the agency should be continued for any period of
time the agent must make compensation to sufficient cause. Reasonable notice
must be given of such renunciation otherwise compensation has to be paid to the
principal by the agent. Renunciation may be express or implied.
When the agency is for a particular purpose the agency will be put an end to
when that object is accomplished or completed.
VENKATACHALAM VS. NARAYANAN (1916) 39 MAD 376, 378, 379
The agency terminates when the sale is completed and that it does not
continue until payment of the price.
The death or insanity of the principal or agent terminates agency. When the
agency is terminated by the death or insanity of the principal, the agent is bound to
take all reasonable steps for protecting and preserving the interest entrusted to
him, on behalf of the representatives.
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MADHUSUDAN VS.RAKHAL CHANDRA (1916) 43 CAL 248; 254. 255

There is nothing in Sec. 209 of Indian Contract Act, 1872 to indicate that the
agency continues on the old terms.

6. If the subject matter of the agency is destroyed, the agency comes to an end.
For example, if an agent is authorised to effect an insurance on a particular
house, the agency is terminated if, before the insurance is effected, it is
destroyed by fire.
Agency is terminated by law by reason of the occurrence of some event
rendering the continuance of relationship unlawful.

7. The insolvency of the principal puts an end to agency.

8. Frustration of agency may arise when the principal becomes an alien enemy.
If war breaks out between the two countries the contract of agency is
terminated. Frustration may also occur due to a supervening event making
the performance of agency impossible.
19.3 WHEN AGENCY BECOMES IRREVOCABLE
Agency cannot be revoked or terminated by the principal in the following
cases.
1. When the agency is one coupled with interest.
When the authority has been partly excerised, it cannot be revoked with regard
to acts and obligations arising from acts already in the agency.
2. When there is an express contract to that effect.
Agency is said to be coupled with interest when authority is given for the
purpose of securing some benefit to the agent.
The following are the examples of agency coupled with interest.
1. Where the principal authorized the agent to sell goods at the most profitable
prices and realize the debt due to him from the principal.
2. Where the agent is authorised to collect rents from the estate of the principal
with which he has to discharge debts due to him from the principal.
3. Where A sells the good will and book debts of his business to B and appoints
B as his (A’s) agent to collect the debts.
Sec. 202 of Indian Contract Act, 1872 reads as follows.
“Where the agent has himself an interest in the property which form the
subject matter of the agency, the agency cannot, in the absence of an express
contract, be terminated to the prejudice of such interest.
1. SMART VS. SANDERS (1848) 5. C. B. 895 AT P.917
Where an agreement has been entered into on a sufficient consideration,
whereby an authority is given for the purpose of securing some benefit to the donee
of the authority, such an authority is irrevocable. The authority must be given with
the object of protecting or securing must be given with the object of protecting or
securing an Interest of the agent and it is not sufficient that it does so incidentally.
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Where a principal and agent agree for valuable consideration or under seal
that the agent is to have authority to collect rent in order to secure a loan the
principal thereby confers an interest on the agent and the agency cannot be
revoked.
Where the agent has, in pursuance of his authority contracted a personal
liability or become liable to personal loss, the agency cannot be revoked by the
principal without his consent, for this would be to defeat rights already established.

Sec. 204 of Indian Contract Act, 1872 says

“The principal cannot revoke the authority given to his agent after the
authority has been partly exercised so far as regards such acts and obligations as
arise from acts already done in the agency”.

READ VS. ANDERSON (1884), 13 Q. B. D. 779 AT P 783

The liability or loss must have been in the contemplation of the parties at the
time that the authority was conferred.
SEYMOUR VS. BRIDGE (1885) 14 Q. B. D. 460
The principal could not revoke his authority so as to cause the agent actual
loss.
1. Where there is an express contract not to revoke the authority before the
expiry of a particular period or until the purpose of agency is over, it is termed as
irrevocable agency. Inspite of this express agreement if the principal revokes the
authority of the agent, principal has to pay damages to the agent for breach of the
express agreement. Further the principal has to indemnify the agent against the
liability already incurred.
The authority of an agent comes to an end the moment the agent knows that
his authority has been terminated.
As against third party the authority of an agent comes to an end when the
third party comes to know of the termination of the authority of the agent.
On the termination of the authority of an agent, the authority of all sub-agents
is also terminated.
19.4 SUGGESTED QUESTIONS
1. How is agency terminated by acts of parties and by operation of law?
2. What is agency coupled with interest and when can such agency be terminated
by the principal?

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LESSON - 20

PARTNERSHIP
STRUCTURE
20.1 Partnership
20.1.1 Definition of Partnership
20.2 Essentials of Partnership
20.3 Distinction between partnership and co-ownership
20.3.1 Partnership – Joint Hindu family
20.3.2 Partnership – Incorporated Company
20.3.3 Partnership – Contract of service
20.4 Rights of Legal Representative and Surviving Partners
20.5 Suggested questions
20.1 PARTNERSHIP
20.1.1 Definition of Partnership
Prior to the enactment of the Indian Partnership Act, 1932, which came into
force on 1st October, 1932 the law of partnership was embodied in chapter XI of the
Indian Contract Act, 1872. The Indian Partnership Act, 1932 is substantially based
on the English Partnership Act, 1890, with certain alterations made to suit the
peculiar conditions prevailing in India. A contract of partnership is a special
contract.
The English Partnership Act, 1890 defines partnership as “the relations which
subsists between persons carrying on business in common with a view of profit”.
Sir F. Pollock defines partnership as “the relation which subsists between
person who have agreed to share the profits of a business carried on by all, or any
of them on behalf of all of them”.
Sec 239 of the Indian Contract Act, 1872 (repealed) defined partnership as “the
relation which subsists between persons who have agreed to combine their
property, labour or skill in some business and to share the profits thereof between
them”.
Sec.4 of the Indian Partnership Act, 1932 defines partnership as “Partnership
is the relation between persons who have agreed to share the profits of a business
carried on by all or any of them acting for all. Persons who have entered into
partnership with one another are called individually “partners” and collectively “a
firm” and the name under which their business is carried on is called the firm
name.
20.2 ESSENTIALS OF PARTNERSHIP
1) Partnership is the name of the abstract legal relationship between the
partners and not the collective name of all partners.
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2) There must be two or more partners. Please make a note that nowhere the
Partnership Act stipulates the maximum number of partners to be admitted
as partners. But Sec. 11 of the Companies Act, 1956 fixes the maximum
number of partners as ten in the case of firms carrying on the business of
banking and twenty in the case of other firms. Consequently a firm
consisting of more than the prescribed number of partners is illegal.
3) Partnership is the result of an agreement between the partners and does not
arise from status as in the case of members of a joint Hindu family.
4) The agreement between the partners must be mainly to combine property,
labour or skill. Inspite of the above ingredients, a person would be a partner
if he undertakes the liability of a partner even though he has not contributed
anything.
5) The agreement between the partners must be to carry on some business as
stated in Section 2 (b) of the Partnership Act, i.e. including every trade,
occupation and profession.
6) The business of partnership may be carried on by all the partners or any of
them acting for all of them. The law of partnership is a branch of the law of
principal and agent. Each partner is bound by the acts of the other partners
in the business of partnership. The idea of agency or representation of each
partner by all or some of the partners in the partnership business; is the
leading characteristic of partnership, which distinguishes it from other legal
relationship.
7) The agreement entered into by the partners must be to share the profits of a
business. Profits means net profit; The sharing of profit also contemplates
sharing of loss.
TEST OF PARTNERSHIP
Sec. 6 of the Partnership Act, 1932 deals with the mode of determining
existence of partnership as follows:
“In determining whether a group of persons is not a firm or whether a person
is not a partner in a firm regard shall be had to the real relation between the
parties, as shown by all relevant facts taken together.
Explanation 1: The sharing of profits or of gross returns arising from property
by persons having a join or common interest in that property does not itself make
such persons partners.
Explanation 2: The receipt by a person of share of the profits of a business, or
of a payment contingent upon the earning of profits or varying with the profits
earned by a business does not of itself make him a partner with the persons
carrying on the business; and in particular the receipt of such share or payment.
a) By a lender of money to person engaged or about to engage in any business.
b) By a servant or agent as remuneration.
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c) By the widow or child of a deceased partner, as annuity.

d) By a previous owner or part owner of the business as consideration for the
sale of the goodwill or share thereof.
Does not itself make the receiver a partner with the persons carrying on the
business.
If the agreement between group of person is to share the profits of a business
and the business is carried on by all or any of them acting for all, there is a
partnership.
To put it in a nutshell the necessary element of partnership is an agreement
among the partners to share profits.
MUNSHI ABDUL LATIF VS. GOPESHWAR A.I.R. (1933) CAL. 201
A contractor for loading and unloading railway wagons, appointed a servant to
manage, The agreement is that the servant was to receive 75% of profits and was to
bear all losses. Held the servant was the agent of the contractor and not his
partner.
According to Sec.6 of the Partnership Act, 1937 in determining whether a
person is or is not a partner in a firm regard shall be had to the real relation
between the parties as shown by all relevant fact taken together”.
To put it in a nutshell the following three elements must be presents to
constitute a partnership.
1. There must be an agreement, express or implied among all the present
concerned.
2. The agreement must be with a view to share profits of a business and
3. The business must be carried on by all or any of them acting for all.
20.3. DISTINCTION BETWEEN PARTNERSHIP AND CO-OWNERSHIP
PARTNERSHIP CO-OWNERSHIP
1. It arises from contract. 1. It may arise without any agreement. It may
arise by status e.g. several persons inheriting
the property of a deceased individual.
2. It involves the sharing of 2. It does not always involve the sharing of
profits and losses. profits and losses.
3. A partner is entitled to 3. A co-owner can claim division of the joint-
claim a share in the property in specie.
surplus assets of the
firms, but not share in
the properties of the firm
specie.
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4. One partner cannot 4. One co-owner can alienate his share to

assign his share to a strangers without the consent of the other
stranger without the co-owners.
consent of the other
partners.
5. Every partner is bound by 5. A co-owner is not bound by any liabilities
the acts of the other incurred by the other co-owner without his
partners in the business consent.
of the firm.
6. A partner, being an agent 6. A co-owner has no such lien.
of the other partners, has
a lien on the partnership
properties.
7. A partnership necessarily 7. A co-ownership need not necessarily be for
involves the working for gain.
gain
8. Business is necessary for 8. Co-ownership can exist without it.
the existence of
partnership.
9. Partnership involves 9. Co-ownership is not the agent of the other
community of interest. co-owners.
10. A partner is the agent of 10 A co-owner is not the agent of the other co-
co-partners. . owners.
20.3.1 Partnership – Joint Hindu Family
PARTNERSHIP JOINT HINDU FAMILY
1. It is the result of an 1. It is not the result of an agreement but the
agreement between the result of status.
members.
2. The death of a member 2. It is not dissolved by the death of any
dissolves the firm. male member.
3. A member of either sex can 3. It is only male members that can be
be a partner in a firm. members of a joint family firm.
4. A new member can be 4. It is not so. There will be consent and
admitted only with the automatic additions to the joint family by
consent of the other the birth of male children.
partners.
5. Every partners has a right to 5. The management of a joint family
pledge the credit of the firm business is generally by the Karta, the
or the partnership business. senior most male member of the family.
The Karta, is the only person to pledge the
credit of the family.
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6. Each partner is personally 6. It is the Karta (manager) who is personally

liable for the debts of the liable for the firm’s debts. Other members
firm. of the family are liable only to the extent of
their interest in the joint family firm
unless they joint with the Karta in
contracting the debt or ratify the same
subsequently.
7. Every partner can ask 7. The only right of a member of the joint
dissolution and accounts of family is to ask for partition of the existing
the firm. assets and not to demand an account
from the Karta for his past dealings.
8. On insolvency a partner 8. The insolvency of a copartner does not
ceases to be member of the prevent him from continuing to be a
firm. member of a Hindu family.
9. A minor has to be admitted 9. A minor is entitled to the benefits of joint
by the other partners to the family firm by his birth.
benefits of the partnership.
20.3.2 Partnership firm – incorporated company
PARTNERSHIP FIRM INCORPORATED COMPANY
1. A firm is not a legal entity, 1. A company is a corporate body and has
but consists of the got an artificial personality, apart from the
individual partners for the member or shareholders constituting it.
time being.
2. The liabilities of a firm can 2. In the case of a company with limited
be enforced against each liability, the liabilities of the company
partners personally. have to be realised from the assets of the
company and shareholder is not liable to
contribute more than the value of the
share taken by him.
3. A partner cannot assign his 3. A shareholder can assign his share to any
share to a stranger, without one he pleases.
the consent of the other
partners.
4. Death, retirement or 4. Death, retirement or insolvency of a
insolvency of a partner shareholder does not affect the existence
dissolves the firm. of a company.
20.3.3 Partnership - contract of service
PARTNERSHIP CONTRACT OF SERVICE
1. The relationship between 1. The relationship in contract of service is
partners is that of principal that of employer and employee.
and agent.
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2. One partner is an agent of 2. One employee is not the agent of another

another partner. employee. He can only represent his
employer and not another employee.
3. It involves the sharing of 3. It does not involve the sharing of profits or
profits and losses. losses. It is based on salary or wages.
4. A partners is entitled to 4. If all the employee could claim a bonus
claim a share in the surplus and not a share in the surplus assets of
assets of the firm. the firm.
5. Every partner is bound by 5. It is not so. No employee could make the
the acts of the partners in other responsible for his act.
the business of the firm.
6. Each partner is personally 6. It is not so. No employee is personally
liable for the debts of the liable for the debts of the employer.
firm
LEGAL NOTION - MERCANTILE NOTION
A firm is not a person in the legal notion whereas a firms is looked upon as a
person, apart from its individual members, in the mercantile notion.
A partner can be a debtor or a creditor only of the other partner according to
legal notion. The mercantile notion permits a partners to be a debtor or a creditor
of the firm.
On death, retirement or insolvency of a partner, the firm gets dissolved in the
legal notion. According to mercantile notion a firm continues to exist
notwithstanding the death, retirement or insolvency of a partner.
1. PARTNERSHIP AT WILL
Sec. 7 of the Partnership Act, 1932 defines partnership at will as follows.
“Where no provision is made by contract between the partners for the duration
of their partnership is called “partnership at will”.
The first exception is where there is a provision in the contract for the duration
of the partnership.
The second exception is where there is provision for the determination of the
partnership.
The duration of a partnership may be expressly provided for in the contract
where there is no express provision, the partnership will not be at will if the
duration can be implied.
KARUMUTHU THIAGARAJAN CHETTIAR VS. E.M. MUTHAPPA CHETTIAR A.I.R. (1961)
S.C. 1225
A term in the contract that either partner may withdraw from the partnership
by relinquishing his right of management by the other partner would not make the
partnership a partnership at will for the essence of a partnership at will is that it is
open to either partner to dissolve the partnership by giving notice.
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Sec. 43 of the Partnership Act, 1932 deals with dissolution by notice of

partnership at will.
1) “Where the partnership is at will the firm may be dissolved by any partner
giving notice in writing to all the other partners of his intention to dissolve
the firm.
2) The firm is dissolved as from the date mentioned in the notice as the date of
dissolution or, if no date is so mentioned as from the date of the
communication of the notice”.
2. PARTNERSHIP FOR A FIXED TERM
Where the partnership agreement stipulates a fixed period of time, it is called a
partnership for a fixed term. When the fixed period is over it comes to an end. It
cannot be dissolved at the will of one or more of the partners. On the expiry of the
fixed term, the partners may agree to carry on the business. In such
circumstances the rights and duties of the partners continue and the new
partnership becomes partnership at will.
3. PARTICULAR PARTNERSHIP
Sec. 8 of the Partnership Act, 1932 defines particular partnership as follows.
“A person may become a partner with another person in particular adventures
or undertakings”.
In cases of joint adventures or undertakings the position of the parties is
recognised by law as that of partners. All the requirement of a partnership must be
present. It comes to an end as soon as that adventure is completed.
IV MINOR AS A PARTNER – DIFFERENCE IN ENGLISH LAW
You have already studied in the general Principles of the Law of Contracts that
a minor has no capacity to enter into a contract and any contract with him is void.
To put it in nut shell a minor is incompetent to enter into a valid enforceable
contract. Consequently a minor cannot be a partner in a firm. But in the case of
agency a minor can be an agent though not a principal. Further you all know that
the principles of agency are made applicable in partnership. With the result a
minor can be admitted to the benefits of a partnership already in existence. The
admission of the minor for the benefit of the partnership shall be done only with the
consent of all the partners.
The rights and liabilities of a minor, who has been so admitted to the benefits
of a partnership are laid down under Section 30 of the Partnership Act, 1932 as
follows:
1. “A person who is a minor according to the law to which he is subject may not
be a partner in a firm but, with the consent of all the partners for the time
being” he may be admitted to the benefits of partnership.
2. Such a minor has a right to such share of the property and of the profits of
the firm as may be agreed upon he may have access to inspect any of the
accounts of the firm.
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3. Such minor’s share is liable for the acts of the firm, but the minor is not
personally liable for any such act.
4. Such minor may not sue the partners for an account or payment of his share
of the property or profits of the firm, save when severing his connection with
the firm and in such case the amount of his share shall be determined by a
valuation made as far a possible in accordance with the rules contained in
Section 48.
Provided that all the partners acting together or any partner entitled to
dissolve the firm upon notice to other partners may elect in such suit to
dissolve the firm, and thereupon the court shall proceed with the suit as one
for dissolution and for settling accounts between the partners, and the
amount of the share of the minor shall be determined along with the share of
the partners.
5. At any time within six months of his attaining majority or of his obtaining
knowledge that he had been admitted to the benefits of partnership,
whichever date is later, such person may give public notice that he has
elected to become or that he has elected not to become a partner in the firm
and such notice shall determine his position as regards the firm.
Provided that if he fails to give such notice, he shall become a partner in the
firm on the expiry of the said six months.
6. Where any person has been admitted as a minor to the benefits or
partnership in a firm, the burden of proving the fact that such person had no
knowledge of such admission untill a particular date after the expiry of six
months of his attaining majority shall lie on the person asserting that fact.
7. Where such person becomes a partner.
a) His rights and liabilities as a minor continue up to the date on which he
becomes a partner, but he also becomes personally liable to third parties for
all acts of the firm done since he was admitted to the benefits of partnership
and
b) His share in the property and profits of the firm shall be the share to which
he was entitled as a minor.
8. Where such person elects not to become a partner.
a) His right and liabilities shall continue to those of a minor under the section
upto the date on which he gives public notice.
b) His share shall not be liable for any acts of the firm done after the date of the
notice : and
c) He shall be entitle to sue the partners for his share of the property and
profits in accordance with subsection 4
9. Nothing in sub-section (7) and (8) shall affect the provisions of Section 28
A New partnership cannot be formed with minor as a partner.
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OFFICIAL ASSIGNEE OF MADRAS VS. PALANIAPPA CHETTY (1918) 41 MAD. 824; 49

I.C. 220
A member of the family on attaining majority does not necessarily become
personally liable for debts contracted in the joint family business during his
minority.
Minor’s share is liable for the acts of the firm, but the minor is not personally
liable for any such acts. To put it in nut shell, the liability of a minor is a limited
liability i.e.; limited to his share in the property and profits of the firm.
ENGLISH LAW
An infant may be a partner in a firm. He cannot be sued for the debts of firm
contracted during his minority. If he wishes to avoid liability, he must repudiate
the contract within a reasonable time of attaining majority.
If he elects to remain as a partner, he will not be personally liable for
partnership debts contracted while he was an infant.
GOODE VS. HARRISON 1921 5B & ALD. 147: 24 R. R. 307.
The minor will not in any event be liable for partnership debts contracted while
he was a minor.
20.4 RIGHT OF LEGAL REPRESENTATIVE AND SURVIVING PARTNERS
Where a partner retires or dies and the continuing or surviving partners carry
on the business of the firm with the property of the firm without any final
settlement of accounts as between them and the outgoing partner or his estate
then, in the absence of a contract to the contrary the outgoing partner or his estate
is entitled at the option of himself or his representatives to such share of the profits
made since he ceased to be a partner as may be attributable to the use of his share
of the property of the firm or to interest at the rate of 6% per annum on the amount
of his share in the property of the firm.
In some cases by contract between the partners an option is given to surviving
or continuing partners to purchase the interest of a deceased or outgoing partner. If
that option is duly exercised the above mentioned two rights i.e.
a) A share of the profits made since he ceased to be a partner as is attributed to
the use of his share of the firm.
b) Interest at the rate of 60% per annum on the amount of his share in the
property of the firm are not available to the deceased partner’s estate or the
outgoing partners of his estate.
But if the terms of the contract are not properly complied with, the rights will
be enforced.
VI) MUTUAL RIGHT AND DUTIES OF PARTNERS
The mutual rights and liabilities of a partner may be determined by agreement,
express or implied between the partners and such an agreement may be varied by
the express or implied consent of all the partners.
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In the absence of specific agreement or where the agreement is silent on a

certain point, the relations of partners to one another as regards to their rights and
duties are governed by Sections 9 to 17 of the Indian Partnership Act, 1932.
Every partner has the following rights:
1. Every partner is a joint owner of the firm which includes all property and
rights and interest in property originally brought into the stock of the firm or
acquired by purchases or otherwise, by or for the firm or for the purpose and
in the course of the business of the firm and includes also the goodwill of the
business.
2. Every partner is entitled to share equally in the profits earned. So also every
partner shall contribute equally to the losses sustained by the firm.
3. Every partner has a right to take part in the conduct of business. This is
based on the general principle that partnership business is the common
business of all the partners.
KRISHNAMACHARIAR VS. SANKARA 1921 (A.P.C. 91)
If a partner neglects or refuses to perform his duties and the burden of
performing such duties for the conduct of the business false on the other partners,
have a right to compensation.
4. In an emergency every partner can do all such acts for the purpose of
protecting the firm from loss as are reasonably necessary. Such acts of the
partner bind the firm, In consequence of such act; if the partner incurs any
liability, he has a right to be indemnified.
5. Every partner has a right to have access to and inspect and copy any of the
books of the firm. The partner may himself exercise this right or may
exercise it through his duly authorised agent with the consent of all the other
partners. A minor partner may have access to and inspect any of the
accounts of the firm, but not books.
6. Every partner shall have the right to express his opinion on any matter, but
in case of difference of opinion regarding ordinary matters of the business he
is bound by the view of the majority. But no change may be made in the
nature of the business without the consent of all the partners.
7. Where a partner is entitled to claim interest on the capital subscribed by
him, such interest shall be payable only out of profits.
8. Every partner is entitled to interest at 6% per annum on any amount
advanced by him beyond the amount of capital which he was agreed to
subscribe.
9. Every partner is entitled to be indemnified by the firm in respect of liabilities
incurred by him in the ordinary course of the business and in emergency.
10. Every partner is entitle to remain in the firm, unless a power to expel is
conferred upon the partners and it has been exercised bonafide by a majority
of the partners.
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11. A new partner cannot be introduced into the firm without consent of all the
existing partners.
12. A partner does not become liable for any of the liabilities of the firm
contracted before he joined the firm.
13. A partner may retire.
a) With the consent of all other partners.
b) In accordance with an express agreement by the partners.
c) Where the partnership is at will, by giving notice in writing to all the other
partners of his intention to retire.
14. An outgoing partner may carry on a business competing with that of the firm
and he may advertise such business but, subject to contract to the contrary.
He may not
a) Use the firm name
b) Represent himself as carrying on the business of the firm.
c) Solicit the custom of person who were dealing with the firm before he ceased
to be partner.
15 A retired partner or the representative a deceased partner is entitled, in case
the share of such partner in the property of the firm has not been
ascertained and delivered by the other partners, to claim profits that may be
attributable to the use of such share or interest at 6% on that share, from
the date on which it ought to have been paid up, to the date of payment,
whichever is higher. This rule however does not apply if the other partners
are entitled to purchase the share of a deceased or outgoing partner
according to an agreement between them and that option was duly exercised
complying with its terms in all material respects.
16. Subject to contract between the partners, the property of the firm shall be
held and used by partners exclusively for the purpose of the business.
17. Every partner for the purposes of the business of the firm is the agent of the
firm.
Now let us consider the duties of partners
1. It is the foremost duty of every partner to attend diligently to his duties in the
conduct of the business.
2. A partner is not entitled to receive any remuneration. However a working
partner is entitled to some remuneration.
3. It is the utmost duty of every partner to carry on the business of the firm to
the greatest common advantage.
4. Yet another duty of every partner is to observe the utmost good faith in all
dealings between him and other partners since partnership in a contract of
uberrimaefidei. The partners must act with utmost good faith as the very
basis of partnership is mutual trust and confidence.
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5. A partner should render true accounts of all business transacted for the firm.
6. Every partner should furnish full information of all things affecting the firm
to any partner or his legal representative.
7. If a partner derives any profits for himself from any transaction of the firm
the use of the property or business connection of the firm on the firm name,
he shall account for that profit and pay it to the firm.
8. A partner shall not carry on any business other than that of the firm while he
is a partner.
9. If a partner carries on any business of the same nature as and competing
with that of the firm, he shall account for and pay to the firm all profits made
by him in that business.
10. After a firm is dissolved, a partner may restrain every other partner from
carrying on a similar business in the firm name or from using any property of
the firm for his benefit, until the affairs are completely wound up.
11. A partner cannot assign his rights and interest in the firm to a third party
without the consent of other partners. He can however assign his share of
the profit and his share in the assets of the firm.
12. The partners are bound to contribute equally to the losses sustained by the
firm. Please make a note that an agreement to share profits implies an
agreements to share losses also.
13. Every partner is bound to act within the scope of his actual or implied
authority. If he exceeds his authority, he must compensable the firm for any
loss.
14. Every partner shall indemnify the firm for any loss caused to it by his wilful
neglect in the conduct of the business of the firm.
15. Every partner shall indemnify the firm for any loss caused to it by his fraud
in the conduct of the business of the firm.

16. It is the duty of every partner of the firm to hold and use the property of the
firm exclusively for the purposes of the business of the firm.
20.5 SUGGESTED QUESTIONS
1. Define a partnership. State the essentials of partnership.
2. Distinguish between 1) Partnership and a Company 2) Partnership and joint
family business.
3. The law of partnership arises from contract and not from status” Explain.


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LESSON – 21

PARTNERSHIP (CONTD)
STRUCTURE
21.1 Authority of Partners-Implied and Emergency
21.2 Liability of the Partner
21.3 Rights of Buyer and Seller of Goodwill
21.4 Rights and Duties of vendor and purchaser of Goodwill
21.5 Retirement of partners
21.6 Attachment of Partnership Property
21.7 Effect of Non-Registration of Firm
21.8 Authority of partners
21.9 Suggested questions
21.1 Authority of Partners-Implied and Emergency
If the act of a partner is of a nature which is common in the type of business
carried on by the firm and is done by him in the usual way of carrying on by the
particular partnership business it will bind the other members of the partnership
as well. This authority to bind the firm is known as implied authority.
In the absence of any usage or custom of trade to the contrary, the implied
authority of a partner does not empower him to:
a) Submit a dispute relating to the business of the firm to arbitration.
b) Open a banking account on behalf of the firm in his own name.
c) Compromise or relinquish any claim or portion of a claim by the firm.
d) Withdraw a suit or proceeding against the firm
e) Admit any liability in a suit or proceeding against the firm.
f) Acquire immovable property on behalf of the firm.
g) Transfer immovable property belonging to the firm.
h) Enter into partnership on behalf of the firm.
In order to bind a firm, an act done by a partner must be done in the name of
the firm or in any other manner expressing or implying an intention to bind the
firm.
The partners may, by contract extend or restrict the implied authority of any
partners. If the third party knows of the restriction or if he does not believe that
person to be a partner the act may not bind the firm.
A partner has the following implied authority to do.
1. To enter into all contracts usual in the ordinary course of business.
2. To engage servants for the partnership business.
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3. To draw, accept, indorse bills and other negotiable instruments in the name of
the firm.
4. To recover debt due to the firm.
5. To settle accounts with the person dealing with the firm
6. To make payment of a debt or part payment of the debt to any creditor of the
firm.
7. To bring and defend suits in the name of the firm.
A partner has authority, in an emergency, to do certain 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 circumstance and such acts bind the firm.
Please make a note that English Law does not enable a partner to bind the
firm by acts done in an emergency for saving the business. However, he will be
entitled to indemnify from his co-partners for the acts done by him to protect or
preserve the business or partnership property.
21.2 LIABILITY OF THE PARTNER
Every partner is liable, jointly with all the other partners and also severally, for
all acts of the firm done while be is a partner.
An act of a firm is defined under section 2 (a) of the Partnership Act an “any
act or omission by all the partners or by any partner or agent of the firm; which
gives rise to a right enforceable by or against the firm.
The liability of a partner for acts of the firm is joint and several is consistent
with Section 43 of the Indian Contract Act, 1872 to the effect that in the absence of
an express agreement to the contrary all joint promises create joint and several
obligations.
In England the contractual liability of a partner is joint, during his life time.
After his death his estate is also severally liable for the debts of the firm contracted
while he was a partner and remaining unsatisfied.
The nature of the liability of the partner is joint and several. Consequently the
creditor of a firm can sue any one of the partners or all of them. Further a partner
is liable only for those debts which were incurred during the time he was a partner.
The firm is liable for the wrongful acts of a partners in the ordinary course of
the business of the firm Section 26 of the Partnership Act reads.
“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”
In England, every partner is jointly as well as severally liable for:
1. Any wrong committed by a partner in the ordinary course of the firm or with
the authority of the co-partners, which cause loss or injury to third persons;
and
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2. Misapplication of money or property by a partner received by him while within

the scope of his authority, while they are in the custody of his authority, of the
firm in the course of its business.
Held both the partners were liable.
Where a partner receives money or property from a third party and misapplies
it, the firm is liable to make good the loss. This principle is stated under Section 27
of the Partnership Act, 1932.
Where-
a) A partner acting within his apparent authority receives or property from a third
party and misapplies it; or
b) 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”.
As stated above there are two vital points to fix the liability of the firm. They
are (1) The partner must be acting within his apparent authority. (2) The firm must
receive the money in the course of its business.
This can be explained with the following illustrations:
A. B and C are partners in a Bank, C taking no active part in the business, D a
customer of the bank, deposits securities with the firm for safe custody and these
securities are sold by A and B without D’s authority. The value of the securities is
a partnership debt for which the firm is liable whether he knew of the sales or not.
IX) PRINCIPLES OF AGENCY IN PARTNERSHIP
Every partner is the agent of the firm for the purpose of the business of the
firm.
Lord Wensleydale has explictly explained the principles of agency in
partnership in Cox Vs. Hickman (1960) 8 H.L.C. 268, 312 as follows.
“So if two or more agree that they should carry on a trade and share the profits
of it, each is a principal and each is an agent for the other and each is bound by the
other’s contract in carrying on the trade, as much as a single principal would be by
the act of an agent who was to give the whole of the profits to his employer”.
Please make a note that though the partner is an agent of the other partners
the firm is not an agent of the individual partners.
POWELL VS. BRODHURST 1901 2 CH 160
“Payment to one partner is in general a good payment to the firm, but payment
to the firm of a private debt due to one partner is not a discharge unless it is shown
that the firm had in fact authority to receive it”.
The law of partnership is a branch of the law of agency. The business of the
partnership can be carried on by all the partners together or any of them acting for
all of them. Each partner is bound by the acts of the other partners in the business
of partnership. This is based on the principle of agency. It is the agency which is
the foundation of the liability of the partner. Each partner is the general and
accredited agent of the partnership.
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Each partner is both an agent and principal for himself and others. He is
bound by the acts of other partners so also he can bind the other partners in the
business of the partnership.
X) PARTNERSHIP PROPERTY TESTS
All property and rights and interest in property originally brought into the
stock of the firm or acquired by purchase or otherwise became partnership property
subject to contract between the partners. This property includes the goodwill of the
business.
Section 14 of the Partnership Act, 1932 provides that the property of the firm,
in the absence of a contract to the contrary includes.
1. All property originally brought into the common stock of the firm.
2. All rights and interest in the property originally brought into the stock of the
firm.
3. All property acquired, by purchase or otherwise, by or for the firm.
4. All rights and interests in any property, an acquired.
5. All property acquired for the purpose and in the course of the firm.
6. All rights and interest in any property to acquired.
7. Goodwill of the business of the firm.
Further property and rights and interests in property acquired with money
belonging to the firm are deemed to have been acquired by the firm.
To put it in a nut shell, whatever at the commencement of a partnership is
thrown into the common stock and what ever has, from time to time during the
existence of the partnership, been added there to or obtained by means there of
whether directly purchased or in the course of the business, property of the firm.
The test to determine whether any property is the property of the firm is that
property is held and used by the partners exclusively of for the purpose of the
business. This has been stated under Section 1 the Partnership Act, 1932 as
follows:
Subject to contract between the partners, the property of the firm shall be held
and used by the partners exclusive for the purpose of the business”.
DAVIS VS. DAVIS (1894) 1 CH 393
Property belong to the partners or to one of them does not become property of
the firm merely by being used for the purpose of the business. It will become so
only if the partners show an intention to make it so.
ADDANICI NARAYANAPPA VS. BHASKARA KRISHNAPPA A.I.R. (1966) S.C. 1300
“The whole concept of partnership is to embark upon a joint venture and for
that purpose to bring in as capital money or even property including immovable
property, Once that is done, whatever so bought in would cease to be the exclusive
property of the person who brought it in. It would be the trading asset of the
partnership is which all the partners would have interest in proportion to their
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share in the joint venture of the business of partnership. The person who brought
it in would, therefore, not be able to claim or exercise any exclusive right over any
property which he has brought in much less in any other partnership property. He
would not be able to exercise his right even to the extent of his share in the
business of the partnership. It is true that even during the subsistence a partner
may assign his share to another. In that case what the assignee would get would
be only that which is permitted by Section 29 (1) of the Partnership Act, 1932 that
is to say the right to receive the share of profits of the assignor and accept the
account of the profits agreed to by the partners”.
XI) SETTLEMENT OF ACCOUNTS – GOODWILL AND ITS DISPOSAL DISTRIBUTION
OF ASSETS
Generally the method of settling the accounts between partners after
dissolution of a firm is determined by the partnership deed. In the absence of any
specific agreement or deed between them as to the mode of settlement of accounts
after the dissolution of the firm the rules laid down in Sections, 48, 49 and 55 of
the Partnership Act, 1932 would apply.
Section 48 of the Partnership Act 1932 deals with the mode of settlement of
accounts between partners. It reads as follows.
“In settling the accounts of a firm after dissolution, the following rules shall
subject to agreements by the partners be observed
a) Losses; including deficiencies of capital, shall be paid first out of profits, next
out of capital and lastly, if necessary by the partners individually in the
proportions in which they were entitled to share profits.
b) The assets of the firm, including any sums contributed by the partners to
make up deficiencies of capital shall be applied in the following manner and
other:
i) In paying the debts of the firm to third parties.
ii) In paying to each partner rateably what is due to him from the firm for
advances as distinguished from capital.
iii) In paying to each partner rateably what is due to him on account of capital,
and
iv) The residue, if any shall be divided among the partners in the proportion in
which they were entitled to share profits.
Section 49 of the Partnership Act, 1932 deals with payment of firm of debts
and of separate debts as follows.
“Where there are joint debts due from the firm and also separate debts due
from any partner, the property of the firm shall be applied in the first instance in
payment of the debts of the firm and if there is any surplus, then the share of each
partner shall be applied in payment of his separate debts or paid to him. The
separate property of any partners shall be applied first in the payment of his
separate debts and the surplus (if any) in the payment of the debts of the firm”.
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Section 55 of the Partnership Act, 1932 deals with sale of goodwill after
dissolution as follows.
In settling the accounts of a firm after dissolution the goodwill shall subject to
contract between the partners, be included in the assets, and it may be sold either
separately or along with other property of the firm.
21.3 RIGHTS OF BUYER AND SELLER OF GOODWILL
Where the goodwill of a firm is sold after dissolution, a partner may carry on a
business competing with that of the buyer and he may advertise such business, but
subject agreement between him and the buyer, he may not.
a) Use the firm name.
b) Represent himself as carrying on the business of the firm; or
c) Solicit the custom of person who were dealing with the firm before its
dissolution.

AGREEMENT IN RESTRAINT OF TRADE

Any partners may upon the sale of the goodwill of a firm make an agreement
with the buyer that such partner will not carry on any business, similar to that of
the firm within a specified period or within specified local limits and
notwithstanding anything contained in Section 27 of the Indian Contract Act, 1872
such agreement shall be valid if the restrictions imposed are reasonable.

The word “Goodwill is a commercial rather than legal one. Lord Mac Maughten
has said “it is a thing very easy to describe but very difficult to define. However, it
has been summed up as the benefit arising connection from and reputation which
includes the probability of the old customers going to the new firm which has
acquired the business.”

RE DAVID AND MATHEWS (1899) I CH 378 ATP.382

On the dissolution of a firm by the death of one partner the good will of the
business would be an asset, and might well be the most valuable assert of the
partnership.”

On the dissolution of a partnership, every partner has a right, in the absence

of any agreement to the contrary to have the goodwill of the business sold for the
common benefit of all the partners.

MOHAMMED ABDUL VS. HOFIA BIBI A.I.R. 1944 MAD. 220 I.C. 422
“When the goodwill has been fully appropriated by the surviving partner with
all the advantages following from the old business connection together with a trade
mark, it is impracticable to direct a sale of the goodwill, which has in reality long
ceased to exist. The only way to do justice between the partners, in such
circumstances is to value the trade mark or give a proportionate share of such,
value to the heirs of the deceased partner”.
Section 27 of the Indian Contract Act, 1872 reads as follows.
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“Every agreement by which any one is restrained from exercising a lawful

profession, trade or business of any kind is to that extent void.
Exception: One who sells the goodwill of a business may agree with the buyer
to refrain from carrying on a similar business, within specified local limits, so long
as the buyer, or any person deriving title to the good will from him; carries on a like
business therein provided that such limits appear to the court reasonable regard
being had to the nature of the business.

Further the partners of a firm may agree that a partner shall not carry on any
business other than that of the firm while he is a partner.
A partner may make an agreement with his partners that on ceasing to be a
partner he will not carry on any business, similar to that of the firm within a
specified period or within specified local limits. Such agreement shall be valid if the
restrictions imposed are reasonable

Yet another valid agreement in restraint of trade is stated in Section 5 of the

Partnership Act, 1932. Partners may in anticipation of the dissolution of the firm,
make an agreement that some or all of them will not carry on a business similar to
that of the firm within a specified period or within specified local limits. Such
agreements shall be valid if the restrictions imposed are reasonable.

Further Section 55 (3) of the Partnership Act, 1932 says. Any partner may
upon the sale of the goodwill of a firm, make an agreement with the buyer that
such partners will not carry on any business similar to that of the firm within a
specified period or within specific local limits. Such agreement shall be valid if the
restrictions imposed are reasonable.

21.4 RIGHTS AND DUTIES OF VENDORS AND PURCHASER OF GOODWILL

Where the goodwill of a business whether carried on in partnership or not, is
sold the rights and duties of the vendor and purchaser are determined by the
following rules in the absence of any special agreement excluding or varying their
effect.
a) The purchaser alone may represent himself as continuing or succeeding to the
business of the vendor.
b) The vendor may nevertheless carry on a similar business in competition with
the purchaser, but not under the name of the former firm, nor so as to
represent himself as continuing or succeeding to the same business.
c) The vendor may publicly advertise his business, but may not canvass the
customers of the former’s firm even if they have of their own choice continued
to deal with him, and he must not use the name of the old firm so as to
represent that he is continuing, not merely a similar business, but the same
business.
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d) The sale carried the exclusive right to use the name of the former firm, subject
to his qualification that the purchaser may use the vendor’s name only so long
and so for as he does not by so doing expose him to any liability. It also
carries the benefit of any covenant by a partner not to carry on a competing
business for a fixed term. The purchaser has a right to trade as the vendor’s
successor, but not to hold out as the vendor still in the business and
personally answerable. A purchaser of “a set” without any restrictive terms, or
a partner retaining the assets on dissolution is entitled to the goodwill which is
an incidental right.
Section 43 (2) the Partnership Act, 1932 has clearly stated the distribution of
the assets. Please refer above.
If the assets are sufficient to pay the debts of the firm to third parties and to
pay each partner rateable what is due to him from the firm for advances
distinguished from capital, but insufficient to repay to each partner his full capital,
deficiency in the capital is to be borne by the partners in the proportion in which
they are entitled to share profits.
Where the contributions to capital are unequal, but the partners share the
profits equally and if a deficiency of capital occurs all the partners are bound to
contribute equality. The assets of the firm will thereafter be distributed to the
partners rateably, as return of capital. This principal is called the rule in Garner
Vs. Murray.
GARNER VS. MURRAY 1904 I CH. 57
G.M. and W were partners and they agreed that the profits should be divided
equally. The capital was contributed unequally G contributing more than M. On
dissolution, the assets though sufficient to pay the creditors, were insufficient to
repay the capital in full.
Held the true principal of division was for each partner to be treated as liable
then to apply the assets in paying to each partner rateably his share of capital.
Where there are joint debts due from the firm and also separate debts the from
any partner the administration or appropriate on of the partnership property and
the individual property shall be in the following monner.
The property of the firm shall be applied in the first instance in payment of the
debts of the firm. If there is any surplus then the share of each partner shall be
applied in payment of his separate debts or be paid to him.
The separate property of a partner shall be first applied to discharge his
separate debts. The surplus, if any, shall be applied for the payment of the debts
of the firm.
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21.5 RETIREMENT OF PARTNERS

Section 32 of the Partnership Act, 1932 deals with retirement of a partners as
follows:
1) A partner may retire.
a) With the consent of all the other partners.
b) In accordance with an express agreement by the partner or
c) Where the partnership is at will by giving notice in writing to all the other
partners of his intention to retire.
2) A retiring partner may be discharged from any liability to any third party for
acts of the firm done before his retirement by an agreement made by him with
such third party and the partners of the reconstituted firm and such
agreement may be implied by a course of dealing between such third party and
the reconstituted firm after he had knowledge of the retirement.
3) Notwithstanding the retirement of a partner from a firm, he and the partners
continue to be liable as partner to third parties for any act done by any of them
which would have been an act of the firm if done before the retirement until
public notice is given of the retirement.
Provided that a retired partner is not liable to any third party who deals with
the firm without knowing that he was a partner.
4) Notice under sub-section (3) may be given by the retired partner of the
reconstituted firm.
A partner is said to retire when he ceases to be a member of the firm without
bringing to an end the subsisting relations between the other members or between
the firm and third parties. In other words retirement is confined to the cases where
a partner withdraws from the firm and the other partners continue to carry on the
business without dissolution of partnership between them.
A retired partner continues to be liable for all the acts of the firm done before
his retirement or acts pending at the time of his retirement unless he is discharged
from his liability.
He may be discharged from liability to any third party for the acts of the firm
done before his retirement if
i) there is a tripartite agreement called novation made by him with such third
party and the partners of the reconstituted firm.
ii) there is an implied agreement to the above effect. Such an agreement may
be implied by a course of dealing between such third party and the reconstituted
firm after the third party had knowledge of the retirement.
A retiring partner, along with other partners at the time of his retirements
continues to be liable as partner to third parties for any act done by any of them
after the retirement of the partner until public notice is given of the retirement. The
public notice of the retirement or any of the reconstituted firm.
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A sleeping partner is not liable for the acts of the firm done after his
retirement, provided the persons dealing with the firm do note know, that he was a
partner as such. A sleeping partner need not given a public notice of his retirement
to persons who are ignorant of his being a partner in the firm.
An outgoing partner may carry on a business competing with that of the firm
and he may advertise such business subject to contract to the contrary, he may
not.
a) Use the name.
b) Represent himself as carrying on the business of the firm, or
c) Solicit the custom of persons who were dealing with the firm before ceased to
be a partner.
Where a partner dies or otherwise ceases to be a partner and there is no final
settlement of accounts between the legal representatives of the deceased partners of
the retiring partner and the surviving or continuing partner and they use the
property of the firm, the legal representatives of the deceased partner or the retiring
partner are entitled either.
a) They may claim such share of the profit earned after the death or retirement of
the partner which is attributable to his share of the firm or.
b) They may claim interest at the rate of 6% per annum on the amount of his
share in the property.
The mode of giving public notice is defined under Section 72 of the Partnership
Act, 1932 as follows:
“A public notice under this Act is given:
a) Where it relates to the retirement or expulsion of a partner from a registered
firm, or to the dissolution of a registered firm, or to the election to become or
not to become partner in a registered firm by a person attaining majority who
was admitted as a minor to the benefits of partnership by notice to the
Registrar of Firms under Section 63 and by publication in the Official Gazette
and in at least one vernacular newspaper circulating in the district where the
firm to which it relates has its place or principal place of business; and
b) In any other case, by publication in the Official Gazette and in atleast one
vernacular newspaper circulating in the district where the firm to which it
relates has its place of business.
Section 63 (1) of the Partnership Act, 1932 deals with recording of changes in
an dissolution of a firm as follows:
“When a change occurs in the constitution of a registered firm any incoming,
continuing or outgoing partner and when a immediately before the dissolution or
the agent of any such partner or person specifically authorised to this behalf, may
give notice to the Registrar of such change or dissolution specifying the date
thereof; and the Registrar shall make a record of the notice in the entry relating to
the firm in the Registrar of firms and shall file the notice along with the statement
relating to the firm filed under Section 59”.
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XIII) DISSOLUTION OF FIRM AND MODES AND CIRCUMSTANCES

Section 39 of the Partnership Act, 1932 defines dissolution of a firm
Please make a note that there is a distinction between ‘dissolution of
partnership’ and ‘dissolution of firm’. Dissolution of firm means complete break
down of the relation of partnership between all the partners. If this breakdown or
severance of partnership relation is between a few and not all the partners this
amounts to dissolution of partnership and not of the firm. Dissolution of
partnership involves only change in the relation of the partners. Retirement of a
partner from a firm does not dissolve the firm. It merely severs the partnership
relation between the retiring partner and the continuing partners.
Dissolution of firm may be voluntary or without the intervention of court or it
may take place by the order of the court.
Dissolution of firm without the intervention of the court may take place in any
one of the following ways.

1. Section 40 of the Partnership Act, 1932 deals with dissolution by agreement as

follows.
“A firm may be dissolved with the consent of all the partners or in accordance
with contract between the partners”.
This section deals with dissolution of firms by mutual consent. The contract
for the dissolution of the firm may be express or implied.
2. Compulsory dissolution under Section 41 of the Partnership Act, 1932.
“A firm is dissolved”.
a) By the adjudication of all the partners or of all the partners but one as
insolvent or
b) By the happening of any event which makes it unlawful for the business of the
firm to be carried on or for the partners to carry in on in partnership.
Provided that where more than one separate adventure or undertaking is
carried on by the firm, the illegality of one or more shall not of itself cause the
dissolution of the firm in respect of its lawful adventures and undertakings.
You have studied under Section 34 (1) of the Partnership Act, 1932 that
“where a partner in a firm is adjudicated as insolvent he ceases to be a partner on
the date on which the order of adjudication is made whether or not the firm is
thereby dissolved”.
If all or all the partners except one are adjudicated insolvent the firm can no
longer exist, for the reason these must be at least two partners to constitute a firm.
The following illustration is self explanatory.
A, a resident in India and P, a resident in Pakistan, are partners War breaks
between India and Pakistan. The partnership becomes unlawful and is dissolved
automatically on the outbreak of war.
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3) Dissolution on the happening of certain contingencies Section 42, of the

Partnership Act, 1932 reads:
“Subject to contract between the partners of firm is dissolved.
a) If constituted for a fixed term by the expiry of that term.
b) If constituted to carry out one or more adventures or undertakings by the
completion thereof.
c) By the death of a partner; and
d) By the adjudication of a partners as an insolvent.

COMMISSIONER OF INCOME TAX MADHYA PRADESH VS. SETH GOVINDARAM

SUGAR MILLS 1966 S.C. 24
An agreement between two partners that on the death of one of them his legal
heir or nominee should take the place of the deceased will not therefore have the
effect to automatically making such heir or nominee a partner of the firm. In other
words there cannot be contract between two partners that on the death of one of
them the partnership will not be dissolved.

4) Dissolution by notice of partnership at will, Section 43 of the Partnership Act,

1932 says:
1) Where the partnership is at will, the firm may be dissolved by any partner
giving notice in writing to all the other partners of his intention to dissolve the
firm.
2) The firm is dissolved as from the date mentioned, in the notice as the date of
dissolution or, if no date is so mentioned, as from the date of the
communication of the notice”.
Partnership at will is defined under contract between the partners for the
duration of their partnership or for the determination of their partnership, is
“partnership at will”.

Dissolution by Court: When all the partners do not agree for dissolution under the
above mentioned provisions, the partnership may be dissolved under Section 44 of
the Partnership Act, 1932.
“At the suit of partner, the court may dissolve a firm on any of the following
grounds namely

a) That a partner has become of unsound mind in which case the suit may be
brought as well by the new friend of the partner who has become of unsound
mind as by any other partners.
b) That a partner, other than the partner suing, he become in any way
‘permanently incapable performing his duties as partner.
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c) That a partner other than the partner suing, is guilt of conduct which is likely
to affect prejudicially, it carrying on of the business regard being had to the
nature of the business.
d) That a partner other than the partner using wilfully or persistently commits
breach of agreement relating to the management of the affairs of the firm or the
conduct of its business, or otherwise so conduct himself in matters relating to
the business that it is not reasonably practicable for the other partners to
carry on the business in partnership with him.
e) That a partner other than the partner suing, has it any way transferred the
whole of his interest in the firm to a third party, or has allowed his share to be
charged under the provisions of Rule 49 of Order XXI of the First Schedule to
the Code of Civil Procedure, 1908 or has allowed it to be sold in the recovery of
arrears of land-revenue or of any ‘dues recoverable as arrears of land-revenue
or of any ‘dues recoverable as arrears of land-revenue due by the partner.
f) That the business of the firm cannot be carried on save at a loss; or
g) On any other ground which renders it just and equitable that the firm should
be dissolved.

SARDAR HARDUTT SINGH VS. CH. MUKHA SINGH AND OTHERS A.I.R 1973 J AND
K.46
Section 44 of the Partnership Act, 1932 confers a right to pray for dissolution
on any of the grounds specified therein notwithstanding any term of the
partnership deed.
CARMICHAEL VS. EVANS (1903) CH. 486
Where a partner was convicted of travelling in a train without ticket and with
intent to defraud, it was held that the conviction was for dishonesty and is likely to
prejudicially affect carrying on of the business of the partnership.
Rule 49 of Order XXI of the First Schedule to the Code of Civil Procedure, 1908
says.
21.6 ATTACHMENT OF PARTNERSHIP PROPERTY
1) Save as otherwise provided by this rule, property belonging to partnership
shall not be attached or sold in execution of a decree other than a decree
passed against the firm or against the partners in the firm as such.
2) The court may, on the application of the holder of a decree against a partner,
make an order charging the interest of such partners in the partnership
property and profits which payment of the amount due under the decree and
may be the same or a subsequent order, appoint a receiver of the share of such
partner in the profits (whether already declared or accruing) and of any other
money which may be coming to him in respect of the partnership and direct
accounts and inquiries and make an order for the sale of such interest or other
orders as might have been directed or made if a charge had been made in
favour of the decree
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A and B, partners in trade, agree to dissolve the partnership, and execute a

deed for that purpose, declaring the partnership dissolved as from January 1; but
they do not discontinue the business of the firm or give notice of the dissolution.
On February 1, A indorses a bill in the partnership name to C who is not aware of
the dissolution. The firm is liable on the bill.

Section 46 of the Partnership Act, 1932 deals with the right of persons to have
business wound up after dissolution.

On the dissolution of a firm every partner or his representative is entitled, as

against all the other partners or their representatives to have the property of the
firm applied in payment of the debts an liabilities of the firm and to have the
surplus distributed among the partners or their representative according to their
rights.

GOLLA NAGABHUSHANAM V. KANAKALA (1864) 2M. H. C. 2;

No suit will lie, as a general rule, by one partner against another for
partnership accounts without praying for a dissolution.
M.M. VALLIAMMAL ACHI AND OTHERS V. RAMANATHAN CHETTIAR A.I.R (1969) MAD
257
A partner or a representative’s lien with reference to partnership assets is
generally on the surplus of the assets and he cannot claim any particular item of
property.
Section 47 of the Partnership Act, 1932 deals with continuing authority of
partner for purpose of winding up.
After the dissolution of a firm the authority of each partner to bind the firm
and the other mutual rights and obligations of the partners, continue
notwithstanding the dissolution, so far as may be necessary to wind up the affairs
holder by such partner, or as the circumstances of the case may require.
The other partner or partners shall be at liberty at any time to redeem the
interest charged or in the case of a sale being directed to purchase the same.
Every application for an order under sub-rule (2) shall be served on the
judgement debtor and on his partners or such of them as are within India.
Every application made by any partner of the judgement debtor under sub-rule
(3) shall be served on the decree holder and on the judgement-debtor and on such
of the other partners as do not join in the application and as are within India.
Service under sub-rule (4) or Sub-rule (5) shall be deemed to be service on all
the partners and all orders made on such applications shall be similarly served.
Section 45 of the Partnership Act, 1932 deals with the liability for acts of
partners done after dissolution.
Notwithstanding the dissolution of a firm, the partners continue to be liable as
such to third parties for any act done by any of them which would have been an act
 285

of the firm if done before the dissolution until public notice is given of the
dissolution.
Provided that the estate of a partner who dies or who is adjudicated on
insolvent or of a partner who, not having been known to the person dealing with the
firm to be a partner, retires from the firm, is not liable under this section for acts
done after the date on which he ceases to be a partner.
Notices under Sub-Section (1) may be given by any partner Exparte Robinson
(1883) 3 D. and Ch. At P.388. of the firm and to complete transaction began but
unfinished at the time of the dissolution, but not otherwise.
Provided that the firm is in no case bound by the acts of a partner, who has
been adjudicated insolvent, but this provision does not affect the liability of any
person who has after the adjudication represented himself or knowingly permitted
himself to be represented as a partner of the insolvent.
21.7 EFFECT OF NON-REGISTRATION OF FIRM
The Partnership Act, 1932 does not provide for the compulsory registration of
firms. It has left it to the option of the firms to get themselves registered.
Section 69 of the Partnership Act, 1932 lays down the consequence of non-
registration of a firm as follows:
1. No suit to enforce a right arising from a contract or conferred by this Act shall
be instituted in any court by or on behalf of any person suing as a partner in a
firm against the firm or any person alleged to be or to have been a partner in
the firm unless the firm is registered and the person suing is or has been
shown in the Register of Firms as a partner in the firm.
2. No suit to enforce a right arising from a contract shall be instituted in any
court by or on behalf of a firm against any third party unless the firm is
registered and the persons suing are or have been shown in the Register of
firms as partners in the firm.
3. The provisions of sub-sections (1) and (2) shall apply also to a claim of set-off
or other proceedings to enforce a right arising from a contract but shall not
affect.
a) The enforcement of any right to sue for the dissolution of firm or for accounts
of a dissolved firm, or any right or power to realise the property of a dissolved
firm; or
b) The powers of an official assignee or court under the Presidency Towns
Insolvency Act 1909 or the Provincial Insolvency Act, 1920 to realise the
property of an insolvent partner.
4. This section shall not apply.
a) To firm or to partners in firms which have no place of business in the
territories to which this Act extends or whose places of business in the said
territories are situated in areas to which, by notification under Section 56, this
chapter does not apply, or
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b) To any suit or claim of set-off not exceeding one hundred rupees in value
which, in the Presidency. Towns, is not of a kind specified in Section 19 of the
Presidency Small Cause Court Act, 1882, or outside the Presidency Towns, is
not of a kind specified in the Second Schedule to the Provincial Small Cause
Courts Act, 1887 or to any proceeding in execution or other proceeding
incidental to or arising from any such suit or claim.
BHARAT SARVODAYA MILLS CO-LTD VS. M/S MOHATTA BROTHERS A.I.R. 1969
GUJ. 178
The conditions required by Section 69 of the Partnership Act, 1932 are
mandatory and the bar of section applies both to suits by the firms as well as on
behalf of the firm.
SUBRAMANIA MUDALIAR VS. EAST ASIATIC CO. LTD. (1936) 71. K.L.J. 663 165. I.C.
939 A.I.R. MAD. 991.
Held that a subsequent registration could not cure the defect which existed at
the time of the institution of the suit.
PONNUSAMI GOUNDER VS. MUTHUSAMI GOUNDER I.L.R. (1942) MAD. 335
A Division Bench held that Section 69 of the Partnership Act, 1932 is
mandatory and that the registration of the firm is a condition precedent to its right
to institute the suit and that if a firm was not registered at the time of the
presentation of the plaint, but was registered subsequently, the only course open to
the court was to dismiss the suit.
Inspite of non-registration the following are maintainable.
1. Suit for dissolution of a firm.
2. Suit for accounts of a dissolved firm.
3. Suit for realisation of the property of a dissolved firm.
4. The power of the official assignee or a receiver of the estate of an insolvent
partner to realise the property of the insolvent.
5. Firms which have no place of business in India i.e., foreign firm.
6. Suits for claims for set-off, not exceeding Rs.100 in value which are filed in the
Small Causes Court and to proceedings, incidental to such suits.

21.8 SUGGESTED QUESTIONS

1. Explain the rights and Liabilities of each partner in respect of the partnership
business.
2. Discuss several methods by which a firm is dissolved.
3. Explain “Good will of a firm” State the rules relating to the disposal of goodwill
on the dissolution of a firm in the absence of any special agreement between
the members of the firm and their transferee.
4. Discuss the legal consequences of non registration of a partnership.


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LESSON-22

NEGOTIABLE INSTRUMENTS
STRUCTURE
22.1 Negotiable Instruments
22.1.1 Promissory Note
22.1.2 Bill of Exchange
22.2 Holder
22.3 Holder in Due Course
22.4 Endorsement
22.4.1 Payment in Due Course
22.5 Distinction between promissory note, bill of exchange.
22.6 Cheque X Bill of Exchange
22.7 Holder X Holder in Due Course
22.8 Negotiability X Assighability
22.9 Suggested questions
22.1 NEGOTIABLE INSTRUMENT
22.1.1 PROMISSORY NOTE
Section 4, of the Negotiable Instrument Act, 1881 defines promissory note as
follows.
“A promissory note is an instrument (not being a bank note or currency note)
containing an unconditional under taking, signed by the maker, to pay a certain
sum of money only to or to the order of a certain person or to the bearer of the
instrument”.
Annamalai Nagar,
1st July 2005.
On demand I promise to pay Mr. Gopal or order Rs.1,000/- (Rupees one
thousand only) with interest at 6% per annum for value received.

Stamp

(Sd.) SUNDAR.
The essential requisites or elements or ingredients of a valid promissory note
are:
1. It must be in writing. The writing may be in ink or in pencil or even in print.
This Act has not defined writing. Hence one has to look the General Clauses
Act, 1897. Section 3 (65) of the General Clauses Act, 1897 says, expressions
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referring to ‘writing’ shall be construed as including references to printing,

lithography, photography, and other modes of representing or reproducing
words in a visible form. Promissory notes are usually written on paper. They
may be written on paper. They may be written on parchment, linen, cloth,
leather or any other convenient substitute for paper or on any substance
capable of holding writing.
2. There must be an unconditional promise to pay The essence of promissory
note is the unconditional under taking of the maker. Mere acknowledgement
of an indebtedness is not a promissory note. But if over and above the mere
acknowledgement, a promise to pay can be inferred from the words used the
instrument will be regarded as a promissory note.
3. It must be signed by the maker. If the executants is illiterate he may put his
thumb-mark or any mark indicating his intention to sign. The signature may
be in ink or pencil or print or even by a stamp.
4. The maker of the note must be certain. The instrument must show on its face
or by a reasonable construction, the person who is liable as a maker. For
example, when an agent signs a promissory note on behalf of his principal,
unless he signs as an agent the principal will not be bound, but agent alone
will be personally liable. A promissory note may be made by two or more
makers when they will be jointly and severally liable under the instrument.

AMIRTHAM VS. NANJAH COUNDEN, 26 M.L.J. 257

Where, according to the body of a promissory note two persons had to jointly
execute it, but only one of them executed it, it was held that it was not enforceable
even against that person.
5. It must be a promise to pay money only and that amount must be certain. A
document to be a promissory note must substantially contain a promise to pay
a definite sum only and nothing else.

Venkatasubbiah Vs. Satyanarayanamoorthy (1958) I An W.R. 224

An instrument though styled as a promissory note but containing stipulations
as to giving up of interest if the amount is paid within a particular time and in
default of payment the entire amount becomes payable is not a promissory note.
6. The payee must be certain.
To make a promissory note there must be a payee ascertained by name or
designation.
Apart from the above requisites of the promissory note, the particulars
regarding the place, date of execution and the manner of the passing of
consideration should also find a place in the promissory note.
Finally it should be properly stamped.
22.1.2 Bill of exchange
Section 5 of the Negotiable Instruments Act, 1881 defines a Bill of exchange as
follows
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“A bill of exchange” is an instrument in writing containing an unconditional

order, signed by the maker, directing a certain person to pay a certain sum of
money to or to the order of a certain person or to the bearer of the instrument”.
A typical form of a Bill of Exchange is as follows.
Rs.5000/- Annamalai Nagar,
1st July 2005.
Three months after date pay to Edwin or bearer, the sum of Rs.5,000/-
(Rupees five thousand) only for value received.

To
Mr. Selvaraj Stamp
66-A, Laporte Street,
Pondicherry.
(Sd.) SUNDAR.
The essential elements of a bill of exchange are:
1. It must be in writing.
2. There should be an unconditional order to pay.
3. There should be three parties to the instrument i.e. drawer, drawee and payee.
4. The order must be to pay a certain sum of money.
5. It must be signed by the drawer.
Other formalities, date, place and consideration, stamp, should also find a
place in the bill.
Cheque; Section 6 of the Negotiable Instrument Act, 1881 defines Cheques as
follows:-

A ‘Cheque’ is a bill of exchange drawn on a specified banker and not expressed

to be payable otherwise on demand”.

The characteristics of a cheque are:-

1. A cheque is always drawn on a bank or a banker, and is payable immediately

on demand without any days of grace.
2. A cheque requires no acceptance apart from prompt payment. It is presented
for payment only.
3. A cheque is supposed to be drawn upon funds in the hand of the banker.
4. The drawer of a cheque is not discharged by failure of the holder to present it
in due time unless the drawer has sustained damage by the delay.
5. A cheque is not noted or protested for dishonor.
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6. In respect of crossed cheques there is protection given to the banker.

7. Cheques are written on from supplied by the banks.

Negotiable Instrument
Section 13 of the Negotiable Instrument’s Act, 1881 define Negotiable
Instrument as follows.
(1) ‘a negotiable instrument’ mean a promissory note, bill of exchange or
cheque, payable either to order or to bearer’
Explanation (1) a promissory note, bill of exchange or ‘cheque is payable to
order which is expressed to be so payable or which is expressed to be payable to a
particular person and does not contain words prohibiting transfer or indicating an
intention that it shall not be transferable.
Explanation (ii) A promissory note, bill of exchange or cheque is payable to
order which is expressed to be so payable or on which the only or last indorsement
is an Indorsement in blank.

Explanation (iii) Where a promissory note, bill of exchange or cheque either

originally or by indorsement is expressed to be payable to the order of a specified
person and not to him or his order it is nevertheless payable to him or his order at
his option.

(2) A negotiable instrument may be made payable to two or more payee jointly,
or it may be made payable in the alternative to one or two or one or some of several
payees”.

The essential features of a negotiable instrument are:

1. It is a contract to pay money.
2. The property in it passes from one person to another by delivery or by
endorsement and delivery.
3. A bonafide transferee for value is not affected by any defect in the title of his
transferor or of any of the previous holders of the instrument. In other words
the holder in due course get the instrument free from all defects in the title of
transferors. The maxim nemo dot quod non habet (i.e. one can give better title
than what he has) does not apply to bonafide transferee.
4. The transferee of a negotiable instrument can sue in his own name.
5. It can be transferred in future, till it is at maturity.
6. It is as good as cash because cash can be obtained at any time even before
maturity by discounting it i.e., by paying a small commission.
7. It is capable of easy proof and it has got special rules of evidence such as
presumption as to consideration date, order of endorsement duly stamped etc.
8. Prompt payment is assured, because dishonour will tarnish the credit of the
parties involved in the negotiable instrument.
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Section 17 of the Negotiable Instrument Act, 1881 defines Ambiguous

Instruments as follow:
“Where an instrument may be construed either as a promissory note or a bill
of exchange, the holder may at the election treat it as either and the instrument
shall be then once forward treated accordingly.”
Where in a bill the drawer and the drawee are the same person or where the
drawee is a fictitious person or person not having capacity to contract, the holder
may treat the instrument at his option, either as a bill of exchange or as a
promissory note.
Payee:
The person named in the instrument, to whom or to whose order the money is
by the instrument directed to be paid, is called the payee.
Drawee in case of need
When in the bill or in any indorsement thereon the name of any person is
given in addition to the drawee to be resorted to in case of need, such person is
called a “drawee in case of need”.
The drawer of a bill or any indorser may insert therein the name of a person,
directing the holder to resort to him in case of need, i.e. in case the bill is not
accepted by the drawee when presented or after being accepted, is not paid on the
due date. Under Section 115 of the Negotiable Instrument Act 1881 a bill is not
dishonoured until it has been dishonoured by such a drawee in case of need. The
effect of it is to make the presentment to the drawee in case of need obligatory of
the part of the holder. Under Section 116 of the Negotiable Instrument Act, 1881 a
drawee in case of need may accept and pay the bill of exchange without previous
protest.
In English Law a drawee in case of need is spoken of as referee in case of need.
“Further in English Law resort to the ‘referee in case of need” is optional with the
holder. Again under the English Law a bill must be protested or noted for protest
before it can be presented to the referee in case of need”.
Acceptor for honour
“When a bill of exchange has been noted or protested for non-acceptance or for
better security and any person accepts it supra protest for honour of the drawer or
of any one of the Indorsers, such person is called an acceptor for honour.
An acceptor for honour is a person who voluntarily becomes a party to the bill
by acceptance, when the original drawee refuses to accept or refuses to furnish
better security when demanded by a Notary Public.

21.2 HOLDER
Section 8 of the Negotiable Instrument Act, 1881 defines “Holder” as follows
‘The Holder’ of a promissory note bill of exchange or cheque means any person
entitled in his own name to the possession thereof and to receive the amount due
thereon from the parties thereto.
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Where the note, bill or cheque is lost or destroyed its holder is the person; so
entitled at the time of such, loss or destruction”.
In order to be a holder, the person must have the possession of the instrument
and also the right to recover the money in his own name. Consequently persons
having simply possession and not having the right to recover the money due
thereon e.t.
a) The finder of a lost instrument.
b) A thief
c) A payee prohibited by an order of the court from receiving the amount.
d) A payee who is agent of another.
e) A person taking under a forged endorsement are not holders within the
meaning of Section 8 of the Negotiable Instruments Act, 1881.
The doctrine of benami has no application to the negotiable instruments with
the result only a person whose name appears on the Instrument will be deemed to
be a party to it.
Section 8 of the Negotiable Instrument Act, 1881, does not affect the
devolution of rights by operation of law. Therefore the legal representatives of a
deceased holder, or the official assignee or receiver in the case of an insolvent,
would certainly come within the purview of this Section.
To put it in nutshell “Holder” means the payee or indorsee of an instrument
who is in possession of the instrument or the bearer thereof, but does not include a
beneficial owner claiming through a benamidar.
21.3 HOLDER IN DUE COURSE:
Section 9 of the Negotiable Instruments Act, 1881 defines “Holder in due
course” as follows:
“Holder in due Course” means any person who for consideration became the
possessor of a promissory note, bill of exchange or cheque if payable to bearer or
the payee or indorsee thereof if (payable to order) before the amount mentioned in it
became payable, and without having sufficient cause to believe that any defect
existed in the title of the person from whom he derived his title.

A holder in due course should satisfy the following conditions.

1. He should become a holder within the meaning of Section 8 of the Negotiable
Instrument became payable.
2. He must have become a holder for consideration i.e. he must have become the
payee or the endorse of the instrument by furnishing consideration which is
valuable, and is not fraudulent or unlawful.
3. He should take the instrument without having sufficient cause to believe that
any defect existed.
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A holder of a negotiable instrument will not be a holder in due course if

1. He has obtained the instrument by gift for an unlawful consideration or by
some illegal method; or
2. He has obtained the instrument after its maturity, or
3. He has not obtained the instrument bonafide.
In English law a holder in due course is also called “Bonafide holder for value
without notice”.
CHOCKALINGAM VS. SUBRAMANYA 1940 RANG. 170
“To be a holder in due course the following conditions are necessary, Firstly he
must be a holder for consideration. Secondly the instrument must have been
transferred to him before it become overdue. Thirdly he must be a transferee in
good faith, and that he should not have any reason to believe that there was any
defect in the title of the transferor”.
INCHOATE INSTRUMENT
Section 20 of the Negotiable Instrument Act, 1881 defines inchoate instrument
as follows:
“Where one person signs and delivers to another a paper stamped in
accordance with the law relating to negotiable instruments then in force in India,
and either wholly blank or having written thereon an incomplete negotiable
instruments he thereby gives prima facie authority to the holder thereof to make or
complete, as the case may be upon it negotiable instrument, for any amount
specified therein and not exceeding the amount covered by the stamp. The person
so signing shall be liable upon such instrument in the capacity in which he signed
the same to any holder in due course shall recover from the person delivering the
instrument anything in excess of the amount intended by him to be paid
thereunder”.
This section is based on the rule of estoppel. It enables persons to lend their
mercantile credit to others by signing their names on a blank instrument which
may subsequently be filled up as a negotiable instrument.
This Section does not apply to cheques since cheques do not requires any
stamp under law.
It gives a general authority to a person to whom a stamped and signed paper is
delivered to convert it into a negotiable instrument payable to any specified person.
The paper must be stamped in accordance with law relating to negotiable
instruments in force in India. The holder of the instrument can complete the bill
for any amount not exceeding the amount covered by the stamp. The person so
signing shall be liable upon such instrument in the capacity, in which he signed
the same, to any holder in due course for such amount. No person other than a
holder in due course shall recover from the person delivering the instrument any
thing in excess of the amount intended by him to be paid thereunder.
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21.4 INDORSEMENT
Section 15 of the Negotiable Instruments Act 1881, defines indorsement as
follows:-
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, or so signs for same purpose a stamped paper
intended to be completed as a negotiable instrument he is said to indorse the same
and is called the “indorser”.
The word “indorsement” in its literal sense, imports a writing on the back of an
instrument, but in its technical sense, it is applicable to negotiable papers and
means the writing of one’s name on the back thereof with the intent of transferring
the rights therein.
The signature ought, generally, to be in ink to prevent its defacement but this
is not indispensable and a pencil indorsement has been held to be good.
No particular form is specified in the Act, But care must be taken that the
signature must confirm with the name mentioned in the bill.
SIVARAMAKRISHNA VS. MOIDEEN 33 MAD 34
“As to the form of an indorsement, it is not indispensable that any particular
form of word should be used”.
Indorsement may be made on the face of the bill or on the back of it. It may
also be made on a slip of paper attached in the instrument. Such a slip is called an
“allonge”
MANMOHINEE VS. SECRETARY OF STATE FOR INDIA 22 W.W. 106
“An allonge is a slip of paper annexed to a bill upon which there being no legal
limit to the number of indorsements, when there is no room to write them all
distinctly on the back of the bill, the supernumerary indorsements may be written.
It is annexed by the holder in order that he may write the indorsement and they do
no require fresh stamps”.
Please make a note that under Section 3 of Indian Securities Act (X of 1920)
(now Public Debt Act, 1944) an emphasis made that in the case of Government
securities indorsement should be made on the back of the security itself.
21.4.1 Payment in due course
Section 10 of the Negotiable Instruments Act, 1881 defines payment in due
course as follows:
“Payment in due course” means payment in accordance with the apparent
tenor of the instrument in good faith and without negligence to any person in
possession thereof under circumstances which do not afford a reasonable ground
for believing that he is not entitled to receive payment of the amount therein
mentioned”.
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Payment in due course in one made in accordance with the apparent tenor of
the instrument, that is according to what appears on the face of the instrument to
be the intention of the parties.
A payment cannot be a payment in due course, if it is made to a person not
entitled to receive it or if it is made before the due date.
Again, a payment may become invalid as a payment a due course, if it is made
with a knowledge of the facts which justly impair or destroy the rights of the holder
to receive the money or under circumstances affording reasonable grounds for
believing that the holder is not entitled to receive payment.
The payment must be made by a person who has the right authority and
capacity to authority.
The payment should have been made in good faith: that is honestly without
negligence.
The person to whom payment is made must be in possession of the instrument
and should have been made in such circumstances that there is no ground for
believing that the person is entitled to receive payment.
When a payment in due course is made there is complete discharge except in
cases of forgery.
According to this section, payment, would seem to be payment of money only,
for the section in the last portion speaks of ‘amount’ therein mentioned.
INLAND AND FOREIGN INSTRUMENT
Section 11 of the Negotiable Instrument Act defines Inland Instrument as
follows.
“A promissory note, bill of exchange or cheque drawn or made in India and
made payable in or drawn upon any person resident in India shall be deemed to be
an inland instrument.
AMNER VS. CLARK (1835) 3 C.R. M.I.R. 468; 41 R.K. 77
An inland instrument is an instrument which purports to be (a) both drawn
and payable in India (b) drawn in Indian on some person resident therein, though
the place of payment may be a foreign country.
Section 12 of the Negotiable Instrument Act, 1881 defines Foreign Instrument
as follows.

“Any such instrument not so drawn, made or made payable shall be deemed to
be a foreign instrument”.

A foreign bill may be one of these kinds:

1. Drawn in India on a resident outside India and payable outside.

2. Drawn outside and payable in India.
3. Drawn outside on one residing outside India.
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4. Drawn outside India on one resident in India

5. Drawn outside India and made payable outside.
Section 104 of the Negotiable Instrument Act, 1881 reads as follows.
“Foreign bills of exchange must be protested for dishonour when such protest
is required by the law of the place where they are drawn”.
Foreign bills have to be protested for dishonour while such protest is required
by the law of the place where they are drawn”.
21.5 DISTINCTION BETWEEN PROMISSORY NOTE AND BILL OF EXCHANGE
PROMISSORY NOTE BILL OF EXCHANGE
1. There are two parties the maker (the 1. There are three parties drawer, the
promisor) the payee (the promisee) drawee and the payee.
2. It contains an unconditional promise 2. It contains an unconditional order
to pay. to pay.
3. The maker is liable absolutely as a 3. Till the bill is accepted by the
principal debtor. drawee, the drawer, is liable as a
principal debtor. But after
acceptance the drawer becomes
liable as surely and the acceptor
becomes the principal debtor.
4. The maker stands in immediate 4. The drawer stands in immediate
relationship with payee. relationship with the acceptor and
not the payee.
5. It cannot be made payable to the 5. It can be made payable to the
maker himself. drawer i.e. the drawer himself may
be the payee.
6. It cannot be drawn in sets. 6. It can be drawn in sets.
7. The requirement as to prior 7. The requirements as to prior
acceptance, presentment, notice of acceptance, presentment, notice of
dishonour protest and noting are not dishonour, protest and noting are
necessary. absolutely necessary.

2.16 CHEQUE – BILL OF EXCHANGE

CHEQUE BILL OF EXCHANGE
1. It is always drawn on a banker 1. May be drawn on any one
including a banker.
2. It requires no acceptance 2. It unless it is payable on demand,
requires acceptance.
3. It is payable on demand, It is not 3. It unless expressed to be payable
entitled to any days of grace. on demand, will carry with it three
days of grace for payment.
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4. It is supposed to be drawn on the 4. There is no such presumption.

funds of the drawer in the hands of
a banker
5. The drawer of a cheque is not 5. The drawer of a bill is discharged
discharged by failure of the holder from all liability to the payee if it
to present it in reasonable time is not presented with in a
unless the drawer, has sustained reasonable time.
damage by the delay.
6. No notice of dishonour is necessary. 6. Notice of dishonour is absolute
necessary.
7. It is a revocable order and it may be 7. There can be no countermand by
revoked by countermand at any the drawer after it is accepted.
time, before actual payment.
8. It may be crossed. 8. It cannot be crossed.
9. It does not require any stamp. 9. It except in certain cases, must be
stamped.
10. It is not required to be noted or 10. It may be noted or protested for
protested for dishonour. dishonour.
11. Authority to pay comes to an end on 11. Notice of death or insolvency does
drawer’s death or insolvency. not affect the mandate to pay.

21.8 NEGOTIABILITY – ASSIGNABILITY

NEGOTIABILITY ASSIGNABILITY
1. Negotiable instruments only can be 1. Other instruments can be
negotiated. assigned.
2. Negotiation requires delivery only or 2. Assignment requires a written
indorsement and delivery for document signed by the transferor.
effecting a transfer.
3. Notice of transfer is not necessary to 3. Notice is essential.
make the transfer effective.
4. The transferee takes it free from all 4. The transferee takes them subject
defects, if he is a holder in due to the defect of the transferor’s
course. title.
5. Consideration is presumed. 5. Consideration must be proved..

21.7. HOLDER – HOLDER IN DUE COURSE

HOLDER HOLDER IN DUE COURSE
1. He may have obtained the 1. He must have obtained the
instrument for an unlawful instrument for lawful
consideration, by gift or by some consideration.
illegal method.
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2. He may have obtained the 2. He must have obtained the

instrument after its maturity. instrument before maturity.
3. He may have obtained the 3. He must have obtained the
instrument not in good faith. instrument in good faith.
4. He has not privileges. 4. He has certain privileges.
iii) Minor in relation to negotiable Instrument and negotiable instrument executed in a
representative capacity.
Section 26 of the Negotiable Instrument Act, 1881 reads as follows.
“Every person capable of contracting according to the law to which he is
subject, may bind himself and he bound by the making drawing, acceptance,
indorsement, delivery and negotiation or a promissory note, bill of exchange or
cheque.
A minor may draw, indorse deliver and negotiate such instrument so as to
bind all parties except himself.
Nothing herein contained shall be deemed to empower a corporation to make,
indorse or accept such instruments except in cases in which under the law for the
time being in force, they are so empowered.
You might have studied the Indian Contract Act, 1872 wherein Section 11 says
as to who are competent to contract.
“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”.
Section 3 of the Indian Majority Act IX of 1875 declares that every person
domiciled in India shall be deemed to have attained his majority, when he shall
have completed his age of eighteen years and not before. In the case, however, of a
minor of whose person or property or both a guardian has been appointed by a
court or to whose property the superintendence is assumed by a court of ward
before the minor has attained the age of eighteen years, the Act provides that the
age of majority shall be deemed to have been attained on the minor completing his
age of twenty one years.
Further you might have come across under Section 30 of the Partnership Act,
1932 that a minor may be admitted to the benefits of Partnership.

Minor can also be appointed as agent but not be a principal.

The capacity of a party to draw accept, make or indorse a bill or note is co-
extensive with his capacity to enter into a contract. However, the peculiarity of the
bill is that the incapability of any one party to the bill in no way diminishes the
liability of the others.
A minor may draw, indorse, deliver and negotiate such instrument so as to
bind all parties.
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The minor may operate as a conduit pipe to convey title and liability, but not
originate it. The instrument does not become void merely because a minor is a
party to it. It remains binding on all the other parties to it.
The minor is not personally liable on a bill or note given by him for necessaries
supplied to him. It is only his estate which is liable for such a bill or note.
Vambagathachi Vs. Rajamannarswami 17 L.W. 596 : Natha Venkatesa in the matter of
49 Mad 89 (F B)
“A note made by a person for whom a guardian had been appointed by the
court is void, though he may have been over eighteen at the time, but below twenty-
one”.
COUTIS & CO VS. BROWN LECKY (1946) 2 A.E.R. 207
“Even a guarantor of the overdraft, cannot be held liable to the bank when all
parties knew the fact’.
Where a minor drawn or negotiates a bill of exchange or other instrument,
parties who are major could thereby acquire rights and incur liabilities. A minor
can be a payee or holder of a negotiable instrument. The minor can enforce his
claim through his adult member. The minor cannot bind himself by accepting a bill
or making a note.
Such a bill is not enforceable against the minor, but is enforceable against the
other adult parties.
A minor can make a valid indorsement where a bill is drawn in favour of a
minor and if he indorses it to another the latter would be entitled to enforce
payment.
Section 29 of the Negotiable Instruments Act, 1881 deals with the liability of
legal representative signing it.
“A legal representative of a deceased person who signs his name to a
promissory note, bill of exchange or cheque is liable personally thereon unless he
expressly limits his liability to the extent of the assets received by him as such”.
A legal representative is entitled to all the instruments after the death of the
holder. He can on them for recovery of the amount and given a valid discharge.
AMMALU VS. NAMAGIRI 83 M.L.J. 631
“Under Section 29 of the Negotiable Instruments Act, 1881, unless the legal
representative expressly limits his liability to the extent of the assets in his hands
received by him as such, he will be held personally liable”.
SUBBANNA VS. SUBBARAYALU 50 M.L.J. 125; 1926 MAD. 390
Under Section 20 of the Negotiable Instruments Act, 1881, in the case of
executor or administrator there must be express words limiting liability and that to
the extent of the assets. Under Section 28 of the Negotiable Instruments Act, 1881
it is sufficient for the agent to indicate that personal liability is excluded.
“When the executor or administrator or legal representative makes or indorses
a bill or note in his own name adding thereto the words as executor, administrator,
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or legal representative”, he will still be personally liable thereon, such phrases or

terms being treated as mere surplusage. For it is immaterial whether they (the
executors) indorse it the bill as executors or not. If they indors, it at all, they are
liable personally and not as executors, for their indorsement would give an action
against the effects of the testators”.
JAMSHEDJEE VS. SORABJI I.L.R (1940) BOM. 53 (P.C) 1940 P.C.75, 67, 1 A 270
“In India as in England it is open to an executor in consideration that a
creditor of his testator will forbear to sue to make himself liable for consideration,
such a forbearance to sue for the debt whether the assets of the testator be
sufficient. The law in India puts upon a legal representative the full burden of
showing that he has duly applied all assets proved to have come to his hands but it
has no bias tending to make legal representative liable to answer with his own
property for the deceased ………..”
SANKA KRISHNAMURTHY VS. BANK OF BURMA 35 MAD 692
“Where the signature to the document is made ‘perpro’ on behalf of the party
taking such instrument is fixed with notice of the contents of the powers’.
An agent authorised to indorse cheques ‘per pro’ is not thereby entitled to
negotiate or cash them or pay them into his own private account. A ‘signature per
pro-operates as notice that the agent has only a limited authority to sign and the
principal is bound by such signature only if the agent was acting within the actual
limits of his authority.
ADIKKAPPA CHETTI VS. THOMAS COOK; 1993 P.C., 78
“A power to the Manager of Bank to sign as drawer or acceptor does not
authorise him to sign as indorser i.e., to back the bill”.
MIDLAND BANK V RECKETT, 1933 A.B.I
‘A solicitor empowered to draw cheques on his client’s account and to apply
the money for the purpose of the alient is not authorised to draw cheques as agent
of the client for his own benefit, i.e. to reduce his own overdraft with the bank and
the bank who collected these cheques and had the benefit of them was not allowed
to retain it, as form of the cheques itself was notice to the bank who must be
therefore treated to have acted negligently in not making enquiries as to the extent
of the solicitor’s authority”.
‘A partner is a trading firm may indorse a bill or note in the name of the firm,
and if it gets into the hands of a holder in due course, the presumption of the
authority becomes absolute.
MORISON VS. LONDON COUNTRY AND WESTMINISTER BANK (1914) 3 K.B.356
“The act of an agent in making drawing, accepting or indorsing a bill or note
without the express authority of his principal may be ratified by the latter so as to
make himself liable on the bill or note and such subsequent recognition of the
agent’s act is equivalent to a previous authority and operates on the contract in the
same manner as if the authority to make the contract had originally existed”.
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A bill drawn by an agent after the death of his principal bonafide and without
knowledge of death is valid Section 208 of Indian Contract Act.
Section 28 of the Negotiable Instruments Act, 1881 deals with the liability of
agent signing.
“An agent who signs his name to a promissory note, bill of exchange or cheque
without indicating thereon that he signs as agent or that he does not intend thereby
to incur personal responsibility is liable personally on the instrument except to
those who induced him to sign upon the belief that the principal only would be held
liable”.
“It is not a universal rule that a man who puts his name to a bill of exchange
thereby makes himself personally liable, unless he states on the face of the bill that
he subscribes for another or by procuration of another which are words of
exclusion. Unless he says plainly, ‘I am the mere scribe’ he become liable’.
In order to exclude personal liability, an agent should indicate on the
negotiable instrument either that he signs as an agent or that he does not intend
thereby to incur any personal liability.
If the guardian executes the note without indicating clearly that he is incurring
no personal liability he is liable on the instrument itself Sivagurunatha Pillai Vs.
Padmavathi I.L.R. (1941) Mad 513 (F.B) 1941 Mad 417
“While the English Act requires that the words indicating the exclusion of
personal liability should be found in the signature itself the law in India it is said is
less rigorous and the intention to exclude personal liability may be inferred from
the whole document but not surrounding circumstances outside the instrument
can be considered.
22.8 SUGGESTED QUESTIONS
1. Define Negotiable instrument. Distinguish between Negotiability and
assignability
2. Define bill of Exchange. Explain the essential features.
3. Distinguish between holder and holder in due course.


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LESSON – 23

NEGOTIABLE INSTRUMENT (CONTD)

STRUCTURE
23.1 Liability of Drawer – Maker – Acceptor and Indorser
23.2 Consideration in Negotiable Instrument Accommodation Bills
23.3 Kinds of Indorsement and Their Effect
23.3.1 Blank or General Indorsement
23.3.2 Full or Special Indorsement
23.3.3 Absolute Indorsement
23.3.4 Restrictive Indorsement
23.3.5 Conditional Indorsement
23.3.6 Faculative Indorsement
23.3.7 Sans Frais Indorsement
23.4 Effect of Fraud and Forgery in Negotiable Instruments
23.5 Suggested questions
23.1 LIABILITY OF DRAWER–MAKER–ACCEPTOR AND INDORSER
Section 30 of the Negotiable Instrument Act, 1881 deals with the liability of
drawer. “The drawer of a bill of exchange or cheque is bound in case of dishonour
by the drawee or acceptor thereof, to compensate the holder provided due notice of
dishonour has been given to or received by the drawer as hereinafter provided”.
In the case of a bill of exchange, you all know, that there are three parties viz.,
the drawer, the drawee and the payee. The drawee is primarily liable under the
instrument until acceptance. After acceptance his liability becomes secondary. If
notice of dishonour is given he is bound to compensate the holders.
A bill of exchange may be dishonoured by non-acceptance or non-payment.
When a bill of exchange is payable on demand or on sight and it is not paid when
duly presented, the drawer becomes liable to the payee. Where the bill is payable at
a certain time after presentment or acceptance and it is accepted but not paid, the
primary liability is that of the acceptor and the drawer’s liability is secondary and is
conditional. In both the cases, the drawer would be made liable subject to the
condition either the payee or the holder of the bill gives notice of dishonour to the
drawer.
The object of insisting to give notice of dishonour to the drawer is to given an
opportunity for him to secure his rights against the drawee.
The position of the drawer is not that of a surety for the acceptor, since the
drawee is not liable until he accepts When there is not acceptance, the liability of
the drawer is only as principal debtor under an implied contract of indemnity.

The drawer does not undertake to fulfil the original contract, but only to
compensate the holder for its breach.
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RAM RAVIJI VS. PRALHADDAS, 20 BOM, 133

“Notice of dishonour to the drawer is absolutely necessary and unless and
until it is given, the holder has no cause of action against him”.
When notice of dishonour is dispensed with as stipulated in Section 98 of the
Negotiable Instruments Act, the drawer is not discharged from his liability.
MOTILAL VS. MOTILAL 6 ALL, 78.81
The doctrine of notice of dishonour is based upon a just and equitable
principle and that it may rightly and fairly be applied to hundi transactions’.
The notice of dishonour may be given by the holder himself within a
reasonable time after dishonour.
When the drawee refuses to accept or the acceptor refuses to pay at maturity,
the drawer must bear all losses and expenses, that is, the holder will have to be
compensated not only for the principal sum, but also in certain cases for interest
re-exchange and costs as a consequence of the bill not being honoured-Ssection
117 of the Negotiable Instrument Act.
In the case of accommodation bills drawn for the accommodation of the
drawer, in addition to the contract implied in favour of the payee or holder, the
drawer is bound to indemnify the acceptor if he suffers any damage on account of
his acceptance on his behalf.
In the case of cheque if it is not paid, the holder has his remedy against the
drawer. The holder has no re-course upon the drawer until the cheque has been
presented and payment refused.
The presentment for payment is essential, in the case of a cheque, because the
cheque is drawn against funds.
The drawer should be informed of non-payment immediately so that he could
enquire into the cause of refusal, and make arrangement for its payment.
The cheque has to be presented within six months otherwise it becomes stale.
The drawer of a cheque is not absolutely discharged by the failure of the holder
in making the due presentment or giving him notice of dishonour unless he has
suffered damage by delay in presentment or for want of notice.
The drawer by an express stipulation in the instrument negatives or limits his
own liability; as by drawing ‘sans recourse’ or without recourse’ to me; or drawing
as an executor stipulating for payment out of the assets of the deceased or he may
waive as regards himself all or some of the holder’s duties i.e. waiving notice of
dishonour.
Section 32 of the Negotiable Instrument Act, 1881 defines the liability of maker
of note and acceptor of bill as follows:
“In the absence of a contract to the contrary, the maker of a promissory note
and the acceptor before maturity of a bill of exchange are bound to pay the amount
thereof at maturity according to the apparent tenor of the note or acceptance
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respectively and the acceptor of a bill of exchange at or after maturity is bound to

pay the amount thereof to the holder on demand.
In default of such payment as aforesaid such maker or acceptor is bound to
compensate any party to the note or bill for any loss or damage sustained by him
and caused by such default.
This liability of the acceptor of a bill and the maker of a promissory note is
absolute and unconditional.
The expression ‘contract to the contrary’ is used to cover the position of
accommodation bills and notes.
SETH KOHANDAS VS. DAHIA 3 BOM. 182
“Where there is no acceptance, no cause of action can arise to the payee
against the drawee”.
The acceptor of a bill of exchange by accepting it engages that he will pay it
according to the tenor of his acceptance and the effect of such acceptance is to
make the acceptor primarily liable to pay the bill and to render the drawer and the
indorsers liable as sureties in case of his default.”
This liability of the acceptor when once fixed cannot cease by reason of the
insolvency or the death of the drawer or by any other change in the circumstances
of the other party.
Once a bill is accepted by the drawer, it is presumed that the drawer has the
authority to draw and that the drawer has funds of the drawer in his hands.
Further the payee is a person capable of indorsing. Finally, by acceptance the
drawee agrees to pay to the order of the payee.
Under English law the acceptor is said by his acceptance to admit the
genuineness of the signature of the drawer, but under the Indian Law, the acceptor
may deny that the bill really drawn by the person by whom it purports to be drawn.
If the bill or note purports to be drawn by the agent of the drawer; the
acceptance by the drawee involves an admission of such agent’s capacity and
authority, but such acceptance cannot be said to admit the genuineness of the
signature of the agent.

If the acceptor knows at the time of the acceptance that an indorsement is

forged, he cannot subsequently set up the forgery of such indorsement to escape
liability.

NARASIMMAMURTHI VS.RAMASWAMI CHETTIAR 24 M.L.J. 91

“A person who has signed a promissory note as principal is no entitled to prove
by oral evidence that it was intended that he was to be liable as surety only and
when a note contains an unconditional undertaking to pay, evidence of an oral
agreement to vary it in effect is not admissible though the English law allows such
parol contracts to be proved by way of equitable defence.
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In the case of a qualified acceptance the acceptor is bound to pay only

according to the tenor of the qualified acceptance.
In order to be a valid payment, the payment must be made to the person
whose name appears on the face of the bill or note as entitled to demand payment.
The liability of the acceptor of a bill or the maker of a note is subject to any
contract to the contrary. You all know the general rule is that the acceptor of a bill
is the primary debtor and the drawer only a surety. The acceptor can also prove
that by virtue of a contract between himself and the holder, his liability is that of a
surety and not of a principal debtor.
The liabilities of the maker of the note or an acceptor, may be controlled by
some collateral agreement between the parties.
The phrase “contract to the contrary” in Section 32 of the Negotiable
Instruments Act, 1881 is designed specially to meet cases of accommodation bills
and notes.
There is an implied warranty by the drawer (for whose accommodation the bill
was accepted) to provide him with funds for the purpose and in default to indemnify
the acceptor against claim which may be made on him in respect of the bill or note.
Section 35 of the Negotiable Instruments Act 1881 deals with the liability of
indorser as follows.
“In the absence of a contract to the contrary, whoever indorses and delivers a
negotiable instrument before maturity without any such indorsement, expressly
excluding or making conditional his own liability is bound thereby to every
subsequent holder, in case of dishonour by the rawee, acceptor or maker to
compensate such holder for any loss or damage caused to him by such dishonour,
provided due notice of dishonour has been given to, or received by such indorser as
hereinafter provided.
Every indorser after dishonour is liable as upon an instrument payable on
demand”.
The liability of an indorser is conditional. The liability of an indorser does not
arise unless he indorses and delivers the instrument to the transferee.
PUNJAB NATIONAL BANK VS. BALAKRISHNA DASS 6 LAH L.J.230; 1924 LAH 460: 79
I.C. 461
When we speak of indorsing a negotiable instrument, the idea of its being
delivered to the indorsee is always assumed’.
When a party signs a negotiable instrument and it is not clear in what capacity
he signed it, the whole circumstance relating to making issuing and indorsing may
be taken into consideration to define the nature of his liability.
The indorser of a negotiable instrument is precluded from denying to a holder
in due course the genuineness and regularity in all respects of the drawer’s
signature and all previous indorsement and also from denying to his immediate or
 306

subsequent indorsee that the bill was at the time of his indorsement a valid and
subsisting bill and that he had then a good title and right to indorse.

The contract of the indorser is that he will compensate the holder if the
instrument is not accepted and paid according to its tenor at the time of his
indorsement.

In order to charge the indorser, due notice of dishonour should be given to him
by the holder or from some party liable on the instrument.

SUNDARA NADAR VS. MEYAPPA (1954) M.L.J.603

“An indorser may in certain cases enlarge his liability by promising to pay even
without presentment, when he says he will pay if the amount is not realised”.
Between the indorsers, the rule no doubt is that their liability is in the order in
which their names appear on the instrument. This rule may be reversed by proof of
the real intention of the parties. The liability of the indorser is one implied by law
and can be qualified by proof of a different agreement.
23.2 CONSIDERATION IN NEGOTIABLE INSTRUMENT ACCOMMODATION BILLS
Section 43 of the Negotiable Instruments Act, 1881 reads:
“A negotiable instrument made, drawn, accepted indorsed or transferred
without consideration or for a consideration which fails, creates no obligation of
payment between the parties to the transaction. But if any such party has
transferred the instrument with or without indorsement to a holder for
considration, such holder and every subsequent holder deriving title from him, may
recover the amount due on such instrument from him, may recover the amount
due on such instrument from him, may recover the amount due on such
instrument from the transferor for consideration or any prior party thereto.

EXCEPTION I
No party for whose accommodation a negotiable instrument has been made,
drawn, accepted or indorsed can, if he has paid the amount thereof, recover
thereon such amount from any person who became as party to such instrument for
his accommodation.
EXCEPTION II
No party to the instrument who has induced any other party to make, draw,
accept indorse or transfer the same to him for a cosideration which he has failed to
pay or perform in full shall recover thereon an amount exceeding the value of the
consideration (if any) which he has actually paid or performed”.
Between immediate parties, like the drawer and the payee of a bill of exchange
or a maker and a payee of a promissory note or an indorser and his indorsee, the
amount due under the instrument will not be recoverable unless it is proved that
the plaintiff furnished consideration.
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As a negotiable instrument is also a contract consideration is necessary to

support it. Further negotiable instruments are presumed to stand on the basis of
valuable consideration.
This presumption is laid down under section 188 (a) of the Negotiable
Instruments Act, 1881 as follows.
“That every negotiable instrument was made or drawn for consideration, and
that every such instrument, when it has been accepted, indorsed, negotiated or
transferred, was accepted, indorsed, negotiated or transferred for consideration.
However, this presumption may be rebutted by showing that the instrument
was obtained from its lawful owner by means of fraud or an offence or that no
consideration was in fact given. The party denying the consideration has to prove
his case.
“Where a note was given for services to be rendered which had never been
performed, the maker is not liable on account of failure of consideration”.
“Where a note was given for a balance which was not really due the maker is
not liable for want of consideration”.
BALAKRISHNAN VS. CHATHU (1939) MAD 848: (1939) I. M. L. J. 897.
“Where A took money from B for investment on immovable property but
instead lent it on note in his own name to C and subsequently transferred it to B it
was held in a suit by B against A and C that it was supported by consideration.
“Partial failure of consideration is a valid defence to a suit on a negotiable
instrument”.
“In an action on a bill of exchange a defence by way of damages cannot be set
up by reason of the breach by the plaintiff of some other contract or the
commission of some tort”.
Section 44 of Negotiable Instrument Act, 1881 deals with partial absence or
failure of money consideration as follows:
“When the consideration for which a person signed a promissory note, bill of
exchange or cheque consisted of money and was originally absent in part or has
subsequently failed in part, the sum which a holder standing in immediate relation
with such signer is entitled to receive from him is proportionately reduced.
EXPLANATION
The drawer of a bill of exchange stands in immediate relation with the
acceptor. The maker of a promissory note, bill of exchange or cheque stands in
immediate relation with the payee, and the indorser with his indorsee. Other
signers may be agreement stand in immediate relation with a holder.
The following illustration is self explanatory.
A draws a bill on B for Rs.500/- payable to the order of A. B accepts the bill
but subsequently dishonours it by nonpayment. A sues B on the bill. B proves
that it was accepted for value as to Rs.400/- and as an accommodation to the
plaintiff as to the residue. A can only recover Rs.400/-.
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Section 44 of the Negotiable Instruments Act, 1881 deals with partial absence
or partial failure of money, consideration.
ROBINSON VS. REYNOLDS (1841) 2 Q.B. 196; 114 E.R. 76, 57 R.R. 649
“The operation of Section 44 of the Negotiable Instrument Act 1881 is confined
to immediate parties, i.e., those who are in direct and immediate relation with each
other. Ordinarily such parties are, (a) the drawer and the acceptor of a bill, (b) the
drawer and the payee of a bill (c) the maker and payee of a note, (d) the drawer and
payee of cheque and (e) the indorser and his indorsee of a bill, note or cheque. If a
bill is drawn and accepted for the accommodation of the payee, the acceptor will
then stand in immediate relation with the payee.
KISHAN BAHADUR VS. SASSRAM LIME LTD, (1924) PAT. 521.
When a cheque is given for a sum larger than was really due, the payee is not
entitled to recover more than what is actually due.
Section 42 of the Negotiable Instruments Act, 1881 deals with partial failure of
consideration and consisting of money as follows:
“Where a part of the consideration for which a person signed a promissory
note, bill of exchange or cheque, though not consisting of money is ascertainable in
money without collateral enquiry and there has been a failure of that part the sum
which a holder standing in immediate relation with such signer is entitled to receive
from him is proportionately reduced”.
“If a vendee accepts a bill for ₤ 100 as the price of two bales of cotton, each
bale being worth ₤ 50, if the vendor fails to supply one bale or the vendee returns
one bale as being of inferior sample, then the vendee can set up the defence of
partial failure of consideration”.
Accommodation bill is drawn to enable a drawer to raise money. It is drawn to
oblige him or to accommodate him. The accommodating party puts his name to the
bill without consideration. The other party will use the bill and is expected to pay it
when due. The transaction does not represent exchange of values. It is a sort of a
loan of mercantile credit to others. The accommodated party, however, is liable to a
holder for value and the former can recover the sum from the accommodated party
by way of suit. He has a right to be indemnified. The bill must be accepted
expressly to accommodate the drawer or endorser to enable him to raise money.
The bill is also referred to as a kite bill or windmill: Parr Vs. Jewell (1855) 16 C.B.
684: 138 E.R. 918: 100 R.R.884.
“An accommodation bill or note is one to which the accommodating party has
put his name without consideration for the purpose of accommodating some other
party who is to use it and is expected to pay it when due”.
In the case of an instrument drawn for a accommodation, if the party
accommodated pays the amount covered by the instrument, he cannot recover the
same from the person who became a party to it for his accommodation.
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If an accommodation instrument comes into the hands of a holder in due

course, he can recover the amount from any prior party, including the person who
subscribed his signature for the sake of accommodation.
NAND RAM VS.SITLA PRASAD 5 ALL 484:
“The party who procures another to lend his name, thereby engages himself to
pay the bill or note at its due date, or to provide the accommodating party with
funds for so doing, or in case the accommodating party has to take up the bill and
pay it, he undertakes to indemnify him to the extent of the damage incurred by
him”.
The relationship between the accommodation party and the accommodated
party being one of surety any principal debtor, the former would be entitled to
recover the amount paid by him from the latter.
“A mere fluctuating balance between the two parties does not make the bill an
accommodation bill”.
23.3 KINDS OF INDORSEMENTS AND THEIR EFFECT
Section 16 of the Negotiable Instruments Act, 1881 defines indorsement ‘in
blank’ and in ‘full indorsee’ as follows.
1. If the indorser signs his name only, the indorsement is said to be “in blank”
and if he adds a direction to pay the amount mentioned in the instrument to,
or to the order of; a specified person the Indorsement is said to be “in full”, and
the person so specified called the “indorsee” of the instrument.
2. The provisions of this Act relating to payee shall apply with the necessary
modifications to an indorsee”.
Endorsement
1. Blank or general.
2. Full or special.
3. Absolute.
4. Restrictive.
5. Conditional.
6. Facultative.

23.3.1 Blank or general indorsement

An indorsement is said to be in blank where the indorser merely signs his
name on the back of the instrument without indicating the name of the person to
whom the money is to be paid. The instrument may be negotiated by mere delivery.
The holder can put in his own name, or the name of any other person above the
indorsement and convert the blank indorsement into a full indorsement.
e.g.sd/x.
Above ‘X’ the holder may give the name of a third party as
e.g. John
sd/X
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BHANDARI VS. PUNJAB NATIONAL BANK (1938) LAH. 520

“So long as the indorsement continues blank, the property in the negotiable
instrument may be passed by mere delivery, exactly as if it were payable to bearer”.
Section 54 of the Negotiable Instruments Act, 1881 reads:-
“Subject to the provisions hereinafter contained as to crossed cheques a
negotiable instrument indorsed in blank is payable to the bearer thereof even
although originally payable to order”.
“There is no difference between a note in blank and one payable to bearer.
They both go by delivery and possession proves property in both cases”.
23.3.2 Full or special indorsement
When the indorsement contains not only the signature of the indorser but also
the name of the person in whose favour the indorsement is made then that
indorsement is said to be in full or special

e.g. “pay to John Bosco or oder

sd/Jaikumar”
Here full details are given and it will have to be negotiated by indorsement and
delivery.
SRINIVASA VS. VENKATAMMAL 24 M. L. J. 296
“An indorsement to the effect that the note has been made over to one on a
particular date signed by the payee is an indorsement in full and can operate as
negotiation when the instrument is delivered”.
Section 49 of the Negotiable Instruments Act, 1881 deals with conversion of
indorsement in blank into indorsement in full as follows:
“The holder of a negotiable instrument is blank may, without signing his own
name by writing above the indorser’s signature a direction to pay to any other
person as indorsee, convert the indorsement in blank into on indorsement in full
and the holder does not thereby incur the responsibility of an indorser”.
“Where an instrument has been indorsed in blank any holder may convert the
blank indorsement into a special indorsement by writing above the indorser’s
signature a direction to pay the instrument to or to the order of himself or some
other person”.
Section 55 of the Negotiable Instruments Act, 1881 deals with conversion of
indorsement in blank into indorsement in full as follows:
If a negotiable instrument, after having been indorsed in blank, is indorsed in
full, the amount of it cannot be claimed from the indorser in full, except by the
person to whom it has been indorsed in full, or by one who derives title through
such person”.
“If a bill is indorsed in blank or is payable to bearer and is afterwards indorsed
by another in full, the bill remains transferable by delivery with regard to all parties
 311

prior to such indorser in full, but such indorser in full cannot be sued by any one
except the person in whose favour the indorsement in full is made or any one
deriving title through an indorsement in his hand.
“C the payee of a bill indorses it in blank and delivers it to D’ who specially
indorses it to E or order. E without indorsement transfers the bill to F. Then F as
the bearer is entitled to receive payment or to sue drawer, the acceptor or C who
indorsed it in blank, but he cannot sue D or E”.
23.3.3 Absolute indorsement
It takes place where the indorsee is empowered to take under the instrument
without any restriction of qualification. He becomes the absolute holder thereof.
23.3.4 Restrictive Indorsement
An indorsement is said to be restrictive, when it prohibits or restricts the
further negotiability of the instrument.
Section 50 of the Negotiable Instruments Act, 1881 reads as follows:
“The indorsement of a negotiable instrument followed by delivery transfers to
the indorsee the property therein with the right of further negotiation, but the
indorsement may by express words, restrict or exclude such right, may merely
constitute the indorsee an agent to indorse the instrument or to receive its contents
for the indorser or for some other specified person”.
The examples of restrictive indorsement are
“Pay to Edwin only”
Sd/John.
“Pay to Indian Bank for collection only”
Sd/Bosco
“Pay to John Bosco as advocate for Edwi
Sd/Jaikumar.
23.3.5 Conditional indorsement
An indorsement is conditional or qualified if it limit or negatives the liability of
the indorser.
Section 52 of the Negotiable Instruments Act, 1881 reads:
“The indorser of a negotiable instrument may, by express words in the
indorsement, exclude his own liability thereon, or make such liability or the right of
the indorsee to receive the amount due thereon depend upon the happening of a
specified event, although such event may never happen.
Where an indorser so excludes his liability and afterwards becomes the holder
of the instruments all intermediate indorsers are liable to him”.
Conditional indorsement is also called “qualified indorsement” or ‘Sana
recourse indorsement’. A conditional indorsement does not affect negotiability but
only excludes or qualifies the liability of the endorser.
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The indorser may also make the right of the indorsee to receive the contents of
the instrument depending on the happening of a specified event.
e.g.
1. “Pay John or order Sans recourse”
2. “Pay Bosco or order on his marriage with Vimala”.

23.3.6 Facultative indorsement

In the case of facultative indorsement the indorser waives some right of his or
enlarges his liability under the instrument.
e.g.
“Notice of dishonour waived.
Sd/John.
23.3.7 SANS FRAIS INDORSEMENT
The indorser does not want any expense to be incurred on his account on the
instrument.
23.3.8 Partial indorsement
An indorsement will become partial where an instrument has been partly paid
and it is negotiated for the balance, indicating on the document the fact of part
payment as otherwise a part indorsement is invalid. An indorsement cannot
purport to assign only a part of the amount due under a negotiable instrument.
Section 56 of the Negotiable Instruments Act, 1881 says:-
“No writing on a negotiable instrument is valid for the purpose of negotiation if
such writing purports to transfer only a part of the amount appearing to be due on
the instrument, but where such amount has been partly paid, a note to that effect
may be indorsed on the instruments which may be taken to be negotiated for the
balance”.
23.4 EFFECT OF FRAUD AND FOREGERY IN NEGOTIABLE INSTRUMENTS
Section 58 of the Negotiable Instruments Act, 1881 deals with the instrument
obtained by unalwful means or for unlawful consideration as follows:
“When a negotiable instrument has been lost or has been obtained from any
maker acceptor or holder thereof by means of an offence or fraud, or for an
unlawful consideration no possessor or indorsee who claims through the person
who found or so obtained the instrument is entitled to receive the amount due
thereon from such maker, acceptor or holder or from any party prior to such
holder, unless such possessor or indorsee is, or some person through whom he
claims was a holder thereof in due course”.
The finder of a lost instrument gets no title to it as against the rightful owner.
The true owner can recover the instrument from the finder. If the finder obtains
payment on a lost bill the person who pays it in due course gets a valid discharge
for it. But the true owner can recover the value as damages from the finder. If the
finder of a lost instrument which is payable to bearer or which is indorsed in blan
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and is therefore transferable by mere delivery, negotiates it to a transferee for value

and in good faith the transferee gets a valid title. If the maker, drawee or acceptor
pays the amount due on such instrument to such unauthorised person by a
payment in due course, he is discharged from liability.
If the thief of a bill or note payable to order forges the indorsement of the
rightful owner and negotiates it to a bonafide transferee for value, the latter
acquires no legal title to it, for a forgery can never confer title.
If a negotiable instrument was obtained by fraud the possessor gets no title to
it. Persons deriving title through such possessor also would not get any valid title
except a holder in due course.
A negotiable instrument given for unlawful consideration is void and creates
no obligation between the parties thereto.
Forgery conveys no title. A forged signature of the drawer of acceptor is in law
wholly in operative and a forged indorsement is regarded in law as no indorsement
at all.
Where the signature of the drawer or acceptor is forged, the holder will not be
entitled to enforce payment. He cannot give a valid discharge for it. The property
in the instrument remains in the person who was the real owner at the time of
forgery. A person who has paid money by mistake on a forgery. A person who has
paid money by mistake on a forged signature may recover it from the person to
whom he has paid it. Even a holder in due course cannot get any title in the forged
document.
To the rule that forgery conveys no title, there are two exceptions;
1. If the signature of the indorser appears to have been made by the very person
named therein, even though it is forged and there is nothing irregular or
exciting suspicion in the endorsement, the banker is discharged from his
liability by payment in due course and he can debt the customer’s account
with the amount of the cheque.
2. A demand draft drawn by one branch of a bank upon another branch of the
same bank.

INGHAM VS. PRIMROSE (1859) 7 C.B. (N.S.) 82: 141 E.R. 745: 8 L.J.C.P.294
“A accepted a bill and gave it to B who put his name as a drawer for the
purpose of his discounting it and paying the proceeds to him. B having failed to
discount returned the bill to A who intending to cancel it tore it into two and threw
the pieces into the street which B picked up, pasted together and put in circulation.
It was held that A was liable to a bonafide holder without notice”.
NARAYANASWAMI VS.RAJAVALLI L.B.R. (1893-1960) 412; 10 HALS. P.219
“It is to be noticed that the cases insist upon the absence of negligence on the
part of the signor as a condition of his exemption from liability.”
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VIII) RULES OF PRESENTMENT FOR ACCEPTANCE AND PAYMENT-PRESENTMENT

WHEN UNNCESSARY:
If a bill of exchange is payable after sight, or is so expressed that it shall be
presented for acceptance or is payable at other than the place of residence or
business of the drawee, it must be presented for acceptance.
Section 61 of the Negotiable Instrument Act, 1881 deals with presentment for
acceptance as follows:
“A bill of exchange payable after sight must, if no time or place is specified
therein for presentment, be presented to the drawee thereof for acceptance, if he
can, after reasonable search, be found, by a person entitled to demand acceptance,
within a reasonable time after it is drawn and in business hours on a business day.
In default of such presentment no party thereto is liable thereon to the person
making such default.
If the drawee cannot, after reasonable search, be found the bill is dishonoured.
Where authorised by agreement or usage, a presentment through the post
office by means of a registered letter is sufficient.
VEERAPPA VS. VELLAYAN (1919) M.W.N. 780:10 L. W. 39; 52 I.C. 370
Presentment for acceptance must precede presentment for payment in the
case of every bill in order to fix the drawee with liability”.
Section 105 of the Negotiable Instruments Act, 1881 defines reasonable time.
In determining what is a reasonable time for presentment for acceptance or
payment, for giving notice of dishonour and for nothing, regard shall be had to the
nature of the instrument and the usual course of dealing with respect to similar
instrument, and in calculating such time public holidays shall be excluded”.
“There is no fixed time when a bill or not payable after sight should be
presented to the drawee, but all that is required is that it should be presented
within reasonable time”.
RAMACHURN VS. LACHMEECHAND (1854) 9 MOO P.C.G.46 : 14 E R 225 (PC)
“Where a bill drawn in Calcutta on Hong-Kong at sixty days after sight, was
held up by circulation in India for over five months owing to the unfavourableness
of the exchange, it was held that the delay discharged the drawer”.
MUTTY LOLL VS.CHOOL MULL, 11 CAL 344
“The facility of communication between the parties should along with other
thing be considered in determining the question of reasonable time”.
Section 62 of the Negotiable Instruments Act, 1881 deals with presentment of
promissory note for sight as follows:
“A promissory note, payable at a certain period after sight, must be presented
to the maker thereof for sight (if he can after reasonable search be found) by a
person entitled to demand payment, within a reasonable time after it is made and
in business hours on a business day. In default, of such presentment, no party
thereto is liable thereon to the person making such default.
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“The expression ‘after sight’ in a promissory note merely imports that the
payment is not to be demanded until it has been again exhibited to the maker”.
Section 75 of the Negotiable Instrument Act, 1881 reads:
“Presentment for acceptance or payment may be made to the duly authorised
agent of the drawee, maker or acceptor as the case may be or where the drawee,
maker or acceptor has died to his legal representative or, where he has been
declared an insolvent to his assignee.
PHILIPS VS. ASTLING (1809) 2 TAUNT 206: 127 E.R. 1066:11 R.R. 547
“Where a bill was presented to an agent at the place of business such
presentment has been held to be good”.
“If the drawee, acceptor or maker as the case may be, is dead, then
presentment for acceptance or payment may be made to his legal representative.
Section 75-A of the Negotiable Instruments Act, 1881 deals with excuse for
delay in presentment for acceptance or payment.
Delay in presentment for acceptance or payment is excused if the delay is
caused by circumstances beyond the control of the holder and not imputable to his
default, misconduct or negligence. When the cause of delay ceases to operate,
presentment must be made within a reasonable time”.
Section 63 of the Negotiable Instruments Act 1881 deals with drawee’s time for
deliberation as follows”.
“The holder must, if so required by the drawee of a bill of exchange presented
to him for acceptance allow the drawee forty eight hours exclusive of public
holidays to consider whether he will accept it”.
If the drawee with whom a bill is left for acceptance destroys it or does not
return the bill the holder may maintain an action for the recovery of the bill or for
damages.
WARWICK VS. ROGERS (1843) 5 M.&G.340:134 E.R. 595:63 R.R. 292
“The duty cast on the drawee is not more than to take due care of the bill and
if he did no choose to accept it to return it uncancelled”.
Presentment for acceptance is unnecessary in the cases of bills.
a. Payable on demand.
b. Payable within a certain number of days after date.
c. Payable on a certain day.
In the following cases presentment for acceptance is execused and the bill
becomes dishonoured.
1) When the drawee is a fictitious person.
2) When the drawee cannot after reasonable search be found.
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3) Although the presentment has been irregular acceptance has been refused on
some other ground.
4) Where the drawee is incompetent to contract.
5) Where the drawee becomes insolvent or is dead.
Section 64 of the Negotiable Instruments Act 1881 deals with presentment for
payment as follows:
“Promissory notes, bills of exchange and cheques must be presented for
payment to the marker, acceptor or drawee thereof respectively by or on behalf of
the holder as hereinafter provided. In default of such presentment, the other
parties thereto are not liable thereon to such holder.

Where authorised by agreement or usage, a presentment through the post

office by means of a registered letter is sufficient.

EXCEPTION
Where a promissory note is payable on demand and is not payable at a
specified place, no presentment is necessary in order to charge the maker thereof”.

DEVI DUTTA VS. PRATAB SINGH (1933) LAH. 176

“In the case of the drawer and the indorser, if presentment for payment is not
made, they are discharged from liability but the maker and the acceptor are not”.
Section 65 of the Negotiable Instruments Act, 1881 deals with hours of
presentment:
“Presentment for payment must be made during the usual hours of business
and if at a banker’s within banking hours”.
“In India, the usual hours of business are from 10 A.M. to 5 P.M. except on
Saturdays when the hours are generally from 10 A.M. to 3 P.M. these hours are
subject to variation according to the place or the custom of usage of trade in the
place where the instrument is payable and presentment is to be made.
Section 66 of the Negotiable Instrument Act, 1881 deals with presentment for
payment of instrument payable after date or sight.
“A promissory note or bill of exchange made payable at specified period after
date or sight thereof, must be presented for payment at maturity”.
BENARES BANK VS. FIRYA DAS (1930) ALL 106
“A bill of exchange made payable at a specified period after date must be
presented for payment at maturity and the want of presentment exempts the
indorser from liability”.
Section 67 of the Negotiable Instruments Act, 1881 deals with presentment for
payment of promissory note payable by instalments.
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“A promissory note payable by instalments must be presented for payment on

the third day after the date fixed for payment of each instalment and non-payment
on such presentment has the same effect as non payment of a note at maturity”.
“For promissory notes made payable by instalments three days of grace are
allowed for each instalment”.
“The dates of the instalments must be clear from the instrument itself;
otherwise the instrument is not valid as a note”.
Section 68 of the Negotiable Instruments Act, 1881 deals with presentment for
payment of instrument payable at a specified place and not elsewhere.
“A promissory note, bill of exchange or cheque made; drawn or accepted
payable at a specified place and not elsewhere must, in order to charge any party
thereto, be presented for payment at that place”.
MANUMAL VS. SHIBBA MAL (1939) LAH 18
“Where in an instrument the place of payment is indicated by the maker,
drawer or acceptor it must be presented at the place for payment. If no such place
is stated, the note or the bill must be presented at the place of business, if any or at
the usual residence of the maker drawee or acceptor as the case may be”.
The mention of the place of payment may be made either by the drawer or the
maker at the time the instrument is originally made or may be made by the
acceptor, as a part of his acceptance on the bill.
Section 69 of the Negotiable Instruments Act, 1881 deals with instrument
payable at specified place:
“A promissory note or bill of exchange made drawn or accepted payable at a
specified place must in order to charge the maker or drawer thereof, be presented
for payment at that place”.
“Presentment is necessary at the place mentioned to charge the drawer or the
maker”.
‘If in a bill of the place of payment is printed as the acceptor’s residence a
presentment to any inmate will suffice”.
SIVARAM VS. JAYARAM, 1966 MAD 297, 302, 304
“The place of payment must appear extacie in the face of the instrument. It
must be precise, certain and definite and must be incorporated in the body of the
instrument”.
“Where a promissory note is made payable at either of two places presentment
at either of these places will suffice, though it is proved that had it been presented
at the nearer of the two places, it would have been paid”.
Section 70 of the Negotiable Instruments Act, 1891 defines presentment where
no exclusive places are specified as follows:-
“A promissory note or bill of exchange not made payable as mentioned in
sections 68 and 69, must be presented for payment at the place of business (if any),
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or at the usual residence of the maker, drawee or acceptor thereof, as the case may
be”.
Section 72 of the Negotiable Instrument Act, 1881 deals with presentment of
cheque to charge drawer as follows:
“Subject to the provisions of Section 84, a cheque must, in order to charge the
drawer, be presented at the bank upon which it is drawn before the relation
between the drawer ad his banker has been altered, for the prejudice of the drawer’.
Section 84 of the Negotiable Instruments Act, 1881 reads as follows:
1. Where a cheque is not presented for payment within a reasonable time of its
issue, and drawer or person on whose account it is drawn had the right, at the
time when presentment ought to have been made, as between himself and the
banker, to have the cheque paid and suffers actual damage through the delay,
he is discharged to the extent of such damage, that is to say, to the extent to
which such drawer or person is a creditor of the banker to a larger amount
than he would have been if such cheque had been paid.
2. In determining what is a reasonable time, regard shall be had to the nature of
instrument, the usage of trade and of bankers and the facts of the particulars
case.
3. The holder of the cheque as to which such drawer or person is so discharged
shall be a creditor in lieu of such drawer or person, of such banker to the
extent of such discharged and entitled to recover the amount from him.

SOBHA SINGH VS. COMMISSIONER OF INCOMETAX (1950) E.P.347

“Where a bill is given to a bank for collection the receipt of the money is
deemed in law to be only at the place where the bank on which it is drawn is
situated”.`
“A cheque must, in order to charge any person except the drawer be presented
within a reasonable time after delivery thereof by such person”.
Section 76 of the Negotiable Instrument Act, 1881 deals with when
presentment for payment unnecessary as follows:-
“No presentment for payment is necessary and the instrument is dishonoured
at the due for presentment in any of the following cases.
a) if the maker, drawee or acceptor intentionally prevents the presentment of
the instrument, or.
If the instrument being payable at his place of business he closes such place
on a business day during the usual business hours; or
If the instrument being payable at some other specified place, neither he nor
any person authorized to pay it attends at such place during the usual business
hours; or
If the instrument not being payable at any specified place, he cannot after due
search be found.
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b) as against any party sought to be charged therewith, if he has engaged to

pay notwithstanding non-presentment.
c) as against any party if, after maturity, with knowledge that the instrument
has not been presented.
He makes a part-payment on account of the amount due on the instrument.
Or promises to pay the amount due thereon in whole or in part.
Or otherwise waives his right to take advantage of any default in presentment
for payment.
d) as against the drawer, if the drawer could not suffer damage from want of
such presentment.
The excuses for non-presentment are in many cases the same as and similar
to the excuses for dispensing with notice of dishonour.
i) Discharge – Different Modes of Discharge Including Material Alteration:
In the case of negotiable instruments, there are two kinds of discharge.
1) Discharge of the negotiable instrument.
2) Discharge of one or more of the parties from liability of the negotiable
instrument.
An instrument is discharged when all rights of action under it are completely
extinguished and when it ceases to be negotiable.
If one or more of the parties are discharged from liability, the instrument
continues to be negotiable and the other parties continue to be liable on it.
Let us now consider the different modes of discharge of an instrument.
Section 78 of the Negotiable Instrument Act, 1881 reads:
“Subject to the provisions of Section 82, clause (c) payment of the amount due
on a promissory note, bill of exchange or cheque must, in order to discharge the
maker or acceptor, be made to the holder of the instrument”.
The payment of the amount due on the instrument must be made at or after
the maturity of the holder of the instrument if the maker or acceptor is to be
discharged.
Section 82 (c) of the Negotiable Instrument Act, 1881 provides that where an
instrument is payable to bearer or is indorsed in blank payment in due course by
the acceptor or indorser thereof, of the amount due thereon gives a complete
discharge to all parties liable on the bill.
Section 81 of the Negotiable Instruments Act, 1881 reads “Any person liable to
pay and called upon by the holder thereof to pay, the amount due on a promissory
note, bill of exchange or cheque is before payment entitled to have it shown and is
on payment entitled to have it delivered up, to him or if the instrument is lost or
cannot be produced to be indemnified against any further claim thereon against
him”.
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To put it in other words, any person liable to pay is entitled to have the
instrument shown to him before payment. On payment he is entitled to have it
delivered up to him.
Section 90 of the Negotiable Instrument Act reads “if a bill of exchange which
has been negotiated is at or after maturity held by the acceptor in his own rights of
action thereon are extinguished.
To put it in nut shell, if the maker of a note or acceptor of a bill becomes its
holder at or after its maturity in his own right the instrument is discharged.
When the holder of a negotiable instrument at or after its maturity absolutely
and unconditionally renounces or gives up his right against all the parties to the
instrument the instrument is discharged.
Where an instrument is intentionally cancelled by the holder or his agent and
the cancellation is apparent thereon the instrument is discharged.
A negotiable instrument may be discharged by novation, or rescission or by
lapse of period of limitation.
Let us now consider the discharge of party of parties of the negotiable
instrument.
Section 82 (a) of the Negotiable Instruments Act says the maker, acceptor or
indorser of a negotiable instrument is discharged from liability to a holder who
cancels such acceptor’s indorser’s name with intent to discharge him and to all
parties claiming under such holder.
“If the holder of a bill or note or his agent deliberately cancels the name of any
party on the instrument with an intention to discharge him such party is
discharged from liability to the holder”.
Under Section 82 (b) of the Negotiable Instruments Act, 1881 where the holder
of a negotiable instrument releases any party to the Instrument by any method
other than cancellation, the party so released is discharged from liability.
A release granted to the principal debtor on the instrument operates as a
discharge.
Under Section 83 of the Negotiable Instruments Act, 1881 if the holder of a bill
of exchange allows the drawee more then fortyeight hours, exclusive of public
holidays to consider whether he will accept the same, all previous parties not
consenting to such allowance are thereby discharged from liability to such holder.
Under Section 84 of the Negotiable Instruments Act, 1881, where a cheque is
not presented by the holder for payment within a reasonable time of its issue and
the drawer suffers actual damage through the delay because of the failure of the
bank; he is discharged from liability to the holder to the extent of such damage.
The following illustration are self explanatory.
a) A draws a cheque for Rs.1,000/- and when the cheque ought to be presented
has funds at the bank to meet it. The bank fails before the cheque it
presented. The drawer is discharged but the holder can prove against the
bank for the amount of the cheque.
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b) A draws a cheque at Ambala on a bank in Calcutta. The bank fails before the
cheque could be presented in ordinary course. A is not discharged for he has
not suffered actual damage through any delay in presenting the cheque.
Under Section 85 of the Negotiable Instruments Act, 1881, where a cheque
payable to order purports to be indorsed by the payee, the banker is discharged by
payment in due course.
Where a cheque is originally expressed to be payable to bearer the drawee is
discharged by payment in due course to the bearer thereof notwithstanding any
indorsement whether in full or in blank appearing thereon, and notwithstanding
any such indorsement purports to restrict or exclude further negotiation.
Under section 85-A of the Negotiable Instruments Act, 1881 where any draft
that is, an order to pay money, drawn by one office of a bank upon another office of
the same bank for a sum of money payable to order on demand, purports to be
indorsed by or on behalf of the payee the bank is discharged by payment in due
course.
Under section 86 of the Negotiable Instruments Act, 1881, if the holder of a bill
of exchange acquiesces in a qualified acceptance, all the previous parties whose
consent is not obtained to such acceptance are discharged from liability. They will
be liable if on a notice being given to them they give their assent to such
acceptance.
The insolvent who happens to be maker, acceptor or indorser of any bill, is
discharged by an order of Insolvency court.
When the remedy becomes time-barred, the parties are discharged.
Under Section 87 of the Negotiable Instruments Act, 1881, a material
alteration of a negotiable instrument renders the same void against persons who
were parties thereto before such alteration unless they have consented to the
alteration.
Under Section 89 of the Negotiable Instruments Act, 1881, where a promissory
note, bill of exchange or cheque has been materially altered but does not appear to
have been so altered or where a cheque is presented for payment which does not at
the time of presentation appear to be crossed, payment on such an instrument
discharges the party liable if he pays according to the apparent tenor of the
instrument at the time of payment and otherwise in due course.
Such a payment cannot be questioned even if it is proved that the instrument
has been altered or that the cheque was originally crossed.
TANJORE PERMANENT BANK VS. RANGACHARI (1959) 2, M.L.J. 196
“A customer is bound to exercise reasonable care in drawing a cheque to
prevent the banker being misled, but this does not mean that a banker can escape
liability in cases where the loss was occasioned by his negligence”.
“If a material alteration is made accidentally the instrument is not rendered
void”.
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HONGKONG AND SHANGHAI BANK VS. LO LEE SHI (1928) A.C. 181
“The instrument was mutilated and effaced by the wash and ironing of the
garment in which it was left. Held the instrument was not rendered void”.
If a material alteration is made by a third party, without any fault on the part
of the holder, the instrument is not rendered void.
If alterations are made in regard to any of the following, they are material
alterations.
1) Date,
2) Time of drawing,
3) Place of payment,
4) Sum payable,
5) Medium of payment,
6) Rate of interest,
7) Number of parties to the instrument,
8) The relation of parties,
9) The legal character.
The following will not amount to material alteration and will not discharge a
party from liability.
1) If an alteration is made to carry out the commor intention of parties; or
2) To rectify a bonafide error; or
3) Made before issue or completion of the instrument;
4) By converting an endorsement in blank into full endorsement, or
5) Crossing a bearer cheque.
Alterations such as
1) Crossing of cheques.
2) Conversion of blank into special indorsements;
3) Filling in of blanks in the case of inchoate instruments;
4) Qualified acceptance.
are permitted by the Negotiable Instruments Act, 1881.

23.5 SUGGESTED QUESTIONS

1. What are the different types of endorsements.
2. Discuss the legal position of the indorsers with reference to the acceptor of Bill
exchange.


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LESSON – 24

NEGOTIABLE INSTRUMENTS (CONTD)

STRUCTURE
24.1 Dishonour of Bills and Notice of Dishonour
24.2 Acceptance for Honour and Reference in case of Need.
24.3 Rules as to Payment of Compensation
24.4 Suggested Questions
24.1 DISHONOUR OF BILLS AND NOTICE OF DISHONOUR:
Dishonour may be either by non-acceptance or by non payment. When the
drawee refuses to accept a negotiable instrument, the instrument is said to be
dishonoured by non-acceptance. In the cases where there are several drawers who
are not partners, refusal to accept by one of them will result in dishonour by non-
acceptance.
A bill of exchange is dishonoured by non-acceptance in any one of the
following ways:
1) If the drawee does not accept within 48 hours from the presentment though
the bill is duly presented for acceptance.
2) If there are several drawees (who are not partners) and if all of them do not
accept.
3) When presentment for acceptance is excused the bill is not accepted.
4) When the drawee is incompetent to contract.
5) When the drawee gives a qualified acceptance.
6) When the drawee is a fictitious person or after reasonable search, cannot be
found.
Section 91 of the Negotiable Instruments Act deals with dishonour by non-
acceptance as follows:-
“A bill of exchange is said to be dishonoured by non-acceptance when the
drawer, or one of several drawees not being partners, makes default in acceptance
upon being duly required to accept the bill, or where presentment is excused and
the bill is not accepted. Where the drawee is incompetent to contract or the
acceptance is qualified, the bill may be treated as dishonoured”.
A dishonour by non-payment takes place when the maker of a promissory
note, acceptor of a bill or the drawee of a cheque makes a default, in payment on
being called upon to pay by proper presentment.
Section 92 of the Negotiable Instrument Act, 1881 deals with dishonour by
non-payment.
“A promissory note, bill of exchange or cheque is paid to be dishonoured by
non-payment when the maker of the note, acceptor of the bill or drawee of the
cheque makes default in payment upon being duly required to pay the same”.
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An instrument is also dishonoured by non-payment when presentment for

payment is excused and the instrument when overdue remains unpaid.
Section 93 of the Negotiable Instrument Act, 1881 deals with notice of
dishonour by and to whom it should be as follows.
When a promissory note, bill of exchange or cheque is dishonoured by non
acceptance or non-payment, the holder thereof, or some party thereto who remains
liable thereon must give notice that the instrument has been so dishonoured to all
other parties, whom the holder seeks to maker severally liable thereon and to some
one of several parties whom he seeks to make jointly liable thereon.
“Nothing in this section renders it necessary to given notice to the maker of the
dishonoured promissory note, or the drawee or acceptor of the dishonoured bill of
exchange or cheque”.
“Why the law requires prompt notice of dishonour is to enable the drawer of
the bill and other indorsers to withdraw their effort from or prevent them from
reaching the hand of the drawee or acceptor and also to enable such persons to
protect their interest by taking the necessary measures for obtaining payment from
all other parties liable to them”.
“In all cases, it is safer for the holder to give a reasonable, though not an
immediate, notice of dishonour”.
Notice of dishonour proceeds in most cases, from the holder who presents the
instruments for acceptance of payment, but it is not necessary that it should
always emanate from him.
The holder may given notice to all prior parties or may content himself by
giving notice only to his immediate indorser or to any one of several indorsers and if
any of the indorsers give notice to the drawer or to any indorser prior to himself
within a reasonable time after dishonour and before the said person is discharged
by lapse of reasonable time for giving notice to himself, then the holder is entitled to
rely on such notice and hold the person notified liable to him.
“For a party to give a valid notice of dishonour, it is necessary that he should
himself be liable on the instrument at the time of giving such notice, but it is not
necessary that he should be aware of the dishonour at the time or that he should
have himself received notice of dishonour by that time”.
The notice must come from the party entitled to call for payment of
reimbursement.
“An agent entrusted with the duty of collecting a bill must give the necessary
notice of dishonour, otherwise he is liable for the damages, sustained, by his
principal.
In the case of persons who are jointly and severally liable, notice to some of
them is not sufficient, except to the holder the joint liability only of those parties.
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KUTTAPPA VS. PALANIAPPA, 27 MAD 540

“The drawer and the indorsers to whom notice of dishonour is not given are
discharged from the liability not only on the bill, but also in respect of the original
consideration”.
Section 94 of the Negotiable Instruments Act, 1881 deals in which notice may
be given as follows:
“Notice of dishonour may be given to a duty authorised agent of the person to
whom it is required to be given or, where he has died, to his legal representative or
where he has been declared an insolvent to his assignee, may be oral or written,
may if written be sent by post and may be in any form, but it must inform the party
to whom it is given either in express terms or by reasonable intendment, that the
instrument has been dishonoured and in what way, and that he will be held liable
thereon; and in what way, and it must be given within reasonable time after
dishonour, at the place of business or (in case such party has no place of business)
at the residence of the party for whom it is intended.
If the notice is duly directed and sent by post and miscarries, such
miscarriage does not render the notice invalid”.
Under the Indian as well as English Law, if the party giving notice does not
know of the fact of the death of the indorser, a notice addrested to the dead man is
a valid notice.
Notice does not mean mere knowledge, but actual notification for a man who
can be shown to have known, before hand that the bill would be dishonoured is
nevertheless entitled to notice”.
Verbal notice can only sent through a messenger, while a written notice may
be sent either by a messenger or by post but it is always safer to send it by post.
“The notice, if by post, must be duly directed; a notice sent to the place
mentioned in the bill or to the ostensible place of business”.
“Where notice was by mistake sent to the wrong branch of a large bank, a
subsequent telegram correcting the address has been held to be sufficient”.
Notice of dishonour should be put in the post box.
“Notice should be given within a reasonable time of dishonour”
Section 95 of the Negotiable Instruments Act, 1881 reads:-
“Any party receiving notice of dishonour must, in order to render any prior
party liable to himself give notice of dishonour to such party within a reasonable
time unless such party otherwise receives due notice as provided by Section 93”.
Section 96 of the Negotiable Instruments Act, 1881 reads:-
“When the instrument is deposited with an agent for presentment the agent is
entitled to the same time to give notice to his principal as if he were the holder
giving notice of dishonour and the principal is entitled to a further; like period to
give notice of dishonour”.
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“Section 97 of the Negotiable Instruments Act, 1881 reads:-

“When the party to whom notice of dishonour is despatched is dead but the
party despatching the notice is ignorant of his death, the notice is sufficient”.
Section 98 of the Negotiable Instruments Act, 1881 deals with when notice of
dishonour is unnecessary:-
“No notice of dishonour is necessary:-
a) When it is dispensed with by the party entitled thereto.
b) In order to charge the drawer, when he has countermanded payment.
c) When the party charged could not suffer damage for want of notice.
d) When the party entitled to notice cannot after due search be found, or the
party bound to give notice is, for any other reason, unable without any fault of
his own to give it.
e) To charge the drawers, when the acceptor is also a drawer:
f) In the case of promissory note which is not negotiable.
g) When the party entitled to notice, knowing the facts, promises unconditionally
to pay the amount due on the instrument”.
Usually the drawer when drawing or the indorser when indorsing uses the
words “notice of dishonour waived”. This waiver could be at any time before
dishonour”.
Waiver of presentment is not waiver of notice.
“Waiver of notice of dishonour in favour of the holder ensures for the benefit of
all the parties coming after him”.
“A waiver of notice of dishonour by an indorser does not affect the liability of
an indorser prior or subsequent to him”.
Dispensing with notice must be clear and unequivocal.
The drawer is not entitled to notice of dishonour when he has countermanded
payment.
xi) Noting-Protest for Better Security
Section 99 of the Negotiable Instruments Act, 1881 deals with Noting’ as
follows:
“When a promissory note or bill of exchange has been dishonoured by non-
acceptance or non-payment, the holder may cause such dishonour to be noted by a
Notary Public upon the instrument, or upon a paper attached thereto or partly
upon each.
Such note must be made within a reasonable time after dishonour and must
specify the date of dishonour, the reason if any, assigned for such dishonour, or if
the instrument has not been expressly dishonoured the reason why the holder
treats it as dishonoured and the notary’s charges”.
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The holder of a negotiable instrument, before issuing notice of dishonour may

get the fact of dishonour noted down by a Notary Public.

The Notary Public will note –

a) The fact of dishonour.

b) The date of dishonour,
c) The reason for dishonour, and
d) Notarial charges.
This is of evidentiary value. If noting is there, the fact of dishonour will be
presumed.

If the original is lost, a copy can be had at any time from the notary’s office.

Noting should be made by the notary within a reasonable time after dishonour.
The noting should take place on the day of dishonour or at any rate not later
than the next business day unless the delay is caused by circumstances beyond the
holder’s control.
Section 100 of the Negotiable Instruments Act, 1881 deals with protest and
protest for better security as follows:
“When a promissory note or bill of exchange has been dishonoured by non-
acceptance or non-payment, the holder may, within a reasonable time, cause such
dishonour to be noted and certified by a notary public. Such certificate is called
protest.
When the acceptor of a bill of exchange has become insolvent, or his credit has
been publicly impeached, before the maturity of the bill, the bill holder may, within
a reasonable time, cause a notary public to demand better security of the acceptor
and on its being refused may, within a reasonable time, cause facts to be noted and
certified as aforesaid. Such certificate is called a protest for better security”.
Noting is preliminary to protest. Protest is a formal document or certificate
made by way of memorandum. It is a formal certificate of dishonour drawn up by a
notary.
There may be a protest for better security. Where the acceptor becomes a
bankrupt or suspends payment before maturity or when his credit is publicly
impeached the holder may, within a reasonable time cause such facts to be noted
and certified and such a certificate is called a protest for better security.
In the case of inland bills, noting or protest is not necessary to have recourse
against the drawer or indorser. In the case of foreign bills when dishonoured,
noting and protest are obligatory. Otherwise the drawer or endorser will be
discharged.
The usual practice is to enter a minute of the demand of payment and of the
dishonour of the bill, together with a copy of the same in the notarial register of the
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notary, and afterwards to draw up the formal protest, dating it on the day when the
bill was presented for payment and the instrument so drawn up is as much an
original as if it has been drawn up at the time of presentment and is equally
admissible in evidence in courts.

Section 101 of the Negotiable Instruments Act, 1881 deals with contents of
protest as follows:-
a) Either the instrument itself or a literal transcript of the instrument and of
everything written or printed thereupon.
b) The name of the person for whom and against whom the instrument has been
protested.
c) A statement that payment or acceptance; or better security, as the case may be
has been demanded of such person by the notary public, the terms of his
answer, if any; or a statement that he gave no answer, or that he could not be
found.
d) When the note or bill has been dishonoured the place and time of dishonour,
and when better security has been refused, the place and time of refusal.
e) The subscription of the notary public making the protest.
f) In the event of an acceptance for honour or of a payment for honour, the name
of the person by whom or the person for whom and the manner in which, such
acceptance or payment was offered and effected.
A Notary public may make the demand mentioned in clause (c) of this section
either in person or by his clerk, or, where authorised by agreement or usage, by
registered letter”.
“In an action on a bill drawn in England and accepted by a French house, it
was held that it was sufficient if it was proved that such notice of dishonour and
protest as was required by the law of France was given, eventhough the parties
between whom this was decided (i.e. the indorsee and payee) were domiciled in
England”.
A protest to be valid must be drawn up on a stamp paper of the value of two
rupees as per Art 50 of schedule 1 of the Indian Stamp Act (II of 1899) or on such
stamp as may have been prescribed by the various states.
Section 102 of the Negotiable Instruments Act, 1881 deals with notice of
protest as follows:
“When a promissory note or bill of exchange is required by law to be protested,
notice of such protest must be given instead of notice of dishonour, in the same
manner and subject to the same conditions; but the notice may be given by the
notary public who makes the protest”.
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In the case of a foreign bill of exchange, all the parties liable on such bill whom
the holder wants to proceed against, are entitled in insist on notice of protest being
given to him.
Notice of the protest is necessary to fix the liability of the parties on a bill of
exchange which requires to be protested.
“In giving notice of dishonour to the drawer of a foreign bill resident abroad, it
is sufficient to inform him that the bill had been protested without actually sending
him a copy of the protest”.
The rules as to giving the notice of protest are same as those that apply to the
notice of dishonour.

Section 103 of the Negotiable Instruments Act, 1881 deals with protest for
non-payment after dishonour by non-acceptance as follows:-
“All bills of exchange drawn payable at some other place than the place
mentioned as the residence of the drawee and which are dishonoured by non
acceptance, may without further presentment to the drawee be protested for non
payment in the place specified for payment unless paid before or at maturity”.
“Where the drawee of a bill resides in one place, and the bill is drawn payable
at another place, it will be sufficient to present the bill for acceptance to the drawee
at the place where he resides and is acceptance is refused, it may be protested
there”.
Section 104 of the Negotiable Instrument Act, 1881 deals with protest of
foreign bill as follows:-
“Foreign bill of exchange must be protested for dishonour when such protest is
required by the law of the place where they are drawn.
The following are foreign bills of exchange:
a) Bills drawn outside India and made payable in or drawn upon any person
resident in any country outside India.
b) Bills drawn outside India and made payable in India or drawn upon any
resident therein and
c) Bills drawn in India and made payable outside India or drawn upon any
resident outside India but not made payable in India.
A protest affords authentic and satisfactory evidence of dishonour to a foreign
drawer or indorser who will be in difficulty in making inquires of such dishonour
and will be compelled to rely on the representations of the holder.
“A Notary public by the law of nations has credit everywhere”.
Section 104 A of the Negotiable Instruments Act, 1881 deals with when noting
equivalent to protest as follows:-
“For the purpose of this Act where a bill or note is required to be protested
within a specified time or before some further proceedings is taken, it is sufficient
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that the bill has been noted for protest before the expiration of the specified time or
the taking of the proceeding and the formal protest may be extended at any time
thereafter as of the date of the noting”.
It is essential that noting must have taken place within the time allowed by
law, though formal protest may be drawn up later on.
“If a bill was regularly presented and noted at the time, the protest may be
made at any future period and in fact at any time before or after the date of action”.
Why noting alone should be insisted upon being made at the time is that the
Notary will not be permitted to trust his memory for the requisite particulars, and
law will give credit only to his contemporaneous written statement.
Whenever protest is drawn up it relates back to the date of noting.
24.2 ACCEPTANCE FOR HONOUR AND REFERENCE IN CASE OF NEED
Section 108 of Negotiable Instruments Act, deals with acceptance for honour
as follows:-
“When a bill of exchange has been noted or protested for non-acceptance or for
better security, any person not being a party already liable thereon may, with the
consent of the holder, by writing on the bill accept the same for the honour of any
party thereto”.
If a bill is dishonoured by non-acceptance, a stranger can intervene and accept
the bill in the place of the defaulting drawee. The object of this is to save the credit
or honour of same party to the bill or of the person for whose account it is drawn,
especially if such party lives far away from the place of dishonour by non-
acceptance to prevent legal proceedings against him and to exempt him from
damages in the case of exchange and re-exchange. The acceptance by a stranger is
called an acceptance for honour and can take place only after the bill has been
noted or protested for non-acceptance.
It is essential that the acceptance by a stranger should not be given until after
a regular noting or protest of the bill for non-acceptance of for want of better
security has been drawn up by a Notary Public.
A bill cannot be accepted for honour or supra protest by a person whose
liability on the bill is already fixed.
There cannot be an acceptance supra protest for part only of the sum for
which the bill is drawn.
Section 109 of the Negotiable Instruments Act, 1881 deals with how
acceptance for honour must be made as follows:-
“A person desiring to accept for honour must (by writing on the bill under his
hand) declare that he accepts under protest, the protested bill for the honour of the
drawer or of a particular indorser whom he names, or generally for honour”.
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It is not now necessary for the acceptor for honour to make the, declaration
before a notary and have it recorded in the notarial register nor is it required that it
should be signed by the acceptor.
The acceptor for honour should write his acceptance by his own hand on the
bill and should declare that he accepts the protested bill for the honour of the
drawer or of a particular person whom be names or generally for honour”.
No special form is prescribed for an acceptance for honour.
Section 110 of Negotiable Instrument Act, 1881 reads:-
“Where the acceptance does not express for whose honour it is made, it shall
be deemed to be made for the honour of the drawer”.
Section 111 of the Negotiable Instruments Act, 1881 deals with the liability of
acceptor for honour as follows:-

An acceptor for honour binds himself to all parties subsequent to the party for
whose honour he accepts to pay the amount of the bill if the drawee do not; and
such party and all prior parties are liable in their respective capacities to
compensate the acceptor for honour of all loss or damage sustained by him in
consequence of such acceptance.
But an acceptor for honour is not liable to the holder of the bill unless it is
presented, or (in case the address given by such acceptor on the bill is a place other
than the place where the bill is made payable) forwarded for presentment, not later
than the day next after the day of its maturity”.
An acceptor for honour is liable on the bill to the holder and to all parties to
the bill subsequent to the one for whose honour he accepted.
“The acceptance for honour is in its nature qualified and amounts only to a
collateral engagement i.e. an undertaking to pay, if the original drawee upon
presentment to him for payment should persist in dishonouring the bill”.
The acceptor for honour is liable only to parties subsequent to him for whose
honour he has accepted and any estoppel; which can be set up against such party
may be set up against the acceptor also.
If a bill is accepted for the honour of the drawer, such acceptor cannot set up
the plea that the payee is a fictitious person, as the drawer, cannot set up such a
plea.
The rights of an acceptor for honour are that he on paying the bill, can sue the
party for whose honour he has accepted and all parties prior to him.
When the bill has been protested for better security, he has his remedy also
against the acceptor.
Section 112 of the Negotiable Instruments Act, 1881 deals with when acceptor
for honour may be charged as follows:-
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“An acceptor for honour cannot be charged unless the bill has at its maturity
been presented to the drawee for payment and has been dishonoured by him, and
noted or protested for such dishonour”.
The liability of the acceptor for honour arises only if the following conditions
are fulfilled:-
1) Due presentment of the bill to the drawee for payment.
2) If the drawee still refuses to pay, the bill should be noted or protested for
payment.
3) The bill should be presented or forwarded to the acceptor for honour not
later than the day next after the day maturity.
“If the acceptor for honour pays the money when the bill is not presented to
the drawee or when the bill is not noted or protested for non-payment by the
drawee, he cannot recover the amount paid or any compensation from the party for
whose honour he has accepted or any party prior to him”.
Section 115 of the Negotiable Instruments Act, 1881 deals with drawee in case
of need as follows:-
“Where a drawee in case of need is named in a bill of exchange; or in any
indorsement thereon, the bill is not dishonoured until it has been dishonoured by
such drawee”.
Section 116 of the Negotiable Instruments Act, 1881 reads:-
“A drawee in case of need may accept and pay the bill of exchange without
previous protest”.
If the drawee in case of need pays the bill the drawer will be liable to him for
the full amount.
24.3 RULES AS TO PAYMENT OF COMPENSATION
When a negotiable instrument is dishnoured, the party liable to pay becomes
bound to pay compensation to the holder or indorser.
Section 117 of Negotiable Instruments Act, 1881 deals with rules as to
compensation as follows:
“The compensation payable in case of dishonour of a promissory note, bill of
exchange or cheque, by any party liable to the holder or any indorser shall be
determined by the following rules:-
a) the holder is entitled to the amount due upon the instrument together with the
expenses properly incurred in presenting, noting and protesting it;
b) when the person charged resides at a place different from that at which the
instrument was payable, the holder is entitled to receive such sum at the
current rate of exchange between the two places;
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c) An indorser who, being liable, has paid the amount due on the same is entitled
to the amount so paid with interest at six per centum per annum from the date
of payment until tender or realization thereof; together with all expenses
caused by the dishonour and payment;
d) When the person charged and such indorser reside at different places, the
indorser is entitled to receive such sum at the current rate of exchange
between the two places.
e) The party entitled to compensation may draw a bill upon the party liable to
compensate him, payable at sight or on demand for the amount due to him,
together with all expenses properly incurred by him. Such bill must be
accompanied by the instrument dishonoured and the party dishonouring the
same is liable to make compensation there of in the same manner as in the
case of the original bill.

xiv) Special rules of evidence – presumption and estoppel

The Negotiable Instruments Act lays down rules of evidence and estoppel
regarding negotiable instruments.
Section 118 of Negotiable Instruments Act, 1881 deals with presumption as to
negotiable instruments as follows:-
“Until the contrary is proved the following presumptions shall be made”.
a) That every negotiable instrument was made or drawn for consideration and
that every such instrument, when it has been accepted, indorsed negotiated or
transferred, was accepted, indorsed, negotiated or transferred for
consideration.
b) That every negotiable instrument bearing a date was made or drawn on such
date;
c) That every accepted bill of exchange was accepted within a reasonable time
after its date and before its maturity.
d) That every transfer of a negotiable instrument was made before its maturity;
e) That the indorsements appearing upon a negotiable instrument were made in
the order in which they appear thereon;
f) That a lost promissory note; bill of exchange or cheque was duly stamped.
g) That the holder of a negotiable instrument is a holder in due course, provided
that, where the instrument has been obtained from its lawful owner, or from
any person in lawful custody thereof, by means of an offence or fraud, or has
been obtained from the maker or acceptor thereof by means of an offence from
the maker or acceptor thereof by means of an offence or fraud, or for unlawful
consideration the burden of proving that the holder is a holder is due course
lies upon him.
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OFFICIAL RECEIVER VS. ABDUL SHAKOOR, 1965 S.C. 920

“The special rules of evidence laid down in this section have been intended to
apply only as between the parties to the instrument or those claiming under them”.
Further in this case Supreme Court has stated; “The presumption under this
section that every negotiable instrument was made or drawn for consideration
cannot avail against the Receiver of the estate of the insolvent in a proceeding
under Section 33 of the Provincial Insolvency Act as it is not a proceeding between
the insolvent and the proving creditor, but as one between the creditors represented
by the official Receiver and the insolvent”.
Now let us see, the presumption as to date.
KIRMANY VS. AGA ALI (1928) MAD. 919
“If a promissory note is proved to be genuine and it bears the date and place of
execution, the presumption is that it was executed at the place and on the date it
shows and the onus lies on the party pleading a different place and date to prove
it”.
Presumption as to time of acceptance
BEGBIE VS. LEVI (1830) I CR. AND J. 180:148 E.R. 1383
“When the acceptance bears no date there is no presumption that it was
accepted on the day of drawing, because the presumption under this section is only
that it was accepted after the date of drawing”.
Presumption as to time of transfer:
PARKIN VS. MOON (1836) 7 C. & P.408
“Except where indorsement bears a date after the maturity of the bill, every
indorsement is prima facie deemed to has been effected before the bill was overdue.
Presumption as to order of indorsement
When there are two or more indorsement on a negotiable instrument, each
indorsement is deemed to have been made in the order in which it appears on the
instrument.
“But this presumption may be rebutted by evidence, as where successive
indorsers of a note were allowed to show between themselves that they were co-
sureties”.
Presumption as to stamp on lost bills:
“The presumption of law is that a lost promissory note or bill of exchange was
duty stamped”.
Presumption that holder is a holder in due course:-

RAMASWAMI VS. GANAPATHI I.L.W. 100

“It is usually almost impossible to prove that a holder is not a holder in due
course by direct evidence, and the question has to be decided by probabilities,
mutual position of the parties and other circumstances connected with the case’.
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RAMANATHAN VS. GUNDU (1928) MAD. 1238

“The holder has to prove not only that he gave consideration, but also that he
gave it without having sufficient cause to believe that any defect existed in the title
of the person from whom he took the instrument”.
“Unless the contrary appears on the face of the bill, the holder may treat it as
an inland bill.
When a bill is no longer in the hands of the party who has signed it as drawer,
acceptor or indorser, valid and unconditional delivery is presumed and in the
hands of a holder in due course, the presumption is conclusive.
Section 119 of the Negotiable Instruments Act, 1881 deals with presumption
on proof of protest as follows”.
“In a suit upon an instrument which has been dishonoured, the court shall,
on proof of the protest, presume the fact of dishonour unless and until such fact is
disproved”.
VEERAPPA CHETTY VS. VELLAYAN (191:9) M.W.N. 780:10 L.W. 3.9
“A mere entry “Noted for non-payment” without date of dishonour or certificate
of protest is not a proper protest and the presumption under this Section does not
apply”.
Protest can operate as prima facie evidence of dishonour and is open to
rebuttal by the other side.
So far we have learn about the presumptions of Negotiable Instruments.
The following three Sections deal with estoppel of negotiable instruments.
Section 120 of Negotiable Instrument Act, 1881 deals with estoppel against
denying original validity of instrument as follows:
No maker of promissory note, and no acceptor of a bill of exchange or cheque
and no acceptor of a bill of exchange for the honour of the drawer shall, in a suit
thereon by a holder in due course be permitted to deny the validity of the
instrument as originally made or drawn”.
Under the Indian Law, an acceptance is no admission of drawer’s signature
and it is open to an acceptor to show even against a holder in due course that the
drawer’s signature is a forgery. In this respect, law in India is in direct conflict with
the English law.
Under the English law, the acceptor of a bill is precluded from denying to a
holder in due course, the following:
a) The existence of the drawer and his capacity and authority to
b) The capacity of the drawer to indorse in the case of a bill payable to his order
and,
c) The existence and the capacity of the payee.
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Under the Indian law, the acceptor cannot deny the existence of the drawer i.e.
he cannot plead that the drawer is a fictitious person because the liability of the
acceptor under section 42 is based on that estoppel.
The estoppel under this section precludes the drawer and acceptor for the
honour of the drawer from denying the validity of the instrument as originally
drawn.
CHIDAMBARAM CHETTIAR VS. AIYASAMI THEVAN 40 MAD 585 31 M.L.J. 401: L.W.261
“In a suit by the payee on a promissory note which offends, against the Paper
Currency Act and which is therefore on the face of it illegal, the maker is not
estopped from setting up the illegality of the instrument since the payee under such
a promissory note cannot be said to be a holder in due course.
Section 121 of the Negotiable Instrument Act, 1881 deals with estoppel against
denying capacity of payee to indorse as follows:-
“No maker of a promissory note and no acceptor of a bill of exchange (payable
to order) shall, in a suit there on by a holder in due course, be permitted to deny
the payee’s capacity, at the date of the note or bill, to indorse the same”.
If the insolvency or the insanity happened after the making of the note of the
indorsing of the bill, the indorsement by such a person is a mere nullity and can
confer no title on the indorsee and the acceptor is not justified in making payment
to any one whose title is affected by it.
Section 120 of Negotiable Instruments Act, 1881 deals with estoppel against
denying signatures or capacity of prior party as follows:
“No indorser of negotiable instrument shall, in a suit thereon by a subsequent
holder, be permitted to deny the signature or capacity to contract of any prior arty
to the instrument”.
xv) Crossing of Cheques, Kinds of Crossing and Their Effect Marking of Cheques
There are two types of cheques, open cheques and crossed cheques.
Open cheques are payable across the counter and considerable risk is involved
in this. Open cheques may be stolen or lost an payment may be effected wrongly to
an unauthorised person.
To avoid the losses incurred by open cheques getting into the hand of wrong
parties, crossing the cheques was recognised by statutes. The object of crossing
the cheque is to make the payment through a bank and not across the counter.
When payments are made through the bank, it is possible to trace the payee
and the risk of the cheque getting into unauthorised hands can be avoided.
Section 123 of the Negotiable Instruments Act, 1881 deals with cheque crossed
generally as follows:
“Where a cheque bears across its face an addition of the words ‘and company’
or any abbreviation thereof, between two parallel transverse lines, or of two parallel
transverse lines simply, either with or without the words ‘not’ negotiable’, that
addition shall be deemed a crossing and the cheque shall be deemed to be crossed
generally”.
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Crossing is done by simply drawing two transverse parallel lines across the
face of the cheque.
In a general crossing two parallel transverse lines are drawn across the face of
the cheque, usually at one side, the words “& co”, or “not negotiable” or “Account
payee”.
Please make a note that two transverse lines are the essential of general
crossing. The following are the examples of general crossing.
If any one of the marks, is in a cheque, it is a direction to the banker not pay
the cheque across the counter, but to pay it only to a banker.
This direction affords a protection and safeguard to the owner of the cheque by
securing payment through a banker. Consequently a person who is not entitled to
receive payment cannot get the cheque cashed at the counter.
Section 124 of the Negotiable Instruments Act 1881 deals with cheque crossed
specially as follows:-
“Where a cheque bears across its face an addition of the name of a banker,
either with or without the words ‘Not’ negotiable’, that addition shall be deemed a
crossing and the cheque shall be deemed to be crossed specially and to be crossed
to that banker”.
In the case of a special crossing two transverse lines are not essential as in the
case of general crossing, though it is usual to draw those two lines, but the
important requirement is that the name of the banker to whom it should be paid
should be written across the cheque.
The following are special crossings:-
The specific mention of a banker makes the cheque doubly safe. In cases
where the words ‘Account Payee’ or ‘payee’s account’ are indicated the collecting
banker has the duty to the see that the amount is received in the payee’s account
only. These cheques can be sent by ordinary post. If it is lost no one can collect
the cheque other than the bank mentioned therein.
Section 125 of the Negotiable Instruments Act, 1881 deals with crossing after
issue as follows:
“Where a cheque is uncrossed, the holder may cross it generally or specially.
Where a cheque is crossed generally, the holder may cross it specially.
Where a cheque is crossed generally or specially, the holder may add the
words ‘not negotiable’.
Where a cheque is crossed specially, the bankers to whom it is crossed may
again cross it specially to another banker, his agent for collection”.
If a cheque which was not originally crossed is subsequently crossed, either
generally or specially by a holder it does not amount to a material alteration.
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Where a cheque is crossed generally, the holder may cross it specially by

adding the name of the banker to the general crossing.
If a cheque is crossed specially, the holder cannot convert it into a general
crossing by striking out or obliterating the name of the banker.
Where there is double crossing, the banker before paying should make certain
that the second banker is the agent of the first.

Section 126 of the Negotiable Instruments Act, 1881 deals with payment of
cheque crossed generally and specially as follows:

Where a cheque is crossed generally the banker on whom it is drawn shall not
pay it otherwise than to a banker.

“Where a cheque is crossed specially, the banker on whom it is drawn shall

not pay it otherwise than to the banker to whom it is crossed or his agent for
collection.

Section 127 of the Negotiable Instruments Act, 1881 says:

“Where a cheque is crossed specially to more than one banker except when
crossed to an agent for the purpose of collection the banker on whom it is drawn
shall refuse payment thereof”.

Marking of Cheques
If a customer issued a cheque to a dealer, the customer would be asked to
mark the cheque by his banker for ascertaining its payment.

When a cheque is marked or initialed by a bank it simply means that it is

drawn in good faith on the funds of the drawer in the hands of the bank and it
gains additional currency.

You know that a cheque does not require acceptance and it is meant for
immediate payment.

There is a custom among bankers to mark cheques for “good for payment”.
This does not amount to an acceptance.

Marking is the writing on a cheque by the drawee banker that it would be

honoured when duly presented for payment.

BANK OF BARODA LTD VS. PUNJAB NATIONAL BANK LTD. AND OTHERS (1944) 2
M.L.J. 275 (P.C)
“Held that such marking or certificate is not equivalent to an acceptance of the
cheque by the banker similar to the acceptance of a bill of exchange”.
The facts of the case where that a cheque was drawn on the Baroda Bank on
13th June which was postdated to 20th June. It was marked good for payment on
20th June. The Punjab National Bank became holders in due course of the cheque.
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It presented the cheque to the Bank of Baroda for payment on 20 th June which was
dishonoured on account of insufficient funds. The Baroda Bank was held not liable
on the cheque.

In India there is no such practice of marking recognised either by judicial or by

statutes.
Yet cheques may be marked as good by the drawee banker at the request of
the drawer, the holder or the collection banker.
When a cheque is marked good at the instance of the drawer the drawer will
have no right of countermanding payment. With the result the drawee banker is
entitled to dishonour other cheques of the drawer.
When a cheque is marked good at the instance of the holder, it is an
intimation to the holder that at the time of marking, the banker has sufficient
funds of the drawer in his hands. Please make a note that there is no
appropriation by the banker as that of a cheque marked good at the instance of the
drawer.
When a cheque is marked at the instance of the collecting banker the marking
is treated as constructive payment”.
Ante-dated or post-dated cheques may be marked as good by the drawee-
banker.
24.4 SUGGESTED QUESTIONS
1. When is notice of dishonour for non payment obligatory? When can such
notice be dispensed with?
2. What are the essential particulars to be contained in a protest?

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LESSON – 25

PROTECTION TO PAYING AND COLLECTING BANKER

STRUCTURE
25.1 Protection to Paying and Collecting Banker
25.2 Bills in Sets – Nature and Incidents.
25.3 Suggested Questions
25.1 PROTECTION TO PAYING AND COLLECTING BANKER
Section 128 of Negotiable Instruments Act 1881 deals with payment in due
course of crossed cheque as follows:
“Where the banker on whom a crossed cheque is drawn has paid the same in
due course, the banker paying the cheque and (in case such cheque has come to
the hands of the payee) the drawer thereof, shall respectively be entitled to the
same rights, and be placed in the same position in all respects, as they would
respectively be entitled to and placed in, if the amount of the cheque had been paid
to and received by the true owner thereof.”
If the banker on whom a crossed cheque is drawn has paid the same in due
course, he may debit the drawer with the amount in his accounts with him.
In case of payment to a wrong person, the drawer or the true owner of the
cheque may recover the amount from the person, who received the money, since he
has no title to the cheque.
Section 129 of the Negotiable Instruments Act, 1881 deals with payment of
crossed cheque out of due course as follows.
Any banker paying a cheque crossed generally otherwise than to a banker, or a
cheque crossed specially otherwise than to the banker to whom the same is crossed
or his agent for collection, being a banker shall be liable to the true owner of the
chque for any loss he may sustain owing to the cheque having been so paid.
“If the banker on whom a cheque is drawn pays the amount in contravention
of the provisions of Section 126, and the amount is not received by the true owner
of the cheque, he cannot charge the drawer with the amount”.
If the crossing is not apparent by its being skillfully obliterated or otherwise
altered and if the banker pays in good faith he is not liable.
Section 130 of Negotiable Instruments Act, 1881 deals with cheque bearing
‘not negotiable’ as follows:-
“A person taking a cheque crossed generally or specially, bearing in either case
the words ‘not negotiable’ shall not have and shall not be capable of giving a better
title to the cheque than that which the person from whom he took it had”.
“The words ‘non-negotiable’ themselves may be enough to put the bank on
enquiry”.
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A ‘non negotiable’ cheque can be transferred from hand to hand only the
transferee gets not title better than the transferor and if that is defective, he or
those subsequent to him will have to recoup the true owner.
Section 131 of Negotiable Instruments Act, 1881 deals with non liability of
banker receiving payment of cheque as follows:-
“A banker who has in good faith and without negligence received payment for a
customer of a cheque crossed generally or specially to himself shall not, in case the
title to the cheque proves defective incur any liability to the true owner of he cheque
by reason only of having received such payment”.
Explanation: - A banker receives payment or a crossed cheque for a customer
within the meaning of this Section not withstanding that he credits his customer’s
account with the amount of the cheque before receiving payment thereof.
MIDLAND BANK VS. RECKITT (193) ACI. 137 L.T. 817
“ A per pro indorsement puts the banker on inquiry not only as to the
authority to indorse, but also the authority to deal with indorsed cheque in the
manner proposed”.
IMPERIAL BANK OF INDIA VS. KRISHNAMURTHI (1933) MAD. 628.
“If the banker has knowledge of the misapplication of trust money received by
his customer and paid to him, he is just as much liable for the amount as if he had
himself been nominated a trustee of the money and it had come into his hands as
such”.
HOUSE PROPERTY CO. VS. LONDON COUNTY & WESTMINISTER BANK (1915) 84
L.J.K. B. 1846
“Where a cheque drawn by the plaintiffs payable to F.S.H. & others ‘or bearer’
and crossed ‘account payee’ is sent to their solicitor who paid it to his private
account with the defendants his bankers, it was held that the latter were put on
inquiry and their collection without investigation was negligent.
“Where in the case of one man company its sole director pays into his on
account with the defendants, of the company for collection the defendants, if they
collect without inquiry are not entitled to the protection of this section.
Where cheques payable to an official as such are sought to be collected to his
own private account, the bank is put on inquiry and it not entitled to the protection
of this section

“It is negligence to collect a cheque payable to a partnership to the credit of

one of the partners”.

Under section 85(1) of Negotiable Instruments Act, 1881 we have studied that
if a cheque payable to order purports to be indorsed by or on behalf of the payee,
the banker is discharged or proected by the payment in due course.
This protection is given to the banker, because he is not expected to know the
signature of all the persons, except his customers.
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Under section 85(2) of the Negotiable Instruments Act, 1881, a banker gets a
good discharge or protected by payment in due course of the amount on a bearer
cheque to the holder of the instrument.
Protection under the statue will be available to the paying banker only if he
makes a payment in due course.
To put it in nut shell, the Negotiable Instruments Act gives protection to the
banker under certain circumstances, in order to enable the smooth running of the
banking business and to befit commerce.
A banker will be protected if he makes a payment in due course i.e. if he acts
in good faith, without negligence and without reasonable grounds to suspect the
title of the holder.
25.2 BILLS IN SETS-NATURE AND INCIDENTS
Sometimes bills may be drawn in several parts to avoid delay when they are
sent over long distances. All the parts will together make a single document. Each
part will be numbered and will refer to the other parts also. That is why these are
called bills in set.
Please make a note if one part is paid, the other parts become inoperative.
Usually, foreign bills are drawn in sets.
Section 132 of Negotiable Instruments Act, 1881 deals with set of bills or bills
in set as follows:
“Bills of exchange may be drawn in parts, each part being numbered and
containing a provision that it shall continue to be payable only so long as the others
remain unpaid. All the parts together make a set but the whole set constitutes only
one bill, and is extinguished when one of the parts, it a separate bill would be
extinguished.
Exception: When a person accepts or indorses different parts of the bill in
favour of different persons he and the subsequent indorsers of each part are liable
on such part as if it were a separate bill”.
“Each of these parts is numbered and contains a reference to the other parts.
Extinguishment of one of them operates to extinguish the others also”.
“The facility which drawing a bill in sets affords for its presentment has been
held to accelerate the time within which a bill payable after sight ought to be
presented for acceptance”.
When bills are prepared in sets, it is usual to insert a condition saying “pay
this my first of exchange, second and third remaining unpaid”.
This condition operates as a notice to a holder taking up the bill, that all parts
constitute one bill and puts him on guard to make inquiries as to all parts of the
bill. Suppose a bill is drawn in triplicate, would any man rely on one set without
knowing what had become of the other two?
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The acceptor should take care to pay only the part accede by him for, if he
should pay another part, he is still liable on his accepted part, because it may be
outstanding in the hands of a holder in due course.
Section 133 of the Negotiable Instruments Act 1881 deals with holder of first
acquired part entitled to all as follows:
“As between holders in due course of different parts of the same set he who
first acquired title to is parts is entitled to the other parts and the money
represented by the bill”.
“A person who negotiates a bill of exchange drawn in a set is bound to deliver
up all the parts in his possession, though by his negotiation it has been held that
he does not warrant that he has the rest.”
Where two or more parts of a set are negotiated to different holders in due
course, he who first acquires title to his part is deemed to be the true owner of the
bill. Consequently he is entitled to the possession of all other parts and claim the
money represented by the bill.
Annamalai Nagar,
$ 1,000 1st September, 2005.
Three months after sight of First of this Exchange (2nd and 3rd of the same
tenor and date being unpaid) pay to Smith or order the sum of one thousand
pounds only for value received.
To
Jones & Co.
London

Stamp
John

The second part contains a reference to the first and third parts and the third
part to the first and second parts.
xviii) Rules of International Law Governing Negotiable Instruments:
Section 134 of the Negotiable Instruments Act, 1881 deals with law governing
liability of maker, acceptor or indorser of foreign instrument as follows:
“In the absence of a contract to the contrary, the liability of the maker or
drawer of a foreign promissory note, bill of exchange or cheque is regulated in all
essential matters by the law of the place where he made the instrument and the
respective liabilities of the acceptor and indorser by the law of the place where the
instrument is made payable”
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The following illustration is self-explanatory.

A bill of exchange was drawn by A in California, where the rate of interest is
25% and accepted by B payable in Washington, where the rate of interest is 6%.
The bill is indorsed in India and is dishonoured. An action on the bill is brought
against B in India. He is liable to pay interest at the rate of 6% only but, if A is
charged as drawer, A is liable to pay interest at the rate of 25%.
In the case of negotiable instruments, where there it more than one system of
law applicable the principles to be applied are partly those applicable to ordinary
contracts and partly the provisions of the Act.
The law prevailing in England is that the proper law of contract is the law by
which the parties intended to be governed”.
“So far as Indian Law relating to negotiable instruments is concerned, the
choice of parties has been settled by the Section as conclusive for, the Section
starts by saying “in the absence of a contract to the contrary” so that it gives a clear
indication that if there is a contract between the parties as to the law they intend to
be governed by, that law governs the contract to the extent mentioned in section
134 of the Negotiable Instruments Act, 1881”.
REGAZZONI VS. K.C. SETHIA (1946) I ALL E.R. 229
“Courts will not enforce a right otherwise duly acquired under the laws of a
foreign country on contracts involving breaking the laws of a friendly country even
though such contracts are valid under their proper law”.
A State must be just, before it is generous and therefore no State should
exercise comity in favour of contracts which violate its own laws or the law of
nature or the law of God.
Courts will not enforce a right otherwise duly acquired under the law of a
foreign country:-
a) When the enforcement of such a right is inconsistent with any statute
intended to have extra territorial operations.
b) Where the enforcement of such a right is inconsistent with the policy of
the land where the action is brought or with the maintenance of the
political institutions of that land; and
c) Where the enforcement of such a right involves interference with the
authority of a foreign sovereign within the country whereof he is the
sovereign.
Further, the Court will not enforce the foreign law where such enforcement
involves the enforcement of a foreign penal law or confiscatory law or the foreign
revenue laws.
The formal validity or invalidity of the contract may be judged by the law of the
place where the contract is made.
In the case of Negotiable Instruments, where there is more than one system of
law applicable the principles to be applied are partly those applicable to ordinary
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contracts and partly the provisions of the Act. The doctrine as accepted in England
as applicable to contracts in general is the doctrine of proper-law.
Apart from formal validity of a contract, the law governing its essential validity,
its interpretation on the rights and liabilities of parties, is governed by the law by
which the parties agree they should be governed.
This point is very clearly stated in the section 134 of the Negotiable
Instruments Act, 1881, by saying “in the absence of a contract to the contrary”.
The famous author Dicey has opined that the law of lex loci contractus is
applicable to mercantile contracts.
“The formal validity of an instrument is determined by lex loci contractus is
applicable to mercantile contracts.
“The formal validity of an instrument is determined by lex loci contractus
celelebrationis or the lex loci actus i.e. the law of the lace where the contract is
made”.
PALANIAPPA CHETTI VS. PERIYA KARUPPAN CHETTI, 17 MAD 262.
“There may be a doubt as to the place where a given contract is finally
completed or made. In some cases it may be difficult to determine whether a given
formality belongs to the form of contract, in which case it is governed by the law of
the place where it is made or to the evidence of contract, in which case it is
governed by the law of procedure which depends upon the place where the action is
brought”.
The place where a bill or note is made, is not the place where a bill or note is
signed, but the place where the delivery of the instrument takes place for then it is
that the contract is complete”.
When the agreement is rendered void by omission to comply with the
formalities prescribed by the law of the place, where it is made it is void everywhere.
If the instrument be merely inadmissible in evidence for want of stamp in the
country in which it is made, the holder can sue upon the bill in England”.
As for the indorser’s liability, according to International law his liability, is to
be settled by the law of the place where the indorsement is made, whereas in Indian
law, it has to be settled by the law of the place of payment. The Indian view is based
on the principle that the indorser being a surety, his liability should naturally
follow the liability of principal debtor.
Section 135 of the Negotiable Instruments Act, 1881 reads:
“Where a promissory note, bill of exchange or cheque is made payable in a
different place from that in which it is made or indorsed, the law of the place where
it is made payable determines what constitutes dishonour and what notice of
dishonour is sufficient”.
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The following illustration is self explanatory:

A bill of exchange drawn and indorsed in India, but accepted payable in
France, is dishonoured. The indorsee causes it to be protested for such dishonour
and gives notice thereof in accordance with the law of France, though not in
accordance with the rules herein contained in respect of bills which are not foreign.
The notice is sufficient. The necessity for and sufficiency of protest or notice of
dishonour are determined by the law of the place where the bill is dishonoured.
“The obligation incurred by accepting a bill of exchange or by making a
promissory note is measured by the law of he place where it is payable, that is, the
manner of enforcing the obligation and the mode of performance of the obligation
are governed by the law of the place of performance.
“The conduct and refusal of the oblige is to be considered in the light of the law
of that place where such acts are done”.
“Notice of dishonour given by an indorsee to his prior parties is to be governed
by the law of the place where the instrument is payable”.
Section 136 of Negotiable Instruments Act, 1881 deals with instrument made
etc, out of India, but in accordance with the law of India as follows:
“If a Negotiable Instrument is made, drawn, accepted or indorsed (outside
India) but in accordance with the law of India the circumstances that any
agreement evidenced or indorsed (outside India) but in accordance with country
wherein it was entered into does not invalidate any subsequent acceptance, or
indorsement made there on within India.
The invalidity of an instrument under foreign law does not affect the liability
between persons who subsequently become parties to it in India.
MOHAMED ROWTHAN VS. MD. HASIN ROWTHAN 22 MAD. 337
“The Stamp Act requires a Negotiable Instrument drawn or made outside India
to be stamped again for negotiation in India, but a suit can be brought on it, if it is
not negotiated in India, without affixing a stamp to it”.
Section 137 of the Negotiable Instruments Act, 1881 deals with presumption
as to foreign law as follows:
“The law of any foreign country regarding promissory notes bills of exchange
and cheques shall be presumed to be the same as that of India unless and until,
the contrary is proved”,
“Any person relying on such law must prove it by evidence and in the absence
of such evidence, the courts shall presume the law of any foreign country to be the
same as that of our country”.
In India, proof of foreign law may be given in the following three ways.
1) By means of law books, printed and published under the authority of the
government of the foreign country and the reports of rulings of the courts of such
country contained in a book purporting to be a report of such rulings.
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“The Indian Evidence Act allows the use of text-book in courts, but such text-
books cannot be used in evidence, unless they are published under the authority of
the foreign country”.
2) By oral testimony of expert.
Section 45 of the Evidence Act insists such evidence must be given by a person
specially skilled in such foreign law.
BRISTOW VS. SECQUEVILLE 5 EX 275
In England the only witness competent to give such evidence is some person
who is conversant with the foreign law, either as a legal practitioner in the foreign
state or holding some office there, the duties of which entail such knowledge”.

3) By the opinion of foreign courts.

Now we have to learn something about Hundis.

Hundis are indigenous bills of exchange, written in the local vernacular and
governed by local usages. Hundi means to collect.

Indian merchants were using Hundis for transmitting money from one place to
another with perfect safety.

The Negotiable Instruments Act does not affect such instruments, but the
parties are at liberty to exclude the ‘prevalent usage’ in which case the provisions of
the Act will apply.

There are two classes of hundis:

1) Darshan, payable at sight.
2) Mudati or Midai, payable after a specified period.
We shall now consider a few of the commonly known hundis which may belong
to either of the above two classes.

a) Shah jog is payable through a Shah or to a Shah or a man of worth. This

can be transferred by delivery and no endorsement is required. It is similar to a
crossed cheque.

b) Nam jog. It is payable to one whose name is specified in the body of the
instruments and need not be payable to a Shah.

c) Firman jog. It is payable to the orders of holder. It can be negotiated, like

instruments payable to order, by indorsement and delivery.

d) Dhani jog is one which is payable to bearer. Dhani is said to mean ‘owner’
or ‘holder’. It is just like an instrument payable to the bearer and can be negotiated
by mere delivery.
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e) Jokhmi implies a condition that the sum shall be payable only in the event
of arrival of the goods against which the hundi is drawn. Here you will find a
combination of a bill of exchange and insurance policy. But there is this difference
that the money is paid before-hand and is to be recovered if the ship arrives safely.
The seller of the goods asks the buyer to pay the value of the goods to the holder of
the hundi. The buyer accepts the hundi subject to the condition that he will pay the
money mentioned in the hundi only if he receives the goods. The insurer takes the
risk of loss. Jokhmi Hundi is advantageous both to the seller and to the buyer, the
former gets the money and the latter incurs no liability unless he receives the goods

f) Jowabi: The receiver of the money gives a receipt in the form of an answer –
Jowab to the remitter. If any one who wants to make a remittance of money, he
writes to the payee and delivers the letter to the banker who endorses it to one near
the payee who gives a receipt in the form of an answer. This is sent to the drawer
through the same channel.

Zikri chit: It is a letter of protection given to the holder by some prior party to
the hundi to be used by him in case the hundi is not accepted. This resembles the
position of an acceptor for honour.

Khoka: When hundi is paid up and cancelled, it is called khoka.

Peth: When the original is lost, it is customary to issue a duplicate hundi. The
duplicate of a hundi is called perpeth.

25.3 SUGGESTED QUESTIONS

1. State the effect of forgery with reference to a Negotiable instrument. Are the
bankers protected in any way.
2. Write a note on
i. Bills in set
ii. Notice of dishonour

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MODEL QUESTION PAPER

B.A.L. DEGREE EXAMINATION
First Year
(Paper – II)
LAW OF CONTRACTS

1. “All contracts are agreements but all agreements are not contracts” – Explain
2. Define acceptance. Explain its essentials
3. Explain the law relating to privity of contract and privity of consideration.
4. Explain the different kinds of impossibility of performance which gives
discharge to a contract.
5. Explain the duties of an agent.
6. Define sale. Explain the difference between sale and Agreement to sell.
7. When a bank is justified in dishonouring a cheque?
8. Explain the different ways of dissolution of a firm.
9. Write a short notes on any THREE of the following
a) Irrevocable agency
b) Different kinds of crossing of a cheque
c) Anticipatory breach
d) Contracts which can be specifically enforceable.