18635902 lesson 1 introduction to law and the meaning and essentials

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LESSON 1:INTRODUCTION TO LAW AND THEMEANING AND ESSENTIALS OF

CONTRACT

UNIT I

Learning OutcomesAt the end of this chapter, you will be able to know:• The meaning of law• The main sources of mercantile law• The meaning of contract• The essential elements of valid contract

IntroductionBusiness laws are essential for the students of management tounderstand the legal rules and aspects of business. Just like anyother study even business management is incomplete without aproper study of its laws. Any form of business needs legalsanction. Therefore, it is imperative that a manager understandsthe various ways in which businesses can be organized. Thissubject introduces some of the common forms of businessorganizations, including some forms unique to India like theJoint Hindu Undivided Family firm. Different types oforganizations like Sole Ownership, Partnership, Private LimitedCompany, Public Limited Company, Joint Stock Companyalong with the rationale for adopting these forms are explored.What form of business organization is the best under aparticular set of conditions? What advantage or disadvantagedoes it have over other forms of business? Formalities to begone through and some the quasi-legal processes required forstarting a business will be discussed in detail in this subject.For the proper working of the society, there must exist a codeof conduct. As you all know, in the ancient times the societywas not organized. The rights of the individuals were notrecognized. Gradually, the society evolved and the state cameinto being. As we all know, to regulate the state, there should bea specific code of conduct, which should be followed byeveryone. As a result of which law evolved as a system of rightsand obligations including all the rules and principles, whichregulate our relations with other persons and with the state.These rules and regulations took the form of statutes.To enforce the law and to resolve the conflicts arising therefrom, courts of law were setup by the state.Laws were made to govern almost every walk of life. You allmust know that criminal laws were made to control criminalactivities in the society like Indian Penal Code, which enumer-ates which activities are considered criminal and what will be thepunishment for committing a crime. Likewise, mercantile lawwas evolved to govern and regulate trade and commerce. Hence,the term mercantile law can be defined as that branch of law,which comprises laws concerning trade, industry and commerce.It is an ever-growing branch of law with the changing circum-stances of trade and commerce.Now the question arises as to what are the sources of mercantilelaw in India. The answer isThe Indian statutes on mercantile law

English/ Foreign lawPrecedents(previous judgments of the courts.)Customs and usageI must tell you that most of the Indian Mercantile Law iscontained in the statutes. The prime legislation is the IndianContract Act 1872 but it is not exhaustive to deal with all kindsof contracts. In addition to this there are the Sale of GoodsAct, 1930, The Indian Partnership Act 1932, The NegotiableInstruments Act 1881 etc. wherever the Indian Contract Act issilent, the Indian courts may apply the principles of the EnglishCommon Law.It is interesting to know that in England there is no EnglishContract Act in the form of a statute. It has been derived fromcommon law, the usage of merchants and traders in differentspheres of trade, substantiated or ratified by decisions in thecourt of law. The judicial precedents are an important source oflaw. Sometimes, there is no provision, which can answer aparticular question of law. In such cases the court will look intothe previous decisions on similar matters to find the relevantlaw.Custom and usage of a trade play an important role in businessdealings of that trade. To have a binding force, the custom orusage must be certain, reasonable and well known.Now it is more than a century that that the mercantile laws aregoverning trade and commerce. The law of contract is thefoundation upon which the superstructure of modern businessis built. It is common knowledge that in business transactionsquite often promises are made at one time and the performancefollows later. In such a situation if either of the parties were freeto go back on its promise without incurring any liability, therewould be endless complications and it would be impossible tocarry on trade and commerce. Hence the law of contract wasenacted which lays down the legal rules relating to promises,their formation, their performance, and their enforceability.Explaining the object of the law of contract Sir William Ansonobserves. “The law of contract is intended to ensure that what aman has been led to expect shall come to pass, that what hasbeen promised to him shall be performed”.The law of contract is applicable not only to the businesscommunity but also to others. Every one of us enters into anumber of contracts almost everyday, and most of the time wedo so without even realizing what we are doing from the pointof law. A person seldom realizes that when he entrusts hisscooter to the mechanic for repairs, he is entering into a contractof bailment; or when he buys a packet of cigarettes, he ismaking a contract of the sale of good; or again when he goes tothe cinema to see a movie, he is making yet another contract;and so on.

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Besides, the law of contract furnishes the basis for the otherbranches of mercantile law. The enactments relating to sale ofgoods, negotiable instruments, insurance, partnership andinsolvency are all founded upon the general principles ofcontract law. That is why the study of the law of contractprecedes the study of all other sub-division of mercantile law.The Indian contract act was enacted from the 1st day of Septem-ber; 1872.it is applicable to the whole of India except the stateof Jammu and Kashmir. There may be some occasions whereIndian law disagrees with the English laws. In such cases, theIndian law will prevail.Now we will move on to the definition and concept of thecontract.

The Indian Contract Act, 1972The law of contract in India is contained in the Indian ContractAct 1872. This Act is based mainly on English common law,which is to a large extent made up of judicial precedents. (therebeing a separate contract act in England). It extends to thewhole of India except the state of Jammu and Kashmir andcame into force on the first day of September 1872(Sec.1 IndianContract Act 1872). The act is not exhaustive. It does not dealwith all the branches of the law of contract. There are separateacts, which deal with contracts relating to negotiable instru-ments, transfer of property, sale of goods, partnership,insurance, etc. Again the act does not affect any usage or customof trade (Sec.1).

Scheme of the Act.The scheme of the Act may be divided into two main groups.1. General principles of the law of contract (Secs. 1-75).2. Specific kinds of contracts, Viz;

(a) Contracts of indemnity and Guarantee (Secs. 124-147).(b) Contracts of Bailment and pledge (Secs. 148-181).(c) Contracts of Agency (Secs. 182-238).

Before 1930 the Act also contained provisions relating tocontracts of sale of goods and partnership. Sections 76-123relating to sale of goods were repealed in 1930 and a relating topartnership were repealed in 1932 when the Indian separate Actcalled the Sale of Goods Act was enacted. Similarly, sections239-266 partnership Act was passed.But we will not study the specific kinds of contracts for the timebeing but only concentrate on contracts generally.Before we take up the discussion of the various provisions ofthe Indian contract Act. It will be proper to see some of thebasic assumptions underlying the Act.Definition of contractAccording to section 2(h) of the Indian Contract Act: “ Anagreement enforceable by law is a contract.” A contract therefore,is an agreement the object of which is to create a legal obligationi.e., a duty enforceable by law.From the above definition, we find that a contract essentiallyconsists of two elements: (1) An agreement and (2) Legalobligation i.e., a duty enforceable by law. We shall now examinethese elements detail.

1. Agreement. As per section 2 (e): “ Every promise and everyset of promises, forming the consideration for each other,is an agreement.” Thus it is clear from this definition that a‘promise’ is an agreement. What is a ‘promise’? the answerto this question is contained in section 2 (b) which definesthe term.” When the person to whom the proposal ismade signifies his assent thereto the proposal is said to beaccepted. A proposal, when accepted, becomes a promise.”An agreement, therefore, comes into existence only whenone party makes a proposal or offer to the other party andthat other party signifies his assent (i.e., gives hisacceptance) thereto. In short, an agreement is the sum totalof ‘offer’ and ‘acceptance’.On analyzing the above definition the followingcharacteristics of an agreement become evident:(a) At least two persons. There must be two or more

persons to make an agreement because one personcannot inter into an agreement with himself.

(b) Consensus-ad-idem. Both the parties to an agreementmust agree about the subject matter of the agreementin the same sense and at the same time.

2. Legal obligation. As stated above, an agreement to becomea contract must give rise to a legal obligation i.e., a dutyenforceable by law. If an agreement is incapable of creatinga duty enforceable by law. It is not a contract. Thus anagreement is a wider term than a contract. “ All contracts areagreements but all agreements are not contracts,”Agreements of moral, religious or social nature e.g., apromise to lunch together at a friend’s house or to take awalk together are not contracts because they are not likely tocreate a duty enforceable by law for the simple reason thatthe parties never intended that they should be attended bylegal consequences.

I shall give you a very simple example to explain this point.An agreement to sell a car may be a contract but an agreement togo for lunch may be a mere agreement not enforceable by law.Thus all agreements are not contracts. In business agreementsthe presumption is usually that the parties intend to create legalrelations. Thus an agreement to buy certain specific goods at anagreed price e.g., 200 bags of rice at Rs.100 per bag is a contractbecause it gives rise to a duty enforceable by law, and in case ofdefault through a court provided other essential elements of acontract was made by free consent of the parties competent tocontract, for a lawful consideration and with a lawful object .Thus it may be concluded that the Act restricts the use of theword contract to only those agreements, which give, rise to legalobligations between the parties.It will be appropriate to point out here that the law of contractdeals only with such legal obligations which arise formagreements, obligations which are not contractual in nature areoutside the purview of the law of contract.Before moving further we must know the conditions whichmust be satisfied for the contract to become valid.


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Essential Elements of a Valid ContractA contract has been defined in section 2(h) as “an agreementenforceable by law.” To be enforceable by law, an agreementmust possess the essential elements of a valid contract ascontained in sections 10, 29 and 56. According to section 10, allagreements are contracts if they are made by the free consent ofthe parties, competent to contract, for a lawful consideration,with a lawful object, are not expressly declared by the Act to bevoid, and where necessary, satisfy the requirements of any law asto writing or attention or registration. As the details of theseessentials form the subject matter of our subsequent chapters,we propose to discuss them in brief here.The essential elements of a valid contract are as follows.1. Offer and acceptance. There must a ‘lawful offer’ and a

‘lawful acceptance’ of the offer, thus resulting in anagreement. The adjective ‘lawful’ implies that the offer andacceptance must satisfy the requirements of the contract actin relation thereto.

2. Intention to create legal relations. There must be anintention among the parties that the agreement should beattached by legal consequences and create legal obligations.Agreements of a social or domestic nature do notcontemplate legal relations, and as such they do not giverise to a contract. An agreement to dine at a friend’s housein not an agreement intended to create legal relations andtherefore is not a contract. Agreements between husbandand wife also lack the intention to create legal relationshipand thus do not result in contracts.

Try to work out the solution in the following cases and then goto the answer.

Illustrations.

(a) M promises his wife N to get her a necklace if she willsing a song. N sang the song M did not bring thenecklace for her.

(b) The defendant was a civil servant in Ceylon. He and hiswife were enjoying leave in England. When thedefendant was due to return to Ceylon, his wife couldnot accompany him because of her health. Thedefendant agreed to send her £ 30 a month asmaintenance expenses during the time they were thusforced to live apart. She sued for breach of thisagreement.

Answers

(a) N cannot bring an action in a court to enforce theagreement as it lacked the intention to create legalrelations.

(b) Her action was dismissed on the ground that no legalrelations had been contemplated and therefore there

was no contract.(Balfour vs. Balfour)In commercial agreements an intention to create legal relations ispresumed. Thus, an agreement to buy and sell goods intendsto create legal relationship hence is a contract, provided otherrequisites of a valid contract are present. But if the parties areunder a legal obligation, even a business agreement does notamount to a contract. The case of Rose & Frank co, vs.

Crompton & Brothers Ltd. Provides a good illustration on thepoint.Illustration In the above case R Company entered into anagreement with C Company. By means of which the former wasappointed as the agent of the latter. One clause of the agree-ment was as follows. “This arrangement is not entered into as aformal or legal agreement. And shall not be subject to legaljurisdiction in the law courts.” It was held that there was nointention to create legal relations on the part of parties to theagreement and hence there was no contract.Now let us go to the third essential of a contract i.e.3. Lawful consideration. The third essential element of a valid

contract is the presence of ‘consideration’. Considerationhas been defined as the price paid by one party for thepromise of the other. An agreement is legally enforceableonly when each of the parties to it gives something andgets something. The something given or obtained is theprice for the promise and is called ‘consideration’ subject tocertain exceptions; gratuitous promises are not enforceableat law.

The ‘consideration’ may be an act (doing something) orforbearance (not doing something) or a promise to do or notto do something. It may be past, present or future. But onlythose considerations are valid which are ‘lawful’. The consider-ation is ‘lawful’. unless it is forbidden by law; or is of such anature that, if permitted it would defeat The provisions of anylaw; or is fraudulent; or involves or implies injury to the personor property of another; or is immoral; or is opposed to publicpolicy (sec.23).4. Capacity of parties. The parties to an agreement must be

competent to contract. But the question that arises now isthat what parties are competent and what are not. Thecontracting parties must be of the age of majority and ofsound mind and must not be disqualified by any law towhich they are subject (sec.11). If any of the parties to theagreement suffers form minority, lunacy, idiocy,drunkenness etc. The agreement is not enforceable at law,except in some special cases e.g., in the case of necessariessupplied to a minor or lunatic, the supplier of goods isentitled to be reimbursed from their estate (sec 68).

5. Free consent. Free consent of all the parties to anagreement is another essential element. This concept hastwo aspects.(1) consent should be made and (2) it shouldbe free of any pressure or misunderstanding. ‘Consent’means that the parties must have agreed upon the samething in the same sense (sec. 13). There is absence of ‘freeconsent,’ if the agreement is induced by (i)coercion, (ii)undue influence, (iii) fraud, (iv) mis-representation, or (v)mistake (sec. 14). If the agreement is vitiated by any of thefirst four factors, the contract would be voidable andcannot be enforced by the party guilty of coercion, undueinfluence etc. The other party (i.e., the aggrieved party) caneither reject the contract or accept it, subject to the rules laiddown in the act. If the agreement is induced by mutualmistake which is material to the agreement, it would bevoid (sec. 20)


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6. Lawful object. For the formation of a valid contract it isalso necessary that the parties to an agreement must agreefor a lawful object. The object for which the agreement hasbeen entered into must not be fraudulent or illegal orimmoral or opposed to public policy or must mot implyinjury to the person or the other of the reasons mentionedabove the agreement is void. Thus, when a landlordknowingly lets a house to a prostitute to carry onprostitution, he cannot recover the rent through a court oflaw or a contract for committing a murder is a void contractand unenforceable by law.

7. Writing and registration. According to the Indian contractAct, a contract to be valid, must be in writing andregistered. For example, it requires that an agreement to paya time barred debt must be in writing and an agreement tomake a gift for natural love and affection must be inwriting and registered to make the agreement enforceableby law which must be observed.

8. Certainty. Section 29 of the contract Act provides that “Agreements, the meaning of which is not certain or capableof being made certain, are void.” In order to give rise to avalid contract the terms of the agreement must not bevague or uncertain. It must be possible to ascertain themeaning of the agreement, for otherwise, it cannot beenforced

Illustation. A, agrees to sell B “ a hundred ton of oil” there isnothing whatever to show what kind of oil was intended. Theagreement is void for uncertainly.9. Possibility of performance. Yet another essential feature of

a valid contract is that it must be capable of performance.Section 56 lays down that “An agreement to do an actimpossible in itself is void”. If the act is impossible initself, physically or legally, the agreement cannot be enforcedat law.

Illustration. A agrees with B, to discover treasure by magic. Theagreement is not enforceable.10. Not expressly declared void. The agreement must not have

been expressly declared to be void under the Act. Sections24-30 specify certain types of agreements that have beenexpressly declared to be void. For example, an agreement inrestraint of marriage, an agreement in restraint of trade,and an agreement by way of wager have been expresslydeclared void under sections 26, 27 and 30 respectively.

Before dealing with the various essentials of a valid contract oneby one in detail, it will be appropriate to discuss the ‘kinds ofcontracts’. First, because we shall be using the terms like‘voidable contract’, ‘void contract’, ‘void agreement’, etc. veryoften in the course of our discussion.Here we end our discussion on essentials of a valid contract.Now attempt the following questions for a better understand-ing:1. Comment that the all contracts are agreements but all

agreements are not contract.2. What are the essential elements of a valid contract?

3. A invites B to see a picture with him. B accepts the offer. Apurchase a ticket for B and waits for him outside thecinema hall. B does not turn up has A any cause of actionagainst B. [Hint: No]

4. A agrees with B to murder C for Rs. 10,000. Is this a validcontract?

[Hint: No]5. X agrees to pay Y Rs. 1000 if Y writes 100 pages for him

in one minute. Is it a valid contract? [Hint: No]6. State whether there is any valid contract in the following

cases?7. (i) X boards a DTC bus at Mayur Vihar for Shalimar

Bagh.(ii) X and Y agree to go for fishing(iii) X buys an evening paper(iv) X a minor borrows Rs. 5000 from Yand agreed to

repay back the same within a week.

References• Kapoor, N.D. (2003), “Elements of Mercantile Law,”

Sultan Chand and Sons, New Delhi.• http://www.indialawinfo.com/bareacts/soga.html• M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing

House Pvt. Ltd, Delhi.• P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill

Pvt. Ltd, Delhi.

Notes:

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LESSON 2KINDS OF CONTRACTS

Learning OutcomesBy the end of the lecture we should be able to answer thefollowing questions:• The different types of contracts with respect to

performance, enforceability, validity and formation

IntroductionFirst of all we will study[I] Kinds of contracts from the point of view of Enforceability

• Valid contract• Voidable contract.• Void contract• Unenforceable contract• Illegal or unlawful contract

From the point of view of enforceability a contract may bevalid, voidable, void, unenforceable or illegal.1. Valid contract. According to section 2(i), it is”an agreement

enforceable by law”, an agreement becomes enforceable bylaw when all the essential elements of a valid contract aswere enumerated in the last lesson are present.

If one or more of these elements is/are missing the contract iseither void, voidable, illegal or unenforceable.2. Voidable contract. According to section 2(i), “an agreement

which” is enforceable by law at the option of one or moreof the parties thereto, but not at the option of the otheror others, is a voidable contract.” Thus, a voidable contractis one which is enforceable by law at the option of one ofthe parties only. Until it is avoided or rescinded by the partyentitled to do so by exercising his option in that behalf, itis a valid contract.

Usually a contract becomes voidable when the consent of oneof the parties to the contract is obtained by coercion, undueinfluence, misrepresentation or fraud. Such a contract is voidableat the option of the aggrieved party i.e., the party whoseconsent was so caused (secs. 19 and 19A). but the aggrievedparty must exercise his option of rejecting the contract (i) withina reasonable time, and (ii) before the rights of third partiesintervene, otherwise the contract cannot be repudiated.

Illustration.

(a) A : threatens to shoot B if he does not sell his newBajaj scooter to A for Rs. 2,000. B agrees. The contracthas been brought about by coercion and is voidable atthe option of B.

(b) A. intending to deceive B. falsely represents that fivehundred quintals of indigo are made annually at A’sfactory, and thereby induces B to buy the factory. Thecontract has been caused by fraud and is voidable at theoption of B.

other circumstances under which a contract becomesvoidable. The Indian contract act has laid down certainother situations also under which a contract becomesvoidable. For example.

(i) When a contract contains reciprocal promises, and oneparty to the contract prevents the other from performinghis promises, then the contract becomes voidable at theoption at the party so prevented (sec. 53).

Illustration. A. Contracts with B that A shall whitewash B’shouse for Rs. 100. A. is ready and willing to execute the workaccordingly, but B prevents him from doing so. The contractbecomes voidable at the option of A.(ii) When a party to the contract promises to do a certain thing

within a specified time, but fails to do it, then the contractbecomes voidable at the option of the promisee. If theintention of the parties was that time should be of theessence of the contract. (sec.55)

Illustration. X Agrees to sell and deliver 10 bags of wheat to Yfor Rs. 2,5000 within one week. But X does not supply thewheat within the specified time. The contract becomes voidableat the option of Y.Consequences of rescission of voidable contract. Section 64 laysdown the rights and obligations of the parties to a voidablecontract after it is rescinded. The section states that when aperson at whose option a contract has become has received anybenefit from another party to such contract, he must restoresuch benefit. If an amount has been received as a security forthe due performance of the contract, such earnest moneydeposit is not to be returned if the contract becomes voidableunder section 55 on account of the promisor’s failure tocomplete the contract at the time agreed and has been rescindedby the promisee because it is not a benefit received under thecontract.3. Void contract. Literally the word ‘void’ means ‘not binding

in law’. Accordingly the term. ‘void contract’ implies auseless contract which has no legal effect at all. Such acontract is a nullity, as for there has been no contract at all.Section 2(j) defines: A contract which ceases to beenforceable by law becomes void, when it ceases to beenforceable.” It follows form the definition that a voidcontract is not void from its inception and that it is validand binding on the parties when originally entered butsubsequent to its formation it becomes invalid anddestitute of legal effect because of certain reasons.

The reasons which transform a valid contract into a voidcontract, as given in the contract Act. Are as follows.(a) Supervening impossibility (sec. 56) A contract becomes

void by impossibility of performance after the formationof the of contract for example, A and B contract to marry


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each other. Before the time fixed for the marriage, A goesmad. The contract to marry becomes void.

(b) Subsequent illegality (sec, 56) A contract also becomes voidby subsequent illegality. For example, A agrees to sell B 100hags of wheat at Rs. 650 per bag. Before delivery thegovernment bans private trading in wheat. The contractbecomes void.

(c) Repudiation of a voidable contract. A voidable contractbecomes void, when the party, whose consent is not free,repudiates the contract. For example, M by threatening tomurder B’s son, makes B agree to sell his car worth Rs.30,000 for a sum of Rs. 10,000 only. The contract, beingthe result or coercion, is voidable at the option of B. B mayeither affirm or reject the contract. In case B decides torescind the contract, it becomes void.

(d) In the case of a contract contingent on the happening ofan uncertain future event, if that event becomesimpossible. A contingent contract to do or not to dosomething on the happening of an uncertain future event,becomes void, when the event becomes impossible(sec.32).” for example, A contracts to give Rs. 1,000 as loanto B marries C. C dies without being married to B. thecontract becomes void.

Void agreement- “An agreement not enforceable by law is saidto be void” [sec.2 (g)]. Thus, a void agreement does not giverise to any legal consequences and is void agreement does notgive rise to any legal consequences and is void ab-initio. In theeye of law such an agreement is no agreement at all from its veryinception. There is absence of one or more essential elementsof a valid contract, except that of ‘free consent,’ in the case of avoid agreement. Thus, an agreement with a minor is void ab-initio as against him, because a minor lacks the capacity tocontract. Similarly, an agreement without consideration is voidab-initio, of course with certain exceptions as laid down insection 25. Certain agreements have been expressly declared voidin the contract act e.g., agreements which are in restraint of tradeor of marriage or of legal proceedings or which are by way orwager.A ‘void’ agreement should be distinguished from a ‘voidcontract’. A ‘void agreement ‘ never amounts to a contract as itis void ab-initio. A ‘void contract’ is valid when it is enteredinto, but subsequent to its formation something happenswhich makes it unenforceable by law, notice that a contractcannot be void ab-initio and only an agreement can be void ab-initio.Obligation of person who has received advantage under voidagreement or contract that becomes void. In this connectionsection 65 lays down that when an agreement is discovered tobe void or when a contract becomes void, any person who hasreceived any advantage under such agreement or contract isbound to restore it. Thus, this section provides for restitutionof the benefit received. Thus both parties may stand un-effected by the transaction in the following two cases.(a) When an agreement is discovered to be void. In other

words, when an agreement is void being discovered at alater stage. For example, A pays B Rs. 1,000 for B’s agreeing

to sell his horse to him. It turns out that the horse wasdead at the time of the bargain, through neither party wasaware of the fact. In this case the agreement is discoveredto be void and B must repay to A Rs. 1,000. it should,however, be noted that agreements which are known to bevoid or illegal, when they are entered into, are excludedfrom the purview of this section. Thus, if L pays Rs.10,000 to M to murder Z, the money cannot be recovered.Similarly, nothing can be recovered in the case of expresslydeclared void agreements, of course, subject to thefollowing exceptions.

(i) In the case of an agreement caused by bilateral mistake ofessential fact (although it is expressly declared void undersection 20) restitution is allowed as it comes under thecategory of ‘an agreement discovered to be void.’

(ii) In the case of an agreement with a minor who commitsfraud by misrepresenting his age (although agreement witha minor is known to be void.) restoration is allowed inspecie on equitable grounds because a minor cannot beallowed to cheat people, and also because the other partyhas not lost his title to the thing in question.

(b) When a contract becomes void, restitution is also allowedin the case of a void contract. For example, A agrees to sellB after one month 10 quintals of wheat at Rs. 625 perquintal and receives Rs. 500 as advance. Soon after thecontract, private sales of wheat becomes void but A mustreturn the sum of Rs. 500 to B. Similarly, where afteraccepting Rs. 1,000 as advance for singing at a convert for B,A is too ill to sing. A is not bound to make compensationto B for the loss of the profits which B would have madeif A would have been able to sing, but A must refund to Bthe 1,000 rupees paid in advance.

4. Unenforceable contract. An unenforceable contract is onewhich is valid in itself, but is not capable of being enforcedin a court of law because of some technical defect such asabsence of writing, registration, requisite stamp, etc., ortime barred by the law of limitation. For example, an oralarbitration agreement is unenforceable because the lawrequires an arbitration agreement to be in writing. Similarly,a bill of exchange or promissory note, though valid initself, becomes unenforceable after three years from the datethe bill or note falls due, being time barred under thelimitation act.

5. Illegal or unlawful contract. The word ‘illegal’ means‘contrary to law’ and the term ‘contract’ means ‘anagreement enforceable by law’. As such to speak of an‘illegal contract’ involves a contradiction in terms, because itmeans something like this an agreement enforceable by lawand contrary to law. There is apparent contradiction interms. Moreover, being of unlawful nature, such anagreement can never attain the status of a contract. Thus, itwill be proper if we use the term ‘illegal agreement’ in placeof ‘illegal contract’ an illegal agreement is void ab-initio.

Some important comparisons


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Agreement and Contract

Agreement Contract

Illegal and Void Agreements

Illegal agreement Void agreement

Despite the similarity between an illegal and a void agreementthat in either case the agreement is void ab- initio and cannot beenforced by law, I will explain the above points in detail now.(i) An illegal agreement is narrower in scope than a void

agreement. ‘all illegal agreements are void but all voidagreements are not necessarily illegal.’ The object orconsideration of an agreement way not be contrary to lawbut may still be void. For example, an agreement may notbe contrary to law but may still be void. For example, an

An agreement is a promise or set of promises (s). A contract is essentially an agreement, i.e., a promise or set of promise (s).

Differences Enforceability – An agreement may or my not be enforceable at law. For example, social agreements are generally not enforceable while business agreements are enforceable at law. Effect – An agreement is not always a binding on the concerned parties. Scope – All agreements are not contracts.

A contract is an agreement which is enforceable at law. A contract is always concluded and binding on the concerned parties, All contracts are agreements.

Similarities These agreements are not enforceable at law. These agreements are not enforces able at law. Differences Scope- These agreements are narrower in scope. All illegal ag reements are void. Effect on collateral transaction – Collateral transaction of an illegal contract also becomes illegal and contract not be enforced. Punishment – Parties may be punished for making illegal agreement.

These agreements are wider in scope. An agreement may be void because of a reason other than illegality. Collateral transaction of an agreement which is void for a reason other than illegality are enforceable at law. Being void does not make a contract punishable.

agreement with a minor is void as against him but notillegal. Again, an agreement theterms of which are uncertain isvoid but such an agreement theterms of which are uncertain isvoid an agreement is not illegal.(ii) An illegal agreement iswider in effect in relation tocollateral transactions than a voidagreement. When an agreement isillegal, other agreement which are

incidental or collateral to it are also tainted with illegality,hence void, provided the third parties have the knowledgeof the illegal or immoral design of the main transaction.The reason underlying this rule is that no person shall be

allowed to invoke the aid of thecourt if he is himself implicatedin the illegality. On the otherhand, when an agreement isvoid (but not illegal),agreements which are collateralto it are not invalidated andremain valid.Illustrations. (a) A engages B toMurder C and borrows Rs.

5,000 from D to pay B. D is aware of the purpose of the loan.Here the agreement between A and B. D is aware of thepurpose of the loan. Here the agreement between A and B isillegal and the agreement between A and D is collateral to anillegal agreement. As such the loan transaction is illegal andvoid and D cannot recover the money. But the position willchange if D is not aware of the purpose of the loan. In thatcase the loan transaction is not collateral to the illegal agreementand is a valid contract.

Void and Voidable Contract

Void Agreement and Void ContractSimilarities Restitution – If any benefit is passed between the parties, it may be restored back.

If any benefit is passed between the parties, it may be restored back.

Differences Definition – When a contract ceases to be enforceable at law, it becomes void contract. Status – A void contract cannot create any legal rights. It is a total nullity. Nature – A void contract is valid when it is made. But subsequently it becomes void due to one reason or the other. Rights – A void contract is valid when it is made. But subsequently it becomes void due to one reason or the other. Effect – When a contract is void because of illegality, its collateral transactions also becomes void.

It is a contract which is enforceable by law at the option of one or more parties thereof, but not at the option of others.

A voidable contract takes its full

and proper legal effect unless it is

disputed and set aside by the person

entitled to do so.

A contract may be voidable since very beginning, or may subsequently become voidable. A voidable contract gives rights to the aggrieved party to rescind the contract, and claim the damages, etc. in certain cases. A voidable contract does not effect the collateral transactions.


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Kinds of contracts from the point of view of modeof creationFrom the point of view of mode of creation a contract may beexpress or implied or constructive.1. Express contract. Where both the offer and acceptance

constituting an agreement enforceable at law are made inwords spoken or written, it is an express contract. Forexample. A tells B on telephone that he offers to sell his carfor Rs. 20,000 and B in reply informs A that he accepts theoffer, there is an express contract.

2. Implied contract. Where both the offer and acceptanceconstituting an agreement enforceable at law are madeotherwise than in words i.e., by acts and conduct of theparties, it is an implied contract. Thus, where A, a coolie inuniform takes up the luggage of B to be carried out of therailway station without being asked by B, and B, allowshim to do so, then the law implies that B agrees to pay forthe services of A, and there comes into existence animplied contract and N is under obligation to pay to M.

It is relevant to state in respect of mode of creation, certaincontracts may be a mixture of the ‘express’ and ‘implied’ typesof contracts, that is, where out of the two components of anagreement, namely, offer and acceptance, one is expressed inwords and the other is implied from acts and circumstances.Such contracts may be called as contracts of mixed character. Forexample, A offers to buy B’s scooter for Rs. 4,000 and B acceptsthe offer by sending the scooter itself. Here A’s offer is expressedin words and B’s acceptance is implied form his conduct. It is acontract of mixed character.1. Constructive or quasi contract. The term ‘constructive or

quasi contract is a misnomer, the cases grouped under thistype of contracts have little or affinity with contract. Such acontract does not arise by virtue of any agreement, expressor implied between the parties but the law infers orrecognizes a contract under certain special circumstances.For example, obligation to finder of lost goods to returnthem to the true owner or liability or person to whommoney is paid under mistake to repay it back cannot be saidto arise out of a consent, but these are very mushconversed under quasi contracts as per sections 71 and 72respectively. The contract act has rightly named suchcontracts as “ certain relations resembling those created bycontract”.

A quasi contract is based upon the equitable principle that aperson shall not be allowed to retain unjust benefit at theexpense of another. Sections 68-72 of the contract act describethe cases which are to be deemed ‘quasi contracts’”.Now we come to-

Similarities A void agreement cannot create any legal rights. It is a total nullity.

A void contract cannot create any legal rights. It is a total nullity.

Differences It is an agreement. It never takes form of a contract. It is a nullity since very beginning.

It is a contract. When it is formed it is perfectly valid. Subsequently it becomes a nullity.

example, and A says to B, If you dig my garden next Sunday, Iwill pay you Rs. 500.’ B makes no commitment, but says, I amnot sure that I shall be able to, but if I do, I shall be happy totake Rs. 500. This arrangement is not bilateral. A has committedhimself to pay Rs. 500 in certain circumstances, but B has madeno commitment at all. He is totally free to decide whether hewants to dig A’s garden or not. If B does not turn up onSunday to dig the garden, A cannot do anything about is. If,however, B reaches to A’s place on Sunday to do the work, it willamount to his acceptance a contract will be formed where bothparties will be bound by their performance.Before I end the discussion on kinds of contracts I would liketo discuss another kind of contract called the Standard FormContractWhen a large number of contracts have got to be entered intoby a person, from a practical point of view and for the sake ofconvenience, a standard form for the numerous contracts maybe used. An insurance policy, shares or a railway ticket are fewexamples of such standardized contracts. The “special termsand conditions” become binding as part of the contract only ifthey are brought to the notice of the acceptor before or at thetime of the contract. In view of the unequal bargaining powerof the two parties, the courts and the legislature have evolvedcertain rules to protect the interest of the weaker party:-(1) Reasonable notice – e.g. by printing on a ticket, “For

conditions see back”, or obtaining signatures on thedocument containing terms, or otherwise explaining thethe terms,. Where an adequate notice is not given theofferee is not bound by the terms.

(2) Notice should be contemporaneous with the contract – if aparty to the contract wants to have exemption from liabilityhe must give a notice about the exemption while thecontract is being entered into and not thereafter ( Olley Vs.Marlborough Court. Ltd.)

(3) Terms of contract should be reasonable – if the terms ofthe contract are unreasonable and opposed to public policy,they will not be enforced.

(4) Fundamental breach of contract – no exemption clause isallowed to permit the non-compliance of the basiccontractual obligation i.e. obligation which is fundamentalor core of the contract. Thus, the dry cleaner has to beanswerable , even if the contract contains all sorts ofexemption clauses, if the cloth is altogether lost.

(5) Strict construction – a strict construction shall be applied toexemption clause, and any ambiguity is to be resolved infavour of the weaker party.

(6) Statutory protection – The English Unfair Contract TermsAct, 1977 severely limits the right of the contracting parties


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to exclude or limit their liability through exemption clausesin the agreement. India lacks such an Act.

Practical ProblemsAttempt the following problems, giving reasons for youranswers.1. A invites B to a dinner. B accepts the invitation. A made

elaborate arrangement but B failed to turn up. Can A sue Bfor the loss he has suffered?.[Hint. No, A cannot sue B for the loss he suffered becausethe agreement was of a social nature and hence lacked theintention to create legal relationship— one of the essentialsof a valid contract.]

2. M agrees to pay N Rs. 100 and in consideration N agrees inwrite for him 100 pages within five minutes. Is it a validcontract?[Hint. No, it is not valid contract. It is a void agreementbecause as per section 56 “ an agreement to do an actimpossible in itself is void.”]

3. C orally offered to pay A, an auto mechanic, Rs.50 fortesting a used car which C was about to purchase from D.A agreed and tested the car. C paid A Rs. 50 in cash for hisservices. Is the agreement between A and C(a) Express or implied(b) Executed or executory(c) Valid, voidable or void6. A promises to pay B Rs.500 if beats C.B beats C but A

refuses to pay. Can B recover the amount?( Hint : No as the agreement is illegal.)

4. X invites Y to dinner. Y accepts the invitation but fails toturn up. Can X sue Y for the damage?

Solution: X cannot claim any damages from Y because theagreement between X and Y is not enforceable by law. It is asocial agreement and the usual presumption in such agreementis that the parties do not intend to create legal relationship.5. X makes a promise to his wife Y to give her pocket money

of Rs 1,000 per month. After 6 months, he stops makingthe payment. Can Y claim damages from X

Solution: Y cannot claim any damages from X because theagreement between X and Y is not enforceable by law. It is asocial agreement and the usual presumption in such agreementis that the parties do not intend to create legal relationship.6. X promises Y to give a diamond ring at the time of

his marriage. X fails to give the ring. Can Y claim thering?

Solution: Y cannot claim the diamond ring because there is noconsideration from Y.7. X polished Y’s shoes without being asked by Y to do so. Y

does not make any attempt to stop X from polishing theshoes. Is Y bound to make payment to X?

Solution: Y is bound to pay because he has accepted X’ simplied offer by conduct (i.e. by not stopping X from polishingthe shoes). 9. X agreed to sell a particular horse to Y. Later on, it

was discovered that the horse was dead at the time of makingthe contract. Advise the parties.Solution:. The agreement is void because both the parties wereunder a mistake of fact regarding existence of the subjectmatter.8. X agrees to let his flat to Y for use as a gambling den on a

monthly rent of Rs 10,000. After 3 months, Y stopsmaking the payment of rent. Advise X.

Solution: X cannot recover anything. The agreement between Xand Y is void because the object of the agreement is unlawful.9. X threatens to kill Y if he does not sell his house to X for

Rs 1,00,000. Y agrees. X borrows Rs 1,00,000 from Z whois also aware of the purpose of the loan. What is thenature of the agreement between X and Y, and X and Z?

Solution: The contract between X and Y is a contract which isvoidable at the option of Y because Y’s consent is not free as ithas been obtained by coercion. The contract between X and Z isa valid contract because the object of contract (i.e. borrowing forthe purchase of a house) is lawful.10. X agrees to pay Y Rs 1,00,000 if Y kills Z. To pay Y, X

borrows Rs 1,00,000 from W who is also aware of thepurpose of the loan. Y kills Z but X refuses to pay. X alsorefuses to repay the loan to W. Advise Y and W.

Solution: The agreement between X and Y is an illegal agree-ment because its object is unlawful. Hence, Y cannot recoveranything from X. Since the main agreement between X and Y isillegal, the agreement between X and W which is collateral to themain agreement is also void and hence W cannot recoveranything from X.




Pvt. Ltd, Delhi.• Rohini Aggarwal(2003), “Student’s Guide To Mercantile

And Commercial Laws,” Tata Mc. Graw Hill Pvt. Ltd,Delhi.

Notes:


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LESSON 3:ACCEPTANCE

Learning OutcomesAfter todays class you should be able to answer the followingquestions:• The meaning of offer and acceptance• The communication of offer and acceptance• The revocation of offer and acceptance

IntroductionBy now you must be aware of the essentials of a contract. Intoday’s lecture we shall do a detailed study of the concept ofofferThe four basic elements of a contract are offer, acceptance,consideration and contractual capacity out of which we shallstudy the first one in this lesson.While discussing the essential elements of a valid contract in thepreceding chapter we observed that as a first step in the makingof a contract there must be a ‘lawful offer’ by one party and a‘lawful acceptance’ of the offer by the other party, thus where A,offers to sell a wrist watch to B for Rs. 200 and B accepts theoffer, a contract comes into being provided other essentials of avalid contract like that of competency of parties to contract, etc.are present. We propose to discuss now the legal rules relatingto a ‘lawful offer’.

The Proposal or OfferThe words ‘ proposal’ and ‘offer’ are synonymous and are usedinterchangeably. Section 2 (a) of the Indian contract act defines a‘proposal’ as, “ when one person signifies to another hiswillingness to do or to abstain form doing anything, with aview to obtaining the assent of that other to such act orabstinence, he is said to make a proposal”. This definitionreveals the following three essentials of a ‘proposal’.(i) One person signifies to another; it must be an expression

of the willingness to do or to abstain from doingsomething. According to section 3 to signify means thatthe proposal must be communicated to the other party.

(ii) The expression of willingness to do or to abstain formdoing some thing must be to another person. There can beno ‘proposal’ by a person to himself

(iii) The expression of willingness to do or to abstain fromdoing some-thing must be made with a view to obtainingthe assent of the other person to such act or abstinence.Thus a casual enquiry “ do you intend to sell yourmotorcycle?” is not a ‘proposal’. Similarly, a mere statementof intention” I may sell my motorcycle if I can get Rs.14,000 for it” is not a ‘proposal’. But if M says to N, “ willyou buy my motorcycle fro Rs. 14,000,” or “ I am willingto sell my motorcycle to you for Rs. 14,000”, we have a‘proposal’ as it has been made with the object ofobtaining the assent of N.

The person making the ‘proposal’ or ‘offer’ is called the‘promisor’ or ‘ offeror’, the person to whom the offer is madeis called the ‘offeree’, and the person accepting the offer is calledthe ‘promisee’ or ‘acceptor’.

Legal Rules Regarding a Valid OfferA valid offer must be in conformity with the following rules:1. An offer may be’ express’ or ‘implied’. An offer may be

made either by words or by conduct. An offer which isexpressed by words, spoken or written is called an ‘expressoffer’ and the one which is inferred form the conduct of aperson or the circumstances of the case is called an ‘impliedoffer.’ Thus stepping into a taxi and consuming eatables ata restaurant both create implied promise to pay for benefitsemployed. In Upton Rural District Council v Powell, a firebroke out in the defendant’s farm . believing that he wasentitled to the free service of Upton Fire Brigade (which hewas not) he summoned it. Upton claimed compensationfor its services. Held services were rendered on an impliedpromise to pay for them.

I will give a few more illustrations in this regard.

Illustration

(a) M says to N that he is willing to sell his motorcycle to himfor Rs. 20,000. this is an express offer.

(b) X writes to Y he offers to sell his house to him for Rs.80,000. there is an express offer.

(a) The Delhi Transport Corporation runs omnibuses ondifferent routes to carry passengers at the scheduled fare.This is an implied offer by the D.T.C.

(b) A shoe shiner starts shining some one’s shoes, withoutbeing asked to do so, in such circumstances that anyreasonable man could guess that he expects to be paid forthis, he makes an implied offer.

The second essential of a valid offer is intention.2. An offer must contemplate to give rise to legal

consequences and be capable of creating legal relations.If the offer does not intend to give rise to legal consequences, itis not a valid offer in the eyes of law. An offer to a friend todine at the offeror’s place, or an offer to one’s wife to show her amovie is not a valid offer and as such cannot give rise to abinding agreement, even though it is accepted and there isconsideration, because in social agreements or domesticarrangements the presumption is that the parties do not intendlegal consequences to follow the breach of agreement. But inthe case of agreements regulating business agreements it istaken for granted that parties intend legal consequences tofollow. Even in the case of a business agreement if the partiesagree that the breach of the agreement would not confer oneither of the parties a right to enforce the agreement in a court


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of law, there is no contract (Rose & Frank Co. vs. Crompton &Brothers Ltd.)3. The terms of the offer must be certain and not loose or

vague. The terms of the offer must be certain and notvague (sec 29). Mangham L.J. has rightly observed: “ unlessall the material terms of the contract are agreed, there is nobinding obligation.” Thus an agreement to agree in futureis not a contract, because the terms of agreement areuncertain as they are yet to be settled.

Let us try to work out these problems on our own

Illustrations.(a) X purchased a horse form Y and promised to buy another,

if the first one proves lucky. X refused to buy the secondhorse.

(b) A offers to B lavish entertainment. If B does a particularwork for him.

(c) A agrees to sell to B “my white horse for Rs. 500 or Rs.1000”

Answers(a) Y could not enforce the agreement, it being loose and

vague (Taylor vs. Porting ton)(b) A’s offer does not amount to lawful offer being vague and

uncertain.(c) There is nothing to show which of the two prices was to

be given, thus it is not a valid offer.3. An invitation to offer is not an offer. An offer must be

distinguished form an ‘invitation to receive offer’ or as it issometimes expressed in judicial language an ‘invitation totreat.’ In the case of an ‘invitation to offer’ the personsending out the invitation does not make an offer but onlyinvites the other party to make an offer. His object ismerely to circulate information that he is willing to dealwith anybody who, on such information, is willing to opennegotiations with him. Such invitations for offers aretherefore not offers. In the eyes of law and do not becomeagreements by their acceptance. We may give someexamples of them here.

(a) An advertisement for sale of goods by auction does notamount to an offer to hold such sale. It merely invitesoffers. Actual bids made at the auction are ‘ offers’, eachhigher bid superseding the previous one, and when thehammer falls on the higher bid, there is an acceptance andthe contract becomes complete. An advertisement for anauction sale does not even bind the auctioneer to hold theauction and the prospective bidders have no legal right tocomplaint if they have wasted their time and money incoming to the advertised place of the auction sale (Harriesvs. Nickerson)

(b) There is a self-service system in a shop. A customer selectsthe goods and takes them to the cashier for payment of theprice. The cashier totals the price and accepts the amount.The contract, in this case in made, not when the customerselects the goods, but when the cashier accepts the offer byaccepting the payment. The selection of goods by thecustomer constitutes an ‘implied offer’ to buy goods and

the acceptance of payment by the cashier constitutes‘acceptance’ of the offer. [Pharmaceutical society of GreatBritain vs. Boots cash Chemists (southern). Ltd.]

(c) A notice that goods will be sold by ‘tender’ does notamount to an offer. It is only an attempt to ascertainwhether an offer can be obtained within such a margin asthe seller is willing to adopt (Spencer vs. Harding) thetenders to accept them or not.

(d) In Mc Pherson vs Appanna it was held that mere statementof the lowest price at which the offerer would sell containsno implied contract to sell at that price.

(e) In the case of Harvey vs Facey the plaintiffs telegraphed tothe defendants writing; “ will you sell us Bumper Hall Pen?Telegraph lowest cash price.” The defendants replied, alsoby a telegram: “Lowest price for pen, £900”. The plaintiffsimmediately sent their last telegram stating: “ We agree tobuy Pen for £900 asked by you”. The defendants, however,refused to sell the plot of land at that price. The courtobserved that the defendants had made no offer. Theplaintiffs’ last telegram was an offer to buy, but that wasnever accepted by the defendants.

5. An offer may be a ‘specific’ or ‘general’. There are two kindsof offers - general and specific. The specific order is madeto a specific person, while a general offer is made to theworld or public at large. However, in case of general offersthe contract is made only with that person who comesforward and performs the conditions of the proposal assuch performance amounts to the acceptance ofperformance. Such an offer can be accepted only by theperson or persons to whom it is made. Thus, where Mmakes an offer to N to sell his bicycle for Rs. 200, there is aspecific offer and N alone can accept it. A ‘general offer’ onthe enter hand is one which is made to the world at large orpublic in general and may be accepted by and person whofulfils the requisite conditions. The leading case on thesubject of ‘general offer’ is that of Carlill vs Carbolicsmoke Ball co,”

IllustrationIn the above case the carbolic smoke Ball co. issued an advertise-ment in which the company offered to pay £ 100 to any personwho contract influenza, after having used their smoke Ballsthree times daily for two weeks, according to the printeddirections. Mrs. Carlill, on the faith of the advertisement,bought and used the Balls according to the directions, but shenevertheless subsequently suffered from influenza. She sued thecompany for the promised reward. The company was heldliable.Offers of reward made by way of advertisement, addressed tothe public at large, for the rendering of certain services, or therestoration of lost article are also examples of general offers.Such offers may be accepted by performance of the conditionsby an individual person in order to give rise to a contractualobligation to pay the reward. It is worth noting that therecannot result into a contract until it has been accepted by anascertained person. If a large number of persons accepted ageneral offers of continuing nature, as it was in the smoke Ball


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company case discussed above, which can be accepted bynumber of persons. In case of general offer of reward for someinformation or restoration of a missing thing, the offer is openfor acceptance to only one individual who performs the requiredcondition first of all, and as soon as the condition is firstperformed the offer is closed.6. An offer must be communicated to the offeree. The

communication of a proposal is complete when it comesto the knowledge of the person to whom it is made (Secn4). An offer is effective only when it is communicated tothe offeree. Until the offer is made known to the offeree,there can be no acceptance and no contract. Doing anythingin ignorance of the offer can never be treated as itsacceptance, for there was never a consensus of wills. Thisapplies to both ‘specific’ and ‘general’ offers.

Illustrations (a) A. without knowing that a reward has beenoffered for the arrest of a particular criminal, catches the criminaland gives the information to the superintendent of police. Acannot recover the reward as he cannot be said to have acceptedthe offer when he was not at all aware of it.In Lalman Shukla vs. Gauri Datt. “ the defendant’s nephewabsconded from home. He sent his servant, the plaintiff, insearch of the boy. After the servant had left. The defendantannounced a reward of Rs. 501 to anybody giving informationrelating to the boy. The servant, before seeing the announce-ment, had traced the boy and informed the defendant. Later, onreading the notice of reward, the servant claimed it. His suit wasdismissed on the ground that he could not accept the offer,unless he had knowledge of it.The court observed: “ where an offer has been accepted withknowledge of the reward the fact that the informer wasinfluenced by motives other than the reward will be immate-rial.” In Williams vs. Carwardine where information was givenabout the murderers of her husband of a woman, not so muchfor reward, but to assuage her feelings, she was allowed torecover. The court further observed that in the case of publicadvertisements offering a reward, the performance of the actraises an inference of acceptance. But in the case of LalmanShukla vs Gauri Dutt , the plaintiff being a servant was alreadyunder an obligation to do what he did and therefore theperformance of act cannot be regarded as a consideration fordefendant’s promise.7. Cross offers – when two parties make identical offers to

each other, in ignorance of each other’s offer, the offers arecross offers. Such offers do not constitute acceptance ofone’s offer by the other and as such there is no completedagreement. For eg. A wrote to B offering to sell him certaingoods. On the same day, B wrote to A offering to buy thesame goods. The letters crossed in the post. There is noconcluded contract between A and B.

Let me give you an example so that you can understand itbetter. Suppose on 15 October, 1989 A wrote to B offering tosell him 100 tons of iron at Rs. 8,800 per ton. On the same day,B wrote to A offering to buy 100 tons of iron at Rs. 8,800 perton. The letters crossed in the post. There is no concludedcontract between A and B, because the offers were simulta-

neous. Each being made in ignorance of the other, and there isno acceptance of each other’s offer.You all must be thinking about the contracts which are enteredinto a by large number of people at the same time. These arecalled standard form contracts we have already discussed themin brief but now I would like to take up a few examples ofsuch contracts.Communication of special terms (Standard Form Contracts)Regarding the communication of the special terms of thecontract as contained in a ticket, receipt, or, ‘standard formdocuments’, the more important rules adopted by the courtsare as follows.(i) If the acceptor or the promisee had no knowledge of

special terms. Before or at the time of the contract, they arenot binding upon the acceptor.

Illustration In Handerson vs. Stevenson. “ the plaintiff boughta steamer ticket which bore on its face the words. ‘Dublin towhite haven’ on the back of the ticket certain special terms wereprinted one of which excluded the liability of the company forloss, injury or delay to the passenger or his luggage. Theplaintiff never looked at the back of the ticket bore no referenceto the back. The plaintiffs luggage was lost in the shipwreckcaused by the fault of the company’s servants. He claimeddamages for its loss. It was held that the plaintiff was entitledto recover his loss from the company as there was not sufficientcommunication of the terms and conditions contained on theback of the ticket.(ii) If the acceptor or the promisee had the knowledge or may

be presumed to have the knowledge; because a reasonablysufficient notice has been given to him by suitable wordson the document; of special terms, before or at the time ofthe contract, the terms are binding upon the acceptorwhether he has read them or not is immaterial. The leadingcase on the point is Parker vs. South Eastern Railway co.

Illustration. in the above case P deposited his bag at the cloak –room at a railway station and received a ticket containing on itsface the words, ‘see back’. On the back of the ticket there was acondition that, “ the company will not be responsible for anyexceeding the value of £10 unless extra charge was paid”. Anotice to the same effect was hung up in the cloak- room P’ sbag was lost and he claimed the actual value of the lost bag. £24 sh 10 P, admitted knowledge of the printed matter on theticket, but denied having read it. It was held that, even thoughhe had not read the exemption clause, he was bound by it. Asthe defendants had done what was reasonably sufficient to givehim notice of its existence, and therefore P was entitle therecover only £ 10.Again, where the terms are printed in a language which theacceptor does not understand, he cannot set up this fact as areason for not being bound by the terms, provided hisattention is drawn to them by suitable words on the document.It is the acceptor’s duty to ask for a translation of the termsbefore he actually accepts the offer and if he did not ask, hemust suffer for his ignorance (MacKillican vs. the CompagnieMarkemas de France.) similarly, the acceptor cannot plead that hewas illiterate or blind, provided the notice is reasonably


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sufficient for the class of persons to which he belongs (Thomp-son vs. L.M. & S. Railway co.)It is important to note that the special terms and conditionsbecome binding as part of the contract only if they are broughtto the notice of the acceptor before or at the time of contract. Asubsequent communication will not bind the contracting partyunless he has assented thereto. The facts of Olley vs.Marlborough court LTD. Case provide a good illustration onthe point.Illustration. in the above case Olley and her husband hired aroom at a hotel and paid for a week’s board and lodging inadvance. When they went to occupy the room there was a noticeon one of the walls which contained the clause. ‘ the proprietorswill not hold themselves responsible for articles lost or stolen,unless handed to the manageress for safe custody. Owing to thenegligence of the hotel staff, a thief entered the room and stolesome of their property. The owner of the hotel was held liablesince the notice formed no part of the contract as it came to theknowledge of the plaintiff after the contract had been enteredinto.Again, where the terms are printed in a language which theacceptor does not understand, he cannot set up this fact asdefence. He must suffer for his ignorance (Mackillican vs. thecompanies Marukemas de France) similarly, the acceptor cannotplead that he was illiterate of blind the contracting party unlesshe has assented thereto. The facts of olley vs. Marlboroughcourt Ltd. Case provide a good illustration on the point.Finally, we must note that even where adequate notice of theterms and conditions in a document has been given, thedoctrine of fundamental breach and strict construction protectsthe contracting party form the unreasonable consequences ofwide and sweeping exemption clauses. Thus a dry-cleaner’sterms that he will pay only eight times the amount of cleaningcharges, for any damage to or loss of garments has been held tobe unreasonable (M. siddalingappa vs. T. Nataraj).7. An offer should not contain a term the non- compliance of

which would amount to acceptance. Thus an offeror cannotsay that if acceptance is not communicated up to a certaindate, the offer would be presumed to have been accepted.If the offeree does not reply, there is no contract, becauseno obligation to reply can be imposed on him, on thegrounds of justice.

The question that comes up now is whether any terms orconditions can be attached to an offer:8. An offer can be made subject to any terms and conditions.

An offeror may attach any terms and conditions to theoffer he makes. He may even prescribe the mode ofacceptance. The offeree will have to accept all the terms ofthe offer. There is no contract, unless all the terms of theoffer are complied with and accepted in the modeprescribed. As regards mode of acceptance, it must benoted that in case of deviated acceptance, for example, ifthe offeror asks for sending the acceptance ‘by telegram’and the offeree sends the acceptance ‘by post’ the offerormay decline to treat that acceptance as valid acceptanceprovided the gives a notice to that effect to the offeree

within a reasonable time after the acceptance iscommunicated to him. If he does not inform the offereeas to this effect, he is deemed to have accepted the deviatedacceptance. (sec. 7)

Now we come to revocation of the offerLapse and Revocation of offerAn offer lapses and becomes invalid (i.e., comes to an end) inthe following circumstances.1. An offer lapses after stipulated or reasonable time. An offer

lapses if acceptance is not communicated within the timeprescribed in the offer, or if no time is prescribed, within areasonable time. [sec. 6 (2)]. What is a reasonable time is aquestion of fact depending upon the circumstances of eachcase. for example, an offer made by telegram suggests thata reply is required urgently and if the offeree delays thecommunication of his acceptance even by a day or two, theoffer will be considered to have lapsed.

In Ramsgate Victoria Hotel Co. vs. Montefiore. An applicationfor allotment of shares was made on 8 June. The applicant wasinformed on the 23 November that shares were allotted to him.He refused to accept them. It was held that his offer had lapsedby reason of the delay of the company in notifying theiracceptance, and that he was not bound to accept the shares.2. An offer lapses by not being accepted in the mode

prescribed, or if no made is prescribed, in some usual andreasonable manner. But, according to section 7, if theofferee does not accept the offer according to the modeprescribed, the offer does not accept the offer according tothe mode prescribed, the offer does not lapse automatically.It is for the offeror to insist that his proposal shall beaccepted only in the prescribed offeror to insist that hisproposal shall be accepted only in the prescribed manner,and if he fails to do so he is deemed to have accepted theacceptance.

3. An offer lapses by rejection. An offer lapses if it has beenrejected by the offeree. The rejection may be express i.e., bywords spoken or written, or implied. Implied rejection isone(a) where either the offeree makes a counter offer, or (b)where the offeree gives a conditional acceptance.

How about some examples in this context

(i) A offered to sell his house to B for Rs. 90,000. B offeredRs.80,000 for which price A refused to sell. Subsequently Boffered to purchase the house for Rs.90,000. A, declined toadhere to his original offer. B filled a suit to obtain specificperformance of the alleged contract. Dismissing the suit,the court held that A was justified because no contract hadcome into existence, as B, by offering Rs. 80,000, hasrejected the original offer. Subsequent willingness to payRs. 90,000 could be no acceptance of A’s offer as there wasno offer to accept. The original offer had already come to anend on account of ‘counter’ ( Hyde vs. wrench).

(ii) A offered to sell his motorcar to B for Rs. 25,000. B saidthat the he accepted the offer if he was offeror. Forexample, C makes an offer to D by letter. Immediately onreceiving the letter D writes a letter rejecting the offer.


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Before the rejection reaches C, D changes his mind handtelephones his acceptance. There would be a contract C andD and the rejection shall not be effective.

It is worth noting that a rejection is effective only when it comesto the knowledge of the offeror. For example, C makes an offerto D by letter. Immediately on receiving the letter D writes aletter rejecting the offer. Before the rejection reaches C, Dchanges his mind and telephones his acceptance. There wouldbe a contract between C and D and the rejection shall not beeffective.4. An offer lapses by the death or insanity of the offeror or

the offeree before acceptance. If the offeror dies or becomesinsane before acceptance, the offer lapsed provided that thefact of his death or insanity comes to the knowledge of theacceptor before acceptance [sec. 6 (4)]. From the language ofthe section, it may be inferred that an acceptance inignorance of the death or insanity of the offeror, is a validacceptance, and gives rise to a contract. Thus the fact ofdeath or insanity of the offeror would not put an end tothe offer until it comes to the notice of the acceptor beforeacceptance. An offeree’s death or insanity before acceptingthe offer puts an end to offer and his heirs cannot acceptfor him (Reynolds vs. Atherton).

5. An offer lapses by revocation. An offer is revoked when itis retracted back by the communication of notice ofrevocation by the offeror to the other party [sec. 6(1). Forexample, at an auction sale, A makes the highest bid. Buthe withdraws the bid before the fall of the hammer. Therecannot be a concluded contract because the offer has beenrevoked before acceptance;

Further, an offer, agreed to be kept open for a definite period,may be revoked even before the expiry of that period, unlessthere is some consideration for so keeping it open. The effect offacing a time for acceptance is merely to fix a tie beyond whichthe offer cannot be accepted. Where no time limit is set, theoffer open for a definite period, unsupported by consideration,is regarded as a ‘bare pact,’ and hence not offer open, supportedby consideration, is called an ‘option’ an ‘option’ is in effect aseparate contract making the promisor liable for breach if herevokes the offer before the expiry o f agreed time.Illustration. M. offers to sell his house to N for Rs. 1,40,000. Nsays to M that if he agree the offer open for 10 days he (N) willpay him Rs. 1,000. M agrees M cannot revoke the offer beforethe expiry of 10 days, as N has obtained an option to purchasethe house within 10 days. If M revokes the offer before theexpiry of 10 days. He can be sued for breach of option contract.Revocation of an offer must be communicated or made knownto the offeree, otherwise the revocation does not preventacceptance. Revocation of a ‘general offer’ must be madethrough the same channel by which the original offer wasmade. Again, revocation must always be express and must becommunicated by the offeror himself or his duly authorizedagent to the other party.Revocation of standing offer or tender. Where a person offersto another to supply specific goods, up to a stated quality or inany quality which may be required, at a certain rate, during a

fixed period, he makes a standing offer. A standing offer is inthe nature of an open or continuing offer. An acceptance ofsuch an offer merely amounts to an intimation that the offerwill be accepted from time to time by placing order for specified,quantities. Each successive order given, while the offer remainsin force, is an acceptance of the standing offer as to the quantityordered, and creates a separate contract. In view of this legalposition, the offeror is free to revoke the standing offer withregard to further supply, at any time, by giving a notice to theofferee, except where consideration is given for it.6. Revocation by non- fulfillment of a condition precedent

to acceptance. An offer stand revoked if the offeree fails tofulfill a condition precedent to acceptance [sec. 6 (3)]. Thus,where A, offers to sell his scooter to B for Rs. 4,000. if Bjoins the lions club within a week the offer stands revokedand cannot be accepted be B if B fails to join the lionsclub.(in default of payment of earnest money.)

7. An offer lapses by subsequent illegality or destruction ofsubject matter. An offer lapses if it becomes illegal after it ismade, and before it is accepted. Thus, where an offer ismade to sell 10 bags of wheat for Rs. 6,500 and before it isaccepted, a law prohibiting the sale of wheat by privateindividuals is enacted, the offer comes to an end. In thesame manner, an offer may lapse if the thing, which is thesubject matter of the offer, is destroyed or substantiallyimpaired before acceptance.

Practice QuestionsI. Comment on the following statements

(1) Offer must be communicated to the offeree.(2) Terms of an offer must be certain.(3) An offer must be distinguished from an invitation to

offer.(4) A proposal cannot be revoked otherwise than by

communication.II. Define the term offer. Explain the legal rules regarding the

term offer.III. How does an offer get terminated?IV. Distinguish between

(1) General offer and specific offer(2) Offer and an invitation to offer(3) Cross offer and counter offer

V. Solve the following problems giving reasons(1) A garment store gave a following advertisement in the

newspaper :“ Special sale for tomorrow only. Men’s nightsuits reduced fromRs.200 to Rs.100 only” is it a valid offer or not.(2) A sees a rare book displayed in a shop. It is labelled ‘ First

Edition Rs.15’. a enters the shop and puts Rs.15 on thecounter and asks for the book. The bookseller does notagree to sell saying that the real price of the book isRs.50and that it had been marked as Rs.50 by mistake. Isthe bookseller bound to sell the book for Rs.15?


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(3) A sent a telegram to B, ‘will you sell your car? Quote lowestprice.’ B sent a reply, ‘lowest price Rs.25000.’ A sent asecond telegram to B, ‘I agree to buy your car at Rs.25000.’B thereafter refuses to sell. Can a compel B to do so. Isthere a contract between A and B?

References:• Kapoor, N.D. (2003), “Elements of Mercantile Law,”





Notes:


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LESSON 4:ACCEPTANCE OF AN OFFER

Learning OutcomesAfter today’s class you should be able to answer the followingquestions:• The meaning of acceptance• The essentials elements of acceptance• The communication of an acceptance

IntroductionToday first we will start with the meaning of acceptanceA contract as already observed, emerges from the acceptance ofan offer. Section 2(b) states that “ A proposal when acceptedbecomes a promise” and defines ‘ acceptance’ as “ when theperson to whom the proposal is made signifies his assentthereto, the proposal is said to be accepted.” Thus, ‘ acceptance’is the manifestation by the offeree of his assent to the terms ofthe offer. Thus there are two essential requirements of a validacceptance• Firstly the offeree to the offeror should communicate

acceptance.• Secondly, acceptance should be absolute and unqualified.Legal Rules Regarding a valid AcceptanceA valid acceptance must be in conformity with the followingrules.1. Acceptance must be given only by the person to whom the

offer is made. An offer can be accepted only by the person or persons towhom it is made and with whom it imports an intentionto contract. It cannot be accepted by another personwithout the consent of the offeror. The rule of law is clearthat “ if you propose to make a contract with A. then Bcan’t substitute himself for A without your consent.” Anoffer made to a particular person can be validly accepted byhim alone. Similarly an offer made to a class of person s(i.e., teachers) can be accepted by any member of that class.An offer made to the world at large can be accepted by anyperson who has knowledge of the existence of the offer.

Let us suppose A sold his business to his manager B withoutdisclosing the fact to his customers. C, a customer, who had arunning account with A, sent an order for the supply of goodsto A by name. B received the order and executed the same. Crefused to pay the price. It was held that there was no contractbetween B and C because c never made any offer to B and assuch C was not liable to pay the price to B (Boulton vs. Jones).I will give you another example. In Felthouse vs Bindley thenephew intended his uncle to have the horse but had notcommunicated this to the uncle, instead he told the auctioneernot to sell the horseas it was already sold to his uncle. It wasthereby held that the communication to a stranger like theauctioneer in this would not do. A communication to any other

person is no communication in the eyes of law. The offerorcannot say that if no answer is received in a certain time the offeris deemed to be accepted. Mere silence is no acceptance of theoffer.2. Acceptance must be absolute and unqualified [sec. 7(1)]. In

order to be legally effective it must be an absolute andunqualified acceptance of all the terms of the offer. Eventhe slightest deviation from the terms of the offer makesthe acceptance invalid. In effect a deviated acceptance isregarded as a counter offer in law.

Illustration. L offered to M his scooter for Rs. 4,000 M acceptedthe offer and tendered Rs. 3,900 cash down, promising to paythe balance of Rs. 100 by the evening. There is no contract, asthe acceptance was not absolute and unqualified.Other important features that we must know in respect ofacceptance would be3. Acceptance must be expressed in some usual and

reasonable manner, unless the proposal prescribes themanner in which it is to be accepted. [sec. 7(2)]. If theofferor prescribes no mode of acceptance, the acceptancesmust be communicated according to some usual andreasonable mode. The usual modes of communication areby word spoken or written or by conduct, it is called animplied or tacit acceptance. Implied acceptance may be giveneither by doing some required act, for example, tracing thelost goods for the announced reward, or by accepting somebenefit or service, for example, stepping in a public bus bya passenger.

If the offeror prescribes a mode of acceptance, the acceptancegiven accordingly will no doubt be a valid acceptance, even if theprescribed mode is funny. Thus, if an offeror prescribes lightinga match as a mode of acceptance and the offeree accordinglylights the match, the acceptance is effective and complete. Butwhat happens if the offeree deviates from the prescribed mode?The answer to this query is given in section 7(2) itself whichstates that in cases of deviated acceptances ‘the proposer may,within a reasonable time after the acceptance is communicationto him, insist that his proposal shall be accepted in the pre-scribed manner, and not otherwise; but, if he fails to do so, heaccepts the (deviated) acceptance.”For Example If the offeror prescribes ‘acceptance by telegram’and the offeree sends acceptance through a messenger, there isno acceptance of the offer, if the offeror informs the offereethat the acceptance is not according to the mode prescribed. Butif the offeror fails to do so, it will be presumed that he hasaccepted the acceptance and a valid contract will arise.It should be noted that law does not allow an offeror toprescribe ‘silence’ as the mode of acceptance. Thus, a personcannot say that if within a certain time acceptance is notcommunicated the offer would be considered as accepted.


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Similarly, a trader who, of his own without receiving any order,sends goods to some person with a letter saying “ if I do nothear from you by the next Monday, I shall presume that youhave bought the goods”, cannot impose a contract on theunwilling recipient. It is so because in the absence of such a rulethe offeree’s will be at the mercy of offeror’s, unless they replayall such offers in negative which will certainly be causing a lot ofinconvenience and financial burden to them.Now what about the cases where no acceptance is communi-cated although there is an intention of entering into a contract.Mental acceptance ineffectual. Mental acceptance or quiet assentnot evidenced by words or conduct does not amount to a validacceptance, and this is so even where the offeror has said thatsuch a mode of acceptance will suffice. Acceptance must becommunicated to the offeror, otherwise it has no effect. Thus,if an oral acceptance is spoken into a telephone after thetelephone has gone dead, there is in effect no acceptance. Thisrule is based on the theory of consensus ad idem or of identityof minds. Unless the acceptance of the offer comes to theknowledge of the offeror, there is no identity of mind andtherefore no contract.(a) A person received an offer by letter. In reply he wrote a

letter of acceptance. Put the letter in his drawer and forgotall about it. Held, this uncommunicated acceptance did notamount to acceptance and so did not complete the contract.(Brogden vs. Metropolitan Rly co)

4. Acceptance must be communicated by the acceptor. For anacceptance to be made it should be made by the offeree butmust also be communicated by, or with the authority of,the offeree (or acceptor) to the offeror.

In the landmark case of Powell vs. Lee, P was a candidate forthe post of headmaster in a school. The managing committeeof the school passed a resolution selecting him for the post. Amember of the managing committee, acting in his individualcapacity, informed P that he had been selected, but P received noother intimation. Subsequently, the resolution was cancelled,and P was not appointed no other intimation. Subsequently,the resolution was cancelled, and P was not appointed to thepost. P filed a suit against the committee for breach of contract.The court held that in the absence of an authorized communi-cation form the committee there was no binding contract.5. Acceptance must be given within a reasonable time and

before the offer lapses and/or is revoked. To be legallyeffective acceptance must be given within the specified timelimit, if any, and if no time is stipulated, acceptance mustbe given within a reasonable time because an offer cannotbe kept open indefinitely (shree Jaya Mahal cooperativeHousing society vs. Zenith chemical works pvt. Ltd.)where M applied for certain shares in a company in Junebut the allotment was made in November and he refusedto accept the allotted shares. It was held that the offeror Mcould refuse to take shares as the offer stood withdrawnand could not be accepted because the reasonable periodduring which the offer could be accepted had elapsed(Ramsgate Victoria Hotel co. vs. Monteforte). Again theacceptance must be given before the offer is revoked or

lapses by reason of offeree’s knowledge of the death orinsanity of the offeror.

6. Acceptance must succeed the offer. Acceptance must begiven after receiving the offer. It should not precede theoffer. In a company shares were allotted to a person whohad not applied for them. Subsequently he applied forshares being unaware of the previous allotment. It washeld that the allotment of shares previous to theapplication was invalid.

7. Rejected offers can be accepted only, if renewed. Offer oncerejected cannot be accepted again unless a fresh offer ismade (Hyde vs. Wrench).

Communication of Acceptance and RevocationWhen the contracting parties are face to face and negotiate inperson, there is instantaneous communication of offer andacceptance, and a valid contract comes into existence themoment the offeree gives his absolute and unqualified accep-tance to the proposal made by the offeror. The question ofrevocation of either offer or acceptance does not arise, for, insuch cases a definite offer is made and accepted instantly at oneand the same time.But where services of the post office are utilized for communi-cating among themselves by the contracting parties because theyare at a distance form one another, it is not always easy toascertain the exact time at which an offer or /and an acceptance ismade or revoked. In these cases the following rules, as laiddown in section 4 and 5, will be applicable;1. Communication of an offer. The communication of an

offer is complete when it comes to the knowledge of theperson to whom it is made, i.e., when the letter containingthe offer reaches the offeree.

2. Communication of an acceptance. The communication ofan acceptance has two aspects, viz., as against the proposerand as agonist the acceptor. The communication of anacceptance is complete (a) as against the proposer, when itis put in a course of transmission to him, so as to be outof power of the acceptor, and (b) as against the acceptor,when it comes to the knowledge of the proposer i.e., whenthe letter of acceptance is received by the proposer.

Illustrations

(i) A proposes, by letter, to sell a house to B for Rs. 80,000.the letter is posted, on 6th instant. The letter reaches B on8th instant. The communication on the offer is completewhen B, the offeree, receives the letter i.e., on 8th.

(ii) B accept A’s proposal, in the above case, by a letter sent bypost on 9th instant. The letter reaches A on 11th instant. Thecommunication of the acceptance is complete. As against Awhen the letter is posted i.e., on 9TH, and as against B, whenthe letter is received by A. i.e., on 11th.

3. Communication of a revocation. The communication of arevocation is complete. (a) as against the person whomakes it, when it is put into a course of transmission tothe person to whom it is made, so as to be out of theposer of the person revoking, i.e., when the letter ofrevocation is posted, and (b) as against the person to


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whom it is made, when it comes to his knowledge, I.e.,when the letter of revocation is received by him.

Illustration

(a) In the illustration (i) given above. A revolves his offer byletter on 8th instant. The letter reaches B on 10th instant.The revocation is complete as against A on 8th, when theletter of revocation is received by him.

(b) In the illustration (ii) given above, B revokes his acceptanceby letter on 10th instant. The letter reaches A on 12th instant.The revocations complete as against B on 10th, the date onwhich the letter of revocation is posted and as against A on12th, the date on which the letter reaches him.

Time during which an offer or acceptance can be revoked. In theillustrations (a) and (b) given above, there arises a question.Whether the revocation of offer by A is operative or not, orwhether the revocation of acceptance by B is operative or not?For answering this question, it is necessary to know the limit oftime within which an offer or acceptance can be revoked. Section5 deals with this question and provides as follows.“A proposal may be revoked at any time before the communica-tion of its acceptance is complete as against the proposer, butnot afterwards. An acceptance may be revoked at any time beforethe communication of the acceptance is complete as against theacceptor but not afterwards.Applying section 5 to our illustrations given above. A mayrevoke his offer at any time before or at the moment when Bposts his letter of acceptance i.e., 9th, but not afterwards. B mayrevoke his acceptance at any time before or at the moment whenthe letter of acceptance reaches A. i.e., 11th, but not afterwards.While discussing the rule regarding communication of accep-tance is complete as against A on the day of posting itself i.e.,9th, A’s revocation of his offer, which is complete as against B on10th is inoperative. B’s acceptance is valid and there shall be abinding contract.For the sake of practice of the rules regarding communicationof offer, acceptance and revocation discussed above, we takeanother illustration.

Illustration

(i) A offers, by letter, to sell his car to B for Rs. 75,000 on 1st

August B receives the letter on 3rd august.(ii) B puts the letter of acceptance in post on 4th August, which

reaches A on 6th.(iii) A write a letter of revocation of his offer and posts it on

3rd August i.e., which reaches B on 5th August.

Rules Applied

(i) Communication of offer is compete on 3rd August i.e.,when it comes to the knowledge of B.

(ii) Communication of acceptance is complete as against theproposer i.e.,. A when the letter of acceptance reaches theproposer i.e., on 6th August.

(iii) Revocation of offer is complete as against A on 3rd August,when the letter or revocation is posted, and as against B on5th August, when the letter of revocation is received by him.

(iv) As B has put his acceptance into transmission on 4th

August and revocation of offer is communicated to himon 5th August, his acceptance is valid and there shall be abinding contract. A cannot revoke his offer after 4th August,when the communication of acceptance is complete asagainst him.

Effect of delay or loss of letter of acceptance in postal transit.So for as the offeror is concerned, he is bound by the acceptancethe moment the letter of acceptance is posted. Although theletters delayed or wholly lost through an accident of the postand the letter never in fact reaches him. But in order to bind theofferor, the letter of acceptance must be correctly addressed,properly stamped and actually posted. If the letter of acceptanceis misdirected because it has not been addressed correctly, therewould in law, be no communication of the acceptance; but ifthe wrong address is furnished by the offeror himself, he will bebound. So far as the acceptor is concerned. He is not bound bythe letter of acceptance till it reaches the offeror, the contractremains voidable at the instance of the acceptor. He can compelthe offeror to enforce the contract or he may revoke his accep-tance by communicating his revocation at any time before theletter reaches the offeror. Thus the acceptor is at an advantage ifthe letter is delayed or lost in transit.Accidental formation of contract. There remains yet anotherquery; what happens if both the letter of acceptance’ and the‘telegram of revocation of acceptance’ are delivered to the to theofferor at the same time? In such a situation the formation ofcontract will depend on a matter of chance. If the offeror readsthe letter of acceptance first and then the telegram, a bindingcontract will arise. But if the offeror reads the telegram ofrevocation of acceptance first and then the letter of acceptance,there will be no binding contract because the communication ofrevocation comes to the offeror’s notice first than the communi-cation of acceptance. It will be seen that the formation ofcontract in the aforesaid circumstance depends on a matter ofchance and therefore such contracts are called ‘ accidental form ofcontracts,’Contracts Over the TelephoneExternal manifestation or overt actThe definition clearly require that the assent should be signified,it may be signified or expressed by an act or omission by whichthe party accepting intends to communicate his assent or whichhas the effect of communicating it. A very common instance ofan act amounting to acceptance is the fall of the hammer in thecase of an auction sale. The principle is that there should besome external manifestation of acceptance. A mere mentaldetermination to accept unaccompanied by any externalindication will not be sufficient.Such manifestation may be in the form of express words,written or spoken or may be signified through conduct. Anillustration of acceptance by conduct is the decision of theHouse of Lords in Brogden v. Metropolitan Railway Co.B had been supplying coal to a railway company without anyformal agreement. B suggested that a formal agreement shouldbe drawn up. The agents of both the parties met and drew up adraft agreement. It had some blanks when it was sent to B for


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his approval. He filled up the blanks, including the name of anarbitrator and then returned it to the company. The agent of thecompany put the draft in his drawer and it remained therewithout final approval having been dignified. B kept up hissupply of coals but on the new terms and also receivedpayment on the new terms. A dispute having arisen B refusedto be bound by the agreement.The conduct of the company agent in keeping the agreement inhis drawer was an evidence of the fact that he held mentallyaccepted it. But he had not expressed his mental determinationand retention of the agreement was not be sufficient acceptance.But the subsequent conduct of the parties in supplying andaccepting coal on the basis of proposed agreement was aconduct that given. Said Lord CAIRNS LC “when the companycommenced a course of dealing which is referable only to thecontract and when that course of dealing was accepted and actedupon by B in the supply of coals.This rule, that the communication of an acceptance is completeas against the proposer when the letter is posted, is probablyintended to apply only when the parties are at a distance andthey communicate by post. “Where, however, the parties are ineach other’s presence or, though separated in space”, they are indirect communication, as, for example, by telephone, nocontract will arise until the offer or receives the notification ofacceptance. This appears from the speeches delivered in EntoresLtd. v. Miles Far East Corporation. Denning U observed asfollows:Let me first consider a case where two people make a contract byword of mouth in the presence of one another. Suppose, forinstance, that I shout an offer to a man across a river or acourtyard but I do not hear his reply because it is drowned byan aircraft flying overhead. There is no contract at that moment.It he wishes to make a contract, he must wait till the aircraft isgone and then shout back his acceptance so that I can hear whathe says.... Now take a case where two people make a contract bytelephone. Suppose, for instance, that I make an offer to a manby telephone and, in the middle of his reply, the line goes ‘dead’so that I do not bear his words of acceptance. There is nocontract at that moment.The facts of the case were that an offer was made from Londonby Telex to a party in Holland and it was duly accepted throughthe Telex, the only question being as to whether the contractwas made in Holland or in England. The Court of Appeal heldthat Telex is a method of instantaneous communication and“the rule about instantaneous communications between theparties is different from the rule about the post. The contract isonly complete when the acceptance is received by the offer orand the contract is made at the place where the acceptance isreceived.”Where, however, the proposal and acceptance are made byletters, the contract is made at the place where the letter ofacceptance is posted. It has been observed by the SupremeCourt that “authorities in India exhibit a fairly uniform trendthat in case of negotiations by post the contract is completewhen acceptance of the offer is put into a course of transmis-sion to the offeror”. Thus where a premium due on a lifeinsurance policy was sent by money order, it was held that the

policy had revived from the date of the money order and notfrom the late of its receipt by the company. The assured havingdied in the mean times widow recovered the proceeds.Whatever merit this rule may have from the point of view ofthe assured or the offered, it certainly makes the position of theoffer or miserable. The current feeling, therefore, is that even inreference to postal communications the principle of consensusor “meeting of minds” should be adhered to and there shouldbe no contract till the acceptance is received. Thus in HolwellSecurities v. Hughes an option to purchase land was exercisableby notice, it was held that the mere posting of the notice whichwas never delivered was not a valid exercise of the option.Supreme Court approval of Entores caseThe principle of the Entores case has been endorsed by theSupreme Court in Bhagwandas Goverdhandas Kedia v.Girdharilal Parshottamdas & Co. In this case, the plaintiffsmade an offer from Ahmedabad to the defendants atKhamgaon to purchase certain goods and the defendantsaccepted the offer. The question was whether the conversationresulted in a contract at Khamgaon at Ahmedabad. A majorityof the judges preferred to follow the English rule as laid downin the Entores case and saw no reason for extending the postoffice rule to telephonic communications but section 4 does notimply that the contract is made qua the proposer at one placeand qua the acceptor at another place. The contract becomescomplete... when the acceptance of offer is intimated to theofferor. It was further contended, that the draftsman of theIndian Contract Act could not have envisaged use of telephonebecause it had not yet been invented and, therefore, the wordsof the section should be confined to communications by post.The judge was, on the other hand, convinced that though “thelaw was framed at a time when telephones, wireless, Telstar ‘andEarly Bird were not contemplated”, the language of Section 4 isflexible enough to cover telephonic communications. Thecourts should not completely ignore the language of the Act.When the words of acceptance are spoken into’-the telephone,they are put into the course of transmission to- the offeror soas to be beyond the power of the acceptor; the acceptor cannotrecall them. The communication being instantaneous thecontract immediately arisesIn the case of contracts over the telephone, each contractingparty is able to hear the voice of the other. There is instanta-neous communication of offer and acceptance, rejection andcounter offer. And therefore, the rule which applies to contractsnegotiated orally by the parties in the physical presence of eachother i.e., the contract is complete only when the acceptance isreceived by the offeror also applies to contracts made over thetelephone. If the acceptance is not in fact communicated to theofferor because the telephone suddenly goes dead there will beno contract ( Entores Ltd. Vs. miles for east corporation). Theofferee, therefore must make sure that his acceptance is received(heard and understood) by the offeror, otherwise there is nobinding contract. The observation made by denning, L. J., inEntores case is enlightening in this connection.“Now take a case where two people make a contract bytelephone. Suppose for instance, that I make an offer to a manby telephone and in the middle of his reply, the line goes ‘dead’


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so that I do not hear his words of acceptance. There is nocontract at that moment. The other man may not know theprecise moment when the line failed. But he will know that thetelephonic conversation was abruptly broken off, becausepeople usually say something to signify the end of the conver-sation. If he wishes to make a contractor, he must, therefore,get through again so as to make sure that I heard. Suppose nextthat the line doesn’t go dead but it is nevertheless so indistinctthat I do not catch what he says and I ask him to repeat it. Hethen repeats it and I hear, but only the second time when in dohear. If he does not repeat it, there is no contract. The contractis only complete when I have his answer accepting the offer.”In Kanhialal vs. Dineshchandra it has been so held in India aswell that where a contract is effected by telephonic conversation,the contract is not complete till acceptance of the offer by theofferee is clearly heard and understood by the offeror.No question of revocation. When the parties negotiate acontract over telephone, no question of revocation can possiblyarise, for in such instantaneous communication, a definite offeris made and accepted at one and the same time. An offer whenaccepted, explodes into a contract and cannot be revoked. In thewords of sir Anson’ “ Acceptance is to an offer what a lightedmatch is to a train of gunpowder. It produces something whichcannot be recalled or undone.Here we end our discussion on acceptance of an offer.

Test QuestionsComment on the following

1. Offer must be communicated to the offeree.2. Terms of an offer must be certain3. Counter offer to an offer lapses the offer4. An invitation to an offer is not an offer

Practical ProblemsAnswer the following problems, giving reasons for youranswers.1. Harish says in conversation to suresh that he will give Rs.

10,000 to a person whosoever marries his daughter. Alokmarries Harish’s daughter and files a suit to recover Rs.10,000 will he succeed?[Hint. No, Harish has expressed his wish only, and hasnever made an offer with a view to obtaining the assent ofthe other party.]

2. X sees a book displayed in a shelf of a book shop with aprice tag of Rs. 85. X tenders Rs. 85 on the counter andasks for the book. The bookseller r3fuses to sell saying thatthe book has already been sold to someone else and hedoes not have another copy of that book in the stock. Isthe bookseller bound to sell the book to X?[Hint. No. a display of goods with prices marked thereonis only an invitation for offer, and not an offer itself. Hencethe bookseller is free to accept the offer or not.]

3. B offered to sell his car to A for Rs. 95,000. A accepts topurchase it for Rs. 94,500. B refused to sell the car Rs.94,500. subsequently A agree to purchase the car for Rs.

95,000 but B refused to sell the car. A sues B for the specificperformance of the contract. Will he succeed?[Hint. No. B’s offer comes to an end by the counter offerof A, and there, was no offer available for acceptancesubsequently.]

4. P sold his business to Q disclosing this to his customers.M, an old customer sent an order for goods to P by name.Q, the new owner, executed the order. Is M bound toaccept the goods?[Hint. No. M is not bound to accept the goods because aspecific offer made to P can be accepted only by P and noneelse (Boulton vs. Jones.]

5. X wrote to Y, his would be son-in-law, that his daughterwould have a share of what he left after the death of hiswife. Is the letter a valid offer by X to Y?

Solution: The letter was a mere statement of intention and notan offer at all. [Farina v. Fickus]6. A notice that the goods stated in the notice will be sold by

tender. Is the notice a valid offer to sell?Solution: The notice was mere a statement of intention and notan offer to seen. [Spencer v. Harding]7 X and Mrs X hired a room in a hotel for a week. When

they entered the room, they found a notice on the walldisclaiming the owner’s liability for damages; loss or theftof articles. Some of their items were stolen. Discuss thelegal position.

Solution: The owner of the hotel was liable because the specialterms (i.e. notice) were communicated after the formation ofthe contract. [Leading case: Olley v. Marlborough Court Ltd.]8. X sold his business to Y but this fact was not known to an

old customer Z. Z placed an order for certain goods to Xby name. Y supplied the goods to Z.

Is there a valid contract?Solution: There was no contract at all between Y and Z becauseZ’s offer was a specific offer to X and X alone could accept it.[Leading case: Boulton v. Jones]9. X offered to sell his .car for Rs 1,00,000 to Y. Y replies “I

will pay Rs 90,000 for it.” X refuses to sell at this price. Ythen attempts the original offer but X refuses to sell hiscar. Discuss the legal position.

Solution: Y’s first reply is a counter offer and not an acceptanceof X’ s offer and has put an end to the original offer. Afterhaving made the counter offer, Y cannot accept the original offerwhich has already come to an end. Hence, X is not bound to sellhis car to Y. [Leading case: Nihal Chand v. Amar Nath]10. X offered to sell two plots of land to Y at a certain price. Y

accepted the offer for one plot. Is there a valid contract?Solution: This is not a contract at all because the acceptance wasnot valid as itwas not for the whole of the offer. [Bhawan v. Sadula]11. F offered by a letter to buy his nephew’s horse for Rs 100

saying “If I hear


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no more about him, I shall consider the horse mine.” Thenephew sent no reply at all but told B his auctioneer not to’ sellthat particular horse as he intended to sell that horse to F. Bsold the horse by mistake. F filed a suit against B. Will hesucceed?Solution: F will not succeed because his nephew had notcommunicated accep-tance to him. [Felt house v. Bindley]






Notes:


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LESSON 5:CONSIDERATION

Learning OutcomesAfter todays class you should be able to answer the followingquestions:• The meaning of consideration• The essentials of consideration• The exceptions to the doctrine of consideration

IntroductionBy now you all must have understood the concept anddefinition of contract and its essentials. Our next topic of studyshall be consideration. Consideration constitutes the veryfoundation of the contract. As you all know that as per section10 of the Indian Contract Act there must be a consideration foran agreement to become a contract and that consideration mustalso be lawful. An agreement not supported by consideration isvoid.Consideration is one of the essential elements of a validcontract (Sec. 10). The fact. of its existence serves to distinguishthose promises by which the promisor intends to be legallybound from those which are not” seriously meant.In the words of Blackstone: “A consideration of some sort orother is so necessary to the forming of a contract, that a nudumpactum, or agreement to do or pay something on one side,without any compensation on the other, will not at law supportan action; and a man cannot be compelled to perform it. Thelaw supplies no means nor affords any rem-edy to compel theperformance of an agreement made without consideration. If Ipromise a man £ 100 for nothing, he neither doing norpromising anything in return or to compensate me for mymoney, my promise has no force in law.”Anson said that the offer and acceptance bring the partiestogether and constitute the outward semblance of a contractbut most systems of law require some further evidence of theintention of the parties, which is provided by consideration andform. It may be noted that consideration is a cardinal necessityfor the formation of a contract., but no consideraion isnecessary for the discharge or modification of a contract.The breach of a gratuitous promise cannot be redressed by legalremedies. It is only when a promise is made in return of‘something’ from the promisee, that such promise can beenforced by law against the promisor. This ‘something’ inreturn is the consideration for the promise. In the language ofpurchase and sale Pollock has observed: “Consideration is theprice for which the promise of the other is bought”. Ansonsaid that an offer and acceptance bring the parties together andconstitute the outward semblance of a contract.

DefinitionSection 2(d) of the Indian Contract Act defines consideration asfollows

“When at the desire of the promisor, the promisee or any otherperson has done or abstained from doing, or does or abstainsfrom doing, or promises to do or to abstain from doingsomething, such act or abstinence or promise is called aconsideration for the promise. “An analysis of the abovedefinition will show that it consists of the following fourcomponents:(a) The act or abstinence or promise which forms the

consideration for the promise, must be done at the desireof the promisor:

(b) It must be done by the promisee or any other person(c) Tt may have been already executed or is in the process of

being done or may be still executory;(d) Tt must be something to which the law attaches a value.The concept of consideration will become more clear to youafter reading these illustrations.

Illustrations

(i) A agrees to sell his house to B for Rs 10,000. Here B’spromise to pay the sum of Rs10,000 is the considerationfor A’s promise to sell the house, and A’s promise to sellthe house is the consideration for B’s promise to pay thesum of Rs10,000.

(ii) A promises to maintain B’s child and B promises to pay ARs 1,000 yearly for the purpose. Here the promise of eachparty is the consideration for the promise of the otherparty.

(iii) A promises to pay B Rs 1,000 at the end of six months, ifC, who owes that sum to B, fails to pay it. B promises togrant time to C accordingly. Here the promise of each partyis the consideration for the promise of the other party.

(iv) A promises his debtor B not to file a suit against him forone year on B’s agreeing to pay him Rs.100 more. Theabstinence of A is the consideration for B’s promise to pay.

(v) A promises to type the manuscript ‘of B’s book, and inreturn B promises to teach A’s son for a month. Thepromise to each party is the consideration for the promiseof the other party.

(vi) A person had a. daughter to marry and in order to raisefunds for her marriage he intended to sell a property. Hisson promised that if the father would forbear to sell, hewould pay the father Rs. 50,000. The father accordinglyforbore. The abstinence of the father is the considerationfor son’s promise to pay. -

Essentials of Valid ConsiderationThe four component parts of the definition of consideration(given above) may well be described as the essentials of validconsideration. We shall now discuss these essentials one by onein detail.


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1. Consideration must move at the desire of the promisor.In order to constitute legal consideration the act orabstinance forming the consideration for the promise mustbe done at the desire or request of the promi-sor. Thusacts done or services rendered voluntarily, or at the desireof the third party, will not amount to valid considerationso as to support a contract. The logic for this may be foundin the worry and expense to which every one might besubjected, if he were obliged to pay for services, which hedoes not need or require.

We shall study some more examples to make this conceptclearer

Illustrations

(a) A sees B’s house on fire and helps in extinguishing it. Hecannot demand payment for his services because B neverasked him to come for help.

(b) D had built, at his own expense, a market at the request ofthe Collector of the District. The shopkeepers in themarket promised to pay D a commission on the articlessold by them in the market. When D sued the shopkeepersfor the commission, it was held that the promise to paycommission did not amount to a contract for want ofconsideration, because D (the promisee) had constructedthe market not at the desire of the shopkeepers (thepromisors) but at the desire of the Collector to please him(Durga Prasad vs Baldeo)

It must be noted that this essential does not require that theconsidera-tion must confer ‘some benefit’ on the promisor. Itwould be enough if the act or forbearance or promise constitut-ing the consideration was done or given at the promisor’srequest, the benefit may accrue to a third party. We call thisconcept Privity of Consideration

For Example

(a) B requests A to sell and deliver to him goods on credit. Aagrees to do so, provided C will guarantee the payment ofthe price of the goods. C promises to guarantee thepayment. The contract between A and C is a ‘contract ofguarantee’ and is perfectly valid though the benefit which Aconfers in return of C’s guarantee is conferred not on C buton B (in the shape of sale of goods on credit). A’s promiseto deliver the goods is the consideration for C’s promise ofguarantee. (Illustration appended to Section 127).

(b) A, who owed Rs 20,000 to B, persuaded C to pass apromissory note for the amount in favour of B. Cpromised B that he would pay the amount (by passing ona promissory note), and B credited the amount to A’sAccount in his books. The discharge of A’s Account wasconsideration for C’s promise (though C the promisor hadreceived no benefit) (National Bank afUpper India vsBansidhar).

2. Consideration may move from the promisee or any otherperson. The second essential of valid consideration, ascontained in the definition of consideration in Section 2(d), is that consideration need not move from thepromisee alone but may proceed from a third person.

Thus, as long as there is a consideration for a promise, it isimmaterial who has furnished it. It may move from thepromisee or from any other person. This means that even astranger to the consideration can sue on a contract,provided he is a party to the contract. This is sometimescalled as ‘Doctrine of Constructive Consideration’. UnderEnglish law, however there is privity of consideration i.e.consideration must move from the promisee andpromisor only, a stranger cannot furnish consideration.

The leading case of Chinayya vs Ramayya provides a goodillustration the point.Let me tell you the facts of that case now.Illustration in the. above case A, an old lady, by a deed of gift,made over certain property to her daughter R, with a directionthat the daughter should pay an annuity to A’s sister C, as hasbeen done by A. Accordingly, on the same day R, the daughter,executed a writing in favour of her maternal aunt C agreeing topay the annuity. Afterwards she declined to fulfill her promisesaying that no consideration had moved from her maternalaunt i.e., the promisee. It was held that the words “thepromisee or any other person” in Section 2 (d) clearly show thata stranger to consideration may maintain a suit. Hence thematernal aunt, though a stranger to the consideration (as theconsideration indirectly moved from her sister) was entitled tomaintain the suit.Another important illustration that would make you under-stand the concept better is the case of Dutton vs Poole, aperson intended to sell wood in order to provide his daughter amarriage portion. His son(defendant) promised that if heabstains from selling he would pay the daughter £1,000. Thefather accordingly forebore but the defendant did not pay. Thedaughter and her husband (plaintiffs) sued the defendants forthe same. Held that….as the consideration moved indirectlyfrom the plaintiff to the defendant and the action of thedefendant operated to shut out the plaintiff from a certainbenefit, the plaintiff can sue. It is a legal common place that if apromise causes some loss to a promisee, that is sufficientconsideration for the promise.A stranger to a contract cannot sue. A person may be a strangerto the consideration but he should not be a stranger to thecontract because ‘privities of contract’ is essential for enforcingany of the rights arising out of the contract. It being a funda-mental principle of the law of contracts that a stranger to acontract cannot sue only a person who is a party to a contract cansue on it.Thus, where A mortgages his property to B in consideration ofB’s promise to A to pay A’s debt to C, C cannot file a suitagainst B to enforce his promise, C being no party to thecontract between A and B (Iswaram Pillai vs Sonnivaveru).

Exceptions to the Privity ruleIn the course of time, the courts have introduced a number ofexceptions in which the rule of privity of contract does notprevent a person from enforcing a contract, which has beenmade for his benefit but without he being a party to it. Thedifferent exceptions are as follows:


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• Trust or Charge• Marriage settlement, partition or other Family

arrangements• Acknowledgement or Estoppel• Covenants running with land• Agency• AssignmentNow let me discuss them in detail(i) Where an express or implied trust is created. A trust is the

property held and managed by one or more persons foranother’s benefit as in Chinnaya case. In case of a trust, thebeneficiary can sue in his own right to enforce his rightsunder the trust, though he was not a party to the contractbetween the settler and the trustees.

Illustrations

(a) A transfers certain properties to B to be held by B in‘trust for the benefit of M. M can enforce theagreement i.e., trust (M.K.Rapai vs John).

(b) An addressee of an insured article is entitled to sue the.Post Office in case V- of loss, as on receipt of sucharticle, the Post Office becomes in law a constructivetrustee for the addressee (Amir ullah vs. Central Govt).

(c) In Khwaja Mohammad Khan vs Hussaini Begum,there was an agreement between the lady’s father in lawand her father that in consideration of her marriagewith his son, he would pay to her Rs.500 per month inperpetuity for the betel leaf expnses. Some immovableproperty was specifically charged for this purpose. Asuit by the wife (not a party to the agreement ) for therecovery of arrears of annuity was upheld.

(ii) Family settlement. Where a provision is made in a partitionor family arrangement for maintenance or marriageexpenses of female mem-bers; such members, though notparties to the agreement, can sue on the footing of thearrangement.

Illustration. A daughter along with her husband entered into acontract with her father whereby it was agreed that she willmaintain her mother and the property of the father will beconveyed to them. The daughter subsequently refused tomaintain the mother. On a suit it was held that the mother wasentitled to require her daughter to maintain her, though she wasa stranger to the contract (Veeramma vs Appayya).Where a girl’s father entered into an agreement for her marriagewith the defendant, it was held that the girl could sue thedefendant for damages for the breach of the promiseofmarriage even though she was not a party to the agreement.(Rose vs Joseph)(iii) When the defendant constitutes himself, as the agent of

the third party/ Acknowledgement or Estoppel. Wherebythe terms of a contract a party is required to make apayment to a third person (viz. while making a partpayment), a binding obligation is thereby incurred towardshim.. acknowledgement can be express or implied. Thus ifA receives some money from B to be paid over to C and he

admits of this receipt to C, then C can recover this amountfrom A who shall be regarded. as the agent of C (Surjan vsNanat)

(iv) In case of agency. Where a contract is entered into by anagent, the principal can sue on it.

(v) In case of assignment of rights under a contract in favourof a third party either voluntarily or by operation of law,the assignee can enforce the benefits of the contract, e.g.,the assignee of an insurance policy or the official assigneeon the insolvency of a person can sue on the contract eventhough originally they were not parties to it

(vi) Covenants running with land. A person who purchases aland with notice that the owner of the land is bound bycertain duties created by an agreement or covenant affectingthe land, shall be bound by them although he was not aparty to the agreement.

Now we shall discuss the third essential of consideration i.e.3. Consideration may be past, present or future. The words,

“has done or abstained from doing; or does or hasabstained from doing; or promises to do or to abstainfrom doing,” used in the definition of consideration clearlyindicate, that the consideration may consist of eithersomething done. or not done in the past, or done or notdone in the present, or promised to be done or not donein the future, To put it briefly, consideration may consist ofpast, present, or future act or abstinence,

Consideration may consist of an act or abstinence. Consider-ation may consist of either a positive act or abstinence i.e. anegative act. Thus, an agreement between B and A, under whichB; on failing to pay the debt amount on the due date to A;promises to raise the rate of interest from 9 per cent to 12 percent in consideration of A promising not to file a suit againsthim for another one year, is a valid contract; A’s abstinence beingthe consideration for B’s promise.Now the question that comes up is that what do we mean bypast, present or future consideration.Past consideration. When something is done or suffered beforethe date of the agreement, at the desire of the promisor, it iscalled ‘past considera-tion.’ It must be noted that past consider-ation is good consideration only if it is given by the promisee,‘at the desire of the promisor. Under English law, pastconsideration is no consideration. In India sec 25(2) adequatelycovers a past voluntary service.Let us discuss some examples of this.

Illustrations

(a) A teaches the son of B at B’s request in the month ofJanuary, and in February B promises to pay A a sum of Rs200 for his services. The services of A will be pastconsideration.

(b) A lawyer, gave up his practice and served as manager of alandlord at the latter’s request in lieu of which the landlordsubsequently promised a pension. It was held thatthere was good past consideration. (Shiv Saran vs KeshoPrasad)


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Present consideration. Consideration which moves simulta-neously with the promise, is called ‘present consideration’ or‘executed consideration’. For example, A sells and delivers abook to B, upon B’s promise to pay for it at a future date. Theconsideration waiting from A is present or executed consider-ation since A has done his act of delivering the booksimultaneously. with the promise of B. It should, however, benoted that it is said to be . ‘present consideration’ when at thetime of the agreement it is executed on one side and executoryon the other. If both parties have done their part under thecontract, e.g., where A sells a book to B and B pays its priceimmediately, it is a case of executed contract (where nothingremains to be done) and not of executed or present consider-ation.Future consideration. When the consideration on both sides isto move at a future date, it is called ‘future consideration’ or‘executory considera-tion’. It consists of an exchange ofpromises and each promise is a consid-eration for the” other.For example, X promises to sell and deliver 10 bags of wheatto Y for Rs 6,500 after a week, upon Y’s promise to pay theagreed price at the time of delivery. The promise of X issupported by promise of Y and the consideration is executoryon both ides. It is to be observed that in an ‘executed consider-ation’, the liability ‘is outstanding against only one side whereasin an ‘executory consideration’ it is outstanding on both ends.4. Consideration must be ‘of something’ The fourth and last

essential of valid consideration is that it must be‘something’ to which the law attaches a value. Theconsideration need not be adequate to the promise for thevalidity of an agreement. The law only insists on thepresence of consideration and not on the adequacy of it. Itleaves the people free to make their own bargains. Thus,where A agrees to sell his motorcar worth Rs 20,000 for Rs1,000 only and his consent is free, the agreement is a validcontract, notwithstanding the inadequacy of theconsideration. However, if the consideration be grossly orshockingly inadequate, and if one of the parties to thecontract alleges that his consent was obtained by fraud,coer-cion Or undue influence, the court will treatinadequacy .of consideration as an evidence in support ofsuch allegation and. will declare the contract void.

Inadequacy of consideration being no bar to a valid contract,unless it is an evidence of un free consent, it has been correctlyobserved that “in many cases, the doctrine o f consideration is amere technicality irreconcil-able either with business expediencyor common sense:”Consideration must be real Though consideration need not beade-quate, it must be of some value in the eye of law, i.e., itmust be real and competent. Where consideration is physicallyimpossible, illegal, uncertain or illusory, it is not real andtherefore shall not be a valid consideration.(i) Physically impossible. A promise to do something which is

physi-cally impossible, e.g., to make a dead man alive or torun at a speed of 100 kilometres per hour, does not formvalid consideration.

(ii) Legally impossible A promise to do something which. isillegal, e.g., a promise for illegal cohabitation, does notamount to good considera-tion.

(iii) Uncertain consideration. A promise to do somethingwhich is too vague and uncertain, e.g., a promise to paysuch remuneration “as shall be deemed right,” is noconsideration in the eye of law. -

(iv) Illusory consideration Again, an illusory or deceptiveconsideration does not amount to a valid consideration.Consideration is illusory if it consists in a promise toperform a public duty, or to perform a contract alreadymade with the promisor.

Illustrations

(a) C (the plaintiff) received a subpoena (a kind of sum-mon)to appear at a trial as a witness on behalf of G (thedefendant). G promised him a sum of money for histrouble. On default by G, C filed the suit for the recoveryof the promised sum. It was held that C being under apublic duty to attend and give evidence, there was no.consideration for the promise and hence the promise isunenforceable. (Collins vs Godefroy)

(b) Two of the crew of a ship deserted it half way while theship was on a voyage from London to the Baltic and back.The captain, being unable to supply their place, promisedthe rest of the crew that, if they would work the vesselhome, the wages of the two deserters should be equallydivided amongst them. The agree-ment was held to bevoid for want of consideration because it was thecontractual duty of the mariners who remained with theship to exert themselves utmost in any emergency of thevoyage to’ bring the ship in safety to her destined port. Thedesertion of a part of the crew is to be considered anemergency of the’ voyage as much as their death. (Stilk vsMyrick)

Performance of Existing Duties

(1) Performance of Legal obligation – in order to constituteproper consideration there should be a promise to dosomething more than what a person is already bound todo. Doing of something, which a person is already legallybound to do, is no consideration. For instance, where aperson having received summons to give evidence in a case;a promise to pay such a person for appearing in case is oconsideration. Similarly, a promise to pay a sum of moneyto a police officer for investigating into the crime will bewithout consideration. However, where the police authorityprovides a special form of protection outside the scope oftheir public duty (e.g. performing an extraordinary act) theymay demand payment of it.

(2) Performance of Contractual Obligations(a) Pre –existing contract with promisor - If A is already

bound to perform a particular contractual duty owed toB, B’s promise to pay something additional for thesame promise is no consideration. Likewise, a promiseto pay a special reward to a pleader (apart from usualfee) if the suit decided in the promisor’s favour, does


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not constitute consideration. I am sure you all must befamiliar with the Lalman Shukla’s case.

On the same principle, a promise to pay less than what is dueunder a contract cannot be regarded as a consideration. How-ever, there are certain exceptions to this rule. Thus, part paymentby a third party may be good consideration for the discharge ofthe whole debt. In India the promisee may accept in satisfactionof the whole debt an amount smaller than that. No consider-ation is needed for such a promise.

(b) Pre existing contract with third party – Where a personhas contracted to do an act, and a third personpromises to pay him a sum of money if he would goahead with the performance, is there a consideration forthe promise? In Shadwell vs Shadwell, the plaintiff A hadalready promised to marry one Miss Nicholl. A’s unclesent him a letter; “I am glad to hear of your startingintended marriage with Nicholl; and as I promised toassist you at starting , I will pay to you £ 150 yearlyduring my life…” thereafter A married Nicholl. Themajority judgement was that there is a sufficientconsideration for the promise. The promise of theannuity might’ve intended as an inducement to themarriage.

Exceptions to the Rule, “No Consideration, NoContract”Consideration being one of the essential elements of a validcontract the general rule is that “an agreement made withoutconsideration is void. But there are a few exceptions to the rule,where an agreement without consideration will be perfectly validand binding. These exceptions are as follows:Agreement made on account of natural love and affection [Sec.25 (1)]: An agreement made without consideration is enforce-able. If it is

(i) Expressed in writing(ii) Registered under the law for the time being in force for

the registration of documents(iii) Is made on account of natural love and affection(iv) Between parties standing in a near relation to each

other.Thus there are four essential requirements which must becomplied with to enforce an agreement made without consider-ation, as per Section 25 (1).Let us now study some some illustrations in this behalf(a) A promises, for no consideration, to give to B Rs 1,000.

This is a void agrpement(b) A for natural love and affection, promises to give his son

B, Rs 1,000. A puts his promise to B into writing andregisters it This is a contract.

(c) A registered agreement, whereby an elder brother, onaccount of natural love and affection, promised to a thedebts of his younger brother, was held to be valid andbinding an the younger brother cause the elder brother inthe event of his not carrying out the agreement(Venkatasamy vs Rangasami)

It should, however, be noted that mere existence of a nearrelation between the parties does not necessarily import naturallove and affection. Thus where a Hindu husband, after referringto quarrels and disagreement between him and his wife,executed a registered document in favour of his wife, agreeingto pay for separate residence and maintenance, it was held thatthe agreement was void for want of consideration because itwas not merely out of natural love, and affection. (Rajlakhi Devivs Bhootnath)2. Agreement to compensate for past voluntary service (Sec.25

(2)].A promise made without consideration is also valid, if it is apromise to compensate, wholly or in part, a person who hasalready voluntarily done something for the promisor,’ or donesomething which the promisor was legally compellable to do.

Illustrations(a) A finds B’s purse and gives it to him. B promises to give A

Rs 50. This is a contract.(b) A supports B’s infant son. B promises to pay A’s expenses

in so doing. This is a contract. (Note that B was legallybound to support his infant son).

(c) A rescued B from drowning in the river, and B,appreciating the service that had been rendered, promisesto pay Rs 1,000 to A. There is a contract between A and B.

In order to attract this exception, the following points shouldbe noted:(i) The service should have been rendered voluntarily for the

promisor. If it is not voluntary but rendered at the desireof the promisor, then it is covered under ‘pastconsideration’ [as per Sec. 2(d) and not under thisexception].

(ii) The promisor must be in existance at the time the servicewas, rendered. Thus where services were rendered by apromoter for a company not then in existence, asubsequent promise by the company to pay for them couldnot be brought within the exception. (Ahmedabad JubileeSpinning Co. vs Chhotalal).

(iii) The promise must be to compensate a person who hashimself done something for the promisor and not to aperson who has done nothing for the promisor. Thus,where B treated A during his illness but refused to acceptpayment from A; they being friends; and A in gratitudepromises to pay Rs 1,000 to B’s son D, the agreementbetween A and D is void for want. of consideration as it isnot covered under the exception.

(iv) The intention of the promisor ought to be to compensatethe promisee. A promise given for any motive other thanthe desire to compensate the promisee would not fallwithin the exception. (Abdulla Khan vs Parshottam)

(v) The promisor to whom the service has been renderedneeded competence to contract at the time the service wasrendered. Thus a promise- made after attaining majority topay for goods supplied voluntarily to the promisor duringhis minority has been held valid and the promisee couldenforce it ,(Karam Chand vs Basant Kaur). The court in


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that case ob-served that they failed to see how anagreement made by a person of full age to compensatewholly or in part a promisee, who had already volun-tarilydone something for the promisor, even at a time when thepromisor was a minor, did not fall within the purview ofSec. 25(2) of the Contract Act. The reasoning of the courtis, that at the time the thing was done the minor wasunable to contract, and therefore the person who did. it forthe minor must in law be taken to have done it voluntarily.In their opinion the ‘provisions of Sec. 25(2) appliedequally to a contract by a major, as well as by a minor, topay for past services. In this connection it is important tonote that this exception does ‘not cover a promise by aperson on attaining majority to repay the money borrowedduring his minority because such a promise cannot be saidto be a promise to compensate a person who has alreadyvoluntarily (without any promise of compensation) donesomething for the promisor. ‘Advancing money as a loan’necessarily implies a promise to compensate (i.e., a promiseto repay the loan) on the part of the borrower, Thus apromise made by a minor after attaining majority to repaymoney advanced during his minority has been held invalidand beyond the purview of Section 25(2) of the ContractAct (Indran Ramaswami vs Anthappa).

(vi) The service rendered must also be legal. Thus pastcohabitation will not make a promise to pay for itenforceable under this exception (Sabava vs Yamanappa).

3. Agreement to pay a time-barred debt (Sec. 25 (3)]. Wherethere is an agreement, made in writing and signed by thedebtor or by his au-thorised agent, to pay wholly or in parta debt barred by the law of limi-tation, the agreement isvalid even though It is not supported by any con-sideration. A time barred debt cannot be recovered andtherefore a promise to repay such a debt is withoutconsideration, hence the importance of the presentexception.

But before the exception can apply, it is necessary that:(i) The debt must be such of which the creditor might’ have

enforced payment but for the law for the limitation ofsuits.

(ii) The promisor himself must be liable for the debt. So apromissory note executed by a widow in her personalcapacity in payment of time-’ barred debt of her husbandcannot be brought within the exception (Pestonji vsMaherbai28);

(iii) There must be an ‘express promise to pay’ a time barreddebt as distinguished from a mere ‘acknowledgement of aliability’ in respect of a debt. Thus. a debtor’s letter to hiscreditor, “I owe you Rs. 1,000 on account of my time-barred promissory note” is not a contract. There must be adistinct promise to pay; and

(iv) The promise must be in writing and signed by the debtoror his agent. An oral. promise to pay a time-barred debt isunenforceable.

The logic behind this exception is that by lapse of time the debtis not destroyed but only the remedy is” lost. The remedy isrevived by a new promise under the exception.Illustration. A owes B Rs 1,000, but the debt is barred by theLimitation Act. A signs a written promise to pay BRs 500 onaccount of the debt. This is Ii contract (Appended to Sec. 25).4. Completed gift. A gift (which is not an agreement) does

not require consideration in order to be valid “As betweenthe donor and the done any lift actually made will be valid Iand binding even though without consideration”[Explanation 1, to Section 25]. In order to attract thisexcep-tion there need not be natural love and affection ornearness of relationship between the donor and done. Thegift must, however, be complete.

5. Contract of agency. Section 185 of the Contract Act laysdown that no consideration is necessary to create an agency.

6. Remission by the promisee, of performance of thepromise (Sec. 63). For compromising a due debt, i.e.,agreeing to accept less than what is due, no consideration isnecessary. In other words, a creditor can agree to give up apart of his claim and. there need be no consideration forsuch an agreement. Similarly, an agreement to extend timefor performances of a contract need not be supported byconsideration (Sec.63).

7. Contribution to charities. A promise to contribute tocharity, though gratuitous, would be enforceable, if on thefaith of the promised subscrip-tion, the promisee takesdefinite steps in furtherance of the object and undertakes aliability, to the extent of liability incurred, not exceeding thepromised amount of subscription. In Kedar Nath vsGhorie Mohammad, the defendant had agreed to subscribeRs 100 towards the construction of a Town Hall atHowrah. The plaintiff (secretary of the Town Hall) on thefaith of the promise entrusted the work to a contractor andundertook liability to pay him. The defendant was heldliable. But where the promisee had done nothing on thefaith on the promise, a promised subscription is not legallyrecoverable. Accordingly, in Abdul Aziz vs Masum Ali, thedefendant promised to subscribe Rs 500 to a fund startedfor building, a Mosque but steps had been take to carry outthe repairs. The defendant was held not liable and the suitwas dismissed.

Comment on the following

1. For every valid agreement there should be a consideration2. A stranger to a consideration can sue3. Consideration can be past, present and future.

Practical ProblemsAttempt the following problems, giving reasons for youranswers:1. M offered a reward to anyone who would rescue his wife

dead or alive from a burning building. A fireman riskinghis life brought out the wife’s dead body. Is he entitled torecovery of the reward?

[Hint. Yes. In the instant case the fireman took an extra risk ofendangering his life, which does not fall in his normal duties in


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connection with rescue opera-tions. As such the consideration’sis not illusory and the fireman is entitled to reward.]2. A and B are friends. B treats A during A’s illness. B does

not accept payment from A for the treatment and Apromises B’s son, X, to pay him Rs 1,000. A being in poorcircumstances, is unable to pay. X sues A for the money.Can X recover?

[Hint. No, X cannot recover the money from A. The agreementbetween X and A is not a contract in the absence of consider-ation. In this case X’s father, B, voluntarily treats A during hisillness. Apparently it is not a valid consideration because it isvoluntary, whereas consideration to be valid must be given atthe desire of the promisor-vide Section 2(d). The question nowis whether this’ case is cov-ered by the exception given in Section25(2) which inter-alia provides: “If it is a promise to compensatea person who has already voluntarily done something for thepromisor...” Thus as per the exception the promise must be tocompensate a person who has himself done something for thepromisor and not to a person who has done nothing for thepromisor. As B’s son, X, to whom the promise was made, didnothing for A, so A’s promise is not enforceable even under theexception.]3. X, a social reformer, promised Y a reward of Rs 1,000 if he

refrained from smoking for two years does so. Is heentitled to the reward?

[Hint. Yes, Y is entitled to the reward from X. In the instantcase, Y at the desire of X refrained from smoking for two years.This is a valid consideration in the form of an act of abstinence-vide Section 2(d).]4. A writes to B, “at the risk of your own life, you saved me

from a serious motor accident. I promise to’ pay you Rs1,000.” A does not pay. Advise B as to his legal rights.

[Hint. B is advised, to file a suit for recovery for Rs 1,000. UnderSection 25 (2) of the Contract Act, a promise to compensate forvoluntary acts done in the past is valid even though withoutconsideration. As the instant case is fully covered by the aboveSection, A cannot avoid his liability later on.]5. For a valid consideration from B, A makes a promise to B

to render some service to C. C sues A on the promise.Discuss whether he can succeed?

[Hint. C cannot succeed. The general rule of law is that “astranger to a contract cannot sue.’; In the instant case, C is not aparty to the contract and therefore he cannot enforce thepromise.]6. X gifted Rs 50,000 to Y his neighbor’s wife by executing a

registered gift deed without any consideration. There is nonear relation between X and Y.

Is this gift valid?Solution: Section to which the given problem relates: Explana-tion I to Section 25. Decision: The gift is valid.Reason: A completed gift needs no consideration. and’ neednot be a result of natural love and affection or near relation.7. X promises to make a gift of Rs 50,000 to Y, his neighbors

wife. Is this promise valid?

Solution: Section to which the given problem relates: Explana-tion 1 to Section 25. Decision: A promise to gift is not valid.Reason: This agreement is void for want of consideration andat the same time, there is only a promise to gift and not acompleted gift.8. X who was badly in need of money offered to sell his car

worth Rs 1,00,000 to Y for Rs 10,000. Before the car wasdelivered, X received an offer of Rs 20,000 and refused tocarry out the contract on the ground of inadequacy ofconsideration. Is X liable to Y for damages?

Solution: Section to which the given problem relates: Explana-tion 2 to Section 25.Decision: X is liable to Y for damages.Reason: An agreement to which the consent of the party isfreely given is not void merely because the consideration isinadequate.

True or False1. An act constituting consideration must be done by the

promisee only. 3. Consideration must result in a benefit toboth parties. (False)

2. Consideration must result in a detriment to both parties.(True)

3. Consideration must result in a benefit to the promisor anddetriments to promisee.( F)

4. Past consideration is no consideration in India. (F)5. Consideration must be adequate. (F)6. An agreement to which the consent of the promisor is

freely given is not void merely because the consideration isinadequate. (T)

7. The inadequacy of the consideration may be taken intoaccount by the Court in determining the question whetherthe consent of the promisor was freely given.( T)

8. Consideration must be something, which a promisor isnot already bound to do. (T)

9. A stranger to consideration can sue. (T)10. A stranger to a contract cannot sue. (T)11. In case of trusts, the beneficiary being a stranger to a

contract cannot sue. (F)12. An assignee cannot enforce the contract because he is a

stranger to a contract. (F) 13. Nearness of relation by itself does not necessarily import

natural love and affection.(T)14. Natural love and affection by itself does not necessarily in

nearness of relation. (T)15. A promise made without consideration to compensate the

person who has already done something voluntarily is validif it is made in writing. (F)

16. A verbal promise to pay a time barred debt is valid. (F)17. Completed gifts need no consideration. (T)18. Completed gifts without consideration are valid only if

they are out of natural love and affection, and near relation.-(F)


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19. A promise to gift to wife is valid. (F)20. No consideration is required to create an agency.(T)






Notes:


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11.555 31

LESSON 7CAPACITY OF PARTIES

Learning OutcomesIn today’s lecture we shall study about capacity of a party to acontract.• In particular we shall do today• Nature of minor’s agreement• Effects of minor agreement• Persons of unsound mind• Other persons incompetent to contract

IntoductionToday we will discuss what exactly is meant by competence toenter into a contractAccording to section 10 an essential ingredient of a validcontract is that the contracting parties must be “competent tocontract’. Section 11 lays down that “Every person is competentto contract who is of the age of majority according to the law towhich he is subject, and who is of sound mind, and is notdisqualified from contracting by any law to which he is subject.”Thus the section declares that a person is incompetent tocontract under the following circumstances:• If he is a minor according to the law to which he is subject,• If he is of unsound mind, and• If he is disqualified from contracting by any law to which

he is subject.Thus minors, persons of unsound mind and persons disquali-fied by law are incompetent to contract.We shall now discuss them one by one in detail.

I. MinorFirst of all let us understand who is a minorAccording to section 3 of the Indian majority Act 1875, aperson domiciled in India, who is under 18 years of age is aminor. Accordingly every person who has completed the age of18 years becomes a major. But minors of whose person orproperty or both a guardian is appointed by a court, and minorsof whose property superintendence has been assumed by acourt of wards, attain majority at the age of 21 years. However,by an amendment in 1999 in the Indian Majority Act1875, theage of majority is fixed as 18 years for every person (irrespectiveof the fact of appointment of a guardian.)Section 11 expressly provides that the age of majority of aperson is to be determined “according to the law to which he issubject.” The courts of law used to decide the age of majority(competency to contract) by the law of domicile and not by thelaw of the place where the contract is entered into (Kashiba VsShripat). But the later trend of law for determining the age ofmajority is:

In the case of contracts relating to ordinary mercantile transac-tions, the age of majority is to be determined by the law of theplace where the contract is made, andIn the case of contracts relating to land, the age of majority is tobe determined by the law of the place where the land is situated.Thus, where a person aged 18 years, domiciled in India,endorsed certain negotiable instrument in Ceylon, by the lawsof which he was a minor, he was held not to be liable as anendorser.

Minor’s AgreementsThe law regarding minor’s agreements may be summed up asunder:An agreement by a minor is absolutely void and inoperative asagainst him. Law acts as the guardian of minors and protectstheir rights, because their mental faculties are not mature – theydon’t possess the capacity to judge what is good and what isbad for them. Accordingly, where a minor is charged withobligations and the other contracting party seeks to enforcethose obligations against minors, the agreement is deemed asvoid ab-initio.In the leading case of Mohiri Bibi Vs Dharmo Das Ghosh, aminor executed a mortgage for Rs. 20,000 and received Rs. 8,000from the mortgage. The mortgage filed a suit for the recoveryof his mortgage money and for sale of the property in case ofdefault. The Privy Council held that an agreement by a minorwas absolutely void as against him and therefore the mortgageecould not recover the mortgage money nor could he have theminor’s property sold under his mortgage.No restitution except in certain cases. A minor cannot beordered to make compensation for a benefit obtained under avoid agreement, because sections 64 and 65 of the contract Act,which deal with restitution, apply only to contracts betweencompetent parties and are not applicable to case where there isnot and could not have been any contract at all. The court may,however, in certain cases, while ordering for the cancellation ofan instrument, at the instance of a minor, require the minorplaintiff to make compensation to the other party to theinstrument. This is so as per section 33 of the Specific ReliefAct, 1963 which states as follows:“On adjudging the cancellation of an instrument, the court mayrequire the party to whom such relief is granted, to restore, sofar as may be, any benefit which he may have received from theother party and to make any compensation to him which justicemay require.”Thus, the court will compel restitution by a minor when he is aplaintiff. For example, if a minor sells a house for Rs.50,000and later on files a suit to set aside the sale on the ground ofminority, he may be directed by the court to refund the purchasemoney received by him before he can recover possession of the


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property sold. It may be emphasized that section 33 of theSpecific Relief Act, 1963 is framed so as to afford relief only in acase where the minor himself as plaintiff seeks the assistance ofcourt and the section is inapplicable if he happens to be merelya defendant in a suit by the person who dealt with him when hewas a minor. This section is based on the well known principlethat “he who seeks equity must do equity”

Beneficial ContractsThe meaning of the proposition that an infant is incompetentto contract or that his contract is void is that the law will notenforce any contractual obligation of an infant. The decision inMohiribibi case is confined to cases is confined to cases where aminor is charged with obligations and the other contractingparty seeks to enforce those obligations agreements against him.Accordingly, a minor is allowed to enforce a contract, which is ofsome benefit to himand under which he is required to bear niobligation. A minor will have the option of retiring from abeneficial contract on attaining majority.Beneficial agreements are valid contracts. The decision inMohiribi case as observed earlier, the court protects the rights ofminors. Accordingly, any agreement, which is of some benefitto the minor and under which he is required to bear noobligation, is valid. In other works, a minor can be a beneficiarye.g. a payee, an endorsee or a promisee under a contract. Thusmoney advanced by a minor can be recovered by him by a suitbecause he can take benefit under a contract. The HinduMinority and Guardianship Act, 1956, also provides to thesame effect, namely, a natural guardian is empowered to enterinto a contract on behalf of the minor and the contract wouldbe binding and enforceable if the contract is for the benefit ofthe minor.

Illustrations

(a) A duly executed transfer by way of sale or mortgage infavor of a minor, who has paid the whole of theconsideration money. The contract is enforceable by him orby any other person on his behalf.

(b) Where a minor as a purchaser of immovable property was,subsequent to his purchase, dispossessed by a third party,it was held that the minor could recover from his vendorthe sum which he has paid as purchase money.

(c) A minor purchaser of immovable property was heldentitled to recover possession of property purchased fromhis vendor, when refused by vendor.

(d) A promissory note executed in favor of a minor is validand can be enforced in a court.

(e) Where a minor had performed his part of the agreementand delivered the goods, he was held entitled to maintain asuit for the recovery of their price.

(f) A contract for marriage of a minor is also prima facie forhos or her benefit. While a contract of marriage could beenforced against the other contracting party at the instanceof the minor, it can not be enforced against the minor.

(g) A lease to a minor is void.(h) A minor can also be supplied with necessaries suited to his

conditions in life(e.g. food, lodging, education)and the

supplier of such necessaries is entitled to be reimbursedfrom the property of the minor.

Contracts of apprenticeship and service by a minor.A contract of apprenticeship stands on a different footing thanan agreement of service by a minor. A contract of apprentice-ship is valid and binding upon a minor because such a contractis protected by the Apprentices Act, 1961 provided the case fallswithin the terms of that act. The act inter alia, provides that theminor must not be less than fourteen years of age and thecontract must be entered into on behalf of the minor by hisguardian. The act was passed with a view to enabling children tolearn trades, crafts and employments, by which, when they cometo full age, they may gain a livelihood.So far as an agreement of service by a minor is concerned it isvoid because a minor’s promise to serve would supply noconsideration for the promise of the defendant to pay him/hera salary. In that case the court said that the contract of appren-ticeship entered into by the guardian is protected by theapprentices act provided the case falls within the terms of thatact, but no such exception is made in the case of contracts ofservice of course, where a minor has already served under acontract of service, he is entitled to enforce the contract not byvirtue of the contract but by reason of the relationshipresembling those created by the contract under section 70 of thecontract Act.No ratification on attaining the age of majority. Ratificationmeans the subsequent adoption and acceptance of an act oragreement. A minor’s agreement being a nullity and void ab-initio has no existence in the eye of law. It cannot be ratified bythe minor on attaining the age of majority, for, an agreementvoid ab – initio cannot be made valid by subsequent ratification.Thus, if an advance is made to a minor during his minority, apromise to pay for such amount after he attains majority wouldnot be enforceable. “the consideration which passed under theearlier contract cannot be implied into the contract into whichthe minor enters on attaining majority”.In Arumugam Chetti vs Duraisings Tevar, it was held that therecan be no ratification of a transaction which is void owing tothe provisory possessing no contractual capacity at the time. Norcan a void deed form a good consideration for a fresh contractmade by the minor on attaining majority. Similarly, in SurajNarain Vs Sukhu Ahir, where a minor borrowed a sum ofmoney by executing a promissory note, and after attainingmajority executed a second bond in respect of the original loan,the court held that a suit upon the second bond was notmaintainable as that bond was without consideration. Sinceratification relates back to the date when the contract wasoriginally made, it is necessary for a valid ratification that theperson who purports to ratify must be competent to contract atthe time of the contract. But if services are rendered or anadvance is made to a minor during his minority and the servicesare continued or a further advance is made after he attainsmajority, a promise to pay for such services or amount as awhole would be valid and enforceable.Let us now discuss the liabilities of a minor under differentcircumstances


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No Estoppel Against A MinorThe rule of estoppel does not apply to a minor. Section 115 ofthe Indian Evidence act explains “Estoppel” as follows: “Whereone person has, by his declaration, act or omission, intentionallycaused or permitted another person to believe a thing to be trueand to act upon such belief, neither he nor his representativesshall be allowed, in any suit or proceeding between himself andsuch person or his representative, to deny the truth of thatthing.”In the words of Lord Halsbury: “Estoppel arises when you areprecluded from denying the truth of anything, which you haverepresented as a fact, although it is not a fact.” The rule ofestoppels does not apply to a minor i.e. a minor is not a fact.”The rule of estoppels Does not apply to a minor i.e. a minor isnot stopped from pleading his infancy in order to avoid acontract, even if he has entered into an agreement by falselyrepresenting that he was of full age. In other words, where aninfant represents fraudulently or otherwise that he is of full ageand thereby induces another to enter into a contract with himthem in an action founded on the contract, the infant is notestopped from setting up infancy.But if any thing is traceable in the hands of minor, out of theproceeds of the contract made by fraudulently representing thathe was of full age, the court, may direct the minor to restorethat thing to the other pary, on equitable considerations, forminors can have no privilege to cheat man”.Whenever theinfant is still in possession of any property in specie which hehas obtained by his fraud, he will be made to restore it to itsformer owner. But I think that it is incorrect to say that he canbe made to repay money which he has spent, merely because hereceived it under a contract induced by his fraud”. Similarly, theinfant will be made to restore to the person deceived, anyproperty purchased out of, or money received as a result of, saleproceeds of the goods obtained by his fraud. Thus if a minorobtains a loan by fraudulent representation and purchases amotorcar out of that, although the loan transaction is invalid,the court may direct the minor to restore the motorcar to thelender. But once the identity of the property of money hasbeen lost because it has been spent wastefully, it is no longerpossible to invoke the aid of the ‘equitable doctrine ofrestitution’.Again, it may be noted that restoration is allowed only when aminor commits fraud by misrepresenting his age becausesection 65 expressly prohibits restoration in cases which areknown to be void.

Minor’s Liability for Necessaries.The case of necessaries supplied to minor is governed bysection 68 of the contract act which provides that “if a personincapable of entering into a contract, or any one whom he islegally bound to support, is supplied by another person withnecessaries suited to his condition in life, the person who hasfurnished such supplies is entitled to be reimbursed from theproperty of such incapable person.”

Illustrations

(a) A supplies B, a lunatic, with necessaries suitable to hiscondition in life. A is entitled to be reimbursed from B’sproperty.

(b) A supplies the wife and children of B, a lunatic, withnecessaries suitable to their condition in life. A is entitled tobe reimbursed from B’s property.

Thus section 68 confers a quasi-contractual right on the supplierof “necessaries” to a person incapable of entering into acontract, or to any one whom he is legally bound to support.But a minor is not personally liable, it is his property only whichis liable. Therefore. If a minor owns no property, the supplierwill lose the price of necessaries. Even where a minor ownsproperty, the supplier will get a reasonable price and not theprice agreed to by the minor.

Now let us discuss as to”what is a necessaryarticle,”This is to be determined with reference to the status andcircumstances of the particular minor. Objects of mere luxuryare not necessaries, nor are objects, which though of real use, areexcessively costly. Food and clothing may be taken as simpleexamples of necessaries. The necessaries would also includes theinfant’s lodging expense, medical attendance, cost of defendinga minor in civil and criminal proceedings. Loans taken by aminor to obtain necessaries also bind him. But where a minoris engaged in trade, contracts entered into by him for tradingpurposes are not for necessaries and are not binding on him.

Specific Performance.Specific performance means the actual carrying out of thecontract as agreed. Since an agreement by a minor is absolutelyvoid the court will never direct ‘specific performance’ of such anagreement by him. But a contract entered into on behalf of aminor, by his guardian or by the manager of his estate, isbinding on the minor and can be specifically enforced by oragainst the minor, provided:(a) The contract is within the authority of the guardian or

managers; and(b) It is for the benefit of the minor. Thus it was held in

Gujoba Tulasiram vs Nilkanth, that a contract of sale ofimmovable property by the guardian of minor, for theminor benefit, may be specifically enforced by either partyto the contract.

Similarly, in Ramalingam vs Babanambal, it was held that aHindu minor is bound by a contract entered into by his motheras his guardian for sale of his property, however a guardian hasno power to bind the minor: (i) by a contract, for the purchaseof immovable property (Mir Sarwarjan vs Fakruddin) and (ii)By a Contract of service on his behalf (Raj Rani vs Prem Adib),and therefore such contracts cannot be specifically enforced by oragainst the minor.

Minor Partner.A minor being incompetent to contract cannot be a partner in apartnership firm, but under section 30 of the Indian partner-ship act he can be admitted to the ‘benefits of partnership’ withthe consent of all the partners by an agreement executed


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through his lawful guardian with the other partners. Such aminor will have a right to such share if the property or profitsof the firm as may be agreed upon and he would have access toand inspect and copy any of the accounts of the firm. Theminor cannot participate in the management of the businessand shall not share losses except when liability to third partieshas arisen but then too up to his share in the partnership assets.He cannot be made personally liable for any obligations of thefirm, although he may after attaining majority accept thoseobligations if he thinks fit to do so.

Minor AgentA minor can be an agent. He shall bind the principal by his actsdone in the course of such an agency, but he cannot be heldpersonally liable for negligence or breach of duty. Thus inappointing a minor as an agent, the principal runs a great risk.

Minor and InsolvencyA minor cannot be adjudicated an insolvent, for, he is incapableof contracting debts. Even for necessaries supplied to him, he isnot personally liable, only is property is liableContract by minor and adult jointly. Where a minor and anadult jointly enter into an agreement with another person, theminor has no liability but the contracts as a whole can beenforced the contract against the major vendee.

Surety for a MinorWhen in a contract of guarantee, an adult stands surety for aminor the adult is liable under the contract, although the minoris not (as for three is a direct contract between the surety and thethird party). In fact in such a case there cannot be a contract ofguarantee in true sense. The Bombay high court considered thequestion in Manju Mahadeo vs Shivappa Manju, and held that“… if a minor could not default, the liability of the guarantorbeing secondary, does not arise at all”. Similar decision has beengiven by Madras High Court in Edvavan Nambiar vs MoolakiRaman.

Position of Minor’s Parents.The parents of a minor are not liable for agreements made by aminor, whether the agreement is for the purchase of necessariesor not. The parents can be held liable only when the child iscontracting as an agent for the parents.

Minor Shareholder.A minor, being incompetent to contract, cannot be a share-holder of the company. A company can also refuse to registertransfer or transmission of shares in favor of a minor unlessthe shares are fully paid. It follows from it that a minor, actingthrough his lawful guardian, may become a shareholder of thecompany, in case of transfer or transmission of fully paid sharesto him. Logically also, if a minor could legally hold property inhis name, it would be wrong to debar him from holding fullypaid up shares in his own name.

Minor’s Liability in Tort.First of all let me tell you what is a tort?A tort is a civil wrong (not having its genesis in contractual orequitable relationship) for which the ordinary remedy isdamages. A minor is liable for his tort, unless the tort is inreality a breach of contract. Thus where a minor hired a horse

for riding and injured it by overriding, he was not held liable.The court observed in that case, “if an infant in the course ofdoing what he is entitled to do under the contract is guilty ofnegligence, he cannot be made liable in tort if he is not liable onthe contract.” But if the wrongful action is of a kind notcontemplated by the contract, the minor may be held liable fortort. Thus, where a minor hired a horse for riding under expressinstructions not to jump, he was held liable when he lent thehorse to one of his friends who jumped it, whereby it was heldliable when he lent the horse to one of his friends who jumpedit, whereby it was injured and ultimately died. The courtobserved, “ it was a bare trespass, not within the object andpurpose of the hiring, for which the defendant was liable”

II. Persons of Unsound MindAs stated earlier, as per section 11 of the contract Act for a validcontract, it is necessary that each party to it must have a soundmind.What is a ‘sound mind’?Section 12 of the contract act defines the term ‘sound mind’ asfollows: “A person is said to be of sound mind for thepurpose of making a contract, if at the time when he makes it,he is capable of understanding it and of forming a rationaljudgment as to its effects upon his interests.”According to this section, therefore, the person entering into thecontract must be a person who understands what he is doingand is able to form a rational judgment as to whether what he isabout to so is to his interest or not. The section further statesthat:“A person who is usually of unsound mind, but occasionallyof sound mind, may make a contract when he is of soundmind.” Thus a patient in a lunatic asylum, who is at intervals ofsound mind, may contract during those intervals.“A person who is usually of sound mind, but occasionally ofunsound mind, may not make a contract when he is ofunsound mind.” Thus, a sane man, who is delirious fromfever, or who is so drunk that he cannot understand the termsof a contract, or from a rational judgment as to its effect on hisinterest, cannot contract whilst such delirium or drunkennesslasts.In Halsbury’s Lawa of England, it is stated: “The general theoryof the law in regard to acts done, contracts made by partiesaffecting their rights and interests, is that in all cases there mustbe a free and full consent to bind the parties, consent is an actof reason accompanied by deliberate consent that the convey-ance and contracts of unsound mind are generally deemed to beinvalid; or in other works, (subject to exceptions), there cannotbe a contract by a person of unsound mind.Unsoundness of mind may arise from:(a) Idiocy – it is god given and permanent, with no intervals

of saneness. The mental powers of an idiot are completelyabsent because of lack of development of the brain;

(b) Lunacy or Insanity – it is a disease of the brain. A lunaticloses the use of his reason due to some metal strain ordisease. Of course he may have lucid intervals of sanity;


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(c) Drunkenness – it produces temporary incapacity, till thedrunkard is under the effect of intoxication, provided it isso excessive as to suspend the reason for a time and createimpotence of mind;

(d) Hypnotism – it also produces temporary incapacity, till theperson is under the impact of artificially induced sleep;

(e) Mental decay on account of old age, etc. In case where thecontract is sought to be avoided on any of the abovegrounds, the burden of proof lies on the party who setsup such a disability; but if unsoundness of mind is onceestablished, the burden of providing a lucid interval is onhim, who sets it up (Mohanlal vs Vinayak).

Effects of agreements made by persons of unsound mind. Anagreement entered into by a person of unsound mind is treatedon the same footing as that of minor’s, and therefore anagreement by a person of unsound mind is absolutely void andinoperative as against him but he can derive benefit underit(Jugal Kishore vs Cheddu ). The property of a person of unsoundmind is however, always liable for necessaries supplied to himor to any one whom he is legally bound to support undersection68 of the act.

III . Disqualified PersonsThe third type of incompetent persons, as per section 11, arethose who are “ disqualified from contracting by any law towhich they are subject.”

Who are disqualified PersonsAlien enemies. An alien (citizen of a foreign country) living inIndia can enter into contracts with citizens of India during peacetime only, and that too subject to any restrictions imposed bythe government in that respect. On the declaration of a warbetween his country and India, he becomes an alien enemy andcannot enter into contracts. “Alien friend can contract but analien enemy can’t contract.” Contracts entered into before thedeclaration of the war stand suspended and cannot be per-formed during the course of war, of course, they can be revivedafter the war is over provided they have not already becometime- barred.Foreign sovereigns and ambassadors. One has to be cautiouswhile entering into contracts with foreign sovereigns andambassadors, because whereas they can sue others to enforce thecontracts entered upon with them, they cannot be sued withoutobtaining the prior sanction of the central Government. Thusthey are in a privileged position and are ordinarily consideredincompetent to contract.Convict. A convict is one who is found guilty and is impris-oned. During the period of imprisonment, a convict isincompetent (a) to enter into contracts, and (b) to sue oncontracts made before conviction. On the expiry of the sentence,he is at liberty to institute a suit and the law of limitation isheld in abeyance during the period of his sentence.Married women. Married women are competent to enter intocontracts with respect to their separate properties provided theyare major and are of sound mind. They cannot enter intocontracts with respect to their husbamds’ properties. A marriedwoman can, however, act as an agent of her husband and bind

her husband’s property for necessaries supplied to her, if hefails to provide her with these.Insolvent. An adjudged insolvent (before an ‘order of dis-charge’) is competent to enter into certain types of contracts i.e.he can incur debts, purchase property or be an employee but hecannot sell his property which vests in the official receiver.Before ‘discharge’ he also suffers from certain disqualificationse.g. can’t be a magistrate or a director of company or a memberof local body but he has the contractual capacity except withrespect to his property. After the order of discharge,’ he is justlike an ordinary citizen.Joint-stock company and corporation incorporated under aspecial act. A company/ corporation is an artificial person createdby law. It cannot enter into contracts outside the powerconferred upon it by its memorandum of association or by theprovisions of its special act, as the case may be. Again being anartificial person(and not a natural person) it cannot enter intocontracts of a strictly personal nature e.g. marriage.

Practical ProblemsAttempt the following problems, giving reasons for youranswers:1. A, an infant, obtains a loan from B. Can A be asked to

repay the money?[Hint. No, A cannot be asked to repay the money. A minor’sagreement is void ab-initio as against him2. A, a minor lends Rs. 1000 against a promissory note

executed in his favor. Is the borrower liable to repay themoney?

3. A minor fraudulently represented to a money lender thathe was of full age, and obtained a loan of Rs. 500. has themoney lender any right of action against the minor for themoney lent, or for damages for fraudulentmisrepresentation?

4. A, an infant, borrows Rs 2000 form B and executes apromissory note for the amount in favor of B. on hisattaining majority, the minor executes another promissorynote in lieu of the first which is then cancelled. Is thesecond promissory note valid?

5. X, a guardian, on behalf of Y, a minor, entered into acontract with Z for the purchase of a movable property forthe benefit of the minor. Is the contract valid?

Solution: Section to which the given problem relates: Section 10and Section 11. Decision: This contract is valid provided thiscontract is within the scope of the authority of guardian.Reason: This contract is for the benefit of minor.[Leading case: Subramanayan v. Subba Rao]6. X, a minor entered into contract with Y to supply food and

clothes to his dependents. Y supplied the same but Xrefused to pay for the same. Can Y recover anything?

Solution: Section to which the given problem relates: Section 68.Decision: Y is entitled to be reimbursed from the property ofsuch minor.


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Reason: A person who has supplied the necessaries to a minoror those who are dependents on him is entitled to be reim-bursed from the property of such minor.7. X, a guardian, on behalf of Y, her minor daughter, entered

into a contract with Z whereby Z promised to marry her.Later on Z refused to marry. Can Y sue Z for damages?

Solution: Sections to which the given problem relates: Sections10 and 11. Decision: Y can sue Z for damages.Reason: This contract was for the benefit of minor and a minorcan be promisee. [Leading case: Mohari Bibee v. DharmodasGhosh]






Notes:


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11.555 37

LESSON 8:FREE CONSENT

Learning OutcomesAfter today’s class you should be able to answer the followingquestions:• The meaning of consent• The various factors vitiating consent

IntroductionIn today’s lecture we shall study about another essentialelement of a contract that is free consent.It has already been pointed out in the earlier lecture that,according to Section 10’ free consent’ of all the parties to anagreement is one of the essential elements of a valid contract.But students do you know what is meant by consent?

‘Consent’ DefinedSection 13 of the Contract Act defines the term ‘consent’ andlays down that “Two or more persons are said to consent whenthey agree upon the same thing in the same sense. “Thus,consent involves identity of minds or consensus ad-idem i.e.,agreeing upon the same thing in the same sense. If, forwhatever reason, there is no consensus ad item among thecontracting parties, there is no real consent and hence no validcontract.Now we come to free consent‘Free Consent’ defined. Section 14 lays down that “Consent issaid to be ‘free’ when it is not caused by-1. Coercion, as defined in Section 15, or2. Undue influence as defined in Section 16, or3. Misrepresentation as defined in Section 18, or4. Fraud, as defined in Section 17, or5. Mistake, subject to the provisions of Section, 20, 21

and 22.Henceforth the various factors which vitiate consent are• Coercion,• Undue influence• Misrepresentation• Fraud• Mistake“Consent is said to be so caused when it would not have beengiven but for the existence of such coercion, undue influence,misrepresentation, fraud or mistake” (Sec. 14). This means thatin order to bring a case within this Section, the party, whoalleges that his consent has been caused by any of the aboveelements which vitiate consent, must show that, but for thevitiating circumstance the agreement would not have beenentered into. To put it differently, in order to prove that hisconsent is ‘not free’, the complainant must prove that if he hadknown the truth, or had not been forced to agree, must prove

that if he had known the truth, or had not been forced to agree,he would not have entered into the contract.In the absence of ‘free consent’, the contract may turn out to beeither voidable or void depending upon the nature of the flawin consent to an agreement is caused by coercion, undueinfluence, misrepresentation or fraud, there is ‘no free consent’and the contract is voidable at the option of the party whoseconsent was so caused (Sec. 19 and 19A).But when consent is caused by ‘bilateral mistake’ as to a matterof fact essential to the agreement, the agreement is void (Sec.20). In such a case there is ‘no consent’ at all.The various causes leading to ‘flaw in consent’ will now bediscussed one by one in detail.

CoercionLet us first define coersionDefinitionSection 15 of the Contract Act defines ‘Coercion’ as follows:“Coercion is the committing or threatening to commit, any actforbidden, any property, to the prejudice of any personwhatever, with the intention of causing any person to enter intoan agreement.”The Explanation to the Section further adds that “it is immate-rial whether the Indian Penal Code is or is not in force in theplace where the coercion is employed,”

Illustrations

(i) A Madrasi gentleman died leaving a young widow. Therelatives of the deceased threatened the widow to adopt aboy otherwise they would not allow her to remove thedead body of her husband for cremation. The widowadopted the boy and subsequently applied for cancellationof the adoption. If was held that her consent was not freebut induced by coercion, as any person who obstructed adead body from being removed for cremation, would beguilty of an offence under Section 297 of the I.P.C. Theadoption was set aside (Ranganayakamma vs Alwar Setti).

(ii) L threatens to shoot M. if he does not let out his house tohim . M agrees to let out his house to L. The consent of Mhas been induced by coercion.

(iii) An agent refused to hand over the account books of thebusiness to the new agent sent in his place, unless theprincipal released him from all liabilities. The principal hadto give a release deed as demanded. Held, that the releasedeed was voidable at the instance of the Principal who wasmade to execute the release deed under coercion ( Muthiavs Karuppan).

(iv) The Government gave a threat of attachment against theproperty of A, for the recovery of a fine due from B, theson of A. A, paid the fine. Held, The payment of fine was


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induced by coercion and therefore A was entitled to recoverthe money paid to remove wrongful attachment (Bansrajvs The Secy of State).

2. The act constituting coercion, may be directed at anyperson, and not necessarily at the other party to theagreement. Likewise it may proceed even from a stranger tothe contract.

Illustrations(a) A. threatens to shoot B, a friend of C if C does not let out

his house to him. C agrees to do so. The agreement hasbeen brought about by coercion.

(b) A. threatens to shoot B if he does not let out his house toC. B agrees to let out his house to C. B’s consent has beencaused by coercion.

3. It does not matter whether the Indian Penal Code is or isnot in force in the place where the coercion is employed . Ifthe suit is filed in India, the above provision ( i.e. Sec. 15)will apply.

Illustration (Appended to Sec. 15) A, on board an English shipon the high seas, causes B to enter into an-agreement by’ an actamounting to criminal’ intimidation under the Indian PenalCode. A, afterwards sues B for breach of con-tract, at Calcutta.A, has employed coercion, if though his act not an offence bythe law of England and although Section 506 of the IndianPenal Code was not in force, at the time or place where, the act,was done.Threat to file a suit. To threaten a criminal or civil prosecutiondoes not constitute coercion because it is not an act forbiddenby the Indian Penal Code. But a threat to file a suit of a falsecharge constitutes coercion, for such an act is forbidden by theI.P.C. (Askari Mirza vs Bibi Jai Kishori)Threat to commit suicide. Neither suicide nor threat to commitsuicide is punishable under the Indian Penal Code: Only anattempt to commit suicide is punishable under it. In ChikkamAmmiraju vs Chikkam Seshamma, there arose a question as towhether a threat to commit suicide amounts to coercion, andthe Lordships of the Madras High Court answered thequestion in the affirmative holding that this amounts to coer-cion. In that case a person, by a threat to commit suicide,induced his wife and son to execute a lease deed, in favor of hisbrother in respect of certain properties which they claimed astheir own. The transaction was set aside on the grounds ofcoercion. It was stated by the majority footings that though athreat to commit suicide was not punishable under the IndianPenal Code, it must be deemed to be forbidden by that Code asan attempt to commit suicide was punishable under section 09of that Code. Their Leadership observed “ “The term any actforbidden by the Indian Penal Code’ is wider than the term‘punishable by the Indian Penal Code.’ . S’iinp1y’ because a _anepiscopes punishment, it does not follow that the act , is notforbidden by the Penal code. For-example, a lunatic or a minor.May not be punished. This does not show that their criminalacts are not forbidden by the Penal Code.”Duress. The term ‘duress’ is used in English Law to denoteillegal imprisonment or either actual or threatened violence overthe person ( body) of another party of his wife or children with

a view to obtain the consent of that party to the agreement. Inshort, for ‘duress’ the act ,or threat must be aimed at the life or”liberty of the other patty to the contract or the members of hisfamily: A threat to destroy or detain property will not amountto ‘duress.’ Thus the scope of the term ‘coercion,’ as defined inSection 15, is wider, because it includes threats over propertyalso. ‘

Effect of CoercionA contract brought about by coercion is voidable at the option.of the party whose consent was so caused (Sec. 19). This meansthat the aggrieved party shall either exercise the option to affirmthe transaction and hold the other party bound by it, orrepudiate the transaction by exercising a right of rescission. Asper Section 64, if the aggrieved party opts to rescind a voidablecontract, he must restore any benefit received by him under thecontract to the other party from whom received.The burden of proof that coercion was used lies on the partywho wants to set aside the contract on the plea of coercion.The second factor vitiating consent is

Undue Influence

DefinitionSection 16(1) defines the term ‘Undue influence’ as follows:“A contract is said to be induced by undue influence where, (i)the relations subsisting between the. parties are such that oneof the parties is in a position to obtain an unfair advantage overthe other.”The phrase “in a position to dominate the will of the other” isclarified by the same section under sub-section (2), thus:Under section 16(2)- A person is deemed to be in a position to dominate the willof another-(a) Where he holds a real or apparent authority over the other,

e.g., the relationship between master and the servant, policeofficer and the accused; or

(b) Where he stands in a fiduciary relation to the other.Fiduciary, relation means a relation of mutual trust andconfidence. Such a relationship is supposed to exist in thefollowing cases; father and son, guardian and ward,solicitor and client, doctor and patient, Guru (spiritualadviser).and disciple, trustee and beneficiary, etc: or

(c) Where he makes a contract with a person whose mentalcapacity of is temporarily or penitently affected by reasonof age, illness, or mental or bodily distress, e.g., oldilliterate persons.

It is to be observed that for proving the use of undue-influenceboth the elements mentioned above, namely, (i) the other partywas in a position to dominate, his will, and (ii) the transactionwas an unfair one, must be established.

Presumption of Undue InfluenceUndue influence is presumed to exist under the circumstancesmen-tioned above in sub-clauses (a), (b) and (c). In otherwords, for example, where the relationship between thecontracting parties is that of master and servant, father and son,doctor and patient, solicitor and client, etc., or where one of the


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parties to the contract is an old illiterate person, there is no needof proving the use of undue influence by the party whoseconsent was so caused. Merely status of parties is enough toweave the existence of undue influence in these cases. Presump-tion of undue influence is also there, in case of a contract by orwith a ‘pardanashin woman.There is, however, no presumption of undue influence in thefollowing cases:(i) Husband and wife (In case of persons engaged to marry,

the pre-sumption of undue influence will arise)(ii) Mother and daughter(iii) Grandson and grandfather.(iv) Landlord and tenant.(v) Creditor and debtor.In these cases, undue influence shall have to be proved by theparty alleging that undue influence existed.

Burden of proof and rebutting the presumption.In cases where there is a presumption of undue influence theburden of proving that the person who was in a position todominate the will of another, did not use his position toobtain an unfair advantage, will lie upon the person who was ina position to dominate the will of the other [Sec.16(3)]. He canrebut or oppose the presumption(i) That disclosure of facts was made,(ii) That the price was adequate,(iii) That the other party was in receipt of competent

independent advice and his consent was freeLet us study some illustrations in this repect

Illustrations

(a) A, having advanced money to his son B. obtains, bymisuse of parental influence, a bond from B for a greateramount than the sum due in respect of the advance. Aemploys undue influence. As undue influence is pre-sumedto exist if the relationship between contracting parties isthat of father and son, the burden of proof lies on A, thefather. It will be for A to prove that he did not employundue influence, of a suit by B alleging undue influence.

(b) A,on 1st Jan enfeebled by disease or age, is induced, by B’sinfluence over him as his medical attendant, to agree to payB an unreasonable sum for his professional services. Bemploys undue influence. On a petition by A allegingundue influence, it lies on B, the doctor, to prove that thecontract was not induced by undue influ-ence.

(c) An old illiterate woman made a gift of almost the wholeof her property to her nephew, who was managing herestate. On a petition by the old lady for setting aside thegift deed on the ground of undue Influence, the onus hason the nephew to prove that the transaction is bona fide,well understood and free from undue influence, becauseundue influence is presumed in such a case.

Effect of Undue Influence“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. Any such contract may be setaside either absolutely or, if the party who was entitled to avoidit has received any benefit there under, upon such terms andconditions as the court may seem just.” (Sec. 19-A)Illustrations (Appended to Sec. 19-A).(a) A’s son has forged B’s name to a promissory note. B, under

threat of prosecuting A ‘s son, obtains a bond from A forthe amount of the forged note. If B sues on this bond,the Court may set the bond aside.

(b) A, a money lender, advances Rsl00 to B. an agriculturist,and by undue influence, induces B to execute a bond forRs200 with interest at 6 percent per month. The Court mayset the bond aside, ordering B to repay the Rs100 withsuch interest as may seem just.

Thus, it will be noticed that Section 19-A also declares a contractbrought about by undue influence vojdable at the option of theaggrieved party, just as section 19 so declares. In case of acontract brought about by coercion, misrepresentation or fraud,the special feature of Section 19, is that while in the case ofrescission of a contract procured by coercion, misrepresentationor fraud, any benefit received by the aggrieved party has to berestored under Section 64 of the Contract Act; underSection19A, if a contract procured by undue influence is setaside, the Court has discretion to direct the aggrieved party forrefunding the benefit whether in whole or in part or set asidethe contract without any direction for refund of benefit.The following points must also be noted in this, connection:(i) Lack of judgment, lack of knowledge of facts or absence

of foresight are generally not by themselves sufficientreasons for setting aside a contract on the ground ofundue influence. Persuasion and argument are also not inthemselves undue influence. Undue influence impliesmental and moral coercion so as to make the consent ofone of the parties to the contract without freedom.

(ii) Undue influence by a person, who is not a party to thecontract, may make the contract voidable in other words, itis not necessary that the person in a position to dominatethe will of the other party use himself be benefited. It issufficient If the third person m whom he is interested isbenefited (Chirmamma vs Devenga Sangha).

Unconscionable TransactionsUnfair or unreasonable bargains belong to the category ofunconscionable transactions. These are such transactions whereas between two con-tracting parties, one is in a dominantposition and makes an exorbitant profit of the others distress -High rate of interest.Unconscionable bargains take place mostly in money lendingtransactions where moneylenders charge high rates of interestfrom needy borrower. The presumption of undue influence onthe ground of high rate of interest is raised only when thefollowing two things are proved:1. That the moneylender was in a position to dominate the

will of the borrower, and2. That the bargain is unreasonable i.e., rate of interest is

excessive without any valid reason.


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In such cases the law presumes that consent must have beenobtained by undue influence and the burden of proving thatthere was no undue influence lies on the creditor. It must benoted that both the above conditions must be proved forgiving rise to a presumption of undue influence. There will beno presumption of undue influence and a transaction will notbe set aside on ground of undue influence, merely because therate of interest is high if both the parties are, on equal footing(i.e. none of the parties is in a position to dominate the, will ofthe other party) or if there exists valid reason (like tight marketconditions) for charging high rate of interest

Illustrations

(a) A being in debt ,to B, the moneylender of his village, -contract a fresh loan on terms which appear to beunconscionable. It .lies on B to prove that the ‘contract wasnot induced by undue influence [Illustration (c) to Section16].

(b) A poor Hindu widow borrowed Rs 1,500 ;from amoneylender at 100 per cent per annum rate of interest forthe purpose of enabling her to establish her right tomaintenance. It lies on the moneylender to prove that therewas no undue influ-ence (Rannee Annapurni vsSwaminatha).

(c) A, applied to a banker for a loan at the time when there isstringency in the money market. The banker declines tomake the loan except at an unusually high, rate of interest.A, accepts the loan on these terms. This is a transaction inthe ordinary course of business, and the contract is notinduced by undue influence [Illustration (d) to Section 16].

Pardanashin WomanAs observed earlier, there is a presumption of undue influencein case of a contract by or with a ‘pardanashin woman’. She canavoid any contract entered .by her on the plea of undueinfluence and it is for the other party to prove that no undueinfluence was used. For proving the absence of undue influ-ence, the other party will have to satisfy the Court (i) that theterms of the contract were fully explained to her, (ii) that sheunderstood their implications, and was free to have indepen-dent advice in the matter, and (iii) that she freely consented tothe contract. It may be noted that the term ‘pardanashin’ hererefers to a woman who observes complete seclusion (parda) fromcontact with people outside’ her own family, because of thecustom of her community, and one does not become‘pardanashin’ simply because she lives in some degree ofseclusion Shaik Ismail vs Amir BibiFurther note that the protection ranted to ardent in woman isso extended to illiterate and ignorant ladies, who are equallyexposed to the danger and risk of an unfair deal (Sonia Parshinivs’,S.M. Baksha).

Distinction between Coercion and Undue 1n.i1uenceBoth, coercion and undue influence, vitiate consent and makethe consent of one of the parties to the contract unfree.’ But thefollowing are the points of distinction between the two:1. In coercion, the consent of the aggrieved party is obtained

by committing or threatening to commit an act forbiddenby Indian Penal Code or detaining or threatening to detain

some property unlawfully. While in undue influence, theconsent of the aggrieved party is affected from thedomination of the will of one person over another.

2. Coercion is mainly of a physical character involving mostlyuse of physical or violent force. Whereas undue influence isof moral character involving use of moral force or mentalpressure.

3. There is no presumption of coercion by law under anycircumstance. The burden of proof that coercion was usedlies on the party whose consent was so caused. In the caseof undue-influence, however, there is presumption as tothe same in the case of certain relationships. In these casesthere is no need of proving the use of undue-influence bythe party whose consent was so caused.

4. While in the case of rescission of a contract procured bycoercion, any “benefit received by the aggrieved party has tobe restored under Section 64, of the Contract Act; in thecase of rescission of a contract procured by I undueinfluence, as per Section 19-A, the, Court has discretion todirect the aggrieved party for restoring the benefitwhether in whole or in part or set aside the contract withany direction for refund of benefit.

5. The party exercising coercion exposes himself to criminalliability under the Indian Penal Code, besides an action oncontract. There is no criminal liability case of undue-influence.

MisrepresentationA representation means statement of fact made by one party tothe other, either before or at the time of contract, relating tosome matter, essential to the formation of the contract, withan intention to induce the other party to enter into the contract.It may be expressed by words spoken or written or impliedfrom the acts or conducts of the parties (e.g., by any halfstatement of truth).A representation when wrongly made, either innocently orindecently , is termed as a mi-representation. To put in differ-ently, misrepresent- may be either innocent or intentional ordeliberate with an intent to deceive the other party. In law, forthe former kind, the term ‘misrepresen-tation’ and for the latterthe term ‘fraud’ is used.

DefinitionAccording to Section 18 ‘Misrepresentation’ means andincludes:(a) The positive assertion, in a manner not warranted by the

information of the person making it, of that which is nottrue, though he believes it to be true; or

(b) Any breach of duty which, without an intent to deceive,gains an advantage to the person committing it, or anyoneClaiming under-him, by misleading another to theprejudice or to the prejudice of any one claiming underhim; or

(c) Causing, however innocently, a party to an agreement, tomake a mistake as to the substance of the thing which isthe subject of the agreement.


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Thus, as per Section 18, there is misrepresentation in thefollowing three cases:(a) Positive assertion of unwarranted statements of material

facts believing them to be true. If a person makes anexplicit statement of fact not warranted by his information(i.e., without any reasonable ground), under an honestbelief as to its truth though it is not true, there ismisrepresentation.

Illustration. A says to B who intends to purchase his land, “Myland produces 10 quintals of wheat per acre. A, believes thestatement to be true, although he did not have sufficientgrounds for the belief later on, it transpires! that the landproduces only 7 quintals of wheat, ‘per are. This is ‘a misrepre-sentation.It may be noted that a mere expression of opinion or words ofcommen-dation for example in a sale of land a mere generalstatement that the land is fertile, cannot be held to amount to apositive assertion.(b) Breach of duty which ‘brings an advantage to the person

committing it by misleading the other to his prejudice.This clause comes those cases where a statement whenmade was true but subsequently before it was acted upon,it became false to the knowledge of the person making it.In such a case, the person making the statement comesunder an obligation to disclose the change in circumstancesto the other party, Otherwise he will be guilty ofmisrepresentation.

Illustration A before signing a contract with B for the sale of business,correctly states that the monthly sales are Rs. 50,000. Negotia-tions lasted for five months, when the contract of sale wassigned. During this period the sales dwindled to Rs.5,000 amonth. A, unintentionally keeps quite. It was held that therewas misrepresentation and B was entitled to rescind the contract( With vs O’Flanagan).Note, that a partial non-disclosure may also constitute amisrepresen-tation, for instance, where a vendor of land told apurchaser that all the farms on the land were fully let, butinadvertently omitted to inform him that the tenants had givennotice to quit, he was held guilty of misrepresen-tation(Dimmock vs Hallett). .(c) Causing mistake about subject-matter innocently If one of

the parties induces the other, though innocently, tocommit a mistake as to the quality or nature of the thingbargained, there is misrepresentation.

Illustration. in a contract of sale of 500 bags of wheat , theseller made a representation that no sulphur has been used inthe cultivation of wheat. Sulphur, however, had been used in 5out of 200 acres of land. The buyer would not have purchasedthe wheat but for the representation. There is a misrepresenta-tion.Let us now understand the essentials of misrepresentationEssentials of misrepresentation. From the foregoing discus-sion, It follows that for alleging misrepresentation, thefollowing four things are nec-essary

(i) There should be a representation; made innocently, with anhonest belief as to its truth and without any desire todeceive the other party, either expressly or impliedly.

(ii) The representation must relate to facts material to thecontract and not to mere opinion or hearsay

(iii) The representation must be, or must have become untrue(iv) The representation must have been instrumental in

inducing the other party to enter into a contract (As per theExplanation to Section 19).

Effects of MisrepresentationIn case of misrepresentation, the aggrieved party has twoalternative courses open to him(i) He can rescind the contract, treating the contract as

voidable; or(ii) He may affirm the contract and insist that he shall be put

in the position in which he would have been; if therepresen-tation made had been true (Sec. 19).Misrepresentation does not entitle the aggrieved party toclaim damages by way of interest or otherwise for expens-es occurred.

Illustration A, innocently in good faith tells B that his T.V. set ismade in Japan. B. thereupon buys the T.V. set. However, itcomes out to be an Indian make. A. is guilty of misrepresenta-tion. B. may either avoid the contract or may insist on its beingcarried out. In the latter case, B may either ask for replacing theset by a Japanese make set or may keep the Indian make set andclaim the difference in price between that set and a Japanesemake set.Exception. The above remedy is lost, if the party whoseconsent was caused by misrepresentation, had the means ofdiscovering the truth with ordinary diligence.Illustration A. by a misrepresentation, leads B erroneously tobelieve that 500 maunds of indigo are made annually at A’sfactory. B examines the accounts of the factory, which show thatonly 400 maunds of indigo have been made. After this B buysthe factory. The contract is not voidable on account of A ‘smisrepresen-tation (Illustration ( b) to Section 19].

FraudThe term ‘fraud’ includes all acts committed by a person withan intention to deceive another person. -

DefinitionAccording to Section 17, ‘fraud means and includes any of thefollowing acts committed by a party to a contract, or with hisconnivance, or by his agent,. with intent to deceive or to induceanother party thereto or his agent, to enter into the contract:1. The suggestion that an act is true when it is not true by

one who does not believe it to be true. Thus a falsestatement intentionally made is fraud. An absence ofhonest belief in the truth of the statement made isessential to constitute fraud. If a representor honestlybelieves his statement to be true, he cannot be liable indeceit no matter how ill-advised, stupid, or even negligenthe may have been. In order to be called fraudulentrepresentation the false statement must be madeintentionally. Lord Herschell gave the definition of fraud in


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Derry vs Peep as, “a false statement made knowingly orwithout belief in its truth, or recklessly careless whether itbe true or false.”

2. The active concealment of a fact by a person who hasknowledge or belief of the act. Active concealment of a materialfact is taken as much and as if the existence of such fact wasexpressly denied or the reverse of it expressly stated. Mere non-disclosure is not fraud, where there is no duty to disclose.Caveat Emptor or ‘Buyer Beware’ is the principle in all contractsof sale of goods. As a rule the seller is not bound to disclose tothe buyer the faults in the goods he is selling.

Illustrations

(a) A, a horse dealer sells a mare to B. A knows that the marehas a cracked hoof which he fills up in such a way as to defydetection or on enquiry from B, A affirms that the mare issound. The defect is subsequently dis-covered by B. Thereis ‘fraud’ on the part of A and the agreement’ can beavoided by B as his consent has been obtained by. fraud.

(b) A, sells by auction, to B a horse, which he knows to beunsound. A says nothing to B about the horse’sunsoundness. This is not ‘fraud’ because A is under noduty to disclose the fact to B. the general rule of law being‘let the buyer beware’ [Illustration (a) to Section 17].

3. A promise made without any intention of performing it.If a man while entering into a contract has no intention toperson his promise, there is fraud on his part.

Illustrations

(a) X purchases certain goods from Y on credit without anyintention of paying for them as he was in insolventcircumstances. It is a clear case of fraud from X’s side. Notethat mere failure to pay, where there was no originaldishonest intention, is not fraud.

(b) Where a man and a woman went throug a ceremony ofmarriage without any intention on the part of the husbandto regard it as a real marriage, it was held that the consentof the wife was obtained by fraud and that the marriagewas mere pretence. (Shireenl vs John J J. Taylor) .

4. Any other act fitted to deceive. “the fertility of man’sinvention in devising new schemes of fraud is so great thatit would be difficult, if not impossible, to confine fraudwithin the limits of any exhaustive definition. All surprise,trick, cunning, dissembling and other unfair way that isused to cheat anyone is considered fraud and sub-section(4) is obviously intended to cover all those cases of fraudwhich cannot appropriately be covered by the other sub-sections.

5. Any such act or omission as the law specially declares to befraudulent. This sub-section refers to the provisions incertain Acts which make it obligatory to disclose relevantfacts. Thus, for instance under Section 55 of the Transferof Property Act, the seller of immovable property isbound to disclose to the buyer all material defects in theproperty (e.g., the roof has a crack) or in the seller’s title(e.g., the property is mortgaged). An omission to makesuch a disclosure amounts to fraud.

Thus, in order to allege fraud, the act complained of must bebrought within the scope of the acts enumerated above. A mereexpression of opinion or commendatory express is not fraud.“The land is very fertile” is simply a statement of opinion or‘fur products are the best in the market” is merely a commenda-tory expression. Such statements do not ordinarily amount tofraud.

Can Silence be Fraudulent?The Explanation to Section 17 deals with cases as to when‘silence is fraudulent’ or what is sometimes called ‘constructivefraud,’ The-explanation declares that “mere silence as to factslikely to affect the willingness of a person to enter into acontract is not fraud, unless(i) The circumstances of the case are such that, regard being

had to them, it is the duty of the person keeping silence tospeak, or

(ii) Silence is, in itself, equivalent to speech.”It therefore follows that

1. As a rule mere silence is not fraud because there is no dutycast by law on a party to a contract to make a disclosure tothe other party, of material facts within his knowledge.

Illustration A and B, being traders, enter upon a contract. A hasprivate information of a change in prices which would affect B’swillingness to proceed with the contract. A is not bound toinform B [Illustration (d) to Section 17].2. Silence is fraudulent, if the circumstances of the case are

such that it is the duty of the person keeping silence tospeak ‘. In other words, silence is fraudulent in contract of‘utmost good faith’ i.e contracts ‘unberrimae fides’. Theseare contracts in which the law imposes a duty of abundantdisclosure on one of the parties thereto, due to peculiarrelationship of the parties or due to the fact that one ofthe parties has peculiar means of knowledge which are notaccessible to the other. The following contract come withinthe class of ‘unberrimae fides’ contracts;

(a) Fiduciary relationship. When the parties stand in a fiduciaryrela-tion to each other, the person in whom confidence isreposed is under a duty to act with utmost good faith andto make a full disclosure of all material facts concerning thetransaction known to him. Examples of a fiduciaryrelationship include those of principal and agent, solicitorand client, guardian and ward, and trustee and beneficiary.

Illustrations(i) Where a broker who was employed to buy shares for the

client, sold his own shares to the client, without disclosingthis fact to him and without obtaining his consenttherefore, it was held that the sale can be avoided by theclient (Regier vs Campbell-Stuart).

(ii) Where solicitor purchased certain property from his clientnominally for his brother, but really for himself; it was heldthat the sale can be avoided by the client, even if thetransaction was perfectly proper one (Macpherson vs Watt).

(b) Contract of insurance-In contracts of marine, fire and lifeinsurance, the insurer contracts on the basis that all materialfacts have been communicated to him; and it is an implied


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condition of the contract that full disclosure shall be made,and that if there has been non: disclosure he shall beentitled to avoid the contract. The assured, therefore mustdisclose to the insurer all material facts concerning the riskto be undertaken e.g., disease etc., in case of life insurance. Aconcealment or misstatement of a material fact will renderthe contract void (Ratan Lal vs Metropolitan Co.).

(c) Contract of marriage engagement . Every material fact mustbe disclosed by to parties to a contract of marriageotherwise the other party is justified in breaking off theengagement (Haji Ahmed vs Abdul Ganj).

(d) Contracts of family settlements. Contracts of familysettlements and arrangements also require full disclosureof all material facts within the knowledge of the parties tosuch contracts. Such a contract is not binding if either partyhas been misled by the concealment of material facts.

(e) Share allotment contract: Promoters and directors, whoissue the ‘prospectus’ of a company to invite the public tosubscribe for shares and debentures, possess informationwhich is not available to general public and as such they arerequired to. disclose all information regarding the’ companywith strict and scrupulous accuracy.

3. Silence is fraudulent where the circumstances are such that“silence is, in itself, equivalent to speech.” “Where, forexample, B says to A-”If you do not deny it, I shallassume hat the horse is sound.” A says nothing. Hence A’ssilence is equivalent to speech. If the horse is unsound A’ssilence is fraudulent [Illustration © to Section 17].

Effect of FraudA party who has been induced to enter into a contract by fraud,has the following remedies open to him:1. He can rescind the contract i.e he can avoid the

performance of the contract; contract ‘being voidable at hisoption (Sec. 19); ,or

2. He can ask for restitution and insist that the contract shallbe per-formed, and that he shall be put in the position inwhich he would have been, if the representation made hadbeen true (Sec. 19).

Illustration A, fraudulently informs B that A’s estate is free fromen-cumbrance. B thereupon buys the estate. The estate is subjectto a mortgage. B may either avoid the contract, or’ may insist onits being carried out and the, mortgage debt of deemed.[Illustration (c)to Section 19].The aggrieved party can also sue for demand if any. Fraud is a‘civil wrong’ hence compensation is payable. For instance, if theparty suffers injury because of unsound horse, which was notdisclosed despite enquiry, compensation can be demanded.Similarly, where a man was fraudulently induced to buy a house,he was allowed to recover the expense involved in moving intothe house as damages (in addition to rescission. of the contract)[Doyle vs Olby (Ironmongers) Ltd ].Special points- For giving rise to an action for deceit, thefollowing points deserve special attention:

(i) Fraud by a stranger to the contract does not affect contract.It may, be recalled that ‘coercion’ as ‘undue influence’ by astranger to a contract affect the contract.

(ii) Fraudulent representation must have been instrumental ininducing the other party to enter into the contract i.e., butfor this, the aggrieved party would not have entered intothe contract.

(iii) The plaintiff must have been actually deceived byfraudulent state-ment. A deceit which does not deceivegives no ground for action.

(iv) The plaintiff must be thereby idemnified. Unless theplaintiff has sustained a damage or injury, no action will lie.It is a common saying that “there is no fraud withoutdamages.”

In cases. of fraudulent silence, the contract is not voidable, ifthe party whose consent was so caused had the means ofdiscovering the truth with ordinary diligence ( Exception to Sec.19 given in the Act). Note that in other cases of fraud, this is nodefence i.e., the contract is voidable even if the fraud could bediscovered with ordinary diligence.

Distinction Between ‘Fraud and MisrepresentationThe following are the points of distinction between the two:1. Fraud implies an intention to deceive, it is deliberate or

wilful; whereas misrepresentation is innocent, without anyintention to deceive.

2. Fraud is a civil wrong which entitles a party to. claimdamages in addition to the right of rescinding the contract.Misrepresentation, gives only the right to avoid thecontract and there can be no suit for damages

3. In case of misrepresentation, the fact that the aggrievedparty had the means to discover the, truth with ordinarydiligence will prevent the party from avoiding the contract.But In case of fraud: excepting fraud by silence, the contractis voidable even though the party defrauded had the meansof discovering the truth with ordinary diligence,

Loss of Right of RescissionWe have observed earlier that a contract brought about bycoercion, undue influence, misrepresentation or fraud isvoidable at the option of the party whose consent was socaused. He has the ‘option either to rescind the contract or toaffirm it. But his right of rescission is lost in the followingcases:1. Affirmation. If after becoming aware of ‘his right to

rescind, the aggrieved party affirms the transaction either byexpress words or by an act which shows an intention toaffirm it, the right of rescission is lost. So, for example, if aperson, who has purchased shares on the faith of amisleading prospectus, subsequently becomes aware of itsfalsity, but accepts dividends paid to him, he will not bepermitted to avoid the contract. Paying for the goodspurchased (if not paid so far), attempting to sell the goodare some other examples of implied affirmation.

2. Resestitution not possible. If the party seeking rescission isnot in a positiol’1 to restore the benefits he may haveobtained under the contract, e.g., where the subject-matter


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of the contract has been consumed or destroyed, the rightto rescind the contract cannot be exercised.

3. Lapse of time. It may be treated as evidence of affirmationwhere the party misled fails to exercise his rights promptlyon discovering the representation to be untrue of’ onbecoming aware of –the fraud ‘of coercion. As ‘such theright of rescission may also be lost be too long-a-delay

4. Rights of third parties. Since the, contract is valid untilrescinded, being a voidable contract, if before the contract isrescinded third parties, bona fide for value, acquire rights inthe subject matter of the contract, those rights are validagainst the party misled, and the right to rescind will nolonger be available.34 Thus where a person obtains goodsby fraud and, before the seller rescinds the contract,disposes them off to a bona fide party, the seller cannotthen rescind (Phillips vs Brooks Ltd 35).

MistakeMistake may be defined as an erroneous belief concerningsomething. It may be of two kinds:

1. Mistake of law.2. Mistake of fact.

Mistake of LawMistake of law may be of two types:

(a) Mistake of law of the country;(b) Mistake of foreign law.

(a) Mistake of law of the country or Mistake of law. Every oneis deemed to be conversant with the law of his country,and hence the maxim “ignorance of law is-no excuse.”Mistake of law, therefore, is no excuse and It does not giveright to the parties to avoid the contract Stating the effectof mistake as to law, Section 21 declares that “a contract isnot voidable because it was caused by a mistake as to .anylaw in force in India. Accordingly, no relief can be grantedon the ground of mistake of law of the country.

Illustration (To Sec. 21). A and B make a contract grounded onthe erroneous belief that a particular debt is barred by theIndian Law of Limitation: the contract is not voidable (i.e., thecontract is valid).However, if one of the parties makes a ‘mistake of law’through the inducement, whether innocent or otherwise, of theother party, the contract may be avoided(b) Mistake of foreign law. Mistake of foreign law stands on

the same footing as the ‘mistake of fact’. Here theagreement is void in case of ‘bilateral mistake’ only, asexplained under the subsequent heading.

Mistake of FactMistake of fact may be of two types:

i. Bilateral mistake; orii. Unilateral mistake.

1 Bilaterial mistake. Where the parties to an agreementmisunderstood each other and are at cross purposes, thereis a bilateral mistake. Here there is no real correspondence‘of offer acceptance, each party obviously understandingthe contract in a different way. In fact in such cases, there is

no agreement at all, there being entire absence of consent.This has been termed by Salmond as ‘error in consensus asdistinguished from ‘error in causa’ (i.e. where consent isnot free and is caused by coercion, undue influence,misrepresentation or fraud). In case .of bilateral mistake ofessen-tial fact, the agreement is void ab-initio. Section 20provides that “where both the parties. to an agreement areunder a mistake as to a matter of fact essential to theagreement, the agreement is void Thus for declaring anagreement void ab-inito under this Section, the followingthree conditions must be fulfilled

(i) Both the parties must be under a mistake i.e., the mistakemust be mutual. Both the parties should misunderstandeach other so as to nullify consent.

Illustration M, having two houses A and B, offers to sell houseA, and N not knowing that M has two houses, thinks of houseB and agrees to buy it. Here there is no real consent and theagreement is void.(ii) A stake must relate to some fact and not to judgement or

opinion etc. An erroneous opinion as to the value of thething which forms the subject-matter of the agreement isnot to be deemed a mistake as to a matter of fact(Explanation to Section 20)

Illustration

(i) If A buys a motorcar, thinking that it is worth Rs 80,000,and pays Rs. 80,000 for it, when it is only worth Rs 40,000,the contract remains good. A has to blame himself for hisignorance of the true value of the motorcar and he cannotavoid the contract on the ground of mistake.

(ii) The fact must be essential to the agreement -i.e., the factmust be- such which goes to the very root to theagreement. On the basis of judicial decisions, the mistakeswhich may be covered under this condition may broadly beput into the following heads

(a) Mistake as to the existence of the subject-matter of theagreement. If at the time of the agreement and unknownto parties, the subject-matter of the agreement has ceasedto exist, or if it has never been in existence, then theagreement is void (Bell vs Lever Bros.).

Illustrations

(a) A agrees to sell to B a specific cargo of goods supposedto be on is way from England to Bombay. it turns outthat, before the day of the bargain, the ship conveyingthe cargo had been cast away, and the goods lost.Neither party was aware of these facts. The agreementis void.

(b) A. agrees to buy from B a certain horse. It turns outthat the horse was dead” at the time of-the bargain,though neither party was aware of the fact. Theagreement is void.

(b) Mistake as to the identity of the subject-matter. “ Whereboth parties are working under mistake as to the-identityof the - subject-matter i. e., one, party had one thing inmind and the other party had another, the agreement isvoid for want of consensus-ad-idem


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Illustration.Where there was a contract of the sale of ascertain quantity ofcotton arriving per ‘ex ship Peerless, and there were two ships ofthat name sailing, and the parties had in mind different ships atthe time of entering into the contract, held here was no contract.The Court observed: “the defendant meant one peerless andthe Plaintiff another. That being so, there was no consensus-ad-idem and therefore’ no binding contract.” (Reffles vs Wichelaus)(c) Mistake as to the title of the subject-matter. Normally a

mistake as to ‘title of the seller’ does not affect the validityof the contract because Section 14 of the Sale of GoodsAct, 1930, imposes an implied ‘condition’s to the title ofthe seller in a contract of sale, unless otherwise agreed.Accordingly, a .seller is taken to warrant his title to theproperty sold and he may be made liable in damages forbreach of the condition, even though both the partiescontract under a mistaken belief as to the title of the seller.It is. only in a very special circumstance, where a personagrees to purchase property or goods which unknown tohimself and the seller, is” his own already,’ that theagreement is void ab-initio and none of the parties can bemade liable in damages.

Illustration.(a) A agreed to take a lease of fishery from B, though

contrary to the belief of both parties at the time A wastenant for life by inheritance of the fishery and B hadno title at all. It was held that the lease agreement wasvoid (Copper vs Phibbs).

(d) Mistake as to the quantity of the Subject Matter. If boththe parties are working under a mistake as to the quantityof the subject-matter, the agreement is void.

IllustrationP enquired about the price of rifles from H stating that he maybuy as many as 50. H quoted the price. P telegraphed “Sendthree rifles.” The telegraph clerk transcribed the message as“Send the rifles.” H sent 50 rifles. P accepted only three andreturned 47. H filed a suit for damages for non-acceptance of 47rifles. It was held that there was no contract as there was noconsent and it made no difference even if the mistake wascaused by the negligence of a third party. Of course P must paythe price of three rifles accepted by him (Henkel vs Pope).(e) Mistake as to the quality of the subject – matter. If there is

a mutual mistake of both the parties as to the quality ofthe subject-matter I.e., if the subject-matter is somethingessentially different, from what the parties believed it tobe, the agreement is void.

Illustrations

(a) A set of table-linen was sold at an auction by a ‘de-scription ‘with the crest of Charles I and the authenticproperty of that monarch.’ In.’ fact the linen wasGeorgian and there was a mutual mistake of bothparties as to the quality of subject-matter. Held . the

agreement was void ( Nicholson & I’enn. Vs SmithMarriott).

(b) A, contracts to sell B a particular horse, which isbelieved by both the parties to be a race horse. But lateron it’ time out to be a cart horse. The agreement

Strictly speaking it is the mistake as to ‘substance’ of thesubject-matter going to the very root of the agreement andaffecting .the whole consideration which makes it void and notthe mistake as to ‘quality’. For, the principle of caveat emptor(let the buyer beware) clearly states that there is no impliedwarranty or condition as to the quality or fitness for any partic-ular purpose of goods supplied under a contract of sale and thebuyer must be held to have taken the risk that the goods soldmight prove defective or might in some way be different itemthat which the parties believed it to be, in the absence of anymisrepresentation or guarantee by the seller.

Illustration.A sold certain seeds to B. Both parties honestly believed that theseeds were two years old. Actually the seeds proved to be onlyone year eleven months old. The contract cannot be avoided asthe mistake does not affect the substance of the transaction.(f) Mistaken assumption going to the root of agreement.

Thus, where a man and woman entered into anagreement for separation on the erroneous assumptionthat their marriage was valid, the agreement was heldvoid as the parties entered into the contract under afalse and fundamental assumption that they were lawfullymarried. (Galloway vs Galloway).

2. Unilateral mistake. Where only cine of the contractingparties is mistaken as to a matter of fact, the mistake is aunilateral mistake. Regard-ing the effect of unilateralmistake .on the validity of a contract, Section 22 providesthat “a contract is not voidable merely because it was causedby one of the parties to it being under a mistake as to amatter of fact.” Accord-ingly, in case unilateral mistake acontract remains valid unless the mistake is caused bymisrepresentation or fraud, in which case the contract isvoidable at t e option of aggrieved art. n t e basis ofjudicial deci-sions, however, in certain exceptional caseseven an unilateral mistake, whether caused by fraud,misrepresentation, etc., or otherwise, may make anagreement void ab-intio.

With a view to elucidating the above mentioned variouspossibilities regarding the validity of a contract under unilateralmistake, we shall now discuss them in some detail.Contract valid. If a man due to his own negligence or lack ofreasonable care does not ascertain what he is contracting about,,he must ,blame himself and cannot avoid the contract. Thus asrule, an unilateral mistake is, not ,allowed as a defence inavoiding. The contract i. e., it has no’ effect on the contract andthe contract remains valid.

Illustrations

(a) Where the government sold by auction the right of fisheryand the plaintiff offered the highest bid thinking that theright was sold for three years, when in fact it was for oneyear only, he could not avoid the contract because it was hisunilateral mistake caused by his own negligence. He ought


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to have ascertained the tenure of fishery before bidding atthe auction (A.A. Singh vs ‘Unon of India).

(b) X buys rice from Y, by sample under the impression thatthe rice is old. The rice -is, however, new. X cannot avoidthe contract. The rule of caveat emptor (let the buyerbeware) of the Sale of Goods Act is generally applicable insuch cases of unilateral mistake as to quality of subject-matter of a contract, and despite the mistake the contractremains valid.

Contract voidable. If the unilateral mistake is caused by fraud ormisrepresentation, etc., on the part of the other party, thecontract is void-able and can be avoided by the injured, party.Illustration. A, has a horse with a’ hole in the hoof. A, so fills itup that the defect cannot be discovered on a reasonableexamination. B. purchases the horse under the impression thatthe horse is sound. Here A, is guilty of fraud and as such ondiscovery of the defect B can avoid the contract because hisunilateral mistake has been caused by A’s fraudAgreement void ab-initio. In the following two cases, where thecon-sent is given by a party under a mistake which is sofundamental as goes to the root of the agreement and has theeffect of nullifying consent, no contract will arise even thoughthere is a unilateral mistake only:1. Mistake as to the identity _contracted with. where such

identity is important. The rule of law is that a contractapparently made between A and C is a complete nullity, ifthe inference from the faces is that to the knowledge of C,it was the intention of A to contract only with B, for, therecan be no real formation of an agreement by proposal andacceptance unless a proposal is accepted by the person towhom it is made. Thus, whenever the identity of theperson with whom one intends to contract is importantelement of the contract, a mistake with regard to theperson contracted with destroys his consent andconsequently annuls the contract. Identity of personcontracted ‘with is important either when there is a creditdeal or when one party has a set-off agilest the other party.It is important to note that in case of mistake as to identityof person contracted with, even if the mistake iscommitted because of fraud or misrepresentation ofanother party, the contract is not merely voidable but isabsolutely void.

Illustrations. (a) In Boulton vs Jones Boulton had. taken overthe business of one Brocklehurst, with whom the defendant,Jones, had been accustomed to deal, and against whom” he hada set-of. Jones sent an order for goods to. Brocklehurst; whichBoulton supplied without informing hi131 that the businesshas . changed hands. Jones consumed the goods of the beliefthat thy had been supplied by Brocklehurst. When Boultondemanded. the payment the of the goods supplied, Jonesrefused to pay, alleging that he had intended to contract withBrocklehurst personally, since he had a set-off which he wishedto enforce against him. Boulton, therefore, sue3d Jones for theprice. It was held that Jones was not liable to pay for thegoods. Pollock C.B. observed, “it is a rule of law that if aperson intends to contract with A, B cannot give himself anyright under it.”

(b) In Said vs Butt Butt, the managing director of a theatricalcompany, gave instructions that no ticket was to be sold toSaid, who was a very bad critic of all the plays of _11ecompany. Said, knowing this, asked a friend to buy a ticketfor him. With this ticket Said went to the theatre but wasrefused admission. Said filed a suit for damages for breachof contract. Held that there was no contract because thetheatrical company never intended to contract with Said.(Notice that in the given circumstances the identity of theplaintiff was a material element in the formation of thecontract.)

(c) In Cundy vs Lindsay A fraudulent person named Blenkarn,taking advan-tage of the similarity of his name with thatof a big company named Blenkiron & Co., in the sametown, placed an order with Lindsey & Co., for supply ofcertain goods on credit and signed the order in such a wayas to look like that of Blenkiron & Co. Lindsay & Co.,mistook ‘his order for that of Blenkiron & Co., anddispatched the goods. Blenkarn took delivery of the goodsand sold them to Cundy & Co., a bona fide purchaser forvalue, and did not pay Lindsay & _o., for them. On comingto know the true facts, Lindsay & Co., filed a suit on Cundy& Co., for recovery of goods. The Court of Appeal heldthat owing to mistake as to identity of contracting partycaused by Blenkarn, the rogue, there was no consensus ofmind which could lead to any agreement whatever betweenBlenkarn and Lindsay & Co., and hence the agreement wasvoid ab-initio and Blenkarn got no title to the goods whichhe could pass to Cundy & Co. As Cundy & Co., obtainedno title to the goods, it must return them or pay their priceto Lindsay & Co.

Notice that in the above case if the contract between Blenkarnand Lindsay & Co., would have been merely voidable for fraud,Cundy & Co., would have been entitled to retain the goods as ithad taken them in good faith for value, because in case of avoidable contract before it is repudiated, one can pass a goodtitle to a bonafide purchaser for value. Hence the specialty of amistake as to the identity of person contracted with becomesclear. that in such a case, even if the mistake is committedbecause of misrepresentation or fraud of another party, thecontract is absolutely void. to the prejudice of third parties wholater deal in good faith with the fraudulent person.Further, “mistakes to the identity” of a party is to be distin-guished from “mistake as to the attributes” of the other party.Mistake as to attributes, for example, as to the solvency or socialstatus of that person, cannot negative the consent. It can onlyVitiate consent.. It, therefore, makes the’ contract merelyvoidable for fraud. Thus where X enters into a contract ‘with’ Y,falsely representing himself to be a richman, the contract is onlyvoidable at the option of Y. Again where the identity of theparty contracted with is. immaterial, mistake as to identity willnot avoid a contract. Thus if X enters a shop, introduceshimself as Y and purchases some goods for cash, the contract isvalid.2. Mistake as to the nature and character of a written

document. The second circumstances which even anunilateral mistake may make a ‘ con-tract absolutely void is


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where the consent is given by a party under a mistake as tothe nature and character of a written document. The ruleof law is that where the mind of the signer did notaccompany the signature; i. e., he did not intend to sign; incontemplation of law, he never did sign the contract towhich his name is appended and the agreement is void ab-initio.

Illustrations

(a) An old illiterate woman executed a deed under theimpression that she was executing a power of attorneyauthorising her nephew to manage her estate, while in factit was a deed of gift in favour of her nephew. The evidenceshowed that the woman never intended to execute such adeed of gift nor was the deed read or explained to her. Thedocument was held to be void, as her mind did not gowith her signature (Bala Devi vs Santi Mazllmda).

(b) A blind man signed what he thought was a compromisepetition, but was in fact a release, on the fraudulentrepresentation of another, the document was held to bevoid (Hem Singh vs Bhaar).

(c) M, an old man with feeble sight, signed a bill of exchangefor £ 3,000 thinking it was a guarantee. It was held that Mwas not liable (Foster vs Mackin-non). In this case made avery interesting observation was made: “It was as if he hadwritten his name in a lady’s album, or on an order foradmission to the Temple Church, or in the fly-leaf of abook, and there had already been without his knowledge, abill of exchange ... on the other side of the paper.”

It should be borne in mind that in the aforesaid type ofmistake, even if one party’s consent is induced by misrepresen-tation of another, the con-tract is not merely voidable but isentirely void and the third party would acquire no rights(Ningawwa vs Byrappa). .

Practical ProblemsAttempt the following problems, giving reasons for youranswers:1. A, sells a horse to B knowing fully well that the horse is

vicious. A does not disclose the nature of the horse to B.Is the sale valid?

[Hint. Yes, the sale is valid, because A is under no duty todisclose the fault to B. the general rule of law being “let thebuyer beware.”]2. A, who is trying to sell an unsound horse, forges a

veterinary surgeon’s certificate, stating that the horse is,sound and pins it on the stable door. B comes to examinethe horse but the certificate goes unnoticed by him. Hebuys the horse and finds later on the horse to be unsound.He wants to avoid the agreement under the plea that he hasbeen defra6ded. Will he succeed?

[Hint. B will not succeed because he bought the horse after hisexamination and not on the basis of the Certificate. B has nottherefore been deceived by the Certificate actually and a deceitwhich does not deceive is not fraud-.]3. X offers to sell Y a painting which X knows is a copy of a

well known masterpiece. Y, thinking that the painting is an

original one and that X must be unaware of this,immediately accepts X’s offer. Does this result in ac6ntract?

[Hint. Yes, there is a contract. The rule of Caveat Emptor appliesin case of unilateral mistake as to quality of subject – matter ofa contract, and despite the mistake the contract remains valid.]4. X buys from Y a painting which both believe to be the

work of an old master and for which X pays a high price.The painting turns out to be only a modern copy. Discussthe validity of the contract?

[Hint. The contract is absolutely void as there is a mutualmistake of both the parties as to the substance or quality of thesubject-matter going to the very root of the contract. In case ofbilateral mistake of essential fact, the agreement is void ab-initio,as’ per Section 20.] .5. X threatens to kill Y if he does not sell his house to X for

Rs 1,00,000. Y assigns the necessary documents for the saleof house and receives the pay-ment. Later on, Y wants toavoid the contract. Will he succeed?

Solution: Sections to which the given problem relates: Sections15 and 72. Decision: Y can avoid the contract on the ground ofcoercion but he will have to return Rs 1,00,000 which he hasreceived from X.Reason: Y’s consent is not free as it has been obtained by givinga threat to commit an act which is forbidden by the IndianPenal Code.6. X threatens to kill Y’s son if Y does not sell his house to X

for Rs 1,00,000. Y signs the necessary documents for thesale of house and receives the pay-ment. Later on, Y wantsto avoid the contract. Will he succeed?

Solution: Sections to which the given problem relates: - Sections15 and 72. Decision: Y can avoid the contract on the ground ofcoercion but he will have to return Rs 1,00,000 which he hasreceived from X.Reason: Y’s consent is not free, as it has been obtained bycommitting an act, which is forbidden by the Indian PenalCode.7. X threatens to kill Y’s son if Y does not sell his house to Z

for Rs 1,00,000. Y signs the necessary document for the saleof house and receives the pay-ment. Later on, Y wants toavoid the contract. Will he succeed?

Solution: Sections to which the given problem relates: Sections15 and 72. Decision: Y can avoid the contract on the ground ofcoercion but he will have to return Rs 1,00,000 which he hasreceived from X.Reason: Y’s consent is not free as it has been obtained bycommitting an act which is forbidden by the Indian Penal Code.8. X, by a threat to commit suicide induced Y, his wife, and Z,

his son, to execute a release deed in favor of his brother inrespect of certain property. Are Y and Z bound by suchrelease deed?

Solution: Section to which the given problem relates: Section 15.Decision: Y and Z are not bound by such release deed.


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Reason: The consent of Y and Z is not free as it has beenobtained by threatening to commit an act which is deemed tobe forbidden by the Indian Penal Code.[Leading case: Ammiraju v. Seshamma]9. X, an illiterate old man of about 90 years, physically infirm

and mentally in distress, executed a gift deed of hisproperties in favour of Y his nearest relative who waslooking after his daily needs and managing hiscultivation.Is X bound by this gift deed?

Solution: Section to which the given problem relates: Section16(2). Decision: No. X is not bound by this gift deed.Reason: Y’s consent is not free as it has been obtained byexercising undue influence because Y was in position todominate the will of X[Leading case: Sher Singh v. Prithi Singh]10. X, a poor Hindu widow, was in great need of money to

establish her right to maintenance. She took a loan of Rs1,500 bearing a rate of interest of 100% p.a.

Is this transaction an unconscionable?Solution: Section to which the given problem relates: Section16(3). Decision: This transaction appears to be an unconscio-nable.Reason: Not only the rate of interest is too high but also thelender has used the circumstances of poor Hindu widow toobtain an unfair advantage.[Leading case: Ranee Annapurni v. Swaminatha]






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LESSON 9:LEGALITY OF OBJECT AND CONSIDERATION

Learning OutcomesAfter todays class you should be able to answer the followingquestions:• The legality of object and consideration• The consequence of the unlawful object or

consideration• The effect of illegal agreement on collateral transaction

IntroductionIn today’s lecture we shall study about another essential elementof a contract that is legality of object and considerationThe object of consideration of an agreement must be lawful, inorder to make the agreement a valid contract, for, Section 10 laysdown that all agreements” are contracts if made for lawfulconsideration and with a lawful object. Section 23 declares whatkinds of considerations and objects are not lawful. If the objector consideration is unlawful for one or the other of the reasonsmentioned in Section 23, the agreement is ‘illegal’ and thereforevoid (Sec. 23).The use of the word ‘illegal’ is somewhat a misnomer here. Itusually connotes a punishable offence, but the parties to a socalled “illegal agreement,” unless it is expressly punishable bylaw or amounts to a criminal conspiracy are not liable topunishment. They have committed no offence. They havemerely concluded a transaction that will be spurned by thecourts.’The words ‘object’ and ‘consideration’ used in Section 23 arenot synonymous. The word ‘object’ here means ‘purpose ordesign.’ Thus, where a person, while in insolvent circumstances,transferred his property to one of his creditors with the objectof defrauding his other creditors, it was held that the agreementwas void and the transfer was inoperative (Jajlar Meher Ali vsBudge Budge Jute Mills Co. ). The court observed that althoughthe consideration of the contract was lawful but the object wasunlawful because the purpose of the parties was to defeat theprovisions of the Insolvency Law.

What Considerations and Objects are Unlawful?According to Section 23, every agreement of which the object orcon-sideration is unlawful is void, and the consideration or theobject of an agreement is unlawful in the following cases:1. If it is forbidden by law .This clause refers to agreements which arc declared illegal by law.If the consideration or object for a promise is such as isforbidden by law, the agreement is void. An act or an undertak-ing is forbidden by law:a. When it is punishable by the criminal law of the

country, orb. When it is prohibited by special legislation or

regulations made by a competent authority underpowers derived from the legislature.

Illustrations

(a) Agreements for sale or purchase above the standardprice fixed by the relevant law (e.g Commodity’s Act. 1955)with regard to “a controlled article are illegal and hence void(Sua Ram vs Kunj LaI).

(b) An agreement to pay consideration to a tenant to inducehim to’ vacatepremises governed by the Rent RestrictionAct is illegal and cannot be enforced because such an act isforbidden by the said Act (Mohanchana vs Manindta).

2. If it is of such a nature that, if permitted, it would defeatthe provision of any law. This clause refers to cases wherethe objector consideration to an agreement is of such anature that, though not directly forbidden by law, it wouldindirectly lend to a violation of law, whether enacted orotherwise (e.g., Hindu and Mohammedan Laws). Such anagree-ment. is also void.

Illustrations

(a) A loan granted under a promissory note to the guard-ianof a minor to enable him to. celebrate the minor’s marriagein contravention of the Child Marriage Restraint Act washeld illegal and could not be recovered back (ChandraShrinivisa Rao vs Korrapati Raja Rama Mohana Rao).It willbe seen that the purpose of borrowing in this case is ofsuch a nature that if permitted it would defeat theprovisions of Child Marriage Restraint Act of 1929, for themoney was lent to enable the guardian to celebrate themarriage contrary to the provisions of the said Act.

(b) An agreement by the debtor not to raise the plea oflimitation, should a suit have to be filed, is void as tendingto limit the provisions of the Limitation Act (RamaMurthy vs Gopayya).

(c) An agreement between husband and wife to live separatelyis invalid as being opposed to Hindu Law (A. E.Thimma/ Naidu vs Rajamma).

3. If it is fraudulent. An agreement whose object or consideration is to defraudothers, is unlawful and hence void.

Illustrations.

(a) A, promises to pay Rs 200 to B, if B would commit fraudon C. B agrees. B’s agreeing to defraud is unlawfulconsideration for A’s promise to pay. Hence the agreementis illegal and void.

(b) A, B and Center into an agreement for the division amongthem of gains acquired, to be acquired, by them by fraud.The agreement is void, as its object is unlawful.[Illustration (e) to Section 23] -

(c) A, being agent for a landed proprietor, ‘agrees for money,without the, knowl-edge of his principal, to obtain a lease


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of land belonging to his principal . The agreement betweenA and B is void as it implies a fraud by concealment by Aupon his principal. [Illustration (g) to Section 23].

4. If it involves or implies in fury to the person or propertyof an-other. If the object or consideration of an agreementis injury to the person or property of another, it is void,being an lawful agreement.

Let us now do some illustrations in this respect

Illustrations(a) An agreement to commit an assault or to beat a man has

been held unlawful and void (Allen vs Raucously).(b) An agreement to put certain property to fire is unlawful

and void under this clause.(c) An agreement involving the publication of a libel

(defamatory article against someone) has been heldunlawful and void (Clay vs Yates).

(d) An agreement by which a debtor, who borrowed Rs 100,promised to do manual labour without pay for thecreditor, so long as the debt was not repaid in full has beenheld to be void, as it involved injury to the person of thedebtor (Ram Sarup vs Bansi Mandar)

5. If. the court regards it as immoral. An agreement whoseobject orconsideration, is immoral, is illegal and thereforevoid. The scope of the word ‘immoral’ here extends to thefollowing:

(i) Sexual immorality e.g., illicit cohabitation or concubinage orpros-titution.

Illustrations

(a) A, agrees to let her daughter to hire to B for concubi-nage.The agreement is void, because it is immoral, though theletting may not be punishable under the Indian PenalCode. - [Illustration (k) to Section 23]

(b) A gift deed executed in consideration of illicit intercoursehas been held void as its object was immoral (Ghumma vsRam Chandra ).

It may be noted that an agreement to pay for ‘past’ or ‘future’illicit cohabitation is also void, as being immoral. Considerationwhich is immoral at the time when it passes cannot becomeinnocent by passage of time and therefore the .consideration forpast cohabitation is unlawful as being immoral (Hussenali vsDinbai). Similarly, a promise to pay for the purpose of futurecohabitation, which comprised the consideration, was heldillegal and void (Lakshminarayana vs Subhadri).(ii) Furtherance of sexual immorality.

Illutration

(a) A prostitute was sued for the hire money of a carriage inwhich she used to go every evening in order to make adisplay of her beauty and thus to attract customers. Thesuit was dismissed on the ground that the plaintiffcontributed towards the performance of an immoral andillegal act and hence he was liable to suffer ( Pearce vsBrooks).

(b) A man who knowingly lets out his house for prostitutioncannot recover the rent, it being an act for furtherance ofsexual immorality ( Choga Lal vs Piyasi).

The landlord may, however, recover if he did not know thepurpose.

Illustrations

(a) Money advanced to a married woman to enable her toprocure a divorce and to marry the plaintiff could not berecovered back as the object of the agreement was heldimmoral (Bai Vij/i vs Nansa Nagar).

(iii) An agreement for future separation between a husbandand wife is void ab--initio, it being immoral in the eye orlaw.

(iv) Such acts which are against good public morals.

Illustrations

(a) An agreement for future marriage, after the death of firstwife is against good morals and hence would be void(Wilson vs Comleyl)

(b) A who is B’s mukhtar, promises to exercise his influence,as such with B in favour of C and C promises to pay Rs1,000 to A. The agreement is void, because it is immoral.[Illustration to Section 23]

6. If the court regards it as opposed to public policy. Anagreement is unlawful if the court regards it as ‘opposed topublic policy.’ It is not possible to give a precise or exactdefinition of the term ‘public policy.’ It is rather an elasticterm and its connotation may vary with the social structureof a state. Public policy is a principle of law which holdsthe no citizen can lawfully do that which is injurious to thepublic or is against the interests of the society or the state.Broadly speaking, an agreement which tends to promotecorruption or injustice or immorality is said to be opposedto public policy. It is interesting to note that ‘opposed topublic policy’ and ‘immoral,’ both are very much similar innature because what is ‘immoral’ must be ‘opposed topublic policy’ and reverse is also true in most cases.

Public policy is an illusive concept. It has been described as an‘un-trustworthy guide’ ‘unruly horse’ etc., and therefore, thedoctrine of public policy is generally governed by precedents. InGherulal vs Mahadeodas the Supreme court served, “, thoughthe heads (of public policy) are not closed and though theoreti-cally it may be permissible to evolve a new head underexceptional circumstances of a changing world, it is advisable inthe interest of stability of society not to make any attempt todiscover new heads in these days.” The courts, thus, aregenerally disinclined to invent new heads of public policy.On the basis of decided cases. on the subject the following’agreements have been held to be against -public polity:(i) Trading with an alien enemy. It is now fully established

that trading with an alien enemy ( i.e. a citizen of the othercountry at war with the state ) is against public polity in sofar as It tends to aid the economy of the enemy country.Such agreements are therefore illegal, unless made with thespecial permission of Government. It is to be noted that


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an agreement to promote hostile action in a friendly state isalso illegal and void as being opposed to public policy.

(ii) Agreements interfering with the course of justice, Anagreement the object of which is to interfere with thecourse of justice, e.g., an agreement not to disclosemisconduct to the other interested party or an agreementto influence a judge to induce him to decide the case in aparty’s favour, is obviously opposed to public policy and isvoid. But an agreement to refer present or future disputesto ‘arbitration is a valid agreement.

(iii) Agreements for stifling criminal prosecution:. It is wellsettled law that if a-person has committed a crime, hemust be punished. Hence any agreement which seeks toprevent the prosecution of a guilty party is opposed topublic policy and is void” In Sudhindra Kumar vs GaneshChand, it was observed: “No court of law can countenanceor give effect to an agreement which attempts to take theadministration of law out of the hands of the judges andput it in the hands of private individuals.” Where, therefore, A promises B to drop a prosecution which he hasinstituted against B for robbery, and B promises to restorethe value of the thing taken, the agreement is void, as itsobject is unlawful.

Similarly, the compromise of a public offence is illegal . It isobvious that if such a course is allowed to be adopted andagreements made between the parties based solely on theconsideration of stifling criminal prosecutions are sustained, thebasic pur-pose of Criminal Law would be defeated. However,under the Indian Criminal Procedure Code there are certaincompoundable offences (e.g., assault) which can be compro-mised and agreements for the compromise of such offences arevalid (Ramachandra vs Bhauwari Bai).(iv) Maintenance and Champertv: ‘Maintenance’ may be

defined as an agreement whereby a stranger promises tohelp another person by money or otherwise in litigation inwhich that -third person has himself no legal interest.‘Champerty’ is an agreement whereby a person agrees toassist another in litigation in exchange promise to handover a portion of the proceeds of the action. Thus, in bothcases financial or professional assistance is provided with aview to assisting another person in litigation but in case ofchamperty the party helping in litigation also shares in thegains of the litigation in addition to interest on moneyadvanced or fees for professional services.

Under the English Law such agreements are absolutely void.’The Indian Law, however, does not make them absolutely voidbecause of the peculiar position of Indian litigants many ofwhom are too poor to afford expensive litigation. “Theuncertainties of litigation are proverbial; and if the financiermust need risk losing his money he may well be allowed somechances of exceptional advantage” (Ram Sarup vs Court ofWards).

The rules applied in India are as follows: - -

I. An agreement for supplying funds by way of ‘maintenance for‘Champerty’ is valid unless:

(a) it is unreasonable so as to be unjust to the other party, or

(b) It is made by a malicious motive like that of gambling inlitigation or oppressing other party by encouragingunrighteous suits, and not with the -bona fide object ofassisting a claim believed to be just (Bhagwat Dayal -Singhvs Debi D “I Sahu ).

II. An agreement for providing professional services is valid ifit is made by way of maintenance’ and with a bona fideobject of assisting a claim believed to be-just and obtaininga reasonable recompense therefore. But if it is made by wayof ‘Champerty’, i.e., making the remuneration dependentto any extent whatsoever upon the result of the suit, it isvoid (Ko/hi Jairam vs Vishvanat).

Illustrations(a) Where 75 paise in a rupee was agreed as the share of the

financier, out of the prop recovered, It was held that theagreement was unreasonable and hence void. However, theplaintiff (financier) was awarded the expenses legitimatelyincurred by him with interest (Nuthaki Venkataswami vsKatta Nagi Reddy).

(c) An agreement by a client to pay his lawyer according to theresult of the case was held opposed to public policy andvoid, it being against the professional code of conduct(Kothi Jairam vs Vishvanath).

(v) Traffic in public offices. Agreements for sale or transfer ofpublic offices or for appointments to public offices inconsideration of money are -illegal, being opposed topublic policy. Such agreements, if enforced, would lead toinefficiency and corruption in public life.

Illustrations.

(a) A, promises to obtain for B an employment in the publicservice, and B promises to pay Rs. 1,000 to A. Theagreement is void as the consideration for it is unlawful[Illustration (f) to Section 23].

(b) So also a promise to pay money to a public servant toinduce him to retire and make way for the appointment ofthe promisor is void ( Saminatha vs Muthusami).

(vi) Agreements creating an interest opposed to duty. Anagreement which tends to create a conflict between interestand duty is illegal and. void on. the ground that it isopposed to public policy.

Illustrations.

(a) A, agrees to pay B, the lieutenant colonel in the army,Rs10,000 if he will assist her brother to desert the army.The object of the agreement is opposed to public policyand .hence the agreement is void and illegal.

(b) An agreement by an agent with a third party whereby hewould be enabled to make secret profits is illegal and voidas it tends to create a conflict between interest and duty.

(vii) Agreements unduly restraining personal liberty:Agreements which unduly restrict personal freedom havebeen held to be void and illegal as being against publicpolicy.


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Illustration.A, borrowed money from B, a moneylender, and agreed that he.would not, without the written consent of B, leave his job,borrow money, dispose of his property or change his residence.It was held that the agreement was illegal as it unduly restrictedthe liberty of A ( Harwood vs Miller’s Timber and Trading Co ).(viii)Agreements interfering with parental duties. A father, and

in his absence the mother, is the legal guardian of his/herminor child. The au-thority of a guardian is to be exercisedin the best’ interest of the child, in accordance with goodpublic morals. If, therefore, the right of guardianship isbartered away by any agreement, which is - inconsistentwith the duties arising out of such custody such anagreement shall be void on the ground of public policy.

Illustration.For monetary consideration, A agrees to place his daughter atthe disposal of B to be married as B likes. The agreement isillegal and void as B it would interfere with A’s parental duty toselect a husband in the best interests of the girl (Alma Ram vsBanku Mal)(ix) Marriage brokerage agreements. These are agreements for

thepayment of money in consideration of procuring foranother in marriage a husband or a wife. Such agreementits are illegal and void as being contrary to public policy.Thus, when a ‘profit’ was promised Rs 200 in considera-tion of procuring a wife for the defendant, the agreementwas held, invalid and the money could} recovered(Pitamber vs. Jagjiwan). .

Further, an agreement of dowry i.e., to give money or propertyto the parents of the bride or the bridegroom in connection oftheir agreeing to the contract of marriage is also illegal andcannot be enforced. But such an agreement is illegal in respectof payment only; the validity of marriage is not affected. So,once the marriage is solemnized, money if actually paid cannotbe recovered back, and if not paid, a suit therefore would notlie, because the agreement to pay is illegal. Of course the moneycan be recovered when the marriage is not performed(Dharnidhar vs. Kanhji Sahay). Similarly, clothes and ornamentsor their value can be recovered if the marriage does not takeplace (Girdhari Singh vs Neelandhar Singh ).(x) Miscellaneous cases. The following agreements have also

been held to be against public policy:(a) Agreements “tending to create monopolies” are illegal and

void (Kameshwar Singh vs Yasin Khan). .(b) Agreements to the fraud revenue authorities are void and

illegal. For example, an agreement by which’ an employeewas to get, in addition to salary, an expense allowancegrossly in excess of the expenses actually incurred by him,was held illegal because the provision as to expenses was ‘contrary to public policy being merely a device to defraudthe income-tax authorities (Napeier vs National BusinessAgency Ltd).

(c) Agreements whereby money is given to induce persons togive evidences in a civil court are void because every one isexpected to perform his legal duty ( Adhiraja Shatty vsVittil Bhatta).

Object or Consideration Unlawful in PartSection 23 (already discussed) deals with cases in which objector/and consideration are unlawful. Now we come to thosecases where object/consideration are unlawful in partThe Dowry Prohibition Act, 1961 had defined dowry asproperty given directly or indirectly by one party to another, byparents of one party to either party at or before or after themarriage or in consideration of marriage. The Dowry Prohibi-tion (Amendment) Act, 1984 has changed the definition ofdowry slightly. The new Act has defined dowry as propertygiven in connection (not consideration) with marriage. TheAmendment Act however clarifies that presents given to thebride or the bridegroom at the time of marriage voluntarily,without a demand being made, will not be treated as dowry.But these presents will have to be carefully listed in accordancewith the rules of the Amendment Act. In this case consider-ation is wholly illegal.But what is the position if the same agree-ment contains, both1egal and illegal terms, i.e., it is partly legal and partly illegal?Sections 24, 57 and 58 of and 58 of the Contract Act providefor such cases. Accordingly, if the object or consideration ispartially unlawful, the following rules will apply:1. When an agreement contains several distinct promises to

do things legal and also other things illegal, and the legalpart cannot be separated from the illegal part (i.e., theconsideration for different promises is a single sum ofmoney), the whole agreement is illegal and void (Sec.24).

Illustrations(a) A promises to superintend, on behalf of B, a legal

manufacturer of indigo and an illegal traffic in otherarticles. B promises to pay to A a salary of Rs. 10,000 a year.The agreement is void and unlawful. Here a part of theobject is legal and a part is illegal which are not severablebecause the consideration for both promises is a singlesum (illustration to Section 24).

(c) A agrees to serve B as his housekeeper and also to live inadultery with him at a fixed salary. The whole agreement isunlawful and void. A cannot sue even for service renderedas housekeeper because it cannot be ascertained as to whatwas due on account of adulterous intercourse and whatwas due for housekeeping (Alice Hill vs. William Clarke).

2. Where there is reciprocal promise to do things legal andalso other things illegal and the legal part can be separatedfrom the illegal part (i. e., there is a separate considerationfor different promises), the legal part is a contract and theillegal part is a void agreement (Sec. 57).

Illustration. A and B agree that A shall sell B a house for Rs10,000, but that, if B uses it is as a gambling house he shall payA Rs50,000 for it. The first set of reciprocal promises, namely,to sell the house and to pay Rs10,000 for it is a contract. Thesecond set is for an unlawful. object, namely, that B may use thehouse as a gambling house, and is a void and illegal agreement.(Illustration to Section 57). Here it is to be noted that the twopromises are distinct and severable with a separate considerationfor each such promise. The promises are thus inde-pendent ofeach other except that they form part of the same contract.


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3. In the case of an alternative promise, one branch of which’is legal and the other. illegal, the illegal branch alone can beenforced (Sec. 58).

Illustration. A and B agree that A shall pay B Rs1,000 for whichB shall afterwards deliver to. A either rice or smuggled opium.This is a valid contract to deliver rice and a void and unlawfulagreement as to opium (Illustration to Section 58).

Effect of Illegal Agreements on CollateralTransactionsWhile discussing different kinds of contracts in Chapter Lesson3 we have already seen that an ‘illegal agreement’ like the ‘voidagreement’ is unen-forceable as between the immediate parties.But an ‘illegal agreement’ has this further effect that othertransactions whether incidental or collateral to it are also taintedwith illegality and, therefore, are not enforceable, provided theparties to the collateral transaction had the knowledge of theillegal or immoral design of the main or primary agreement ( avoid agreement does not invalidate collateral transaction).

Illustrations

(a) A enters into a smuggling of goods agreement with B andborrows Rs 1,000 from C for giving an advance to B. Ccannot recover the money lent - if he knew the illegalpurpose, because his loan agreement was a collateraltransaction to an illegal agreement. Of course if C. did notknow the purpose of the loan, he can recover even thoughA had used the money for an illegal object. -

(c) A bets on - a horse race with B and borrows Rs 500 from Cfor this purpose. C can always recover the money lent,whether he knew the purpose of loan or’ not, because hisloan agreement was collateral of a void (wagering)agreement only.

No restitution is allowed. Parties to an illegal agreement cannotget all help from a court of law, for, “no polluted hand shalltouch the pure fountain of justice.” So, nothing can berecovered under an illegal agreement and if something has beenpaid it cannot be recovered back, whether the illegal object hasbeen carried out or has not been carried out, is immaterial. Therule of law is that “no action is allowed on a illegal agreement”and “in case of equal guilt, the position of the defendant isbetter than that of the plaintiff.Illustration X promises Y to pay Rs 10,000 if he murders Z. IfY commits the murder, he cannot recover the amount from X.If X has already paid the amount and Y fails in murdering Z, Xcannot recover the amount back.

Practical ProblemsAttempt the following problems, giving reasons for youranswers:1. A promises to pay a certain ‘slim of money to B,”

wHs.f’is’8l1' intended witness in a suit against A, inconsideration of B’s absenting hit P self-at-the trial. Babsents I but fails to get the money. Can he recover?

(Hint. B cannot recover the money because an agreement, whichtends to create a conflict, between interest and duty is illegal andvoid being opposed to public

2. In a suit by A against B for the recovery of Rs 5,000, A is inneed of money. C agrees to provide funds to A inconsideration of sharing one-fourth’ of the moneyrecovered from B.’ Decide the validity of the agreementbetween C and A.

[Hint. The agreement between C and A is valid. It is a champer-tous agreement which is valid provided its terms are fair andreasonable and is made with a bona fide object of. assisting ajust claim.]3. A, while his wife B was alive, promised to marry C in the

event of B’s death. Subsequently B died but A refused tomarry. C sues A for damages for breach of promise.Decide.

[Hint. C will not succeed because an agreement for futuremarriage, after the death of first wife is against good publicmorals and hence illegal and void (Wilson vs Carnley, 1908, 1K.B. 729)]5. A, entered into an agreement with B and engaged B for the

purpose of informing puja (prayer) for A’s success in a suitwhich he had before the court and promised to pay Rs2,000 in the event of success. A succeeded in the suit. Bsued A for the amount agreed upon. Will B succeed?

[Hint. ‘No, B will not succeed as the object of the agreement isto interfere with the course of justice, making the agreementillegal and void. It has been held that where the object of anagreement is to exercise some extraneous influence, unautho-rized by law, on the mind of the court, the agreement iscontrary to public policy and hence void [Bhagwan Datt Shastrivs Raja Ram, (1927) All. 406]. However, in BalasundaraMudaliar vs Mahomed Usman, A.I.R. (1929) Mad. 812, apromise of reward by a Muslim litigant to a Hindu devotee inconsideration of offering prayers for the success of his suit hasbeen held not against public policy. Thus accordingly theagreement between A and B is valid and B must succeed.]6. X’s estate is sold for arrears of revenue under the

provisions of an Act of the Legislature, by which adefaulter is prohibited from purchasing the estate. Y, uponthe understanding with X, becomes the purchaser andagrees to convey the estate to X for the price, which Y haspaid. Is this agreement valid?

Solution: Section to which the given problem relates: Section 23.Decision: The agreement is void.Reason: This agreement results in an indirect purchase by thedefaulter and hence it defeats the object of the law by which adefaulter is prohibited from purchasing the estate.7.” X, Y and Z enter into an agreement for the division among

them of gains acquired or to be acquired by them by fraud.Is this agreement valid?

Solution: Section to which the given problem relates: Section 23.Decision: This agreement is void.Reason: The object of this agreement is unlawful as it isfraudulent.8. X borrowed Rs 1,000 from Y. X executed a bond

promising to work for Y without pay for 2 years and in


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case of default agreed to pay interest at 10% per monthand the principal amount at once. Is this agreement valid?

Solution: Section to which the given problem relates: Section 23.Decision: This agreement is void.Reason: The object of this agreement is unlawful as it involvesan injury to another person. [Leading case: Ram Saroop v. BansiMandar]9. X let a flat on hire to y, a prostitute, knowing that it would

be used for immoral purposes. Is this agreement void?Solution: Section to which the given problem relates: Section 23.“Decision: The agreement is void. Reason: The object of thisagreement is immoral. -[Leading case: Pearce v. Brooks]10. X knowing that Y has committed a murder, obtains a

promise from Y to pay him (X) Rs 5,00,000 inconsideration of not exposing Y. Is this agreement valid?

Solution: Section to which the given problem relates: Section 23.Decision: The agreement is void.Reason: This agreement is opposed to public policy as it is forstifling prosecution.11. X promises to pay Y Rs 1,00,000 if Y secures him an

employment in the public service. Is tip’s agreement valid?Solution: Section to which the given problem relates: Section 23.Decision: The agreement is void.Reason: The agreement is opposed to public policy as it is forthe sale of public office.






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LESSON 10:VOID AGREEMENTS

Learning OutcomesAfter today’s class you should be able to answer the followingquestions;• The agreements expressly declared to be void• The uncertain agreements• The wagering agreements

IntroductionIn today’s lecture we shall study about void agreements andtheir different classesYou all must be aware by now that“An agreement not enforceable by law is said to be void”[Sec.2(g)]. Thus a void agreement does not give rise to any legalconsequences and is void ab-initio. In the eye of law such anagreement is no agreement at all from its very inception.We have already dealt with the following types of void agree-ments in the preceding chapters, and will not therefore discussthem here again: The preceding chapters, and will not thereforediscuss them here again:1. Agreements by a minor or a person of unsound mind

(Sec. 11).2. Agreements made under a bilateral mistake of fact material

to the agreements(Sec. 20).3. Agreements of which the consideration or object is

unlawful (Sec. 23).4. Agreements of which the consideration or object is

unlawful in part and the illegal part cannot be separatedfrom the legal part (Sec. 24).

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

Expressly Declared Void AgreementsThe last essential of a valid contract as declared by Section 10 isthat it must not be one which is ‘expressly declared’ to be voidby the Act. Thus, there arises a question, as to what are‘expressly declared’ void agreements? The following agreementshave been ‘expressly declared’, to be void by the IndianContract Act:1. Agreements in restraint of marriage (Sec. 26).2. agreements in restraint of trade (Sec. 27).3. Agreements in restraint of legal proceedings (Sec. 28).4. Agreements the meaning of which is uncertain (Sec. 29)5. Agreements by way of wager (Sec. 30).6. Agreements contingent on impossible events (Sec. 36).7. Agreements to do impossible acts (Sec. 56).At the very outset, it may be borne in mind that the lawdeclares these agreements void ab-initio and not illegal, andtherefore transactions collateral to such agreements are notmade void. In fact it is for this reason that these agreements

have not been discussed in the preceding chapter. Illegalagreements are also ‘unlawful agreements’ as they are expresslydeclared void by the Contract Act. It may be recalled that in thecase of illegal agreements, transactions collateral to them are alsotainted with illegality and hence void.1. Agreements in Restraint of MarriageEvery individual enjoys the freedom to marry and so accordingto Section 26 of the Contract Act “every agreement in restraintof the marriage of any person, other than a minor, is void.”The restraint may be general or partial but the agreement isvoid, and therefore, an agreement agreeing not to marry at all, ora certain person, or a class of persons, or for a fixed period, isvoid. However, an agreement restraining the marriage of aminor is valid under the Section.It is interesting to note that a promise to marry a particularperson does not imply any restraint of marriage, and is,therefore, a valid contract.

Illustrations(a) Agrees with B for good consideration that he will not

marry C. It is a void agreement.(b) A agrees with B that she will marry him only. It is a valid

contract of marriage.2. Agreements in Restraint of TradeThe Constitution of India guarantees the freedom of trade andcommerce to every citizen and therefore Section27 declares“every agreement by which any one is restrained from exercisinga lawful profession, trade or business of any kind, is to thatextent void,” Thus no person is at liberty to deprive himself ofthe fruit of his labour, skill or talent, by any contracts that heenters into.It is to be noted that whether restraint is reasonable or not, if itis in the nature of restraint of trade, the agreement is voidalways, subject to certain exceptions provided for statutorily.

Illustration.An agreement whereby one of the parties agrees to close hisbusiness in consideration of the promise by the other party topay a certain sum of money, is void, being an agreement inrestraint of trade, and the amount is not recoverable, if theother party fails to pay the promised sum of money ( MadhubChander vs Raj Kumar)But agreements merely restraining freedom of action necessaryfor the carrying on of business are not void, for the law doesnot intend to take away the right of a trader to regulate hisbusiness according to his own discretion and choice.

IllustrationAn agreement to sell all produce to a certain party, with astipulation that the purchaser was bound to accept the wholequantity, was held valid because it aimed to promote business


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and did not restrain it (Mackenzie vs Striramiah). But where in asimilar agreement the purchaser was free to reject the goods (i.e.,was not bound to accept the whole quantity tendered) it washeld that the agreement was void as being in restraint of trade(Sheikh Kalu vs Ram Saran).

ExceptionsAn agreement in restraint of trade is valid in the following cases(i) Sale of goodwill. The seller of the ‘goodwill’ of a business

can be restrained from carrying on a similar business,within specified local limits, so long as the buyer, or anyperson deriving title to the goodwill from him, carries on alike business therein, provided the restraint is reasonable inpoint of time and space (Exception to Sec. 27).

Illustrations

(a) A after selling the goodwill of his business to B promisesnot to carry on similar business “anywhere in the world.”As the restraint is unreasonable the agreement is void.

(b) C a seller of imitation jewellery in London sells hisbusiness to D and promises that for a period of two yearshe would not deal: (a) in imitation jewellery in England,(b) in real jewellery in England, and (c) in real or imitationjewellery in certain foreign countries. The first promisealone was held lawful. The other two promises, namely (b)and (c), were held void as the restraint was unreasonable inpoint of space and the nature of business (Goldsoll vsGoldma).

(ii) Partners’ agreements. An agreement in restraint of tradeamong the partners or between any partner and the buyerof firm’s goodwill is valid if the restraint comes within anyof the following cases:

(a) An agreement among the partners that a partner shall notcarry on any business other than that of the firm while heis a partner .

(b) An agreement by a partner with his other partners that. onretiring from the partnership he will not carry on anybusiness similar to that of the firm within a specifiedperiod or within specified local limits, provided therestrictions imposed are reasonable [Section 36(2) of thePartnership Act}.

(c) An agreement among the partners, upon or in anticipationof the dissolution of the term, that some or all of themwill not carry on a business similar to that of the firmwithin a specified period or within specified local limits,provided the restrictions imposed are reasonable (Section54 of the Partnership Act).

(d) An agreement between any partner and the buyer of thefirms that such partner will not carry on any businesssimilar to that of the firm within a specified period orwithin specified local limits, provided the restrictionsimposed are reasonable [Section 55(3) of the Partnership ,Act.]

(iii) Trade combinations. As pointed out earlier, an agreement,the Ii primary object of which is to regulate business andnot to restrain it, is valid. Thus, an agreement in the natureof a business combination between traders or

manufacturers e.g., not to sell their goods below a certainprice, to pool profits or output and to divide the same inan agreed proportion, does not amount to a restart oftrade and IS perfectly valid (Fraser & Co. v Bombay IceCompany5). Similarly, an agreement amongst the tradersof a, particular locality with the object of keeping the tradein their own hands is not void merely because it hurts arival in trade (Bhola Nath vs Lachmi Narain). But if anagreement attempts to create a monopoly, it would be void(Kameshwar Singh vs Yasin Khan). Agreements tendingto create monopolies are now also governed by theprovisions of the Monopolies and Restrictive TradePractices Act, 1969, which forbids certain types of tradeagreements.

(iv) Negative stipulations in service agreements. An agreementof service by which a person binds himself during theterm of the agreement, not to take service with anyoneelse, is not in restraint of lawful profession and is valid.Thus a chartered accountant employed in a company maybe debarred from private practice or from serving elsewhereduring the con-tinuance of service (Maganlal vs AmbicaMills Ltd. 8) But an agreement of service which seeks torestrict the freedom of occupation for some period, afterthe termination of service, is void. Thus, where S, whowas an employ-ee of Brahmputra Tea Co. Assam, agreednot to employ himself or to” change himself in any similarbusiness within 40 miles from Assam, for a period of fiveyears from the date of the termination of his service, it washeld that the agreement is in restraint of lawful professionand hence void (Brahamputra Tea Co. vs Scarth).

3. Agreements in Restraint of Legal ProceedingsSection 28, as amended by the Indian Contract(Amendment) Act, 1996, declares the following three kindsof agreements void:

(a) An agreement by which a party is restricted absolutely nomtaking usual legal proceedings, in respect of any rightsarising Item a contract.

(b) An agreement which limits the time within which one mayenforce his contract rights, without regard to the timeallowed by the Limitation Act.

(c) An agreement ‘which provides for forfeiture of any rightsarising from a contract, if suit is not brought within aspecified period, without regard to the time allowed by theLimitation Act.

Restriction on Legal proceedings. As stated above Section 28renders every agreement in restraint of legal proceedings void.This is in furtherance of what we studied under the definitionof a ‘contract’, namely, agreement plus ‘enforceability at law is acontract. Thus if an agreement inter-alia provides that no partyshall ‘-go to a court of law, in case of breach, there is no contractand the agreement is void ab-initio. In this connection thefollowing points must also be borne in mind:(a) The Section applies only to rights arising from a contract. It

does not apply to cases1o of civil or criminal wrongs ortorts.


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(b) This Section does not affect the law relating to arbitratione.g., if the parties agree to refer to arbitration any disputewhich may arise between them under the contract, such acontract is valid (Exceptions 1 and 2 to Section 28).

(c) The Section does not affect an agreement whereby partiesagree “not to file an appeal” in a higher court. Thus whereit was agreed that neither party shall appeal against the trialcourt’s decision, the agreement was held valid, for, Section28 applies only to absolute restriction on taking the legalproceedings, whereas here the restriction is only partial asthe parties can go to a court of law alright and the onlyrestriction is that the losing party cannot file an appeal(Kedar Nath vs Ramlal).

(d) Lastly, this Section does not prevent the parties to acontract from selecting one of the two courts which areequally competent to try the suit. Thus in A. Milton & Co.vs qjha Automobile Engineering Company’s Casel2, therewas an agreement which inter-alia provided “Any litigationarising out of this agreement shall be settled in. the HighCourt of Judicature at Calcutta, and in no other courtwhatsoever.” The defendants filed a suit in Agra whereasthe plaintiff brought a suit in Calcutta. It was held that theagreement was binding between the parties and it was notopen to the defendants to proceed with their suit in Agra.

Curtailing the period of limitation. Any agreement curtailingthe period of limitation prescribed by the Limitation Act is alsovoid under .section 28. Thus, if a clause in an agreementbetween A and B provides that either party can sue for breachwithin a year of breach only, the clause is void and despite theclause the parties have a right to sue in case of breach Such casescome under “Agreements Stifling Prosecutions” which havebeen discussed in the preceding chapter.by either party withinthe time allowed by the Limitation Act i. e.. within three’ yearsfrom the date of breach. It is relevant to state that agreementsextend tile period of limitation prescribed by the Limitation Actare also void, not under this Section but under Section 23, asthe object will be to defeat the provisions of the law (RamaMurthy vs Gopayya).Forfeiture of contract rights. Under Clause (c) of Section 28(stated above) an agreement which provides for forfeiture ofany rights arising from a contract, if suit is not brought within aspecified time (say 3 months) is also void. This Clause was’inserted by the Indian Contract (Amendment) Act, 1996.The distinction between Clause (b) and Clause (c) of Section 28(stated above) may be noted. Under Clause (b), the agreementlimits the time withinwhich one may enforce his contract rights thereby curtailing the.period of limitation prescribed by the Limitation Act, whereasunder Clause (c), the agreement limits the time within whichone is to have any contract tights to enforce. Thus, Clause (c)refers to an agreement which does not affect the remedy forbreach but which extinguishes the right itself after the specifiedtime and such a stipulation has also been declared void.The background behind the passing of the Indian Contract(Amend-ment) Act, 1996 may be briefly stated as follows. Priorto this Amendment Act, the insurance policy documents issued

by general insurance companies invariably provided that if aclaim is rejected and a suit is not tiled within three months aftersuch rejection, all benefits under the policy shall be forfeited.Such a provision was held valid and binding on the ground thatit is outside the scope of Section 28 (Baroda Spinning Co. Ltd.vs Satya-narayan Marine & Fire Insurance Co. Ltd. 14). Thelearned judge observed: “what the plaintiff was forbidden todo was to limit the time within which he was to enforce hisrights; what he has done is to limit the time within which he isto have any rights to enforce; and that appears to me to be avery different thing”. However, the Supreme Court in the FoodCorporation of India vs New India insurance Co. Ltd. (1994).Case held that insurance contracts restraining the time periodwithin which one is to have any con-tract rights to enforce wereviolative of the Limitation Act. The Parliamenthas therefore amended Section 28 by inserting a new clause.Accordingly henceforth general insurance companies cannotinsist that suits for claims be brought within a period of timesmal1er than the period provided under the Limitation Act,otherwise all benefits under the policy shall be forfeited.Uncertain Agreements“Agreements, the meaning of which is ‘not certain, or capableof being made certain, are void” (Sec. 29). Through Section 29the law aims to ensure that the parties to a contract should beaware of the precise nature and scope of their mutual rights andobligations under the contract: Thus, words used by the partiesare vague or indefinite, the law cannot enforce the agreement.’Illustrations (to Sec. 29).(a) A agrees to sell to B ,”a hundred tons of lories nothing

whatever to’ show what kind of oil was intended. Theagree void for uncertainty.

(b) A, who is a dealer in coconut oil only, agrees to sell to B“one hundred tons. The nature of A ‘s trade affords anindication of the meaning of the words, last entered into acontract for the sale of one hundred tons of coconut oil.

(c) A agrees to sell to B “one thousand mounds of rice at aprice to be fixed As the price is capable of being madecertain, there is no uncertainty here the agreement void.

(d) A agrees to sell to B “his white horse for rupees fivehundred or rupees one oil.” There is nothing to showwhich of the two prices was, to be given. The agreement isvoid.

Further, an agreement of to enter into an agreement in future”is void certainty unless all’ the terms of the proposed agreementare agreed sly or implicitly. Thus, an agreement to engage aservant some time next year, at a salary to be mutually agreedupon is a void agreement.5. Wagering AgreementsWhat is a wager? Literally the word ‘wager’ means a ‘a bet.:something to be lost or won on the result of a doubtful issue”and, therefore, wagering agreements are nothing but ordinarybetting agreements. Thus A and B mutually agree that if it rainstoday A will pay B Rs 100 it does not rain B will pay A Rs 100or where C and D enter into agreement that on tossing up a


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coin, if it falls head upwards C will pay O and if it falls tailupwards D will pay C Rs 50; there is, a wagering agreementA ‘wager’ can be described as, follows: “The agreement ofgaming and wagering’ is that one party is to win and the other eupon a future every which at the time C the contract is of an ain nature - that is to say, if the event turns out one way A willlose; I it turns out the other way he will win.”Possibly the most expressive and all-encompassing definitionof a “was agreement” was given by, Hawkins., in Carlill vsCarboli,c Smoke Ball Co.‘A wagering contract is one by which two persons professing tohold opposite views touching the issue of a future uncertainevent mutually agree independent upon the determination ofthat event, one shall win from the and the other shall pay orhand over to him, a sum of money or other neither of thecontracting parties having any other interest ill that contract thanthe sum of stake he will so win or lose, there being ‘no otherreal consideration ‘for the making of such contract by either ofthe parties. It is essential to a wagering contract that each partymay under it either win or lose, whether he will win or losebeing dependent on the issue of the event, and, therefore,remaining ‘uncertain until that issue is known. If either’ of theparties may win but cannot lose, or may lose but cannot win, itis not a wagering contract.”Certain aspects of the above definition require to beemphasised. In me first place, wager is a game of chance inwhich the contingency of either gain or loss is wholly depen-dent on an ‘uncertain event.’ An event may be uncertain., notonly because it is a future event, but because it is not yet knownto the parties. Thus a wager may be made upon the result ofthe cricket match which is to take place”, next month in Calcutta,or upon the result of an election which is over, if the parties donot know the result. Secondly, the parties to a wager must haveno interest in the event’s ‘hap-pening or non-happening exceptthe winning or losing of the bet laid be-tween them. It is herethat wagering agreements differ from insurance contracts whichare valid because parties have an interest to protect the life orproperty, and have, for that very reason, entered into thecontract of insurance.Essential features of a wager. The essentials of a wageringagreement may thus be summarised as follows:(a) There must bean promise to pay money or money’s

worth,_(b) The promise must be conditional on an event’s happening

or not happening(c) The event must be an uncertain one. If one of the parties

has the event in his own hands, the transaction is not awager.

(d) Each party must stand to win or lose under the terms ofagreement. An agreement is not a wager if one party- mayonly win and cannot lose, or if he may lose but cannotwin, or if he can neither win nor lose.

(e) No party should have a proprietary interest in the event.The stake must be the only interest which the parties havein the agreement.

An agreement by way of a wager , void. Section 30 lays downthat “agreements by way of wager are void; and no suit shall bebrought or recovering anything alleged to be won on any wager,or entrusted to any person to abide the result of any game orother uncertain event on which any wager if made.” Thus,where A and B enter into an agreement which provides that ifEngland’s cricket team wins the test match, A will pay B Rs,100, and if it loses B will pay Rs. 100 to A, nothing can berecovered by the winning party under the agreement, it being awager. Similarly, where C and D enter into a wagering agreementand each deposits Rs 100 with Z. instructing him to, pay or givethe total sum to the winner, no suit can ‘be brought by thewinner for recovering the. bet amount from Z, the stake-holder.Further, if I.. had paid the sum to the winner, the loser cannotbring a suit. for recovering his Rs 100, either against the winneror against Z, the stake-holder, even if Z had paid after theloser’s definite instructions not to pay. Of course the loser canrecover back, his deposit if he makes the demand before thestake-holder’ had paid it ovation the winner (Ratnakalli vsVochalapu).But even such a deposit cannot be recovered by a loser. in theStates of Maharashtra and Gujarat. where such an agreement isvoid and illegal.The Section makes an exception in favour of certain prizes forhorse racing by providing further that “This Section shall not bedeemed to render unlawful’” a subscription, or contribution, oragreement to subscribe or con-tribute, made or entered into foror toward any plate, prize or sum of money, of the value oramount of five hundred rupees or upwards, to be awarded tothe winner or winners of any horse race.” Thus, a bet on ahorse race carrying a prize of Rs 500 or more to the winners hasbeen made valid under the exception. But with a view toprotecting the poor persons from gambling, a bet on a’ horserace carrying a prize of less than Rs 500 remains a wager.It is important to note that in the States of Maharashtra andGujarat wagering agreements are, by a local statute, not onlyvoid but also illegal. As a result in these states the collateraltransactions to wagering agreements become tainted withillegality and hence are void.Special cases. We now turn to certain special cases in order toexamine as to whether they are wagers:Commercial transactions. Agreements for sale and purchase ofany commodity or share market transactions, in which there is agenuine inten-tion to ‘do legitimate business i. e., to give andtake delivery of goods or shares, are not wagering agreements.If there is no such genuine intention and parties only want togamble on the rise or fall of the market by paying or receivingthe differences in prices only, the transaction would be a wa-gering agreement and therefore void. “In order to constitute awagering contract, neither party should intend to perform thecontract itself, but only to pay the differences”Lotteries. A lottery is a game of chance. Hence the lotterybusiness is a wagering transaction. Such a transaction is not onlyvoid but also illegal because 294-A of the Indian Penal Codedeclares ‘conducting of lottery a punishable offence. If a lotteryis authorized by the Government, the only effect of suchpermission is that the persons conducting the lottery (i. e., the


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persons running the lottery and the buyer of lottery ticket) willnot. be guilty of a criminal offence, but the lottery remains awager alright (Dorabji Tata vs Lance). . .Crossword puzzles. Where prizes depend upon a chance, it is ‘alottery and therefore a wagering transaction. Thus a crosswordpuzzle, in which prizes depend upon correspondence of thecompetitor’s solution with a previously prepared solution, is awager. But if prizes depend upon skill and intelligence, it is avalid transaction. Thus prize competitions which are games ofskill and in which an effort is made to select the best competitore.g., picture puzzles, literary competitions and athletic competi-tions are not wagers. Even in such competitions .the amountof prize should not exceed Rs 1,000, otherwise they shall bewagers as per the provisions of the Prize Competition Act,1955.Insurance contracts. Insurance contracts are valid contracts eventhough they provide for payment of money by the insurer ,onthe happening of a future uncertain event. Such contracts differfrom wagering agreements mainly in three respects:(a) The holder of an insurance policy must have an ‘insurable

interest’ in the event upon which the insurance moneybecomes payable. ‘thus con-tracts of insurance are enteredinto to protect an interest. In a wagering agreement there isno interest to protect and the parties bet exclusively becausethey can thereby make some easy money.

(b) Contracts of insurance are based on scientific and actuarialcalculation whereas wagering agreements are a gamblewithout any scientific calculation of risks.

(c) Contracts of insurance are regarded as beneficial to thepublic, whereas wagering agreements do not serve anyuseful purpose.

6. Agreements Contingent on Impossible Events“Contingent agreement to do or not to do anything, if animpossible event happens, are void, whether the impossibilityof the event is known or not to the parties to the agreement atthe time when it is made.” (See.. 36)

Illustrations (to Sec. 36).

(a) A agrees to pay B Rs 1,000 (as a loan) if two straight linesshould enclose a space. The agreement is void.

(b) A agrees to pay B Rs. 1,000 (as a loan) if B will marry A’sdaughter, C. C was dead at the time of the agreement. Theagreement is void.

7. Agreements to do Impossible Acts“An agreement to do an act impossible in itself is void.” (Sec.56 Para 1

Illustrations

(a) A agrees with B to discover treasure by magic. Theagreement is void [Illustration (a) to Section 56].

(b) A agrees with B to run with a speed of -100 Kilometers perhour. The agreement is void.

No RestitutionThe term ‘restitution’ means ‘return’ or ‘restoration’ of thebenefit received from the plaintiff under the agreement. As per

Section 65 , no restitution ,of the benefit received is allowed inthe’ case of expressly declared void agreements.

Practical ProblemAttempt the following problems, giving reasons for youranswers:1. A agrees to sell all the goods manufactured by him in the

ensuring season to B. In breach of the said agreement Asold some goods manufactured during the said season toC. Thereupon B sued A for breach of contract. Will Bsucceed?

{Hint: Yes, B will succeed because the agreement between himand A is valid as it aims to promote business and does notrestrain it.}2. A agrees to sell his cow to B for Rs 500 if the cow gives 6

kg milk every day, but for Rs 10 only if it fails to do so. Thecow fails, whereupon B demands the cow for Rs. 10 asagreed. A refuses. Bbrings a suit against him. Will Bsucceed?

[Hint: No, B will not succeed as the transaction, throughostensibly a sale, is in reality a wager ( Brogden vs Marriott)3. A lends money to B to enable him to pay off the loss

which he has sustained in a wagering transaction with C.Can A recover the money lent by him?

[ Hint: A can recover, because an agreement collateral to awagering agreement remains valid except in Maharashtra andGujarat States where wagering agreements are illegal.]4. A and B are partners in a business. They enter into a

wagering agreement with a third party. On losing the bet Asatisfies his own and also B’s liability under the agreement.Can A claim from B the amount paid on his behalf?

[Hint. Yes, A can claim the amount from B because a wageringagreement is only void and not illegal and therefore a collateralcontract can be enforced.]

True or False QuestionsState whether the following statements are true or false:1. The performance of a contingent contract depends upon

the happening of some future event.2. The performance of a contingent contract depends upon

the non-happening of some future event.3. The event in. a contingent contract must be essential to the

contract. 4. The event in a contingent contract may becertain, or uncertain.

5. The performance of a contingent contract must notdepend upon mere will of the promisor.

6. Contracts contingent upon the happening of an uncertainfuture event becomes avoidable at the option ofpromisee if that event becomes impossible.

7. Contracts contingent upon the non-happening of a certainfuture event cannot be enforced if the happening of thatevent becomes impossible.

8. Contracts contingent upon the happening of an uncertainspecified event within a fixed time can become void onlyafter the expiry of the fixed time.


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9. Contracts contingent upon the non-happening of anuncertain specified event within a fixed time can beenforced only after the expiry of the fixed time.

10. Agreements contingent upon impossible events are voidonly if the parties to the agreements at the time when theseare made know the impossi-bility of the event.

Answers





And Commercial Laws,” Tata Mc. Graw Hill Pvt. Ltd,Delhi

Notes

1. False 5. True 9. False

2. False 6. . False 10. False

3. False 7. False

4. False 8. False


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11.555 61

LESSON 11:QUASI CONTRACTS AND CONTINGENT CONTRACTS

Learning OutcomesAfter today’s class you should be able to answer the followingquestions:• The meaning of quasi contract• The different types of quasi contract• The meaning of contingent contract• The nature and effect of contingent contract• The differences between wagering and contingent

contracts.The first of all we will start with the Quasi Contracts

Quasi Contracts

IntroductionWe have seen that a contract is the result of an agreementenforceable by law. But in some cases there is no offer, noacceptance, no consensus ad idem and in fact no intention on thepart of parties to enter into a contract and still the law, from theconduct and relationship of the parties, implies a promiseimposing obligation on the one party and conferring a right infavour of the other.In other words under certain special circumstances obligationsresembling those created by a contract are imposed by lawalthough the parties have never entered into a contract. Suchobligations imposed by law are referred to as ‘Quasi-Contracts’or ‘Constructive Con-tracts’ under the English law, and “certainrelations resembling those cre-ated by contracts” under theIndian law. The term’ quasi-contract’ has been used becausesuch a contract resembles with a contract so far as result or effectis concerned but it has little or no affinity with a contract inrespect of mode of creation.A quasi-contract rests upon the equitable “doctrine of unjustenrich-ment” which declares that a person shall not be allowedto enrich himself unjustly at the expense of another. Duty, andnot a promise or agreement, is the basis of such contracts. Itmay be noted that a suit for damages for the breach of thecontract can be filed in the case of a quasi-contract in the sameway as in the case of a completed contract (Sec. 73).The Contract Act deals with ‘quasi-contractual obligations’under Sections 68 to 72, which are discussed below:I. Claim for necessaries supplied to a person incapable of

contract-ing or on his account (Sec. 68). “If a person,incapable of entering into a contract, or anyone whom he islegally bound to support, is supplied by another personwith necessaries suited to his condition in life, the person.who has furnished such supplies is entitled to bereimbursed from the property of such incapable person.”

This provision has already been considered in connection withminor’s agreements in the chapter of “Capacity of Parties.”With a view to recapitu-late it may be stated here that although

agreements by minors, idiots, luna-tics, etc., are void ab-initio,but Section 68 makes an exception to this rule by providing thattheir estates are liable to reimburse the supplier who suppliesthem or to some one whom they are legally bound to supportwith ‘necessaries’ of life. The following points need to beemphasized:(i) The Section does not create any personal liability but only

the estates are liable.(ii) The things supplied must come within the category of

‘necessaries’. The word ‘necessaries’ here covers not onlybare necessities of existence, e.g.. food and clothes, but allthings which are reasonably necessary to the incompetentperson, having regard to his status in society, e.g., a watch, aradio, a bicycle may be included therein.

(iii) Necessaries should be supplied only to such incompetentperson or to some one

whom he is legally bound to support such as his wife andchildren.

(iv) Incompetent person’s property is liable to pay onlyreasonable price for the goods or services supplied and notthe price which the incompetent person might have agreedto pay(legally speaking an incompetent person cannot agreeto anything).

Illustrations (to See 68)

(a) A supplies B, a lunatic, with necessaries suitable to hiscondition in life. A is entitled to be reimbursed from B’sproperty.

(b) A supplies the wife and children of B, a lunatic, withnecessaries suitable to their condition in life. A is entitled tobe reimbursed from B’s property.

2. Reimbursement of person paying money due by another,in pay-ment of which he is interested (Sec. 69). “A personwho is interested in the payment of money which anotheris bound by law to pay, and who therefore pays it, isentitled to be reimbursed by the other.”

Illustration (to Sec. 69).B holds land in Bengal, on a lease granted by the zamindar. Therevenue payable by A to the Government being in arrear, hisland is advertised for sale by the Government. Under therevenue law, the. conse-quence of such sale will be the annul-ment of B’s lease. B, to prevent the sale and the consequentannulment of his own lease, pays to the government the sumdue from A. A is bound to make good to B the amount sopaid.In order to make Section 69 applicable, the following conditionsmust be satisfied:(i) The plaintiff should be interested in making the payment

in order to protect his own interest and the payment


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should not be voluntary one. Moreover, the payment musthave been done in good faith and not to manufactureevidence of title to land or any other thing.

Illustrations.

(a) A sub-tenant pays the arrears of rent due by the tenant thelandlord, in order to save the tenancy from forfeiture. Thesub-tenant is entitled to recover from the tenant, theamount paid by him to the landlord, although there is nocontract between the two.

(b) A, pays the arrears of rent of his neighbour B, just toavoid a struggle between B and his landlord. A cannotrecover from B as he acted voluntarily and had no interestof his own in the payment. [But if B should agree toreimburse A, this would be a good contract under Section25(2).]

(ii) The payment must be such as the other party was boundby law to pay.

Illustration a’s goods were wrongfully attached to. realise thearrears of Government revenue due by B. A pays the dues tosave the goods from being sold. He is entitled to recover theamount from B (Abid Hussain vs Ganga Sahai).(iii) The payment must not be such as the plaintiff himself

was bound to pay. He should only be interested in makingthe payment. In other words, a suit under this section ismaintainable only for reimbursement and not forcontribution. Thus, where there is a joint liability on jointwrong doers and only one of them discharges the liability,no suit for contribution from the other would bemaintainable under this Section (Ramkrishna vsRadhakrishana). [A suit for contribution from the otherjoint promisor would be maintainable under Section 43.]

Illustration A and B have been fined jointly Rs500 for sellingadulter-ated ghee. A alone pays the amount of fine in goodfaith, A cannot later claim contribution from B under Section69. Notice that although B was bound by law to pay and A haspaid B’s share in good faith, yet A cannot recover as he himselfwas bound to make the payment, being jointly liable with Band was not simply inter-ested in making the payment. [A can,however, claim contribution form B under action 43.]3. Obligation of person enjoying benefit of non-gratuitous

act (Sec. 70). This is the third type of quasi-contractprovided in the Contract Act. Section 70 lays down thus,“Where a person lawfully does anything for anotherperson, or delivers anything to him, not intending to doso gratui-tously, and such other person enjoys the benefitthereof, the latter is bound to make compensation to theformer in respect of, or to restore, the thing so done ordelivered.”

For giving rise to a right of action under this Section, thefollowing three conditions must be fulfilled:(i) The thing must have been done lawfully in good faith.

This means that the act done must be in pursuance of theimplied wishes (because there should not be any request inthe case of a quasi-contract) and in the presence of the

other party, giving him the full choice to reject the thing orservice.

(ii) The thing must have been done by a person not intendingto act gratuitous i.e., it must have been done with theintention of being paid for. .

(iii) The person for whom the act is done must have enjoyedthe benefit of the act.

Illustrations

(a) A, a tradesman, leaves goods at B’s house by mistake. Btreats the goods as his own. He is bound to pay A forthem. [Illustration to Section 70].

(b) A saves B’s property from fire. A is not entitled to.compensation from B if the -circumstances show that heintended to act gratuitously. [Illustration to Section 70]

(c) Where a coolie takes the luggage at the railway stationwithout being asked by the passenger or a shoe-shinerstarts shining shoes of the passenger without being askedto do so, and if the passenger does not object to that, thenhe is bound to pay reasonably for the same as the work wasnot intended to be gratuitous. .

4. Responsibility of finder of goods (Sec. 71). Section 71 laysdown another circumstance in which also a quasi-contractual obligation is to be presumed. It says: “Aperson.. who finds goods belonging to another and takesthem into his custody, is subject to the same responsibilityas a bailee. Thus law between the owner and finder of thegoods also implies an agreement and the latter is deemedto be a bailee.

Duties of finder of goods. He must try to find ‘out the real,’owner of the goods and must not appropriate the property tohis own use. If the real owner is traced, he must restore thegoods to him on demand. If he does not take these measures,he will be guilty of criminal misappropriation of the propertyunder Section 403 of Indian Penal Code. Further, till the goodsare in possession of the finder, he must take as much care ofthe goods as a man of ordinary prudence would, under similarcircumstances, take of his own goods of the same bulk, qualityand value (Sec. 151).The rights of a finder of goods have been discussed in Sections168-.169 which provide as follows:Rights of finder of goods. Till the true owner is found out, hecan retain possession of the goods against everybody in theworld. He is entitled to receive from the true owner, all expensesincurred by him for preserving the goods or finding the trueowner. He has a lien on the goods for the money so spent i.e.,he can refuse to redeem the goods to the true owner until thesemoneys are paid. He is not entitled to file a suit for the recoveryof such sums. But he can file a suit against the owner to recoverany reward, which was offered by the owner for the return ofthe goods, provided he came to know of the offer of rewardbefore actually finding out the goods.The finder of goods is entitled to sell the goods if the ownercannot be found out or if he refuses to pay the lawful chargesof the finder, in the following two situations only:


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(a) When the thing is in danger of perishing or of losing thegreater part of its value, or

(b) When the lawful charges of the finder amount to two-thirds of the value of the goods found. The true owner isentitled to get the balance of sale proceeds, if there issurplus after meeting the lawful charges.

It is to be noted that no one except the real owner can claimpossession of goods from the finder. If anybody deprives himof the possession of the goods, he can file a suit for damagesfor trespass.Illustration. H picked up a diamond on the floor of F’s shopand handed it over to F to keep it till the owner appeared. Inspite of best efforts the true owner could not be searched. Afterthe lapse of some weeks, H tendered to F the lawful expensesincurred by him for finding the true owner and an indemnitybond and requested him to return the diamond to him (i.e.,H). F refused to do so. Held, F must return the diamond to Has he was entitled to retain the goods as against everybodyexcept the true owner (Hollinsvs FowlerS).5. Liability of person to whom money is paid, or thing

delivered by mistake or under coercion (Sec. 72). This is thefifth and the last kind of quasi-contract mentioned in theAct. Section 72 declares thus, “A person to whom moneyhas been paid, or anything delivered, by mistake or undercoercion, must repay or return it.” Accordingly, if one partyunder a mistake pays to another party money, which is notdue by contract or otherwise, that money must be repaid.

The term ‘mistake’ has been used in the Section without anyqualifi-cation or limitation whatever and comprises within itsscope a mistake of law as well as a mistake of fact (Sales TaxOfficer vs Kanhaiyalal Mukund). The term ‘coercion’ has beenused in its ordinary sense ‘and not as defined in Section 157(Pep/ad Bulakhidas Mills vs Union of India). Here ‘coercion’means ‘under pressure’.

Illustration

(a) A and B jointly owe Rs 100 to C. A alone pays the amountto C, and 13, not knowing this fact, pays Rs 100 over againto C. C is bound to repay the amount to B [illustration toSection 72].

(b) A railway company refuses to deliver up certain goods tothe consignee, except upon the payment of an illegal chargefor carriage. The consignee pays the sum charged in orderto obtain the goods. He is entitled to recover so much ofthe charge as was illegally excessive (illustration to Section72).

(c) A pays some money to B by mistake. It is really due to C. Bmust refund the money to A. C, however, cannot recoverthe amount from B in the absence of privities of contractbetween B and C.

(d) A fruit parcel is delivered under a mistake to R whoconsumes the fruits thinking them as birthday present, Rmust return the parcel or pay for the fruits.

Although there is no agreement between R and the true owner,yet he is bound to pay as the law regards it a quasi-contract.

It is to be noted, that this Section does not cover a, base Wheremoney has been paid in payment of a natural obligation. Thus”where one has paid up a time-barred debt, he cannot recover it.Similarly the Section does not apply when there is a deliberatedisregard of law e.g., where moneys are paid voluntarilyknowing fully well that the contract has become void, it cannotbe recovered under the Section (Ananth Bandhu vs Union ofIndia).Contingent ContractsFirst let us define a contingent contract

DefinitionSection 31 of the Contract Act defines a contingent contract asfollows:“A contingent contract is a contract to do or not to do some-thing, if some event, collateral to such contract does or does nothappen.” Thus it is a contract, the performance of which isdependent upon, the happening or non-happening of anuncertain event, collateral to such contract.Illustration A contract to indemnify B upto Rs20,000, inconsideration of B paying Rs1,000 annual premium, if B’sfactory is burnt. This is a contingent contract.Any ordinary contract can be changed into a contingent contract,if its performance is made dependent upon the happening ornon-happening of an uncertain event, collateral to such contract.For example, the following are contingent contracts:(a) A contracts to sell B 10 bales of cotton for Rs20, 000, if the

ship by which they are coming returns safely.(b) A promises to give a loan of Rs1, 000 to B, if he is elected

the president of a particular association.(c) A promises to pay Rs50, 000 to B if a certain ship does not

return, of course after charging usual premium. (It is acontract of insurance.)

(d) C advances a loan of Rs10, 000 to D and M promises to Cthat if D does not repay the loan, M will do so. (It is acontract of guarantee.)

Contracts of insurance and contracts of indemnity andguarantee are popular instances of contingent contracts.As the performance of a contract is made dependent upon acontingency, contingent contracts are also known as ‘conditional’contracts. But in certain cases a contract may look like a ‘condi-tional’ contract, whereas in fact it may be simply an ordinaryabsolute contract where the promisor undertakes to performthe contract in all events. For example, where A promises to payRs.500 to B, a property broker, if B manages to get a tworooms accommodation for him at a rental of Rs2,500 permonths, it is not a contingent contract, though on the face of it,it appears like a conditional contract. It is an ordinary absolutecontract because the uncertain event (namely, managing to get anaccommodation) itself forms the consideration of the contractand is not a collateral event. Hence it must be clearly understoodthat in the case of contingent contracts the uncertain eventsmust be collateral to such contracts.Collateral event. According to Pollock and Mulla, a collateralevent, means an event which is “neither a performance directlypromised as part of the contract, nor the whole of the consider-


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ation for a promise.” Thus, where C contracts to pay Rs100 toD for white-washing his house on the terms that no paymentshall be made till the completion of the work, it is not collateralto the contract, but is itself a reciprocal promise or is the verything contracted for, and is thus an integral part of the contract.Similarly, a contract for the sale of goods wherein the selleragrees to give delivery of goods after a week provided thepurchaser makes the payment within two days, is an absolutecontract and not a contingent contract because the event(making payment by the buyer) is an integral part of thecontract ( a condition precedent ) and not collateral to thecontract.In simple words, the collateral event is one, which does notform part of consideration of the contract, and is independentof it. For example, A contracts to pay Rs50,000 to B, a contrac-tor, for constructing a building, provided the construction isapproved by an architect. It is a contingent contract because theconsideration of the promise to pay Rs50,000, is the construc-tion of the building, and the event, namely, approval by anarchitect, is a collateral event, which is independent of theconsideration, and it is on the happening of this collateral eventthat the contract shall be enforced.

Essentials of Contingent ContractFrom the foregoing discussion the following two essentials ofa contingent contract become evident:1. The performance of such a contract depends upon the

happening or non-happening of some future uncertainevent.

2. The future uncertain event is collateral i.e., incidental to thecontract.

Rules Regarding the Performances of ContingentContractsThe rules regarding the performance of contingent contracts, ascontained in Sections 32 to 36 of the Contract Act, are givenbelow:1. Contingent contracts to do or not to do anything if an

uncertain future event happens, it cannot be enforced bylaw unless and until that event has happened. If the eventbecomes impossible, such contracts become void (Sec. 32).

Illustrations(a) A makes a contract with B to buy B’s horse if A survives C.

The contract cannot be enforced by law unless and until C, dies in A’s

lifetime.(b) A makes a contract with B to sell a horse to B at a specified

price, if C, to whom the horse has been offered, refuses tobuy it. The contract cannot be enforced by law unless anduntil C refuses to buy the horse.

(c) A contracts to pay B a sum of money (as loan when Bmarries C. C dies without being married to B. The contractbecomes void.

2. Contingent contracts to do or not to do anything if anuncertain future event does not happen, it can be enforcedwhen the happening of that event becomes impossible,and not before (Sec. 33).

Illustration ( to Sec. 33). A agrees to pay B a sum of money (asinsurance claim) if a certain ship does not return (of courseafter charging premium). The ship is sunk. The contract can beenforced when the ship sinks.3. If a contract is contingent upon how a person will act at an

unspecified time, the event shall be considered to becomeimpossible when such person does anything which rendersit impossible that he should so act within any definitetime, or otherwise than under further contingencies (Sec.34).

Illustration (To Sec. 34). A agrees to pay B a sum of money (asloan) if B marries C. C marries D. The marriage of B to C mustnow be considered impossible, although it is possible that Dmay die and that C may afterwards marry B. [If later B actuallymarries C (the D’s widow), it will not revive the old obligationof A to pay the sum, because that came to an end when Cmarried D].4. Contingent contracts to do or not to do anything, if a

specified uncertain event happens within a fixed time,becomes void, if, at the expiration of the time fixed, suchevent has not happened, or if, before the time fixed, suchevent becomes impossible [Sec. 35 (1)].

Illustration ( to Sec. 35). A promises to pay B a sum of money(as loan) if a certain ship returns within a year. The contract maybe enforced if the ship returns within the year, and becomesvoid if the ship is burnt within the year or if the ship does notreturn within the year.5. Contingent contracts to do or not to do anything, if a

specified uncertain event does not happen within a fixedtime, may be enforced by law when the time fixed hasexpired and such event has not happened, or, before thetime fixed has expired, if it becomes certain that such eventwill not happen [Sec. 35 (2)].

Illustration ( to Sec, 35). A promises to pay B a sum of money( as insurance claim) if a certain ship does not return within ayear. The contract may be enforced if the ship does not returnwithin the year, or is burnt within the year.6. Contingent agreements to do or not to do anything, if an

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

Illustrations (to Sec. 36). (a) A agrees to pay B Rs. 1,000 (as aloan), if two straight lines should enclose a space. The agree-ment is void.(a) A agrees to pay B Rs. 1,000 (as a loan), if B will marry A’s

daughter C. C was dead at the time of the agreement. Theagreement is void.

Difference between a Contingent Contract and a WageringAgreementThe main points of distinction between the two are as under:1. A contingent contract is a valid contract but a wagering

agreement is absolutely void.2. In a contingent contract the parties have real interest is the

occurrence or non-occurrence of the event e.g., insurableinterest in the property insured, but in a wager the parties


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are not interested in the occurrence of the event except forthe winning or losing the best amount.

3. In a contingent contract the future uncertain event is merelycollateral whereas in a wagering agreement the uncertainevent is the sole determining factor of the agreement.

Attempt the following problems, giving reasons for youranswers:

Practical Problems1. A, a Hindu minor, fraudulently representing himself as

major, takes a loan of Rs 5,000 for the marriage of hissister from B at 8 per cent interest. Can B recover the loanand the interest? ‘

[Hint. Although the minor cannot be estopped from setting uphis minority. Yet B can recover the loan out of A’s property. Ifany, because marriage expenses of one’s sister are includedwithin the scope of ‘necessaries. (Nanadan Pd. Vs Ajundhia pd.1910, 32 All. 325). Interest, of course , will not be allowed.]2. A contracts to sell a part of a specific crop of potatoes to be

grown on his farms to B for Rs1,000. The delivery is to bemade after two months and the payment is to be madeone month before delivery. Soon after the crop is destroyedby a pest to the knowledge of both the parties but stillmakes the payment as agreed. On the expiry of twomonths, when no potatoes are delivered to B, B sues A forbreach of the contract and for refund of the purchase price.Will B succeed’?

[Hint. No, B will not succeed. The contract in question standsdischarged by subsequent destruction of subject-matter andhence there arises no question of its breach. As regards therefund of purchase price. it also cannot be recovered because Sec.72 does not apply when there is a deliberate disregard of law(Ananth Bandhu vs Dom. of India, A.J.R. 1955. Cal. 626).3. A agreed to construct a building for B for Rs. 2 lakhs, on

the terms that no payment shall be made till thecompletion of the work. Is this a contingent contract?

[Hint. No, this is not a contingent contract because the uncertainevent ( i.e., A’s completing the work ) is not collateral to thecontract but is the very thing contracted for, and is thus anintegral part of the contract.]4. A agrees to sell land to B at a price to be fixed by C. C

refuses to fix the price, the contract enforceable?[Hint. No, the contract is not enforceable because by C’s refusalto fix the price the agreement becomes void for uncertainty interms.]5. A promises to pay B for his services whatever A himself

will think right or reasonable. Later, being dissatisfied withthe payment made, B sues A. Decide.

[Hint. B’s suit will not be admitted by the Court because if theperformance of a promise is contingent upon the mere will andpleasure of the promisor, certain, or capable of being madecertain, are void” (Sec. 29).]






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LESSON 12:PERFORMANCE AND DISCHARGE OF A CONTRACT

Learning OutcomesAfter todays class you should be able to answer the followingquestions:• The performance of a contract• The time and place of performance• The performance of reciprocal promises• The appropriation of payment• The contracts which need not be performed• The modes of discharge of a contract

IntroductionLet us first learn about the performance of a contractSection 37 lays down that the parties to a contract must eitherperform, or offer to perform, their respective promises, unlesssuch performance is dispensed with or excused under theprovisions of this Act, or of any other law. Promises bind therepresentatives of the promisors in case of death of suchpromisors before performance, unless a contrary intentionappears from the contract.

Illustrations(a) A promises to deliver goods to B on a certain day on

payment of Rs. 1,000. A dies before that day. A’srepresentatives are bound to deliver the goods to B, and Bis bound to pay Rs. 1,000 to A’s representatives.

(b) A promises to paint a picture for B by a certain day, at acertain price. A dies before the day. The contract cannot beenforced either by A’s representative or by B [section 37].The performance can be ‘actual performance’ or ‘attemptedperformance’, i.e. ‘offer to perform’.

Section 38 specifies that where a promisor has made an offer ofperformance to the promisee, and the offer has not beenaccepted, the promisor is not responsible for non-performance,nor does he thereby lose his rights under the contract.Every such offer must fulfill the following conditions:(1) It must be unconditional;(2) It must be made at a proper time and place, and under such

circumstances, that the person to whom it is made mayhave a reasonable opportunity of ascertaining that theperson by whom it is made is able and willing there andthen to do the whole of what he is bound by his promiseto do;

(3) If the offer is an offer to deliver anything to the promisee,the promisee must have a reasonable opportunity of seeingthat the thing offered is the thing which the promisor isbound by his promise to deliver.

An offer to one of several joint promisees has the same legalconsequences as an offer to all of them.

Effect of refusal of party to perform promise wholly (Section39) When a party to a contract has refused to perform, ordisabled himself from performing, his promise in its entirety,the promisee may put an end to the contract, unless he hassignified, by words or conduct, his acquiescence in its continu-ance.Now a question arises who are the persons who shouldperform the contract

By Whom Contracts Must be PerformedSection 40 specifies that if it appears from the nature of the casethat it was the intention of the parties to any contract that anypromise contained in it should be performed by the promisorhimself, such promise must be performed by the promisor. Inother cases, the promisor or his representatives may employ acompetent person to perform it.Effect of accepting performance from third person (Section41)- When a promisee accepts performance of the promisefrom a third person, he cannot afterwards enforce it against thepromisor.Devolution of joint liabilities (Section 42)- When two or morepersons have made a joint promise, then, unless a contraryintention appears by the contract all such persons, during theirjoint lives, and, after the death of any of them, his representa-tive jointly with the survivor or survivors, and, after the deathof the last survivor, the representatives of all jointly, mustfulfill the promise.Any one of joint promisors may be compelled to perform (Section 43) When two or more persons make a joint promise,the promisee may, in the absence of express agreement to thecontrary, compel any [one or more] of such joint promisors toperform the whole of the promise.Each promisor may compel contribution.- Each of two ormore joint promisors may compel every other joint promisorto contribute equally with himself to the performance of thepromise, unless a contrary intention appears from the contract.Sharing of loss by default in contribution.- If any one of twoor more joint promisors makes default in such contribution,the remaining joint promisors must bear the loss arising fromsuch default in equal shares. Explanation.— Nothing in thissection shall prevent a surety from recovering from his principal,payments made by the surety on behalf of the principal, orentitle the principal to recover anything from the surety onaccount of payments made by the principal.As the liability is joint and several under Sec. 43 of the ContractAct, D1 cannot escape from his liability merely because the claimas against D2 stood abated. Therefore, there is not any illegalityin the decree granted by the lower Court as against D1.Effect of release of one joint promisor (Section 44) Where twoor more persons have made a joint promise, a release of one of


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such joint promisors by the promisee does not discharge theother joint promisor or joint promisors, neither does it free thejoint promisors so released from responsibility to the otherjoint promisor or joint promisors.Devolution of joint rights (Section 45)- When a person hasmade a promise to two or more persons jointly, then, unless acontrary intention appears from. the contract, the right to claimperformance rests, as between him and them, with them duringtheir joint lives, and, after the death of any of them, with therepresentative of such deceased person jointly with the survivoror survivors and, after the death of the last survivor, with therepresentatives of all jointly.The time and place of performance is very important in thecontext of a valid performance of a contract

Time and Place For PerformanceTime for performance of promise, where no application is to bemade and no time is specified (Section 46) Where, by thecontract, a promisor is to perform his promise withoutapplication by the promisee, and no time for performance isspecified the engagement must be performed within a reason-able time.

ExplanationThe question “what is a reasonable time” is, in each particularcase, a question of fact.Time and place for performance of promise, where time isspecified and no application to be made (Section 47) When apromise is to be performed on a certain day, and the promisorhas undertaken to perform it without application by thepromisee, the promisor may perform it at any time during theusual hours of business on such day and at the place at whichthe promise ought to be performed.Application for performance on a certain day to be at propertime and place. (Section 48) When a promise is to be performedon a certain day, and the promisor has not undertaken toperform it without application by the promisee, it is the duty ofthe promisee to apply for performance at a proper place andwithin the usual hours of business.Explanation.- The question “what is a proper time and place”is, in each particular case, a question of fact.(Section 49) Place for performance of promise, where noapplication to be made and no place fixed for performance.-When a promise is to be performed without application by thepromisee, and no place is fixed for the performance of it; it isthe duty of the promisor to apply to the promisee to appoint areasonable place for the performance of the promise, and toperform it at such place.(Section 50) Performance in manner or at time prescribed orsanctioned by promisee.- The performance of any promise maybe made in any manner, or at any time which the promiseeprescribes or sanctions.Let us learn about the performance of reciprocal promises

Performance of Reciprocal PromisesPromisor not bound to perform, unless reciprocal promiseeready and willing to perform. - (Section 51) When a contractconsists of reciprocal promises to be simultaneously per-

formed, no promisor need perform his promise unless thepromisee is ready and willing to perform his reciprocal promise.Section 52 states that where the order in which reciprocalpromises are to be performed is expressly fixed by the contract,they shall be performed in that order; and where the order isnot expressly fixed by the contract, they shall be performed inthat order which the nature of the transaction requires.Section 53 states that when a contract contains reciprocalpromises, and one party to the contract prevents the other fromperforming his promise, the contract becomes voidable at theoption of the party so prevented; and he is entitled to compen-sation1 from the other party for any loss which he may sustainin consequence of the non-performance of the contract.Effect of default as to that promise which should be firstperformed, in contract consisting of reciprocal promises(Section 54) When a contract consists of reciprocal promises,such that one of them cannot be performed, or that itsperformance cannot be claimed till the other has been per-formed, and the promisor of the promise last mentioned failsto perform it, such promisor cannot claim the performance ofthe reciprocal promise, and must make compensation to theother party to the contract for any loss which such other partymay sustain by the non-performance of the contract.Effect of failure to perform at fixed time, in contract in whichtime is essential. - - (Section 55) When a party to contractpromises to do a certain thing at or before a specified time, orcertain things at or before specified times, and fails to do anysuch thing at or before the specified times, the contract, or somuch of it as has not beer performed becomes voidable at theoption of the promisee, if the intention of the parties was thattime should be of the essence of the contract.Effect of such failure when time is not essential.- If it was notthe intention of the parties that time should be of the essenceof the contract, the contract does not become voidable by thefailure to do such thing at or before the specified time; but thepromisee is entitled to compensation from the promisor forany loss occasioned to him by such failure.Effect of acceptance of performance at time other than thatagreed upon.- If, in case of a contract voidable on account ofthe promisor’s failure to perform his promise at the timeagreed, the promisee accepts performance of such promise atany time other than that agreed, promisee cannot claimcompensation for any loss occasioned by the non-performanceof the promise at the time agreed, unless, at the time of suchacceptance, he gives notice to the promisor of his intention todo so.Section 56 states that an agreement to do impossible act in itselfis void.A contract to do an act which, after the contract is made,becomes impossible, or, by reason of some event which thepromisor could not prevent, unlawful, becomes void when theact becomes impossible or unlawful. Where one person haspromised to do something which he knew, or, with reasonablediligence, might have known, and which the promisee did notknow, to be impossible or unlawful, such promisor must makecompensation to such promisee for any loss which such


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promisee sustains through the non-performance of thepromise.Section 57 - Reciprocal promise to do things legal, and alsoother things illegal.- Where persons reciprocally promise, firstlyto do certain things which are legal, and, secondly, underspecified circumstances, to do certain other things which areillegal, the first set of promises is a contract, but the second is avoid agreement.Section 58- Alternative promise, one branch being illegal.- Inthe case of an alternative promise, one branch of which is legaland the other illegal, the legal branch alone can be enforced.Let us now learn about the appropriation of payments

Appropriation Of PaymentsSection 59 specifies that an application of payment where debtto be discharged is indicated.- Where a debtor, owing severaldistinct debts to one person, makes a payment to him, eitherwith express intimation, or under circumstances implying, thatthe payment is to be applied to the discharge of some particulardebt, the payment, if accepted, must be applied accordingly.Section 60 states about an application of payment where debtto be discharged is not indicated.- Where the debtor hasomitted to intimate, and there are no other circumstancesindicating to which debt the payment is to be applied, thecreditor may apply it at his discretion to any lawful debt actuallydue and payable to him from the debtor, whether its recovery isor is not barred by the law in force for the time being as to thelimitation of suits. Section 61 states that where neither partymakes any appropriation, the payment shall be applied indischarge of the debts in order of time, whether they are or arenot barred by the law in force for the time being as to thelimitation of suits. If the debts are of equal standing, thepayment shall be applied in discharge of each proportionately.You may be thinking that is it necessary that every contract needto be performedWhat are the contracts, which need not be performed?

Contracts, Which Need Not be PerformedSection 62 states the Effect of novation, rescission and alter-ation of contract.- If the parties to a contract agree to substitutea new contract for it, or to rescind or alter it, the original contractneed not be performed.Promisee may dispense with or remit performance of promise(Section 63) Every promisee may dispense with or remit,wholly or in part, the performance of the promise made tohim, or may extend the time for such performance, 3 or mayaccept instead of it any satisfaction which he thinks fit.Consequences of rescission of voidable contract (Section 64)When a person at whose option a contract is voidable rescindsit, the other party thereto need not perform any promise thereincontained in which he is promisor. The party rescinding avoidable contract shall, if he has received any benefit thereunderfrom another party to such contract, restore such benefit, so faras may be, to the person from whom it was received.Obligation of person who has received advantage under voidagreement or contract that becomes void (Section 65) When anagreement is discovered to be void, or when a contract becomes

void, any person who has received any advantage under suchagreement or contract is bound to restore it, or to makecompensation for it, to the person from whom he received it.Mode of communicating or revoking rescission of a voidablecontract (Section 66) The rescission of a voidable contract maybe communicated or revoked in the same manner, and subjectto the same rules, as apply to the communication or revocationof a proposal.Effect of neglect of promisee to afford promisor reasonablefacilities for performance (Section 66) If any promisee neglectsor refuses to afford the promisor reasonable facilities for theperformance of his promise, the promisor is excused by suchneglect or refusal as to any non-performance caused thereby.This was all-important about the performance of a contract. Letus now learn about the modes of a discharge of a contract.

Discharge of a ContractDischarge of a contract means termination of the contractualrelations between the parties to a contract. A contract is said tobe discharged when the rights and obligations of the partiesunder the contract come to an end.Modes of discharge of contractA contract may be discharged in various modes as discussedbelow:

Discharge by PerformanceA contract can be discharged by performance in any of thefollowing ways:(a) By Actual Performance A contract is said to be discharged

by actual per-formance when the parties to the contractperform their promises in accordance with the terms of thecontract.

(b) By Attempted Performance or Tender A contract is said tobe discharged by attempted performance when thepromisor has made an offer of performance to thepromisee but it has not been accepted by the promisee.

Discharge by Mutual Agreement Since a contract is created by mutual agreement, it can also bedischarged by mutual agreement. A contract can be dischargedby mutual agreement in any of thefollowing ways:a) Novation [Section 62] Novation means the substitution of

a new contract for the original contract. Such a new contractmay be either between the same parties or betweendifferent parties. The consideration for the new contract isthe discharge of the original contract.

Example

i) A owes money to B under a contract. It is agreed betweenA, Band C that B shall henceforth accept C as his debtor,instead of A. The old debt of A to B no longer exists anda new debt from C to B has been contracted.

ii) A owes B Rs 10,000. A enters into an agreement with B,and gives B a mortgage of his (A’s) estate for Rs 5,000 inplace of the debt of Rs 10,000. This is a new contract andextinguishes the old.


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(c) Rescission [Section 62] Rescission means cancellation ofthe contract by any party or all the parties to a contract.

Example X promises Y to sell and deliver 100 Bales of cottonon 1st Oct. at his god own and Y promises to pay for goods on1st Nov. X does not supply the goods. Y may rescind thecontract.(d) Alteration [Section 62] Alteration means a change in the

terms of a contract with mutual consent of the parties.Alteration discharges the original contract and creates a newcontract. However, parties to the new contract must notchange.

Example X promises to sell and deliver 100 bales of cotton on1st Oct. and Y promises to pay for goods on 1st Nov. After-wards, X and Y mutually decide that the goods shall bedelivered in five equal installments at Z’s godown. Here,original contract has been discharged and a new contract hascome into effect.(e) Remission [Section 63] Remission means acceptance by the

promisee of a’ lesser fulfillment of the promise made.According to Section 63, “Every promisee may dispensewith or remit, wholly or in part, the performance of thepromise made to him, or may extend the time for suchperformance, or may accept instead of it any satisfactionwhich he thinks fit.”

Example i) A promises to paint a picture for B. B afterwardsforbids him to do so. A is no longer bound to perform thepromise.ii) A owes B Rs 5,000. A pays to B, and B accepts, in

satisfaction of the whole debt, Rs 2,000 paid at the timeand place at which Rs 5,000 were payable. The whole debtis discharged.

iii) A owes B, under a contract a sum of money, the amountof which has not been ascertained. A, without ascertainingthe amount, gives to B, and B, in satisfaction thereof,accepts the sum of Rs 2,000. This is a discharge of thewhole debt;whatever may be itsamount.

iv) A owes B Rs 2,000,and is also indebtedto other creditors. Amakes anarrangement withhis creditors,including B, to paythem a compositionof 50 paise in arupee uponrespective demands.Payment to B of Rs1,000 is a dischargeof B’s demand.

(f) Waiver Waivermeans intentionalrelinquishment of a right under the con-tract. Thus, it

amounts to releasing a person of certain legal obligationunder a contract.

Example A promises to supply goods to Y. Subsequently, Yexempts X from carrying out the promise. This amounts towaiving the right of performance on the part of Y.

Discharge by Operation of LawA contract may be discharged by operation of law in thefollowing cases:(a) By Death of the Promisor A contract involving the

personal skill or ability of the promisor is discharged onthe death of the promisor.

(b) By Insolvency When a person is declared insolvent, he isdischarged from his liability up to the date of hisinsolvency.

(c) By Unauthorised Material Alteration If any party makes anymaterial alteration in the terms of the contract without theapproval of the other party, the contract comes to an end.

(d) By the Identity of Promisor and Promisee When thepromisor becomes the promisee, the other parties aredischarged.

Example X draws a bill receivable on Y who accepts the same. Xendorses the bill in favour of Z who in turn endorses in favourof Y. Here, Y is both promisor and promisee and hence theother parties are discharged.

Discharge by Impossibility of PerformanceThe effects of impossibility of the performance of a contractmay be discussed under the following two heads:(a) Effects of Initial Impossibility(b) Effects of Supervening Impossibility(a) Effects of Initial Impossibility [Section 56] Initial impos-

sibility means the impossibility existing at the time ofmaking the contract. The effects of initial impossibility areas under

Case Effect I Where both the promisor and promisee know about the initial impossibility II. Where both the promisor and promisee do not know about the initial impossibility III. Where the promisor alone knows about the initial impossibility

Such agreement is void ab initio. Example X undertakes to put life into the dead wife of Y. This agreement is void. Such agreement is void on the ground of mutual mistake. Example X agrees to sell his horse to Y. Unknown to both the parties; the horse was dead at the time of making the agreement. This agreement is void. Such promisor must compensate for any loss which such promisee sustains through the non-performance of the promise. Example A contracts to marry B, being already married to C, and being forbidden by the law to which he is subject to practise polygamy. A must make compensation to B for the loss caused to her by the non-performance of his promise.


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(b) Effects of Supervening Impossibility [Section 56]Supervening impossibility means impossibility which doesnot exist at the time of making the contract but whicharises subsequently after the formation of the contract. Theeffects of supervening impossibility are as under

Let us discuss some of the cases when a Contract is dischargedon the ground of Supervening ImpossibilityA contract is discharged by supervening impossibility in thefollowing cases:(a) Destruction of Subject Matter: The contract is discharged if

the subject matter of the contract is destroyed after theformation of the contract without any fault of either party.

Example X agreed to sell his crop of wheat. The entire crop wasdestroyed by fire though no fault of the party. The contract wasdischarged.Example A music hall was rented out for a series of concertson certain days. The hall caught fire before the date of firstconcert. It was held, the contract has become void on ground ofsupervening impossibility.(b) Death or personal incapacity: The contract is discharged on

the death or incapacity or illness of a person if theperformance of a contract depends on his personal skill orability.

Example X agreed to sing on a specified day. X fell seriously illand could not perform on the day. The contract was discharged.(c) Declaration of War The pending contracts at the time of

declaration of war are either suspended or declared as void.Example X contracts to take in cargo for Y at a foreign port. X’sgovernment afterwards declares war against the country in whichthe port is situated. The contract becomes void when the war isdeclared.(d) Change of Law The contract is discharged if the

performance of the contract becomes impossible orunlawful due to change in law after the formation of thecontract.

Example X agreed to sell his land to Y. After the formation ofthe contract, the Government issued a notification and acquired

Case Effect 1. Where an act becomes impossible after the

contract is made II. Where an act becomes unlawful by reason of some event beyond the control of promisor III. Where the promisor alone knows about the impossibility IV. Where an agreement is discovered to be void or where a contract becomes void

The contract to do such an act becomes void when the act becomes impossible. [Section 56 Para 2] The contract to do such an act becomes void when the act becomes unlawful. [Section 56, Para 2] Such promisor must compensate the promisee for any loss which such promisee might have suffered on account of non-performance of the promise. [Section 56 Para 3] Any person who has received any benefit under such agreement or contract is bound to restore it or to make compensation for it, to the person from whom he received it. [Section 65] Example X contracts to sing for Y at a concert for Rs 1,000, which is paid in advance. X is too ill to sing. X must refund Rs 1,000 to Y.

the land. The contract was discharged. [Shyam Sunder v.Durga](e) Non-existence or Non-occurrence of a Particular State of

Things Necessary for Performance The contract isdischarged if that particularstate of thing which formsthe basis of a contract,ceases to exist or occur.Example a) X and Ycontract to marry each other.Before the time fixed for themarriage X goes mad. Thecontract becomes void.

b) X hired a room from Yfor viewing the coronationprocess of King EdwardVII. The procession wascancelled because of King’sillness. It was held that Xwas not liable to pay the

room rent because the procession, which formed the basis ofthe contract, did not occur. (Krell v. Henry)Cases when the Contract is not Discharged on the Ground ofSupervening ImpossibilityImpossibility of performance is, as a rule, not an excuse fromperformance. It means that when a person has promised to dosomething, he must perform his promise unless the perfor-mance becomes absolutely impossible. A contract is notdischarged by the supervening impossibility in the followingcases:(a) Difficulty of Performance A contract is not discharged

simply on the ground that its performance has becomemore difficult, more expensive or less profitable than thatagreed at the time of its formation.

Example X agreed to supply coal within a specified time. Hefailed to supply in time because of government’s restriction onthe transport of coal from collieries. Here X will not bedischarged because the coal was available in the open marketfrom where X could have obtained it.(b) Commercial Impossibility A contract is not discharged

simply on the ground of commercial impossibility, i.e.when the contract becomes commercially unviable orunprofitable.

Example X, a furniture manufacturer agreed to supply certainfurniture to Y at an agreed rate. Afterwards, there was a sharpincrease in the rates of the timber and rates of wages. Since, itwas no longer profitable to supply at the agreed rate, X did notsupply. X will not be discharged on the ground of commercialimpossibility.(c) Default of a Third Party A contract is not discharged if it

could not be performed because of the default of a thirdparty on whose work the promisor relied.

Example X entered into a contract with Y for the sale of goodsto be manufactured by Z, a manufacturer of those goods. Z


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did not manufacture those goods. X will not be discharged andwill be liable to Y for damages.(d) Strikes, Lockouts and Civil Disturbances A contract is not

discharged on the grounds of strikes, lockouts and civildisturbances unless otherwise agreed by the parties to thecontract.

Example X agreed to supply to Y certain goods to be importedfrom Algeria. The goods could not be imported due to riots inthat country. It was held that this was no excuse for non-performance of-the contract. [Jacobs v. Credit Lyonnais](e) Partial Impossibility A contract is not discharged simply on

the ground of impossibility of some of the objects of thecontract.

Example X agreed to let a boat to H (i) to view the naval reviewat the coronation. of king and (Ii) to cruise round the fleet. Dueto the illness of the king, the naval review was cancelled but thefleet was assembled and the boat could have been used to cruiseround the fleet. It was held that the contract was not discharged.[H.B. Steamboat Co. v. Hutton]

Discharge by Lapse of TimeA contract is discharged if it is not performed or enforcedwithin a specified period, called period of limitation. TheLimitation Act, 1963 has prescribed the different periods fordifferent contracts, e.g. period of limitation for exercising rightto recover a debt is 3 years, and to recover an immovableproperty is 12 years. The contractual parties cannot exercise theirrights after the expiry of period of limitation.Example On 1st July, 2001 X sold goods to Y for Rs 1,00,000and Y has made no payment till Aug. 2004. State the legalposition as on 1st Aug. 2004 if no credit period was allowed (b)if 2 months credit period was allowed.

SolutionCase (a) The contract is discharged by lapse of time (i.e. 3 years)from 1st July 2001 because the debt has become time barredand hence X cannot exercise his right to recover this debt.Case (b) The contract is not discharged by lapse of time becausethe period of limitation is yet to expire on 31st Aug. 2004 (3years from the expiry of the credit period)

Discharge by Breach of ContractA contract is said to be discharged by breach of contract if anyparty to the contract refuses or fails to perform his part of thecontract or by his act makes it impossible to perform hisobligation under the contract. A breach of contract may occur inthe following two ways:(a) Anticipatory Breach of Contract Anticipatory breach of

contract occurs when party declares his intention of notperforming the contract before the performance is due.

(b) Actual Breach of Contract Actual breach of contract occursin the follow-ing two ways:

(i) On Due Date of Performance: If any party to a contractrefuses or fails to perform his part of the contract at thetime fixed for performance, it is called an actual breach ofcontract on due date of performance.

During the Course of Performance: If any party has performeda part of the contract and then refuses or fails to perform theremaining part of the contract, it is called an actual breach ofcontract during the course of performance.

Consequences of Breach of ContractThe aggrieved party (i.e. the party not at fault) is dischargedfrom his obligation and gets rights to proceed against the partyat fault. The various remedies available to an aggrieved party willbe discussed with you in detail in the next class.Solve the following problems for a better understanding:

Practical Problems

1. X undertakes to put life into the dead wife of Y and takeshis fees Rs 5,000 in advance. X fails to do so. Y claims Rs5,000. Is Y’s claim valid? Solution: Section to which thegiven problem relates: [Section 56 (Para 1), and Section 65].

Decision: Y’s claim is void.Reason: (a) The agreement is void ab-initio [Section 56 (Para 2)].(a) The person who received any advantage under a void

agreement, is bound to restore it [Section 65]2. X of Delhi agreed to sell 100 bales of cotton @ Rs 1,000

per bale and to deliver within a fortnight at buyer’sgodown at Lahore. X failed to supply these goods. Statethe legal position in each of the following alternative cases:Case (a) If, unknown to both the parties, the goods weredestroyed by fire at the time of agreementCase (b) If X knew that goods were destroyed by fire at thetime of agreement. Case (c) If the goods were destroyed byfire after the formation of agreement. Case (d) If war isdeclared between India and Pakistan.Case (e) If these goods were to be manufactured by Z whois ready to supply @ Rs 1,100 per bale because ofunexpected increase in the cost of material and labour.Case if) If these goods were to be manufactured by Z whodid not manufacture those goods.Case (g) If these goods could not be delivered because ofstrike of transport operators.

Solution: Section to which the given problem relates: Section 56.

Decision and Reason

Case(a) The contract is void on the ground of mutualmistake.Case (b) The contract is void but X; the promisor, mustcompensate the buyer for the promisee for any loss whichsuch promisee sustains through the non-perfor-mance ofthe promise.Case (c) & (d) The contract has become void on the groundof supervening possibilityCase (e) The contract is not discharged because ofcommercial impossibility. Case (j) The contract is notdischarged because of default of third party. Case (g) Thecontract is not discharged because of non-performance dueto strikes, lock-out or civil disturbance

4. Mr X a Hindu contracts to marry Y a Muslim. State thelegal position in each of the following alternative cases:


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Case (a) If Mr X is already married to Z who lives with X;Case (b) If Mr X goes mad before the date fixed formarriage;Case (c) If Mr X dies before the date fixed for marriage.

Solution: Section to which the given problem relates: Section 56

Decision and Reason:

Case (a) The contract is void ab-initio because such contractis forbidden by law. X must compensate Y for the losscaused to her by the non-performance of the promise.Case (a) The contract becomes void because of change inthe state of things which formed the basis of the contract.Case (c) The contract is discharged on the death of X.

5. X, a singer enters into a contract with Y, the manager of atheatre, to sing at his theatre two nights every week duringthe next two months and Y engages to pay her at the rateof Rs 100 for each night on completion of the contract.State the legal position in each of the following alternativecases:Case (a) On sixth night if X willfully absents herself fromthe theatre and wants to sing on the seventh night but Ydoes not allow her to sing on the seventh night. Case (b)On the sixth night if X willfully absents herself from thetheatre and Y allows X to sing on seventh night.Case (c) On sixth night, X is too ill to sing.Case (d) On sixth night, X dies before she sings

Solution: Section to which the given problem relates: Sections39, 56. Decision and Reason:

Case (a) Y can rescind the contract and can claim thedamages for the breach of contract [Section 39].Case (b) Y cannot rescind the contract but can claim thecompensation for the damages sustained by him throughX’s failure to sing on the sixth night [Section 39].

(c) & (d) X is discharged on the sixth night because of herincapability to sing and Y cannot claim the compensationfor the damages sustained by him through Y’s failure tosing on the sixth night.






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11.555 73

LESSON 13 :REMEDIES FOR BREACH OF CONTRACT

Learning OutcomesAt the end of this chapter, you would be able to:• Identify the remedies for breach of the Contract• Rescission of the contract• Suit for damages• Suit upon quantum meruit• Suit for specific performance of the contract• Suit for an injunction

IntroductionThere are the following remedies available to the aggrieved partyfor the breach of the ContractLet us first start with the Rescission of the Contract

Rescission of the ContractWhen there is a breach of contract by one party, the other partymay rescind the contract and need not perform his part of theobligations under the contract and may sit quietly at home if hedecides not to take any legal action against the guilty party. Butin case the aggrieved party intends to sue the guilty party fordamages for breach of contract, he has to file a suit for rescis-sion of the contract. When the court grants rescission, theaggrieved party is freed from all his obligations under thecontract; and becomes entitled to compensation for any damagewhich he has sustained through the non-fulfillment of thecontract (Sec. 75). .Illustration A contracts to supply 100 kg of tea leaves for Rs8,000 to B on 15 April. If A does not supply the tea leaves onthe appointed day, B need not pay the price. B may treat thecontract as rescinded and may sit quietly at home. B may also filea suit for rescission and claim damages.Thus, applying to the court for ‘rescission of the contract’ isnecessary for claiming damages for breach or for availing anyother remedy. In prac-tice a ‘suit for rescission’ is accompaniedby a ‘suit for damages,’ etc., in the same plaint.It is worth noting that in certain cases a suit for ‘rescission ofthe contract’ may be filed even when no damages are to beclaimed, for example, in case of pledge of movable goods, saygold ornaments, if the pledger does not pay as per agreement,the pledgee may file a suit for rescission of the contract (ofcourse within the period of limitation which is 30 years in thiscase), in order to free himself from his obligation to return theornaments on payment and to become entitled to sell theornaments in order to realise his debt.

Suit for DamagesDamages are monetary compensation allowed to the injuredparty for the loss suffered by him as a result of the breach ofcontract. The fundamental principle underlying damages is notpunishment but compensation. By awarding damages the courtaims to put the injured party into the position in which he

would have been had there been performance and not breach,and not to punish the defaulter party. As a general rule,“compensation must be commensurate with the injury or losssustained, arising naturally from the breach.” “If actual loss isnot proved, no damages will be awarded.Assessment of damages. We will now consider the extent towhich a plaintiff is entitled to demand damages for breach ofcontract. The rules in this regard have been laid down by Section73. Accordingly, an injured party is entitled to receive from thedefaulter party:(a) Such damages which naturally arose in the usual course of

things from such breach. No compensation is to be givengenerally for any remote or indirect loss sustained by reasonof the breach (Ordinary Damages).

(b) Such damages which the parties knew, when they enteredinto the contract, as likely to result from the breach (SpecialDamages).

(c) In estimating the loss or damage caused to a party bybreach, the means which existed of remedying theinconvenience caused by the breach must also be taken intoaccount (Explanation to Sec.73). (Duty to mitigate damagesuffered.)

With a view to making the study of the quantum of damageseasily comprehensible, the above rules, as enunciated in Section73 may now be considered in some more details underappropriate heads.Different kinds of damages. Damages may be of four kinds:1. Ordinary or General or Compensatory damages (i.e.,

damages arising naturally from the breach).2. Special damages (i.e., damages in contemplation of the

parties at the time of contract).3. Exemplary, Punitive or Vindictive damages.4. Nominal damages.

We shall now see these kinds one by one.

1. Ordinary DamagesWhen a contract has been broken, the injured party can, as arule, always recover from the guilty party ordinary or generaldamages. These are such damages as may fairly and reasonablybe considered as arising natu-rally and directly in the usual course ofthings from the breach of contract itself. In other words,ordinary damages are restricted to the “direct or proximateconsequences” of the breach of contract and remote or indirectlosses, which are not the natural and probable consequence ofthe breach of contract, are generally not regarded.


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Illustrations

(a) The leading case of Hadley vs Baxendale, which is said tobe the foundation of modern law of damages in Englandand India (as Sec, 73 is almost based on the rules laid downin this case); is an authority on the point. In that case:

H’s mill was stopped by a breakage of the crankshaft. Hdelivered the shaft to B, a common carrier, to take it to themanufacturers at Greenwich as a pattern for a new one. Theonly information given to B was that the article to be carried wasthe broken shaft of the mill. It was not made known to B thatdelay would result in loss of profits. By some neglect on thepart of B the delivery of the shaft was delayed beyond areasonable time. In consequence the mill remained idle for alonger period than should have been necessary. H brought anaction against B claiming damages for loss of profits, whichwould have been made during the period of delay. Held that Bwas not liable for loss of profits caused by the delay because itwas a remote consequence, and only nominal damages wereawarded. The Court pointed out that B, the defendant, wasnever told that the delay in the delivery of the shaft would entailloss of profits of the mill; the plaintiffs might have hadanother shaft, or there might have been some other defect inthe machinery to cause the stoppage, or for any other reasonthere might have been loss actually. Accord-ingly it was not adirect consequence of the breach and hence not recoverable.(b) A contracts to pay a sum of money to B on a specified day.

A does not pay the money on that day. B, in consequenceof not receiving the money on that day, is unable to pay hisdebts, and is totally ruined. A is not liable to make good toB anything except the principal sum he contracted to pay,together with interest upto the date of payment[Illustration (n) to Section 73]. (If a suit has been filedthen A will have also to pay ‘cost of the suit’ to B.)

(c) A contracts to sell and deliver 500 bales of cotton to B on afixed day. A knows nothing of B’s mode of conducting hisbusiness. A breaks his promise, and B, having no cotton, isobliged to close his mill. A is not responsible to B for theloss caused to B by the closing of the mill [Illustration (p)to Section 73]. (B, however, can claim damages for thebreach of ‘contract. He cannot claim the loss of profitscallused by the closing of the mill because it cannot beconsidered to have been in contemplation of both theparties when they made the contract and thus is a remoteconsequence of the breach.)

In the case of a contract for ‘sale and purchase’ the general ruleas regards measure of damages is that the damages would beassessed on the difference between the contract price and themarket price at the date of breach and any subsequent increaseor decrease in the market price would not be taken note of. Ifthere is no market price for the subject matter of the contract,the rule is to take the market price of the nearest substitute. Ifthere is no nearest substitute, the market price is to be ascer-tained by adding to the price at the place of purchase, theconveyance charges to the place of delivery plus the usual profitof the importer (Hajee Ismail & Sons vs Wilson & Co). If thedelivery is to be made in instalments, then the due date of eachinstalment is taken as the date of breach and the measure of

damages is the sum of the difference of the market value at theseveral dates of delivery.

Illustrations

(a) A agrees to sell to B 5 bags of rice at Rs 500 per bag,delivery to be given after two months. On the date ofdelivery the price of rice goes up and the rate is Rs550 perbag. A refuses to deliver the bags to B, B can claim from ARs 250, as ordinary damages arising directly from thebreach, being the difference between the contract price (i.e.;Rs 500 per bag) and the market price (i,e” Rs 550 per bag)on the date of delivery of 5 bags. Notice that if Rs 250 arepaid to B by way of damages, then he will be in the sameposition as if the contract has been performed.

(b) A contracts to buy from B, at a stated price, 50 maunds ofrice, no time being fixed for delivery: A afterwards informsB that he will not accept the rice if tendered to him. B isentitled to receive from A, by way of compensation, theamount, if any, by which the contract price exceeds thatwhich B can obtain for the rice at the time when A informsB that he will not accept it [Illustration (c) to Section 73].

(c) A contracts to buy B’s ship for Rs 60,000, but breaks hispromise. As a consequence of breach B sold the ship in theopen market and he could only get Rs 52,000 for the ship.B can recover by way of compensation Rs 8,000, the excessof the contract price over the actual sale price [Adaptedfrom Illustration (d) to Section 73].

Under a contract of ‘sale of goods,’ if there is a breach of‘warranty,’ the seller is liable to pay all damages which thepurchaser has to pay to the person to whom the goods are soldby him, whether the seller is aware of such a sale or not. Inorder that the purchaser should be able to claim such damagesand costs it is an overriding requirement that the sub-contractsshould have been made on the same terms and conditions asthe first contract.Illustration A sells certain’ merchandise to B, warrant-ing it tobe of a particular quality, and B, in reliance upon this warranty,sells it to C with a similar warranty. The goods prove to be notaccording to the warranty, and B becomes liable to pay C a sumof money by way of compensation. B is entitled to be reim-bursed this sum by A.

2. Special DamagesSpecial damages are those which arise on account of the specialor unusual circumstances affecting the plaintiff. In other words,they are such remote losses which are not the natural andprobable consequences of the breach of contract. Unlikeordinary damages, special damages cannot be claimed as amatter of right. These can be claimed if the special circum-stances which would result in a loss in case of breach ofcontract are brought to the notice of the other party. It isimportant that such damages must be in contemplation of theparties at the time when the contract is entered into. Subsequentknowledge of the special circumstances will not create any specialliability on the guilty party.


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Illustrations

(a) A having contracted with B to supply B 1,000 tons of ironat Rs 100 a ton, to be delivered at a stated time, contractswith C for the purchase of 1,000 tons of iron at Rs 80 aton, telling C that he does so for the purpose ofperforming his contract with B, C fails to perform hiscontract with A, and A could not procure other iron, and B,in consequence rescinds the contract. C must pay to A Rs20,000 being the profit which A would have made by theperform-ance of his contract with B. [Illustration to Section73]. (If C was not told of B’s contract then only thedifference in contract price and market price, if any, could beclaimed.)

(b) A contracts with B to make and deliver to B, by a fixed day,for a specified price a certain piece of machinery. A does notdeliver the piece of machinery at’ the time specified, and, inconsequence of this, B is obliged to procure another at ahigher price than that which he was to be paid to A, and isprevented from performing a contract which B had madewith a third person at the time of his contract with A, (butwhich had not been then communicated to A), and iscompelled to make compensation for breach of thatcontract. A must pay to B, by way of compensation, thedifference between the contract price of the piece ofmachinery and the sum paid by B for another, but not thesum paid by B to the third person by way ofcompensation [Illustration to Section 73].

(c) A,a builder, contracts to erect and finish a house by the firstof January, in order that B may give possession of it atthat time to C, to whom B has contracted to ‘let it. A isinformed of the contract between Band C. A builds thehouse so badly that, before the first of January, it fallsdown, and has to be rebuilt by B, who, in consequenceloses the rent which he was to have received from C, and isobliged to make compensation for’ breach of that contract.A must pay to B, by way of compensation, (i) for the costof rebuilding the house, (ii) for the rent lost, and (iii) forthe compensation made to C. [Illustration (l) to Section73]

3. Exemplary or Vindictive DamagesThese are such damages which are awarded with a view topunishing the guilty party for the breach and not by way ofcompensation for the loss suffered by the aggrieved party. Asobserved earlier,’ the cardinal principle of the taw of damagesfor a breach of contract is to. compensate the injured party forthe loss suffered and to punish the guilty party. Hence, obvi-ously exemplary damages have no place in the law of contractand are not recoverable for a breach of contract. There are,however, two exceptions to this rule.(a) Breach of a contract to marry. In this case the amount of

the damages will depend upon the extent of injury to theparty’s feelings. One may be ruined, other may not mind somuch.

(b) Dishonour of a cheque by a banker when there aresufficient funds to the credit of the customer. In this casethe rule of ascertaining damages is, “the smaller the cheque,

the greater the damage.” Of course, the actual amount ofdamages will differ according to the status of the party.

4. Nominal DamagesNominal damages are these which are awarded only for thename sake. These are neither awarded by way of compensationto the aggrieved party nor by way of punishment to the guiltyparty. These are awarded to establish the right to decree forbreach at contract when the injured party has not actuallysuffered any real damage and consist of a very small sum ofmoney, say, a rupee or two. For example, where in a contract ofsale of goods, if the contract price and the market price isalmost the same at the date of breach at the contract, then theaggrieved party is entitled only to nominal damages.

Duty to Mitigate Damage SufferedIt is the duty of the injured party to mitigate damage sufferedas a result of the breach of contract by the other party. He mustuse all reasonable means of mitigating the damage, just as aprudent man would, under similar circumstances in his owncase. He cannot recover any part of the damage, traceable to hisown neglect to mitigate. The onus of proof, however, is on thedefendant to show that the plaintiff has failed in his duty ofmitigation and the plaintiff is free from the burden of provingthat he tried his best to mitigate the loss (Pauzu, Ltd. vsSaunders).“The rule in regard to mitigation must be applied withdiscretion and a man who has already put himself in the wrongby breaking his contract has no right to impose new andextraordinary duties on the aggrieved partys. Courts should takecare to see that they have put the plaintiff in the same positionas if the contract had been performed, and have been overgener-ous to the contract-breaker by too severe an application of therule that the plaintiff must take reasonable steps to mitigatedamages.

Illustrations

(a) Where a servant is dismissed, even though wrongfully, it ishis duty to mitigate the damages by seeking otheremployment. He can recover only nominal damages if herefuses a reasonable offer of fresh employment. But if itcannot be proved that he has failed in his duty ofmitigation, he will be entitled to the full salary for thewhole of the unexpired period of service, if the contractof employment was for a fixed period. If the contract ofemployment was not for a fixed term, then the principle ofawarding damages for a reasonable period of notice comesinto play (S S Shetty vs Bharat Nidhi Ltd. ).

(b) A took a shop on rent from B and paid one month’s rentin advance. B could not give possession of the shop to A.A chose to do no business for 8 months though therewere other shops available in the vicinity. A sued B forbreach of contract and claimed damages for the losssuffered. Held, he was entitled only to a refund of hisadvance, and nothing more, as he had failed in his duty tominimize the loss by not taking another shop in theneighborhood (Neki vs. Pribhu).


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Liquidated Damages and PenaltyLet us first know what we mean by the two terms. ‘Liquidateddam-ages’ means a sum fixed up in advance, which is a fair andgenuine pre--estimate of the probable loss that is likely to resultfrom the breach. ‘Pen-alty’ means a sum fixed up in advance,which is extravagant and uncon-scionable in amount incomparison with the greatest loss that could conceiv-ably beproved to have followed Item the breach. Thus the essence of apenalty is a payment of money stipulated as per the terms ofthe offending party.Sometimes the parties fix up at the time of the contract thesum payable as damages in case of breach. In such a case, adistinction is made in English Law as to whether the provisionamounts to ‘liquidated damages’ or a ‘penalty’. Courts inEngland usually allow ‘liquidated damages’ as stipulated in thecontract, without any regard to the actual loss sustained.‘Penalty’ clauses, however, are treated as invalid and the courts inthat case calculate damages according to the ordinary principlesand allow only rea-sonable compensation.Under the Indian Law Section 74 does away with the distinctionbe-tween ‘liquidated damages’ and ‘penalty’. This Section laysdown that the Courts are not bound to treat the sum men-tioned in the contract, either by way of liquidated damages orpenalty, as the sum payable as damages for the breach. Insteadthe courts are required to allow reasonable compensation so asto cover the actual loss sustained, not exceeding the amount sonamed in the contract. Thus, according to the section, thenamed sum, regardless whether it is a penalty or not, deter-mines only the maximum limit of liability in case of the breachof contract. The section does not confer a special benefit uponany party; it merely declares the law that notwithstanding anyterm in the contract pre-determining damages or pro-viding forforfeiture of any property by way of penalty, the Court willaward to the party aggrieved only reasonable compensation notexceeding the amount named or penalty stipulated.Exception. There is, however, one exception provided for bySection 74 to the above rule. When any person enters into anybailbond, recognizance or other instrument of the same nature,or under the provisions of any law or under the orders of theGovernment, gives any bond for the performance of any publicduty or act in which the public are interested, he shall be liable topay the whole sum mentioned therein upon breach of thecondition of any such instrument.

Illustrations

(a) A contracts with B to pay Rs 1,000 if he fails to pay B Rs500 on a given day, A fails to pay B Rs 500 on that day. B isentitled to recover from A such compensation, notexceeding Rs 1,000 as the court considers reason-able.[illustration (a) to Section 74]

(b) A undertakes to repay B a loan of Rs 1,000 by five equalmonthly installments with a stipulation that, in default ofpayment of any installment, the whole shall become due.This stipulation is not by way of penalty and the contractmay be enforced according to its terms. [Illustration (j) toSection 74]

(c) A borrows Rs 100 from B, and gives him a bond for Rs200 payable by five yearly installments of Rs 40, with astipulation that, in default of payment of any installment,the whole shall become due. This is a stipulation by way ofpenalty. [illustration (g) to Section 74]

Stipulation regarding payment of interest. The Explanationadded to Section 74 states, “a stipulation for increased interestfrom the date of default may be a stipulation by way ofpenalty.” It implies that such a stipulation maybe considered apenalty clause and disallowed by the courts, if the enhanced rateis exorbitant.Illustration [(d) to Sec. 74]. A gives B a bond for the repaymentof Rs 1,000 with interest at 12 percent per annum at the end ofsix months, with a stipulation that in case of default interestshall be payable at the rate of 75 per cent p.a. from the date ofdefault. This is a stipulation by way of penalty and B is only,entitled to recover from A such compensation as the courtconsiders reasonable.The following rules must also be noted in connection withpayment of interest(a) Unless the parties have made a stipulation for the payment

of interest or there is a usage to that effect, interest cannotbe recovered legally as damages, generally speaking{Mahabir Prasad vs Durga Datt).

(b) Where a contract provides that the amount should be paidwithout interest by a particular date and on default it willbe payable with interest, such a stipulation may be allowedif the interest is reasonable. If the interest is exorbitant, thecourts will give relief.

(c) Payment of compound interest on default is allowed, onlyif it is not at an enhanced rate (Bhushan Rao vs Subayyal).

Earnest money. Money deposited as security for the dueperformance of a contract is known as earnest money. Forfeitureof earnest money is allowed if the amount is reasonable. Butwhere it is in the nature of penalty, the court has jurisdiction toaward such sum only as it considers reasonable but notexceeding the amount so agreed (Fateh Chand vs BalkishenDass). The proportion the amount bears to the total sale price,the nature of the contract and other circumstances have to betaken into account in ascertain-ing the reasonableness of theamount.

Cost of SuitThe aggrieved party is entitled, in addition to the damages, toget the costs of getting the decree for damages tram thedefaulter party. The cost of suit for damages is in the discretionof the court.Summary of the Rules Regarding the Measure of DamagesThe principles governing the measure of damages discussedabove may be summarised as under:1. The damages are awarded by way of compensation for the

loss suffered by the aggrieved party and not for thepurpose of punishing the guilty party for the breach.

2. The injured party is to be placed in the same position, sofar as money can do, as if the contract had been performed.


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3. The aggrieved party can recover by way of compensationonly the actual loss suffered by him, arising naturally in theusual course of things.

4. Special or remote damages, i.e., damages which are not thenatural and probable consequence of the breach are usuallynot allowed until they are in the knowledge of both thepatties at the time of entering into the contract.

5. The fact that damages are difficult to assess does notprevent the injured party from recovering them.

6. When no real loss arises from the breach of contract, onlynominal damages are awarded.

7. If the parties fix up in advance the sum payable as damagesin case of breach of ,contract, the court will allow only,reasonable compensation so as to cover’ the actual losssustained, not exceeding the amount so named in thecontract.

8. Exemplary damages cannot be awarded for breach ofcontract except in case of breach of contract of marriage orwrongful refusal by the bank to honour the customer’scheque.

9. It is the duty of the injured party to minimise the damagesuffered.

10. The injured party is entitled to get the costs of getting thedecree for damages from the defaulter party.

Suit Upon Quantum Meruit (Sections 65 and 70)The third remedy for a breach of contract available to an injuredparty against the guilty party is to file a suit upon quantummeruit. The phrase quantum meruit literally means “as much asis earned” or “in proportion to the work done.” A right to useupon quantum meruit usually arises where after part perfor-mance of the contract by one party, there is a breach of contract,or the contract is discovered void or becomes void. This remedymay be availed of either without claiming damages (i. e.,claiming reason-able compensation only for the work done) orin addition to claiming damages for breach (i.e., claimingreasonable compensation for part per-formance and damagesfor the remaining unperformed part).The aggrieved party may file a suit upon quantum meruit andmay claim payment in proportion to work done or goodssupplied in the follow-ing cases:I. Where work has been done in pursuance of a contract,

which has been discharged by the default of the defendant.

Illustrations

(a) P agreed to write a volume on ancient arm our to bepublished ,in a magazine owned by C. For this he was toreceive $ 100 on comple-tion. When he had completed part,but not the whole, of his volume, C abandoned themagazine. P was held entitled to get damages for breach ofcontract and payment quantum meruit for the part alreadycompleted (Planche vs Colburn).

(b) A, engages B, a contractor, to build a three storied house.After a part is constructed A prevents B from working anymore. B, the contractor, is entitled to get reasonablecompensation for work done under the doctrine of

quantum meruit in addition. to the damages for breach ofcontract.

Notice that in both the above cases the contract was wrongfullyterminated by the defendant, and both damages as well aspayment quantum meruit have been allowed. It is important thatin the case of a wrongful breach of contract the injured party canalways claim payment quantum meruit, whether the contract isdivisible or indivisible.2. Where work has been done in pursuance of a contract

which is discovered void’ or ‘becomes void,’ provided thecontract is divisible.

Illustrations.(a) C was appointed as managing director of a company by the

board of directors under a written contract which providedfor his remunera-tion. The contract was found voidbecause the directors who constituted the ‘Board’ were notqualified to make the appointment. C nevertheless,purporting to act under the agreement, rendered services tothe company and sued for the sums specified in theagreement, or, alternatively, for a reasonable, remunerationon a quantum meruit. Held, C could recover on a quantummeruit. (Craven-Ellis vs Canons Ltd. ).

(b) A contracts with B to repair his’ house at a piece rate. Aftera part of the repairs were carried out, the house isdestroyed by lightning. Although the contract becomesvoid and stands discharged because of destruction of thehouse, A can claim payment for the work done on‘quantum meruit’. Note that if under the contract a lumpsum is to be paid for the repair job as a whole, then Acannot claim quantum meruit because no money is due tillthe whole job is done.

3. When a person enjoys benefit of non-gratuitous actalthough there exists no express agreement between theparties. One of such cases is provided in Section 70.14Section 70 lays’ down that when services are rendered orgoods are supplied by a person, (i) without any intentionof doing so gratuitously, and (ii) the benefit of the same isenjoyed by the other party, the latter must compensate theformer or restore the thing so deliv-ered.

Illustrations

(a) A, a trader, leaves certain goods at B’s house by mistake. Btreats the goods as his own. He is bound to pay A forthem. [Illustration (a) to Section 70]

(b) Where A ploughed the field of B with a tractor to thesatisfaction of B in B’s presence, it was held that A wasentitled to payment as the work was ‘not intended to begratuitous and the other party has enjoyed the benefit ofthe same. (Ram Krishna vs Rangoobed).

4. A party who is guilty of breach of contract may also sue ona quantum meruit provided both the following conditionsare fulfilled:(a) The contract must be divisible, and(b) The other party must have enjoyed the benefit of the

part which has been performed, although he had anoption of declining it.


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Illustrations

(a) Where a common carrier fails to take a completeconsignment to the agreed destination, he may recover pro-rata freight. (He will, of course, be liable for breach of thecontract.)

(b) S had agreed to erect upon H’s land two houses and stablesfor $ 565. S did part of the work and then abandoned thecontract. H himself completed the buildings using somematerials left on his land by S. In an action by S for thevalue of work done and of the materials used by H, it washeld that S could recover the value of the materials (for Hhad the option to accept or to reject these) but he’ couldnot recover the value of the work done (for H had nooption with regard to the partly erected building, but toaccept that). The court observed, ‘“The mere fact that adefendant is in possession of what he cannot help keeping,or even has done work upon it, affords no ground for suchan inference. He is not bound to keep unfinished abuilding which in an incomplete state would be a nuisanceon his land.” (Sumpter vs Hedges).

Suit for Specific PerformanceSpecific performance means the actual carrying out of thecontract as agreed. Under certain circumstances an aggrievedparty may file a suit for specific performance, i. e., for a decree bythe court directing the defendant to actually perform thepromise that he has made. Such a suit may be filed eitherinstead of or in addition to a suit for damages.A decree for specific performance is not granted for contracts ofevery description. It is only where it is just and equitable so todo, i.e., where the regal remedy is inadequate or defective, thatthe courts issue a decree for specific performance. It is usuallygranted in contracts connected with land buildings articles andunique goods having some special value to the party suingbecause of family association. Notice that in all these contractsmonetary compensation is not an adequate relief because theinjured party will not be able to get an exact substitute in themarket.Specific performance is not granted, as a rule, in the followingcases:(i) Where monetary compensation is an adequate relief. Thus

the courts refuse specific performance of it contract to lendor to borrow money or where the contract is for the sale ofgoods easily procurable elsewhere.

(ii) Where the court cannot supervise the actual execution ofthe con-tract, e.g., a building construction contract.Moreover, in most cases dam-ages afford an adequateremedy.

(iii) Where the contract is for personal services, e.g., a contract tomarry or to paint a picture. In such contracts ‘injunction’(i.e., an order which forbids the defendant to perform a likepersonal service for other persons) is granted in place ofspecific performance.

Suit for an Injunction‘Injunction’ is an order of a court restraining a person fromdoing particular act. It is a mode of securing the specific

performance” of the negative terms of the contract. To put itdifferently, where a party is in breach of negative term of thecontract (i. e., where he is doing something which he promisednot to do), the court may, by issuing an injunction, restrain himfrom doing, what he promised not to do. Thus ‘-injunction’ isa preventive relief. It is particularly appropriate in cases ofanticipatory breach of contract where damages would not be anadequate relief.

Illustration

(a) A, agreed to sing at B’s theatre for three months from 1stApril and to sing for no one else during that period.Subsequently she contracted to-sing at C’s theatre andrefused to sing at B’s theatre. On a suit by B, the courtrefused to order specific performance of her positiveengagement to sing at the plaintiff’s theatre, but granted aninjunction restraining A from singing elsewhere andawarded damages to B to compensate him for the losscaused by A’s refusal. (Lumley vs Wagnerl)

(b) G agreed to take the whole of his supply of electricity froma certain company. The agreement was held to import anegative promise that he would take none from elsewhere.He was, therefore, restrained by an injunction from buyingelectricity from any other company. (Metropolitan ElectricSupply Company vs Ginder).

Practical ProblemsAttempt the following problems, giving reasons for youranswers:1. A contracts to pay a sum of money to B on a specified day.

A does not pay the amount on that day. B in consequenceof not receiving the money on that day, is unable to pay hisdebts and, is totally ruined. B claims heavy damages.Advise A.

[Hint. A is liable to pay interest only from the specified dayupto the date of payment. In other words B can; claim onlyordinary damages. B cannot claim heavy damages unless A hadnotice of the special circumstances resulting in the special loss atthe time of entering into the contract]2. A agreed to erect a plant for B by 31st March, 1976. A

further agreed to pay Rs 500 per month as damages in caseof delay beyond the agreed date. A was late by fourmonths. B sued A for Rs 4,500, the actual loss caused tohim as a result of the delay. What damages will you award,and why?

[Hint B is entitled to recover Rs 2,000 only, because when a sumis named in - the contract as the amount to be paid in case ofbreach, the court will allow only reasonable compensation so asto cover the actual loss sustained, within the limits stated in thecontract.]3. A employs B as manager of his factory for a term of three

years at a monthly salary of Rs 3,000. Without any lapse onthe part of B, A dismisses him after two years of service. Bcould not get an alternate job elsewhere and files a suit fordamages for breach of contract against A. Will he succeed?If yes, assess the amount of damages recoverable by him.


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[Hint. Yes, B will succeed. If it cannot be proved that B hasfailed in his duty to mitigate the loss subsequent upon thebreach, B. will be entitled to full salary for the whole of the unexpired period of service i.e., one year. Hence the amount ofdamages recoverable by B amounts to Rs 36,000.]4. A mate was engaged for a lump sum to be paid after the

completion of voyage. The mate dies when only of thevoyage was completed. His legal representatives claimdamages on quantum meruit. Decide.

[Hint. The legal representatives of the mate cannot recoveranything as the doctrine of quantum meruit is inapplicableunder the circumstances (Cutter vs. Powell, 6 T.R. 320). The ruleof law on the point is that ‘party in default’ cannot sue uponquantum meruit, if the contract is ‘indivisible’ and a lump sumis to be paid for the job as a whole, because no money is due tillthe job is done.]






Notes:


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LESSON 14:THE SALE OF GOODS ACT, 1930

INTODUCTION TO SALE OF GOODS AND ITS FORMATION

Learning OutcomesAfter reading the lesson, you should be able to know:• Contract of Sale of Goods• Formation of Sale of Goods• Difference between Sale and Agreement to Sale

IntroductionContract of Sale of GoodsWe have already studied rules relating to Indian Contract Act,1872. These rules are applicable to contract of Sales of GoodsAct as for as they are not in consistent with the express provi-sions of sales of goods Acts. This Act came into force on firstJuly 1930. The provisions of this Act extends to the whole ofIndia except the state of J&K. certain minor amendmentswhere made in this Act in 1963.Some of the provisions of Indian Contract Act apply to thisAct for example the rules relating to Capacity of parties, freeconsent, agreements in Restaurant of trade , wagering agree-ments and measure of damages. However the definition ofconsideration stands modified to the extent that in a contract ofsale of goods consideration must be my way of ‘Price’, onlymoney consideration.Just like Indian Contract Act, there should be offer andacceptance in the case of sales of goods. The parties to thecontract enjoy unfettered discretion to agree to any terms theylike, for example delivery of goods and payment of Price etc.The sales of goods Act does not seek to fetter this discretion; itsimply lays down certain positive rules of General applicationfor those cases where the parties have failed to contemplateexpressly for contingencies which may interrupt the smoothperformance of a contract of sale, such as destruction of goodssold, before it is delivered or in solvency of the buyer. Howeverthe law gives full freedom to the parties to modify any provi-sions.

Definition of Sale of goodsSection 4 (1) the sales of goods Act defines a contract of sale ofgoods as “A contract where by the seller transfers or agrees totransfer the property in goods to the buyer for a price”.

Essential Characteristics of Sale of Goods

1. Two parties: There should be two parties namely the buyerand seller. Incase the students of a Hostel take meals in amess run by them , there is no contract of sale because thestudent are undivided joined owners, who are running themess on cooperative basis. An undivided join ownersmust be distinguished from a ‘part-owner’ who is a joinowner with divisible share. Example supposes X and Yjointly owns a typewriter and X sells the type writer to Ythe ownership of type writer goes to Y. Although thegeneral rule is that a person cannot buy his own goods,

there is one exemption i.e. where a person’s goods are soldin execution of a decree, he himself may buy them.

2. Transfer of Property: ‘Property’ here means ‘ownership’.Transfer of property in the goods is another essential of acontract of sales of goods. A mere transfer of possessionof the goods cannot be termed as sale. To constitute acontract of sale the seller must either transfer or agree totransfer the property in the goods to the buyer. Further,the term ‘property,’ as used in the Sale of Goods Act,means ‘general property’ in goods as distinguished from‘special property’

3. Goods: The subject-matter of the contract of sale must be‘goods’ According to Section 2(7) “goods means every kindof movable property other than actionable claims andmoney; and includes stock and shares, growing crops,grass, and things attached to or forming part of the landwhich are agreed to be severed before sale or under thecontract of sale.” Goodwill, trade marks, copyrights,patents right, water, gas, electricity,, decree of a court of law,are all regarded as goods. In the case of land the grasswhich forms part of land have to be separated from theland. Thus where trees sold so that they could be cut outand separated from the land and then taken away by thebuyer, it was held that there was a contract for sale ofmovable property or goods (Kursell vs Timber Operators& Contractors Ltd.). But contracts for sale of things‘forming part of the land itself’ are not contracts for saleof goods. For example, a contract for the sale of coal mineor building-stone quarry is not a contract of sale of goods.

‘Actionable Claims’ means claims which can be enforced by alegal action or a suit, example a book debt. A book debt is notgoods because it can only be assigned as per Transfer ofProperty Act but cannot be sold. Same is case in the case of billof exchange, promissory note etc. The negotiable instrumentlike promissory note can be transferred under NegotiableInstruments Act by mere delivery or endorsement and delivery,such instruments cannot be sold.‘Money’ means current money. It is not regarded as goodsbecause it is the medium of exchange through which goods canbe bought. Old and rare coins, however, many be treated asgoods and sold as such.It may be mentioned that sale of immovable property isgoverned by the Transfer of Property Act, 1882.4. Price: The consideration for a contract of sale must be

money consideration called the ‘price .’ If goods are sold orexchanged for other goods, the transaction is barter,governed by the Transfer of Property Act and not a sale ofgoods under this Act. But if goods are sold partly forgoods and partly for money, the contract is one of sale(Aldridge vs Johnson).


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5. Includes both a ‘sale’ and ‘an agreement to sell.’ The term‘contract of sale’ is a generic term and includes both a ‘sale’and an ‘agreement to sell’ [as is clear from the definitionof the term as per Section 4(1) given carlier ].

6. Sale: Where under a contract of sale the property in thegoods is immediately transferred at the time of making thecontract from the seller to the buyer, the contract is called a‘sale’ [Sec. 4(3)]. It refers to an ‘absolute sale’, e.g. anoutright sale on a counter in a shop. There is immediateconveyance of the ownership and mostly of the subjectmatter of the sale as well (delivery may also be given infuture), It is an executed contract.

An agreement to sell. Where under a contract of sale the transferof property in the goods is to take place at a future time orsubject to some condition thereafter to be fulfilled, the contractis called ‘an agreement to sell’ [Sec. 4(3)]. It is an executorycontract and refers to a conditional sale.

Illustration(a) On 1 January, A agrees with B that he will sell B his scooter

on 15 January for a sum of Rs. 3,000. It is an agreement tosell, since A agrees to transfer the ownership of the scooterto B at a future time.

(b) A agrees to purchase B’s car for Rs 5,000 provided B standssurety for him with C. It is an agreement to sell for B. Itbecomes a sale when the condition is fulfilled by B.

(c) B agrees to buy A’s car for Rs. 30,000 and pay for it, if hissolicitor approves. It is an agreement to sell for A and anagreement to buy for B.

(d) A buys some furniture for Rs. 2,000 and agrees to pay forthat in two monthly installments, the ownership to pass tohim on the payment of second installment. There is anagreement to sell for the furniture dealer.

‘An agreement to sell’ becomes a ‘sale’ when the time elapses orthe conditions are fulfilled subject to which the property in thegoods is to be transferred [Sec. 4(4)].7. No formalities to be observed: A contract of sales of

goods can be made by mere offer and acceptance. Neitherpayment nor delivery is necessary at time of making thecontract of sale. It can be made either orally or in writing orpartly orally or partly in writing or may be even impliedfrom the contact of the parties.

Let us try to understand the difference between sale andagreement to sale.

‘Sale’ and Agreement to Sale’ Distinguished1. Transfer of property (ownership) In a ‘sale’ the property in

goods passes to the buyer immediately at the time ofmaking the contract. In other words, a sale impliesimmediate conveyance of property so that the seller ceasesto be the owner of the goods and the buyer becomes theowner thereof. It creates a just in rem, i.e., gives right to thebuyer to enjoy goods as against the whole world.

In ‘an agreement to sell’ there is no transfer of property to thebuyer at the time of the contract. The conveyance of propertytakes place later so that the seller continues to be the owner until

the agreement to sell becomes a sale either by the expiry ofcertain time or the fulfillment of some condition. Thus whereA agrees to buy 50 kg wheat from B and the wheat is yet to beweighed, the transaction is an agreement to sell because as perSection 22, in such a case the property does not pass to thebuyer till the goods are weighed and the buyer has noticethereof. The transaction becomes a sale and the property in thegoods passes to the buyer after the wheat is weighed and thebuyer has notice thereof. An agreement to sell creates a jus inperson, that is, it gives a right to either buyer or seller against theother for any default in fulfilling his part of the agreement.It is worth nothing that this is the basic point of distinctionbetween a ‘sale’ and ‘an agreement to sell.’ All other points ofdistinction follow from this basic difference, i.e. whether theproperty in the goods has passed or is yet to pass from seller tobuyer.2. Risk of loss. The general rule is that unless otherwise

agreed, the risk of loss prima facie passes with property(Sec. 26). Thus in case of sale, if the goods are destroyedthe loss falls on the buyer even though the goods maynever have come into his possession because the propertyin the goods has already passed to the buyer. On the otherhand, in case of an agreement to sell where the ownershipin the goods is yet to pass from the seller to the buyer,such loss has to be borne by the seller even though thegoods are in the possession of the buyer.

3. Consequences of breach. In case of sale, if the buyerwrongfully neglects or refuses to pay the price of thegoods, the seller can sue for the price, even though thegoods are still in his possession. In case of an agreementto sell, if the buyer fails to accept and pay for the goods,the seller can only sue for damages and not for the price,even though the goods are in the possession of buyer.

4. Right of resale In a sale, the property is with the buyer andas such the seller ( in possession of goods after sale )cannot resell the goods. If he does so, the subsequentbuyer having knowledge of the previous sale does notacquire a title to the goods. The original buyer can sue andrecover the goods from the third person as owner, and canalso sue the seller for the breach of contract as well as forthe tort of conversion. The right to recover the goodsfrom the third person is, however, lost if the subsequentbuyer had bought them bonafide without notice of theprevious sale (Sec. 30).

In an agreement to sell, the property in the goods remains withthe seller and as such he can dispose of the goods as he likesand the original buyer can sue him for the breach of contractonly. In this case, the subsequent buyer gets a good title to thegoods, irrespective of his knowledge of previous sale. Further,goods forming the subject matter of an agreement to sell canalso be attached in execution of a decree of a court of lawagainst the seller.5. Insolvency of buyer before he pays for the goods In a

sale, if the buyer is adjudged insolvent before he pays forthe goods, the seller, in the absence of a ‘right of lien’ overthe goods, must deliver the goods to the Official Receiveror Assignee. The seller is entitled only to a ratable dividend


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for the price of the goods. But in an agreement to sell, inthese circumstances, the seller may refuse to deliver thegoods to the Official Receiver or Assignee unless paid for,as ownership has not passed to the buyers.

6. Insolvency of seller if the buyer has already paid the priceIn a sale, if the seller is adjudged insolvent, the buyer isentitled to recover the goods from the Official Receiver orAssignee, as the property in the goods rests with the buyer.On the other hand, in an agreement to sell, if the buyer hasalready paid the price and the seller is adjudged insolvent,the buyer can only claim a ratable dividend (as a creditor)and not the goods because property in them still rests withthe seller.

Let us now understand the difference between Sale And HirePurchase

Hire PurchaseAlthough hire purchase resembles sale of goods it is differentin many ways. Under hire purchase agreement the goods aredelivered to the hire purchaser for his use at the time of theagreement but the owner of the goods agrees to transfer theproperty in the goods to the hire purchaser only when the hirerpays a certain fixed number of installments of price. Thus, theessence of hire-purchase agreement is that there is no agreementto buy, but there is only a bailment of the goods coupled withan option to purchase them, which may or may not be exer-cised.Distinction between a sale and a hire-purchase agreement

Answer the following Questionsa) A agrees to sell a horse to B who tells A that a) He needs

the horse for riding to Ban galore immediately. The horseis ill at the time of agreement. What are the rights of Aand B?

b) B agrees to buy A’s Furniture at a price to be fixed by D, afurniture dealer. D refuses to oblige A and B and fixes noprice. On A’s refusal to sell, can B legally compel him to sellthe furniture for any price?

c) A agrees to sell to B his two second –hand cars on theterms that the price was to be fixed by C. B takes deliveryof one car immediately. G, however, refuses to fix the price,A asks for the return of the car already delivered whereas Binsists on the delivery of the second car to him, for areasonable price of both the cars. Decide.

Sale Hire-purchase agreement 1. Ownership is transferred from the seller to

the buyer as soon as the contract is entered into.

1 Ownership is transferred from the seller to the hire-purchaser only when a certain agreed number of instalments is paid.

2. The position of the buyer is that of the owner.

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

3. The buyer cannot terminate the contract and as such is bound to pay the price of the goods.

3. The hire-purchaser has an option to terminate the contract at any stage, and cannot be forced to pay the further instalments.

4 If the buyer makes the payment in instalments, the amount payable by the buyer to the seller is reduced, for the payment made by the buyer is towards the price of the goods.

4. The instalments paid by the hire-purchaser are regarded as hire charges and not as payment towards the price of the goods till option to purchase the goods is exercised.

[Hint: B shall have to pay for the car already delivered a reason-able price. A cannot ask for its return. As regards the second car,B cannot insist on its delivery to him since the contract hasbecome void (Sec. 10)].d) A dealer in radios gives a ‘Murphy’ radio to a customer on

the terms that Rs. 100 should be paid by him immediatelyand Rs 200 more in two monthly equal instalments. It wasfurther agreed that if the radio is found defective thecustomer may return it within a week but not later. Thecustomer makes default in paying the last installment. Canthe radio dealer take back the radio on his default? [ Hint.No. the radio dealer connot take back the radio on defaultby the customer because it is a contract of sale and not ofhire purchase]

e) A sold 100 quintals of groundnut oil to B. Before it couldbe delivered to B, the Government of India requisitionedthe whole quantity lying with A in public interest. B wantsto sue A for breach of contract. Advise B.

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SUBJECT MATTER OF CONTRACT OF SALE AND PRICE

Learning OutcomesAfter reading the lesson, you should be able to know:• Subject matter of Contract of Sale• Kinds of Goods• Perishing of Goods• Fixation of Price• Importance of time• Document of title to the goods.

Introduction

Subject Matter of Contract of SaleThe subject matter in sales of goods is ‘goods’. I have alreadyexplained what we mean by Goods. Let us know about itsclassification.Goods may be classified into

1. Existing goods;2. Future goods; and3. Contingent goods

1. Existing goods: At the time of sales if the goods arephysically in existence and are in possession of the sellerthe goods are called ‘Existing Goods’Existing goods can be classified into ‘specific orunascertained.’

(a) Specific goods. Goods identified and agreed upon at thetime of the making of the contract of sale are called‘specific goods’ [Sec. 2(14)]. It may be noted that in actualpractice the term ‘ascertained goods’ is used in the samesense as ‘specific goods,’ For example, where A agrees tosell to B a particular radio bearing a distinctive number,there is a contract of sale of specific or ascertained goods.

(b) Unascertained goods. The goods, which are not separatelyidentified or ascertained at the time of the making of thecontract, are known as ‘unascertained goods.’ They areindicated or defined only by description. For example, if Aagrees to sell to B one bag of sugar out of the lot of onehundred bags lying in his godown, it is a sale ofunascertained goods because it is not known which bag isto be delivered. As soon as a particular bag is separatedfrom the lot for delivery, it becomes ascertained or specificgoods.

The distinction between ‘specific’ or ‘ascertained’ and ‘unascer-tained’ goods is important in connection with the rulesregarding ‘transfer of property’ from the seller to the buyer.2. Future goods: Future goods are goods to be manufactured

or produced or yet to be acquired by seller. There cannot bepresent sale in respect future goods because the propertycannot pass.

Example

(a) A agrees to sell to B all the milk that his cow may yieldduring the coming year. This is a contract for the sale offuture goods.

(b) X agrees to sell to Y all the mangoes, which will beproduced in his garden next year. It is contract of sale offuture goods, amounting to ‘an agreement to sell.’

3. Contingent Goods: Though a type of future goods, theseare the goods the acquisition of which by the sellerdepends upon a contingency, which may or may nothappen [Sec. 6 (2)].

ExampleA agrees to sell specific goods in a particular ship to B to bedelivered on the arrival of the ship. If the ship arrives but withno such goods on board, the seller is not liable, for the contractis to deliver the goods should they arrive.Do you know what would happen if the goods are perished?Effect of Pershing of Goods The first we must know what we mean by perishing of goods.‘Pershing’ means not only physically destruction of goods butit also covers:(a) Damage to goods so that the goods have ceased to exist in

the commercial sense, i.e., their merchantable character assuch has been lost (although they are not physicallydestroyed), e.g., where cement is spoiled by water andbecomes almost stone or where sugar becomes sharbat andthus are unsaleable as cement or sugar;

(b) Loss of goods by theft (Barrow Ltd. Vs Phillips Ltd. );(c) Where the goods have been lawfully requisitioned by the

government (Re Shipton, Anderson & Co. ).You must note that it is only the perishing of specific andascertained goods that affect the sales. In the case of unascer-tained goods, their perishing does not affect the contract. WhereA agrees to sell to B ten bales of Egyptian cotton out of 100bales lying in his godown and the bales in the godown arecompletely destroyed by fire, the contract does not become void.A must supply ten bales of cotton after purchasing them fromthe market or pay damages for the breach.

Effect of Pershing of Goods May Fall Under1. Where specific goods from the subject matter of contract

of sale (both actual sale and agreement to sell, and they,without the knowledge of seller perish, at or before thetime of contract , the contract is void. This provision ismade either on the ground of mutual mistake as to matterof fact essential to agreement, or on the ground ofimpossibility of performance, both of which render thecontract void ab-initio.


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2. Pershing of goods before sell, but after agreement to sell:Where there is agreement to sell specific goods, andsubsequently the goods, without any fault on the part ofthe seller or buyer, perish before the risk passes to buyer,the agreement is thereby avoided, i.e., Sales becomes voidand both parties are excused from performance. This isbased on Supervening Impossibility.

If only part of the goods agreed to be sold perish, the contractis void is if it is indivisible. In case contract is divisible, perish-ing of goods rule apply to the extent of perishing goods. Thecontract is valid as regards the part available in good condition.It is to be noted that if fault of either party causes the destruc-tion of the goods , then the party in default is liable fornon-delivery or to pay for goods as the case may be. Again ifthe risk has passed to the buyer, he must pay for the goods,though undelivered.3. Effect of Perishing of Future goods: Present sale of

future goods is an agreement to sale. In case of futuregoods, if sufficiently identified, are to be treated as specificgoods, the destruction of which makes the contract void.E.g. A agreed to sell B, 100 tons of potatoes to be grownin A’s land. A did everything needed but decease attackedand could produce only 20 tones. The contract was held asvoid.

Price is very important in the contract of Sale of Goods. Let menow take up the meaning and fixation of price.

PriceFor a sale of goods, money consideration is known as “price”.Without money (Price) there are no sales. Unless otherwiseagreed, the price should be pay or promised to be paid, in legaltender money. Price may be paid by cheque, hundi, Bankdeposit etc. the requisite to make a valid sales of goods contractis to pay a price in money and not the mode of payment.Modes of Fixing the Price: Sec 9 says that price may be paid inone or the other following modes:1. It may be Expressly Fixed by the Contract Itself

It is the usual mode of fixing price. The parties are free tofix any price they like and court will not bother as toadequacy of price. But the sum should be definite. Wherean alternative price is fixed, the agreement is void ab-nitio asit involves an element of wager. E.g. A offers to B a cow. Bagrees to buy for Rs. 5000/- if cow gives 10 ltr milk andonly Rs. 100/- if it fails to do so.

2. It may be fixed in accordance with an agreed mannerprovided by the contract:It may by agreed that the buyer would pay the market priceprevailing on a particular date or that the price is to be fixedby a third party ( e.g. valuer ) appointed with consent ofparties.If no price is fixed, then the contract is void for uncertaintybecause in that case law usually allows market priceprevailing on the date of supply of goods as the pricebargained for.

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

If the buyer has been previously paying to a particular sellerthe price prevailing on the date or placing the order, thecourse of dealing suggest that in subsequent transactionsalso the price as on the date of order will be paid.

4. If the price is not capable of being determined inaccordance with any of the above modes, the buyer isbound to pay to the seller “A reasonable price”. What isreasonable price depends of circumstances. Generally, themarket price of the goods prevailing on the date of supplyis taken as reasonable price.

Agreement to Sell at Valuation (Sec. 10 ) says where there is anagreement to sell goods and the price is to be fixed by thevaluation of a third party and such that parties fails to fix theprice (either because he cannot value of because he does notwant to value ) the contract becomes void, except to as part ofgoods delivered and accepted, if any, under the contract, asregards which the buyer is bound to pay a reasonable price. If,however any one of the parties , namely, the sellers or the buyer,prevents the third party from making the valuation, theinnocent party may maintain a suit for damages against theparty at fault. Although in this case also the contract becomesvoid, yet the party at fault is bound to compensate the otherparty for the actual loss suffered by him because of the Act ofprevention.Sec:32 says that, unless otherwise agreed, payment of price anddelivery of goods are concurrent condition.

Escalation ClauseSecton-64A, unless otherwise agreed, where, after making of thecontract and fixing the price but before the delivery of thegoods, a new or increased custom or excise duty of sale orpurchase tax is imposed and the seller has to pay it, the seller isentitled to add the same to the price. Conversely, if the rate ofduty or tax is lowered, the buyer would be entitled to areduction in price.

Earnest or Deposit MoneyMoney deposited by buyer with seller is known as ‘earnest’ or‘deposit’ money for fulfillment of contract. It is treated as partpayment and only balance to be paid by the buyer.In case of default by buyer, the seller can forfeit this. In case ofdefault by seller, the buyer can get a back in addition to dam-ages.The time is very important in life. The lost time is never back. Itis important to realize the importance in the contract of sale ofgoods.

Importance of Time To GoodsDo you know that as regards the time fixed for the delivery ofgoods, time is usually held ‘to be of the essence of thecontract.’? Thus if time is fixed for the delivery of goods andthe seller makes a delay, the contract is voidable at the option ofthe buyer. In case of late delivery, therefore, the buyer mayrefuse to accept the delivery and may put an end to the contract.You must understand the importance of time to goods.Stipulations as to time in a contract of sale fall under thefollowing two heads:1. Stipulation relating to time of delivery of goods.


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2. Stipulation relating to time of payment of the price.As regards the time fixed for the payment of the price, thegeneral rule is that ‘time is not deemed to be of the essenceof the contract,’ unless a different intention appears fromthe terms of the contract (Sec.11). Thus even if the price isnot paid as agreed, the seller cannot avoid the contract onthat account. He has to deliver the goods if the buyertenders the price within reasonable time before resale ofthe goods. The seller may, however, claim compensationfor the loss occasioned to him by the buyer’s failure to payon the appointed day.

Documents to Title To GoodsSection-2(4) Lays down rules regarding above. Any documentused in ordinary cause of business, as proof of the possessionor control of goods, or authorizing or purporting to authorize,either by endorsement or by delivery, the possessor of docu-ment to transfer or receive goods thereby represented is adocument of title of goods. It is a proof of ownership ofgoods and authorizes its holder to receive goods or furthertransfer such right to another person by proper endorsement ofdelivery.Documents of title to goods are unconditional under taking onthe part of issuing authority to deliver goods. Although thesedocuments can be transferred by mere delivery or by endorse-ment, yet it is regarded as ‘quasi negotiable instrument’ ,because the title of transferee ( even if bonafide will not besuperior to that of the transferor in the case of transfer of suchdocuments.

Examples of the Documents of Title to Goods

Bill of ladingDock-warrantWarehouse keeper’s certificate,Where finger’s certificateRailway receiptDelivery order – etc.

Attempt the Following Problems

1. A agrees to sell to B 10 bags of wheat Kalyan (superior)out of 100 bags lying in his godown for Rs. 6,500. Thewheat is completely destroyed by fire. Can B compel A tosupply the wheat as per agreement?

[Hint. Yes, B can compel A, because the goods forming thesubject-matter of the contract in question are unascertained goods,the perishing of which does not affect the contract. A mustsupply the wheat from elsewhere or pay damages for the breach]2. A hirer, who obtains possession of a refrigerator from its

owner under a hire-purchase agreement, sells therefrigerator to a buyer who buys in good faith and withoutnotices of he right of the owner. Does this buyer get agood title to the refrigerator? State reasons for your answer.

[ Hint: No, as the hire-purchaser has no title to the refrigerator].3. P. agrees to sell to Q his two motor cars on the terms that

the price was to be fixed by R. Q takes the delivery of onecar immediately. R refuses to oblige P and Q and fixes noprice. P asks for the return of the car already delivered

whereas Q insists on the delivery of the second car to himfor a reasonable price of both the cars. Decide the case.

[Hint. The case is governed by Section 10 which provides that ifthe third party refuses to fix the price, the contract becomes voidexcept as to part of goods delivered and accepted as regardswhich the buyer must pay a reasonable price. Thus as regardsthe car already delivered, P cannot ask for its return and mustaccept a reasonable price for that. As regards the second car, Qcannot insist on its delivery to him since the contract hasbecome void.]4. A agrees to sell a horse to B who tells A that he B needs

the horse for riding to Mumbai immediately. The horse isill at the time of agreement. What are the rights of A andB?

[ Hint: The agreement is void (Sec. 8)].5. B agrees to buy A’s furniture at a price to be fixed by C, a

furniture dealer, C refuses to oblige A and B and fixes noprice. On A’s refusal to sell, can B legally compel him to sellthe furniture for any price?

[Hint: No (Sec. 10)].




Pvt. Ltd, Delhi.

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LESSON 16:THE SALE OF GOODS ACT, 1930CONDITIONS AND WARRANTIES

Learning OutcomesAfter reading the lesson, you should be able to know:• The meaning of conditions and warranties• The difference between conditions and warranties• The important conditions and warranties• The doctrine of caveat emptor

IntroductionIn a contract of sale of goods various terms or stipulationsregarding quality of the goods, price mode of payment, deliveryof goods etc. are very important. These stipulations are knownas conditions and warranties. Let us know about it.

Conditions and WarrantiesStipulations regarding quality of the goods, price mode ofpayment, delivery of goods etc. are very important are known asconditions and warranties There is a difference betweenconditions and warranties. While some of them may not bevery important but some stipulations may be major termswhich go to the very root of contract and any breach mayfrustrate the contract, while others may be minor terms whichare not very vital that their breach may seem to be breach ofcontract as such. In law of sales major terms are called “Condi-tions” and minor terms are called “warranties”From the terms of contract, it is necessary to distinguish merestatements commendation or praise or expressions made by theseller in reference to goods. The commendatory statements areneither conditions nor warranties. They do not form part ofcontract and give no right of action. For Example: Where ahorse dealer, while praising his horse, states that the horse isvery lucky and one whosoever shall purchase it must very soonbecome a millionaire, his statement, being mere commendatoryin nature, does not form a part of the contract and its breach (i.e., if the buyer of the horse does not actually become amillionaire later) does not give rise to any legal consequences.Condition Sec. 12 (2) defines as ‘A condition’ is a stipulationessential to the main purpose of the contract, the breach ofwhich gives the aggrieved party a right to repudiate the contractitself. In addition he can claim damages from the guilty partyWarranty Sec. 12(3) defines ‘A warranty is a stipulation collateralto the main purpose of the contract, the breach of which givesthe aggrieved party a right to sue for damages only, and not toavoid the contract itself’.Conditions are the very basis of contract of sale, so any breachof condition will make contract void, but in the case ofwarranties, aggrieved parties can claim only damages.There is no hard and fast rule as to which stipulation in acontract is a condition or warranty. Sec 12(4) lays down whethera stipulation in a contract of sale is a condition or a warrantydepends in each case on the construction of contract. A

stipulation may be a condition though called a warranty in thecontract. The court is not to be guided by the terminology ofthe parties but has to look to the intention of the parities byreferring to the terms of the contract, its construction and thesurrounding circumstances to judge whether a stipulation was acondition or a warranty. The best test is to see whether astipulation is fatal to the aggrieved party, then such stipulationis a condition.

Example(a) A man buys a particular horse which is warranted quiet to

ride and drive. If the horse turns out to be vicious, thebuyer’s only remedy is to claim damages. But if instead ofbuying a particular horse, a man asks a dealer to supply himwith a quiet horse and the dealer supplies him with avicious one, the stipulation is a condition, and the buyercan return the horse and can also claim damages for breachof contract ( Hartley vs Hyman).

(b) P goes to R, a horse dealer, and sys, “I want a horse whichcan run at a speed of 30 kilometers per hour.” The horsedealer points out a particular horse and says, “This will suityou.” P buys the horse. Later on P finds that the horse canrun only at a speed of 20 kilometers per hour. There is abreach of condition, P can repudiate the contract, return thehorse to R and get back the price.

But if P says to R, “I want a good horse.” R shows him a horseand says, “This is a good horse and it can run at a speed of 30kilometers per hour,” and P buys the horse and finds later onthat it can run at a speed of 20 kilometers per hour only, there isa breach of warranty because the stipulation made by the sellerdid not form the very basis of the contract and was onlysubsidiary one. The seller gave the assurance about the runningspeed of the horse of his own without being asked by thebuyer hence it is only of secondary important.The above illustrations are a clear proof of the fact that anexactly similar term may be a condition in one contract and awarranty in another depending upon the construction of thecontract as a whole.

Distinction between condition and warranty

You may summarize the difference as follows:

1. As to value. A condition is a stipulation which is essentialto the main purpose of the contract, whereas a warranty isa stipulation which is collateral to the main purpose of thecontract. [Sec. 12(2)(3).

2. As to breach. The breach of a condition gives the aggrievedparty the right to repudiate the contract and also to claimdamages, whereas the breach of warranty gives theaggrieved party a right to claim damages only.


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3. As to treatment. A breach of condition may be treated as abreach of warranty. But a breach of warranty can not betreated as a breach of condition.

When breach of Condition is to be treated as Breach ofWarranty:Sec-13 deals, where breach of condition is to be treated as breachof warranty. In this situation the buyer can claim only damagesand cannot rescind contract.

The Cases are as Follows

1. Voluntary waiver by buyer. In a breach of condition byseller the buyer may instead elect to waive the condition i.eto treat the breach of condition as a breach of warranty andaccept goods and sue the seller for damages.

Example: A agrees to supply B 10 bags of first quality sugar @Rs. 625 per bag but supplies only second quality sugar, the priceof which is Rs. 600 per bag. There is a breach of condition andthe buyer can reject the goods. But if the buyer so elects, he maytreat it as a breach of warranty, accept the second quality sugarand claim damages @ Rs. 25 per bag.Acceptance of goods by buyerWhen the buyer has accepted the goods and subsequently hecomes to know of the breach of the conditions, he cannot rejectthem, but can only maintain an action for damages. This casedoes not depend on the will of the buyer but the law compul-sorily treats a breach of condition as a breach of warranty.In case the buyer has accepted only part of the goods and thecontract indivisible, he will have to treat the breach of conditionas a breach of warranty and accept the remaining part also. Butin case of divisible contracts, he can repudiate as regardsremaining goods, if he has accepted only part thereof.Express and Implied Conditions and WarrantiesConditions & warranties may be either express or implied.When they are inserted in the contract they are expressed andthey are implied when the law presumes their existence in thecontract , although they are not been put in express words.Implied condition and warranties may, however, be negativedby express agreement, or by course of dealing between theparties or by the useage of trade. This provision is merely anapplication of the general maxim of law “what is expresslydone puts an end to what is tacit or implied’ and ‘custom andagreement over-rule implied conditions and warranties’.

Implied ConditionsUnless otherwise agreed, the law incooperates followingconditions in to a contract for sale of goods.1. Condition as to title: Sec.-14(a) In every contract of sale the

first implied condition on the part of the seller is that, incase of sales he has a right to sell the goods and that, in thecase of agreement to sale, he will have a right to sell togoods at the time when the property is to pass. Usually theseller has right to sel the goods if either he is the owner orhe is owner’s agent. This implies that if seller’s title isdefective the buyer is entitled to reject the goods and torecover his price.

ExampleR. purchased a motorcar from D used the same for severalmonths. D had no title to the car and, therefore, R wascompelled to return the car to the true owner. R sued D torecover back the price which he had already paid. He was heldentitled to recover the whole of the price paid by him despitethe fact that he had used the car for some months ( Rowland vsDivall).It may be noted that the implied condition as to title makes itobligatory upon the seller that he must not only be the ownerbut also must be able to uphold the validity of the contract.Thus if the goods sold bear labels infringing the trade mark ofanother, the seller is guilty of breach of this condition althoughhe had full ownership of the goods.2. Condition in a sale by Description

‘Where there is a contract of sale of goods by description,there is an implied condition that the goods shallcorrespond with description’. The goods must correspondwith description whether it is a sale of specific goods or ofunascertained goods. The description may be in term ofthe qualities or characteristics of the goods. E.g. long staplecotton, kalyan wheat, Basmati Rice, Sugar S.30 or maymention trademark, brand name, type of packing etc.

Example

(b) M agreed to supply to L 3,000 tins of canned fruit, to bepacked in cases each containing 30 tins. M tendered asubstantial portion in cases containing 24 tins, It was heldthat the mode of packing constituted a part of thedescription and, therefore, L was entitled to reject thewhole consignment ( Re Moore & co. and Landaure & C.)

3. Condition in a sale by sample:The implied conditions under the contract for sale bysample are

• The bulk of goods should correspond with sample quality• Buyer shall have reasonable opportunity to compare the

sample• That the goods shall be free from any defect, rendering

them unmerchantable, which would not be apparent onreasonable examination of the sample In other words,there should not be any latent defect in the goods. If thedefect is patent one, that is, easily discoverable by theexercise of ordinary care, and the buyer takes delivery afterinspection, there is no breach of implied condition and thebuyer has no remedy.

4. Condition in a sale by sample as well as by description: Theimplied condition is that the bulk of goods shallcorrespond, both with the sample and with description. Ifit corresponds with only sample and not with description,or vice versa, the buyer is entitled to reject the goods. Itmust correspond with both.

Example

(b) N agreed to sell G some oil described as ‘foreign refinedrape oil,’ warranted only equal to sample. The oil supplied,though corresponded with the sample, was adulteratedwith hemp oil. Held that since the oil supplied was not in


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accordance with the description the buyer was entitled toreject the same ( Nichol vs godts).

5. Condition as to fitness or quality: Usually in a contract ofsale of goods there is no implied condition or warranty asto quality or fitness for any particular propose of goodssupplied ; the rule being ‘Caveat Emptor’ that is, let thebuyer beware. But an implied condition is deemed to existon the part of the seller that the goods supplied shall bereasonably fit for the purpose for which the buyer wantsthem, if the following conditions are satisfied:

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

(ii) The buyer should rely on the seller’s skill or judgment and(iii) The goods sold must be of a description which the seller

deals in the ordinary course of his business, whether he bethe manufacturer or not.

ExampleA buyer ordered for the Hessian cloth, which is generally usedfor packing purposes, without specifying the purpose for whichhe wanted the same. The cloth was supplied accordingly. Onreceiving the cloth the buyer found that it was not suitable forpacking food products as it had an unusual smell. Held, that thebuyer had no right to reject the cloth as it was suitable forpacking purposes alright. The buyer ought to have disclosed hisparticular purpose to the seller in order to make him liable forthe breach of implied condition as to fitness (Rs. Andrew Yule& Co.)The purpose need not be told expressly if the goods are fit forone particular purpose only or if the nature of the goods itselftells the purpose by implication. In such case the purpose isdeemed to be made known to the seller impliedly.6. Condition as to merchantability: This condition is applicable

only when the sale is by description. The goods shouldcorrespond with description. Sec-15 Lays down anotherimplied condition that the goods should be ‘merchantablequality’ and it should satisfy following conditions:

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

(b) The buyer must not have any opportunity of examiningthe goods or there must be some latent defect in thegoods, which should be apparent on reasonableexamination.

The term ‘merchantable quality’ means that the goods are suchquality and in such condition that a reasonable man, actingreasonably, would accept them under the circumstances of thecase in performance of his offer to buy those goods, whether hebuys them for his own use or to sell.7. Condition as to wholesomeness. This condition is

implied only in a contract of sale of eatables andprovisions. In such cases the goods supplied must notonly answer to description and be merchantable but mustalso be wholesome, i.e., free from any defect which renderthem unfit for human consumption.

Example

(b) The plaintiff bought a bun at a baker’s and confectioner’sship. The bun contained a stone which broke one of theplaintiff’s teeth. Held, the seller was liable in damagesbecause he violated the condition of wholesomeness(Chaproniere vs Mason).

(c) W bought a bottle of beer from H, a dealer in wines. Thebeer was contaminated with arsenic. W, on taking the beer,feel ill. H was held liable to W for the consequent illness(Wren vs Halt ).

Implied WarrantiesUnless otherwise agreed, the law in-corporate following ImpliedWarranties1. Warranty of quite possession: Sec –14 (b), the first implied

warranty on the part of the seller is that “the buyer shallhave and enjoy quite possession of goods.” If the buyer isin anyway disturbed by a person having a superior rightthan that of the seller, the buyer can claim damages fromthe seller. Since disturbances of quite possession is likely toarise only where the seller’s title of goods is defective, thiswarranty is regarded as an extension of the impliedcondition of the title provided in section-14(a)

Example: A buys a typewriter and spent some money forrepairs. It turns to be a stolen article. A is entitled to get backwhat he paid plus repair charges.2. Warranty of freedom from encumbrances: Sec.-14 (c) Says

that ‘the goods shall be free from any charge orencumbrance in favour of any third party not declared orknown to the buyer before or at the time when the contractis made’ if goods are afterwards found to be subject to acharge and the buyer has to discharge the same , there is abreach of warranty and the buyer is entitled to damages. Ifthe buyer knows about the encumbrance on the goods atthe time of entering into the contract, he becomes boundby the same and he is not entitled to claim compensationfrom the seller for discharging same.

ExampleA pledges a watch with B. Later gets the watch for limitedpurpose and A sales it to C. B tells C about the pledge. C has tomake payment for the pledge amount to B. Here is breach ofwarranty and C can get compensation from A.3. Warranty of disclosing the dangerous nature of goods to

the ignorant buyer: The third implied warranty on the partof seller is that in case the goods sold are of dangerousnature he will warn the ignorant buyer of the probabledanger. If there is a breach of warranty the buyer is entitledto claim damages for injury. The seller is bound to givesome warning of the danger in the goods to the buyer.

ExampleC. Purchases a tin of disinfectant powder from A. A knows thatthe lid of the tin is defective and if it is opened without specialcare it may be dangerous, but tells nothing to C. C opens the tinin the normal ways whereupon the disinfectant powder fliesinto her eyes and causes injury, A is liable in damages to C as heshould have warned C of the probable danger.


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Doctrine of Caveat Emptor: The maxim of caveat emptiermeans “Let the buyer beware” according to this it is the duty ofthe buyer to be careful while purchasing goods of his require-ment, and in the absence of any inquiry from the buyer, theseller is not bound to disclose every defect in goods of which hemay be aware. The buyer must examine the goods thoroughlyand must see that the goods he buys are suitable for thepurpose for which he wants them. If the goods turn out to bedefective the buyer cannot sue the seller because there is noimplied undertaking by the seller that he shall supply goods tosuit the buyer’s purpose. If the buyer depends on his own skilland makes bad choice he must suffer in the absence of anymisrepresentation or fraud or guarantee by the seller.Example: A buys a horse from B for riding –but did notmention this. The horse was found fit only for carriage. Acannot claim damage.However caveat emptor is subject to following exceptions:Exceptions. The doctrine of caveat emptor is subject to thefollowing exceptions:1. Where the seller makes a mis-representation and the buyer

relies on it, the doctrine of caveat emptor does not apply.Such a contract being voidable at the option of theinnocent party, the buyer has a right to rescind the contract.

2. Where the seller makes a false representation amounting tofroud and the buyer relies on it, or where the seller activelyconceals a defect in the goods so that the same could notbe discovered on a reasonable examination, the doctrine ofcaveat emptor does not apply. Such a contract is alsovoidable at the option of the buyer and the buyer isentitled to avoid the contract and also claim damages forfraud.

3. Where the goods are purchased by description and they donot correspond with the (Sec.15). See implied condition ‘ina sale by description’ discussed earlier).

4. Where the goods are purchased by description from a sellerwho deals in such class of goods and they are not of‘merchantable quality’, the doctrine of caveat emptor doesnot apply. But the doctrine applies, if the buyer hasexamined the goods, as regards defects which suchexamination ought to have revealed [Sec. 16(2)]. (Seeimplied condition ‘as to merchantability’ discussed earlier).

5. Where the goods are bought by sample, the doctrine ofcaveat emptor does not apply if the bulk does notcorrespond with the sample, or if the buyer is notprovided an opportunity to compare the build with thesample, or if there is any hidden or latent defect in thegoods (Sec. 17). (See implied condition ‘in a sale by sample’discussed earlier).

6. Where the goods are bought by sample as well as bydescription and the bulk of the goods does notcorrespond both with the sample and with the description,the buyer is entitled to reject the goods (Sec. 15). (Seeimplied condition ‘in a sale by sample as well as bydescription’ discussed earlier).

7. Where the buyer makes known to the seller the purpose forwhich he requires the goods and relies upon the seller’s skill

and judgement but the goods supplied are unfit for thespecified purpose, the principle of caveat emptor does notprotect the seller and he is liable in damages [Sec. 16(1)].(See ‘condition as to fitness or quality’ discussed earlier).

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

Attempt the following problems for better understanding:

Practical Problems1. Worsted coating of quality equal to sample was sold to

tailors who could not stitch it into coats owing to somelatent defect in its texture. The tailors had examined thecloth before affecting the purchase. Are they entitled todamages?

[Hint. In a contract of sale by sample there is an impliedcondition that the goods shall be free from any latent or hiddendefect (Sec. 17). As this implied condition is broken in theinstant case, the tailors are entitled to recover damages.2. A purchases a car from B and uses it for some item. It

turns out that the car sold by B to A was a stolen one andhad to be returned to the rightful owner. A brings actionagainst B for the return of the price. Will he succeed?

[Hint: Yes (sec. 14(a), Rowland v. Divall].3. Soda-water was supplied by S to B in bottles. B was

injured by the bursting of one of the bottles. Can B claimdamages from S?

[Hint. B can claim damages from S for the injury as the bottle isnot of merchantable quality and there is a sale of goods bydescription. (Refer to Condition as to Merchantability)].4. A, a farmer, simply exhibits oats in his farm. B buys the

oats in the belief that they are old oats. In fact they are newoats. B wants. B wants to return the oats and refuses topay the price, Decide.

[Hint: B cannot return the oats as the doctrine of caveat emptorwill apply].5. M was shopping in a self-service super market. He picked

up a bottle of orange squash from a shelf. While he wasexamining it, the bottle exploded in his hand and injuredhim. Can M claim damages for the injury?

[Hint: M cannot claim damages because a warranty or conditionas to merchantability does not arise unless there is a sale. Asthere was no sale (since M may decide not to buy and put backthe bottle in the shelf), there was no implied condition.]6. A purchased a hot-water bottle from a retail chemist. The

bottle could stand hot water but not boiling water. Whenit was filled by A with boiling water, it burst and injuredhis wife. A sues for damages. Decide.

[Hint: There is a breach of implied condition as to fitness andhence A can recover damages (Priest v. Last)].7. A agrees to supply to B a certain quantity of timber of

half-inch thickness. The timber actually supplied varies inthickness from one-third inch to five-eighth inch. Thetimber is merchantable and commercially fit for the


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purpose for which it was ordered. B rejects the timber. Ishis action justified?

[Hint. Yes, B is entitled to reject the goods. The facts of thegiven case are similar to Arcos Ltd. Vs E.A. Ronaasen & Son,1933, A.C. 470, in which case Lord Atkin observed: “If thecontract specifies conditions of weight, measurement and thelike, those conditions must be complied with. A ton does notmean about a ton, or a yard about a yard. Still less, when youdescend to minute measurements, does half an inch meansabout half inch. If the seller wants a margin he must, and inmy experience does, stipulate for it.”]8. A purchases some chocolates from a shop. One of the

chocolates contains a poisonous matter and as a result A’swife who has eaten it falls seriously ill. What remedy isavailable to A against the shopkeeper?

[Hint The chocolates are not of merchantable quality and henceA can repudiate the contract and recover damages (Sec. 17:Drummond v. Van Ingen)].9. A lady, who knew that her skin was abnormally sensitive,

bought a tweed coat and developed skin trouble by usingit. She did not disclose to the seller that her skin wasabnormally sensitive. Is the seller liable for breach ofimplied condition as to fitness or quality?

[Hint. The implied condition as to fitness or quality is withregard to the suitability of the goods to a normal buyer. If thebuyer is suffering from an abnormality and does not inform theseller about the same, this implied condition does not apply.Hence in the given case there is no breach of implied conditionas to fitness and as such the seller is not liable. (Griffths vs peterConway Ltd., 1939,10. Worsted cotton cloth of quality equal to sample was sold

to tailors who could not stitch it into coats owing to somedefect in its texture. The buyers had examined the clothbefore effecting the purchase. Are they entitled to damages?

[Hint. Yes, as there is a latent defect in cloth (Sec. 17;Drummond v. Van Ingen)].11. M. asked for a bottle of Stone’s Ginger Wine at F’s shop

which was licensed for the sale of wines. While M wasdrawing the cork, the bottle broke because of defect in theglass and M was injured. Can M claim damages for theinjury?

[Hint: Yes, as the bottle is not of merchantable quality andthere is a sale of goods by description [Sec. 15 and 16(2); Morelliv. Fitch and Gibbons)].12. A sold to B a tin of disinfectant power. He knew that it

would be dangerous to open the tin without special carebut he did not warn B. B without knowledge of thedanger, opened the tin whereupon the power flew into hiseyes and injured him. B filed a suit for damages for theinjury. Will he succeed?

[Hint: Yes (Sec. 16(2)].13. A contract to sell B a piece of silk. B thinks that it is Indian

silk. A knows that B thinks so, but knows that it is notIndian silk. A does not correct B’s impression. B afterwardsdiscovers that it is not Indian silk. Can he repudiate thecontract?

[Hint: Yes, as the rule of caveat emptor will apply in this case].14. H, a housewife, ordered from C, a coal merchant, ‘a ton of

coalite’ and it was duly delivered to her. When part of theconsignment was put on fire in an open grate in H’s house,an explosion occurred which caused damage. H claimsdamages. Is she entitled to sue?

[Hint: Yes, as the goods are not of merchantable quality (Sec.16(2)].15. In a contract for the purchase of 3,00 tins of canned fruits

to be packed in cases each containing 30 tins, a substantialpart was tendered in cases containing 24 tins instead of 30.Can the buyer reject the cases?

[Hint: Yes, as the goods do not correspond with the descrip-tion of the goods ordered[ Sec. 15; Moore & Co. v. Landaur & Co.)].




Pvt. Ltd, Delhi.

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11.555 91


TRANSFER OF PROPERTY

Learning OutcomesAfter reading the lesson, you should be able to know:• The meaning of transfer of property• The rules relating to transfer of property• The transfer of property by non owners

IntroductionYou must know what we mean by transfer of property.Transfer of property in a contract of sale is primarily the transferof property in goods by the seller to the buyer. The exact timeat which property in goods passes from seller to the buyer is ofgreat importance. ‘The transfer ‘of property in goods’ meanstransfer of ownership of goods. ‘Property in goods’ is differentfrom possession of goods. Possession simply refers to thecustody of goods. Although the property in goods may passfrom the seller to the buyer, but the goods may be in posses-sion of the seller as unpaid seller or as a bailee for buyer. Insome cases the property in goods to still be with the selleralthough the goods may be in possession of the buyer or hisagent or a carrier for transmission to the buyer.

The Following Require special Notice

1. Risk ‘prima-facia’ passes with property.As a general rule the risk of the loss of goods is prima-facie inthe person in whom property is. Section 26 provides to thesame effect, thus, “Unless otherwise agreed, the goods remainat the seller’s risk until the property therein is transferred to thebuyer, but when the property therein is transferred to buyer, thegoods are at the buyer’s risk whether delivery has been made ornot.” Thus, if after the contract the goods are destroyed ordamaged the question who is to bear the loss is to be decidednot on the basis of possession of the goods but on the basisof ownership of goods. Whosoever is the owner of the goodsat the time of loss must bear the loss.

ExampleA buys goods from B and property has passed to him, but thegoods remained in B’s warehouse. Before delivery of goods toA, there is a fire in B’s warehouse and all the goods are de-stroyed. A must bear the loss and pay the price of goods to B,if he has not paid it so far.The opening words of Section 26, namely, ‘unless otherwiseagreed’ are of great significance. These words imply that ‘riskpasses with property’ is not an absolute or inflexible rule, but aprima facie one. Risk is no test of property passing. There isnothing to prevent the parties from contracting that risk shallpass even before passing of property or vice versa.1. Action against third parties: If after the contract of sale, the

goods having damaged by a third party, it is only theperson in whom the property vests who can take actionagainst the wrong doer.

2. Suit for price: Generally speaking the seller can sue for theprice if the property in goods has passed to the buyer.

3. Insolvency of the seller or the buyer: In case of insolvencyof the buyer or seller, whether official receiver or assigneecan take over goods shall depend upon whether theproperty in goods was with the party who has becomeinsolvent. Example: If the seller becomes insolvent beforegiving delivery of the goods but the property in goods hasalready passed on to the buyer who has paid the price, theofficial receiver have no claim on goods.

Do you know that there is a difference in transfer of property inspecific /ascertained goods and unascertained goods. Let us tryto understand the difference.Rule regarding Transfer of Property in specific or ascertainedgoods:In the case of specific or ascertained goods the property istransferred to the buyer at such time as parties intend to betransferred. For ascertaining the intention of parties regard shallbe had on terms of the contract, the conduct of parties andcircumstances of the case. The parties may intend to pass theproperty as wanted at the time making the contract, or whengoods are delivered or when the goods are paid.Only when the intention of parties cannot be judged from thecontract or conduct or circumstances of the case, the rules inSection-20, 21,22,23, will apply.1. When goods are in a deliverable state(Sec 20). Where there

is an unconditional (i.e., not subject to any conditionprecedent to be fulfilled by the parties) contract for the saleof specific goods in a deliverable state, the property in thegoods passes to the buyer as soon as the contract is made,and it is immaterial whether the time of payment of theprice or the time of delivery of the goods, or both arepostponed.

Example

(a) A buys a bicycle for Rs. 300 on a month’s credit and asksthe shopkeeper to send it to his house. The shopkeeperagrees to do so. The bicycle immediately becomes theproperty of A.

(b) P buys a table for Rs 100 on a week’s credit and arranges totake delivery of the table the next day. A fire broke out inthe furniture mart the same evening and the table isdestroyed. The property in the table has passed to P andthe is bound to pay the price.

The goods are said to be in a ‘deliverable sate’ when they are insuch a state that the buyer would, under the contract, be boundto take delivery of them [sec.2(3)]. For example, in illustration(b) above, if the seller has to polish the table to make itacceptable to the buyer, it is not in a deliverable state until it is


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so polished, and the buyer does not acquire property at the timeof the contract.2. When goods have to be put into a deliverable state:

(Section. 21) in the case of sale of specific goods, when theseller is bound to do ‘something’ to do goods for makingthem in a deliverable state, the property does not pass untilsuch thing is done and the buyer has notice thereof.Something may be like polishing, packing, finishing, etc. Itis important that ‘that something’ to be done must becompleted and the fact that it has been done must bebrought the notice of buyer. The fact that the goodshaving put in a deliverable state must come to theknowledge of the buyer in some way or the other.Example: A agrees to sell to B the whole of turpentine oillying in a cistern. It is further agreed that the oil is to be putinto casks by A and then B is to take them away. Some ofthe casks are filled in the presence of B, but before they areremoved or the remainder filled, the whole is destroyedaccidentally bye fire. B must bear the loss of oil which hadbeen put into the casks because in all these casks theproperty has passed to him as nothing further remained tobe done to them by the seller. But the property in thecasks not filled up remained in the seller, at whose risk theycontinued (Rugg vs Minett).

3. When the goods have to be measured etc, to ascertain price:In a contract of specific sale of goods in deliverable state,but the seller is bound to weigh, measure, test or dosomething with reference to the goods for the propose ofascertaining price, the property does not pass until such actis done and the buyer has notice thereof.

It may be noted that if the seller has done all what he wasrequired to do under the contract and nothing remains to bedone by him, the property passes to the buyer even if the buyerhas to do something for his own satisfaction.

ExampleA sold to B 289 bales of goat skins, each bale containing fivedozens, and the price was for certain sum per dozen skins. Itwas the duty of A to count the goat skins in each bale. Before Acould do the same, the bales were destroyed by fire. Held, thatthe property in the goods had not passed to the buyer (i.e.B) assomething still remained to be done by the seller (i.e. , A) forascertaining the price, and as such the loss caused by fire had tobe borne by the seller ( i.e., A) (Zagury vs Furnell).4. When goods are delivered on approval: (Section 24) When

goods are delivered to the buyer on approval or ‘on sale orreturn,’ or on other similar terms, the property thereinpasses to the buyer:

(i) When he signifies his approval or acceptance to the seller ordoes any other act adopting the transaction, e.g., uses thegoods, pledges the goods or resells them;

(ii) If he does not signify his approval or acceptance to theseller but retains the goods, without giving notice ofrejection, beyond the time fixed for the return of goods, orif no time has been fixed, beyond a reasonable time.

Example

(a) A delivered a horse to B on the terms of ‘sale or return,within 8 days. ‘The horse died on the third day withoutany fault on the part of B. Held, A was to bear the loss asthe horse was still his property when it perished (Elphickvs Barnes).

(b) A delivered a horse to B on trial for 8 days. B continued toretain the horse even after the expiry of 8 days withoutgiving notice of rejection A. B had automatically becomethe owner of the horse on the expiry of 8 days.

Transfer of Property in Unascertained and futuregoodsIn section 18 and 23 the rules relating to transfer of property inunascertained and future goods’ are laid down. These sectionsprovide that where goods contracted to be sold are notascertained or where they are future goods, the property ingoods does not pass to the buyer unless and until the goodsare ascertained or unconditionally appropriated to the contractso as to bring them in a deliverable state, either by the sellerwith the assent of the buyer or by the buyer with the assent ofthe seller. Such assent may be expressed or implied, and may begiven either before or after the appropriation is made.The above rule is fundamental rule and it applies irrespective ofwhat the parties intended until goods are ascertained orappropriated there is merely as certained “agreement to sell”.example: Sale of ten tons of wheat from a granary, has not theeffect of transferring property to buyer (It is an agreement tosell only) until ten tons are appropriated to the contract by theseller and the buyer knows it.The process of ascertainment or appropriation consists inearmarking or setting apart goods as subject-matter of thecontract. It involves separating, weighing, measuring, countingor similar acts done in relation to goods with an intention toidentify and determine the specific goods to be delivered underthe contract. The distinction between ‘ascertainment’ and‘appropriation’ is that whereas ‘ascertainment’ can be a unilateralact of the seller, that is, he alone may set apart the goods,‘appropriation’ involves the element of mutual consent of theseller and the buyer.Essentials of valid appropriation: As regard a valid or properappropriation of goods, the following point should be noted:(i) The appropriation must be of goods answering the

contract description, both as to quality and quantity.(ii) The appropriation must be intentional, i.e., it must be

made with intention to appropriate goods to specificcontract, and it must not be due to mere accident ormistake.

(iii) The appropriation must be made either by the seller withthe assent of the buyer or by the buyer with the assent ofthe seller. Assent of the other future party is thusnecessary; whether before of after the appropriation ismade for a valid appropriation.

(iv) The appropriation must be unconditional, i.e. the sellershould not reserve to himself the right of disposal of thegoods until and unless certain conditions are fulfilled.


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Delivery to Carrier: When a seller delivers the goods to a carrieror other bailee for the purpose of transmission to the buyerand does not reserve the right of disposal, the property passeson to the buyer at once. As soon as goods are loaded andrailway receipt obtained and the same is sent to buyer direct theownership is passed on delivery of goods to railway company.If the railway receipt is sent to banker with instructions todeliver the same on payment, the right of disposal is said to bereserved and the property will not pass to buyer at the time ofdelivery of goods to railway co.

The delivery to the carrier may be:(i) Absolutely for the buyer. Where the bill of lading or

railway receipt is made out in the name of the buyer and issent to him, the presumption is that no right of disposalhas been reserved by the seller in respect of those goods.The ownership in such a case passes from the seller to thebuyer.

(ii) Absolutely for the seller. Where the bill of lading or railwayreceipt is taken in the seller’s or his agent’s name and is sentto the agent of the seller to be delivered to the buyer onthe fulfillment of certain conditions, the seller is deemed tohave reserved the right of disposal of the goods. In such acase the ownership does not pass to the buyer until thenecessary conditions are fulfilled and the documents oftitle are delivered to the buyer.

Reservation of right of disposal: (Sec. 25) Reservation of theright of disposal means reserving a right to dispose of thegoods until certain conditions (like payment of the price) arefulfilled. When the seller reserves such a right the property inthe goods does not pass until those conditions are fulfilled.The seller may reserve such a right expressly while making acontract or while making appropriation of unascertained goods.He may also reserve this right by implication, for example,when the seller while transporting goods takes the railwayreceipt or the bill of lading in his own name or where the sellerhas taken the R/R or B/L in the name of the buyer but hasdelivered the same to his bank with the instructions that thedocument is to be delivered to the buyer only when he makespayment of the price or accepts the bill of exchange, the right ofdisposal is said to be reserved impliedly.Rule on transfer of title on sale: The rule is ‘the seller can nottransfer to the buyer of goods a better title when he himselfhas’. Sector 27 says ‘where goods are sold by a person who isnot the owner thereof and who does not sell them under theauthority or with the consent of the owner, the buyer acquiresno better title to goods than the seller had’. The maxim is‘nemo det quod non habet,” which means that no one can givewhat he has not got.The general rule aims at protecting the interest of the trueowner and is deemed necessary in the larger interest of society.If a thief disposes of a stolen property, the buyer acquire notitle though he may have purchased the goods bonabfide forvalue, and real owner of the goods is entitled to recoverpossession of goods without paying anything to the buyer.So the buyer cannot get a good title to the goods unless hepurchase the goods from a person who is the owner thereof or

who sells them under the authority or with the consent of theowner.

Transfer of Title by Non-OwnersThe above rule as to the title is however subject to followingexceptions where the buyer gets a better title to the goods thanwhat the seller himself possesses.1. An unauthorized sale by a mercantile agent:( Sec. 27 ) A

mercantile agent means an agent having in the customarycourse of business as such agent authority either to sellgoods, or to consign goods for the purposes of sale, or tobuy goods, or to raise money on the security of goods[Sec. 2(9)]. Thus as a rule a mercantile agent having anauthority to sell goods conveys a good title to the buyer.But by virtue of this provision ( proviso to Sec. 27) amercantile agent can convey a good title to the buyer eventhough he sells goods without having any authority fromthe principal to do so, provided the following conditionsare satisfied:

(a) He should be in possession of the goods or documentsof title to the goods in his capacity as mercantile agent andwith the consent of the owner,

(b) He should sell the goods while acting in the ordinarycourse of business,

(c) The buyer should act in good faith without having anynotice, at the time of the contract, that the agent has noauthority to sell. Example: F entrusted his car to amercantile agent for sale at a stated price and not belowthat. The agent sold it to S, a bonafide purchaser, belowthe reserve price and misappropriated the proceeds. Sresold the car to K, the defendant. Held, S obtained a goodtitle to the car from the mercantile agent and he conveyed agood title to K and therefore F was not entitled to recoverthe car from K (Kolkes vs King).

2. Transfer of title by estoppel (Sec. 27 )Estoppal means that a person who by his conduct orwords leads another to believe that certain state of affairsexisted, would be estopped ( precluded ) from denyinglater that such as state of affairs did not exist. Sometimesthe doctrine of estop or preclude the owner from denyingthe seller’s right to sell the goods and thus an innocentbuyer may have a good title dispite the want of authorityof the seller. When the true owner of goods by hisconduct or word or by any act or omission leads the buyerto believe that the seller is the owner of the goods or hasthe authority to sell them, he cannot afar wards deny theseller’s authority to sell. The buyer in such case gets a bettertitle when that of the seller. The estopal may arise in any ofthe following ways:1. The owner standing by, when the sale is effected, or2. Still more, by his assisting the sale, or3. By permitting goods to go into the possession of

another with all the insignia of possession thereof andapparent title, or


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4. If he has otherwise acted or made representations so asto induce the buyer to alter his position to hisprejudice.

Example: M, the owner of a wagon allowed one of hisemployees K, to have his name painted on it. M did so for thepurpose of inducing the public to believe that the wagonbelonged to K. C purchased the wagon from K in good faith. Cacquires a good title as M is estopped from denying K’sauthority to sell (O, Connor vs Clark).3. Sale by joint owner: (Sec.28) If one of several joint owners

of goods has the sole possession of them by permissionof the co-owners of goods has the sole possession ofthem by permission of the co-owners, the property in thegoods is transferred to any person who buys them fromsuch joint owner in good faith without notice of the factthat the seller has no authority to sell. It may be noted thatin the absence of this provision (i.e., Sec. 28) the buyerwould have obtained only the title of the co-owners andwould have become merely a co-owner with the other co-owners. Hence the provision constitutes an exception tothe rule – “no one can give what the has not got.”

Example: A, B and C are three brothers. They own a cow incommon. B and C entrust the work of looking after the cow toA and leave the cow in A’s possession. A sells the cow to D. Dpurchases bonafide for value. D gets a good title.4. Sale by person in possession under voidable contract: (Sec.

29) When a person has obtained possession of goodsunder voidable contract and sells those goods before thecontract has been rescinded acquires a good title to themprovided he acts in good faith and without notice of theseller’s defect in title.

Example: A, by misrepresentation induces B to sell and deliverto him a cow. A sells the cow to C before B has rescinded thecontract. C purchases the cow in good faith and without noticeof the seller’s defective title. C acquires a good title.It is to be noted that this Section (Sec. 29) does not apply unlessthere is a contract. Thus it does not apply to a contract originallyvoid or where goods have been obtained by theft.5. Sale by Seller in possession after sale [Sec. 30 (1)] Where a

seller, after having sold the goods, continues to be inpossession of the goods or of the documents of title tothem and again sells or pledges them either himself orthrough a mercantile agent, he will convey a good title tothe buyer or the pledge provided the buyer or the pledgeacts in good faith and without notice of the previous sale.For the application of this exception it is essential that thepossession of the seller must be as seller and not as hireror bailee.

6. Sale by buyer in possession after ‘agreement to buy’ [Sec.30(2)]. Where a buyer has agreed to buy the goods and hasobtained possession of the same or the documents of titleto them with the consent of the seller, resells or pledgesthe goods either himself or through a mercantile agent, hewill convey a good title to the buyer or the pledge providedthe person receiving the goods acts in good faith and

without notice of any lien or other right of the originalseller in respect of those goods.

It is to be noted that a person who has got merely ‘an option tobuy,’ as in a hire-purchase agreement, cannot convey a good titleto a sub-buyer, however bonafide, for ‘an option to buy’ is not‘an agreement to buy’ (Belsize Motor Supply Co. vs Cox). Inorder to make this exception applicable it is essential that theperson must have obtained possession of the goods under ‘anagreement to sell’ (i.e., under ‘and agreement to buy’ from thebuyer’s point of view).

Example

(a) A buys some furniture and agrees to pay for that in twomonthly installments, the ownership to pass to him onpayment of the second installment. Having obtainedpossession of the furniture, A, sells the furniture to Bbefore paying the second installment. B buys the furniturebonafide. Subsequently A does not pay the secondinstallment. The furniture dealer cannot take back furniturefrom B, who obtains a good title to the same. The dealercan, of course, sue A for the breach of the contract andclaim damages.

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

7. Resale by an unpaid seller: [Sec. 54(3)]. Where an unpaidseller, who has exercised his right of lien or stoppage intransit, resells the goods (of which ownership has passedto the buyer), the subsequent buyer acquires a good titlethereto as against the original buyer, even though the resalemay not be justified in the circumstances, i.e., no notice ofthe resale has been given to the original buyer.

8. Exceptions under other Acts. Other Acts also contain someprovisions under which a non-owner may pass to thebuyer a better title than he himself has. For example,

(a) Sale by finder of lost goods under certain circumstances(Sec. 169, The Indian Contract Act).

(b) Sale by Pawnee or pledgee under certain circumstance (Sec.176, The Indian Contract Act.).

(c) Sale by Official Receiver or Assignee in case of insolvencyof an individual and Liquidators of companies. Thesepersons are not owners of the properties they deal in, butconvey a better (good) title to the buyers than theythemselves possess.

(d) Under the Negotiable Instruments Act, a holder in duecourse gets a better title than what his endorser had. Inother words, a person who takes a negotiable instrumentin good faith and for value becomes the true owner even ifhe takes it from a thief of finder.

Solve the following problems for a better understanding:

Practical ProblemsAttempt the following problems, giving reasons:


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1. Has the property in the goods passed in the followingcases?(a) B offers for a specific horse Rs. 20,000 the horse to be

delivered on 5th January, and the price to be paid on the1st February following.

(b) B orders A, a boat-builder, to make him a boat. Whilethe boat is being built, B pays to A money from timeto time on account of price.

(c) A, having a quantity of sugar which is more thantwenty quintals, contracts to sell to B ten quintals outof it. Afterwards A puts ten quintals of sugar in sacksand gives notice to B that the sugar is ready andrequires him to take it away. B says he will take it assoon as he can.

[Hint: (a) The property in the horse would pass to B as soon asthe seller accepts the offer. The fact that the time of delivery andof payment of price is postponed does not prevent theproperty from passing at once. (b) No. The property in the boatwould pass to B when the boat is ready and A gives a notice toB to this effect (Sec. 21). (c) Yes. The property in sugar passes toB when A gives notice to B (Sec. 21)].2. A, a jeweler, was entrusted with a diamond by P with the

instructions that A should obtain offers for it, and if anysuch offer was approved by P, A should sell it to the offeror. Acting contrary to P’s instructions A sold the diamondto S who bought it in good faith. Thereafter, A abscondedwith the price money. Can P recover the diamond from S?

[Hint: No. P cannot recover the diamond from S who bought itin good faith from A who is a mercantile agent (Sec. 27)]3. A delivers a gold necklace to B on “sale or return” basis. It

is agreed between A and B that property is not to pass to Btill he has paid price of the necklace. Without paying theprice, B sells the necklace to C. Does C get a good title tothe necklace?

[Hint: No. C does not get a good title to the necklace, as Bhimself has no title to the necklace till he pays its price (Weinerv. Smith)].4. In a mixed contract for storage of paddy and the sale of

the same thereafter, the paddy was delivered by A to B forstorage. B had the option to name a particular day onwhich he was to buy the paddy at the current prevailingrate. Shall B be liable if the goods are destroyed before heexercises this option?

[Hint: No. (Sec. 19; Chidambaram Chettiar v. Steel Bros.)].5. Jewellery was sent by A to B ‘on sale or return’. B pledged

the jewellery with C. Discuss the rights and liabilities ofthe parties.

[Hint: A can recover the price of jewellery from B. He cannotrecover the jewellery from C [Sec. 24; Kirkham v.Attenborough)].6. In a contract of sale of goods, 200 specified bales of

goatskins containing 60 pieces in each bale were sold. Itwas necessary for the seller to count them before delivery.Before counting was completed, the bales were destroyedby fire. Who should bear the loss, the buyer or the seller?

[Hint: The seller (Sec. 22)].7. A sells to B a horse which is to be delivered to B the next

week. B is to pay the price on delivery. A asks his servantto keep the horse separate from other horses. The horse,however, dies before it is delivered and paid for. Who shallbear the loss?

[Hint. It is a contract of sale of specific goods in a deliverablestate and therefore the property in the horse passes to B at onceat the time of contract. Hence B should bear the loss].8. On 6th May, A entered into a contract for the sale of 100

bags of wheat to B and received Rs 2,500 in part paymentof the price. The goods were not with the seller at thattime but had been dispatched from Hapur on 4th May. Ahad received the R/R which he endorsed in favour of B on6th May. The goods never reached the destination as theywere burnt of 7th May while in transit. Who shall bear theloss?

[Hint. B has to bear the loss as the property in the goods hadpassed to him at once at the time of endorsement of the R/Rin his name, i.e., on 6th May while the loss occurred on 7th May].9. X sells a car by auction to Y, who is the highest bidder. Y

offers to pay for the car by a cheque and he is allowed to doso provided he signs a document stating that the propertyin the car would not pass to him until the amount of thecheque has been credited to the seller’s account. The chequeis subsequently dishonored. X asks Y to return back thecar as he has not become the owner of the car because thecheque given by him has been dishonored. Is X’scontention justified?

[Hint: No, X’s contention is not justified. The property in thecar had passed on the fall of hammer, a subsequent agreementthat the property would not pass until the cheque is realized isof no effect and therefore X having lost his title to the carcannot recover back the same from Y. X’s only remedy is to sueY for the price. Delivery and payment are concurrent condi-tions. X was, therefore, entitled to refuse delivery of car untilpaid and could have exercised his ‘right of lien’ as an unpaidseller. But once he has given the delivery of car, his ‘right oflien’ is lost, since lien is lost once possession is lost.]10. A sells to B the whole content of a certain heap of wheat,

which according to A contains 10 quintals. B gets thewheat weighed for his own satisfaction. When the wheat isbeing weighed, there is a fire and the whole of the wheat isdestroyed. Can A recover the price of wheat from B?

[Hint. Yes, A can recover the price from B. It is a contract ofsale of specific goods in a deliverable state (as nothing remainedto be done by the seller to ascertain the price), and, therefore, theproperty passes to the buyer as soon as the contract is made.When the buer gets something done for his own satisfaction,the passing of property is not affected by that and Sec. 20applies to such a case alright].11. A gives some diamonds to B on sale or return basis. On

the same day B gives those diamonds to C on sale orreturn and from him they are lost. Who shall bear theloss?


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[Hint: B must bear the loss because by transferring the dia-monds further he has adopted the transaction and the propertyin them has, therefore, passed to him.


Sultan Chand and Sons, New Delhi.• http://www.indialawinfo.com/bareacts/soga.html• M.C. Kucchal ( 2002), “ Business Law”, Vikas

Publishing House Pvt. Ltd, Delhi.• P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw

Hill Pvt. Ltd, Delhi.

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PERFORMANCE OF CONTRACT OF SALE

Learning OutcomesAfter reading the lesson, you should be able to know:• The meaning of performance of contract of sale• The rules as to delivery of goods

IntroductionNow you know much about the contract of Sale. Try to answerwhat you could mean by Performance of Contract of SaleThe performance of contract of sale implies delivery of goods,by the seller, and acceptance of the delivery of goods andpayment for them by the buyer, in accordance with in contract.The parties are free to provide any terms they like in theircontract about the time, place and manner of delivery ofgoods, acceptance there of and payment of the price. But if theparties are silent and do not provide any thing regarding thesematters in the contract then the rules contained in the sale ofGoods Act are applicable.If the contract contains any special terms as to delivery andacceptance, these must be complied with. If there are no termsin the contract to this effect, delivery of the goods and paymentof the price are concurrent conditions, that is , both these musttake place at the same time as in, for instance, a cash sale over ashop over counter (sec.32).

Delivery of goods (section. 2(2)Delivery means voluntary transfer of possession of goodsfrom one person to another [sec. 2(2)]. Delivery of goods soldmay be made by doing anything which the parties agree shall betreated as delivery or which has the effect of putting the goodsin the possession of the buyer or his agent (sec.33)Delivery of goods may be actual, symbolic, or constructive.1. Actual delivery. Where the goods are handed over by the

seller to the buyer or his duly authorized agent, the deliveryis said to be actual. Delivery of goods may also be made bydoing anything which has the effect of putting the goodsin the possession of the buyer [sec 33].

2. Symbolic delivery. Where the goods are ponderous orbulky and incapable of actual delivery, e.g., haystack in ameadow, the delivery may be symbolic. Handing over ofthe key of a warehouse to the buyer is symbolic delivery ofthe goods to the buyer and is as effective as actual delivery,even though there is no change in the possession of thegoods.

3. Constructive delivery or delivery by attornment .Where athird person (e.g., a bailee) who is in possession of thegoods of the seller at the time of the sale acknowledges tothe buyer that he holds the goods on his behalf, theretakes place a delivery by attornment or constructive delivery[sec.36(3)]. This may happen in the following cases:

(a) where the seller in possession of the goods agrees tohold them on behalf of the buyer.

(b) Where the buyer is in possession of the goods and theseller agrees to the buyer’s holding the goods as owner.

(c) Where a third person in possession of the goodsacknowledges to the buyer that he holds them on hisbehalf.

Example. A sells to B 10 bags of wheat lying in C’s Go down.A gives an order to C, asking him to transfer the goods to B. Cassents to such order and transfer the goods in his books to B.this is a delivery by attornment.

Rules as to Delivery of Goods

1. Delivery may be either actual or symbolic or constructive.(sec. 33) Delivery of goods sold may be made by doinganything which the parties agree shall be treated as deliveryor which has the effect of putting the goods in thepossession of the buyer or of any person authorized tohold them on his half. Thus, the delivery of the goodsmay be either actual or symbolic or constructive.

2. Delivery and payment are concurrent conditions (sec. 32.)unless otherwise agreed, delivery of the goods andpayment of the price are con-current conditions, that is ,the seller should be ready and willing to deliver the goodsto the buyer in exchange for the price and the buyer shouldbe ready and willing to pay the price in exchange forpossession of the goods simultaneously, just like in a cashsale over a shop counter.

Illustration A contracts to sell to B 10 bags of sugar for Rs.9,000. A need not deliver the goods unless B is ready andwilling to pay for the goods on delivery, and B need not pay forthe goods unless A is ready and willing to deliver them onpayment.3. Buyer to apply for delivery. Apart from any express

contract, the seller of goods is not bound to deliver themuntil the buyer applies for delivery (sec.35). where thegoods are subsequently acquired by the seller. He shouldintimate this to the buyer and the buyer should then applyfor delivery. Unless otherwise agreed , the buyer has nocause of action against the seller if he does not apply fordelivey.

4. Effect of part delivery, when property in goods is to passon delivery (sec.34). A delivery of part of the goods, inprogress of the delivery of the whole, has the same effect,for the purpose of passing the property in such goods, as adelivery of the whole. In other words, when delivery ofpart of the goods has been made with the intention ofdelivering the rest also, the property in the whole of thegoods is deemed to pass to the buyer as soon as someportion is delivered.


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Illustration. A ship arrives with a cargo consigned to X, thebuyer of the cargo, upon the condition that the property is topass to him on delivery. The captain begins to discharge it. Anddelivers over part of the goods to X in progress of the deliveryof the whole. Here, he delivers of the portion of the goods toX is equivalent to the delivery of the whole of the cargo and heproperty in the whole of the goods passes to X, the buyer(Dixon vs Yates’). But when a part of the goods is deliveredwith the intention of severing it from the whole, it is notregarded as delivery of the whole of the goods and the propertyis deemed to pass to the buyer in that portion of the goodsonly which has been delivered. If in a contract for the sale of astack of hay the buyer is permitted to remove only a part of it,this does not amount to delivery of the whole as it shows anintention to separate the part delivered from the rest of hay(Bunnery vs Poyntz).Place of Delivery SEC.36(1) The delivey of goods should beeffected as per the terms contained in the contract. The rules are

1. Time of delivery [sec. 36(2) & (4)]. Where under thecontract of sale the seller is bound to send the goods tothe buyer, but no time for sending them is fixed, the selleris bound to send them within a reasonable time. Further,demand of delivery by the buyer or the tender of deliveryby the seller should be made at a reasonable hour. What isa reasonable hour is a question of fact.

2. Delivery of goods where they are in possession of a thirdparty (sec. 36(3). Where the goods at the time of sale are inthe possession of a third person, there is no delivery by theseller to the buyer unless and until such third personacknowledge to the buyer that he holds the goods on hisbehalf. Such a delivery is known as “ constructive delivery”or “ delivery by attornment” and requires the consent of allthe three parties, the seller, the buyer and the person havingpossession of the goods, where the seller hands over thedelivery order to the buyer, there is no delivery unless theseller’s agent holding the goods has assented thereto.

But where the goods have been sold by the transfer of thedocument of title to goods, e.g., railway receipt or bill of lading,the buyer is deemed to be in possession of the goods repre-sented by such document, and the assent of the third party isnot required.3. Cost of delivery. Unless otherwise agreed, all expenses of

and incidental to making of delivery are borne by the seller,but all expenses of and incidental to obtaining of deliveryare borne by the buyer (sec.36(5)).

4. Delivery of wrong quantity or different quality. [Sec 37] thedelivery of the quanti ty of goods contracted for shouldbe strictly according to terms of the contract. A defective

1. where there is a contract as to the place of delivery

2. where there is no contract as to the place of delivery.

(a) In case of sale (b) In case of an agreement to sell (i) in respect of existing goods (ii) In respect of future goods

At the agreed place. At the place at which the goods are at the time of sale. At the place at which the goods are at the time of agreement to sell. At the place at which the goods are manufactured or produced.

delivery entities the buyer to reject the goods. The threedifferent contingencies which may arise in case of adefective delivery, i.e., delivery of a wrong quantity, are:

(1) Delivery of goods less than contracted for . where the sellerdelivers to the buyer a quantity of goods less than hecontractecd to sell, the buyer may reject the goods. If heaccepts them, he shall pay for them at the contract rate [sec.37(1)].

Example. A sells to B 2,000 OF “200 yards reels of sewingcotton. After taking delivery B finds that the length of thecotton per reel is less than 200 yards. The average being shortageof about 6 per cent. B may reject the goods. If he waives theright of rejection, he is liable to pay the price of the goods at thecontract rate [Back etc. v. synzmanoski, (1924)A.C. 43].If the goods have been rejected for short delivery. The seller canmake, within the time limit, another delivery in accordance withthe terms of the contract.

(2) Delivery ofgoods inexcess of thequantitycontracted for.Where theseller deliversto the buyer aquantity ofgoods larger

than he contracted to sell, the buyer may (i) accept thewhole ; or (ii) reject the whole ;or (iii) accept the quantity heordered and reject the rest. If the buyer accepts the wholeof the goods so delivered, he must pay for them at thecontract rate [sec. 37(2)

Example . A places an order with B to supply 25 bottles oforange syrup. B sends 30.A is entitled to reject the whole, or hemay accept 25 and reject the rest. If he accepts all the 30, he mustpay for them at the contract rate.(3) Delivery of goods contracted for mixed with other goods.

Where the seller delivers to the buyer the goods hecontracted to sell mixed with goods of a differentdescription, the buyer may accept the goods which are inaccordance with the contract and reject the rest, or may rejectthe whole [sec 37(3)].

Example. A contracts with B to buy 100 tons of cane sugar. Adelivers to B 75 tone of cane sugar and 25 tons of beet sugar. Amay either (i) accept 75 tons of cane sugar which is in accordancewith the contract, and reject 25 tons of beet sugar which is of adifferent description, or (ii) reject the whole sugar.The provision of sec.37 are subject to any usage of trade, specialagreement, or course of dealing between the parties [sec.37(4)].If quantity deliver is deficit or excess which is negligilgible , thecourt does not take it into account. The maxim is “ the law doesnot take trival deviations into account.”10. Delivery by installment [sec 38] unless otherwise agreed,

the buyer of goods is not bound to accept delivery thereofby installments. If the parties so agree then only thedelivery of the goods may be made by installments.


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When the parties agree that to be separately paid for, and eitherbuyer or seller commits a breach of contract in respect of one ormore installments, there arises a question as to whether such abreach amounts to a breach of the whole of the contract or abreach of only a part of it? The answer to this questiondepends upon the terms of the contract and the circumstancesof the case, unless otherwise agreed the following two factorsmust be borne in mind in deciding the whole matter.(a) The quantitative proportion which the breach bears to the

contract as a whole, and(b) The degree of probability of the repetition of the breach

(Maple Flock co.Ltd..vs Universal Furniture products Ltd.)Generally, failure to deliver or pay for one installment does notamount to a breach of the whole contract, unless from thespecial circumstances of the case (e.g., the factory is closedbecause of a labour strike or the buyer become insolvent) it canbe inferred that similar breaches will be repeated.Illustration A sold to B 1,500 tons of meat of a specifiedquality to be shipped 125 tons monthly in equal weeklyinstallments. After about half the meat was delivered and paidfor, B discovered that it was not of the contract quality andcould have been rejected, and therefore he refused to takefurther deliveries. Held, that B was entitled to do so (Robert A.Munroe & Co,Ltd. Vs Meyer). (if B might have discovered thedefect just after first installment, he would not have beenallowed to repudiate the whole contract but only the damagesfor the loss in that particular installment delivery would havebeen allowed.11. Delivery to carrier or wharfinger [section 39] where the seller

is authorized or required to send the goods to the buyer,delivery of the goods to carrier (whether named by thebuyer, or not) for the purpose of transmission to thebuyer, or delivery of the goods to wharfinger custody, isprima facie deemed to be a delivery of the goods to thebuyer (section 39(1)]. The seller is further required toperform the following two duties also.(a) To make a reasonable contract with the carrier or

wharfinger: unless other wise authorized by the buyer,the seller shall make a reasonable contract with thecarrier or wharfinger on behalf of the buyer. If theseller omits to do so, and the goods are lost ordamaged in course of transit or whilst in the custodyof the wharfinger, the buyer may decline to treat thedelivery to the carrier or wharfinger as a delivery tohimself, or any hold the seller irresponsible fordamages (section 39(2)]

(b) To give notice to the buyer to enable him to insure thegoods: unless otherwise agreed, where goods are sentby the seller to the buyer by a route involving seatransit, in circumstances in which it is usual to insure,the seller must inform the buyer to enable him toinsure them during their sea transit, and if the sellerfails to do so, the goods shall be deemed to be at hisrisk during such transit [section 39(3)].

12. Liability of buyer for neglecting or refusing to take deliveryof goods. (Sec.44). when the seller is ready and willing to

deliver the goods and requests the buyer to take delivery,and the buyer does not within a reasonable time after suchrequest take delivery of the goods, he becomes liable to theseller for any loss occasioned by his neglect or refusal totake delivery, and also for a reasonable charge for the careand custody of the goods.

Acceptance of Delivery by BuyerThe mere fact that the buyer has taken the delivery of the goodsdoes not amount to acceptance of them. According to section42, the buyer is deemed to have accepted the goods in either ofthe following circumstances, namely:1. when he intimates to the seller that he has accepted the

goods. (Sec.41,) to examine and test the goods in order tobe sure as to whether they are in conformity with thecontract regarding quality etc. in the case of a horse saleconditioned to run at 25 kilometers per hour it is necessaryto use the horse for ascertaining, whether the horse is inconformity with the contract. But if he is not satisfied, hemust act promptly to inform the seller about rejection.

2. when he does any act in relation to the goods which isinconsistent with the ownership of the seller, e.g.,consumers, uses, pledges or resells the goods or puts hismark on them.

Example

(a) Where the buyer having seen that samples drawn frombulk were inferior to the samples originally shown to him,offered the goods for sale by auction at reduced price andthe auction having failed to produce a purchaser, the buyerpurported to reject the goods, it was held that the buyercould not do so as he had in law ‘accepted’ the goods(parker vs plamer)

(b) Where the buyer took delivery of wheat and sold a part ofit, and afterwards found that the wheat was not of contractquality and therefore sought to reject it, it was held that hehad lost the right of rejection as he had accepted the wheatby a dealing inconsistent with the rights of the seller, in sofar as he had sold out a portion of it ( Hardy & co. vsfowler).

3. when, after the lapse of a reasonable time, he retains thegoods with out intimating the seller that he has rejectedthem. What is reasonable time is a question of fact. If timefor rejection is stipulated, rejection must be within thatperiod. It may be mentioned that on rejection of goodsbecause of defective delivery, mere informing the seller isenough and the buyer is not bound to return the rejectedgoods to the seller (sec.43).

Attempt the following problems for a better understanding:

Practical Problems1. X, a dealer in cattle feed, sold to Y, another such dealer,

15,000 tons of meat and bone-meal of specified quality tobe shipped, 1,250 tons monthly in equal instalments. Afterabout half the meat was delivered and paid for, it wasfound that it was not of the contract quality, and Y refusedto take further delivery. Advise X.


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[Hint: Y is entitled to refuse to take further delivery as he is notbound to take the risk of having put upon him furtherdeliveries of goods which do not conform to the contract (Sec.38; Robert A. Munro & Co. v. Myer,(1930) 2 K.B. 312)]1. A contracts with B to buy 50 easy-chairs of a certain quality.

B delivers 25 chairs of the type agreed upon and 25 chairsof some other type. What are the rights of A?

[Hint: A may accept the chairs which are in accordance with thecontract and reject the rest or may reject the whole (Sec. 37 (3)].2. P sold barley to B by sample, delivery to be made at T

railway station. B resold the barley to D. The barley wasdelivered at T station and B, after inspecting a sample of it,sent it on to D. D rejected it as not being according tosample, whereupon B claimed to be entitled to reject it.What are B’s rights?

[Hint: B is not entitled to reject the barley (Secs.17 and 42;Perkins v. Bell)].3. There was a contract for the sale of 4,000 tons of meal, 2

per cent more or less. The seller delivered meal greatly inexcess of the permitted variation. What are the rights ofthe buyer?

[Hint: The buyer can reject the whole quantity (Sec. 37 (3); Payne& Routh V. Lillico & Sons].4. A of Agra ordered certain specified goods from B of

Mumbai. B sends the goods, not ordered, along withthem. What should A do?

[Hint: A may either reject the whole or accept the whole oraccept the goods ordered by him and reject the rest (Sec. 37(3)].5. A contract with B to purchase 30 tons of apple juice. B

crushes the apples, puts the juice in casks and keeps it readyfor delivery. A delays to take the delivery and the juice goesputrid and has to be thrown away. Is A liable to pay theprice?

{Hint: Yes].6. A sells to B 100 bags of wheat which are locked up in a

godown. A hands over to B the key of the godown. Doesit constitute delivery of the goods to B?

[Hint. Yes, this is a delivery to B, being a symbolic delivery.]7. X of Cochin agreed to sell 400 tons of rice to Y of Calcutta

to be shipped in November or December 1995. X puts therice on ship on 20 October 1995. Is the buyer bound toaccept the consignment?

[Hint: The buyer is not bound to accept the consignmentbecause the seller has not complied with the stipulation as totime of delivery and time of delivery of goods being of theessence of all mercantile contracts, an essential term of thecontract has been broken.]8. P of Delhi writes to R of Bombay to send him a book by

parcel post. R accordingly sends the book by parcel post.The parcel is lost on the way. Can R recover its price fromP?

[Hint. Yes, R can recover the price of the book from P becauseas per Section 39 of the sale of Goods Act, delivery to the carrier

(i.e., the post office) is delivery to the buyer and the buyerbecomes the owner thereafter who should bear the loss.]9. P sold barley to B by sample, delivery to be made at T

railway station. B sold the barley to X. The barley wasdelivered at T railway station and B, after inspecting asample of it, sent it on to X. X rejected it as not beingaccording to sample, whereupon B seeks to reject thegoods. Will B succeed?

[Hint. B cannot reject the barley, as by reselling those goods toX and ordering to send them to X, he had in law ‘accepted’ thegoods.]




Pvt. Ltd, Delhi.

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LESSON 19THE SALE OF GOODS ACT, 1930

REMEDIES IN CASE OF BREACH BY BUYER AND SELLER

Learning OutcomesAfter reading the lesson, you shouldbe able to know:• The rights of an unpaid seller• The rights of an unpaid seller

against the goods• The rights of an unpaid seller

against the buyerpersonally

• The rights of buyer

IntroductionToday will be discussing about theremedies in case of breach by sellerand buyer. Let us first start with thestudy of rights of an unpaid seller.

Rights of an Unpaid SellerAccording to (section 45) the term seller includes ‘any personwho is in the position of a seller, as, for instance, an agent ofthe seller to whom the bill of lading had been endorsed, or aconsignor or agent who has himself paid, or is directly respon-sible for, the price.The seller of goods is deemed to be an ‘unpaid seller’ (a) whenthe whole of the price has not been paid or tendered; or (b)where a bill of exchange or other negotiable instrument hasbeen received as a conditional payment, i.e., subject to therealization thereof, and the same has been dishonoured.According to above the following are the characteristics of and‘unpaid seller’.1. He must sell goods on cash terms and not on credit, and

he must be unpaid.2. He must be unpaid either wholly or partly. Even if only a

portion of the price, however small, remains unpaid, he isdeemed to be an unpaid seller. Where the price is paidthrough a bill of exchange or other negotiable instrument,the same must be dishonoured.

3. He must not refuse to accept payment when tendered. Ifthe buyer has tendered the price but the seller wrongfullyrefuses to take the same, he ceases to be an unpaid seller.

Against the goods Against the buyer personally Where the property Where the property In the goods has in the goods has not Passed (Sec.46(1) passed (Sec. 46(2) Lien Stoppage Re-sale Withholding Stoppage in (Secs. Secs. 50 (Sec. 54) delivery Transit 47 to 49 to 52 Suit for Suit for Repudiation Suit for Price damages of contract interest (Sec.55) (Sec. 56) (Sec. 60) (Sec.61)

Rights of an Unpaid Seller

An unpaid seller has two-fold rights, viz.,;I. Rights of unpaid seller against the goods, andII. Rights of unpaid seller against the buyer personally.

We shall now examine these rights in detail.1. Rights of Unpaid Seller against the Goods.An unpaid seller has the following rights against the goodsnotwithstanding the fact that the property in the goods haspassed to the buyer:

1. Right of lien;2. Right of stoppage of goods in transit;3. Right of resale [Sec. 46 (1)].

1. Right of lien (Sec. 47)

‘Lien’ is the right to retain possession of goods and refuse todeliver them to the buyer until the price due in respect of themis paid or tendered. An unpaid seller in possession of goodssold is entitled to exercise his lien on the goods in the followingcases:(a) Where the goods have been sold without any stipulation as

to credit;(b) Where the goods have been sold on credit, but the term of

credit has expired:(c) Where the buyer becomes insolvent, even though the

period of credit may not have yet expired.In the case of buyer’s insolvency the lien exists even thoughgoods had been sold on credit and the period of credit has notyet expired. When he goods are sold on credit the presumptionis that the buyer shall keep his credit good. If, therefore, beforepayment the buyer becomes insolvent, the seller is entitled toexercise this right and hold the goods as security for the price.


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The effect of buyer’s insolvency is that all stipulations as tocredit are put to an end and the seller has a right to say, “I willnot deliver the goods until I see that I shall get my price paid”(Griffiths vs Perry2)The unpaid seller’s lien is a possessory lien, i.e., the lien can beexercised as long as the seller remains in possession of thegoods. He may exercise his right of lien notwithstanding thathe is in possession of the goods as agent or bailee for the buyer[Sec. 47(2)]. Transfer of property in the goods or transfer ofdocuments of title to the goods does not affect the exercise ofthis right, provided the goods remain in the actual possessionof the seller. In fact when property has passed to the buyer thenonly retaining of goods is called technically ‘lien.’ Where theproperty in goods has not passed to the buyer and the title isstill with the seller then it is, strictly speaking, anomalous to saythat the seller has a lien against his own goods. The seller’s lienwhen property has not passed to the buyer is termed as ‘a rightof withholding delivery. Accordingly, Section 46(2) provides:The term insolvent here does not mean a person who has beenadjudged insolvent under the Insolvency Law. In Sale ofGoods Act “a person is said to be insolvent who has ceased topay his debts in the ordinary course of business, or cannot payhis debts as they become due, whether he has committed an actof insolvency or not” [Sec. 2(8)].But if the buyer has transferred the documents of title to abonafide purchaser, the seller’s lien is defeated (Sec. 53).“Where the property in goods has not passed to the buyer, theunpaid seller has, in addition to his other remedies, a right ofwithholding delivery similar to and coextensive with his rightsof lien and stoppage in transit where the property has passed tothe buyer.”This right of lien can be exercised only for the non-payment ofthe price and not for any other charges, i.e., maintenance orcustody charges, which the seller may have to incur for storingthe goods in exercise of his lien for the price. This right of lienextends to the whole of the goods in his possession eventhough part payment for those goods has already been made.In other words the buyer is not entitled to claim delivery of aportion of the goods on payment of a proportionate price.Further, where an unpaid seller has made part delivery of thegoods, he may exercise his right of lien on the remainder,unless such part delivery has been made under such circum-stances as to show an agreement to waive the lien (Sec. 48).Also, the lien can be exercised even though the seller hasobtained a ‘decree’ for the price of the goods [Sec. 49(2)].When lien is lost? As already observed, lien depends onphysical possession of goods. Once the possession is lost, thelien is also lost. Section 49 accordingly provides that the unpaidseller of goods loses his lien thereon in the following cases:(a) When he delivers the goods to a carrier or other beilee for

the purpose of transmission to the buyer withoutreserving the right of disposal of the goods; or

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

(c) When the seller expressly or impliedly waives his right oflien. An implied waiver takes place when the seller grants

fresh term of credit or allows the buyer to accept a bill ofexchange payable at a future date or assents to a sub-salewhich the buyer may have made.

It may be noted that right of lien, if once lost, will not revive ifthe buyer redelivers the goods to the seller for any particularpurpose. Thus, where a refrigerator after being sold wasdelivered to the buyer and since it was not functioning properly,the buyer delivered back the same to the seller for repairs, it washeld that the seller could not exercise his lien over the refrigera-tor ( Eduljee vs John Bros.).

2. Right of Stoppage of Goods in Transit:Meaning of Right of Stoppage of Goods in Transit: The rightof stoppage in transit means the right of stopping the goodswhile they are in transit, to regain possession and to retian themtill the full price is paid. Lord Cairns LJ in case of Schotsmans v.Lances and Yorks Rly. Had made the following observation inthis regard:“The essential feature of stoppage in transit is that the goodsshould be in the possession of a middleman or some otherperson intervening between the vendor who has parted withand the purchaser who has not received them.”Conditions under which Right of Stoppage in Transit can beExercised [Section 50]: The unpaid seller can exercise the rightof stoppage in transit only if the following conditions arefulfilled:

(i) The seller must have parted with the possession ofgoods, i.e., the goods must not be in the possessionof seller.

(ii) The goods must be in the course of transit.(iii) The buyer must have become insolvent.

Note: The buyer is said to be insolvent when he has ceased topay his debts in ordinary course of business, or cannot pay hisdebts as they become due, whether he has committed an act ofinsolvency or not.Note: The seller’s right of stoppage in transit is based on theprinciple that one man’s goods shall nto be applied to thepayment of other man’s debt. [Lord Reading in BoothSteamship Co Ltd. V. Cargo Fleet Iran Co.]Duration of Transit [Section 51(1)]: Goods are deemed to be incourse of transit from the time when they are delivered to acarrier or other bailee for the purpose of transmission to thebuyer, until the buyer or his agent in that behalf takes deliveryof them from such carrier or other bailee.Note: The carrier must hold the goods in the capacity of anindependent person and not in the capacity of an agent for theseller or buyer. If the carrier holds the goods as an agent for theseller, there is no question of exercising the right of stoppage intransit because the seller can exercise his right of lien. If thecarrier holds the goods as an agent for the buyer, the sellercannot exercise the right of stoppage in transit because thedelivery to the carrier amounts to delivery to buyer.Circumstances under which Right of Sopttage is Lost [Sections51 and 53 (1)]: The right of stoppage in transit is lost whentransit comes to an end. Transit comes to an end in thefollowing cases:


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(i) If the buyer or his agent in thatbehalf obtains delivery of the goodsbefore their arrival at the appointeddestination [Section 51(2)].

(ii) If, after the arrival of the goods at theappointed destination, the carrier orother bailee acknowledges to thebuyer or his agent that he holds thegoods on his behalf and continues inpossession of them as bailee for thebuyer or his agent, even if a furtherdestination for the goods may havebeen indicated by the buyer [Section51(3)].

(iii) When goods are delivered to a shipchartered by the buyer, it is a questiondepending on the circumstances ofthe particular case, whether goods arein the possession of the master as a carrier or as agent ofthe buyer [Section 51(5)].

(iv) Where the carrier or other bailee wrongfully refuses todeliver the goods to the buyer or his agent in that behalf[Section 51(6)].

(v) Where part delivery of the goods has been made to thebuyer or his agent in that behalf, the remainder of thegoods may be stopped in transit and such part delivery hasnot been given in such circumstances as to show anagreement to give up possession of the whole of thegoods [Section 51(7)].

(vi) Where the sub-sale or other disposition by the buyer hasbeen done with seller’s consent [Section 53(1)].

(vii) Where a document of title to goods ( e.g., bill of lading orrailway receipt ) has been issued or lawfully transferred toany person as buyer and that person transfers thedocument by way of sale to a person who takes thedocument in good faith and for consideration. [Provisionto Section 53(1)].

How to Exercise Right of Stoppage in Transit [Section 52(1)]:The unpaid seller may exercise his right of stoppage in transit inanyone of the following two ways:

(i) by taking actual possession of the goods, or(ii) By giving notice of his claim to the carrier or other

bailee who possesses the goods.Such notice may be given either to the person in actual posses-sion of the goods or to his principal. In the latter case, thenotice to be effectual shall be given at such time and in suchcircumstances that the principal, by the exercise of reasonablediligence, may communicate it to his servant or agent in time toprevent a delivery to the buyer.Duty of Carrier [Section 51(2)]: When notice of stoppage intransit is given by the seller to the carrier or other bailee inpossession of the goods, he shall redeliver the goods to oraccording to the directions of the seller. The expenses of suchredelivery shall be borne by the seller.Distinction Between Right of Lien and Right of Stoppage inTransit

Basis of distinction Right of lien Right of stoppage in transit 1. Possession of goods 2. Solvency 3. End. Vs. Commencement on delivery to carrier 4. Purpose Mode of exercising the right

The goods must be in actual possession of the seller. The right can be exercised even when the buyer is solvent but refuses to pay the price. This right comes to an end when the seller delivers the goods to a carrier. The purpose of right is to retain possession of the goods. This right can be exercised by the seller himself.

The goods must be in the possession of a carrier or other bailee who is acting as an independent person. This right can be exercised only when the buyer has become insolvent. This right commences only when the seller delivers the goods to a carrier. The purpose of this right is to regain the possession of the goods. This right can be exercised by the seller through the carrier or the other bailee.

Right of Stoppage in as an Extension of the Right of Lien:The right of stoppage in transit is an extension of the right oflien in the sense that the right of stoppage in transit beginswhen the right of lien ends and the purpose of the right ofstoppage in transit is to regain possession of the goods.Effect of Sub-sale or Pledge by Buyer upon the “Two Rights ofthe Unpaid Seller” Discussed Above (Sec. 53)The unpaid seller’s right of lien or stoppage in transit is notaffected by any sale or other disposition (e.g., pledge) of thegoods which the buyer might have made. For example, P sellscertain goods to R and delivers them to a carrier for transmis-sion to R. Before the goods reach their destination P comes toknow that R has become insolvent. In the meanwhile R sellsthose goods to Q. The sale of goods between R and Q will notaffect the right of P to stop them in transit.But there are two exceptional cases when these two rights of theunpaid seller are affected by a sale or other disposition (e.g.,pledge) of the goods by the buyer. These exceptions are:(i) When the seller has assented to the sale or other

disposition (e.g., pledge) which the buyer may have made.(ii) When a document of title to goods (e.g., a bill of lading or

railway receipt) has been issued or transferred to a buyer,and the buyer transfers the document to a person whotakes the document in good faith and for consideration,then,

(a) if such last mentioned transfer was by way of sale, theunpaid seller’s right of lien or stoppage in transit isdefeated, and

(b) if such last mentioned transfer was by way of pledge, theunpaid seller’s right of lien or stoppage in transit can onlybe exercised subject to the rights of the pledgee. But in thiscase the unpaid seller may require the pledgee to satisfy hisclaim against the buyer first out of any other goods orsecurities of the buyer in the hands of the pledgee.

Rights of Unpaid Seller in case of Transfer of Document byway of Pledge [Proviso to Sections 53(1) and 53(2)](i) Where the transfer was by way of pledge or other

disposition for value, the unpaid seller’s right of lien or


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stoppage in transit can only be exercised subject to rightsof the transferee

(ii) Where the transfer is by way of pledge, the unpaid sellermay require the pledgee to have the amount secured by thepledge satisfied in the first instance, as far as possible, outof any other goods or securities of the buyer in the handsof the pledgee and available against the buyer.

3. Right of ResaleThe right of resale is a very valuable right given to an unpaidseller. In the absence of this right, the unpaid seller’s otherrights against the goods, namely, ‘lien’ and ‘stoppage in transit,’would not have been of much use because these rights onlyentitle the unpaid seller to retain the goods until paid by thebuyer. If the buyer continues to remain in default, then shouldthe seller be expected to retain the goods indefinitely, speciallywhen the goods are perishable? Obviously, this cannot be theintention of the law. Section 54, therefore, gives to the unpaidseller a limited right to resell the goods in the following cases:

(a) Where the goods are of a perishable nature; or(b) Where such a right is expressly reserved in the contract

in case the buyer should make a default; or(c) Where the seller has given a notice to the buyer of his

intention to resell and the buyer does not pay or tenderthe price within a reasonable time.

If on a resale there is a loss to the seller, he can recover it fromthe defaulting buyer. But if there is a surplus on the resale, theseller can keep it with him because the buyer cannot be allowedto take advantage of his own wrong. If, however, no notice ofresale [as required in case(c) above] is given to the buyer, theright of seller to claim loss and retain surplus, if any, is reversed.In other words, if the unpaid seller fails to give notice of resaleto the buyer, there neither the goods are of perishable naturenor such a right was expressly reserved, he cannot recover theloss from the buyer and it under an obligation to hand over thesurplus, if any, to the buyer, arising from the resale. Thus, it willbe seen that giving of notice to the buyer, when so required, isvery necessary to make him liable for the breach of contract. It isso because such a notice gives an opportunity to the buyer eitherto pay the price and have the goods, or, if he cannot pay, tosupervise the sale to see that the same is properly made.It is important that absence of notice, when so required, affectsthe rights of the unpaid seller himself only as discussed aboveand it does not affect the title of the subsequent buyer who willacquire a good title to the goods. Section 54(3) specially declares–”Where an unpaid seller who has exercised his right of lien orstoppage in transit resells the goods, the buyer acquires a goodtitle thereto as against the original buyer, notwithstanding thatno notice of the resale has been given to the original buyer.”II. Rights of Unpaid Seller against the Buyer Personally

The unpaid seller, in addition to his rights against thegoods as discussed above, has the following three rights ofaction against the buyer personally:1. Suit for price (Sec. 55). Where property in goods has passed

to the buyer; or where the sale price is payable ‘on a daycertain’, although the property in goods has not passed;

and the buyer wrongfully neglects or refuses to pay theprice according to the terms of the contract, the seller isentitled to sue the buyer for price, irrespective of thedelivery of goods. Where the goods have not beendelivered, the seller would file a suit for price normallywhen the goods have been manufactured to some specialorder and thus are unsaleable otherwise.

2. Suit for damages for non-acceptance (Sec. 56). Where thebuyer wrongfully neglects or refuses to accept and pay forthe goods, the seller may sue him for damages for non-acceptance. The seller’s remedy in this case is a suit fordamages rather than an action for the full price of thegoods.

The damages are calculated in accordance with the rules con-tained in Section 73 of the Indian Contract Act, that is, themeasure of damages is the estimated loss arising directly andnaturally from the buyer’s breach of contract. Where the goodshave a ready market the principle applicable is that the seller mayrecover from the buyer damages equal to the difference betweenthe contract price and the market price on the data of the breachof the contract. Thus, if the difference between the contractprice and market price is nil, the seller can get only nominaldamages ( Charter vs Sullivan). But where the goods do nothave any ready market, the measure of damages will dependupon the facts of each case. For example, in Thompson Ltd. VsRobinson the damages were assessed on the basis of profitslost. In that case, T Ltd., who were car dealers, contracted tosupply a motorcar to R.R refused to accept delivery. It wasfound as a fact that the supply of cars exceeded the demand atthe time of breach and hence in a sense there was no marketprice on the date of breach. Held, T Ltd., were entitled todamages for the loss of their bargain viz., the profit they wouldhave made, as they had sold one car less than they otherwisewould have sold. To take another illustration, if the goods havebeen manufactured to some special order and they areunsaleable and have been manufactured to some special orderand they are unsaleable and have no value at all for other buyers,then the seller may even be allowed the full price of the goodsas damages.1. Suit for special damages and interest (Sec.61) This Section

entitles the seller to sue the buyer for ‘special damages’ alsofor such loss “which the parties knew, when they made thecontract, to be likely to result from the breach of it.” In factthe Section is only declaratory of the principle regarding‘special damages’ laid down in Section 73 of the IndianContract Act. The Section also recognizes unpaid seller’sright to get interest at a reasonable rate on the total unpaidprice of the goods sold, from the time it was due until it isactually paid. (Telu Ram Jain vs Aggarwal & Sons).

We have discussed a lot about the rights of an unpaid seller.But does the buyer too enjoys some rights. Yes, of course! Letme throw a light on it.

Rights of BuyerThe rights available to the buyer have been shown below inLet us discuss these rights one by one.


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(a) Suit for Damages for Non-delivery [Section 57] Where theseller wrongfully neglects or refuses to deliver the goods tothe buyer, the buyer may sue the seller for damages fornon-delivery.

(b) Suit for Specific Performance [Section 58] In any suit forbreach of contract to deliver specific or ascertained goods,the court may direct that the contract shall be performedspecifically.

(c) Suit for Breach of Warranty [Section 59] Where there is abreach of warranty by the seller, or where the buyer elects oris compelled to treat any breach of a condition on the partof the seller as a breach of warranty, the buyer is not byreason only of such breach of warranty entitled to reject thegoods, but he may –(i) Set up against the seller the breach of warranty in

diminution or extinction of the price; or(ii) Sue the seller for damages for breach of warranty.

Note: The fact that a buyer has set up a breach of warranty indiminution or extinction of the price does not prevent himfrom suing for the same breach of warranty if he sufferedfurther damage. [Section 59(2)]Example: X sold a second hand Radio to Y who spent Rs 100on the repair of this Radio. This Radio was seized by the policeas it was a stolen one. Y filed a suit against X for recovery ofdamages for breach of warranty of quite possession includingthe cost of repairs. It was held that Y was entitled to recover thesame. [Mason v. Burmingham](d) Right to Treat the Contract as Rescinded or Operative in

Case of Repudiation of Contract by Seller before due Date[Section 60] Where seller repudiates the contract before thedate of delivery, the buyer may either treat the contract assubsisting and wait till the date of delivery, or he may treatthe contract as rescinded and sue for damages for thebreach.

(e) Suit for Interest [Section 61(2)] In case of breach of thecontract on the part of the seller, the buyer may sue theseller for interest from the date on which the payment wasmade.

Practical Problem

1. A sells goods to B. B pays to A through a cheque. Before Bcould obtain the delivery of goods, his cheque has beendishonored by the bank. A, therefore, refuses to givedelivery of the goods until paid. Is A’s action justified?

[Hint: Yes, A’s action is justified, because the right of lien islinked with possession and not with title or passing ofproperty.]2. A sells goods to B and transfers him the document of title

to the goods. B pays A through a cheque. In fulfillmentof a contract of sale B transfers that document of title toC. Before C could obtain the delivery of goods, B,s chequehas been dishonoured by the bank. Hence A givesinstructions to stop delivery of the goods to C until paid.Is A’s action justified?

[Hint. No. A’s action is not justified. An unpaid seller’s right oflien is defeated against transferee who takes a document of titlein good faith and for consideration (Sec. 53)].3. A sells and consigns to B goods of the value of Rs. 10,000

on credit. B assigns the railway receipt to C to secure aspecific advance of Rs. 50,00 on the railway receipt. Beforethe goods reach the destination B becomes insolvent. Agives notice to stop the goods in transit but C claims them.Can A stop the goods in transit?

[Hint. Yes, A can stop the goods in transit but subject to thepledge of C.C can recover the amount of pledge from thegoods or from A. Hence A can stop the goods in transit onlywhen he pays Rs. 5,000 to C (Sec.53)].4. P sells to R a quantity of wheat lying in P’s warehouse. It is

agreed that three months’ credit shall be given to R.Rallows the wheat to remain in P’s warehouse. Before theexpiry of the three months R becomes insolvent and theOfficial Assignee demands delivery of the wheat from Pwithout offering to pay the price. Is P entitled to retain thegoods until paid?

[Hint. Yes, P is entitled to retain the goods as security for theprice until he is paid. In the case of buyer’s insolvency the lienexists even though goods had been sold on credit and theperiod of credit has not yet expired, provided the goods are stillin possession of the seller (Sec. 47).]5. A sells certain goods to B, the property in the goods is to

pass to B on delivery which is to take place on Ist August1987, and the payment to be made by property in thegoods has not passed to him. Can A sue B for the pricebefore the delivery of the goods takes place?

[Hint. Yes, A can sue B for the price. Where the sale price ispayable ‘on a day certain,’ the seller can sue the buyer on hisdefault, irrespective of passing of property and delivery ofgoods (Sec. 55)].6. A attended an auction sale and made a bid of Rs. 600 for a

typewriter but withdrew the offer before the fall of thehammer. One of the conditions of the sale, which A hadread was that biddings once made, shall not be withdrawn.A was sued for Rs. 600, his being the highest bid. Decide.

[Hint. A is liable to pay Rs 600 because as per the conditions ofthe auction no bid can be withdrawn. The auctioneer has theright to make the auction subject to any conditions he likes (TheCoffee Board vs Famous Coffee and Tea Works, ]7. At an auction sale, A makes the highest bid for a flower

vase. Purporting to accept the bid the auctioneer strikes thehammer, but strikes the vase and breaks it. Who is to bearthe loss? Would your decision differ if the auctioneer hadstruck the table, on which the vase was kept, with thehammer and the vase fell down and broke into pieces?

[Hint. The loss in both the cases is to be borne by the owner ofthe flower vase, because at the time of the completion of thecontract, namely, striking the hammer, the goods forming thesubject matter of the contract have perished, and as suchimpossibility of performance at the time of contract renders theagreements void ab-initio.


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Pvt. Ltd, Delhi

Notes:


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LESSON 21:THE NEGOTIABLE INSTRUMENT ACT 1881

MEANING AND TYPES OF NEGOTIABLE INTRUMENTS

Learning OutcomesAfter reading the lesson, you should be able to know:• The meaning of Negotiable Instruments• The important types of Negotiable Instruments

IntroductionWe are aware that money is most common medium ofexchange itself has the exchange value and is freely transferable.It was felt although the use of ready cash is desirable due toacceptability but may cause risk and inconvenience in dealing. Itssubstitute leads to development of Negotiable Instruments.The Negotiable Instrument Act 1881 came into force on 1st

March 1881. It extends to the whole of India except the Stateof Jammu & Kashmir. The term Negotiable Instrumentconsists of two parts viz; Negotiable and Instrument. Theword ‘negotiable’ means transferable by delivery and the word ‘instrument ‘ mean written documents by which a right iscreated in favour of some person. It means an instrumentpossessing the quality of Negotiability is entitled to be callednegotiable instrumentAccording to Will “A negotiable instrument is one the propertyin which is acquired by anyone who takes it bonafide and forvalue not withstanding any defect of title in the person fromwhom he took it”Thus a negotiable instrument must possess two features.1. The right of ownership contained in the instrument can be

transferred from one person to another by mere delivery, ifit is payable to bearer or by endorsement and delivery ifpayable to order and

2. The transferee taking the instrument in good faith and forconsideration gets a good title to the same even though thetitle of the transfer is defective.

(a) Meaning of Negotiable Instrument Payable toorder.A promissory note, bill of exchange or cheque is payable toorder if, either of the following two conditions is fulfilled:

(a) It must be expressed to be so payable(b) It must be expressed to be payable to a particular

person and it must not contains words which prohibittransfer or indicate and intention that it shall not betransferable.

(b) Meaning of Negotiable instrument Payable toBearer.A Promissory note, bill of exchange or cheque is payable tobearer if either of the following condition is fulfilled(a) It must be expressed to be so payable(b) The only and last endorsement must be endorsement in

blank

Essential Characteristics Feature of a NegotiableInstrumentThe essential characteristics of a negotiable instrument havebeen shown as under:

1. Payable to order or bearer2. Freely transferable3. Presumption as to holder4. Title of holder in due course5. Presumption as to consideration

Let us discuss these one by one1. Payable to order or bearer: - It must be payable either to

order or bearer2. Freely Transferable:- A instrument payable to order is

negotiable by endorsement and delivery and an instrumentpayable to bearer is negotiable by mere delivery

3. Presumption as to Holder:- Every holder of negotiableinstrument is presumed to be holder in due course (Section118)

4. Title of holder in due course:- A holder in due course ( i.e.the person who become the possessor of negotiableinstrument before maturity, for valuable consideration andin good faith ) get the instrument free from all defects inthe title of transferor

5. Presumption as to considerations:- Every negotiableinstrument is presumed to have been made, drawn,accepted, endorsed , negotiated or transferred forconsideration.

Since the Negotiable Instrument Act deals with only threeNegotiable Instruments; Promissory Note, Bill of exchangeand cheque.The same are being discussed in some detail. Let us come to thedefinition aspect of important negotiable instruments

Definitions(a) Promissory Note: A promissory note is an instrument

(not being a bank note or a currency – note ) in writingcontaining an unconditional undertaking, signed by themaker to pay a certain sum of money only to or to theorder of, a certain person or to the bearer of theinstrument ( Section 4).

In other words, the requirements of promissory note are asfollows:(i) It must be in writing: This means that the engagement

cannot be oral. There is no prescribed form of language forthis; even the word ‘promise’ need not be used. What isnecessary is that whatever language is used, it must clearlyshow that the maker is unconditionally bound to pay thesum.


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(ii) The promise to pay must be unconditional: If a conditionis attached to the ‘promise to pay’ then the instrument willnot be construed as a promissory note. Suppose, A signsan instrument made out as follows, “I promise to pay to BRs. 500 on D’s death, provided D leaves me enough to paythe sum”. The instrument will not be a promissory note.Similarly, if A signs thus, “I promise to pay to B Rs. 500deducting any money which B may owe me;” such aninstrument also will not be a promissory note. Let us nowtake a converse case. An instrument runs thus: “Iacknowledge myself to be indebted to B of Rs. 500 to bepaid on demand, for value received”. Thus instrumentwould be a promissory note.

It may be noted that a promise to pay will not be conditionalunder Section 4, where it depends upon an event which iscertain to happen but the time of its occurrence may be‘uncertain. For example, where a promissory note is in thisform: “I promise to pay to A Rs. 2,000, 15 days after the deathof B”, it is not conditional as it is certain that B will die thoughthe exact time of his death is uncertain (Section 4).(iii) The amount promised must be a certain and a definite

sum of money: Certainty is one of the essentialcharacteristics of a promissory note. Certainty must be asto the amount and also as to the person by whose orderand to whom payment is to be made. Uncertainty in suchmatters has a tendency to restrict credit and to hampercommerce. Hence the necessity of certainty. For example,where an instrument contains: “I promise to pay Rs. 350and all other sums which shall be due”, it is not a validpromissory note as the sum is not certain within themeaning of Section 4.

You should also note that payment with interest of at aspecified rate of exchange is certain within the meaning ofSection 4. You should also remember that in the event offigures and words indicating the sum payable being contradic-tory; the sum in words must be taken into account.(iv) The instrument must be signed by the maker: It is

incomplete till it is so signed. Since the signature isintended to authenticate the instrument it can be on anypart of the instrument.

(v) The person to whom the promise is made must be adefinite person:- The payee must be a certain person.Where the name of the payee is not mentioned as a party,the instrument becomes invalid. Remember that apromissory note cannot be made payable to the makerhimself. Thus, a note, which runs “I promise to paymyself”, is not a promissory note and hence invalid.However, it would become valid when it is endorsed by themaker. This is because it then becomes payable to bearer, ifendorsed in blank, or it becomes payable to the endorseeor his order, if endorsed specially.

In connection with the promissory note, you should alsoremember that: (a) consideration need not be mentioned; (b)place and date of making it need not the mentioned: (c) anundated instrument will be treated as having been made on thedate of its delivery; and (d) an antedated or post dated instru-ment is not invalid.

N.B. The words “ or to the bearer of the instrument” stillappear in Section 4 to the Act. since these have not yet beendeleted there from by the Parliament: Nevertheless, in view ofthe provision contained in Sub-section (2) of Section 31 of theReserve Bank of India or the Central Government can make orissue a promissory note payable to the bearer of the instru-ment.

Let us discuss some of the illustrations.

IllustrationsA signs instruments in the following terms: (a) “I promise to Pay B or order Rs.500”. (b) “I acknowledge myself to be indebted to B in

Rs.1,000, to be paid on demand, for value received.” (c) “Mr B I.O.U Rs.1,000.” (d) “I promise to pay B Rs. 500 and all other sums which

shall be due to him.” (e) “I promise to pay B Rs. 500 first deducting there out

any money which he may owe me.” (f) I promise to pay B Rs. 500 seven days after my

marriage with C. (g ) I promise to pay B Rs. 500 on D’s death, provided D

leaves me enough to pay that sum. (h) I promise to pay B Rs. 500 and to deliver to him my

black horse on lst January next.The instruments respectively marked (a) and (b) are promissorynotes. The instruments respectively marked (c), (d), (e), (f), (g)and (h) are not promissory notes.(b) Bill of Exchange: Before going into the definition, you

must know how a bill of exchange ordinarily comes intoexistence. It comes into being, when a trader decides to sellgoods on credit. Suppose, A sells goods worth Rs. 800 toB, and allows him three months’ time to pay the price. Awill them draw a bill on B in the following terms “Threemonths after date pay to my order the sum of Rs. 800 forvalue received”. After signing the bill, A will present it to Bfor acceptance. If B writes across the bill ‘ accepted’, it willindicate that B undertakes the liability to pay a sum of Rs.800 within the time stipulated therein. Here A is thedrawer, B is the drawee and after acceptance B will be theacceptor. A bill of exchange is an instrument in writingcontaining an unconditional order signed by the maker,directing a certain person to pay a certain sum of moneyonly to, or to the order of certain person to the bearer ofthe instrument (Section 4).

You should now try to understand the application of thepoints emerging from the said definition:(i) The bill of exchange must be in writing. This point, we

take it for granted, needs no further annotation.(ii) There must be money to the payee. It is of the essence of

the bill that its drawer orders the drawee to pay money tothe payee. It must be imperative – mere predatory wordsdo not suffice. Although terms of politeness may beadmissible, excessive politeness may nonetheless promptone to disregard it as an order.


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(iii) This order must be unconditional, as the bill is payable atall events. Thus it is absolutely necessary for the drawer’sorder to the drawee to be unconditional. The order mustnot make the payment of the bill dependent on acontingent event. A conditional bill of exchange is invalid.

Where a bill contains an order to pay the amount specifiedtherein out of a particular fund it will be conditional andtherefore invalid. The reason for this invalidity is that it isuncertain whether the funds will be in existence or provesufficient on the bill becoming payable. However, an unquali-fied order to pay together with an indication of a particular fundout of which the drawee is to reimburse himself, is notconditional. Hence such as indication does not vitiate theinstrument.(iv) The drawee must sign the instrument. The instrument

without the proper signature will be inchoate and henceineffective. It is permissible to add the signature at any timeafter the issue of the bill. But if it is not so added, theinstrument remains ineffectual.

(v) The drawer, the drawee (acceptor) and the payee – thenecessary parties to a bill – are to be specified in theinstrument with reasonable certainty. You shouldremember that all these three parties may not necessarily bethree different persons. Once can play the role of two. Butthere must be two distinct persons in any case.

Promissory Note Bill of exchange

(i) It contains a promise to pay.

(ii) The liability of the maker of a note is primary and absolute (Section 32)

(iii) It is presented for payment without any previous acceptance by the maker.

(iv) The maker of promissory note stands in immediate relationship with the payee (Explanation to Section 44) and is primarily liable to the payee or the holder.

(v) It cannot be made payable to the maker himself, that is the maker and the payee cannot be the same person.

(vi) In the case of a promissory note there are only two parties, viz, the maker (debtor) and the payee (creditor).

(vii) A promissory note cannot be drawn in sets.

(viii) A promissory note can never be conditional.

1.It contains an order to pay.

2.The liability of the drawer of a bill is secondary and conditional. He would be liable if the drawee, after accepting the bill fails to pay the money due upon it provided notice of dishonour is given to the drawer within the prescribed time (Section 30)

3.If a bill is payable some time after sight, it is required to be accepted either by the drawee himself or by some one else on his behalf, before it can be presented for payment.

4.The maker or drawer of an accepted bill stands in immediate relationship with the acceptor and the payee (Explanation to Section 44).

5.In the case of bill, the drawer and payee or the drawee and the payee may be the same person.

6.In the case of a bill of exchange there are three parties, viz, drawer, drawee and payee, and any two of these three capacities can be filled by one and the same person.

7.The bills can be drawn in sets.

8.A bill of change too cannot be drawn conditionally, but it can be accepted conditionally with the consent of the holder.

(vi) The sum must be certain [what we have discussed on thispoint in relation to promissory note vide requirement (iii)on page 2 will equally hold goods here].

(vii) The medium of payment must be money and money only.The distinctive order to pay anything in kind will vitiate thebill.

(c) Distinction between a promissory note and a bill ofexchange: The distinctive features of these two types ofnegotiable instruments are tabulated below:

You should carefully note that neither a promissory note nor abill of exchange can be made payable to bearer on demand.(d) Definition of Cheque: A “cheque” is a bill of exchange

drawn on a specified banker and not expressed to bepayable otherwise than on demand and it includes theelectronic image of a truncated cheque and a cheque in theelectronic form.

For the purposes of this section, the expressions –(a) “a cheque in the electronic form” means a cheque which

contains the exact mirror image of a paper cheque, and isgenerated, written and signed in a secure system ensuringthe minimum safety standards with the use of digitalsignature ( with or without biometrics signature ) andasymmetric crypto system;

(b) “a truncated cheque” means a cheque which is truncatedduring the course of a clearing cycle, either by the clearing


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house or by the bank whether paying or receiving payment,immediately on generation of an electronic image fortransmission, substituting the further physical movementof the cheque in writing.

For the purposes of this section, the expression “clearing houserecognized as such by the Reserve Bank of India. (Section 6,Negotiable Instruments Act) That is to say, it is a bill drawn ona banker which is payable on demand.A cheque being specie of bill of exchange, it must, under theSection 5, be signed by the drawer and must contain anunconditional order on a specified banker to pay a certain sumof money to or the order of the specified person or to thebearer of the instrument. A cheque, however, is a peculiar typeof negotiable instrument in the sense that it does not requireacceptance; also it is not meant to be payable to bearer ondemand. A cheque is an exception to the general rule that a billof exchange cannot be drawn “payable to bearer on demand”Section 31, (The Reserve Bank of India Act). A cheque may be drawn up in three forms, viz., (i) bearercheque (i.e., one which is either expressed to be so payable or onwhich the last or only endorsement is an endorsement inblank); (ii) order cheque i.e., one which is expressed to be sopayable words against its transfer or indicating an intention thatit shall not be transferable (Section 18); and (iii) crossed chequeis a cheque which can be only collected through a banker.

Difference between Cheque and Bill of Exchange

(1) In the case of a cheque the drawee – i.e., the person onwhom the bill is drawn – must always be banker whereasin the case of a bill of exchange the drawee may be anyperson.

2) No days of grace are allowed in the case of a cheque, and acheque is as a rule, payable on demand, whereas three days’grace is allowed in the case of a bill.

3) In the case of a dishonour of a cheque, notice ofdishonour is not necessary whereas notice of dishonour isusually required in the case of a bill.

4) A cheque can be drawn to bearer and made payable ondemand, whereas a bill cannot be bearer if it is madepayable on demand.

5) In the case of a cheque, it is not necessary to present it foracceptance. It needs only is advisable to present them foracceptance even when it is not essential to do so.

6) Cheque do not require to be stamped in India, whereas billmust be stamped according to the law. In England andseveral other countries, cheques also are required to bestamped.

7) A cheque may be crossed, whereas a bill cannot be crossed.Generally, it must be remembered that cheques are negotiableinstruments and the most of the rules in relation to bills ofexchange also apply to cheques.(f) Bank Draft: A bank draft is, by definition, an order drawn

by an office of a bank upon another office of the samebank. In other words, it is, in a sense, an order drawn byone person upon himself, whereas in the case of bills, they

are drawn by one person upon another person (Section85A).

Section 131A of the Act makes all rules as regards crossedcheques, laid down in Sections 123 to 131, applicable to draftsdefinition by Section 85A, Thus a banker who collects a draft onbehalf of a customer will not be protected by Section 131.A draft is drawn either against cash deposited at the time of itspurchase or against debit to the buyer’s current account with thebanker. The buyer of the draft generally furnishes particulars ofthe person to whom the amount thereof should be paid. Thebanker charges for his services a small commission. The draftlike a cheque, can be made payable to drawer on demandwithout any legal objection thereto, since the Reserve Bank ofIndia. Act, under Section 31, specially allows such a draft beissued.Moreover, where a draft purports to have been endorsed by oron behalf of the payee the paying bank is discharged fromliability by its payment in due course even though the endorse-ment of the payee has been forged. This affords greatprotection to the paying banker in so far as it is always possiblefor the paying banker to identify the signature of the payee.(g) Marked cheque: A cheque need not be presented for

acceptance. Therefore the drawee of the cheque i.e., thebanker, is under liability, to the person in whose favour thecheque is drawn. The banker, however, will be liable to hiscustomer ( drawer), if he wrongly refuses to honour thecheque. In such a case, action can be taken by the customeragainst the banker for the loss of his reputation. In certaincases, however , a cheque is marked or certified by thebanker on whom it is drawn as “good for payment’. Such acertification of marking is strictly not equivalent to anacceptance but is very similar to it and protects the personto whom the cheque is issued against the cheque beingrefused for payment subsequently by Banking in India, as arule, do not mark or certify cheque in this manner. Bankersin India, are not liable even if a bank has marked a chequeas “good for payment” (Bank of Baroda vs. PunjabNational Bank Ltd. ).

(h) Crossed cheque(a) The usage of crossing cheques: Cheques are usually

crossed as a measure of safety. Crossing is made bydrawing two parallel transverse lines across the face ofthe cheque with or without the addition of certainwords. The usage of crossing distinguishes chequesfrom other bills of exchange. The object of generalcrossing is to direct the drawee banker to pay theamount of the cheque only to a banker, to prevent thepayment of the cheque being made to wrong person(Section 123);

(b) Special crossing: Where a cheque bears across its face anentry of the name of a banker either with or withoutthe words “not negotiable”, the cheque is consideredto have been crossed specially to that banker. In thecase of special crossing the addition of two paralleltransverse lines is not essential though generally thename of the bank to which the cheque is crossed


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specially is written between two parallel transverse lines(Section 124).

(c) Crossing after issue: (f) If cheque has not been crossed,the holder thereof may cross it either generally, orspecially. (ii) If it is crossed generally, the holder maycross it, specially. (iii) If it is crossed, either generally orspecially the holder may add the words “notnegotiable”. (iv) If a cheque is crossed specially, thebanker to whom it is crossed, may again cross itspecially to another banker, his agent, for collection.This is the only case where the Act allows a secondspecial crossing by a banker and for the purpose ofcollection [Akro Kervi Mines vs. Economic Bank(1904) 2 K.B. 465 (Section 125)]. It may be noted thatthe crossing of a cheque is an instance of an alterationwhich is authorized by the Act.

(d) Payment of cheque, crossed generally or specially(Section 126 & 127): If a cheque is crossed generally, thebanker on whom it is drawn shall not pay it otherwisethan to a banker. Again, where a cheque is crossedspecially, the banker on whom it is drawn shall not payit otherwise than to the banker to whom it is crossedor his agent for collection.

Where a cheque is crossed specially to more than one bankerexcept when it is crossed to an agent for the purpose ofcollection, the banker on whom it is drawn shall refuse paymentthereof. This is because, in such a case, the instruction by thedrawer would not be clear (Section 127).

(e) Payment in due course of crossed cheque: Where thebanker on whom a crossed cheque is drawn, pays it indue course, it is to be presumed that he has madepayment to the true owner of cheque, though in fact,the amount of the cheque may not reach the trueowner. In other words, banker making payment in duecourse is protected, whether the money is or is not, infact, received by the true owner of the cheque (Section128).

(f) Payment out of due course: Any banker paying acrossed cheque otherwise than in accordance with theprovisions of Section 126 shall be liable to the trueowner of the cheque for any loss he may havesustained. Thus, if the money does not reach the trueowner, he can claim payment over again from thebanker (Section 129).

(g) Cheque marked “not negotiable”: A person taking acheque crossed generally or specially bearing in eithercase the words’ not negotiable’ shall not have or shallnot be able to give a better title to the cheque than thetitle the person from whom he took had.

In consequence if the title of the transferor is defective, the titleof the transferee would be vitiated by the defect. But, in the caseof a bill negotiated in the ordinary way, the title of the holder indue course would not be affected by the defect in the title of thetransferor (Section 130).For example, X, by means of fraud, obtained from Y a chequecrossed ‘not negotiable’ and got it cashed at a bank other than

the drawee bank. Y sued the bank for conversion. Is the bankliable for conversion? The effect of Section 130 of the Act.broadly, is that if the holder has a good title, he can still transferit with a good title; but if the transferor has a defective title, thetransferee is affected by such defects, and he cannot claim theright of a holder in due course by providing that he purchasedthe instrument in good faith and for value. As X in the case inquestion had obtained the cheque by fraud, he had no title to itand could not give to the bank any title to the cheque or themoney and the bank would be liable for the amount of thecheque for conversion. A similar decision was taken in GreatWestern Railway Co. vs. London and Country Banking Co.(1901) A.C. 414 the facts whereof are exactly the same as theexample cited above.The addition of the words” not negotiable” in a crossed chequehas a special significance. The use of the words does not renderthe cheque non-negotiable but only affects one of the mainfeatures of negotiability. The general rule about the negotiabilityis that the holder in due course of a bill or promissory note orcheque takes the instrument free from any defect which mightbe existing in the title of the transferor. If the holder takes theinstrument in good faith , before maturity and for valuableconsideration, his claim is not defeated or affected by thedefective title of the transferor. In case of any dispute, it is thetransferor with the defective title who is liable. But the additionon the words “not negotiable” to the crossing of a cheque,makes the position different. When such a crossing is placed ona cheque, the holder in due course does not get any better titlethan what the transferor had: If the transferor had defectivetitle, the title of the holder in due course also becomes defective.Therefore, he will have to refund the amount of the bill to thetrue owner. In other words, the principle of the ‘nemo datquod non habet’ – (that is, nobody can pass on a title betterthan what he himself has ) will be applicable to a cheque with a“not negotiable” crossing.Thus, cheques with “not negotiable” crossing are negotiable solong as their title is good. Once the title of the transferor orendorser become defective the title of the transferee is alsoaffected by such defect and the transferee cannot claim the rightof a holder in due course.As per the latest instructions issued by the Reserve Bank ofIndia (9-9-1992) it would be safer for the drawer to cross acheque “not negotiable” with the words “account payee” addedto it. The courts of law have held that “an account payee”crossing is a direction to the collecting banker as to how theproceeds are to be applied after receipt. The banker can disregardthe direction only at his own risk and responsibility. In otherwords, an ‘account payee, cheque can be collected only for theaccount of the payee named in the cheque and not for anyoneelse. A banker collecting an ‘account payee’ cheque for a personother than the payee named in the cheque may be held liable forconversion.In other words, if the bank collects an account payee cheque fora person other than the payee it does so at its own risk. It isimperative on the part of collecting bank, therefore to takeutmost care to enquire into the title of its customer and satisfy


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itself that there is no defect in the title of the customerpresenting such cheque for collection.

(h) Cheque marked “Account Payee”: It is a form ofrestrictive crossing, represented by the words “AccountPayee” entered on the face of the cheque. Such acrossing acts as a warning to the collecting bankers thatthe proceeds are to be credited only to the account ofthe payee. If the collecting banker allows the proceedsof the cheque so crossed to be credited to pay any otheraccount, he may be held guilty of a negligence in theevent of an action for wrongful conversion of fundsbeing brought against him. These words are not anaddition to the crossing but are mere direction to thereceiving or collecting bankers. These do not affect thepaying banker who is under no duty to ascertain thatthe cheque in fact has been collected for the account ofthe person named as the payee.

In the case of a cheque bearing “Account Payee” crossing whichis not specially crossed to another banker, the paying bankerneeds only to see that the cheques bears no other endorsementbut that of the payee, and that it is otherwise in order. Butwhere the cheque is also crossed specially, the paying bankermust make payment only to the bank named in the crossing. Ifhas been held that crossing cheque with the words “AccountPayee” and mentioning a bank is not a restrictive endorsementso as to invalidate further negotiations of the cheque by theendorsee.(i) Protection in respect of uncrossed cheque: When a cheque

payable to order purports to be endorsed by or on behalfof the payee and the banker on whom it is drawn pays thecheque in due course, he is authorized to debit the accountof his customer with the amount so paid, even though theendorsement of the payee subsequently terns out to be aforgery, or though the endorsement may have been madeby payee, agent without his authority . In other words, thebanker is exonerated for the failure to direct either thegenuineness of the validity of the endorsement on thecheque purporting to be that of the payee of hisauthorized agent.

For example, a cheque is drawn payable to B on order and it isstolen, Thereafter, the thief or someone else forges B’s endorse-ment and presents the cheque to the bank for encashment. Onpaying the cheque, the banker would be able to debit thedrawer’s account with the amount of the cheque. Likewise, ifthe cheque in the above case, was not stolen but insteadpresented for payment by B’s agent on endorsing the same “PerPro” for B and the cheque is cashed the banker could debit theaccount of the drawer. He would not be held guilty of theground that he has cashed the cheque endorsed by the agent ofB who has misappropriated the amount thereof.Such a protection is also available in respect of drafts drawn byone branch of a bank of another payable to order (Section85A).(j) Protection in respect of crossed cheques: When a banker

pays a cheque (drawn by his customer), if crossed generallythen to any banker, and if crossed specially then to banker,to whom it is crossed or his agent for collection (also being

a banker), he can debit the drawer’s account so paid, eventhough the amount of the cheque does not reach trueowner.

The protection in either of the two cases aforementioned can beavailed of, if the payment has been made in due course i.e.,according to the apparent tenor of the instrument, in goodfaith and without negligence, to any person in possessionthereof in the circumstances which do not excite any suspicionthat he is not entitled to receive payment of the cheque.Let us know in detail about the other important classificationof instruments.

Classification of Instruments

(a) Bearer and Order instruments: An instrument may bemade payable: (1) to bearer; (2) to a specified person or tohis order.

An instrument is payable to bearer which is expressed to be sopayable on which is expressed thus “Pay to R or bearer”. It isalso payable to bearer when the only or last endorsement on itis an endorsement in blank.An instrument is payable to order (i) when it is payable to theorder of a specified person or (2) when it is payable to aspecified person or his order or, (3) when it is payable to aspecified person without the addition of the words “or hisorder” and does not contain words prohibiting transfer orindicating an intention that it should not be transferable. Whenan instrument, either originally or by endorsement, is madepayable to the order of a specified person and not to him or hisorder, it is payable to him or his order, at his option.When an instrument is not payable to bearer, the payee must beindicated with reasonable certainty.Significance of bearer instruments” The expression “bearerinstrument” signifies an instrument, be it a promissory note,bill of exchange or a cheque, which is expressed to be so payableor on which the last endorsement is in blank (Explanation 2 toSection 13 of the Negotiable Instrument Act ).Under Section 46, where an instrument is made payable tobearer it is transferable merely by delivery, i.e., without anyfurther endorsement thereon. This character of the instrument,however, can be altered subsequently. For Section 49 providesthat a holder of negotiable instrument endorsed in blank (i.e.,bearer ) may, without signing his own name, by writing abovethe endorser’s signatures, direct that the payment of theinstrument be made to another person. An endorsee thus, canconvert an endorsement in blank into an endorsement in full.In such a case, the holder of the instrument would not be ableto negotiable the instrument by mere delivery. He will berequired to endorse the instrument before delivering it.In the case of a cheques, however the law is a little differentfrom the one stated above. According to the provisions ofSection 85(2) where a cheque is originally expressed to bepayable to bearer, the drawee is discharged by payment in duecourse to the bearer thereof, despite any endorsement whetherin blank or full appearing thereon notwithstanding that anysuch instrument purported to restrict or exclude furthernegotiation. In other words, the original character of the cheque


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is not altered so far as the paying bank is concerned, providedthe payment is made in due course. Hence the proposition that“once a bearer instrument always a bearer instrument.”(b) Inland and Foreign Instrument (Sections 11 & 12): A

promissory note, bill of exchange or cheque drawn ormade in India and made payable in or drawn upon anyperson resident in India shall be deemed to be an inlandinstrument. Any such instrument, not so drawn, made orpayable shall be deemed to be a foreign instrument.

Thus, the foreign bills are: (a) bills drawn outside India andmade payable in or drawn upon any person resident in anycountry outside India; (b) bills drawn outside India and madepayable in India, or drawn upon any person resident in India;(c) bills drawn in India upon persons resident outside Indiaand made payable outside India.In the absence of a contract to the country, the liability of themaker or drawer of a foreign promissory note or bill ofexchange is regulated in all essential matters by the law of theplace where he made the instrument, and the respective liabilityof the acceptor and endorser by the law of the place where theinstrument is made payable (Section 134). For example, a bill ofexchange is drawn by A in California where the rate of interest is25% and accepted by B payable in Washington where the rate ofinterest is 6%. The bill is endorsed in the State and isdishonoured. An action on the bill is brought against B in theStates. He is liable too pay interest at the rate of 6% only. But ifA is charged as drawer, he is liable to pay interest at 25.The distinction between inland and foreign bills is of impor-tance in connection with Sections 104 and 134 of the Act.Inland bills need not be protested for dishonour; protest inthis case is optional. But foreign bills must be protested whenlaw of the place of making or drawing them requires suchprotest. The question by what law are the contracts on nego-tiable instruments governed is also important.Foreign bills must be protested for dishonour if the law of theplace where these are drawn prescribes for such a protest. In thecase of inland bills, protest is optional (Section 104).c) Ambiguous and inchoate bills An ambiguous bill means

an instrument which can be constructed either as apromissory note or as bill of exchange (Section 17). E.g., abill drawn by a person on himself in favour of a thirdperson or where the drawee is a fictitious person. The lawon the point is that the holder of such a bill is at liberty totreat the instrument as bill or a promissory note. Thenature of the instrument will be as determined by theholder.

An incomplete instrument called an inchoate instrument.Section 20 of the Negotiable Instruments Act provides thatwhen one person signs and delivers to another a paper stampedin accordance with the law relating to negotiable instrumentsthen in force in India and either wholly blank or having writtenthereon an incomplete negotiable instrument, he thereby giveprima facie authority to the holder thereof to maker or com-plete, as the case may be, upon it a negotiable instrument for anamount specified therein and not exceeding the amount coveredby the stamp. The person so signing shall be liable upon such

instrument in the capacity in which he signed the same, to anyholder in due course for such amount. Provided that no personother than a holder in due course shall recover from the persondelivering the instrument anything in excess of the amountintended to be paid by them there under. The principle of thisrule (namely that a person who gives another possession to hissignature on a blank stamped paper, Prima facie authorizes thelatter as his agent to fil it up and give to the world the instru-ment as accepted by him ) is one of estoppel. By such signaturehe binds himself as drawer, maker, acceptor or endorser. Hissignature on the blank paper purports to be an authority to theholder to fill up the blank, and complete the paper as a nego-tiable instrument.Till this filling in and completion, the instrument is not a validnegotiable instrument, and no action is maintainable on it.Further, as a condition of liability, the signer as a maker, drawer,endorser or acceptor must deliver the instrument to another. Inthe absence of delivery, the signer is not liable. Furthermore, thepaper so signed and delivered must be stamped in accordancewith the law prevalent at the time of signing and on deliveringotherwise the signer is not estopped from showing that theinstrument was filled without his authority.

Sight And Time Bills Etc.: (Sections 21 To 25)

(i) Instruuments payable on demand: Bills and notes arepayable either on demand or at a fixed future time.Cheques are always payable on demand. A promissory noteor bill of exchange in which no time for payment ismentioned is payable on demand. A bill or promissorynote is also payable on demand when it is expressed to bepayable on demand, or “at sight” or “presentment”. Itshould be noted that the expression “on demand” doesnot imply that any actual demand is to be made; it is only atechnical expression meaning “immediately payable”. Sucha bill or note may be presented for payment at any time atthe option of holder, but it must be presented within areasonable time after its issue in order to tender the drawerliable, and within a reasonable time after its endorsementto render the endorser liable.

(ii) Time Bills: The expression “after sight” means, apromissory note after presentment for sight, and in a billof exchange, after acceptance, noting for non-acceptance orprotest for non – acceptance. It is useful to make a bill ornot payable at so many months or days after sight.

The term ‘after sight’ is differently used in a note and a bill. Inthe former case, it denotes that payment is not to be demandedtill it has been exhibited to the maker, for a note is incapable ofbeing accepted; while in the latter case, it denotes that sightmust appears in legal way , i.e., after acceptance, if the bill hasbeen accepted or a after noting for non-acceptance or protest fornon-acceptance soon).(iii) Maturity. Where bill or note is payable at fixed period after

sight, the question of maturity becomes important. Thematurity of a note or bill is the date on which it falls due.A note or bill, not payable on demand, at sight or onpresentment; is at maturity on the third day after the dayon which it is expressed to be payable. Three days are


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allowed as days of grace. No days of grace are allowed inthe case of a note or bill payable on demand, at sight onpresentment.

(iv) Calculation of maturity: Where a bill is payable at a fixedperiod after sight, the time is to be calculated from the dateof acceptances if the bill is accepted and from the date ofnoting or protest if the bill is noted or protested for non-acceptance (For the explanation of noting and protesting,read Section 99 and 100 of the Negotiable InstrumentsAct).

In the case of note, the expression “after sight” means afterexhibition thereof to maker for the purpose of founding aclaim for payment. In the case of a bill payable after a stipulatednumber of months after sight which has been accepted forhonour, the date of its maturity is calculated from the date ofacceptance for honour. (For the explanation of the phrase‘acceptance for honour’, read Section 108 of the NegotiableInstruments Act. ).In calculating the date at which a note or bill made payable acertain number of days after date or after sight or after a certainevent is at maturity on the days or the date, or the day ofpresentment for acceptance or sight or the day of protest fornon-acceptance, or the day on which the event happens shall beexcluded (Section 24). When a note or bill is made payable, astated number of months after date, the period stated termi-nates on the day of the month, which corresponds, with theday on which the instrument is dated. When it is made payableafter a stated number of months after sight the period termi-nates on the day on the month which corresponds with the dayon which it is presented for acceptance or sight or noted fornon-acceptance or protested for non-acceptance. When it ispayable a stated number of months after a certain event, theperiod terminations on the day of the months which corre-sponds with the day on which the event happens (Section 23).If the months in which the period would terminate have nocorresponding day, the period terminates on the last day ofsuch month (Section 23). Three days of grace are allowed tothese instruments after the day on which they are expressed tobe payable (Section 22).When the last day of grace falls on a day, which is public holiday,the instrument is due and payable on the preceding businessday (Section 15).

Illustrations(a) A negotiable instrument dated 29th January, 1878, is

made payable at one month after date. The instrumentis at maturity on the third day after the 28th February,1878.

(b) A negotiable instrument, dated 30th August, 1878, ismade payable three months after date. The instrumentis at maturity on the 3rd December, 1878.

(a) A promissory note or bill of exchange, dated 31stAugust, 1878, is made payable three months after date. Theinstrument is at maturity on the 3rd December, 1878.

Solve the following problems for a betterunderstanding

1. A bill of exchange is drawn stating “Pay to the X or hisorder a sum of ten thousand rupees”. In the margin theamount stated is Rs. 1,000. Is it a valid bill? If so, howmuch amount it will represent?

[Hints : Yes, it will represent Rs. 10,000. Section 18 of the Actsays that if the amount in words and figures is different in anegotiable instrument, the amount stated in words shall betaken as final. ]2. Classify the following instruments as payable to bear or to

order.(a) “ to X” (b) “to bearer” (c) to X or order (d) “to X bearer” (e)“ to the order of X”[Hints: (a) order, (b) bearer, (c) order, (d) bearer, (e) order]

3. A firm carries on business in Bombay and Calcutta. TheBombay house draws a bill on Calcutta house. Can theholder treat this bill as a promissory note?

[Hint: Yes, it is an ambiguous instrument and holder may treat itas a bill or note at his option. The facts of this case are similar tothose of Miller v. Thompson [1841] 3 M & G, 576]4. A bill was payable three months after the date it was

accepted. The acceptance bore no date, and the draweeattained the majority the day before the bill matured. Willthe drawee be liable on the bill?

[Hint: No. In this case it is presumed that the drawee acceptedthe bill on a date when he was minor. A minor being incompe-tent to contract will not incur any liability under the bill. Thefacts of this case are similar to those of Roberts v. Bethel [1852]12 CB 778.5. Are the following instruments promissory notes?(a) Mr. X, I owe you Rs. 10,000 the note is signed by Y.(b) XYZ signs a note reading I have received Rs. 1,000, which I

borrowed, form you. And I have to be accountable to youfor the same with interest.”

(c) XYZ signs a note reading “ I am liable to A in a sum ofRs. 10,000 which is to be paid by installments for rent.”

6. Mr. X promises by way of promissory note to pay Mr. Y,his partner, a sum of Rs. 10,000 in the event of latter’sretirement from the partnership firm. Decide givingreasons for your answer whether the promissory note inthe above case in a laid promissory note.

[Hint. The promise of X is conditional, nad hence it cannot beconstituted as a valid promissory note. Further retirement of Yfrom the partnership firm is not a certain event]

1. A company issued a cheque to its bankers. A receiptwas appended to the cheque and it ordered the bankerto make the payment ‘provided the receipt form at foothereof is duly signed, stamped and dated.” Is thecheque valid?


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[Hint: No, because its payment is conditional upon signing ofthe receipt. Facts of this case are similar to those of Bevin v.London & south western Bank Ltd.[1990] 1 KB 270]7. An instrument on which the word hundi was written was

in the following form “ sixty days after date we promise topay a or order the sum of Rs. 1,000 only for the valuereceived” across the document was written “accepted” andit was signed by the maker x y. is this instrument apromissory note or a bill of exchange?

[Hint: it is promissory note. An instrument does not become abill of exchange for the reason of appearance of word hundi onits face.]8. X draws a bill of exchange on Y and negotiates it to Z. Y

is a fictitious person. Can Z treat it as a promissory notemade by X?

[Hint: Yes. Where in a bill, the drawee is a fictitious person, it isan ambiguous instrument and the holder has an option to treatit as a bill or note].


Sultan Chand and Sons, New Delhi.• http://www.indialawinfo.com/bareacts/soga.html• M.C. Kucchal (2002), “ Business Law”, Vikas Publishing


Pvt. Ltd, Delhi.• Aggarwal, Rohini (2003), “Student’s Guide to Mercantile

and Commercial Laws,” Taxmann’s, New Delhi

Notes:


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LESSON 22:THE NEGOTIABLE INSTRUMENT ACT 1881PARTIES TO A NEGOTIABLE INTRUMENTS

Learning OutcomesAfter reading the lesson, you should be able to know:• The Parties to a negotiable instrument• The liability of various parties to negotiable

instrument

IntroductionThe important parties to Negotiable Instruments can be listedas follows:

• Parties to a promissory note: Maker, payee, indorser,indorsee

• Parties to a bill of exchange: Drawer, Drawee orAcceptor, drawee in case of need, acceptor for honour,, indorser, indorsee.

• Parties to a cheque: Drawer, drawee ( always a banker),payee, indorser, indorsee

Let us learn about themDrawer, Drawee, Acceptor, Maker, Payee, etc.,:(i) The party who draws a bill of exchange or a cheque or any

other instrument is called drawer.(ii) The party on whom such bill of exchange of cheque is

drawn is called the drawee. In other words the person whois thereby directed to pay is called the drawee.

(iii) The drawee of a bill of exchange who has signified hisassent to the order of the drawer is called the acceptor. Theacceptor becomes liable to the holder after he has signifiedhis assent but not before.

Now a question would naturally arise as to who can be accep-tors? Under Section 33 of the Act, no person except the draweeof a bill of exchange, or all or some of several drawees or aperson named there in as drawee in case of need, can bindhimself by an acceptance. Under Section 34, where they areseveral drawees of a bill of exchange who are not partners, eachof them can accept it for himself; but none of them can accept itfor another without his authority.If follows from the aforesaid provisions that the followingperson can be acceptors:(a) Drawee, i.e., the person directed to pay.(b) All or some of the several drawees when the bill is

addressed to more drawees than one.(c) A drawee in case of need.(d) An acceptor for honour.(e) Agent of any of the persons mentioned above.(f) When no drawee has been named in a bill but a person

accepts it, then he may be stopped from denying hisliability as an acceptor.

Acceptance is ordinarily made by the drawee by the signing ofhis names across the face of the bill and by delivery. Acceptance,

therefore, means the signification of assent to the order of thedrawer by delivery or notification thereof. Under Section 27 ofthe Act, every person capable of legally entering into a contract,may make, draw, accept endorse, deliver and negotiate apromissory note, bill of exchange or cheque, himself orthrough a duly authorized agent. The agent may sign in twoways, viz., (a) he may sign the principal’s name, for it isimmaterial what hand actually signs the name of the principal,when in fact there exists an authority for the agent to put itthese; (b) he may sign by procreation stating on the face of theinstrument that he signs as agent. It is thus essenial that theagent, while putting his signature to the instrument, must haveeither express or implied authority to enter, for his principalwho must be sui juris, into the particular contract. The authorityof an agent to make, draw, accept or endorse notes and billsdepends on the general law of agency and is a question of fact.From a perusal of Section 27 and 28 it is, however, evident thata general authority to transact business and to discharge debitsdoes not confer upon an agent the power to endorse bills ofexchange so as to bind his principal; nor can an agent escapepersonal liability unless he indicates that he signs as an agentand does not intend to incur personal liability.What do you think constitutes a valid acceptance: The essentials of a valid acceptance are as follows:(a) Acceptance must be written: The drawee may use any

appropriate word to convey his assent. It may be sufficientacceptance even if just a bare signature is put withoutadditional words. But it should be remembered that anoral acceptance is not valid in law. .

(b) Acceptance must be signed: A mere signature would besufficient for the purpose. Alternatively, the words‘accepted’ may be written across the face of the will with asignature underneath; if it is not so signed, it would notbe an acceptance.

(c) Acceptance must be on the bill: That the acceptance shouldbe on the face of the bill is not necessary; an acceptancewritten on the back of a bill has been held to be sufficientin law. What is essential is that it must be written on thebill; else it creates no liability as acceptor on the part of theperson who signs it. Now what will happen if acceptance issigned upon a copy of the bill and the copy is not one ofthe part of it or if acceptance is made on a paper attachedto the bill; in either of the cases, acceptance would not besufficient.

(d) Acceptance must be completed by delivery: It would notcomplete and the drawee would not be bound until thedrawee has either actually delivered the accepted bill to theholder or tendered notice of such acceptance to the holderof the bill or some person on his behalf.


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Where a bill is drawn in sets, the acceptance should be put onone part only. Where the drawee signs his acceptance on two ormore parts, he may become liable on each of them separately.Acceptance may be either general or qualified. By a generalacceptance, the acceptor assents without qualification to theorder of the drawer . The acceptance of bill is said to bequalified, when the drawee does not accept it according to theapparent tenor of the bill but attaches some conditions orqualification which have the effect of either reducing his(acceptor’s) liability or acceptance of the liability subject to certainconditions. The holder of a bill is entitled to require an absoluteand unconditional acceptance as well as to treat it asdishonoured, if it is not so accepted. However he may agree toqualified acceptance, but he does so at his own peril, sincethereby he discharges all parties prior to himself, unless he hasobtained their consent.According to the Explanation to Section 86 of the Act, anacceptance to be treated as qualified.(1) Where it is conditional, declaring the payment to be

dependent on the happening of an event therein stated,accepted payable when in funds” “accepted payable ongiving up bills of lading for cover per S.S. Amazon“accepted payable when a cargo consigned to me is sold”

(2) When it undertakes the payment of part only of the sumordered to be paid, e.g., a bill drawn for Rs. 5,000 but“accepted for Rs. 4,000 only”.

(3) When, no place of payment being specified on the order, itundertakes to pay only at a specified place and notelsewhere or to pay at a place different from that specifiedin the bill and not elsewhere.

(4) Where it undertakes the payment at a time other than thatat which under the order it would be legally due e.g., a billdrawn “payable three months after date” is accepted as“accepted, payable six months after date.”

The aforementioned list of examples is only illustrative of thedifferent respects in which the bill may be qualified, for it ispossible to qualify the acceptance of a bill in other ways as well.(5) Drawee in case of need: When in the bill or any

endorsement thereon the name of any person is entered, inaddition to the drawee, to be restored to in case of need,such a person is called a drawee in case of need. In case ofneed means in the event of the bill being dishnoured bythe drawee by non-acceptance or non-payment. The holderof the bill is at liberty to choose whether be will resort tothe drawee in case of need or not.

(6) Payee: The party to whom or to whose order the amountof a bill of exchange, cheque or promissory note is payableis the payee.

(7) Delivery means transfer of possession from one person toanother.

(8) Issue of negotiable instrument means its first delivery,complete in form, to a person who takes it as a holder.

A holder may become the possessor or payee of an instrumenteven without consideration whereas a holder in due course isone who acquires possession for consideration.

You must be able to distinguish between a holder and a holderin due course:(i) A holder may become the possessor or payee of an

instrument even without consideration whereas a holder indue course is one who acquires possession forconsideration.

(ii) A holder in due course as against a holder must becomethe possessor payee of the instrument before the amountthereon become payable.

(iii) A holder in due course as against a holder, must havebecome the payee of the instrument in good faith i.e.,without having sufficient cause to believe that any defectexisted in the transferor’s little

Privileges of a “Holder in Due Course”:

(i) A person signing and delivering to another a stamped butotherwise inchoate instrument is debarred from asserting,as against a holder in due course, that the instrument hasnot been filled in accordance with the authority given byhim, the stamp being sufficient to cover the amount(Section 20).

(ii) In case a bill of exchange is drawn payable to the drawer’sorder in a fictitious name and is endorsed by the samehand as the drawer’s signature, it is not permissible foracceptor to allege as against the holder in due course thatsuch name is fictitious (Section 42).

(iii) In case a bill or note is negotiated to a holder in due course,the other parties to the bill or note cannot avoid liability onthe ground that the delivery of the instrument wasconditional or for a special purpose only (Section 42 and 47).

(iv) The person liable in a negotiable instrument cannot set upagainst the holder in due course the defence that theinstrument had been lost or obtained from the former bymeans of an offence or fraud or for an unlawfulconsideration (Section 58).

(v) No maker of a promissory note, and no drawer of a bill orcheque and no acceptor of a bill for the honour of thedrawer shall, in a suit thereon by a holder in due course bepermitted to deny the validity of the instrument asoriginally made or drawn (Section 120).

(vi) No maker of a promissory note and no acceptor of a billpayable to order shall, in a suit thereon by a holder in duecourse, be permitted to deny the payee’s capacity, at the rateof the note or bill, to endorse the same (Section 121). Inshort, a holder in due course gets a good title to the bill.

You must understand the liability of various parties tonegotiable instrument

Liabilities of Parties

(a) Liability of legal representatives (Section 29): A ‘legalrepresentative’ of a deceased person, who signs his ownname on an instrument, is personally liable for the entireamount; but he may expressly limit his liability to theextent of the assets received by him as legal representative.The term “legal representative” includes heirs, executorsand administrators.


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(b) Liability of drawer (Section 30): The drawer of a bill ofexchange or cheque is bound, in the case of dishonour bythe drawer or acceptor thereof to compensate the however.Provided due notice of dishonour has been given to, orreceived by him provided in Section 93 to 98 of the Act.

The drawer’s liability is conditional, i.e., it arises only in theevent of a dishonour by the drawee or acceptor. Once there hasbeen dishonour and the notice of dishonour has been servedon the drawer, he is bound to compensate the holder whateverbe the state of the account between himself and the drawee oracceptor (Seth Ka – Haridas vs. Bhan 3. Bom 182). The holderwill have to be compensated, for the principal sum togetherwith interest calculated according to the rules mentioned inSection 79 & 80 and form the expenses properly incurred byhim in presenting noting and protesting the instrument. Ondishonour of a bill of exchange by non-acceptance followed bya notice of dishonour to the drawer, the drawer becomes liableimmediately for the full amount of the bill. The drawer cannotask the holder to wait till the date of maturity to see whether itwill be dishonoured by non-payment [Whitehead vs. Walker[1842] 9 M and W 506, If however, the holder chooses to waittill its maturity before he sues the drawer he ones not acquire afresh cause of action by reason of its non-payment of the duedate.The only pre-condition of the liability of the drawer is thatnotice of dishonour should have been received by him, unlessthe case is one covered by Section 98 of the Act and notice ofdishonour is dispensed with.The drawer of a bill or cheque is a “prior party” to the instru-ment and as such as liable for every holder in due course, underSection 36 of the Act, till the instrument is discharged. Untilacceptance, he is liable in the instrument as a principal debtorand thereafter as a surety (Section 37).(c) Liability of drawee of cheque (Section 31) The drawee of

the cheque is always a banker. It is the duty of the bankerto pay the cheque, provided he has in his hands sufficientfound of the drawer and the founds are properly applicableto such payment. Trust money is not properly applicable tothe payment of a cheque drawn in breach of trust. If thebanker refuses payment without sufficient case beingshown, he must compensate the drawer for any loss causedby such improper refusal. The bank is required tocompensate, not the holder, but the drawer. The amountof compensation, that the drawee would have to pay to thedrawer is to be measured by the loss or damage say loss ofcredit, suffered by the drawer). The principle is: “The lesserthe value of the cheque dishonoured, the greater thedamage to the credit of the drawer”. If there is anyagreement between the drawer and the banker that theformer shall not draw more than one cheque every week,the banker is not bound to pay the second cheque. Thebanker must pay the cheque, only when he is duly requiredto do so. If any trustee opens an account the banker isentitled to refuse to pay cheques drawn for purposes otherthan those of the trust.

In addition to such a general right, a banker will be justified orbound to dishonour a cheque in the following cases, viz.;

(i) If a cheque is undated(ii) If it is stale, that is if it has not been presented within

reasonable period , which may vary three months to a yearafter its issue dependent on the circumstances of the case

(iii) If the instrument is inchoate or not free from reasonabledoubt If the cheque is post-dated and represented forpayment before its ostensible date

(iv) If the customer’s funds in the banker’s hands are not‘properly applicable’ to the payment of cheque drawn bythe former. Thus, should the funds in the banker’s hand’sbe subject to a lien or should the banker be entitled to aset-off in respect of them, the funds cannot be said to be“properly applicable” to the payment of the customer’scheque, and the banker would be justified in refusingpayment.

(v) If the customer has credit with one branch of a bank andhe draws a cheque upon another branch of the same bankin which either he has account or his account is overdrawn

(vi) If the bankers receive notice of customer’s insolvency orlunacy .

(vii) If the customer countermands the payment of cheque thebanker’s duty and authority to pay on a cheque ceases[Mowji Shamji vs. The National bank of India 22 Bom.499].

(viii)If a garnishee or other legal order from the Court attachingor otherwise dealing with the money in the hand of thebanker, is served on the banker [Rogers vs. Whitely ( 1889),22 Q.B.D. 236, affirmed 1892 A.C. 118].

(ix) If the authority of the banker to honour a cheque of hiscustomer is undermined by the notice of the latter’s death.However, any payment made prior to the receipt of thenotice of death is valid [Tata vs. Hbert 9 Ves, 111; in reBeaumant. 1 Ch. 889].

(e) Liability of endorser (Section 35): The endorser of aninstrument by endorshing and delivering the instrument,before maturity, undertakes in effect the responsibility thaton the due presentment it shall be accepted, (if a bill), andpaid and that if it is dishonoured by the drawee, acceptoror maker, he will indemnify the holder or subsequentendorser who is compelled to pay, provided due notice ofdishonour is received by him. But he may insert, in theendorsement, stipulations excluding, or making his liabilityconditional ; In this respect, his position is better than thata drawer or an acceptor, neither of whom can exclude hisliability. An acceptor, however can make his acceptanceconditional.

(f) Liability of parties to holder in due course (Section 36 ) :Every prior party ( ie. , maker or drawer, acceptor and allintervening endorsers to an instrument is liable to a holderin due course until the instrument is satisfied. Thus themaker and endorsers of a note are jointly and severallyliable for the payment and may be sued jointly.

(g) Liability of maker, drawer and acceptor as principals(Section 37 & 38): The maker of a promissory note is liableas the principal debtor. If the payee endorses it to A, the


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maker will be liable to A as the principal debtor and thepayee will be liable as a surety. Similarly, the drawer of acheque, the drawer of a bill until acceptance and theacceptor are respectively liable as sureties. As between theparties so liable as sure – ties, each prior party is also liableas a principal debtor in respect of each subsequent party.For instance, A draws a bill payable to his own order on Bwho accepts it. Afterwards A endorses the bill to C, C to Dto E. As between E ( holder and B, B is the principaldebtor and A, C and D are his sureties. As between E andC, C is the principal debtor and D his surety.

(h) Nature of suretyship (Section 39): The holder of anaccepted bill may waive his claim against the acceptor, but atthe same time , he may expressly reserve his right to changethe other parties. Under Section 134 of the Contract Act,the release of the principal debtor has the effect ofdischarging the surety, but in the case of a bill it is not so.But if the holder does not reserve his right expresslyagainst the other parties , they too will be discharged if hereleased the acceptor.

(i) Discharge of endorser’s liability (Section 40): Any partyliable on the instrument may be discharged by theintentional cancellation of his signature by the holder.Suppose that A is the holder of bill of exchange of whichB is the payee and it contains the following endorsement inblank:

First Endorsement, “B” Second Endorsement, “C”Third Endorsement, “D” Fourth Endorsement, “E”A, the holder, may intentionally strike out the endorsement byD and C; in that case the liability of D and C upon the bill willcome to an end. But if the endorsements of D and C are struckout without the consent of E, A will not be entitled to recoveranything firm E the reason being that as between D and E, D isthe principal debtor and E is surety. If D is released by theholder under section 39 of the act, E, Being surety, will bedischarged. The rule may be stated thus: when the holderwithout the consent of the endorser impairers the endorser’sremedy against a prior party, the endorser is discharged fromliability to the holder.(i) Liability of acceptor of a bill drawn in a fictitious name:

the acceptor is not relieved from liability by proving thatthe drawer is fictitious. Suppose X uses a fictitious name indrawing a bill upon Z and that the bill is made payable tothe order of the drawer X then endorses the bill in thesame fictitious name to Y, who presents the Bill to Z, foracceptance. If Z accepts the bill, in spite of the fact that thename of the drawer is fictitious; he cannot escape liabilityto pay by showing that the name of the drawer is fictitious;rather he will not be allowed to lead evidence that the nameis fictitious.

(ii) Liability on an instrument made drawn etc. withoutconsideration: an instrument made, drawn, accepted,endorse, or transferred without consideration creates noobligation of payment between the parties to theinstrument. For example, if the maker delivers a

promissory note to the payee as a gift, the payee cannotendorse it against the maker.

Similarly, if the consideration fails, there is no obligation on theparties to pay. For example, X makes note in favor of Y inanticipation of Y’s supplying a bale of cotton. Y fails to deliverthe cotton cannot claim payment from X.Again, a bill that is drawn or accepted without considerationdoes not impose any liability either on the drawer or on theacceptor to pay the holder. Similarly, if an instrument isendorsed without consideration, nothing can be claimed fromthe endorser.But if any party to an instrument made, accepted, endorsed ortransferred without any consideration, or for a considerationwhich fails, has transferred the instrument to a holder for aconsideration such holder and every subsequent holder derivingtitle from him, may recover the amount due on such instru-ment from the transfer for consideration or from any partyprior thereto. For example, X and Z are respectively the drawer,the payee and the acceptor of a bill of exchange drawn withoutconsideration; y transfers the bill to P for consideration. P canclaim payment from Y and also from Z and X.(a) Is also entitled to receive amount when the person through

whom he claims was a holder or the lost instrument in duecourse.

Under section 45A, the loser of the instrument has the right toapply to the drawer for a duplicate of the lost bill. If the drawerdoes not grant the application the loser many compel him toprovide him with a duplicate.Liabilities on an accommodation note or bill (Provision toSection 59): In the case of accommodation bills or notes, adefect in the title of the transferor does not affect the title of theholder acquiring after maturity. An accommodation may beexplained as follows: X draws a bill payable to himself on Y,who accepts the bill without consideration just to accommodateX, that is, to enable X to raise money by negotiating the bill inthe market. Though Y accepts the bill, X is primarily liable onthe bill, and he cannot demand the amount from Y, for in anaccommodation bill, the acceptor is only surety for the partyaccommodated. However, if the accommodation bill, in theabove illustration, is transferred by X to Z for good consider-ation after maturity and Z becomes the holder in good faith, Zwill be able to realize the amount of the bill from Y, theacceptor though Z’s transferor X could not, at the date oftransfer, recover anything from Y.Do you know what are the rights and obligations of a personwho had obtained an instrument by unlawful means of forunlawful consideration?Let us discuss it.a) Rights and obligations of a person who had obtained an

instrument by unlawful means: If an instrument isobtained from any maker, acceptor or holder by means, ofan offence or fraud, the possessor is not, ordinarily, entitledto received the amount under it from such maker, acceptor,X does not acquire any title to the instrument, and theproceeds of the bill, if collected, could be recovered from Xby acceptor. If X transfers it to Y who is a gratuitous


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transferee, Y too would not acquire any title to the bill.Similarly if X obtains a bill from the acceptor by fraud, hecannot receive the amount of it, but if he endorses it to Ywho receives the bill for value without notice of the fraud,he could collect the amount of the bill from X but fromno other party.

(b) Right and obligations of a person who has obtained aninstrument for unlawful consideration: When aninstrument has been obtained from any maker, acceptor orholder for an unlawful consideration no possessor is,ordinarily entitled to receive the amount due thereon fromsuch maker, acceptor or holder or form any party prior tosuch holder. The consideration may be unlawful eitherbecause it is immoral and contrary to public policy orbecause it is specially interdicted or prohibited by thestature if the possessor endorses it to say, P, even P wouldnot be entitled to claim payment, unless he is holder in duecourse. P would be regarded as a holder in the course, if itis endorsed to him for valuable consideration without anynotice having been received by him as to the considerationbeing unlawful.

Effect of forgery: When a signature on a negotiable instrumenthas forged, it becomes a nullity: the property in the instrumentremains vested in the person who is the holder at the timewhen the forged signature was put on it. The holder of aforged instrument can neither enforce payment thereon nor givea valid discharge therefore. In the event of the holder being ableto obtain payment in spite of forgery, he cannot retain themoney. The true owner many sue in tort the person who hadreceived. This principle is universal in character, by reasonswhereof even a holder in due course is not exempt from. Itforgery is not capable of being ratified. But what would be theeffect of a forged endorsement? The answer to this question iswholly dependent upon whether the instrument had beenendorsed in full or in blank. In the former case, the personclaiming under the forged endorsement even if he is purchaserfor value and in good faith, cannot acquire the rights of apurchaser for value and in good faith cannot acquire the rightsof a holder in due course. He acquires no title to the bill or not(Mercantile Bank vs. D’ Silva, 30 Bom L.R. 1225).Instrument acquired after dishonour (Section 59) It has alreadybeen pointed out that the holder in due course is not affectedby the defect in the title of his transferor; but it is not so in thecase of a holder whole acquires the instrument after dishonour,or after maturity.The holder of instrument, who has acquired it after dishonour,has as against the other parties, only the rights thereon of histransferor. For example, receive the amount of it from the otherparties because the endorsee too could not do so.Instrument acquired after maturity (Section 59): The holder ofan overdue instrument too is affected by the defect in title ofhis transferor. For example, Q. accepts a bill drawn by P anddeposits with P certain goods as collateral security for thepayment of bill. The bill, not having been paid at maturity, Psells the goods and retains the proceeds, but in breach of faithendorses the bill to R.R. having only the right of P, cannot

realize the amount of the bill from Q. But if R were bona fideendorsee before maturity, he could relies the amount from Q.


Sultan Chand and Sons, New Delhi.• http://www.indialawinfo.com/bareacts/soga.html• M.C. Kucchal (2002), “ Business Law”, Vikas Publishing




Notes:


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NEGOTIATION, ENDORSEMENT, ASSIGN ABILITY

Learning OutcomesAfter reading the lesson, you should be able to know:• The meaning of negotiation, endorsement and assign

ability• The rules of negotiation, endorsement and assign

ability• The provisions relating to dishonored cheque• The meaning of noting and protesting• The presentment of negotiable instrument• The international law related to negotiable instruments

IntroductionToday, we will discuss about the meaning of negotiation,endorsement and assign ability and the important rules relatedto it.

NegotiationWhen a negotiable instrument is transferred to many personwith a view to constituting that person the holder thereof, theinstrument is deemed to have been negotiated (Section 14). Anegotiable instrument may be transferred in either of the twoways viz., (1) by negotiation under the Negotiable InstrumentsAct (Section 14, 48, 47, 46); and (ii) by assignment of theinstrument as an ordinary chosen in action under the Transferof Property Act (Chapter VII, Section 130). Transfer bynegotiation, however, is the only mode of transfer recognizedby the Act.Duration of negotiation (Section 60): An instrument may benegotiated until payment thereof by the maker, drawee oracceptor at or after maturity, but not after such payment. But themaker, drawee or acceptor cannot negotiate the instrument aftermaturity, even if it remains unpaid. An instrument may besatisfied even without payment, and such satisfaction isequivalent to payment.Under the Act, negotiable instruments may be negotiated eitherby delivery when these are payable to bearer or by endorsementand delivery when these are payable to order.(i) Importance of delivery (Section 46): Delivery is an incident

of the utmost importance in the case of an instrument. Itis essential to the issue of an “instrument’ for “issue”means the delivery of the instrument, complete in form, toa person who takes is as a holder. It is equally essential tothe negotiation of an instrument, for a bearer instrument,must be transferred by delivery and in the case of any otherinstrument, endorsement is incomplete without delivery.In fact, a negotiable instrument is nothing but a contract,which is incomplete and revocable until the delivery of theinstrument is made. For the payee cannot claim payment;Section 46 of the Act provides as follows:

“The making, acceptance or endorsement of promissory note,bill of exchange or cheque is completed by delivery, actual orconstructive”(ii) How to deliver: As between parties standing in immediate

relations, delivery to be effectual, must be made by theparty making, accepting or endorsing the instrument, or bya person authorized by him in this behalf. Thus apromissory note must be handed over to the payee by themaker himself or by some one authorized by the maker.Similarly, a bill of exchange must be delivered to thetransferee by the maker, acceptor or endorser, as a case maybe.

(iii) Conditional and unconditional delivery; An instrumentmay be delivered conditionally or only for a specialpurpose, and not for the purpose of transferringabsolutely the property in the instrument. A bill deliveredconditionally is called an ‘escrow’. Although a conditionaldelivery is valid, the condition attaches exclusively to thedelivery and not to the making or drawing of aninstrument. A bill must be drawn and a note madeunconditionally When an instrument is deliveredconditional or for special purpose, the property in theinstrument does not pass on to the transferee until thecondition is fulfilled and the transferee holds suchinstrument in law as trustee or agent of the transferor.

If, however, he transfers an instrument delivered conditionallyto X for value to Y without notice of the condition, Y can claimpayment even if the condition is not complied with. The reasonis obvious – Y is bonafide transferee for value without noticeof the condition and, as such, he should not suffer forsuppression of fact by X.(iv) Negotiation by delivery (Section 47): An instrument

payable to bearer is negotiable by delivery thereof. Butwhen such instrument is delivered on condition that it isnot to take effect except in certain event, it is not negotiable(except in the hands of a holder for value without noticeof the condition ) unless such event happens.

The distinction between ‘delivery’ and ‘negotiation’ should benoticed. An instrument is said to be negotiated, when it istransferred from one person to another in such a manner as toconstitute the transferee the holder thereof.(v) Negotiation by endorsement: In order to negotiate, that is

to transfer title to an instrument payable to order, it is atfirst to be endorsed and then delivered by the holderthereof.

(vi) Different types of endorsements (a) Blank ( or general):No endorsee is specified in an endorsement in blank itcontains only the bare signature of the endorser. A bill soendorsed becomes payable to bearer.


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SpecimenKishan Lal(b) Special ( or in full) : In such an endorsement, in addition

to the signature of the endorser the person to whom or towhose order the instrument is payable is specified.

SpecimenPay to Hari Ram.Kishan Lal(c) Restrictive: Such an endorsement has the effect of

restricting further negotiation and transfer.Specimen (1) Pay to A only ]

M.Lal P.Kumar(d) Conditional : Such an endorsement combines an order to

pay with condition.Specimen: Pay to A on safe receipt of goods.V. Chopra(e) Sanse Recourse: By adding these words after the

endorsement, the endorser declines to accept and liabilityon the instrument of any subsequent party.

(f) Sans Frais: These words when added at the end of theendorsement, indicate that no expenses should be incurredon account of the bill.

(g) Facultative: When it is desired to waive certain right, theappropriate words are added to indicate the fact, e.g.,“notice of dishonour dispensed with”.

Every endorser of a negotiable instrument is liable, underSection 35, to every subsequent party to it provided due noticeof dishonour is given to or received by him e.g., if a bill isdrawn by A upon B and is payable to C or order, and Cendorses the bill to D, who in turn endorses it to E, then, incase B, dishonours the bill, the holder, i.e., E has the right ofaction against all the parties i.e., D.C. and A. Similarly, D hasright against C and A. To this rule that every prior party of a billis liable to every subsequent party, there are a few exceptionswhich are enumerated below:(1) Any endorser can exclude personal liability by endorsing

“sans recourse” i.e. without recourse.(2) If the holder of a negotiable instrument, without the

consent of the endorser destroys the instrument or in anyway prejudices the holder (Section 40 ).

(3) The rule is not applicable also in the case of “circuitry ofaction” e.g., a bill is drawn by A upon B payable to C ororder, who endorses it to D who endorses it to E, whoendorses it to F, who endorses it to G and who again.Endorses it back to D. In that case, it will be observedthat a circle is complete between the first and secondholdings of D; and the parties in between ( i.e., E,F and G)are absolved from liability to D because D is, as againstthem, both a subsequent party and a prior party. If,however, D’s first endorsement was “sans recourse”, theintermediate parties, i.e., E,F and G would not be absolvedfrom liability to him.

(vii) Conversion of endorsement in blank into endorsement infull (Section 49): The holder of a negotiable instrument

endorsed in blank may, without signing his own name bywriting above the endorsers, signature a direction to pay toany other person as endorsee, covert the endorsement inblank into an endorsement in full; and the holder does notthereby insure the responsibility of an endorser .

(viii)Effect of endorsement (Section 50): (a) The endorsementof an instrument, followed by delivery, transfers to theendorsee the property in the instrument with right offurther negotiation. That is, the endorsee may endorse it tosome other person.(b) The endorsement may also contain express terms

making it restrictive. The effect of restrictiveendorsement is (1) to prohibit or exclude the right offurther negotiation, or (2) to constitute the endorsee anagent to endorse the instrument; or (3) to entitle theendorsee to receive the contents of the instrument forthe endorser or for some other specified person.

(c) A restrictive endorsement gives the endorsee: (1) theright to receive payment of the instrument; (2) thesame rights of action against any other party to theinstrument as the endorser had; (3) power, only inaccordance with the express terms of his authority, totransfer the instruments and his right thereon toanother.

(ix) Who may negotiate (Section 51): The following personsmay negotiate an instrument: .

(1) sole maker, (2) drawer, (3) payee, (4) endorsee.A maker or drawer only when the instrument is drawn to hisown order. When the endorsee is the holder under a restrictiveendorsement, he must exercise his power of negotiability isexcluded by the respective endorsement, the endorsee, asholder, cannot negotiate.The explanation to Section 51 provides that though a maker ora drawer may endorse or negotiate an instrument, he cannot do,so unless the instrument fall into his possession in a lawfulmanner or unless he is the holder thereof. Further, insofar as the payee or an endorsee is concerned, he must before he cannegotiate the instrument, be a holder thereof. Consequently, aperson who steals or endorses or finds a lost instrument,cannot endorse or negotiate, as he is not a holder within themeanings of the Act.(x) Exclusion of liability of endorser (Section 52): The

endorser of an instrument may, by express words in theendorsement, exclude his own liability on the instrument.Suppose that the endorser signs his name, adding thewords “without recourse”, the incurs no liability. Theholder cannot claim compensation from him in case ofdishonoured by the drawee, acceptor or maker. But for thewords “without recourse”, he would have been liable.

The endorser, instead of excluding his liability altogether, mayrestrict his liability by endorsement. Thus, he may either (1)make his liability depend upon the happening of a specifieduncertain event, (2) make the right of the endorsee to receive theamount mentioned in the instrument depend upon a specifieduncertain event.


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But when such endorser afterwards becomes the holder, allintermediate endorsers are liable to him. For example A thepayee and holder of an instrument endorses it to B with thewords “without recourse” and B endorses it to C who in histurn endorses it to A, B and C are liable to A as intermediateendorsers.(xi) Holder deriving title from holder in due course (Section

53): A holder of an instrument deriving title from a holderin due course has rights thereon of the holder in duecourse. Therefore, a holder deriving title from a holder indue course can claim the amount of a bill drawn andaccepted without consideration. It has been held that titlewhich has been cleansed of defects by passing through thehands of a holder in due course remains immune fromthose defects inspite of the fact that a subsequent holdermay have noticed that the defects once existed provided hewas not a party to them.

For example, X obtains Y’s acceptance to a bill by fraud. Xendorses it to Z who takes it as a holder in due course. Zendorses the bill to F who knows of the fraud. Since F derivesthe title from Z who is a holder in due course and F is not partyto fraud, F gets a good title to the bill.(xii) Effect of endorsement in full after a blank one (Section 54

and 55): An instrument endorsed in blank is payable to thebearer, although originally it was payable to order. If aninstrument after having been endorsed in blank isendorsed in full, the endorsee in full does not incur theliability of an endorser, so the amount of it cannot beclaimed from him. In other words if an endorsement inblank is followed by an endorsement in full, theinstrument still remains payable to bearer and negotiableby delivery as against all parties prior to the endorse in full,though the endorser in full is only liable to a holder whomade title directly through his endorsement and thepersons deriving title through such holder.For example, Xis the payee holder of a bill of exchange X endorsee it inblasnk and delivers it to Y who endorses it in full to Z ororder Z, without endorsement, transfers the bill to F. Inview of Section 55, F as the bearer of the instrument canreceive payment or sue the drawer, acceptor or X but not Yor Z who is a subsequent but not a prior party. But there isan exception to this rule. The person to whom it has beenendorsed in full, or any one who derives title through him,can claim the amount from the endorser in full.

(xiii)Effect of endorsement for part of sum due (Section 56):An endorsement purposing to transfer only a part of theamount of instrument is invalid, and the endorsee,therefore cannot negotiate it. But when the amount duehas been paid in part, a note to that effect may be endorsedon instrument and the instrument may then be negotiatedfrom the balance.

There is an important difference between negotiation andassignment. Let us first try to understand the differencebetween it.

Negotiability VS. Assignability

(i) The essential distinction between transfer by negotiationand transfer by assignment is that in the latter case, theassignee does not acquire the right of a holder in duecourse but has only the right, title and interest of hisassignor; on the other hand in the former case he acquiresall the rights of a holder in due course i.e., rights fromequities (Mohammad Khunerali vs. Ranga Rao, 24 M. 654).

(ii) In the case of negotiable instrument, notice of transfer isnot necessary while in the case of an assignment of chosein action, notice of assignment must be served by theassignee on his debtor.

(iii) Again, in the case of transfer of negotiable instrument,consideration is presumed but in the case of transfer byassignment, consideration must be proved as in the case inany other contract.

(iv) Negotiation requires either delivery only in the case of“bearer” instrument or endorsement and delivery only inthe case of “order instrument”. But of in the case anassignment, Section 130 of the Transfer of Property Actrequires a document— be reduced into writing and signedby the transferor.

(v) Endorsements do not require payment of stamp dutywhereas negotiation requires payment of stamp duty.

Negotiation Back – An instrument is said to have beennegotiated back to him and he is said to have taken up or takenback the negotiable instrument when a person who has been aparty to the negotiable instrument takes it again. For example,suppose that that the endorsements on a negotiable instrumentare as under.

PabxyaHere A is person who is a prior party to the instrument. Henegotiated it to B, B to X, X to Y and Y again to this very A.On account of this last endorsement, A should have right toclaim money from X, Y and B. The rule is that every prior partyis liable to every subsequent party. Thus, conversely, everysubsequent party may sue every prior party. As a result of theprior party (i.e. a) having taken back the instrument subsequent,he (i.e., a) becomes a subsequent’ party. Therefore A, by reasonof the last endorsement mentioned above, come to have therights to claim money Y, X or B.A is permitted by law to use Y,X or B then Y, X or B in his turn can sue A because of A’s priorendorsement. This will lead to a circuitry of action. To preventthis, Section 52 of the Negotiable Instruments Act enacts anexception to the general rule to provide that the holder in duecourse of a negotiable instrument may sue all prior partiesthereto. Thus A, in the above case cannot sue Y, X or B. But Acan sue P since the latter is prior to A’s original endorsement. Ifhowever A, in original endorsement, had signed “sans recourse“ there could be no circuitry of action and A could sue Y, X orB.

(b) Capacity to incur liability under instrument Section 26:Every person competent to contract has capacity toincur liability by making ‘drawing’ accepting, endorsing, delivering and negotiating an instrument.


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A party having such capacity may himself put his signature orauthorize some other person to do so. A minor cannot makehimself liable as drawer, acceptor or endorser, but where theinstrument is drawn or endorsed by him, the holder can receivepayment from any other party thereto. Authority to sign(Section 27 & 28): Every person, capable of incurring liability,may bind himself or be bound by a duly authorized agentacting in the name.A general authority to transact business given to an agent doesnot empower him to accept or endorse bill of exchange so as tobind the principal. An agent may have authority to draw bills ofexchange, but endorse them. An authority to draw does not,necessarily, imply an authority to endorse. An agent who signshis name on an instrument without indicating that he signs asagent, is personally liable, but this rule does not apply where anyone induces him to sign upon the belief that principal onlywould be held liable.The mere signature of an agent in his own name, with theword agent” added, does not exempt him from personalliability.You also need to understand the following in regard to thedishonoured cheque.Dishonoured cheque to be treated as an offence: From 1st April1989, a person issuing a Cheque will be committing an offenceif the cheque is dishonoured for insufficiency of funds. Theoffence will be punishable with imprisonment for a term up totwo years [as prescribed by the Negotiable Instruments.(Amendment and Miscellaneous and Provisions Act, 2002] orwith a fine twice the amount of the cheque or both. The chequein question should be issued in discharge of a liability andtherefore a cheque given as gift will not fall in this category. Thecheque should be presented within six months or its specificvalidity period whichever is earlier. The payee or holder in duecourse should give notice demanding payment within 15 daysof the receipt of the notice and only if he fails to do so,prosecution can take place. The complaint can be made only bythe payee/holder in due course, within one month.A banker who in good faith but without negligence receivespayment for a customer of a cheque crossed generally orspecially to himself, does not, in the event of the title of thecustomer to the cheque providing to be defective, incur anyliability to the true owner of the cheque for having receivedpayment therefore (Section 131). It is special protection given tothe collecting banker which is available to him only if he acts ingood faith but without negligence. Given below are a fewillustrations of circumstances in which a banker has beendeemed to have complied with these conditions:

Discharge from Liability on Notes, Bills and ChequeDistinction between discharge of a party and discharge ofinstrument: An instrument is said to be discharged only whenthe party who is ultimately liable thereon is discharged fromliability. Therefore, discharge of a party to an instrument doesnot discharge the instrument itself. Consequently, the holder indue course may proceed against the other parties liable for theinstrument. For example, the endorser of a bill may bedischarged from his liability, but even then acceptor may be

proceeded against. On the other hand, when a bill has beendischarged by payment, all rights there under are extinguished,even a holder in due course cannot claim any amount under thebill.

(b) Different modes of discharge from liability: Parties tonegotiable instrument are discharged from liabilitieswhen the right of action on the instrument isextinguished. The right of action on a negotiableinstrument is extinguished by the following method:

(i) By payment in due course: The maker, acceptor or endorserrespectively of a negotiable ins trument is discharged fromliability thereon to all parties thereto if the instrument ispayable to bearer, or has been endorsed in blank and suchmaker, acceptor or endorser makes payment in due courseof the amount due thereon i.e., when the payment hasbeen made to the holder of the instrument at or aftermaturity in good faith and without notice of any defect inthe title to the instrument (Section 82).

(ii) By cancellations of acceptor’s endorser’s name: The maker,acceptor and endorser respectively of a negotiableinstrument is discharged from liability thereon to a holderthere of who has cancelled such acceptor’s or endorser’sname with the intent to discharge him and to all partiesclaiming under such holder. In other words, if the holder (Payee) of a bill cancels the signature of acceptor ( drawee )with an intention to discharge him both maker (drawer)and the acceptor of such negotiable instrument aredischarged from the liability to the holder and to all partiesclaiming under such a holder [Clause (a) Section 82.}

(iii) By release: The maker, acceptor or endorser respectively of anegotiable instrument is discharged from liability thereonto a holder thereof who has renounced his right in respectof the instrument. The waiver of the right may be expressor implied [Clause (b) of Section 82.]

(iv) By default of the holder: If the holder of a bill ofexchange allows the drawee more than forty-eight hours,exclusive of public holiday, to decide whether he will acceptthe bill, all prior parties not consenting to such anallowance are discharged from liability to such holder. It isbecause if the drawee fails to signify his acceptance withinforty-eight hours, the holder must treat the instrument asdishonoured and he must at once give notice to the drawerand to all prior, parties, and must not allow time unlessthey give their consent that more time should be allowed(Section 83).

(v) Dissenting parties discharged by qualified or a limitedacceptance: If the holder of a bill who is entitled to anabsolute and unqualified acceptance elects to take a qualifiedacceptance, he does so at his own peril and discharges allparties prior to himself unless he obtains their consent tosuch an acceptance. Thus, the previous parties aredischarged in the following cases namely (i) whenacceptance is qualified, (ii) when acceptance is for a part ofthe sum, (iii) when acceptance substitutes a different placeor time of payment, (iv) when acceptance is not signed bythe drawees not being partners.


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They are discharged, if such acceptance is acquiesced in by theholder without obtaining their previous consent. They aredischarged as against the holder and those claiming under him.But, if they subsequently approve of such acceptance by theholder , they will not be discharged.An acceptance is qualified in the following cases, namely: (a)where it is conditional, declaring the payment to be dependenton the happening of an event stated therein, (b) when itundertakes the payment of part only of the sum ordered to bepaid,(c) where no place of payment being specified on the order,it undertakes the payment at a specified place, and not otherwiseor elsewhere or where a place of payment being specified in theorder it undertakes the payment at some other place andotherwise or elsewhere, (d) where it undertakes the payment at atime other than that at which under the order it would be legallydue(vi) By material alteration of the instrument without assent of

all parties liable: Any material alteration of a negotiableinstrument renders the same void as against any one whois party there to at the time of making such alteration anddoes not consent there to, unless it was made in order tocarry out the common intention of the original parties andany such alteration, if made by an endorsee, discharges hisendorser from all liability to him in respect of theconsideration there of (section87). The alteration must beso material that it alters the character of the instrument to agreat extent, alteration of the date, alteration of theamount payable, or alteration of the time and thealteration on the place of payment of the instrument areregarded as material alterations of the instrument, inhongkong and Shangai Bank vs. Lee shi (1928)A.C 181, ithas been held that an accidental alteration will not, howeverrender the instrument void. It is necessary to show that thealteration has been improperly and intentionally.

(vii) By payment, alteration not being apparent: if, however aperson pays an altered note, bill or cheque, provided thealteration is not apparent and payment is made in duecourse by person or a banker who is liable to pay theamount he is protected (section 89. For example, if Adraws a cheque for Rs. 8 in favour of B who fraudulentlyconverts eight into eighty, and the alteration is notapparent, the banker, paying Rs. 80 to B will not be liableto make good to the drawer the amount paid in excess.

(viii) By acceptor becoming holder of a bill at or after maturityin his own right:

If a bill of exchange which has been negotiated is at or aftermaturity held by the acceptor in his own right all rights to actionthereon are extinguished (section90)(ix) By default in presenting the cheque within a reasonable

time: In the case of a cheque if it is not presented forpayment within a reasonable time of its issue and thedrawer or person on whose account, it is drawn had theright at the time when presentment ought to have beenmade as between himself and the banker, to have thecheque paid and suffers actual damage through the delay heis discharged to the extent of such damage, that is to say,to the extent to which such drawer or person is creditor of

the banker to a larger amount that he would have been ifsuch cheque had been paid(section84) for example, if Xdraws 10 cheques of Rs. 100 each, but when the chequeought to be presented, has only Rs. 600 at the bank andsubsequently the bank fails before the cheques arepresented, X will be released from liability to the extent ofRs. 600 but will remain liable for the balance. If he had thefull amount of Rs. 1,000 at the bank, he will be dischargedin full.

Note – In the above case liability of the drawer will be trans-ferred to the banker. For determining what is reasonable timefor presentation, the following matters would be considered: (i)nature of instrument: (ii) usage of the trade and bankers and(iii) facts of the case.(x) By operation of Law: it should be noted that a negotiable

instrument is also discharged by operation of law, whichmay occur in any of the following circumstances. (a) Bylapse of time i.e. when the claim under the instrumentbecome barred by the limitation act on the expiry of theperiod prescribed for the recovery of the amount due onthe instrument; (b) By merger, i.e. when the debt, underthe instrument is merged in the judgment debt obtainedagainst the acceptor maker or endorse; under the law ofinsolvency, i.e. when the acceptor, maker, or endorser, whohas been adjudicated an insolvent, is discharged by an orderof the court made in the insolvency proceedings.

(xi) By payment by the drawee of a cheque payable to order orto bearer: where a cheque payable to order purports to beendorsed by or on behalf of the payee, the drawee whoalways is a banker is discharged by payment in due course.A cheque is said to have been paid in due course, when ithas been paid in good faith, after taking proper care toascertain the genuineness of the endorsement. Payment indue course discharge the bank from liability even if thepayment is made to a wrong person. Even if theendorsement of the payee is forged the banker isdischarged from the payment in good faith and withnegligence. But if the drawer’s signature is forged, thebanker can, under no circumstance, claim discharge onpayment, for the banker is presumed to know the signatureof his customer (i.e. the drawer)

The bank is discharged by payment in due course to the bearernot with standing any endorsement thereon, whether in full orin part and whether or not such endorsement purports torestrict or exclude further negotiation. The endorsee under anendorsement in full cannot recover the amount from the bankerwho has paid it to the bearer (section 85)The rule of the discharge applicable to a cheque payable to orderalso applies, to a draft drawn by one of the bank upon anotherpayable to order or demand (section 85 A)

4.10 Notice of Dishonour

(a) Dishonour by non - acceptance (section 91): A bill may bedishonored either by non acceptance or by non – payment.A dishonour by non - acceptance may take place in any oneof the following circumstances: (i) when the drawee eitherdoes not accept the bill within forty – eight hours of


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presentment or refuse to accept it; (ii) when one of severaldrawees, not being partners, makes default in acceptance;(iii) when the drawee gives a qualified acceptance; (iv) whenpresented for acceptance is excused and the bill remainsunaccepted; and (v) when the drawee is incompetent tocontract.

Note that presentment is not necessary where the drawee afterdiligent, search cannot be discovered, or where the drawee isincompetent to contract or here the drawee is a fictitious person.When a bill has been dishonoured by non- acceptance, it givesthe holder an immediate right to have recourse against thedrawer or the endorser. Since a dishonour by non -acceptanceconstitutes a material ground entitling the holder to take actionagainst the drawer, he need not wait till the maturity of the billfor it to be dishonored on presentment for payment (RamRavij Jambekar vs. prulhaddas 20 Bom. 133).

(b) Dishonour by non-payment (section 92) : Aninstrument is dishonored by non-payment when theparty primarily liable e.g., the acceptor of a bill, themaker of a not or the drawee of a cheque, make defaultin payment. An instrument is also dishonored fornon-payment when presentment for payment excusedand the instrument, when overdue, remains unpaid,under section 76 of the Act.

(c) Distinction between dishounour by non-acceptanceand by non-payment. If a bill is dishonored by non-acceptance, there is no right of action against thedrawee as he is not a party to the bill. The holder ofthe bill can proceed only against the drawer or endorser,if any, on Dishonour by non-payment the drawee canbe sued.

(d) Notice of Dishonour (sections 93 and 94) : (i) bywhom notice to be given: when an instrument isdishonored either by non-acceptance or by non-payment, the holder thereof or some party theretowho remains liable thereon must give notice ofdishounour.

(ii) To whom notice is to be given : Notice must be given tosuch parties whom the holder proposes to charge withliability severally or jointly, e.g., the drawer and theendorsers. Notices may be given either to the party himselfor to his agent, or to his legal representative on his death,or to the official assignee on his insolvency. It is notnecessary to give notice to the maker of a note or thedrawee or acceptor of a bill or cheque.

(iii) Effect of non-service of notice : if a notice is not sent toany prior party who is entitled to such notice within areasonable time, he is discharged form liability. It is acondition precedent to the continuation of the liability ofthe drawer under section 30 and of the endorsee undersection 35 of the Act that they should be notified of thedishonour.

(v) Mode of service of notice. The notice, if written, may begiven by post at the place of business or at the residence ofparty for whom it is intended, and even if it is miscarriedthe notice is not rendered invalid by such miscarriage.

When the holder of the instrument and the party towhom notice of dishonour must be posted by the nextpost if the parties carry on business or live in the sameplace, it is sufficient if the notice is so dispatched that itreaches its destination on the day next after the day ofdishonour.(e) Transmission of notice of dishonour by party

receiving it (section 95) : any party receiving notice ofdishounour should communicate the same within areasonable time to any prior party whom he intends tohold liable in respect of the instrument, but if theprior party receives otherwise ,no such communicationis necessary.

To illustrate the necessity of transmission of notices, let usconsider the following case.A drawn a bill in favour of B on X.B endorses it to C;C endorses it to D;D endorses it to E;E endorses it to F.Suppose X refuses to accept the bill and F, the holder, givesnotice of dishonour only to E and A, but E does not transmitthe notice to D, C and B, in that case F shall have the right ofaction against E or A, E also has right of action against D, Cand B,E must transmit the notice to them as well.

(f) When notice of dishonour is unnecessary (section 98):in a suit against the drawer or endorser on aninstrument being dishonored, notice of dishonour is amaterial part of the cause of action. However, in thefollowing cases the notice of dishonour is notnecessary. (i) when the necessity of the notice has beendispended with by an express waiver by the partyentitled to it. For example, when the drawer of a billinforms the holder that the bill will be dishonored onpresentment, the notice of dishonour is said to havebeen dispensed with [ Bertt vs. Levett (18]1) 13East 213].

(ii) when the drawer has countermanded payment, he, havingput an impediment in the way of the holder obtainingpayment is not entitled to the notice of dishonour.

(iii) When the party charged would not suffer damage for wantof a notice. In such a case neither presentment nor noticeof dishonour is necessary is necessary, provided it is shownthat at the time of drawing the instrument there were nofunds belonging to the drawer in the hands of the drawee[ subrao vs. sitaram 2 Bom L. R. 891]

(iv) When the party entitled to notice after due search, cannotbe found. (v) where there has been accidental omission togive notice, provided the omission has been caused by anunavoidable circumstances, e.g., death or dangerous maladyof the holder or his agent, or other inevitable accident, oroverwhelming catastrophe not attributable to the default,misconduct or negligence of the party tendering notice. (vi)when one of the drawers is acceptor. Form this, it is alsopossible to deduce a further rule that notice of dishonour


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is not necessary for charging the drawer where the drawerand drawee of a bill are partners does not give rise to thepresumption that they are partners in respect of thedrawing of the bill, or that the bill was drawn by one ofthem on behalf of both. [jambu Ramaswamy vs.Sundraraja chetti 29 mad 239]. Such a case does not fallunder purview of the rule mentioned above, so as todispense with notice, (vii) in the case of promissory notewhich is not negotiable, (viii) when the party entitled tonotice, knowing the facts, promises unconditionally to paythe amount due on the instrument.

4.11 Noting and Protesting

(a) Noting- noting is a convenient mode of authenticating thefact that a bill or note has been dishonored. When a noteor a bill has been dishonored by non- acceptance or non-payment, the holder causes such dishounour to be notedby a Notary public. Noting is a minute recorded by anotary public on the dishonored instrument. When aninstrument, say a bill of exchange, is to be noted fordishonour, it is taken to Notary public who presents itonce again for acceptance or payment, as the case may be;and if the drawee or acceptor still refuses to accept or paythe bill, it is noted, i.e., a minute is prepared containing thedate of dishonour, reason for such dishonour, etc.; whichis attached to the instrument; and the facts are’ noted onthe instrument.

(b) Protest - When an instrument is dishonored, the holdermay cause the fact not on by to be noted, but also to becertified by a Notary Public that the bill has beendishonolired. Such a certificate is referred to as a protest.

If the creed it or an acceptor of a bill is shaken by insolvency orotherwise before the date of maturity of the bill, the holdermay cause such a fact also to ‘be noted and certified,Such a certificate is called a protest for better security. Thecontents of a protest are given in Section, 101 of the Act.Neither noting nor protesting is compulsory in the case ofinland bi is. But under Section104 every foreign bill of exchange must be protested fordishonour when such a pretestis required by the law of the country where the bill was drawn.The advantage of both noting and protesting is that thisconstitutes prim facie good evidence in the Court of the fact thatinstrument has been dishonoured; It is necessary to note thatunder Section 119, the Court is bound to recognise a protest.But it may of may not recognise noting.To make good this lacuna, Section 104 A has been introduced.It c1ai-ifies the position that any bill or document which hasbeen noted can be protested any time thereafter for taking legalaction against the parties. Thus, where a document has beennoted within the time required by law, legal proceeding cannotbe vitiated on account of protest not having been made.(c) Notary Public: A Notary public is appointed by the Central

State Government . His functions are to attest deeds,contracts and other instruments that are to be used abroadand to give a certificate of due execution of such

documents. He enjoys the confidence of the businessworld, and any certificate given by him is presumed to betrue by a court of law. The profession of notaries isregulated by the Notaries Act, 1952.

(d) Notice of Protest: When a promissory note or a bill ofexchange is required by law to be protested, notice of suchprotest in lieu of notice of dishonour must be given in thesame manner as notice of dishonour (Section 102).

4.12 Acceptance and Payment for Honour andreference in Case of NeedAcceptance for honour – If a bill has been dishonoured bynon-acceptance and has been duly noted or protested for suchdishonour, any person, before it is overdue, who is not a partlyalready liable under the bill may, with the consent of the holderof the bill, by writing on the bill, accept the bill for the honourof any of the parties liable on it. The object of such anacceptance for honour is to protect the credit of the party liableon the bill, and to prevent legal proceeding being taken againsthim.Conditions for valid acceptance for honour: These are: (i) thatthe bill has been noted or protested for non-acceptance or bettersecurity: (ii) that such an acceptance has been made with theconsent of the holder, (iii) that the acceptor for honour is notalready liable on the bill, (iv) that the acceptance is for thehonour of any party already liable on the bill; and (v) that theacceptance is by writing on the bill.Rights and Liabilities of such acceptor: Section 111 of the Actstates that an acceptor for honour binds h himself all partiessubsequent to the party for whose honour he accepts to pay theamount of the bill if the drawee does not. But an acceptor forhonour is not liable to the holder of the bill unless it ispresented or (in case the address given by such acceptor on thebill is a place other then the place where the bill is made payable)forwarded for presentment not later than the ‘day next after theday of its maturity. Moreover, an acceptor for honour cannot becharged unless the bill has been presented at its maturity to thedrawee for payment and has been dishonoured by him andnoted or protested for such dishonour (Section 112),Section 111 further provides that the party for whose honourthe acceptor accepts to pay andall prior parties become liable in their respective capacities tocompensate the acceptor for honour for all loss or damagesustained by him, in consequence of sad acceptance:Payment for honour: It is a payment which is made by anyperson for the honour of any party liable on the bill after it hasbeen protested for non-payment. The condition essential forsuch payment are, (i) that the bill must have been noted or,protested for non-payment (ii) that the person paying or hisagent declares before Notary Public the pal}:y for whose honourhe pays; (iii) that such declaration has been recorded by suchNotary Public; (iv) that the payment must be made for thehonour of an y party liable to pay the bill and ( v) that thepayment may be made by any person whether he is alreadyliable on the bill or not.The effects of such a payment are : All parties subseq1,Jent tothe party for whose honour it is paid are is charged. ( 2) The


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payer for honour acquires for the rights of a holder whom hepays and becomes entitled to all the remedies of the holder onthe instrument, (3) The payer can recover all sums paid by himtogether with the interest and expenses properly incurred inmaking such payment (Section 114).According to Section 115 where a “drawee in case of need” ismotioned in a bill or nay endorsement thereon, it is obligatoryfor the holder to present the instrument to him i.e. , the draweein case of need, and it will not be considered to have beendishonoured, unless it has been dishonoured by such drawee.The failure to present the bill to the drawee in case of needabsolves the drawer from liability (Bahadur Chand v. Gulab RaiAIR Lah 557). Again according to the Bombay High Court if abill of exchange has been duly accepted by dishonoured whenpresented to drawee in the first instance for payment, it cannotbe validly presented for payment to the drawee in case of needif it was not first presented to him for acceptance [Dore vs.Kanchiwalla & co. 40 Bom LR 473].

4.13 Presentment Of Instruments

(a) Presentment of bills for acceptance (Section 61) - A bill ofexchange is not necessarily required to be presented foracceptance, before its being presented for payment. Forexample, a bill payable on demand, payable certain numberof days after date, payable on a certain day, etc., need not bepresented for acceptance. Although it is a matter ofcommon practice to obtain acceptance of the bill by thedrawee at the earliest opportunity after it is drawn, such anacceptance is not absolutely essential to the bill being anegotiable instrument. For example, a person to whom abill has been negotiated before acceptance may sue thereonas a holder in due course. [National Park Bank of NewYork vs. Berggren & (1914) 110 L.T.907].

It should, however, be noted that in two cases presented foracceptance would be necessary, namely:(i) Where a bill is payable after sight – presentment for

acceptance is with a view to fixing the maturity of theinstrument:

(ii) Where a bill expressly stipulates that it shall be presentedfor acceptance.

But when a bill is not payable after sight, presentment isunnecessary to render any prior party liable. It is, however,prudent for the holder of such bill to present it for acceptance,for if it is accepted, he obtains the security of the acceptor’ssignature and if it is not accepted he is relieved of the necessarypresentment for payment.How, when and by whom bill is to be presented: A bill payableafter sight is to be presented to the drawee by a person entitledto demand acceptance, and it is generally the holder of the billwho is entitled to demand acceptance. The bill must bepresented by the holder within a reasonable time after it isdrawn, and in business hours on a business day either at theresidence or at the place of business of the drawee. But if thebill itself indicates a place of presentment, it must be presentedat the place. If the drawee cannot, after reasonable search, befound, the bill is to be regarded as dishonoured for non –

acceptance. When authorized by agreement of usage, a present-ment through the post office by a registered letter is sufficient.Drawee’s time for deliberation: Under Section 63, the drawee isentitled to a respite of forty eight hours ( exclusive of publicholidays ) top consider whether he should accept a bill pre-sented to him for acceptance.When presentment is excused: Presentment for acceptance isexcused if the drawee is a fictitious person (Section 91) or if hecannot, after reasonable search, be found (Section 61). Againsteven if presentment is made irregularly, such an irregularity isexcused if the bill has been dishonoured by non-acceptance onsome other ground.(b) Presentment of promissory note for sight (Section 64):

When and why a note is to be presented for sight? Like abill of exchange payable after sight, a promissory notepayable at a certain period after sight must be presented tothe maker for sight. The presentment is to be made by aperson entitled to demand payment who is usually theholder. Against, the note must be presented within areasonable time after it is made and in business hours on abusiness day. In default of such presentment, the maker isnot liable to pay anything to the holder. The necessity forpresentment, in the case of such a note, viz., a note payableat a certain period after sight, is obvious; without suchpresentment the maturity of the note cannot be fixed.

(c) Presentment of instrument for payment: Presentment of abill of exchange means it exhibition to drawee or acceptorby holder with a request for payment in Accordance WithIts Apparent Tenor (section 64). Presentment may be madethrough post by means of a registered letter if such amode of presentment is authorized by agreement or usage.If registered letter if such a mode of presentment isauthorized by agreement or usage. If the bill is paid, theholder would have to hand it over to the payer. In defaultof the bill is paid, the holder would have to hand it over tothe payer. In default of presentment, the drawer and theendorser would be discharged form their liability to theholder.

(i) By whom and to whom presentment is to be made:Presentment is to be made either by the holder or bysomebody on behalf of the holder. Promissory notes areto be presented to the maker; bills of exchange are to bepresented to the acceptor; and cheque are to be presented tothe drawee.

(ii) Time of presentment for payment: (a) Presentment shouldbe made during the usual business hours (Section 65( (b)If the bill is made payable a specified period after date orsight, it must be presented for payment at its maturity(Section 66) (C). If the bill is payable on demand, it mustbe presented for payment within a reasonable time after itsreceipt by the holder (Section 74).

(iii) Place of presentment for payment: (a) If the bill is drawnor accepted payable at a specified place and not elsewhere, itmust be presented for payment at such a place in order tocharge any party to the bill (Section 68) (b). If, however thebill is accepted payable at a special place (the word “and not


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elsewhere” being omitted) then to charge the drawer ( butnot he acceptor), presentment should be made at the placespecified (Section 69) (C) If no place of payment isspecified then the bill should be presented for payment atthe place of business ( if any ) or the residence of thedrawee or acceptor or (if he has no fixed place of businessor residence) to him in person wherever he can be found(Section 70 and 71).

(iv) Presentment of promissory note payable by installment(Section 67)

A promissory note payable by instalments must be presentedfor payment on the third day after the date fixed for payment ofeach instalment.(v) Presentment of cheque to drawer (Section 72): It is the

duty of the holder of cheque to present it at the bankupon which it is drawn. If payment is refused by the bank,the holder may sue the drawer. If the holder sues thedrawer without first presenting the cheque at the bank, thesuit will be dismissed.

If the holder does not present the cheque at the bank in time,the position of the bank may become unsound and it may notbe possible for the banker to honour the cheque; in this case,the drawer is not liable if the bank refuses payment on present-ment. The rule is that the cheque must be presented before therelation between the drawer and his banker has been altered tothe prejudice of the drawer.(vi) Distinction between drawer of bills and drawer of cheque:

If a bill is not presented in time, the drawer is absolutelydischarged; but the drawer of a cheque, in case of delay inpresentment, is discharged only if he has suffered someloss or injury and that too, to the extent of such loss only.Therefore, if the bank remains solvent, the drawer willremain bound after presentment and refusal, althoughsolvent, the drawer will remain bound after presentmentand refusal, although months ( short of the period oflimitation ) have elapsed since the drawing.

(vii) Presentment of cheque to charge any other person (Section73) : It may be recalled that in order to charge the drawer,the cheque must be presented before the relation betweenthe drawer and his banker has been altered to the prejudiceof the drawer, but in order to charge any person other thanthe drawer the cheque must be presented within areasonable time. For example, A drawes a cheque in favourof B, who endorses it to C. C must present it at the bankwithin a reasonable time, otherwise B will be dischargedfrom liability.

(viii)Presentment of instrument to agents, etc. (Section 75):Presentment for acceptance or payment may be made notonly to the drawer maker or acceptor acceptance or paymentmay be made not only to the drawer maker or acceptor butalso to his duly authorized agent or where he is dead to hislegal representative, or where he has been declared aninsolvent, to his assignee.

When presentment is unnecessary (Section 76): (a) No present-ment for payment is necessary in any of the following cases; (1)if the maker, of acceptor intentionally prevents the presentment

of the instrument; (2) if the instrument being payable at hisplace of business, he ( i.e., maker, drawer or acceptor ) closessuch place on a business, day during the usual business hours;(3) if the instrument being payable at some other specifiedplace, neither he nor any person authorized to pay it attends atsuch place during the usual business hours: (4) if the instru-ment not being payable at any specified place, he (i.e., maker, etc.) cannot after due search be found.(b) Not presentment for payment is necessary as against any

party sought to be charged with payment, if he hasengaged to pay notwithstanding non-presentment.

(c) No presentment for payment is necessary as against anyparty if, after maturity and with the knowledge thatinstrument has not been presented:

(d) He makes a part-payment on account of the amount dueon the instrument; or (2) he promises to pay the amountdue thereon in whole or in part; or (3) he otherwise waiveshis right to take advantage of any default in presentmentfor payment.

When we say that no presentment for payment is necessary, wemean thereby the instrument is taken as dishonoured at the duedate for presentment even though it has not been presented.The result is that the holder any sue the party liable withoutpresentment and the plea that the instrument was notpresented for payment is no defence to the claim of the holder.

4.14 Payment and Interest

(a) To whom payment should be made (Section 78): Paymentof the amount due on promissory note, bill of exchangeor cheque must, in order to discharge that maker oracceptor, be made to the holder. If payment is made to anyperson other than the holder, the holder can claim paymentover again from the maker or acceptor.

(b) Payment of interest when rate is specified (Section 49):Where interest at a specified rate is expressly made payableon a promissory note or a bill of exchange, interest shall becalculated at the rate specified, on the amount of theprincipal money due thereon; (i) from the date of theinstrument until tender or realization of such amount (ii)from the date of the instrument until such a date after theinstitution of a suit to recover the principal amount as theCourt directs.

(c) Payment of interest when no rate is specified (Section 80):When no rate interest is specified in the instrument ,interest on the amount due shall be calculated at the rate of18% per annum from the date at which the instrumentought to have been paid until tender or realization of theamount, or until such date as the Court directs.

4.15 International Law Regarding NegotiableInstrumentIn the absence of a contract the contrary (i.e., unless the partiesotherwise agree ), the liability of the maker or drawer a foreignpromissory note, bill of exchange or cheque is governed in allessential matters by the law of the place where he madeinstrument. The respective liability of the acceptor and endorser,in such cases, will be governed by the law of the place where the


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instrument is made payable (Section 1‘34). For example, if a billof change was drawn by A in California where the rate ofinterest was 25% it was accepted by B, payable in Washington,where the rate of interest was 6% and the bill was endorsed inIndian and was dishonoured. On an action on the bill beingbrought against B in India. B would be liable to pay interest@6% only; but if A was charged as drawer, A would be liableto pay interest @25%.When the foreign instrument made is payable in a placedifferent from that at which it is made or endorsed, the law ofthe place where the instrument is made payable would deter-mine what constitutes dishonour and what notice ofdishonour is sufficient (Section 135).If the instrument is made, drawn, accepted or endorsed abroad,but it is in accordance with the law of India, any subsequentacceptance or endorsement thereon India will not be regarded asinvalid, because the agreement as evidenced by such an instru-ment is invalid according to the law of such foreign country(Section 136).

Special Rules of Evidence(a) Presumption as to negotiable instrument (Section 118):

For deciding cases in respect of rights of parties on thebasis of a bill of exchange, the Court is entitled to makecertain presumptions. These are briefly stated as follow:(a) That the negotiable instrument was made or drawn for

consideration and every party who made itself boundin respect thereof did so for consideration;

(b) That the negotiable instrument was drawn on the dateshown on the face of it;

(c) That the bill of exchange was accepted before itsmaturity, i.e., before it became overdue;

(d) That the negotiable instrument was transferred beforeits maturity;

(e) That the endorsements appearing upon a negotiableinstrument were made in the order in which theyappear.

(f) That an instrument which has been lost was properlystamped;

(g) That the holder of a negotiable instrument is theholder in due course, except when the instrument hasbeen obtained from its lawful owner or its lawfulcustodian. Likewise, if it has been obtained from amaker or and acceptor by means of an offence or fraud,it is for the holder to prove that he is the holder in duecourse.

(b) Certain rules of estoppel applicable to instruments: Whenone person causes another person to believe a thing to betrue and to act upon such belief he is not allowed in a suitbetween him and such person, to deny the truth of thatthing. That is, he is not allowed to give evidence in supportof his denial. This rule is called the rule of estoppel, bywhich evidence is excluded. There are certain rules ofestoppel applicable to negotiable instruments. These arecontained in Section 120 of the Act.

The objective of these provisions are: (i) that the original partiesto the instrument may not deny the validity of the instrument;(ii) that the maker of a promissory note or an acceptor of a billmay not deny the right of the payee to receive the paymenttherefore; and (iii) that an endorser of a negotiable instrumentmay not disown the signature or capacity to contract of anyprior party to the instrument.Hundis : Bills of exchange drawn up in the vernacular aregenerally known as Hundis. The negotiable instruments Actordinarily is not applicable to Hundis but, the parties to theHundis may agree to be the Negotiable instrument Act.

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TUTORIAL

These questions are intended to enable the student to test hisknowledge before proceeding to answer the test paper. Theanswer to these questions are not required to be written out orsubmitted for evaluation. (The Answers are given at the end).1. X signs a negotiable instrument in the following terms.

(a) “I promise to pay X or order Rs. 400”.(b) “I acknowledge myself to be indebted to X in the

sums of Rs. 400 to be paid on demand for valuereceived”.

(c) “Mr. X, I.O.U. Rs. 800”.(d) “I promise to pay X Rs. 400 and all other sums which

shall be due to him”.(e) “I promise to pay X Rs. 400 first deducting thereout

any money which he may owe me”.(f) “I promise to pay X Rs. 400 seven days after my

marriage with Z”(g) “I promise to pay, X Rs. 400 on P’s death provided P

leaves me enough to pay that sum.(h) “I promise to pay Rs. 400 and deliver to him may black

horse on Ist July next.” Which of the aforesaidinstruments are not promissory notes?

2. State whether the following bills are “inland” bills.(a) Bills drawn outside India and made payable in or

drawn upon any person resident in any countryoutside India.

(b) A bill drawn in Calcutta on a merchant in Bombay butendorsed in Paris.

(c) Bills drawn outside India made payable in India, ordrawn upon any person resident therein.

(d) Bills drawn in India and made payable outside India,or drawn upon a person resident outside India, butnot made payable In India.

(e) A bill is drawn in Madras upon a merchant in Brusselsand accepted payable in Bombay.

3. When a note is drawn in this from ; “I promise to pay Rs.500 to B only”, Can it be called a negotiable instrument?

4. A bill is made payable to “Saroj Sehgal”. Saroj Sehgalendorses it in blank and negotiates it. Is the bill payable tobearer?

5. A bill is drawn by an agent acting with the scope of hisauthority upon his principal. Can the holder thereof treat itat his option as a note or bill.?

6. A draws a bill on B and negotiates it away. B is fictitiousdrawee. Can the holder of the bill teat it as note made byA?

7. A bill is drawn “Pay to X or order the sum of onethousand rupees. In the margin the amount stated is Rs.100. What is the amount of the bill for?

8. When is a negotiable instrument, dated 30th August ( in ayear ) and made payable three months after date, deemed tobe at maturity?

9. A bill of exchange is addressed to Swapan Ganguli, AnilBenerjee writes an acceptance on it. Can Anil Banerjee bindhimself by such acceptance?

10. Where there are several drawees of a bill, who are notpartners, can any one of such drawees accept it for anotherwithout that other’s authority?

11. A who is the holder of a bill transfers it to B withoutconsideration. B transfers it to C without consideration. Ctransfers it to D for value. D transfers it withoutconsideration to E. (a) Can E recover the amount of thebill from A? (b) Has E any right against D? Say Yes or No.

12. A owes to B Rs. 500. B draws a bill on A for Rs. 1,000. Ato accommodate B and at his request, accept it. B sues A onthe bill. Can he recover Rs. 1,000?

13. A agrees to supply a quantity of paper to B. B accept a billfor Rs, 1,000 drawn by A, being the price of the paper. Thepaper. The paper is delivered to B but it turns out to be ofa quality different from the stipulated one, and worth Rs.500 only. B retains the paper. A sues B on the bill. Is Bbound to pay Rs. 1,000 to A?

14. X accepts a bill for Rs. 1,500. This is the agreed price of twobales of cotton to be supplied by Y to X, Y delivers onlyone bale to X, Y sues X on the bill. Can Y recover Rs.1,500 from X?

15. X owes to Y Rs. 2,000 and makes a promissory note forthe amount payable to Y. X dies and the note issubsequently found amongst his papers. Can Y sue on thenote even if it was later on delivered to him?

16. A, the holder of a negotiable instrument payable to bearer,which is in the hands of A’s banker who is at the time thebanker to transfer the instrument to B’s credit in thebanker’s account with B. The banker does so and accordingnow possesses the instrument as B’s agent. Can theinstrument be deemed to have been negotiated?.

17. A is the holder of a bill payable to “A or order”. A bysimple delivery transfers the bill without endorsing it to B.Can ‘B’ deemed to be a holder in due course?

18. A is holder of a bill endorsed by B in bank. A writes overB’s signature the words “Pay to C or order”. (a) is thewriting of A operates as an endorsement in full from B toC ? (b) Is A liable an endorser?

19 B signs the following endorsement on different negotiableinstruments payable to bearer. Do these endorsements


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exclude the right of further negotiation by C? Say yes orno:(a) “Pay the contents to C only”.(b) “Pay C for my use”(c) “Pay C or order for the account of B”.(d) “The within must be credited to C”.(e) “Pay C”(f) “Pay C value in account with the State Bank”.(g) “Pay the contents to C, being part of the consideration

in a certain deed of assignment executed by theendorser and other”

19. A bill is drawn payable to A or order. A endorses it to Bbut the endorsement doe4s not contain the words “ororder” or any equivalent words. Can B negotiate theinstrument?

Notes:


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LESSON 25:INDIAN PARTNERSHIP ACT, 1932

PARTNERSHIP ,FORMATION ,TEST AND REGISTRATION OF PARTNERSHIP

Learning ObjectivesAt the end of this chapter, you will able to know:• The Meaning and nature of partnership• The true test of partnership• The types of partnership• The formation of partnership• The registration of partnership

IntroductionHave you ever heard of partnership?Try to answer what do you mean by partnership in general.Yes, partnership is an association between two or morepersons. Let us now discuss about the legal aspects of partner-ship.The Rules and regulations relating to partnership are governedby the Indian Partnership Act 1932. This act contains 74sections and it came into force on Ist December 1932 exceptSection 69 (relating to the effect of non – registration of thefirms ) which came into force on Ist October 1933. It extends towhole of India except to the state of Jammu and Kashmir

DefinitionSection 4 Indian Partnership Act 1932 defines ‘Partnership’ inthe following terms: -“Partnership is the relation between persons who have agreedto share the profit of business carried on by all or any of themacting for all.”Breaking the above definition, following essential elements ofpartnership are revealed:-1. There must be an agreement.2. Between two or more persons3. Who agree to carry on business4. With the object of sharing profit5. The business must be carried by all or any of them

acting for all or Mutual Agency.All the above elements must coexist in order to constitutepartnership. A brief explanation of these elements is as follows:1. An agreement :- The relationship of partnership arises

from an agreement between the persons concerned notfrom status. Agreement as made between the personsmust be valid and enforceable by law. This agreement maybe oral or written. To avoid future complications anddispute amongst the persons constituting partnership,agreement in writing must be preferred.

ExampleA & B enters into a contract to carry on business of manufactur-ing of tin plates; a partnership is exacted between A&B.

2. Two or more persons:- There must be at least two personsto form a partnership. It is obvious that a single personcannot constitute partnership. Only persons competent tocontract can enter into partnerships.

As to the maximum number of partners, there is no limitationin the partnership Act 1932 but is no limitation in the partner-ship Act 1932 but the Joint Stock companies Act 1956 providesthat in a firm carrying banking business, the number ofpartners should not be more than 10 whereas in other type ofbusiness, the limit is 20 partners. It is also mentioned that incase, the number of partners in the above business are morethan the prescribed limit, the partnership will be treated asillegal.3. Carrying on of business There can be partnership if there

is some business is carried under it. Sec 2(b) of the Actreads as under “business” includes every trade, occupationor profession. If the purpose is to carry on charitable work,it will not be partnership. Carrying on of the businessmeans continuity of business activities is required toconsider it as partnership business. A and B agrees to opena shop of fancy items and agree to carrying on of thebusiness for sharing of profit. It is a partnership.

Sec. 8, however, provides that there can be a ‘particular partner-ship’ between partners whereby they engage in a particularadventure or undertaking, which, if successful, would result inprofit. Thus there can be a partnership for production of a film,construction of a building etc. although there is single adven-ture but the same requires a series of transaction a andcontinuing relationship.4. Sharing of profit:- The essential element of partnership is

to carry on business with the object of sharing profitamongst the partners. The partners may however, agree toshare profits in any ratio they like.

Ex. A, B, and C entered into a contract to carry on business ofmanufacturing of toys. ABC decided the ratio as 40:30:30.Besides sharing of profit, in case, there is loss in the partner-ship, it is not essential that the partners should agree to sharethe losses. Sec 13(b) however, provides that the partners areentitled to share equally in profits earned and shall contributeequally to the loss sustained by the firm, unless otherwise,agreed. It means that the partners may make a contract contraryto this provision. There may be an agreement vide when onlyone artner may bear the whole loss.5. Mutual Agency ‘Business must be carried by all or any of

them acting for all” It means all the partners should be ableto represent each other and should be represented by eachother with respect to the business of partnership. Thus thefundament of a partnership is that partners carrying on thebusiness of the firm are agents as well as principals of eachother. A partner can bind the firm by has act provided: -


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• He act within the scope of his authority• His acts are done in the name of he firm• They are done for the purpose of the business of the firmExample. ABC inters into an agreement to form partnershipfor carrying on business of rice. D, an outsider makes a dealwith B. B has acted as agent of the firm. D can file a suit againstABC in case of default.The rules laid in Cox v/s Hickman (1860) are an authority inthis behalf. The facts of the case are as follows:-S and S was iron merchant in partnership. They becamefinancially embarrassed and made a compromise with theircreditors. The creditors were empowered to carry on business astrustee, to proportionately divide the income amongst thecreditors and return the business after discharge of debt. Coxwas of the trustee who never acted. The other trustee purchasedcoal from Hickman and failed to pay the price. Hickman sued allthe trustees including Cox. The court observed that thecreditors working as trustee, although dividing the profit of thebusiness in a ratable proportion were not partners because theywere not empowered to represent each other. It was holdingthat Cox was not liable to pay Hickman for Coke. ]Do you know how you would identify the partnership? What isthe true test to identify the partnership?Let me now know first your views on it.Yes, It is the mutual agency, which makes a true partnership. Letus now elaborate further over it.Test of PartnershipThe all elements as discussed above must co-exist in order toconstitute partnership Sec 6 of Indian Partnership Act providesthat “in determining whether a group of persons is or is not afirm or whether a person is or in not a partner in a firm, regardshall be had to the real relation between the parties, as shown byall relevant facts taken together “Thus all incidents of relationsof the partnership are to be examined as shown in writtenagreement, verbal agreement or conduct. We can explain beposition by the following examples.

Example

(i) A&B jointly buy a mine and lease it out. They make apartnership agreement that they will divide the lease rent ina ratio of 50:50 between themselves. In this case A&B arehaving understanding that they are partners but in the eyesof low it is not partnership.

How many types of partnership are there?

Type of PartnershipSec 4 of the Act provides that persons who have entered into apartnership with one another are called individually “partners”and collectively a firm and the name under which their businessis carried is called the firm name”The formation of the partnership of type of partnershipmeans, there is an agreement between parties to form the firmthat too as per provision of Partnership Act. The Partnershipcan be classified as under:-1. Partnership at will:- Sec 7 Where no provision is made by a

contract between the partners for duration of their

partnership or for the determination of their partnership,the partnership is, “partnership at will”. It means thepartnership is made without specifying any period and is atthe sweet will of the partners. Any partner may dissolvesuch a partnerships by giving a notice to that effect to allthe other partners.

2. Particular Partnership:- When a partnership is to formedfor a particular period or for a particular venture, in a such acase the partnership is automatically dissolved at expiry offixed term or on the completion of the venture e.g. A&Bhave formed a partnership for manufacture of a particularfilm, the partnership is automatically dissolved oncompletion of the venture provided they don’t enter into acontract to continue this partnership for future.

We have discussed the distinction of partnership vide which theimportant elements for the formation ware discussed in detail.However to make it more clear, we give below the importantpoints for execution of partnership.1. It is executed by a agreement between the partners2. It has no separate entity apart from its members. It is

simply a collection of members3. Maximum number of person allowed 10 in banking firm

and 20 in non banking firm4. Carrying on business is necessary for existence of

partnership5. The liability of partnership is unlimited an the partners are

jointly/personally liable.6. Every partner is agent of the other partner as well as the

firm7. Every partner has a right to take part in the management

of the affairs of the firmNow, we will discuss how the partnership comes into forma-tion. What legal formalities are there in the formation ofpartnership?

Formation of PartnershipA partnership is formed by an agreement between the partners.The rights and obligations of the partners towards each otherand towards the firm can be determined by an oral or writtenagreement. To avoid future dispute it is always advisable to havepartnership expressed in writing.

Partnership DeedA partnership agreement put to writing and is termed aspartnership deed. Before starting of the business the partnersare drafting the deed in proper manner so that the business mayrun smoothly by and if there is any dispute the same may besettled according to the terms of partnership deed. Whatshould be the exact contents, it depends on the circumstancesbut generally the partnership deed must contain the followingclauses1. Name and address of the firm and nature of business to

be carried on.2. Name and address of the partners3. Date of commencement and duration of partnership4. The capital and any other contribution made by partners


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5. The ratio to share profit and losses amongst the partners.6. Rules as to interest on loans and capital, their salary,

commission, etc.7. Method and arrangement of keeping accounts8. Division of task and obligation of partners9. Rules to be followed in case of admission, expulsion /

retirement or death of a partner.10. Whether a partner is allowed to carry competing business.11. The circumstances under which the partnership will stand

dissolved.12. In case of dispute which course of action shall be followed

e.g. Court, arbitrations etc.

Registration of PartnershipRegistration of firm means the recording of the firm namealong with the prescribed particulars, in the Register of thefirms, kept. in the office of the Registrar of Firms. Theregistration provides a reliable evidence and conclusive proof ofthe existence of a partnership firm.Section 56- Power to exempt from application of this ChapterThe 3[State Government of any State], may, by notification inthe Official Gazette, direct that the provisions of this Chaptershall not apply to 4[that State] or to any part thereof specified inthe notification.

Section 57- Appointment of Registrars

(1) The State Government may appoint Registrars of Firmsfor the purposes of this Act, and may define the areaswithin which they shall exercise their powers and performtheir duties.

(2) Every Registrar shall be deemed to be a public servantwithin the meaning of section 21 of the Indian Penal Code(45 of 1860).

Section-58- Application for registration

(1) The registration of a firm may be effected at any time bysending by post or delivering to the Registrar of the area inwhich any place of business of the firm is situated orproposed to be situated, a statement in the prescribedform and accompanied by the prescribed fee, stating-(a) The firm name,(b) The place or principal place of business of the firm,(c) The names of any other places where the firm carries

on business, (d) The date when each partner joined the firm, (e) The names in full and permanent addresses of the

partners, and (f) The duration of the firm.The statement shall be signed by all the partners, or by theiragents specially authorized in this behalf.(2) Each person signing the statement shall also verify it in the

manner prescribed.(3) A firm name shall not contain any of the following words,

namely-

“Crown”, “Emperor”, “Empress”, “Empire”, “Imperial”,“King”, “Queen”, “Royal”, or words expressing or implyingthe sanction, approval or patronage of, 5[Government], except 6,[when the State Government] signified 7[its] consent to the useof such words as part of the firm name by order in writing

Section 59- RegistrationWhen the Registrar is satisfied that the provisions of section 58have been duly complied with, he shall record an entry of thestatement in a register called the Register of Firms, and shall filethe statement..

Section 60- Recording of alterations in firm nameand principal place of business

(1) When an alteration is made in the firm name or in thelocation of the principal place of business of a registeredfirm, a statement may be sent to the Registrar accompaniedby the prescribed fee, specifying the alteration and signedand verified in the manner required under section 58.

(2) When the Registrar is satisfied that the provisions of sub-section (1) have been duly complied with, he shall amendthe entry relating to the firm in the Register of Firms isaccordance with the statement, and shall file it along withthe statement relating to the firm filed under section 59.

Section 61- Noting of closing and opening ofbranchesWhen a registered firm discontinued business at any place orbegins to carry on business at any place, such place not being itsprincipal place of business, any partner or agent of the firm maysend intimation thereof to the Registrar, who shall make a noteof such intimation in the entry relating to the firm in theRegister of Firms, and shall file the intimation along with thestatement relating to the firm filed under section 59.

Section 62- Noting of changes in names andaddresses of partnersWhen any partner in a registered firm alters his name orpermanent address, any partner or agent of the firm may sendan intimation of the alteration to the Registrar, who shall dealwith it in the manner provided in section 61.Section 63- Recording of changes in and dissolution of a firm(1) When a change occurs in the constitution of a registered

firm any incoming, continuing or outgoing partner, andwhen a registered firm is dissolved any person who was apartner immediately before the dissolution, or the agent ofany such partner or person specially authorized in thisbehalf, may give notice to the Registrar of such change ordissolution, specifying the date thereof; and the Registrarshall make a record of the notice in the entry relating to thefirm in the Register of Firms, and shall file the notice alongwith the statement relating to the firm filed under section59.

(2) Recording of withdrawal of a minor-When a minor whohas been admitted to the benefits of partnership in a firmattains majority and elects to become or not to become apartner, and the firm is then a registered firm, he, or hisagent specially authorised in this behalf, may give notice tothe Registrar that he has or has not become a partner, and


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the Registrar shall deal with the notice in the mannerprovided in sub-section (1).

Section 64- Rectification of mistakes

(1) The Registrar shall have power at all times to rectify anymistake in order to bring the entry in the Register ofFirms relating to any firm into conformity with thedocuments relating to that firm filed under thisChapter.

(2) On application made by all the parties who have signedany document relating to a firm filed under thisChapter, the Registrar may rectify any mistake in suchdocument or in the record or note thereof made in theRegister of Firms.

Section 65- Amendment of Register by order ofCourtA court deciding any matter relating to a registered firm maydirect that the Registrar shall make any amendment in the entryin the Register of Firms relating to such firm which is conse-quential upon its decision; and the Registrar shall amend theentry accordingly.

Section 66- Inspection of Register and filedDocuments

(1) The Register of Firms shall be open to inspection byany person on payment of such fee as may beprescribed.

(2) All statements, notices and intimations filed under thisChapter shall be open to inspection, subject to suchconditions and on payment of such fee as may beprescribed.

Section 67- Grant of CopiesThe Registrar shall on application furnish to any person, anpayment of such fee as may be prescribed, a copy, certified underhis hand, of any entry or portion thereof in the Register ofFirms.

Section 68- Rules of Evidence

(1) Any statement, intimation or notice recorded or notedin the Register of Firms shall, as against any person bywhom or on whose behalf such statement, intimationor notice was signed, be conclusive proof of any facttherein stated.

(2) A certified copy of an entry relating to a firm in theRegister of Firms may be produced in proof of thefact of the registration of such firm, and of thecontents of any statement, intimation or noticerecorded or noted therein.

What is the effect of non-registration? Is it mandatory?No, it is not mandatory. But there would be some seriouseffects if the firm is not registered as covered under Section 69.

Section 69- Effect of non-registration

(1) No suit to enforce a right arising from a contract orconferred by this Act shall be instituted in any court byor on behalf of any person suing as a partner in a firmagainst the firm or any person alleged to be or to have

been a partner in the firm unless the firm is registered andthe person suing is or has been shown in the register offirms as a partner in the firm.(2) No suit to enforce a right a rising from a contract shall

be instituted in any court by or on behalf of a firmagainst any third party unless the firm is registered andthe persons suing are or have been shown in theregister of firms as partners in the firm.

(3) The provisions of sub-sections (1) and (2) shall applyalso to a claim of set-off or other proceeding toenforce a right arising from a contract, but shall notaffect-(a) The enforcement of any right to sue for the

dissolution of a firm or for accounts of adissolved firm, or any right or power torealise the property of a dissolved firm, or

(b) The powers of an official assignee, receiver orcourt under the Presidency-towns InsolvencyAct, 1909 (3 of 1909) or the ProvincialInsolvency Act, 1920 (5 of 1920) to realisethe property of an insolvent partner.

(4) This section shall not apply-(a) To firms or to partners in firms which have

no place of business in 10[the territories towhich this Act extends], or whose places ofbusiness in 11[the said territories], aresituated in areas to which, by notificationunder 12[section 56], this Chapter does notapply, or

(b) To any suit or claim of set-off not exceedingone hundred rupees in value which, in thePresidency-towns, is not of a kind specifiedin section 19 of the Presidency Small CauseCourts Act, 1882 (5 of 1882), or, outside thePresidency-towns, is not of a kind specifiedin Schedule II to the Provincial Small CauseCourts Act, 1887 (9 of 1887), or to anyproceeding in execution or other proceedingincidental to or arising from any such suit orclaim.

Section 70- Penalty for furnishing false particulars

Section 70 lays down that if any person who signs anystatement, amending statement, notice or intimation underthis Chapter containing any particular which he knows tobe false or does not believe to be true, or containingparticulars which he knows to be incomplete or does notbelieve to be complete, shall be punishable withimprisonment which may extend to three months, or withfine, or with both.

Section 71- Power to make rules

Section 71 states that The State Government may bynotification in the Official Gazette make rules describingthe fees which shall accompany documents sent to theRegistrar of Firms, or which shall be payable for the


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inspection of documents in the custody of the Registrar ofFirms or for copies from the Register of Firms:It is also provided that such fees shall not exceed themaximum fees specified in Schedule I.

The State Government may make rules-(a) Prescribing the form of statement submitted under

section 58, and of the verification thereof;(b) Requiring statements, intimations and notices under

sections 60, 61, 62 and 63 to be in prescribed form, andprescribing the form thereof;

(c) Prescribing the form of the Register of Firms, and themode in which entries relating to firms are to be madetherein, and the mode in which such entries are to beamended or notes made therein;

(d) Regulating the procedure of the Registrar whendisputes arise;

(e) Regulating the filing of documents received by theRegistrar;

(f) Prescribing conditions for the inspection of originaldocuments;

(g) Regulating the grant of copies;(h) Regulating the elimination of registers and documents;(i) Providing for the maintenance and form of an index

to the Register of Firms; and(j) Generally, to carry out the purposes of this Chapter.

(3) All rules made under this section shall be subject to thecondition of previous publication. Every rule made bythe State Government under this section shall be laid, assoon as it is made, before the State Legislature.

Attempt the following problems for a better understanding:1. X, a publisher, agrees to publish at his own expense, a

book written by Y and to pay Y half the net profits. Isthere a partnership between X and Y?

[Hint. No partnership, mere profit-sharing is not conclusive testof partnership.]2. Two trading firms, each having twelve partners join hands

and make a partnership form having twenty-four partners.Is it a valid entity?

[Hint. No, it’s an illegal association as per section 11 of thecompanies Act, as the number of members exceeds 20]3. A and B separately tender for a contract to cut and remove

bamboos form a certain jungle. They mutually agree thateach one of them shall be entitled to a certain share ofbamboos, no matter whosoever is granted the contract. Isit a partnership agreement?

[Hint. No]4. A agreed with B, a goldsmith, to buy and deliver gold to B,

where B will make ornaments out of it and sell them, andthey shall share the resulting profit and losses. Is it apartnership agreement?

[Hint. Yes.]

5. A advanced some money to B and C, two merchants. Themerchants agreed to carryon the business subject to thecontrol of A in several respects. A was to receive acommission of 20% on all the profits. Is it a partnershipagreement between A, Band C?

[Hint: A is not a partner. The object of the agreement is to givemaximum security to A for the returns on his money - MallowMarch & Co. v. The Court of Wards [1872] LR 2 CP 419.]6. A, a contractor, undertook a contract of loading and

unloading railway wagons. He appointed H-to manage thework. It was agreed that B would receive 75%of the profitsas his remuneration and would bear all the losses, if any. Isit a partnership agreement?

[B. Com. (H), 1999][Hint- No, B is an agent of A, not his partner - Munshi AbdulLatif v. Gopeshwar Chattoraj AIR 1933 Calcutta 204.] )6. A, B and C are partners of an unregistered firm. D owes

this firm Rs. 1,000 on a con-tract. The firm filed a suitagainst D. The suit is dismissed for non-registration of thefirm. The firm is registered later on. Can the firm nowsuccessfully bring the suit against D? [B. Com. (H), 1986]

[Hint - Yes, after registration, the firm can file a fresh suit. Theprovision is - ‘before a suit is filed in the court, registrationmust have been effected’.]7. A and B purchased a taxi to ply it in partnership. They plied

the taxi for a year. When A, without the consent of B,disposed of the taxi, B brought an action to recover hisshare in sale proceeds. A resisted B’s claim on the groundthat the firn1 was not registered.

Will B succeed in his claim?[B. Com. (H), 1982][Hint - B will succeed in his claim because partner of anunregistered firm can sue for his share on dissolution of thefirm.]8. An unregistered firm filed a suit against a debtor to recover

Rs. 500. The court dismissed firm’s application on theground of non-registration. Can the firm get itsregistration now and file a fresh suit against the debtor torecover the amount? [B. Com. (H.), 2000]

[Hint: Yes, the partners can get the firm registered and then filea fresh suit against the debtor.]9. A, B and C were partners in a firm. A died. Z, who did

know about the death of A, made a deal with the firm.The firm committed a default in meeting out the deal. Zsued upon A’s estate, B and C for compensation of hisdamages. Is A’s estate liable for the damages?

[Hint - No, A’s estate is not liable for the dealings of the firmafter A’ death.]10. A, a holding out partner in the firm of X & Y is

adjudicated as insolvent. The firm caused heavy losses to Zby breaching a contract. Z sued X, Y and A for thedamages. Is A liable to share such damages?

[Hint - No, A partner by holding out who is an insolvent,cannot be held liable for the claims on the firm.]


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LESSON 26:INDIAN PARTNERSHIP ACT, 1932

TYPES OF PARTNERS AND THEIR RIGHTS AND OBLIGATIONS

Learning ObjectivesAt the end of this chapter, you will able to know:• The types of partners• The rights of partners• The obligations of partners• The minor’s status in the partnership

IntroductionWe are now well versed what we mean by partnership. Its natureand formation and registration formalities.Today we will discuss about the kinds of partners and theirrights and obligations as provided under the Act.Kinds of Partners in a partnership termsThe partners of partnership firm may be classified in followingcategories: -

1. Actual/Active partner2. Dormant or sleeping partner3. Nominal partner4. Partner in profit only5. Sub Partner6. Partner by estoppels or partner by holding out.

1. Actual/Active Partner Partners actively engaged in theconduct on business are known as “active partners”. Theyare full fledged partners in the real sense. If such partnerwants to retire from the firm he must give public notice ofhis retirement from the firm in order to get himselfabsolved from the responsibly of the firm.

2. Dormant of Sleeping Partner: Some times, there arepersons who merely become partners in a firm bycontributing capital or even without capital and donot takeactive pact in the conduct of the partnership business. Suchpartners are liable to third parties as actual partner

Such partners can retire from the firm without giving notice butthey have assess to the books of the accounts of the firm andcan have a copy of the same.Example:- A&B start a partnership firm wherein A is activepartners and B is dormant partner. This is valid partnership3. Nominal Partner:- These are the partners who have no real

interest in the firm . They donot invest or participate in thebusiness of the firm but give their name as partner of thefirm.

Example:- A is a renowned businessman. His son B starts thebusiness in which A has given consent to become partner ofthe firm which is to be run by his son with the sole purpose tohelp his son. A is only a nominal partner.4. Partner in profits only:- Some times the partnership firm

is formed to carryon business wherein a partner becomes

partner of the firm only for profits. In case the firm suffersloss, he shall not be liable for the loss. These type ofpartners have no say in the management of the firm.However, the liability of such partner towards third party issimilar to active partner .

5. Sub Partner:- When a partner agrees to share his profit in apartnerships firm with an outsider such a outsider in calledsub partner. The outsider cannot interfere business of thefirm nor he is liable to third party as an active partner.

6. Partner by estoppel or holding all :- Section 28 – “Anyonewho by words spoken or written or by conduct representhimself or knowingly permit himself to be representedhimself to be a partner in a firm, is liable as a partner inthat firm to anyone who has on the faith of any suchrepresentation gives credits to the firm, whether the personrepresenting himself or represented to be a partner does ordoes not know that the representation has reached theperson so giving credit”

Thus if the behavior of such person cause misunderstandingto third parties that he is partner of a particular firm. Later onsuch a person is estopped from denying the fact that he is apartner in that particular firm, shall be called partner by estop-pels.Example:- ABC are partners in a partnership firm named XYZ.A tells in the market that D is partners of the firm. D does notc cant contradict his statement: XYZ gets a loan from Y andlater on become insolvent. In the instant case D is partner in thefirm and is estopped from the fact that he is partner of XYZ.Holding out means a partner retires from the firm and does notgive notice of retirement. If transactions are taking place treatingthe retired partner as active partner of the firm, he shall beestopped from denying the fact.Let us now talk about the rights and liabilities of partnersRights and liabilities/ obligations of partnersWe would be discussing the rights and liabilities/ obligationsof the partners in term of Indian Partnership Act 1932 asamended up to date.Section 9-12 deals with the mutual relation pf partners.

Section 9- General duties of partnersPartners are bound to carry on the business of the firm to thegreatest common advantage, to be just and faithful to eachother, and to render true accounts and full information of allthings affecting the firm to any partner or his legal representa-tive.

Section 10- Duty to indemnify for loss caused byfraudEvery partner shall indemnify the firm for any loss caused to itby his fraud in the conduct of the business of the firm.


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Section 11- Determination of rights and duties ofpartners by contract between the partners

(1) Subject to the provisions of this Act, the mutualrights, and duties of the partners of a firm may bedetermined by contract between the partners, and suchcontract may be expressed or may be implied by acourse of dealing.

Such contract may be varied by consent of all the partners, andsuch consent may be expressed or may be implied by a courseof dealing.

(2) Agreements in restraints of trade-Notwithstandinganything contained in section 27 of the IndianContract Act, 1872 (9 of 1872), such contracts mayprovide that a partner shall not carry on any businessother than that of the firm while he is a partner.

Section 12- The conduct of the business

Subject to contract between the partners, -(a) Every partner has a right to take part in the conduct of

the business;(b) Every partner is bound to attend diligently to his

duties in the conduct of the business;(c) Any difference arising as to ordinary matters connected

with the business may be decided by a majority of thepartners, and every partner shall have the right toexpress his opinion, before the matter is decided, butno change may be made in the nature of the businesswithout the consent of all the partners; and

(d) Every partner has a right to have access to and toinspect and copy any of the books of the firm.

Section 13- Mutual rights and liabilities

Subject to contract between the partners-(a) Partner is not entitled to receive remuneration for

taking part in the conduct of the business;(b) The partners are entitled to share equally in the profits

earned, and shall contribute equally to the lossessustained by the firm;

(c) Where a partner is entitled to interest on the capitalsubscribed by him such interest shall be payable onlyout of profits;

(d) Partner making, for the purposes of the business, anypayment or advance beyond the amount of capital hehas agreed to subscribe, is entitled to interest thereonat the rate of six per cent per annum;

(e) The firm shall indemnify a partner in respect ofpayments made and liabilities incurred by him-(i) In the ordinary and proper conduct of the business, and(ii) In doing such act, in an emergency, for the purpose of protecting the firm from loss, as would be done by a person of ordinary prudence, in his own case, under similar circumstances; and

(f) A partner shall indemnify the firm for any loss causedto it by his wilful neglect in the conduct of thebusiness of the firm.

Section 14- The property of the firmThe property of the firm includes all property and rights andinterests in property originally brought into the stock of thefirm, or acquired, by purchase or otherwise, by or for the firm,or for the purposes and in the course of business of the firm,and includes also the goodwill of the business subject tocontract between the partners,.Unless the contrary intention appears, property and rights andinterests in property acquired with money belonging to the firmare deemed to have been acquired for the firm.

Section 15- Application of the property of the firmSection 15 states that the property of the firm shall be held andused by the partners exclusively for the purposes of thebusiness subject to contract between the partners

Section 16.-Personal profits earned by partnersAs is subject to contract between the partners-

(a) If a partner derives any profit for himself from any 0transaction of the firm, or from the use of theproperty or business connection of the firm or thefirm name, he shall account for that profit and pay it tothe firm;

(b) If a partner carries on any business of the same natureas and competing with that of the firm, he shallaccount for and pay to the firm all profits made by himin that business.

Section 17- Rights and duties of partnersSubject to contract between the partners-

(a) After a change in the firm-where a change occurs in theconstitution of a firm, the mutual rights and duties ofthe partners in the reconstituted firm remain the sameas they were immediately before the change, as far asmay be;

(b) After the expiry of the term of the firm, and - where afirm constituted for a fixed term continues to carry onbusiness after the expiry of that term, the mutualrights and duties of the partners remain the same asthey were before the expiry, so far as they may beconsistent with the incidents of partnership at will; and

(c) Where additional undertakings are carried out-where afirm constituted to carry out one or more adventuresor undertakings, the mental rights and duties of thepartners in respect of the other adventures orundertakings are the same as those in respect of theoriginal adventures or undertakings.

Section 25- Liability of a partner for acts of the firmEvery partner is liable, jointly with all the other partners andalso severally, for all acts of the firm done while he is a partner.

Section 26- Liability of the firm for wrongful acts ofa partnerWhere, by the wrongful act or omission of a partner acting inthe ordinary course of the business of a firm, or with the


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authority of his partners, loss or injury is caused to any thirdparty, or any penalty is incurred, the firm is liable therefor to thesame extent as the partner.

Section 27- Liability of firm for misapplication bypartnersWhere

(a) A partner acting within his apparent authority receivesmoney or property from a third party and misappliesit, or

(b) A firm in the course of its business receives money orproperty from a third party, and the money or propertyis misapplied by any of the partners while it is in thecustody of the firm, the firm is liable to make goodthe loss.

Section 28- Holding out

(1) Anyone who by words spoken or written or byconduct represents himself or knowingly permitshimself to be represented, to be a partner in a firm, isliable as a partner in that firm to any one who has onthe faith of any such representation given credit to thefirm, whether the person representing himself orrepresented to be a partner does or does not know thatthe representation has reached the person so givingcredit.

(2) Where after a partner’s death the business is continuedin the old firm name, the continued use of that nameor of the deceased partner’s name as a part thereofshall not of itself make his legal representative or hisestate liable for any act of the firm done after his death.

Section 29- Rights of transferee or a partner’sinterest

(1) A transfer by a partner of his interest in the firm, eitherabsolute or by mortgage, or by the creation by him of acharge on such interest, does not entitle the transferee,during the continuance of the firm, to interfere in theconduct of the business, or to require accounts, or toinspect the books of the firm, but entitles thetransferee only to receive the share of profits of thetransferring partner, and the transferee shall accept theaccount of profits agreed to by the partners.

(2) If the firm is dissolved or if the transferring partnerceases to be a partner, the transferee is entitled asagainst the remaining partners to receive the share ofthe assets of the firm to which the transferring partneris entitled, and, for the purpose of ascertaining thatshare, to an account as from the date of thedissolution.

This was all about the rights and obligations of partners.Do you think that minor can be a partner in the partnershipfirm?

Minor’s status in partnership firmPartnership is based on mutual contract and only those who arecompetent to contract can become partners of a firm. As perIndian Contract Act, any agreement with a minor is void ab-

intio but he can derive benefit under it. Under section 30 of thePartnership Act, a minor can be admitted to the partnership forhis benefit. Section 30 lays down certain condition which arediscussed as under:-

Section 30- Minors Admitted to the Benefits ofPartnership

(1) A person who is a minor according to the law to whichhe is subject may not be a partner in a firm, but, withthe consent of all the partners for the time being, hemay be admitted to the benefits of partnership.

(2) Such minor has a right to such share of the propertyand of the profits of the firm as may be agreed upon,and he may have access to and inspect and copy any ofthe accounts of the firm.

(3) Such minor’s share is liable for the acts of the firm, butthe minor is not personally liable for any such act.

(4) Such minor may not sue the partners for an account orpayment of his share of the property or profits of thefirm, save when severing his connection with the firm,and in such case the amount of his share shall bedetermined by a valuation made as far as possible inaccordance with the rules contained in section 48:

It is provided that all the partners acting together or any partnerentitled to dissolve the firm upon notice to other partners mayelect in such suit to dissolve the firm, and thereupon the courtshall proceed with the suit as one for dissolution and forsettling accounts between the partners, and the amount of theshare of the minor shall be determined along with the sharesof the partners.

(5) At any time within six months of his attainingmajority, or of his obtaining knowledge that he hadbeen admitted to the benefits of partnership,whichever date is later, such person may give publicnotice that he has elected to become or that he haselected not to become a partner in the firm, and suchnotice shall determine his position as regards the firm:

It is provided that, if he fails to give such notice, he shallbecome a partner in the firm on the expiry of the said sixmonths.

(6) Where any person has been admitted as a minor to thebenefits of partnership in a firm, the burden ofproving the fact that such person had no knowledge ofsuch admission until a particular date after the expiryof six months of his attaining majority shall lie on thepersons 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,-


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(a) His rights and liabilities shall continue to be those of a minor under this section up to 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 entitled to sue the partners for his share of the property and profits in accordance with sub- section (4).

It is provided that nothing in sub-sections (7) and (8) shallaffect the provisions of section 28.

Attempt the Following Problems for a BetterUnderstanding

1. A , B and C are partners in a firm. A manages to get acontract from Indian Railways after paying a bribe of Rs. 10lac. The contract is worth Rs. 1 crore. He charges thisamount to the firm, but B and C object to it. Advise.

[Hint: A cannot charge Rs. 10 lac to the firm, because a partnerhas a right to be reimbursed for the payments made by him inthe ordinary and proper conduct of the business This is not themanner in which business should ordinarily be conducted. SeeSection 13 (e).]2. A gives continuing guarantee to B for due fulfillment of

business obligations by firm ‘X& Y’ in its dealings with B.A partner in the firm retires and another partner admitted.What effect the change has on A’s guarantee?

[Hint: Guarantee is revoked.]3. A and B are partners in a firm. ‘C’, the minor son of B is

admitted to the benefits of the partnership. Soon after theadmission of ‘C’, B dies. And the business of the firm iscarried on. During this period, A speculates and losesheavily. The creditors of the firm demand the losses fromA and C. Is C liable to creditors?

[Hint. when B died, partnership came to an end. C being aminor cannot be sole part- x with A. Thus C is not liable forany losses incurred after B’s death.]4. X, Y and Z are partners in a firm. X, without the authority

of Y and Z buys certain shares in his name out ofpartnership money. Will ‘shares’ constitute partnershipproperty?

[Hint. Yes, though shares stand in the name of X, they havebeen acquired using firm’s money.]5. A, Band C are partners. C is a sleeping partner who is not

known to the creditors. C retires without giving publicnotice of his retirement. Is C liable for subsequent debtsincurred by A and B? [B. Com (Pass), 1995, B. Com (H),1976, 1981, 1994]

[Hint - No, C is not liable. He being a sleeping partner is notsupposed to be known to the outsiders dealing with the firm.]6. X, Y and Z are partners in a firm. Z retires and A is

admitted as a new partner. No public notice of this changeis given but the firm continues its business in the oldname. Mr. P, a customer deals with the firm after thischange and the firm become indebted to P. P sues X, Y andA for his dues. What will be the implication? Will hesucceed?

[Hint - Yes, he will succeed. He can sue at his option either theold partners, i.e., X, Y, and Z on the ground of estoppel, or thenew partners, i.e., X, Y. and A.]





and Commercial Laws,”• Taxmann’s, New Delhi

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LESSON 27:INDIAN PARTNERSHIP ACT, 1932DISSOLUTION OF PARTNERSHIP

Learning ObjectivesAt the end of this chapter, you will able to know:• The modes of dissolution of partnership• The consequences of dissolution of partnership• The settlement of accounts on dissolution of

partnership

IntroductionToday, we will be discussing dissolution of partnershipbusiness.But before going ahead you need to understand that there is adifference between the dissolution of partnership and dissolu-tion of firm.Section 39 of the Act provides that there is a difference betweenthe dissolution of partnership and the dissolution of the firm.Partnership is a relation between the partners and the partner-ship firm is an entity which exists because of partnershiprelations. Thus, whenever a partner leaves the firm, partnershipis dissolved but the firm continues until the partnership firm isdissolved. After starting the business, partners may feel likeclosing the business, may be because the business is notlucrative or it is not going the way they predicted or for anyother reason. When a partner close down the firm, dissolutionof the partnership firm takes place. Thus , when partners closedown the business, dissolution of the partnership firm takesplace. The dissolution of partnership between all the partnersof the firms occurs is called dissolution of the firm.Let us now concentrate on the modes of dissolution of thefirm.

Modes of Dissolution of the Firm

Section 40- Dissolution by AgreementA firm may be dissolved with the consent of all the partners orin accordance with a contract between the partners.

Section 41- Compulsory dissolutionA firm is dissolved-

(a) By the adjudication of all the partners or of all thepartners but one as insolvent, or

(b) By the happening of any event which makes itunlawful for the business of the firm to be carried onor for the partners to carry it on in partnership:

It is further provided that, where more than one separateadventure or undertaking is carried on by the firm the illegalityof one or more shall not of itself cause the dissolution of thefirm in respect of its lawful adventures and undertakings.

Section 42- Dissolution on the Happening of CertainContingenciesSubject to contract between the partners a firm is dissolved-

(a) If constituted for a fixed term, by the expiry of thatterm;

(b) If constituted to carry out one or more adventures orundertakings, by the completion thereof;

(c) By the death of a partner; and(d) By the adjudication of a partner as an insolvent.

Section 43- Dissolution by notice of partnership atwill

(1) Where the partnership is at will, any partner givingnotice in writing to all the other partners of hisintention to dissolve the firm may dissolve the firm.

(2) The firm is dissolved as from the date mentioned inthe notice as the date of dissolution or, if no date is somentioned, as from the date of the communication ofthe notice.

Section 44- Dissolution by the courtAt the suit of a partner, the court may dissolve a firm on any ofthe following grounds, namely-

(a) That a partner has become of unsound mind, in whichcase the suit may be brought as well by the next friendof the partner who has become of unsound mind asby any other partner;

(b) That a partner, other than the partner suing, hasbecome in any way permanently incapable ofperforming his duties as partner;

(c) That a partner, other than the partner suing, is guiltyof conduct which is likely to affect prejudicially thecarrying on of the business, regard being had to thenature of the business;

(d) That a partner, other than the partner suing, willfully orpersistently commits breach of agreements relating tothe management of the affairs of the firm or theconduct of its business, or otherwise so conductshimself in matters relating to the business that it is notreasonably practicable for the other partners to carry onthe business in partnership with him;

(e) That a partner, other than the partner suing, has in anyway transferred the whole of his interest in the firm toa third party, or has allowed his share to be chargedunder the provisions of rule 49 of Order XXI of theFirst Schedule to the Code of Civil Procedure, 1908 (5of 1908) or has allowed it to be sold in the recovery ofarrears of land revenue or of any dues recoverable asarrears of land revenue due by the partner;

(f) That the business of the firm cannot be carried on saveat a loss; or

(g) On any other ground which renders it just andequitable that the firm should be dissolved.


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What are the consequences of dissolution ?

Consequences of Dissolution Since dissolution initiates the process of winding up the affairsof the firm some rights are inferred and some obligation areimposed upon the partners to do the needful in this regard .Such consequences are covered under the Indian Partnership Act1932 vide Vide Sec 45 to Sec 55

Section 45- Liability for acts of Partners done afterDissolution

(10 Notwithstanding the dissolution of a firm, thepartners continue to be liable as such to third partiesfor any act done by any of them, which would havebeen an act of the firm if done before the dissolution,until public notice is given of the dissolution:

It is further provided that the estate of a partner who dies, orwho is adjudicated an insolvent, or of a partner who, nothaving been known to the person dealing with the firm to be apartner, retires from the firm, is not liable under this section foracts done after the date on which he ceases to be a partner.Notices under sub-section (1) may be given by any partner.

Section 46- Rights of Partners to have BusinessWound up after DissolutionOn the dissolution of a firm every partner or his representativeis entitled, as against all the other partners or their representa-tives, to have the property of the firm applied in payment ofthe debts and liabilities of the firm, and to have the surplusdistributed among the partners or their representatives accord-ing to their rights.

Section 47- Continuing authority of Partners forPurposes of Winding upAfter the dissolution of a firm the authority of each partner tobind the firm, and the other mutual rights and obligations ofthe partners continue notwithstanding the dissolution, so far asmay be necessary to wind up the affair of the firm and tocomplete transactions begun but unfinished at the time of thedissolution, but not otherwise:It is provided that the firm is in no case bound by the acts of apartner who has been adjudicated insolvent; but this provisodoes not affect the liability of any person who has after theadjudication represented himself or knowingly permittedhimself to be represented as a partner of the insolvent.Settlement of accounts is very important in the partnershipbusiness. Section 48 deals with it.

Section 48- Mode of Settlement of accountsbetween PartnersIn settling the accounts of a firm after dissolution, the follow-ing rules shall, subject to agreement by the partners, beobserved-

(a) Losses, including deficiencies of capital, shall be paidfirst out of profits, next out of capital, and, lastly,if necessary, by the partners individually in theproportions in which they were entitled to shareprofits;

(b) The assets of the firm, including any sums contributedby the partners to make up deficiencies of capital, shallbe applied in the following manner and order-(i) In paying the debts of the firm to third parties;(ii) In paying to each partner ratably what is due to him from the firm for advances as distinguished from capital;(iii) In paying to each partner ratably what is due to him on account of capital; and(iv) The residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profits.

Section 49- Payment of firm debts and of separatedebtsWhere there are joint debts due from the firm, and also separatedebts due from any partner, the property of the firm shall beapplied in the first instance in payment of the debts of thefirm, and, if there is any surplus, then the share of each partnershall be applied in payment of his separate debts or paid tohim. The separate property of any partner shall be applied firstin the payment of his separate debts, and the surplus (if any) inthe payment of the debts of the firm.

Section 50- Personal profits Earned after DissolutionSubject to contract between the partners, the provisions ofclause (a) of section 16 shall apply to transactions by anysurviving partner or by the representatives of a deceasedpartner, undertaken after the firm is dissolved on account of thedeath of a partner and before its affairs have been completelywound up:It is provided that where any partner or his representative hasbought the goodwill of the firm, nothing in this section shallaffect his right to use the firm name.

Section 51- Return of Premium on PrematureDissolutionWhere a partner has paid a premium on entering into partner-ship of a fixed term, and the firm is dissolved before theexpiration of that term otherwise than by the death of apartner, he shall be entitled to repayment of the premium or ofsuch part thereof as may be reasonable, regard being had to theterms upon which he became a partner and to the length oftime during which he was a partner, unless-

(a) The dissolution is mainly due to his own misconduct,or

(b) The dissolution is in pursuance of an agreementcontaining no provision for the return of the premiumor any part of it.

Section 52- Rights where Partnership Contract isRescinded for Fraud or MisrepresentationWhere a contract creating partnership is rescinded on the groundof the fraud or misrepresentation of any of the parties theretothe party entitled to rescind is, without prejudice to any otherright, entitled-

(a) To a lien on, or a right of retention of, the surplus orthe assets of the firm remaining after the debts of the


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firm have been paid, for any sum paid by him for thepurchase of a share in the firm and for any capitalcontributed to him;(b) To rank as a creditor of the firm in respect of any

payment made by him towards the debts of the firm;and

(c) To be indemnified by the partner or partners guilty ofthe fraud or misrepresentation against all the debts ofthe firm.

Section 53- Right to Restrain from use of Firm nameor firm PropertyAfter a firm is dissolved, every partner or his representative may,in the absence of a contract between the partners to the contrary,restrain any other partner or his representative from carrying ona similar business in the firm name or from using any of theproperty of the firm for his own benefit, until the affairs of thefirm have been completely wound up:It is provided that where any partner or his representative hasbought the goodwill of the firm, nothing in this section shallaffect his right to use the firm name.

Section 54- Agreements in Restraint of TradePartners may, upon or in anticipation of the dissolution of thefirm, make an agreement that some or all of them will not carryon a business similar to that of the firm within a specifiedperiod or within specified local limits; and notwithstandinganything contained in section 27 of the Indian Contract Act,1872 (9 of 1872), such agreement shall be valid if the restric-tions imposed are reasonable.

Section 55- Sale of Goodwill after DissolutionIn settling the accounts of a firm after dissolution, the goodwillshall, subject to contract between the partners, be included inthe assets, and it may be sold either separately or along withother property of the firm.Rights of buyer and seller of goodwill-Where the goodwill of afirm is sold after dissolution, a partner may carry on a businesscompeting with that of the buyer and he may advertise suchbusiness, but, subject to 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 persons who were dealing with

the firm before its dissolution.Agreement in restraint of trade -Any partner may, upon the saleof the goodwill of a firm, make an agreement with the buyerthat such partner will not carry on any business similar to thatof the firm within a specified period or within specified locallimits and, notwithstanding anything contained in section 27 ofthe Indian Contract Act, 1872 (9 of 1872), such agreement shallbe valid if the restrictions imposed are reasonable.

Attempt the following Problems for a BetterUnderstanding:

1. A and B partners under an agreement, which provided thatthe partnership could be terminated by mutual

arrangement only. A alone wants to terminate thepartnership. Can he do so?

[Hint. No, however, under Section 44, the court may, at the suitof A, dissolve the firm on certain grounds.]2. X and Y started business in partnership. After a couple of

years they found that the firm is incurring continues losses.Can it be a ground for dissolution of a firm?

[Hint- Yes, the dissolution can be applied for on the groundthat business cannot be carried on except losses. See section44(f)]3. X, Y and Z are partners in a firm. X and Y always behave

arrogantly with each other and do not also co-operate inbusiness matters. Z applies to court for dissolution of thefirm. Will he succeed?

[Hint- Yes, on ‘Just and Equitable grounds’.]4. X and Y form a partnership firm. After 5 years, Delhi

police for trading in narcotics detains Y. He is laterconvicted for the same. Will the court dissolve the firm onthe application of X before the expiry of the term? Advice.

[Hint – Yes. It is possible on the ground ‘Conduct prejudicialto partnership business’. See Section 44]5. X and Y were carrying on a printing business as partners.

They decided to dissolve the firm, and it was provided inthe dissolution deed that even after the sale of goodwill ofthe firm to one of them, nothing should prevent the otherpartner from carrying on the similar business in theneighborhood. X purchased the goodwill of the firm, andY opened another printing house nearby and startedsoliciting the customers of the old firm. X objects. Advice.

[Hint- Y is legally justified in opening a printing house in theneighborhood, but after the sale of goodwill, Y has no right tosolicit the customers of the firm. X can take an injunction orderfrom the court to stop Y from soliciting the firm’s customers.]6. A, B and C were partners in a firm sharing profits in the

ratio of 4:3:2. After 15 years they agree to dissolve the firm.After paying outside liabilities and the capital of partners,there is a surplus of Rs. 40,000. What will be the share ofA, B and C?

[Hint. They will share the surplus in the ratio of 4:3:2.]







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LESSON 29:THE COMPANIES ACT, 1956

DEFINITION AND NATURE OF A COMPANY

Learning ObjectivesAt the end of this chapter, you will be able to• Identify the meaning and nature of a company• Identify the important characteristics of a company

IntroductionToday, we will begin with the Companies Act that was passed in1956.In the lecture of today we will discuss the meaning and natureof a company.Do you know what do we mean by company?In simple words, a company can be defined as a group ofpersons associated together for the purpose of carrying on abusiness, with a view to earn profits. The word ‘Company’ is anamalgamation of the Latin word ‘Com’ meaning “with ortogether” and ‘Pains’ meaning “bread”. Thus, a company isnothing but a group of persons who have come together orwho have contributed money for some common person andwho have incorporated themselves into a distinct legal entity inthe form of a company for that purpose.Section 3(1)(i) of the Act provides that, “a company means acompany formed and registered under this Act or an existingcompany.”Section 3(1)(ii) lays down that, “ An existing company means acompany formed and registered under any of the previouscompanies laws specified below.”

(a) any Act or Acts relating to companies in force beforethe Indian Companies Act, 1866 (10 of 1886), andrepealed by that Act;

(b) The Indian Companies Act, 1866 (10 of 1866);(c) The Indian Companies Act, 1882 (6 of 1882);(d) The Indian Companies Act, 1913 (7 of 1913);(e) The Registration of Transferred Companies Ordinance,

1942 (54 of 1942); and 40[(f) An law corresponding to any of the Acts or the

Ordinance aforesaid and in force-(1) In the merged territories or in a Part B State (other than

the State of Jammu and Kashmir), or any part thereof,before the extension thereto of the Indian CompaniesAct, 1913 (7 of 1913); or

(2) In the State of Jammu and Kashmir, or any partthereof before the commencement of the Jammu andKashmir (Extension of Laws) Act, 1956 41[ in so faras banking, insurance and financial corporations areconcerned, and before the commencement of theCentral Laws (Extension to Jammu & Kashmir)

There is very good definition by Lord Justice Lindey, “Acompany is an association of many persons who contribute

money or money’s worth to a common stock and employ it insome trade or business and who share the profit and lossarising there from. The common stock so contributed isdenoted in money and is the capital of the company. Thepersons who contribute it or to whom it belongs are members.The proportion of capital to which each member is entitled ishis share. The shares are always transferable although the rightto transfer is more or less restricted.”The Supreme Court of India has held in the case of StateTrading Corporation of India v/s CTO that a company cannothave the status of a citizen under the Constitution of India.Let us learn about its important characteristics.

Characteristics of a CompanyA company as an entity has several distinct features, whichtogether make it a unique organization. The following are thedefining characteristics of a company: -

Separate Legal EntityOn incorporation under law, a company becomes a separatelegal entity as compared to its members. The company isdifferent and distinct from its members in law. It has its ownname and its own seal, its assets and liabilities are separate anddistinct from those of its members. It is capable of owningproperty, incurring debt, borrowing money, having a bankaccount, employing people, entering into contracts and suingand being sued separately.The importance of the separate entity of the company washowever firmly established in the following case.Salomon v. Salomon & co. Ltd.(1897) A.C. 22. S sold his bootsbusiness to a newly formed company for £ 30,000. His wife,one daughter and four sons took up one share of £ 1 each. Stook 23,000 shares of £1 each and £ 10,000 debentures in thecompany. The debentures gave S a charge over the assets of thecompany as the consideration for the transfer of the business.Subsequently when the company was wound up, its assets werefound to the worth £ 6,000 and its liabilities amounted to £17,000 of which £ 10,000 were due to S (secured by debentures)and £ 7,000 due to unsecured creditors, the unsecured creditorsclaimed that S and the company were one and the same personand that the company was a mere agent for S and was hencethey should be paid in priority to S. Held, the company was, inthe eyes of the law, a separate person independent from S andwas not his agent. S, though virtually the holder of all theshares in the company, was also a secured creditor and wasentitled to repayment in priority to the unsecured creditors.

Limited LiabilityThe liability of the members of the company is limited tocontribution to the assets of the company up to the face valueof shares held by him. A member is liable to pay only theuncalled money due on shares held by him when called upon to


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pay and nothing more, even if liabilities of the company farexceeds its assets. On the other hand, partners of a partnershipfirm have unlimited liability i.e. if the assets of the firm are notadequate to pay the liabilities of the firm, the creditors can forcethe partners to make good the deficit from their personal assets.This cannot be done in case of a company once the membershave paid all their dues towards the shares held by them in thecompany.For example, if the face value of the share in a company is Rs.10 and a member has already paid Rs. 5 per share, he can becalled upon to pay not more than Rs. 5 per share during thelifetime of the company.

Perpetual SuccessionA company does not die or cease to exist unless it is specificallywound up or the task for which it was formed has beencompleted. Membership of a company may keep on changingfrom time to time but that does not affect life of the company.Death or insolvency of member does not affect the existence ofthe company.There is a very good saying. Even where during war all themembers of a private company, while in general meeting waskilled by a bomb, the company survived; not even a hydrogenbomb could have destroyed it. [ Meat Supplies( Guildford) Ltd;Re( 1966) 3 All E.R.320]

Separate PropertyA company is a distinct legal entity. The company’s property isits own. A member cannot claim to be owner of the company’sproperty during the existence of the company.

Transferability of SharesShares in a company are freely transferable, subject to certainconditions, such that no shareholder is permanently ornecessarily wedded to a company. When a member transfers hisshares to another person, the transferee steps into the shoes ofthe transferor and acquires all the rights of the transferor inrespect of those shares.

Common SealA company is a artificial person and does not have a physicalpresence. Therefore, it acts through its Board of Directors forcarrying out its activities and entering into various agreements.Such contracts must be under the seal of the company. Thecommon seal is the official signature of the company. The nameof the company must be engraved on the common seal. Anydocument not bearing the seal of the company may not beaccepted as authentic and may not have any legal force.

Capacity to sue and Being SuedA company can sue or be sued in its own name as distinct fromits members.

Separate ManagementA company is administered and managed by its managerialpersonnel i.e. the Board of Directors. The shareholders aresimply the holders of the shares in the company and need notbe necessarily the managers of the company.One Share-One Vote:The principle of voting in a company is one share-one vote. I.e.if a person has 10 shares, he has 10 votes in the company. This

is in direct contrast to the voting principle of a co-operativesociety where the “One Member - One Vote” principle appliesi.e. irrespective of the number of shares held; one member hasonly one vote.You have learnt about partnership. Now you also know aboutcompany.Let us try to differentiate between company and partnership.

Distinction between Company and Partnership

1. A Partnership firm is sum total of persons who have cometogether to share the profits of the business carried on bythem or any of them. It does not have a separate legalentity. A Company is association of persons who havecome together for a specific purpose. The company has aseparate legal entity as soon as it is incorporated under law.

2. Liability of the partners is unlimited. However, the liabilityof shareholders of a limited company is limited to theextent of unpaid share or to the tune of the unpaidamount guaranteed by the shareholder.

3. Property of the firm belongs to the partners and they arecollectively entitled to it. In case of a company, the propertybelongs to the company and not to its members.

4. A partner cannot transfer his shares in the partnership firmwithout the consent of all other partners. In case of acompany, shares may be transferred without thepermission of the other members, in absence of provisionto contrary in articles of association of the company.

5. In case of partnership, the number of members must notexceed 20 in case of banking business and 10 in otherbusinesses. A Public company may have as many membersas it desires subject to a minimum of 7 members. APrivate company cannot have more than 50 members.

6. There must be at least 2 members in order to form apartnership firm. The minimum number of membersnecessary for a public limited company is seven and two fora private limited company.

7. In case of a partnership, 100 % consensus is required forany decision. In case of a company, decision of themajority prevails.

8. On the death of any partner, the partnership is dissolvedunless there is provision to the contrary. On the death ofthe shareholder the company’ existence does not getterminated.

I must tell you about the meaning of illegal association.

Illegal AssociationUnder the Companies Act, 1956, not more than 10 persons cancome together for carrying on any banking business and notmore than 20 persons can come together for carrying on anyother of business, unless the association is registered under theCompanies Act or any other Indian law. Any association, whichdoes not comply with the above norms, is an illegal association.Therefore, a partnership of more 10 or 20 members, as the casemay be, is an illegal association unless the registered under theCompanies Act or any other Indian law.However, you cannot apply this provision in the following cases


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1. A Joint Hindu Family business comprising of familymembers only. But where two or more Joint Hindufamilies come together for business through partnership,the total number of members cannot exceed 10 or 20 asthe case may be, but in computing the number of persons,minor members of such family will be excluded.

2. Any association of charitable, religious, scientific trust ororganisation which is not formed with a profit motive

3. Foreign companies.When the number of members exceeds the prescribed maxi-mum, members must register it under Companies Act or anyother Indian law.

Consequences of non-RegistrationLaw does not recognize an illegal association. An illegalassociation cannot enter into any contract, cannot sue anymembers or any outsider, and cannot be sued by any membersor outsiders for any of its debts. The members of the illegalassociation are personally for the obligations of the illegalassociation. A member may be liable to a fine of Rs. 1000. Anymember of an illegal association cannot sue another member inrespect of any matter connected with the association.

Minimum Number of MembersA public company must have at least 7 members whereas aprivate company may have only 2 members. If the number ofmembers falls below the statutory minimum and the companycarries on its business beyond a period of six months after thenumber has so fallen, the reduction of number of membersbelow the legal minimum is a ground for the winding up ofthe company.

Practical Problems

1. A husband and wife who were the only two members of aprivate company died in an accident. Does the companyalso come to an end?

2. There are five members in a company. They are all holdingfully paid shares in a company. What is their liability?

3. What would be the effect if 22 members were carrying on abusiness without registration?

4. How would you differentiate between a company andpartnership?


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osca20.html

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11.555 151


TYPES OF COMPANIES

Learning ObjectivesAt the end of this chapter, you will be able to• Identify the different types of company

IntroductionToday we will learn about the important types of company.There are various basis to classify companies.

On the basis of the number of the members,companies can be divided in two:

• A Private Company• A Public Company

Public Company means a company which not a privatecompany.Private Company means a company which by its articles ofassociation: -

a. Restricts the right of members to transfer its sharesb. Limits the number of its members to fifty. In

determining this number of 50, employee-membersand ex-employee members are not to be considered.

c. Prohibits an invitation to the public to subscribe to anyshares in or the debentures of the company.

If a private company contravenes any of the aforesaid threeprovisions, it ceases to be private company and loses all theexemptions and privileges, which a private company is entitled.Following are some of the privileges and exemptions of aprivate limited company:-1. Minimum number is members is 2 (7 in case of public

companies)2. Prohibition of allotment of the shares or debentures in

certain cases unless statement in lieu of prospectus hasbeen delivered to the Registrar of Companies does notapply.

3. Restriction contained in Section 81 related to the rightsissues of share capital does not apply. A special resolutionto issue shares to non-members is not required in case of aprivate company.

4. Restriction contained in Section 149 on commencement ofbusiness by a company does not apply. A private companydoes not need a separate certificate of commencement ofbusiness.

5. Provisions of Section 165 relating to statutory meeting andsubmission of statutory report do not apply.

6. One (if 7 or less members are present) or two members (ifmore than 7 members are present) present in person at ameeting of the company can demand a poll.

7. In case of a private company which not a subsidiary of apublic limited company or in the case of a private company

of which the entire paid up share capital is held by the oneor more body corporate incorporated outside India, noperson other than the member of the company concernedshall be entitled to inspect or obtain the copies of profitand loss account of that company.

8. Minimum number of directors is only two. (3 in case of apublic company)

The Company Law Board on being satisfied that the infringe-ment of the aforesaid 3 conditions was accidental or due toinadvertence or that on other grounds, it just an equitable togrant relief, may grant relief to the company from the conse-quences of such infringement. The infringement of theaforesaid 3 conditions does not automatically convert a privatecompany into a public company. It continues to remain aprivate company; it merely ceases to be entitled to the privilegesand exemptions available to a private company.

Companies Deemed to be Public limited CompanyA private company will be treated as a deemed public limitedcompany in any of the following circumstances :-1. Where at least 25% of the paid up share capital of a private

company is held by one or more bodies corporate, theprivate company shall automatically become the publiccompany on and from the date on which the aforesaidpercentage is so held.

2. Where the annual average turnover of the private companyduring the period of three consecutive financial years is notless than Rs 25 crores, the private company shall be,irrespective of its paid up share capital, become a deemedpublic company.

3. Where not less than 25% of the paid up capital of a publiccompany limited is held by the private company, then theprivate company shall become a public company on andfrom the date on which the aforesaid percentage is so held.

4. Where a private company accepts deposits after theinvitation is made by advertisement or renews depositsfrom the public (other than from its members or directorsor their relatives), such companies shall become publiccompany on and from date such acceptance or renewal isfirst made.

On the basis of the liability of the members, a company can beclassified in

• Limited Companies• Unlimited Companies

Limited CompaniesCompanies may be limited or unlimited companies. Companymay be limited by shares or limited by guarantee.a. Company limited by shares In this case, the liability of

members is limited to the amount of uncalled share


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capital. No member of company limited by the shares canbe called upon to pay more than the face value of shares orso much of it as is remaining unpaid. Members have noliability in case of fully paid up shares.

b. Company limited by the guarantee A company limited byguarantee is a registered company having the liability of itsmembers limited by its memorandum of association tosuch amount as the members may respectively therebyundertake to pay if necessary on liquidation of thecompany. The liability of the members to pay theguaranteed amount arises only when the company hasgone into liquidation and not when it is a going concern. Aguarantee company may be a company with share capital orwithout share capital.

Unlimited Company: The liability of members of an unlimitedcompany is unlimited. Therefore their liability is similar to thatof the liability of the partners of a partnership firm. It may ormay not have a share capital.Under the Companies Act, 1956, the name of a public limitedcompany must end with the word ‘Limited’ and the name of aprivate limited company must end with the word ‘PrivateLimited’. However, under Section 25, the Central Governmentmay allow companies to remove the word “Limited / PrivateLimited” from the name if the following conditions aresatisfied :-1. The company is formed for promoting commerce, science,

art, religion, charity or other socially useful objects2. The company does not intend to pay dividend to its

members but apply its profits and other income inpromotion of its objects.

On the basis of the control, we can classify company as Holdingand Subsidiary companies

Holding and Subsidiary companies (Sec 4)A company shall be deemed to be subsidiary of anothercompany if: -1. That other company controls the composition of its board

of directors; or2. That other company holds more than half in face value of

its equity share capital3. Where the first mentioned company is subsidiary company

of any company, which that other’s subsidiary. eg CompanyB is subsidiary of the Company A and Company C issubsidiary of Company B, therefore Company C issubsidiary of Company A.

The control of the composition of the Board of Directors ofthe company means that the holding company has the power atits discretion to appoint or remove all or majority of directorsof the subsidiary company without consent or concurrence ofany other person.On the basis of the ownership, a company can be classified as

• Government Companies• Non Government Companies• Foreign Companies

Government CompaniesIt means any company in which not less than 51% of the paidup share capital is held by the Central Government or any StateGovernment or partly by the Central Government and partly bythe one or more State Governments and includes a companywhich is a subsidiary of a government company. GovernmentCompanies are also governed by the provisions of the Compa-nies Act. However, the Central Government may direct thatcertain provisions of the Companies Act shall not apply or shallapply only with such exceptions, modifications and adaptionsas may be specified to such government companies.

Non Government CompaniesIt is controlled and operated by a private capital

Foreign CompaniesBy this, we mean a company incorporated in a country outsideIndia under the law of that other country and has establishedthe place of business in India.There is another important type of company which is called asOne Man CompanyOne man company is a company in which one man holdspractically the whole of the share capital of the company, and inorder to meet the statutory requirement of minimum numberof members, some dummy members who are mostly hisfriends or relations, hold just 1or 2 shares each. It is like anyother company is a legal entity distinct from its members. Thedummy members are usually nominees of the principalshareholder who is the virtual owner of the business and whocarries it on with limited liability.Now attempt the following problems.

Practical ProblemsAttempt the following problems, giving reasons :1. A, a trader, carried on business under the name of A& Co.

Ltd. Without being registered as a company with limitedliability. Discuss the consequences of the act of A.

2. An association of 12 members starts a banking businesswithout being registered. 4 members retire and thereafter asuit is instituted by one of the continuing members forthe partitions of assets of the business. Is the suit valid?[Hint. No]

3. 35 percent of the paid up capita of a private company isheld by a public company. Does the private companybecome a public company? Give reasons for your answer.[Hint. Yes(Badri Prasad v.Nagarmal)]

4. X & Co. and Y & co. are 2 firms roistered under the Indianpartnership act, 1932, each consisting of 12 partners. Thefirms desire to carry on business jointly as partners underthe name XY & co. Does XY & co. require registration and,if so, under what provisions of the companies act?[Hint. Yes]


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5. A joint Hindu family consisting of a father and 5 majorsons and another family consisting of a father. 5 majorsons and 1minor son carried on banking business. Asowners thereof. Does the organization require registrationunder the companies act, 1956?[Hint. Yes ]


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PROMOTION AND FORMATION OF A COMPANY

Learning ObjectivesAt the end of this chapter, you will be able to• Identify the process of forming a company• Identify the process of registration of a company

IntroductionWe have learnt about the meaning, nature and types ofcompany. Today we will learn about how the company isformed.Before a company is formed, certain preliminary steps are to betaken, e.g; whether it should be a private company or a publiccompany; what should be its capital;etc.The process of forming a company can be divided into fourdistinct stages:

a) Promotionb) Registration or incorporationc) Capital Subscriptiond) Commencement of Business.

As regards a private company, it needs to go through the firsttwo stages only. As soon it receives the certificate of incorpora-tion, it can commence business. This is so because it cannotinvite the public to subscribe to its shares and must arrange toraise the capital privately. But Public Company has to gothrough all of the four stages.We shall now discuss each of these four stages.

PromotionThis is the first stage in the formation of a company. It refers tothe entire process by which a company is brought into existence.It starts with the conceptualization of the birth a company anddetermination of the purpose for which it is to be formed.Do you know what we mean by promoters?

PromotersThe persons who conceive the company and invest the initialfunds are known as the promoters of the company. Thepromoters enter into preliminary contracts with vendors andmake arrangements for the preparation, advertisement and thecirculation of prospectus and placement of capital. However, aperson who merely acts in his professional capacity on behalf ofthe promoter (e.g. lawyer, CA, etc) for drawing up the agree-ment or other documents or prepares the figures on behalf ofthe promoter andwhom the promoter pays is not a promoter.

Pre-Incorporation or Preliminary ContractsThe promoters of a company usually enter into contract toacquire some property or right for the company, which is yet tobe incorporated. Such contracts are called Pre-Incorporation orPreliminary Contracts.

Position of promoters as regards Pre-Incorporation orPreliminary Contracts• Company not bound by pre-incorporation contractEnglish & colonial produce co. ltd Re (1906) 2 ch. 435. Asolicitor prepared the memorandum and Articles of associationof a company and paid the necessary registration fees and otherincidental expenses to obtain of the company. He did this onthe instruction of certain persons who later became directors ofthe company. Held, the company was not liable of his work.• Company can not enforce pre-incorporation contractNatal land & colonization co. Ltd. V. Pauline colliery & Develop-ment syndicate ltd., (1904) A.C. 120. The N company agreedwith an agent of the P syndicate Ltd before its formation togrant a mining lease to the syndicate. The syndicate wasregistered and discovered a seam of coal. The company refusedto grant the lease. Held, there was no binding contract betweenthe company and the syndicate.• Promoters are personally liableKelner v. Baxter, (1866) L.R. 2 C.P. 174.A hotel company wasabout to be formed and persons responsible for the newcompany signed an agreement on 27th January, 1866, for thepurchase of stock on behalf of the proposed company,payment to be made on 28th January, 1866. The company wasincorporated on 20th February 1866. the goods were consumedin the business and the company went into liquidation beforethe debt was paid. The persons signing the agreement weresued on the contract. Held. The persons signing were promot-ers and personally liable on their signatures.The promoters have certain basic duties towards the companyformed :-1. He must not make any secret profit out of the promotion

of the company. Secret profit is made by entering into atransaction on his own behalf and then sell to concernedproperty to the company at a profit without makingdisclosure of the profit to the company or its members.The promoter can make profits in his dealings with thecompany provided he discloses these profits to thecompany and its members. What is not permitted ismaking secret profits i.e. making profits without disclosingthem to the company and its members.

2. He must make full disclosure to the company of allrelevant facts including to any profit made by him intransaction with the company.

In case of default on the part of the promoter in fulfilling theabove duties, the company may: -1. Rescind or cancel the contract made and if he has made

profit on any related transaction, that profit also may berecovered


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2. Retain the property paying no more for it then what thepromoter has paid for it depriving him of the secret profit.

3. If these are not appropriate (e.g. cases where the propertyhas altered in such a manner that it is not possible to cancelthe contract or where the promoter has already received hissecret profit), the company can sue him to for breach oftrust. Damages up to the difference between the marketvalue of the property and the contract price can berecovered from him.

A promoter may be rewarded by the company for effortsundertaken by him in forming the company in several ways.The more common ones are :-1. The company may to pay some remuneration for the

services rendered.2. The promoter may make profits on transactions entered by

him with the company after making full disclosure to thecompany and its members.

3. The promoter may sell his property for fully paid shares inthe company after making full disclosures.

4. The promoter may be given an option to buy furthershares in the company.

5. The promoter may be given commission on shares sold.6. The articles of the Company may provide for fixed sum to

be paid by the company to him. However, such provisionhas no legal effect and the promoter cannot sue to enforceit but if the company makes such payment, it cannotrecover it back.

If the promoter fails to disclose the profit made by him incourse of promotion or knowingly makes a false statement inthe prospectus whereby the person relying on that statementmakes a loss, he will be liable to make good the loss suffered bythat other person. The promoter is liable for untrue statementsmade in the prospectus. A person who subscribes for anyshares or debenture in the company on the faith of the untruestatement contained in the prospectus can sue the promoter forthe loss or damages sustained by him as the result of suchuntrue statement.Let us learn about the incorporation of the company.

Incorporation by RegistrationThe promoters must make a decision regarding the type ofcompany i.e. a public company or a private company or anunlimited company, etc and accordingly prepare the documentsfor incorporation of the company. In this connection theMemorandum and Articles of Association (MA & AA) arecrucial documents to be prepared.

Mode of forming incorporated company (Sec. 12)Any 7 or more persons (2 or more in case of a private company)associated for any lawful purpose may form an incorporatedcompany, with or without limited liability.They shall subscribe their names to a Memorandum ofAssociation and also comply other formalities in respect ofregistration. A company so formed may be :

a) A company limited by shares, orb) A company limited by guarantee, or

c) Unlimited company

Registration of the CompanyOnce the documents have been prepared, vetted, stamped andsigned, they must be filed with the Registrar of Companies forincorporating the Company. The following documents must befiled in this connection: -1. The Memorandum of Association duly signed by

subscribers and the Articles of Association, if any signedby subscribers to the Memorandum of Association

3. An agreement, if any, which the company proposes to enterinto with any individual for appointment as its managingdirector or whole-time director or manager.

5. A statutory declaration in Form 1 by an advocate, attorneyor pleader entitled to appear before the High Court or acompany secretary or Chartered Accountant in whole - timepractice in India who is engaged in the formation of thecompany or by a person who is named as a director ormanager or secretary of the company that the requirementsof the Companies Act have been complied with in respectof the registration of the company and matters precedentand incidental thereto.

4. In addition to the above, in case of a public company, thefollowing documents must also be filed: -1.2. Written consent of directors in Form 29 to agree to act

as directors and their written consent to act as directorsand take up qualification shares.

3.4. The complete address of the registered office of the

company in Form 18.5.6. Details of the directors, managing director and

manager of the company in Form 32.

Certificate of IncorporationOnce all the above documents have been filed and they arefound to be in order, the Registrar of Companies will issueCertificate of Incorporation of the Company. This document isthe birth certificate of the company and is proof of theexistence of the company. Once, this certificate is issued, thecompany cannot cease its existence unless it is dissolved byorder of the Court.

Conclusiveness of Certificate of IncorporationThe certificate of incorporation given by registrar in respect of acompany is conclusive evidence that all the requirements of theCompanies Act have been complied in respect of registration.This is known as Rule In Peel’s Case.Note the following CaseJubilee cotton mills Ltd. V. Lewis, (1924) A.C. 958, On 6th

January, the necessary documents were delivered to the registrarfor registration. Two days after, the registrar issued the certificateof incorporation but dated it 6th January instead of 8th, i.e.. theday on which the certificate was issued. On 6th January someshares were allotted to L, i.e.. before the certificate of incorpora-tion was issued. The question arose whether the allotment was


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void. Held, the certificate of incorporation is conclusive evidenceof all that it contains, in law the company was formed on 6th

January and, therefore, the allotment of shares was valid.

Commencement of BusinessA private company or a company having no share capital cancommence its business immediately after it has been incorpo-rated. However, other companies can commence their activitiesonly after they have obtained Certificate of Commencement ofBusiness. For this purpose, the following additional formalitieshave to be complied with: -1. If a company has share capital and has issued a prospectus,

then: -a.b. Shares up to the amount of minimum subscription

must be allotted.c.d. Every director has paid to the company on each of the

shares, which he has taken the same amount as thepublic has paid on such shares.

e.f. No money is or may become payable to the applicants

of shares or debentures for failure to apply for or toobtain permission to deal in those shares ordebentures in any recognized stock exchange.

g.h. A statutory declaration in Form 19 signed by one

director or the employee - company secretary or aCompany secretary in whole time practice that theabove provisions have been complied with must befiled.

2. If a company has share capital but has not issued aprospectus, then: -a.b. It must file a statement in lieu of prospectus with the

Registrar of Companiesc.d. Every director has paid to the company on each of the

shares, which he has taken the same amount as theother members have paid on such shares

e.f. A statutory declaration in Form 20 signed by one

director or the employee - company secretary or aCompany secretary in whole time practice that theabove provisions have been complied with must befiled.

Once the above provisions have been complied with, theRegistrar of Companies grants “Certificate of Commencementof Business” after which the company can commence itsactivities.Now attempt the following problems

Practical ProblemsAttempt the following problems, giving reasons:1. The promoters of a company, before its incorporation,

enter into an agreement with P to buy A Plot of land onbehalf of the company, after incorporation the companyrefuses to buy the said plot of land. Has P any remedyeither against the promoters or against the company?

[Hint. P has no remedy against the company. The promoters arepersonally liable on the contract],2. 6 of the 7 signatures to the memorandum of association

of a company were forged. The memorandum was dulypresented, registered and a certificated of incorporation wasissued. Can the existence of the of the company besubsequently attacked on the ground that the registrationwas void. Decide.

[Hint. No (see.35 Rule in peel’s case)]3. The memorandum of association of a company was

presented to the registrar of companies for registration andthe registrar issued the certificate of incorporation. Thecompany after complying with all the prescribed legalformalities started a business. The company contends thatthe nature of business cannot be one into as the certificateof incorporation is conclusive. Discuss.

[Hint. The company’s contention is untenable and the natureof the business can be gone into.]4. The memorandum of association of a company was

signed by 2 adult members and by a guardian of the other5 minor members. The guardian signing separately for eachminor member. The registrar registered the company andissued under his hand a certificate of incorporation, theplaintiff contended that(a) Conditions of registration were not duly complied

with, and(b) There were no 7 subscribes to the memorandum.

Will the court uphold his contention?[Hint. No (peel’s case)]

5. The express newspapers (Pvt.) Ltd., leading publishers ofnewspapers and weeklies, sold its undertaking to a newcompany. Andhra Prabha (Pvt). Ltd; consequent upon theGovernment adopting certain recommendations of thewage board for improvement in the terms of service andsalaries of the working journalists. Shall the registration ofthe company be declared void on the plea that newcompany was formed for the purpose of evading the newobligations imposed by the wage board?

Hint. No (T.V. Krishna v. Andhra Prabha [Pvt.] Ltd; (1902) 2Ch 809)]




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11.555 157


MEMORANDUM AND ARTICLES OF ASSOCIATION

Learning ObjectivesAt the end of this chapter, you will be able to know about:• The memorandum of association• The articles of association• The doctrine of ultra virus

IntroductionMemorandum and Articles of Association are the two impor-tant documents of the company.Let us learn about them.

Memorandum of Association of aCompanyIt is the constitution or charter of the company and containsthe powers of the company. No company can be registeredunder the Companies Act, 1956 without the memorandum ofassociation. Under Section 2(28) of the Companies Act, 1956the memorandum means the memorandum of association ofthe company as originally framed or as altered from time totime in pursuance with any of the previous companies law orthe Companies Act, 1956.The memorandum of association should be in any of the oneform specified in the tables B,C,D and E of Schedule 1 to theCompanies Act, 1956. Form in Table B is applicable in case ofcompanies limited by the shares, form in Table C is applicableto the companies limited by guarantee and not having sharecapital, form in Table D is applicable to company limited byguarantee and having a share capital whereas form in table E isapplicable to unlimited companies.

Contents of Memorandum:The memorandum of association of every company mustcontain the following clauses

Name ClauseThe name of the company is mentioned in the name clause. Apublic limited company must end with the word ‘Limited’ anda private limited company must end with the words ‘PrivateLimited’. The company cannot have a name which in theopinion of the Central Government is undesirable. A namewhich is identical with or the nearly resembles the name ofanother company in existence will not be allowed. A companycannot use a name which is prohibited under the Names andEmblems (Prevntion of Misuse Act, 1950 or use a namesuggestive of connection to government or State patronage.

Domicile clauseThe state in which the registered office of company is to besituated is mentioned in this clause. If it is not possible to statethe exact location of the registered office, the company muststate it provide the exact address either on the day on whichcommences to carry on its business or within 30 days from thedate of incorporation of the company, whichever is earlier.

Notice in form no 18 must be given to the Registrar ofComapnies within 30 days of the date of incorporation of thecompany. Similarly, any change in the registered office must alsobe intimated in form no 18 to the Registrar of Companieswithin 30 days. The registered office of the company is theofficial address of the company where the statutory books andrecords must be normally be kept. Every company must affix orpaint its name and address of its registered office on theoutside of the every office or place at which its activities arecarried on in. The name must be written in one of the locallanguages and in English.

Objects ClauseThis clause is the most important clause of the company. Itspecifies the activities which a company can carry on and whichactivities it cannot carry on. The company cannot carry on anyactivity, which is not authorised by its MA. This clause mustspecify: -

i. Main objects of the company to be pursued by thecompany on its incorporation

ii. Objects incidental or ancillary to the attainment of themain objects

iii. Other objects of the company not included in (i) and(ii) above.

In case of the companies other than trading corporationswhose objects are not confined to one state, the states to whoseterritories the objects of the company extend must be specified.Doctrine of the ultra-vires Any transaction which is outside thescope of the powers specified in the objects clause of the MAand are not reasonable incidentally or necessary to the attain-ment of objects is ultra-vires the company and therefore void.No rights and liabilities on the part of the company arise out ofsuch transactions and it is a nullity even if every member agreesto it.Consequences of an Ultra vires transaction :-1. The company cannot sue any person for enforcement of

any of its rights.2. No person can sue the company for enforcement of its

rights.3. The directors of the company may be held personally liable

to outsiders for an ultra vires.Note the following caseAshbury Rly. Carriage & Iron Co. Ltd. V. Riche. (1875) l. R. 7H.L 653. A company was incorporated with the followingobjects.

(a) To make, sell, or lend on hire, railway carriages andwagons.

(b) To carry on the business of mechanical engineers andgeneral contractors.


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(c) To purchase, lease, work, and sell mines, minerals, landand buildings.

The company entered into a contract with Riche for thefinancing of the construction of a railway line in Belgium. Thequestion raised was whether that contract was covered withinthe meaning of general contractors. The house of lords heldthat the contract was ultra virus the company and void so thatnot even the subsequent assent of the whole body of share-holders could ratify it.However, the doctrine of ultra-vires does not apply in thefollowing cases :-

1. If an act is ultra-vires of powers the directors but intra-vires of company, the company is liable.

2. If an act is ultra-vires the articles of the company but itis intra-vires of the memorandum, the articles can bealtered to rectify the error.

3. If an act is within the powers of the company but isirregualarly done, consent of the shareholders willvalidate it.

4. Where there is ultra-vires borrowing by the company orit obtains deliver of the property under an ultra-virescontract, then the third party has no claim against thecompany on the basis of the loan but he has right tofollow his money or property if it exist as it is andobtain an injunction from the Court restraining thecompany from parting with it provided that heintervenes before is money spent on or the identity ofthe property is lost.

5. The lender of the money to a company under theultra-vires contract has a right to make directorpersonally liable.

Liability clause A declaration that the liability of the members islimited in case of the company limited by the shares orguarantee must be given. The MA of a company limited byguarantee must also state that each member undertakes tocontribute to the assets of the company such amount notexceeding specified amounts as may be required in the event ofthe liquidation of the company. A declaration that the liabilityof the members is unlimited in case of the unlimted compa-nies must be given. The effect of this clause is that in acompany limited by shares, no member can be called upon topay more than the uncalled amount on his shares. If his sharesare already fully paid up, he has no liabilty towards the company.The following are exceptions to the rule of limited liability ofmembers :-1. If a member agrees in writing to be bound by the

alteration of MA / AA requiring him to take more sharesor increasing his liability, he shall be liable upto the amountagreed to by him.

2. If every member agrees in writing to re-register thecompany as an unlimited company and the company is re-registered as such, such members will have unlimitedliability.

3. If to the knowledge of a member, the number ofshareholders has fallen below the legal minimum, (seven in

the case of a public limited company and two in case of aprivate limited company ) and the company has carried onbusiness for more than 6 months, while the number is soreduced, the members for the time being constituting thecompany would be personally liable for the debts of thecompany contracted during that time.

Capital clause The amount of share capital with which thecompany is to be registered divided into shares must bespecified giving details of the number of shares and types ofshares. A company cannot issue share capital greater than themaximum amount of share capital mentioned in this clausewithout altering the memorandum.A company limited by shares can alter the capital clause of itsMemorandum in any of the following ways provided that suchalteration is authorized by the articles of association of thecompany: -

1. Increase in share capital by such amount as it thinksexpedient by issuing new shares.

2. Consolidate and divide all or any of its share capitalinto shares of larger amount than its existing shares.eg, if the company has 100 shares of Rs.10 each (aggregating to Rs. 1000/-) it may consolidate thoseshares into 10 shares of Rs100 each.

3. Convert all or any of its fully paid shares into stock andre-convert stock into fully paid shares of anydenomination.

4. Subdivide shares or any of shares into smalleramounts fixed by the Memorandum so that insubdivision the proportion between the amount paidand the amount if any unpaid on each reduced sharesshall be same as it was in case of from which thereduced share is derived.

5. Cancel shares which have been not been taken or agreedto be taken by any person and diminish the amount ofshare capital by the amount of the shares so cancelled.

The alteration of the capital of the company in any of themanner specified above can be done by passing a resolution atthe general meeting of the company and does not require anyconfirmation by the court.Reduction of the share capital can be effected only in themanners specified in Section 100-104 of the Act or by way ofbuy back under Section 77A and 77B of the Act. Notice ofalteration to share capital is required to be filed with the registrarof the company in Form no 5 within 30 days of the alterationof the capital clause of the MA. The Registrar shall record thenotice and make necessary alteration in Memorandum andArticles of Association of the company. Any default in givingnotice to the registrar renders company and its officers in defaultliable to punishment with fine which may extend to the Rs50for each day of default.Association clause A declaration by the persons for subscribingto the Memorandum that they desire to form into a companyand agree to take the shares place against their respective namemust be given by the promoters.


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Articles of AssociationThe Articles of Association (AA) contain the rules and regula-tions of the internal management of the company. The AA isnothing but a contract between the company and its membersand also between the members themselves that they shall abideby the rules and regulations of internal management of thecompany specified in the AA. It specifies the rights and dutiesof the members and directors.The provisions of the AA must not be in conflict with theprovisions of the MA. In case such a conflict arises, the MA willprevail.Normally, every company has its own AA. However, if acompany does not have its own AA, the model AA specified inSchedule I - Table A will apply. A company may adopt any ofthe model forms of AA, with or without modifications. Thearticles of association should be in any of the one formspecified in the tables B,C,D and E of Schedule 1 to theCompanies Act, 1956. Form in Table B is applicable in case ofcompanies limited by the shares , form in Table C is applicableto the companies limited by guarantee and not having sharecapital, form in Table D is applicable to company limited byguarantee and having a share capital whereas form in table E isapplicable to unlimited companies. However, a private companymust have its own AA.The important items covered by the AA include :-

1. Powers, duties, rights and liabilities of Directors2. Powers, duties, rights and liabilities of members3. Rules for Meetings of the Company4. Dividends5. Borrowing powers of the company6. Calls on shares7. Transfer & transmission of shares8. Forfeiture of shares9. Voting powers of members, etc

Alteration of articles of association : A company can alter any ofthe provisions of its AA, subject to provisions of the Compa-nies Act and subject to the conditions contained in theMemorandum of association of the company. A company, byspecial resolution at a general meeting of members, alter itsarticles provided that such alteration does not have the effect ofconverting a public limited company into a private companyunless it has been approved by the Central Government.The articles must be printed, divided into paragraphs andnumbered consequently and must be signed by each subscriberto the Memorandum of Association who shall add his address,description and occupation in presence of at least one witnesswho must attest the signature and likewise add his address,description and occupation. The articles of association of thecompany when registered bind the company and the membersthereof to the same extent as if it was signed by the companyand by each member.

Practical ProblemsAttempt the following problems, giving reasons

1. 1. X Ltd. A cotton textile company enters into acontract with A Ltd. an adjacent cotton textile mil, tosupply electricity form their power generation plant.After supplies have been made fro 3 months it isdiscovered that this activity is beyond the scope of theobjective clause of the memorandum of association ofX Ltd. Shareholders of X Ltd. Ratify the contract intheir general body meeting can A Ltd, which refuses tomake payment on the ground that the contract iswholly null and void be legally compelled to makepayment?Hint. No, as the transaction in ultra virus X Ltd]

2. A company altered the objects clause of itsmemorandum of association according to theprocedure laid down by law by passing a specialresolution. A copy of the resolution was filed with theregistrar 4 months after the passing of the resolution.Can the registrar register the alteration?[Hint. No. Sec. 18]

3. A company carrying on business in jute is empoweredby the objects clause of its memorandum ofassociation to do any other business connected withjute. By a resolution passed unanimously the companyresolved to alter the objects clause to include the powerto carry on additional business in rubber. Is thisalteration valid?[Hint. No].

4. A company put up telephone wires in a certain area.There was no power in the memorandum to put upwires there. The defendants cut them down. Can thecompany sue for the damage done to the wire?

[Hint. Yes (National Telephone Co v. St. Peter PortConstables)]5. The memorandum of association of a company

formed to improve and encourage the breeding ofpoultry contained a provision that no remunerationshould be paid to the members of the governing bodyof the company. But the company owing to its increasein the business passed a special resolution providingfor equitable remuneration to such members forservices rendered. Is this alteration of thememorandum valid?[Hint. Yes (Scientific Poultry Breeders Assn. Ltd., Re)]




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THE MANAGEMENT OF A COMPANYDIRECTORS AND MANAGING DIRECTORS

Learning ObjectivesAt the end of this chapter, you will be able to know about:• The meaning of directors and managing director• The position of directors and managing director• The appointment and removal of directors and

managing director

IntroductionA company in the eyes of the law is an artificial person. It hasno physical existence. As such it cannot act by itself and actsinstead through human agency. The persons through whom itacts and by whom the business of the company is conductedare known as directors. The directors of a company are collec-tively known as the “ board of directors” or the “board”First of all, you must know what do we mean by director?Section 2(13) defines a director as any person occupying theposition of a director, by whatever name he is called. It is the directors who exercise the powers of a company on thebehalf of the company. Only individuals can be appointed asthe directors of the company. No body corporate, association orfirm shall be appointed as director of a company. The directorsare the brain of a company. They occupy a pivotal position inthe structure of the company. They are in fact the mainspringsof the company. Speaking about the importance of directors.Nevile J; observed in Bath v. Standard Land Co… [1910] 2CH.408 that “ the Board of directors are the brain and the onlybrain of the company which is the body, and the company canand does act only through them.” It is only “ when the brainfunctions that the corporation is said to function.”

Number of DirectorsEvery public company (other than a deemed public company)must have at least three directors. Every other company musthave at least two directors. Subject to this minimum number ofdirectors, the articles of a company may fix the minimum andmaximum number of directors for its board of directors.Right of company to increase or reduce the number of directorsA company, at a general meeting may, by ordinary resolution,increase or reduce the number of its directors within the limitsfixed in that behalf by its articles.Increase in number of directors to require Governmentsanction (Sec. 259)In the case of a public company, or a private company which is asubsidiary of a public company, any increase in the number ofits directors, beyond the maximum number of directorspermitted by the Articles of the Company as first registered,shall not have any effect unless approved by the CentralGovernment and shall become void if, and in so far as, it isdisapproved by that Government.

However, where such permissible maximum is 12 or less, noapproval of the Central Government is required provided theincrease does not increase the number of directors beyond 12.Let us now learn about the appointment of directors.

Appointment of Directors1. First DirectorsThe articles of a company usually name the first directors bytheir respective names or prescribe the method of appointingthem. In case the promoters of a company do not appoint thefirst directors, subscribers of the memorandum who areindividuals, shall be deemed to be the directors of the company,until the directors are duly appointed.If the first directors are not appointed in the above manner, thesubscribers of the memorandum who are individuals becomedirectors of the company. They shall hold office until directorsare duly appointed in the first annual general meeting.

2. Appointment of Directors by the Company(Secs 255 to 257, 263 and 264). Shareholders in general meetingmust appoint directors. In the case of a public company or aprivate company, which is a subsidiary of a public company, atleast 2/3rds of the total number of directors shall be liable toretire by rotation. Such directors are called rotational directorsand shall be appointed by the shareholders in general meeting.

Ascertainment of Directors retiring by Rotation andFilling of Vacancies (Sec. 256)

• At the annual general meeting of a public company ora private company which is a subsidiary of a publiccompany, 1 /3rd (or the number nearest to 1/3rd) of therotational directors shall retire form office.

• The directors to retire by rotation at every annualgeneral meeting shall be those who have been longestin the office since their last appointment.

• At the annual general meeting at which a director retiresby rotation, the company may fill up the vacancy (thuscreated) by appointing the retiring director or someother person.

• If the place of the retiring director is not filled up, themeeting may resolve not to fill the vacancy. If there isno such resolution, the meeting shall stand adjournedtill the same day in the next week. If at the adjournedmeeting also, the place of retiring director is not filledup, nor is there a resolution not to fill the vacancy, theretiring director shall be deemed to have been re-appointed at the adjourned meeting.

3. Appointment of Directors by Directors(Secs. 260, 262 and 313). The directors of a company mayappoint directors-


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• As Additional Directors (Sec. 260) Any additionaldirectors appointed by the directors shall hold officeonly up to the date of the next annual general meetingof the company. The number of directors andadditional directors must not exceed the maximumstrength fixed for the Board by the Articles [PatrakolaTea Co; Re, A.I.R.(1967) Cal. 406]

If the annual general meeting of a company is not held orcannot be held, the additional director shall vacate his office onthe day on which the annual general meeting should have beenheld.If an additional director has been appointed as managingdirector also, the moment he ceases to be an additional director,he will cease to be the managing director.

• In a casual vacancy (Sec. 262) In the case of a publiccompany, or a private company which is a subsidiary ofa public company, if the office of any directorappointed by the company in general meeting isvacated before his term of office expires in the normalcourse, the resulting casual vacancy may be filled by theboard of directors subject to any regulations in theArticles of the Company. By ‘ casual vacancy’ is meantany vacancy, which occurs by reason of death,resignation, disqualification, or failure of an electeddirector to accept the office for any reason other thanretirement, by rotation. A vacancy caused by theretirement of a director by rotation is not a casualvacancy. Such a vacancy has to be filled by the annualgeneral meeting.

• As alternate director (Sec.313) An alternate director canbe appointed by the board if it is so authorized by (i)the articles of the company, or (ii) a resolution passedby the company in the general meeting.

He shall act for a director called the original director during hisabsence for a period of at least 3 months form the state inwhich board meetings are ordinarily held.

4. Appointment of directors by third parties.The Articles under certain circumstances give power to thedebenture holders or other creditors, e.g., a banking company orfinancial corporation, who have advanced loans to the companyto appoint their nominees to the board. The number ofdirectors so appointed shall not exceed 1/3 of the total numberof directors, and they are not liable to retire by rotation.

5. Appointment by Proportional Representation[Sec. 265]The Articles of a company may provide for the appointment ofnot less than 2/3rds of the total number of directors of a publiccompany or of a private company which is a subsidiary of apublic company according to the principle of proportionalrepresentation. The proportional representation may be by asingle transferable vote or by a system of cumulative voting orotherwise. The appointment shall be made once in 3 years andinterim casual vacancies shall be filled in the manner as providedin the articles.

6.Appointment of directors by the centralgovernment (Sec. 408)Sec 408 empowers the central government to appoint suchnumber of directors on the Board as the Tribunal may, by orderin writing, specify as necessary to effectively safeguard theinterests of the company or its shareholders or the publicinterest. The appointment will be for a period not exceeding 3years on any one occasion. The purpose of the appointment isto prevent the affairs of the company from being conductedeither in the manner.

• Which is oppressive to any members of the companyor

• Which is prejudicial to the interests of the company orto public interest.

The Tribunal may pass the above order on a reference made to itby the central government or on the application.

(i) of not less than 100 members of the company or(ii) of members of the company holding not less than 1/

10th of the total voting power there in .Any director appointed by the central government shall not berequired to hold any qualification shares nor shall his period ofoffice be liable to termination by retirement of directors byrotation .Any such director may be removed by the centralgovernment from his office and another person may beappointed in his place.

Consent of candidate for directorship to be filledwith RegistrarA person shall not act as director of a company unless he has,by himself or by his agent authorized in writing, signed andfiled with the Registrar, consent in writing to act as such directorwithin 30 days of his appointment. This provision shall notapply to a private company unless it is a subsidiary of a publiccompany.As already discussed, directors hold very important position inthe Company.Let us now discuss their position

Position of DirectorsIt is very difficult to pinpoint the exact legal position of thedirectors of a company. They have been described by variousnames, sometimes as agents, sometimes as trustees, andsometimes as managing partners of the company. But “suchexpressions are not used as exhaustive of the powers andresponsibilities of such persons but only as indicating usefulpoints of view from which they may, for the moment and forthe particular purpose, be considered.”We may now consider the position of the director’s form allthese points of view.

Directors as Agents. A company as an artificial person actsthrough directors who are elected representatives of theshareholders. They are, in the eyes of the law, agents of thecompany for which they act, and the general principle ofthe law of principal and agent regulate in most respects therelationship between the company and its directors.


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Directors as Employees. Although the directors of acompany are its agents they are not employees or servantsof the company for being entitled to privileges andbenefits, which are granted under the Companies Act to theemployees. But there is nothing to prevent a director formbeing a servant of the company under a special contract ofservice, which he may enter into with the company.The Companies Act itself indicates many situations wherea director may be in the employment of a company.Directors as officers For certain matters under theCompanies Act, the directors are treated as officers of thecompany [Sec 2 (30)]. As such they are liable to certainpenalties if the provisions of the Companies Act are notstrictly complied with.

Directors as trustees Directors are treated as trustees• Of the company’s money and property; and• Of the powers entrusted to them.Directors are trustees of the company’s money andproperty in the sense that they must account for all thecompany’s money and property over which they exercisecontrol. They have also to refund to the company any ofits money or property, which they have improperly paidaway or transferred.Directors are, however, not trustees in the real sense of theword because they are not vested with the ownership ofthe company’s property. It is only as regards some of theirobligations to the company and certain powers that theyare regarded as trustees of the company.Directors are trustees of the power entrusted to them inthe sense that they must exercise their powers honestly andin the interest of the company and the shareholders andnot in their own interest.Alexander v. Automatic Telephone Co; (1900) 2 CH. 56The directors of a company paid up nothing on their ownshares. They however made all the other shareholders pay3s. 6d. on each share. They did not tell the othershareholders of the difference. Held, this was a breach oftrust, and the directors were bound to pay to the company3s. 6d. on each of their shares.Piercy v. S. Mills & Co. Ltd…(1920) Ch 77The directors of a company had the power to issue theunissued shares of the company. The company was in noneed of further capital but the directors made a fresh issueto themselves and their supporters with a view tomaintaining control of the company Held, the allotmentwas invalid and void.Trustees for the company Directors are trustees for thecompany and not for third persons who have madecontracts with the company (City Equitable Fire Ins. Co.Ltd., Re (1925) Ch. 407] or for the individual shareholders.The leading case on the point is :Percival v. Wright, (1902 )2 Ch. 421 The directors of acompany bought shares from a shareholder, while theywere negotiating for the sale of the company to another at

a very high price and they did not disclose this fact to theshareholder. The shareholder sued to have the sale setaside. Held, the sale was binding, as the directors wereunder no obligation to disclose the negotiations to theshareholder.

Quasi- trustees. Directors are really only quasi trustees because• They are not vested with ownership of the company’s

property.• Their functions are not the same as those of trustees.• Their duties of care are not as onerous as those of

trustees.To sum up we can say: “Directors have sometimes been calledas trustees or commercial trustees, and sometimes they havebeen called managing partners; it does not matter much whatyou call them so long as you understand what their realposition is, which is that they are really commercial menmanaging a trading concern for the benefit of themselves andof all the shareholders in it. They stand in a fiduciary positiontowards the company in respect of their powers and capitalunder their control.”The remaining directors in the case of any such company, andthe directors generally in the case of a private company which isnot a subsidiary of a public company, must also be appointedby the company in general meeting, unless otherwise providedin any regulations in the articles of the company.There are some important restrictions on the appointment ofdirector. Let us learn about them.

Restrictions on Appointment or Advertisement ofDirector (Sec. 266)A person shall not be capable of being appointed director of acompany by the articles, unless before the registration of thearticles, the publication of the prospectus, or the filing of thestatement in lieu of prospectus, as the case may be , he has, byhimself or by his agent authorized in writing(a) Signed and filed with the Registrar a consent in writing to

act as such director; and(b) Either

i. Signed the memorandum for shares not being less innumber or value than that of his qualification shares,if any, or

ii. Taken his qualification shares, if any, from thecompany and paid or agreed to pay for them; or

iii. Signed and filed with the Registrar and undertaking inwriting to take from the company his qualificationshares, if any, and pay for them; or

iv. Made and filed with the Registrar an affidavit to theeffect that shares, not being less in number or valuethan that of his qualification shares, if any, areregistered in his name.

Qualification shares are the minimum number of shares aperson must own, as provided in the articles of the company, inorder to qualify to become a director of the company. A directormust acquire qualification shares within 2 months of hisappointment. The articles cannot require a director to acquire


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qualification shares within a shorter period. The face value ofthe qualification shares cannot exceed five thousand rupees, orif the face value of one share is more than five thousandrupees, then the qualification share will be one qualificationshare.Every director, not being a technical director of a directorappointed, by the Central or a State Government, shall withintwo months after his appointment file with the company adeclaration specifying the qualification shares held by him. If,after the expiry of the said period of two months, any personacts as a director of the company when he does not hold thequalification shares, he shall be punishable with the fine whichmay extend to fifty rupees for every day between such expiry andthe last day on which he acted as a director.The above provisions do not apply to-

a. A company not having a share capital;b. A private company;c. A company which was a private company before

becoming a public company; ord. A prospectus issued by or on behalf of a company

after the expiry of one year from the date on which thecompany was entitled to commence business.

Disqualifications of directors (Sec. 274)

A person shall not be capable of being appointed director of acompany, if,

a. He has been found to be of unsound mind by a Courtof competent jurisdiction and the finding is in force

b. He is an undischarged insolventc. He has applied to be adjudicated as an insolvent and

his application is pendingd. He has been convicted by a Court of any offence

involving moral turpitude and sentenced in respectthereof to imprisonment for not less than six months,and a period of five years has not elapsed from thedate of expiry of the sentence

e. He has not paid any call in respect of shares of thecompany held by him, whether alone or jointly withothers, and six months have elapsed from the last dayfixed for the payment of the call

f. An order disqualifying him for appointment as directorhas been passed by a court and is in force unless theleave of the court has been obtained for hisappointment in pursuance of that section.

The Central Government may, by notification in the OfficialGazette, remove :-i. The disqualification incurred by any person in virtue of

clause (d) either generally or in relation to any company orcompanies specified in the notification; or

ii. The disqualification incurred by any person in virtue ofclause (e)

A private company which is not a subsidiary of a publiccompany may, by its articles, provide that a person shall be

disqualified for appointment as a director on any grounds inaddition to those specified above.

No Person to be a Director of More than TwentyCompaniesDo you know that no person could, hold office at the sametime as director in more than twenty companies?Where a person already holding the office of director in twentycompanies is appointed, as a director of any other company, theappointment: -

a. Shall not take effect unless such person has, withinfifteen days thereof, effectively vacated his office asdirector in any of the companies in which he wasalready a director; and

b. Shall become void immediately on the expiry of thefifteen days if he has not, before such expiry effectivelyvacated his office as director in any of the othercompanies aforesaid.

Where a person already holding the office of director innineteen companies or less is appointed, as a director of othercompanies, making the total number of his directorships morethan twenty, he shall choose the directorships which he wishesto continue to hold or to accept so however that the totalnumber of the directorships, old and new, held by him shallnot exceed twenty.None of the new appointments of director shall take effectuntil such choice, is made; and all the new appointments shallbecome void if the choice is not made within fifteen days of theday on which the last of them was made.In calculating the number of companies of which a person maybe a director, the following companies shall be excluded: -

a. A private company which is neither a subsidiary nor aholding company of a public company

b. An unlimited companyc. An association not carrying on business for profit or

which prohibits the payment of dividendd. A company in which such person is only an alternate

director, that is to say, a director who is only qualifiedto act as such during the absence or incapacity of someother director.

Any person who holds office, or acts, as a director of more thantwenty companies in contravention of the foregoing provisionsshall be punishable with fine which may extend to five thou-sand rupees in respect of each of those companies after the firsttwenty.

Vacation of office by directorsThe office of a director shall become vacant if: -

a. He fails to obtain within the time specified ( 2 months)or at any time thereafter ceases to hold, the sharequalification, if any, required of him by the articles ofthe company

b. He is found to be of unsound mind by a Court ofcompetent jurisdiction

c. He applies to be adjudicated an insolventd. He is adjudged an insolvent


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e. He is convicted by a Court of any offence involvingmoral turpitude and is sentenced in respect thereof toimprisonment for not less than six months

f. He fails to pay any call in respect of shares of thecompany held by him, whether alone or jointly withothers, with in six months from the last date fixed forthe payment of the call unless the Central Governmenthas, by notification in the Official Gazette removedsuch disqualification.

g. He absents himself from three consecutive meetingsof the Board of directors, or from all meetings of theBoard, for a continuous period of three months,whichever is longer, without obtaining leave of absencefrom the Board

h. He, whether by himself or by any person for hisbenefit or on his account or any firm in which he is apartner or any private company of which he is adirector, accepts a loan, or any guarantee or security fora loan, from the company in contravention of section295 ( without due authorization of the CentralGovernment )

i. He acts in contravention of section 299 ( failure todisclose interest in any transaction with the company )

j. He becomes disqualified by an order of Court undersection 203

k. He is removed by the members by- resolution at ageneral meeting

l. Having been appointed a director by virtue of hisholding any office or other employment in thecompany, he ceases to hold such office or otheremployment in the company.

The disqualification referred to in clauses (d). (e) and (j) shallnot take effect,-

a. For thirty days from the date of the adjudicationsentence or order

b. where any appeal or petition is preferred within thethirty days aforesaid against the adjudication, sentenceor conviction resulting in the sentence, or order untilthe expiry of seven days from the date on which suchappeal or petition is disposed of

c. where within the seven days aforesaid, any furtherappeal or petition is preferred in respect of theadjudication, sentence, conviction, or order, and theappeal or petition, if allowed, would result in theremoval of the disqualification, until such furtherappeal or petition is disposed of.

If a person functions as a director, knowing that his office hasvacated on account of the above provisions, shall be liable to afine upto Rs. 500/- per day of default.A private company which is not a subsidiary of a publiccompany may, by its articles, provide, that the office of directorshall be vacated on any grounds in addition to those specified inabove.If the director fails to function in a proper way, he could beremoved.

Now we will discuss how it is made possible?

Removal of DirectorsA company may, by ordinary resolution, remove a director (notbeing a director appointed by the Central Government inpursuance of section 408) before the expiry of his period ofoffice. This provision shall not apply where the company hasavailed itself of the option given to it of proportional represen-tation on the Board of Directors to appoint not less thantwo-thirds of the total number of directors according to theprinciple of proportional representation.Special notice shall be required of any resolution to remove adirector, or to appoint somebody instead of a director soremoved at the meeting at which he is removed.On receipt of notice of a resolution to remove a director underthis section, the company shall forthwith send a copy thereof tothe director concerned, and the director (whether or not he is amember of the company) shall be entitled to be heard on theresolution at the meeting.Where notice is given of a resolution to remove a director andthe director concerned makes representations in writing to thecompany (not exceeding a reasonable length) and requests theirnotification to members of the company, the company shall,unless the representations are received by it too late for it to doso :-

a. In any notice of the resolution given to members ofthe company state the fact of the representationshaving been made; and

b. Send a copy of the representations to every member ofthe company to whom notice of the meeting is sent

If a copy of the representations is not sent as aforesaid becausethey were received too late or because of the company’s default,the director may (without prejudice to his right to be heardorally) require that the representations shall be read out at themeeting.However, copies of the representations need not be sent outand the representations need not be read out at the meeting if,on the application either of the company or of any otherperson who claims to be aggrieved, the Company Law Board issatisfied that the rights conferred by this provision are beingabused to secure needless publicity for defamatory matter andthe Company Law Board may order the company’s costs on theapplication to be paid in whole or in part by the director.A vacancy created by the removal of a director if he had beenappointed by the company in general meeting or by the boardin on a casual vacancy, be filled by the appointment of anotherdirector in his stead by the meeting at which he is removed,provided special notice of the intended appointment has beengiven.A director so appointed shall hold office until the date up towhich his predecessor would have held office if he had not beenremoved as aforesaid.If the vacancy is not filled, it may be filled as a causal vacancy inaccordance with the provisions.The above provisions of removal of a director shall not affect :-


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a. Any compensation or damages payable to him inrespect of the termination of his appointment asdirector or of any appointment terminating with thatas director

b. Any other power to remove a director which may existapart from this provision.

We will also discuss in brief about the managing director as heholds very important position in the company.

Managing DirectorManaging Director means a person who, by virtue of anagreement with the company or of a resolution passed by thecompany in a general meeting or by its Board of directors or byvirtue of its memorandum or articles of association, isentrusted with substantial powers of management which couldnot otherwise be exercisable by him and includes a directoroccupying the position of a managing director, by whatevername called. The power merely to do administrative acts of aroutine nature, when so authorised by the Board such as thepower to affix the common seal of the company on anydocument or to draw and endorse any cheque on the account ofthe company in any bank or to draw and endorse any negotiableinstrument or to sign any share certificate or to direct registra-tion of share transfers will not be deemed to be included withinsubstantial powers of management. The managing directormust exercise his powers subject to the superintendence, controland direction of the Board.

Certain Persons not to be Appointed ManagingDirectorsNo company can, appoint or employ, or continue the appoint-ment or employment of, any person as its managing or wholetime director who-

a. Is an undischarged insolvent, or has at any time beenadjudged an insolvent

b. Suspends, or has at any time suspended, payment tohis creditors or makes, or has at any time made, acomposition with them

c. Is, or has at any time been, convicted by a Court inIndia of an offence involving moral turpitude.

Every public company or a private company which is a subsid-iary of a public company, having a paid up share capital of Rs. 5crores or more must have a managing director or wholetimedirector or manager.Appointment of managing director or wholetime director ormanager of a public company or a private company which is asubsidiary of a public company requires the approval of theCentral Government unless the appointment is in accordancewith the conditions specified in Schedule XIII of the Compa-nies Act, 1956 and a returm in Form 25 C is filed within 30 daysof appointment.Application for approval must be made to the Central Govern-ment if Form 25 A within 90 days of appointment. TheCentral Government shall grant its approval if it is satisfied that

a. The managing director or wholetime director ormanager is in its opinion, a fit and proper person

b. Such appointment is not against public interest

c. The terms and conditions of the appointment are fairand reasonable.

The Central Government may grant approval for a period lessthat the period for which approval is sought.In case the approval of the Central Government is refused, theappointed person shall vacate his office on the date of commu-nication of the decision of the Central Government to thecompany and if he omits to do so, he shall be liable to a fine ofRs. 500/- for each day of default.The Central Government, on information received by it or suomoto, is of the opinion that such appointment made withoutapproval of the Central Government contravenes the condi-tions given in Schedule XIII, it may refer the matter to theCompany Law Board for decision.On receipt of the order of the Company Law Board against thecompany,:-

a. The company shall be liable to fine of upto Rs. 5000/-b. Every officer of the company in default shall be liable

to a fine of Rs. 10000/-c. The appointment shall be deemed to have come to an

end and the appointed person shall in addition tobeing liable to pay a fine of Rs. 10000/-, refund to thecompany the entire amount of remuneration receivedby him from such appointment.

Number of Companies of which one Person may beAppointed Managing directorNo public company or private company which is a subsidiary ofa public company can, appoint or employ any person asmanaging director, of he is either the managing director or themanager of any other company, except as provided below.A public company or a private company which is the subsidiaryof a public company may appoint or employ a person as itsmanaging director, if he is the managing director or manager ofone, and of not more than one, other company provided thatsuch appointment or employment is made or approved by aunanimous resolution passed at a meeting of the Board and ofwhich meeting, and of the resolution to be moved thereat,specific notice has been given to all the directors then in India.In addition to the above provision, the Central Governmentmay, by order, permit any person to be appointed as a manag-ing direct of more than two companies if the CentralGovernment is satisfied that it is necessary that the companiesshould, for their proper working, function as a single unit andhave a common managing director.

Managing Director not to be Appointed for morethan five Years at a TimeNo company can, appoint or employ any individual as itsmanaging director for a term exceeding five years at a time.However, a person may be re-appointed, re-employed, or histerm of office extended by further periods not exceeding fiveyears on each occasion. Such re-appointment, re-employment orextension cannot be sanctioned earlier than two years from thedate on which it is to come into force.


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This provision does not apply to a private company unless it isa subsidiary of a public company.

Practical ProblemsAttempt the following problems, giving reasons1. A contract between N.W. Ltd. And B. one of its directors is

referred to a general meeting for its approval. At themeeting, B voted for the resolution and all others againstit. But as B held majority of shares and was entitled tomajority of votes. The resolution was passed. Is thecontract binding on the company?[Hint. No (sec. 300)].

2. A public limited company has 15 directors, 4 of whom arenot subject to retire by rotation, is it a validly constitutedBoard?[Hint. Yes (sec. 255)].

3. A private company having 2 directors has just become apublic company by virtue of sec. 43 A is it obligatory forthe company to appoint a third director?[Hint. No (Sec. 252)].

4. The Board of directors of X Ltd. Met only 3 times in theprevious year. A fourth meeting was adjourned twice forlack of quorum. Does this constitute a violation of sec.285 of the companies Act,1956?[Hint. No (Sec. 288)].



Notes:


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11.555 167


MEETINGS AND PROCEEDINGS

Learning ObjectivesAfter reading the lesson, you will be able to know about the:• The kinds of meeting of a company• The requisites of a valid meeting of a company• The kinds of resolutions• The other important terms related to meeting, viz;

adjournment, postponement, dissolution andminutes of meeting

IntroductionA company is an association of several persons. Decisions aremade according to the view of the majority. Various mattershave to be discussed and decided upon. These discussions takeplace at the various meetings, which take place between mem-bers and between the directors. Needless to say, the importanceof meetings cannot be under-emphasized in case of companies.The Companies Act 1956 contains several provisions regardingmeetings. These provisions have to be understood andfollowed.For a meeting, there must be at least 2 persons attending themeeting. One member cannot constitute a company meetingeven if he holds proxies for other members.

Kinds of Company MeetingsBroadly, meetings in a company are of the following types :-

I Meetings of MembersThese are meetings where the members / shareholders of thecompany meet and discuss various matters. Member’s meetingsare of the following types :-

Statutory Meeting (Sec 165)A public company limited by shares or a guarantee companyhaving share capital is required to hold a statutory meeting. Sucha statutory meeting is held only once in the lifetime of thecompany. Such a meeting must be held within a period of notless than one month or within a period not more than sixmonths from the date on which it is entitled to commencebusiness i.e. it obtains certificate of commencement ofbusiness. In a statutory meeting, the following matters only canbe discussed: -

a. Floatation of shares / debentures by the companyb. Modification to contracts mentioned in the prospectus

The purpose of the meeting is to enable members to know all-important matters pertaining to the formation of the companyand its initial life history. The matters discussed include whichshares have been taken up, what money has been received, whatcontracts have been entered into, what sums have been spent onpreliminary expenses, etc. The members of the companypresent at the meeting may discuss any other matter relating tothe formation of the Company or arising out of the statutoryreport also, even if no prior notice has been given for such other

discussions but no resolution can be passed of which noticehave not been given in accordance with the provisions of theAct.A notice of at least 21 days before the meeting must be given tomembers unless consent is accorded to a shorter notice bymembers, holding not less than 95% of voting rights in thecompany.A statutory meeting may be adjourned from time to time bythe members present at the meeting.The Board of Directors must prepare and send to everymember a report called the “Statutory Report” at least 21 daysbefore the day on which the meeting is to be held. But if all themembers entitled to attend and vote at the meeting agree, thereport could be forwarded later also. The report should becertified as correct by at least two directors, one of whom mustbe the managing director, where there is one, and must also becertified as correct by the auditors of the company with respectto the shares allotted by the company, the cash received inrespect of such shares and the receipts and payments of thecompany. A certified copy of the report must be sent to theRegistrar for registration immediately after copies have been sentto the members of the company.A list of members showing their names, addresses andoccupations together with the number shares held by eachmember must be kept in readiness and produced at thecommencement of the meeting and kept open for inspectionduring the meeting.If default is made in complying with the above provisions,every director or other officer of the company who is in defaultshall be punishable with fine upto Rs. 500. The Registrar or acontributory may file a petition for the winding up of thecompany if default is made in delivering the statutory report tothe Registrar or in holding the statutory meeting on or after 14days after the last date on which the statutory meeting ought tohave been held.

Contents of Statutory Report Must provide thefollowing Particulars

(a) The total number of shares allotted, distinguishing thosefully or partly paid-up, otherwise than in cash, the extent towhich partly paid shares are paid-up, and in both cases theconsideration for which they were allotted.(b) The totalamount of cash received by the company in respect of allshares allotted, distinguishing as aforesaid.(c) An abstractof the receipts and payments upto a date within 7 days ofthe date of the report and the balance of cash and bankaccounts in hand, and an account of preliminaryexpenses.(d) Any commission or discount paid or to bepaid on the issue or sale of shares or debentures must beseparately shown in the aforesaid abstract.(e) The names,addresses and occupations of directors, auditors, manager


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and secretary, if any, of the company and the changes whichhave taken place in the names, addresses and occupationsof the above since the date of incorporation.(f) Particularsof any contracts to be submitted to the meeting forapproval and modifications done or proposed.(g) If thecompany has entered into any underwriting contracts, theextent, if any, to which they have not been carried out andthe reasons for the failure.(h) The arrears, if any, due oncalls from every director and from the manager.(i) Theparticulars of any commission or brokerage paid or to bepaid, in connection with the issue or sale of shares ordebentures to any director or to the manager.

The auditors have to certify that all information regarding callsand allotment of shares are correct.

B. Annual General Meeting (Secs. 166 and 167) It must be held by every type of company, public or private,limited by shares or by guarantee, with or without share capitalor unlimited company, once a year. Every company must in eachyear hold an annual general meeting. Not more than 15 monthsmust elapse between two annual general meetings. However, acompany may hold its first annual general meeting within 18months from the date of its incorporation. In such a case, itneed not hold any annual general meeting in the year of itsincorporation as well as in the following year only.Note the following case:Sree Meenakshi Mills Co. Ltd. V. Assistant Registrar ofCompanies. A.I.R. (1938) Mad 640. The annual generalmeeting of a company called in December 1934 was adjournedand held in march 1935, the next meeting was held in January,1936, no other meeting being held in 1935. the companycontended that it did hold a meeting in the year 1935. but it washeld by the court that the meeting of march 1935 was theadjourned meeting of 1934.In the case there is any difficulty in holding any annual generalmeeting (except the first annual meeting), the Registrar may, forany special reasons shown, grant an extension of time forholding the meeting by a period not exceeding 3 monthsprovided the application for the purpose is made before the duedate of the annual general meeting. However, generally delay inthe completion of the audit of the annual accounts of thecompany is not treated as “special reason” for granting exten-sion of time for holding its annual general meeting. Generally,in such circumstances, an AGM is convened and held at theproper time . all matters other than the accounts are discussed.All other resolutions are passed and the meeting is adjournedto a later date for discussing the final accounts of the company.However, the adjourned meeting must be held before the lastday of holding the AGM.A notice of at least 21 days before the meeting must be given tomembers unless members, holding not less than 95% ofvoting rights in the company, accord consent to a shorter notice.The notice must state that the meeting is an annual generalmeeting. The time, date and place of the meeting must bementioned in the notice. The notice of the meeting must beaccompanied by a copy of the annual accounts of the company,director’s report on the position of the company for the year

and auditor’s report on the accounts. Companies having sharecapital should also state in the notice that a member is entitledto attend and vote at the meeting and is also entitled to appointproxies in his absence. A proxy need not be a member of thatcompany. A proxy form should be enclosed with the notice.The proxy forms are required to be submitted to the companyat least 48 hours before the meeting.The AGM must be held on a working day during businesshours at the registered office of the company or at some otherplace within the city, town or village in which the registeredoffice of the company is situated. The Central Governmentmay, however, exempt any class of companies from the aboveprovisions. If any day is declared by the Central government tobe a public holiday after the issue of the notice convening suchmeeting, such a day will be treated as a working day.A company may, by appropriate provisions in its articles, fix thetime for its annual general meeting and may also by a resolutionpassed in one annual general meeting fix the time for itssubsequent annual general meetings.Companies licensed under Section 25 are exempt from theabove provisions provided that the time, date and place of eachannual general meeting are decided upon beforehand by theBoard of Directors having regard to the directions, if any, givenin this regard by the company in general meeting.In case of default in holding an annual general meeting, thefollowing are the consequences: -1. Any member of the company may apply to the Company

Law Board. The Company Law Board may call, or direct thecalling of the meeting, and give such ancillary orconsequential directions as it may consider expedient inrelation to the calling, holding and conducting of themeeting. The Company Law Board may direct that onemember present in person or by proxy shall be deemed toconstitute the meeting. A meeting held in pursuance ofthis order will be deemed to be an annual general meetingof the company. An application by a member of thecompany for this purpose must be made to the concernedRegional Bench of the Company Law Board by way ofpetition in Form No. 1 in Annexure II to the CLBRegulations with a fee of rupees fifty accompanied by (i)affidavit verifying the petition, (ii) bank draft for paymentof application fee.

2. Fine which may extend to Rs. 5,000 on the company andevery officer of the company who is in default may belevied and for continuing default, a further fine of Rs. 250per day during which the default continues may be levied.

Business to be Transacted at Annual GeneralMeetingAt every AGM, the following matters must be discussed anddecided. Since such matters are discussed at every AGM, they areknown as ordinary business. All other matters and business tobe discussed at the AGM are specila business.The following matters constitute ordinary business at an AGM

a. Consideration of annual accounts, director’s report andthe auditor’s report


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b. Declaration of dividendc. Appointment of directors in the place of those retiringd. Appointment of and the fixing of the remuneration

of the statutory auditors.In case any other business ( special business ) has to bediscussed and decided upon, an explanatory statement of thespecial business must also accompany the notice calling themeeting. The notice must should also give the nature andextent of the interest of the directors or manager in the specialbusiness, as also the extent of the shareholding interest in thecompany of every such person. In case approval of anydocument has to be done by the members at the meeting, thenotice must also state that the document would be available forinspection at the Registered Office of the company during thespecified dates and timings.

C. Extraordinary General Meeting( Sec. 169)Every general meeting (i.e. meeting of members of thecompany) other than the statutory meeting and the annualgeneral meeting or any adjournment thereof, is an extraordinarygeneral meeting. Such meeting is usually called by the Board ofDirectors for some urgent business which cannot wait to bedecided till the next AGM. Every business transacted at such ameeting is special business. An explanatory statement of thespecial business must also accompany the notice calling themeeting. The notice must should also give the nature andextent of the interest of the directors or manager in the specialbusiness, as also the extent of the shareholding interest in thecompany of every such person. In case approval of anydocument has to be done by the members at the meeting, thenotice mus also state that the document would be available forinspection at the Registered Office of the company during thespecified dates and timings.The Articles of Association of a Company may containprovisions for convening an extraordinary general meeting. Itmay provide that “the board may, whenever it thinks fit, call anextraordinary general meeting” or it may provide that “if at anytime there are not within India, directors capable of acting whoare sufficient in number to form a quorum, any director or anytwo members of the company may call an extraordinary generalmeeting”.

Extraordinary General Meeting on Requisition :The members of a company have the right to require the callingof an extraordinary general meeting by the directors. The boardof directors of a company must call an extraordinary generalmeeting if required to do so by the following number ofmembers :-

a. Members of the company holding at the date ofmaking the demand for an EGM not less than one-tenth of such of the voting rights in regard to thematter to be discussed at the meeting ; or

b. if the company has no share capital, the membersrepresenting not less than one-tenth of the totalvoting rights at that date in regard to the said matter.

The requisition must state the objects of the meetings andmust be signed by the requisitioning members. The requisition

must be deposited at the company’s registered office. When therequisition is deposited at the registered office of the company,the directors should within 21 days, move to call a meeting andthe meeting should be actually be held within 45 days from thedate of the lodgement of the requisition. If the directors fail tocall and hold the meeting as aforesaid, the requisitionists or anyof them meeting the requirements at (a) or (b) above, as thecase may be, may themselves proceed to call meeting within 3months from the date of the requisition, and claim thenecessary expenses from the company. The company can makegood this sum from the directors in default. At such an EGM,any business which is not covered by the agenda mentioned inthe notice of the meeting cannot be voted upon.

Power of Company Law Board to Order Calling ofExtraordinary General Meeting :If for any reason, it is impracticable to call a meeting of acompany, other than an annual general meeting, or to hold orconduct the meeting of the company, the Company Law Boardmay, either i) on its own motion, or ii) on the application ofany director of the company, or of any member of the com-pany, who would be entitled to vote at the meeting, order ameeting to be called and conducted as the Company Law Boardthinks fit, and may also give such other ancillary and consequen-tial directions as it thinks fit expedient. A meeting so called andconducted shall be deemed to be a meeting of the companyduly called and conducted.

Procedure for Application under Section 186 :An application by a director or a member of a company for thispurpose is required to be made to the Regional Bench of theCompany Law Board before whom the petition is to be madein Form No 1 specified in Annexure II to the CLB Regulationswith a fee of Rs200. The petition must e accompanied with thefollowing documents -

a. Evidence in proof of status of the applicant.b. Affidavit verifying the petition.c. Bank draft evidencing payment of application fee.d. Memorandum of appearance with copy of the Board’s

resolution or executed vakalat nama, as the case may be.

D. Class MeetingClass meetings are meetings which are held by holders of aparticular class of shares, e.g., preference shareholders. Suchmeetings are normally called when it is proposed to vary therights of that particular class of shares. At such meetings, thesemembers dicuss the pros and cons of the proposal and voteaccordingly. (See provisions on variations of shareholder’srights). Class meetings are held to pass resolution which willbind only the members of the class concerned, and onlymembers of that class can attend and vote.Unless the articles of the company or a contract binding on thepersons concerned otherwise provides, all provisions pertainingto calling of a general meeting and its conduct apply to classmeetings in like manner as they apply with respect to generalmeetings of the company.


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II. Meetings of the Board of Directors- Meeting of the Board of Directors- Meeting of a Committee of the Board

III. Other Meetings

A. Meeting of debenture holdersA company issuing debentures may provide for the holding ofmeetings of the debentureholders. At such meetings, generallynmmatters pertaining to the variation in terms of security or toalteration of their rights are discussed. All matters connectedwith the holding, conduct and proceedings of the meetings ofthe debentureholders are normally specified in the DebentureTrust Deed. The decisions at the meeting made by the pre-scribed majority are valid and lawful and binding upon theminority.

B. Meeting of CreditorsSometimes, a company, either as a running concern or in theevent of winding up, has to make certain arrangements with itscreditors. Meetings of creditors may be called for this purpose.Eg U/s 393, a company may enter into arrangements withcreditors with the sanction of the Court for reconstruction orany arrangement with its creditors. The court, on application,may order the holding of a creditors’ s meeting. If the schemeof arrangement is agreed to by majority in number of holdingdebts to value of the three-fourth of the total value of thedebts, the court may sanction the scheme. A certified copy ofthe court’s order is then filed with the Registrar and it is bindingon all the creditors and the company only after it is filed withRegistrar.Similarly, in case of winding up of a company, a meeting ofcreditors and of contributories is held to ascertain the totalamount due by the company and also to appoint a liquidator towind up the affairs of the company.

Requisites of a Valid MeetingsIt is necessary for you to understand that the followingconditions must be satisfied for a meeting to be called a validmeeting: -

1. It must be properly convened. The persons calling themeeting must be authorized to do so.

2. Proper and adequate notice must have been given to allthose entitled to attend.

3. The meeting must be legally constituted. There mustbe a chairperson. The rules of quorum must bemaintained and the provisions of the Companies Act,1956 and the articles must be complied with.

4. The business at the meeting must be validly transacted.The meeting must be conducted in accordance with theregulations governing the meetings.

Notice of General MeetingYou must know that a meeting cannot be held unless a propernotice has been given to all persons entitled to attend themeeting at the proper time, containing the necessary informa-tion. A notice convening a general meeting must be given atleast 21 clear days prior to the date of meeting. However, anannual general meeting may be called and held with a shorter

notice, if it is consented to by all the members entitled to voteat the meeting. In respect of any other meeting, it may be calledand held with a shorter notice, if at least members holding 95percent of the total voting power of the Company consent to ashorter notice.Notice of every meeting of company must be sent to allmembers entitled to attend and vote at the meeting. Notice ofthe AGM must be given to the statutory auditor of thecompany.Accidental omission to give notice to, or the non-receipt ofnotice by, any member or any other person on whom it shouldbe given will not invalidate the proceedings of the meeting. Thenotice may be given to any member either personally or bysending it by post to him at his registered address, or if there isnone in India, to any address within India supplied by him forthe purpose. Where notice is sent by post, properly addressing,pre-paying and posting the notice affect service. A notice may begiven to joint holders by giving it to the joint holder firstnamed in the register of members. A notice of meeting mayalso be given by advertising the same in a newspaper circulatingin the neighborhood of the registered office of the companyand it shall be deemed to be served on every member who hasto registered address in India for the giving of notices to him.A notice calling a meeting must state the place, day and hour ofthe meeting and must contain the agenda of the meeting. If themeeting is a statutory or annual general meeting, notice mustdescribe it as such. Where any items of special business are to betransacted at the meeting, an explanatory statement setting outall materials facts concerning each item of the special businessincluding the concern or interest, if any, therein of every directorand manager, is any, must be annexed to the notice. If it isintended to propose any resolution as a special resolution, suchintention should be specified.A notice convening an AGM must be accompanied by theannual accounts of the company, the director’s report and theauditor’s report. The copies of these documents could,however, be sent less than 21 days before of the date of themeeting if agreed to by all members entitled to vote at themeeting.You must have heard about proxy. Let us learn what we meanby it in respect of a company.

ProxyIn case of a company having a share capital and in the case ofany other company, if the articles so authorize, any member ofa company entitled to attend and vote at a meeting of thecompany shall be entitled to appoint another person (whether amember or not) as his proxy to attend and vote instead ofhimself. Every notice calling a meeting of the company mustcontain a statement that a member entitled to attend and vote isentitled to appoint one proxy in the case of a private companyand one or more proxies in the case of a public company andthat the proxy need not be member of the company.A member may appoint another person to attend and vote at ameeting on his behalf. Such other person is known as “Proxy”.A member may appoint one or more proxies to vote in respectof the different shares held by him, or he may appoint one or


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more proxies in the alternative, so that if the first named proxyfails to vote, the second one may do so, and so on.The member appointing a proxy must deposit with thecompany a proxy form at the time of the meeting or prior to itgiving details of the proxy appointed. However, any provisionin the articles which requires a period longer than forty eighthours before the meeting for depositing with the company anyproxy form appointing a proxy, shall have the effect as if aperiod of 48 hours had been specified in such provision.A company cannot issue an invitation at its expense asking anymember to appoint a particular person as proxy. If the com-pany does so, every officer in default shall be liable to fine up toRs1,000. But if a proxy form is sent at the request of a mem-ber, the officer shall not be liable. Every member entitled tovote at a meeting of the company, during the period beginning24 hours before the date fixed for the meeting and ending withthe conclusion of the meeting may inspect proxy forms at anytime during business hours by giving 3 days notice to thecompany of his intention to do so.The proxy- form must be in writing and be signed by themember or his authorised attorney duly authorised in writingor if the appointer is a company, the proxy form must be underits seal or be signed by an officer or an attorney duly authorisedby it.The proxy can be revoked by the member at any time, and isautomatically revoked by the death or insolvency of themember. The member may revoke the proxy by voting himselfbefore the proxy has voted, but once the proxy has exercised thevote, the member cannot retract his vote. Where two proxyforms by the same shareholder are lodged in respect of thesame votes, the last proxy form will be treated as the correctproxy form.A proxy is not entitled to vote except on a poll. Therefore, aproxy cannot vote on show of hands.Another requirement is in respect of a Quorum

QuorumQuorum refers to the minimum number of members whomust be present at a meeting in order to constitute a validmeeting. A meeting without the minimum quorum is invalidand decisions taken at such a meeting are not binding. Thearticles of a company may provide for a quorum without whicha meeting will be construed to be invalid. Unless the articles of acompany provide for larger quorum, 5 members personallypresent (not by proxy) in the case of a public company and 2members personally present (not by proxy) in the case of aprivate company shall be the quorum for a general meeting of acompany.It has been held by Courts that unless the articles otherwiseprovide, a quorum need to be present only when the meetingcommenced, and it was immaterial that there was no quorum atthe time when the vote was taken. Further, unless the articlesotherwise provide, if within half an hour from the timeappointed for holding a meeting of the company, a quorum isnot present in the person, the meeting: -

a. If called upon the requisition of members, shall standdissolved;

b. In any other case, it shall stand adjourned to the sameday in the next week, at the same time and place, or tosuch other day and time as the Board of Directors maydetermine.

If at the adjourned meeting also, the quorum is not presentwithin half an hour from the time appointed for holding themeeting, the members present shall a quorum.In case the Company Law Board calls or directs the calling of ameeting of the company, when default is made in holding anannual general meeting, the government may give directionsregarding the quorum including a direction that even onemember of the company present in person, or by proxy shall bedeemed to constitute a meeting. Similarly the Company LawBoard may, direct a meeting of the company (other than anannual general meeting) to be called and held where for anyreason it is impracticable to call a meeting and direct that evenone member present in person or by proxy shall be deemed toconstitute a meeting.No meeting can be valid unless it has a chairperson to preside inthe meeting.

ChairmanThe chairman is the head of the meeting. Generally, thechairman of the Board of Directors is the Chairman of themeeting. Unless the articles otherwise provide, the memberspresent in person at the meeting elect one of themselves to bethe chairman thereof on a show of the hands. If there is noChairman or he is not present within 15 minutes after theappointed time of the meeting or is unwilling to act aschairman of the meeting, the directors present may elect oneamong themselves to be the chairman of the meeting. If,however no director is willing to act as chairman or if nodirector is present within 15 minutes after the appointed timeof the meeting, the members present should choose oneamong themselves to be chairman of the meeting. If, after theelection of a chairman on a show of hands, poll is demandedand taken and a different person is elected as chairman, thenthat person will be the chairman for the rest of the meeting.

Duties of the ChairmanWithout a chairman, a meeting is incomplete. The chairman isthe regulator of the meeting. His duties include the following :-

1. He must ensure that the meeting is properly convenedand constituted i.e. that proper notice has been given,that the required quorum is present, etc.

2. He must ensure that the provisions of the act and thearticles in regard to the meeting and its procedures areobserved.

3. He must ensure that business is taken in the order setout in agenda and no business, which is notmentioned in the agenda, is taken up unless agreed toby the members.

4. He must impartially regulate the proceedings of themeeting and maintain discipline at the meeting.

5. He may exercise his powers of adjournment of themeeting, should he in good faith feel that such a step isnecessary. The chairman has the power to adjourn the


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meeting in case of indiscipline at the meeting. A chairmanhowever does not have the power to stop or adjourn themeeting at his own will and pleasure. If he adjourns themeeting prematurely, the members present may decide tocontinue the meeting and elect another chairman andproceed with the business for which it was convened.6. He must exercise his power to order a poll correctly and

must order it to be taken when demanded properly.7. He must exercise his casting vote bonafide in the

interest of the company.

MotionMotion means a proposal to be discussed at a meeting by themembers. A resolution may be passed accepting the motion,with or without modifications or a motion may be entirelyrejected. A motion, on being passed, as a resolution becomes adecision. A motion must be in writing and signed by the moverand put to the vote of the meeting by the chairman. Only thosemotions, which are mentioned in the agenda to the meeting,can be discussed at the meeting. However, motions incidental orancillary to the matter under discussion may be moved andpassed. Generally, a motion is proposed by one member andseconded by another member. The motions proposed in a general meeting of a company aredecided on the votes of the members of the company.The Voting may be:

• Voting by a show of hands• Voting by poll

Voting by a show of hands (Secs . 177 and 178). At any generalmeeting, motions put to vote are in the first instance decided bya show of hands, unless a poll is demanded (sec. 177) in takinga vote by show of hands. The duty of the chairman is to countthe hands raised and to declare the result accordingly, withoutregard to the number of votes that a member raising the handpossesses. Proxies cannot be used on a show of hands [Earnestv. Loma Gold Mines. (1906) 2 Ch. 572.]

Voting and Demand for Poll (Sec. 179)Generally, initially matters are decided at a general meeting by ashow of hands. If the majority of the hands raise their handsin favor of a particular resolution, then unless a poll is de-manded, it is taken as passed. Voting by a show of handsoperates on the principle of “One Member-One Vote”.However, since the fundamental voting principle in a companyis “One Share-One Vote”, if a poll is demanded, voting takesplace by a poll. Before or on declaration of the result of thevoting on any resolution on a show of hands, the chairmanmay order suo motu (of his own motion) that a poll be taken.However, when a demand for poll is made, he must order thepoll be taken. The chairman may order a poll when a resolutionproposed by the Board is lost on the show of hands or if he isof the opinion that the decision taken on the show of hands islikely to be reversed by poll. When a poll is taken, The decisionarrived by poll is final and the decision on the show of handshas no effect.

A poll is allowed only if the prescribed number of membersdemand a poll. A poll must be ordered by the chairman if it isdemanded:-a. In the case of a public company having a share capital,

by any member or members present in person or byproxy and holding shares in the company-

i. Which confer a power to vote on the resolution notbeing less than one-tenth of the total voting power inrespect of the resolution, or

ii. on which an aggregate sum of not less than fiftythousand rupees has been paid up.

b. In the case of a private company having a share capital, byone member having the right to vote on the resolution andpresent in person or by proxy if not more than seven suchmembers are personally present, and by two such memberspresent in person or by proxy, if more than seven suchmembers are personally present.

c. In the case of any other, by any member or memberspresent in person or by proxy and having not less thanone-tenth of the total voting power in respect of theresolution.

Now we are going to discuss about resolutions.

ResolutionsResolutions mean decisions taken at a meeting. A motion, withor without amendments is put to vote at a meeting. Once themotion is passed, it becomes a resolution. A valid resolutioncan be passed at a properly convened meeting with the requiredquorum. There are broadly three types of resolutions: -

1. Ordinary Resolution [Sec. 189(1)]An ordinary resolution is one which can be passed by a simplemajority. I.e. if the votes (including the casting vote, if any, ofthe chairman), at a general meeting cast by members entitled tovote in its favour are more than votes cast against it. Voting maybe by way of a show of hands or by a poll provided 21 daysnotice has been given for the meeting.

2. Special Resolution [Sec. 189(2)]A special resolution is one in regard to which is passed by a 75% majority only i.e. the number of votes cast in favour of theresolution is at least three times the number of votes castagainst it, either by a show of hands or on a poll in person orby proxy. The intention to propose a resolution as a specialresolution must be specifically mentioned in the notice of thegeneral meeting. Special resolutions are needed to decide onimportant matters of the company. Examples where specialresolutions are required are :-

a. To alter the domicile clause of the memorandum fromone State to another or to alter the objects clause of thememorandum.

b. To alter / change the name of the company with theapproval of the central government

c. To alter the articles of associationd. To change the name of the company by omitting

“Limited” or “Private Limited”. The CentralGovernment may allow a company with charitable


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objects to do so by special resolution under section 25 ofthe Companies Act, 1956.

3. Resolution Requiring Special Notice [Sec. 190]There are certain matters specified in the Companies Act, 1956which may be discussed at a general meeting only if a specialnotice is given regarding the proposal to discuss these matters ata meeting. A special notice enables the members to be preparedon the matter to be discussed and gives them time to indicatetheir views on the resolution. In case special notice of resolu-tion is required by the Companies Act, 1956 or by the articles ofa company, the intention to propose such a resolution must benotified to the company at least 14 days before the meeting. Thecompany must within 7 days before the meeting give the noticeof the proposed resolution to its members. Notice of theresolution is required to be given in the same way in whichnotice of a meeting is given, or if that is not practicable, thecompany may give notice by advertisement in a newspaperhaving an appropriate circulation or in any other mannerallowed by the articles, not less 7 days before the meeting.The following matters requiring Special Notice before they arediscussed before tha meeting :-

a. To appoint at an annual general meeting appointing anauditor a person other than a retiring auditor.

b. To resolve at an annual general meeting that a retiringauditor shall not be reappointed.

c. To remove a director before the expiry of his period ofoffice.

d. To appoint another director in place of removeddirector.

e. Where the articles of a company provide for the givingof a special notice for a resolution, in respect of anyspecified matter or matters.

Please note that a resolution requiring special notice may bepassed either as an ordinary resolution (Simple majority) or as aspecial resolution (75 % majority).

Circulation of Member’s ResolutionGenerally, the Board of Directors prepare the agenda of themeeting to be sent to all members of the meeting. A member,by himself has very little say in deciding the agenda. However,there are provisions in the Companies Act which enablemembers to introduce motions at a meeting and give priornotice of their intention to do so to all other members of thecompany. If members having one twentieth of the total votingrights of all members having the right to vote on a resolutionor if 100 members having the right to vote and holding paid-up capital of Rs1,00,000 or more, require the company to do so,the company must :-

1. Give to the members entitled to receive notice of thenext annual general meeting, notice of any resolutionwhich may be properly moved and is intended to bemoved at that meeting; and

2. Circulate to members entitled to have notice of anygeneral meeting sent to them, any statement of notmore than 1,000 words with respect to the matter

referred to in any proposed resolution, or any businessto be dealt with at that meeting.

The expenses for this purpose must be borne by therequisitionists and must be tendered to the company. Therequisition, signed by all the requisitionists, must be depositedat the registered office of the company at least 6 weeks beforethe meeting in the case of resolution and not less than 2 weeksbefore the meeting in case of any other requisition togetherwith a reasonable sum to meet the expenses. However, where acopy of the requisition requiring notice of resolution has beendeposited at the registered office of the company and an annualgeneral meeting is called for a date six weeks or less after therequisition is deposited, the copy though not deposited withinthe prescribed time is deemed to have been properly deposited.The company is required to serve the notice of resolution and/or the statement to the members as far as possible in themanner and so far as practicable at the same time as the noticeof the meeting ; otherwise as soon as practicable thereafter.However, a company need not circulate a statement if theCourt, on the application either of the company or any otheraggrieved person, is satisfied that the rights so conferred arebeing abused to secure needless publicity or for defamatorypurposes. Secondly a banking company need not circulate suchstatement, if in the opinion of its Board of directors, thecirculation will injure the interest of the company.It is required to register the resolutions and agreements.

Registration of Resolutions and AgreementsA copy of each of the following resolutions along with theexplanatory statement in case of a special business and agree-ments must, within 30 days after the passing or making thereof,be printed or typewritten and duly certified under the signatureof an officer of the company and filed with the Registrar ofCompanies who shall record the same :-

1. All special resolutions2. All resolutions which have been unanimously agreed

to by all the members but which, if not so agreed,would not have been effective unless passed as specialresolutions

3. All resolutions of the board of directors of a companyor agreement executed by a company, relating to theappointment, re-appointment or renewal of theappointment, or variation of the terms ofappointment, of a managing director

4. All resolutions or agreements which have been agreedto by all members of any class of members but which,if not so agreed, would not have been effective unlesspassed by a particular majority or in a particular mannerand all resolutions or agreements which effectively bindall members of any class of shareholders though notagreed to by all of those members

5. All resolutions passed by a company conferring powerupon its directors to sell or dispose of the whole orany part of the company’s undertaking; or to borrowmoney beyond the limit of the paid-up share capitaland free reserves of the company; or to contribute to


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charities beyond Rs50000 or 5 per cent of the averagenet profits

6. All resolutions approving the appointment of soleselling agents of the company

7. All copies of the terms and conditions ofappointment of a sole selling agent or sole buying orpurchasing agent

8. Resolutions for voluntary winding up of a company We will know discuss some important terms related tomeetings of company in brief.

AdjournmentAdjournment means suspending the proceedings of a meetingfor the time being so that the meeting may be continued at alater date and time fixed in that meeting itself at the time ofsuch adjournment or to decided later on. Only the business notfinished at the original meeting can be transacted at the ad-journed meeting.The majority of members at a meeting may move an adjourn-ment motion at a meeting. If the chairman adjourns themeeting, ignoring the views of the majority, the remainingmembers can continue the meeting. The chairman cannotadjourn the meeting at his own discretion without there being agood cause for such an adjournment. Where the chairman,acting bona fide within his powers, adjourns the meeting as perthe view of the majority, the minority members cannot tocontinue with such meeting and, if they do the proceedingsthere will be null and void.An adjourned meeting is merely the continuation of theoriginal meeting and therefore, a fresh notice is not necessary, ifthe time, date and place for holding the adjourned meeting aredecided and declared at the time of adjourning it. If a meetingis adjourned without stipulation as to when it will be contin-ued, fresh notice of the adjourned meeting must be given.

PostponementPostponement of a meeting means deferring the holding ofthe meeting itself at a later date. Postponement is done by theBoard of Directors or by the person convening the meeting. Incase of adjournment, it is the decision of the majority of themembers present at the meeting itself.

DissolutionDissolution of a meeting means termination of a meeting. Themeeting no longer exists once it has been dissolved. If withinhalf an hour after the time appointed for holding a generalmeeting; the quorum is not present, the meeting shall standdissolved if it was called on requisition by members.

Minutes of Proceedings of MeetingsEvery company must keep minutes of the proceedings ofgeneral meetings and of the meetings of board of directors andits committees. The minutes are a record of the discussionsmade at the meeting and the final decisions taken thereat.Every company must keep minutes containing details of allproceedings at the meetings. The pages of the minute booksmust be consecutively numbered and the minutes must berecorded therein within 30 days of the meeting. They have to bewritten directly on the numbered pages. Pasting or attaching of

papers is not allowed. Each page of every such minutes booksmust be initialed or signed and last page of the record ofproceedings of each meeting in such books must be dated andsigned by :-

a. In the case of the meeting of the Board of directors orcommittee thereof, by the chairman of that meeting orthat of the succeeding meeting, and

b. In the case of a general meeting, by the chairman ofthe same meeting within the aforesaid 30 days or in theevent of the death or inability of that chairman withinthe period, by a director duly authorised by the Boardof directors for the purpose.

The Company Law Board, however, may not object if minutesare maintained in loose-leaf form provided all other proceduralrequirements are complied with and all possible safeguardsagainst manipulation or interpolation of the minutes areensured. The loose leaves must be bound at reasonableintervals. Entering the minutes in a bound minute book by achemical process, which does not amount to attachment to anybook by pasting or otherwise is permissible provided on themechanical impression of the minutes, the original signaturesof the Chairman are given on each page. All appointments ofofficers made at any of the meetings must be included in theminutes of the meeting. In the case of a meeting of the Boardof directors or its Committee, the minutes must also state thenames of directors present at the meeting and the names ofdirectors, if any, dissenting from, or not concurring with aresolution passed at the meeting.The chairman may exclude from the minutes any matters whichare defamatory, irrelevant or immaterial or which are detrimentalto the interests of the company. The discretion of the Chair-man with regard to the inclusion or exclusion of any matter isabsolute and unfettered.Where minutes of the proceedings of any meeting have beenkept properly, they are, unless the contrary is proved, presumedto be correct, and are valid evidence that the meeting was dulycalled and held, and all proceedings thereat have actually takenplace, and in particular, all appointments of directors orliquidators made at the meeting shall be deemed to be valid.The minute books of the proceedings of general meetingsmust be kept the registered office of the company. Any memberhas a right to inspect, free of cost during business hours at theregistered office of the company, the minutes books containingthe proceedings of the general meetings of the company.Further, any member shall be entitled to be furnished, within 7days after he has made a request to the company, with a copy ofany minutes on payment of Rupee One for every hundredwords or fraction thereof. If any inspection is refused or copynot furnished within the time specified, every officer in defaultshall be punishable with fine up to Rs. 500 for each offence. TheCompany Law Board may also by order compel an immediateinspection or furnishing of a copy forthwith. But the minutesbooks of the board meetings are not open for inspection ofmembers.

Practical ProblemsAttempt the following problems, giving reasons


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1. At a meeting of a company, only 15 shareholders werepresent. 9 voted for a special resolution and 2 against and 4did not vote at all. No poll was demanded and thechairman declared the resolution to be carried. Is this avalid resolution?[Hint. Yes (Sec. 189)]

2. S, a shareholder. After appointing P as his proxy at ameeting of the company. He himself attended the meetingand voted on a particular resolution. P, thereafter, claimedto exercise his vote. Examine his claim.[Hint. His claim is invalid (Cousins v. International BrickCo. Ltd.)].



Notes:


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THE WINDING UP OF A COMPANYMODES OF WINDING UP OF A COMPANY

Learning ObjectivesAfter reading the lesson, you will be able to know about the:• The meaning of winding up of a company• The modes of winding up of a company• The petition for winding up of a company• The commencement of winding up of a company• ·The powers of a tribunal/ liquidator in the winding

up of a company

IntroductionA company comes into existence by a legal process and when forany reason, it is desired to end its existence; it must go throughthe legal process of winding up of its affairs. Winding up orliquidation is the process by which the management of acompany’s affairs is taken out of its director’s hands, its assetsare realized by a liquidator, and its debts are paid out of theproceeds of realization. If any balance remains in the hands ofthe liquidator, it is divided among the members of thecompany in accordance with their rights under the articles.However, you must understand that winding up and dissolu-tion of the company are not one and the same thing. Acompany is said to be dissolved when it ceases to exist as acorporate body. Winding up precedes dissolution. It is theprocess by which the dissolution of the company is broughtabout. Let us learn about the modes of winding up.

Modes of Winding Up

(1) The winding up of a company may be either-(a) By the Court; or(b) Voluntary; or(c) Subject to the supervision of the Court.(2) The provisions of this Act with respect to winding up

apply, unless the contrary appears, to the winding up of acompany in any of those modes.

Winding up By The CourtSection 433 lays down that the Court in the following case maywind up a company:1. If the company has passed a special resolution of it’s being

wound up by the Court. It may be mentioned here thatwithout such act cannot be done by the directorsthemselves. It can be done only if a resolution to this effecthas passed at a general meeting of the company. Themembers can however ratify the act of directors alreadydone.

2. If the company makes default in delivering the statutoryreport to the Registrar or in holding the Statutory Meeting.A petition under this ground can be made either by theRegistrar with the previous approval of the Central

Government or by a contributory or after 14 days after thelast day on which the statutory meeting should have beenheld.

3. It does not commence business within one year from itsincorporation or it suspends business for a whole year.

4. The number of its members falls before the minimumrequired i.e. 2 in case of a private company and 7 in case ofa public company.

5. It is unable to pay its debts.6. If the Court of opinion that it is just and equitable that

the company should be wound up.Let us now understand when the Company would be deemedto be unable to pay its debts and what do we mean by just andequitable cause?.

A Company shall be Deemed to be unable to Pay itsDebts (Section 434)

(a) If a creditor, by assignment or otherwise, to whom thecompany is indebted in a sum exceeding five hundredrupees then due, has served on the company, by causing itto be delivered at its registered office, by registered post orotherwise, a demand under his hand requiring thecompany to pay the sum so due and the company has forthree weeks thereafter neglected to pay the sum, or tosecure or compound for it to the reasonable satisfaction ofthe creditor;

(b) If execution or other process issued on a decree or order ofany Court in favour of a creditor of the company isreturned unsatisfied in whole or in part; or

(c) If it is proved to the satisfaction of the Court that thecompany is unable to pay its debts, and, in determiningwhether a company is unable to pay its debts, the Courtshall take into account thecontingent and prospective liabilities of the company.

(2) The demand referred to in clause (a) of sub-section (1)shall be deemed to have been duly given under the hand ofthe creditor if it is signed by any agent or legal adviser dulyauthorized on his behalf, or in the case of a firm, if it issigned by any such agent or legal adviser or by any memberof the firm.

What is ‘just and Equitable’ Clause ?It depends upon the facts of each case. The tribunal may orderwinding up under the just and equitable clause in the followingcases.

(1) When the substratum of a company is gone. Thesubstratum of a company can be said to havedisappeared only when the object for which it wasincorporated has substantially failed, or when it isimpossible to carry on the business of the company


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except at a loss, or the existing and possible assets areinsufficient to meet the existing liabilities.

The substratum of a company disappears :(i) When the very basis for the survival of the company is

gonePirie v. Stewart, (1904) 6 F 847 A shipping company lost it’sonly ship, the remaining asset being a paltry sum of $ 363. Amajority in number and value of shareholders petitioned for itscompulsory winding up but a minority shareholder opposedthis and desired to carry on the business as chatterer. Held it wasjust and equitable that the company should be wound up.

(ii) When the main object of the company hassubstantially failed or become impracticable. Where acompany’s main object fails, its substratum is goneand it may be wound up even though it is carrying onits business in pursuit of a subsidiary objects.

German Date Coffee Co., Re. (1882) 20 Ch. D. 169.In this case, the objects clause of the German Date CoffeeCo. stated that it was for making a partial substitute forcoffee from dates and for the acquisition of inventionsincidental there to and also other inventions for similarpurposes. The German patent was never granted but thecompany did acquire and work a Swedish patent and carriedon business at Hamburg where a substitute coffee wasmade from dates, but not under the protection of a patent.Held, on a petition by 2 shareholders, that the main objectcould not be achieved and. Therefore, it was just andequitable that the company should be wound up.(iii) When the company is carrying on its business at a loss

and there is no reasonable hope that the object oftrading at a profit can be attained. However, where themajority shareholders are against it, the tribunal willnot order a company to be wound up merely because itis making a loss.

(iv) When the existing and probable assets of thecompany are insufficient to meet its existing liabilities.Where a company is totally unable to pay off creditorsand there is ever- increasing burden of interest anddeteriorating state of management and control ofbusiness owing to sharp differences betweenshareholders. The tribunal will order winding up.

(2) When the management is carried on in such a way that theminority is disregarded or oppressed Oppression ofminority shareholders will be a just and equitable groundwhere those who control the company abuse their powerto such an extent as to seriously prejudice the interest ofminority shareholders.

(3) Where there s a deadlock in the management of thecompany. When shareholding is more or less equal andthere is a case of complete deadlock in the company onaccount of lack of probity in the management of thecompany and there is no hope or possibility of smoothand efficient continuance of the company as a commercialconcern, there may arise a case fro winding up ion the justand equitable ground.

Yenidje Tobacco co. Ltd. Re (1916) 2 Ch. 426. A and B werethe only shareholders and directors of a company withequal right of management and voting power. After a timethey become bitterly hostile to each other and disagreedabout the appointment of important servant s of thecompany. All communications between them were madethrough the secretary as they were not on speaking termswith each other. The company made large profits in spiteof the disagreement. Held there was a complete deadlock inthe management and the company was ordered to bewound up.

(4) Where public interest is likely to be prejudiced. Havingregard to the provisions of Secs. 397 and 398 (dealing withprevention of oppression and mismanagement) where theconcept of prejudice to public interest is introduced, itwould appear that the court winding up a company willhave to take into consideration not only the interest ofshareholders and creditors but also public interest in theshape of need of the community, interest of theemployees, etc.

(5) When the company was formed to carry out fraudulent orillegal business or when the business of the companybecome illegal.

(6) When the company is a mere bubble and does not carry onany business or does not have any property[London & County Coal Co; Re (1867) L.R. 3 Eq. 355].

(7) If the company has acted against the interests of thesovereignty and integrity of India, the security of the state,friendly relations with foreign states. Public order, decencyor morality.

(8) If the tribunal is of the opinion that the company shouldbe wound up under the circumstances specified in Sec. 424The last two clauses in Sec. 333(1) have been added by theCompanies [Amendment] Act.

Petition for Winding upSection 439 lays down that an application to the Court for thewinding up of a company shall be by petition presented,subject to the provisions of this section,-1. The Company2. Any creditor of the Company3. Any contributory / shareholder. Contributory means every

person liable to contribute to the assets of a company inthe event of its being wound up and includes holders ofits fully paid shares. While every member of a companybecomes a contributory, not every contributory is amember. Besides members, any person who ceased to be amember 1 year prior to the commencement of winding upis also a contributory.

4. The Registrar may petition for winding up in the followingcircumstances: -(i) If default is made in delivering statutory report or

holding the statutory report.(ii) If the company does not commence its business

within one year from its incorporation or suspends itsbusiness for a whole year.


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(iii) If it appears to him either from the financial positionof the company as disclosed in the balance sheet of thecompany or from the report of a special auditor or aninspector that the company is unable to pay its debts.

(iv) Where the Registrar is authorized by the CentralGovernment to petition for winding up the company.

(v) Where the number of members of the company fallbelow the statutory minimum.

(vi) Where it is just and equitable that the company bewound up.

5. Any person authorized by the Central Government. Undersection 243, if any report of an inspector appointed toinvestigate the affairs of the company discloses: -(i) That the business of the company is being conducted

to defraud its creditors or members or for a fraudulentor unlawful purpose

(ii) That the persons concerned in the formation ormanagement have been guilty of fraud, misfeasance,and it appears to the Central Government from suchreport so to do, then the Central Government mayauthorize any person including the Registrar to petitionfor winding up the company on the ground that it isjust and equitable to do so.

6. The Official Liquidator attached to a Court where acompany is already being voluntarily wound up and suchvoluntary winding up cannot be continued with due regardto the interests of the creditors or contributors or both.

Please note that

• A secured creditor, the holder of any debentures(including debenture stock), whether or not any trusteeor trustees have been appointed in respect of such andother like debentures, and the trustee for the holdersof debentures, shall be deemed to be creditors withinthe meaning of clause (b) of sub-section (1).

• A contributory shall be entitled to present a petitionfor winding up a company, notwithstanding that hemay be the holder of fully paid-up shares, or that thecompany may have no assets at all, or may have nosurplus assets left for distribution among theshareholders after the satisfaction of its liabilities.

However, a contributory shall not be entitled to present apetition for winding up a company unless-(a) Either the number of members is reduced, in the case of a

public company, below seven, and, in the case of a privatecompany, below two; or

(b) The shares in respect of which he is a contributory, orsome of them, either were originally allotted to him orhave been held by him, and registered in his name, for aleast six months during the eighteen months immediatelybefore the commencement of the winding up, or havedevolved on him through the death of a former holder.

Except, in the case where he is authorized in pursuance ofclause (f) of sub-section (1), the Registrar shall be entitled topresent a petition for winding up a company only on the

grounds specified in 12[clause (b), (c), (d), (e) and (f)] of section433:It is also provided that the Registrar shall not present a petitionon the ground specified in clause (e) aforesaid, unless it appearsto him either from the financial condition of the company asdisclosed in its balance sheet or from the report of 13[a specialauditor appointed under section 233A or an inspector] ap-pointed under section 235 or 237, that the company is unable topay its debts. A registrar shall obtain the previous sanction ofthe Central Government for the presentation of the petition onany of the grounds aforesaid.The Central Government shall not accord its sanction inpursuance of the foregoing proviso, unless the company hasfirst been afforded an opportunity of making its representa-tions, if any.Please note that a petition for winding up a company on theground specified in clause (b) of section 433 shall not bepresented-(a) Except by the Registrar or by a contributory; or(b) Before the expiration of fourteen days after the last day

on which the statutory meeting referred to in clause (b)aforesaid ought to have been held.

Before a petition for winding up a company presented by acontingent or prospective creditor is admitted, the leave of theCourt shall be obtained for the admission of the petition andsuch leave shall not be granted-(a) Unless, in the opinion of the Court, there is a prima facie

case for winding up the company; and(b) Until such security for costs has been given as the Court

thinks reasonable.

Commencement of Winding upSection 441 lays down that where, before the presentation of apetition for the winding up of a company by the Court, aresolution has been passed by the company for voluntarywinding up, the winding up of the company shall be deemedto have commenced at the time of the passing of the resolu-tion, and unless the Court, on proof of fraud or mistake,thinks fit to direct otherwise, all proceedings taken in thevoluntary winding up shall be deemed to have been validitytaken.In any other case, the winding up of a company by the Courtshall be deemed to commence at the time of the presentationof the petition for the winding up.

Statement of affairs to be made to OfficialLiquidator.It is very important document to be prepared by the company.Section 454 requires that where the Court has made a windingup order or appointed the Official Liquidator as provisionalliquidator, unless the Court in its discretion otherwise orders,there shall be made out and submitted to the Official Liquida-tor a statement as to the affairs of the company in theprescribed form, verified by an affidavit, and containing thefollowing particulars, namely


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(a) The assets of the company, stating separately the cashbalance in hand and at the bank, if any, and the negotiablesecurities, if any, held by the company;

(b) Its debts and liabilities;(c) The names, residences and occupations of its creditors,

stating separately the amount of secured and unsecureddebts; and in the case of secured debts, particulars of thesecurities given, whether by the company or an officerthereof, their value and the dates on which they were given;

(d) The debts due to the company and the names, residencesand occupations of the persons from whom they are dueand the amount likely to be realised on account thereof;

(e) Such further or other information as may be prescribed, oras the Official Liquidator may require.

The statement shall be submitted and verified by one or moreof the persons who are at the relevant date the directors and bythe person who is at that date the manager, secretary or otherchief officer of the company, or by such of the personshereinafter in this sub-section mentioned, as the OfficialLiquidator, subject to the direction of the Court, may require tosubmit and verify the statement, that is to say, persons-(a) Who are or have been officers of the company;(b) Who have taken part in the formation of the company at

any time within one year before the relevant date;(c) Who are in the employment of the company, or have been

in the employment of the company within the said year,and are, in the opinion of the Official Liquidator, capableof giving the information required;

(d) Who are or have been within the said year officers of, or inthe employment of, a company which is, or within the saidyear was, an officer of the company to which the statementrelates.

The statement shall be submitted within twenty-one days fromthe relevant date, or within such extended time not exceedingthree months from that date as the Official Liquidator or theCourt may, for special reasons, appoint.Any person making, or concurring in making, the statementand affidavit required by this section shall be allowed, and shallbe paid by the Official Liquidator or provisional liquidator, asthe case may be, out of the assets of the company, such costsand expenses incurred in and about the preparation and makingof the statement and affidavit as the Official Liquidator mayconsider reasonable, subject to an appeal to the Court.If any person, without reasonable excuse, makes default incomplying with any of the requirements of this section, he shallbe punishable with imprisonment for a term which may extendto two years, or with fine which may extend to one hundredrupees for every day during which the default continues, or withboth.Any person stating himself in writing to be a creditor orcontributory of the company shall be entitled, by himself or byhis agent, at all reasonable times, on payment of the prescribedfee, to inspect the statement submitted in pursuance of thissection, and to a copy thereof or extract there from. Any personuntruthfully so stating himself to be a creditor or contributory

shall be guilty of an offence under section 18223 of the IndianPenal Code (45 of 1860); and shall, on the application of theOfficial Liquidator, be punishable accordingly.In this section, the expression “the relevant date” means, in acase where a provisional liquidator is appointed, the date of hisappointment, and in a case where no such appointment ismade, the date of the winding up order.We shall now discuss about the important powers of theTribunal.

Powers of TribunalPower of Court to stay or restrain proceedingsagainst company.It is provided under Section 442 that at any after the presenta-tion of a winding up petition and before a winding up orderhas been made, the company, or any creditor or contributory,may-(a) Where any suit or proceeding against the company is

pending in the Supreme Court or in any High Court, applyto the Court in which the suit or proceeding is pending fora stay of proceedings therein; and

(b) Where any suit or proceeding is pending against thecompany in any other Court, apply to the Court havingjurisdiction to wind up the company, to restrain furtherproceedings in the suit or proceeding;

and the Court to which application is so made may stay orrestrain the proceedings accordingly, on such terms as it thinksfit.

Powers of Court on Hearing Petition (Section 443)On hearing a winding up petition, the court may -(a) Dismiss it, with or without cost; or(b) Adjourn the hearing conditionally or unconditionally; or(c) Make any interim order that it thinks fit; or(d) Make an order for winding up the company with or

without costs, or any other order that it thins fit:It is provided that the Court shall not refuse to make a windingup order on the ground only that the assets of the companyhave been mortgaged to an amount equal to or in excess ofthose assets, or that the company has no assets.Where the petition is presented on the ground that it is just andequitable that the company should be wound up, the Courtmay refuse to make an order of winding up, if it is of opinionthat some other remedy is available to the petitioners and thatthey are acting unreasonably in seeking to have the companywould up instead of pursuing that other remedy.Where the petition is presented on the ground of default indelivering the statutory report to the Registrar, or in holding thestatutory meeting, the Court may-(a) Instead of making a winding up order, direct that the

statutory report shall be delivered or that a meeting shall beheld; and

(b) Order the cost to be paid by any persons who, in theopinion of the Court, are responsible for the default.


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Copy of Winding up order to be filed with Registrar( Section 445)On the making of a winding up order, it shall be the duty ofthe petitioner in the winding up proceedings and of thecompany to file with the Registrar a certified copy of the order,within thirty days from the date of the making of the order.In computing the period of thirty days from the date of themaking of a winding up order, the time requisite for obtaininga certified copy of the order shall be excluded.

Suits Stayed on winding up Order (Section 446)When a winding up order has been made or the OfficialLiquidator has been appointed as provisional liquidator, no suitor other legal proceeding shall be commenced, or if pending atthe date of the winding up order, shall be proceeded with,against the company, except by leave of the Court and subject tosuch terms as the Courtmay impose.

Effect of Winding up Order (Section 447)An order for winding up a company shall operate in favour ofall the creditors and of all the contributories of the company asif it had been made on the joint petition of a creditor and of acontributory.

Appointment of Official Liquidator (Section 448)For the purposes of this Act, so far as it relates to the windingup of companies by the Court, -(a) There shall be attached to each High Court, an Official

Liquidator appointed by the Central Government, whoshall be a whole-time officer, unless the CentralGovernment considers that there will not be sufficientwork for a whole-time officer in which case a part-timeofficer may be appointed; and (b) the Official Receiverattached to a District Court for insolvency purposes, or ifthere is no such Official Receiver, then, such person as theCentral Government may, by notification in the OfficialGazette appoint for the purpose, shall be the OfficialLiquidator attached to the District Court.

The Central Government may appoint one or more Deputy orAssistant Official Liquidators to assist the Official Liquidator inthe discharge of his functions.

Official Liquidator to be liquidatorSection 449 provides that on a winding up order being made inrespect of a company, the Official Liquidator shall, by virtue ofhis office, become the liquidator of the company.

Appointment and powers of Provisional Liquidator(Section 450)At any time after the presentation of a winding up petition andbefore the making of a winding up order, the Court mayappoint the Official Liquidator to be liquidator provisionally.Before appointing a provisional liquidator, the Court shall givenotice to the company and give a reasonable opportunity to itto make its representations, if any, unless, for special reasons tobe recorded in writing, the Court thinks fit to dispense withsuch notice. Where a provisional liquidator is appointed by theCourt, the Court may limit and restrict his powers by the orderappointing him or by a subsequent order; but otherwise he

shall have the same powers as a liquidator. The OfficialLiquidator shall cease to hold office as provisional liquidator,and shall become the liquidator, or the company, on a windingup order being made.

General provisions as to liquidators are laid downunder Section 421The liquidator shall conduct the proceedings in winding up thecompany and perform such duties in reference thereto as theCourt may impose.Where the Official Liquidator becomes or acts as liquidator,there shall be paid to the Central Government out of the assetsof the company such fees as may be prescribed.The acts of a liquidator shall be valid, notwithstanding anydefect that may afterwards be discovered in his appointment orqualification:It is provided that nothing in this sub-section shall be deemedto give validity to acts done by a liquidator after his appoint-ment has been shown to be invalid.

Powers of liquidatorSection 457 provides that the liquidator in a winding up by theCourt shall have power, with the sanction of the Court,(powers exercisable without the sanction of the tribunal)(a) to institute or defend any suit, prosecution, or other legal

proceeding, civil or criminal, in the name and on behalf ofthe company;

(b) To carry on the business of the company so far as may benecessary for the beneficial winding up of the company;

(c) To sell the immovable and movable property andactionable claims of the company by public auction orprivate contract, with power to transfer the whole thereofto any person or body corporate, or to sell the same inparcels;

(d) To raise the money on the security of the assets of thecompany any money requisite;

(e) To do all such other things as may be necessary for windingup the affairs of the company and distributing its assets.

The liquidator in a winding up by the Court shall have powerunder Section 457 (powers exercisable without the sanction ofthe tribunal)(i) To do all acts and to execute, in the name and on behalf of

the company, all deeds, receipts, and other documents, andfor that purpose to use, when necessary, the company’sseal;

ii) To inspect records and returns of the company on the filesof the Registrar without payment of any fee;]

(ii) To prove, rank and claim in the insolvency of anycontributory, for any balance against his estate, and toreceive dividends in the insolvency, in respect of thatbalance, as a separate debt due from the insolvent, andratably with the other separate creditors;

(iii) To draw, accept, make and endorse any bill of exchange,hundi or promissory note in the name and on behalf ofthe company, with the same effect with respect to theliability of the company as if the bill, hundi, or note had


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been drawn, accepted, made or endorsed by or on behalfof the company in the course of its business;

(iv) To take out, in his official name, letters of administrationto any deceased contributory, and to do in his official nameany other act necessary for obtaining payment of anymoney due from a contributory or his estate which cannotbe conveniently done in the name of the company, and inall such cases, the money due shall, for the purpose ofenabling the liquidator to take out the letters ofadministration or recover the money, be deemed to be dueto the liquidator himself:

(v) To appoint an agent to do any business which theliquidator is unable to do himself.

Winding up of a company leads to dissolution of the com-pany. When the Court is of opinion that the liquidator cannotproceed with the winding up for want of funds or assets or forany other reason whatsoever, and that it is just and reasonablein the circumstances of the case that an order for the dissolutionof the company be made, the Court may make an order that thecompany be dissolved from the date of the order, and thecompany is accordingly dissolved. A copy of this order has tobe forwarded by the liquidator to the Registrar within 30 daysand the Registrar is required to record it in his books.

Do the Court may also declare the Dissolution of aCompany void in Certain cases?Yes, the Court may at any time within two years of the date ofthe dissolution, make an order, on the application of theliquidator or of any other person interested and upon suchterms as it thinks fit, declaring the dissolution to have beenvoid. The person who obtains the order avoiding the dissolu-tion must file a certified copy thereof with the Registrar within30 days or such further time as the Court may allow. In case ofdefault, he will be punishable with fine to the extent of Rs. 500for every day during which the default continues.We will now discuss about other modes of winding up.

Voluntary Winding Up (Section 484 to 520)In case of voluntary winding up, the entire process is donewithout Court Supervision. When the winding up is complete,the relevant documents are filed before the Court for obtainingthe order of dissolution. The members may do a voluntarywinding up as the creditors may do it.The circumstances in which a company may be wound upvoluntarily are: -1. When the period fixed for the duration of the company in

its articles has expired2. When an event on the happening of which the company is

to be dissolved as per its articles happens3. The company resolves by a special resolution at a general

meeting to be voluntarily wound up.A voluntary winding up commences from the date of thepassing of the resolution for voluntary winding up. This is soeven when after passing a resolution for voluntary winding up,the Court presents a petition for winding up. The effect of thevoluntary winding up is that the company ceases to carry on its

business except so for as may be required for the beneficialwinding up thereof. Types of Voluntary Winding Up A voluntary winding up may be:

• Member’s Voluntary Winding Up• Creditor’s Voluntary Winding Up

Let me tell you about it in detail

Member’s Voluntary Winding UpIn case of a company which is solvent and able to pay itsliabilities in full and which desires to be wound up voluntarily,the majority of its directors at a Meeting of the Board mustmake a declaration of solvency verified by an affidavit stalingthat in their opinion the company will be able to pay its debts infull within such period not exceeding 3 years from the com-mencement of the winding up as may be specified in thedeclaration. Such a declaration must be made within 5 weeksimmediately preceding the date of the passing of the resolutionfor winding up the company and be delivered to the Registrarfor registration before that date. The declaration must embody astatement of the company’s assets and liabilities as at thepracticable date before the making of the declaration. Anydirector making a false declaration shall be criminally liable toimprisonment as well as with fine extending up to Rs. 50,000.The company must appoint liquidators for the purpose ofwinding up and fix their remuneration at a general meeting. Onthe appointment of the liquidators, the Board of directors,managing director and manager of the company cease to haveany management power. The liquidator may transfer or sell theassets of the company and pay off its liabilities. If the windingup proceedings continue for more than one year, the liquidatormust call a general meeting at the end of each year the liquida-tion continues. At the last meeting, the accounts of theliquidator must be approved by the members. Such accountsmust be filed by him with the registrar of Companies and theOfficial Liquidator attached to the Court having jurisdictionover the company.The Registrar on receiving such accounts must register them.The Official Liquidator on receipt of the accounts and otherrelevant details must make a report to the Court if he is of theopinion that the affairs of the company have not been con-ducted in a manner prejudicial to the interest of its members orto public interest.The company shall be deemed to be dissolved from the date ofsubmission of such report. If the Official Liquidator makes areport that the affairs of the company have been conducted in amanner prejudicial to the interest of its members or to publicinterest, the Court may direct the Official Liquidator to makefurther investigation of the affairs of the Company. On receiptof the investigation report, the Court may make an order ofdissolution or may make such order as it deems fit and properion the given circumstances.

Creditors’ Voluntary Winding UpWhere the company is not solvent or where the declaration ofsolvency of the company is not made and delivered to the


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Registrar in a voluntary winding up, it amounts to creditor’svoluntary winding up.In this case all the provisions of a member’s voluntary windingup apply except that instead of the members, it is the creditorswho appoint the liquidator, approve the accounts and regulatethe winding up proceedings. The creditors may appoint aCommittee of Inspection consisting of not more than 5creditors in order to regulate and supervise the winding upproceedings. You will find that Court has some specific powers in case ofVoluntary Winding Up.

Powers of the Court in case of Voluntary WindingUp

1. It may appoint the Official Liquidator or any other personas liquidator where the appointed liquidator is not acting.

2. It may remove the liquidator and appoint the OfficialLiquidator or any other person as liquidator on justifiablecause being shown.

3. It may determine the remuneration of the liquidator whenthe Official Liquidator is appointed as a liquidator

4. It may amend, vary, confirm or set aside the arrangemententered into between a company and its creditors on anappeal made by any creditor or contributory within 3 weeksof the completion of the arrangement

5. On an application of the Liquidator or contributory orcreditor, it may determine any question arising in thewinding up of a company and it may exercise, as respectsthe enforcing of calls, the staying of suits or other legalproceedings or any other matter, all or any of the powerswhich the Court might exercise if the company were beingwound up by the Court.

6. It may set aside any attachment, distress or executionstarted against the assets of the company after thecommencement of the winding up on such terms as itthinks fit on an application made by the liquidator, creditoror contributory if the Court thinks fit.

7. It may order a public examination of any person connectedwith the promotion or formation of the company or anyofficer connected with the company.

Winding up subject to the supervision of courtWhen a company has by special or ordinary resolution resolvedwind up voluntarily, the Court may make an order that thevoluntary winding up shall continue, but subject to suchsupervision the Court and with such liberty for creditors,contributories or others to apply to the Court and generally onsuch terms and conditions, as the Court thinks just.The application for a creditor, contributory or the voluntaryliquidator may make such intervention of the Court, whenthere are irregularities or frauds in the voluntary winding up.The effect of such an order is: -1. The liquidator may exercise his powers for liquidation

subject to terms and conditions imposed by the Court.

2. The Court obtains jurisdiction over suits and legalproceedings as in case of compulsory winding up by theCourt.

3. The supervision order also confers the power on the Courtto make calls or to enforce calls made by the liquidators andto exercise all other powers which it would have in case ofcompulsory winding up by the court.

4. The supervision order when passed, acts as a stay ofactions and other proceedings against the company

5. When an order has been made for winding up subject tosupervision of Court and an order is afterwards made forwinding up by the Court up, the Court has power toappoint any person as either provisional or permanentliquidators, in addition to, and subject to the control of theOfficial Liquidator. The Company cannot be dissolvedexcept by order of dissolution by the Court



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THE WINDING UP OF A COMPANYCONSEQUENCES OF A WINDING UP OF A COMPANY

Learning ObjectivesAfter reading the lesson, you will be able to know about the:• The consequences of winding up of a company• The proof and ranking up of claims• The preferential payments in regard to winding up of a

company• The meaning of defunct company

IntroductionBy now, you are all aware of Winding Up. Today, we will discussits consequences and how the claims are settled.

Consequences of Winding Up1. Consequences as to Shareholders/ MembersIn a company limited by shares, a shareholder is liable to pay thefull amount up to the face value of the shares held by him. Hisliability continues even after the company goes into liquidation,but he is then described as a contributory. A contributory maybe present or past. The liability of present and past contributo-ries has already been discussed in this chapter. In a companylimited by guarantee, the members are liable to contribute up tothe amount guaranteed by them.

2. Consequences as to Creditors

(1) Where the company is solvent (Sec. 528) Where acompany is being wound up, all debts payable on acontingency and all claims against the company, presentor future, certain or contingent, ascertained orsounding only in damages, shall be admissible toproof against the company. A just estimate of thevalue of such debts or claims shall be made. Where asolvent company is wound up. Where a solventcompany is wound up, all claims of creditors, whenproved, are fully met.

(2) Where the company is insolvent (Sec.529) Where acompany is insolvent and is wound up, the same rulesshall prevail as in the case of insolvency with regard to:

(a) Debts provable;(b) The valuation of annuities and future and contingent

liabilities, and(c) The respective rights of secured and unsecured

creditorsThe security of every secured creditor shall, however, be deemedto be subject to a pari passu charge in favors of the workmen tothe extent of the workmen’s portion; therein. Where a securedcreditor instead of relinquishing his security and proving hisdebt, opts to realize his security -

(a) The liquidator shall be entitled to represent theworkmen and enforce the workmen’s charge.

(b) Any amount realized by the liquidator by way ofenforcement of the workmen’s charge shall be appliedrate ably for the discharge of workmen’s dues; and

(c) The debt due to the secured creditor or the amount ofthe workmen’s portion in his security, shall rank paripassu with the workmen’s dues for the purposes ofsec. 529-A (which deals with overriding preferentialpayments.)

All persons who in any such case would be entitled to prove foeand receive dividends out for the assets of the company maycome in under the winding up, and make such claims againstthe company as they are entitled to make.Secured and Unsecured creditors The creditors may be securedor unsecured. A secured. A secured creditor has 3 alternativesbefore him.

(i) He may rely on his security and ignore the liquidation.(ii) He may value his security and prove for the deficit.(iii) He may surrender his security and prove for the whole

debt.If a secured creditor instead of relinquishing his security andproving his debt proceeds to realize his security, he shall beliable to pay his portion of the expenses incurred by theliquidator (including a provisional liquidator, if any) forpreservation of the security before its realization by the securedcreditor.(a) All revenues, taxes, cases and rates due to the central

government or a state government or to a local authority atthe relevant date. The amount should have become dueand payable within the 12 months preceding the relevantdate.

‘Relevant date’ means(i) In the case of a compulsory winding up of a company, the

date on which a provisional liquidator is appointed, or ifhe is not appointed, the date of the winding up order. Incase the company had commenced to be wound upwinding up order, in case the company had commenced tobe wound up voluntarily before that date, ‘relevant daremeans date of commencement of voluntary winding up.

(ii) In the case of a voluntarily winding up of a company, thedate of the passing of the resolution for the winding upof the company.

(b) All wages or salary of any employee, in respect of servicesrendered to the company and due for a period notexceeding 4 months within the 12 months before windingup, the amount shall not, in case of any one claimant,exceed such sum as may be notified by the centralgovernment in the official Gazette.


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(c) All accrued holiday remuneration becoming payable to anyemployee on account of winding up.

(d) All amounts due in respect of contributors payable duringthe 12 months before the winding up order under theemployees’ state insurance act. 1948. This,however doesnot apply when the company is being wound upvoluntarily for the purpose of reconstruction oramalgamation with another company.

(e) All amounts due in respect of any compensation orliability under the workmen’s compensation act. 1923, inrespect of death or disablement of any employee of thecompany.

(f) All sums due to any employee form a provident fund, apension fund, a gratuity fund or any other fund for thewelfare of the employees maintained by the company.

(g) The expenses of any investigation held in pursuance ofsec. 235 or 237 in as far as they are payable by the company.

Advances made by a third person to pay wages or salary to anyemployee, or in the case of his death to any other person in hisright on account of holiday remuneration, shall, in a windingup, have the same priority as the persons to whom thesepayments are made out of money advanced have priority.Primrose (Builders) Ltd; Re. (1950) Ch. 561 A bank allowedoverdrafts to a company for the purpose of paying the wagesof the company on the understanding that an amount equal tothe loan would shortly be paid in order to reduce the overdraft.Held, the bank was entitled to preferential payment in respectof the overdrafts

3. Consequences as to servants and officers.A winding up order shall be deemed to be a notice of dischargeto the officers and employees of the company, except when thebusiness of the company is continued. Such a discharge shallrelieve them of all obligations under their contract of service. Avoluntary winding up shall also operate as a notice of dischargeto the company’s servants.

4. Consequences as to Proceedings Against theCompanyWhen a winding up order has been made or the officialliquidator, has been appointed as provisional liqudator, no suitor other legal proceeding against the company shall be com-menced except by leave of the tribunal. Similarly if a suit ispending against the company at the date of the winding uporder, it shall not be proceeded with against the company,except by leave of the tribunal. In a voluntary winding up also,the tribunal may restrain proceedings against the company if itthinks fit.

5. Consequences as to CostsIf assets are insufficient to satisfy liabilities, the tribunal mayorder for payment of the costs, charges and expenses of thewinding up out of the assets of the company. The paymentshall be made in such order of priority inter se as the tribunalthinks just. Similarly all costs, charges and expenses propertyincurred in a voluntary winding up, including the remunerationof the liquidator, shall be paid out of the assets of the

company in priority to all other claims. The payment shall,however, be subject of the rights of secured creditors.Now, we will learn about the proof and ranking of claims.

Proof and Ranking of ClaimsDebts of all Descriptions to be Admitted to ProofSection 528 requires that in every winding up (subject, in thecase of insolvent companies, to the application in accordancewith the provisions of this Act of the law of insolvency), alldebts payable on a contingency, and all claims against thecompany, present or future, certain or contingent, ascertained orsounding only in damages, shall be admissible to proof againstthe company, a just estimate being made, so far as possible, ofthe value of such debts or claims as may be subject to anycontingency, or may sound only in damages, or for some otherreason may not bear a certain value.Application of insolvency rules in winding up of insolventcompanies.Section 529 lays down that in the winding up of an insolventcompany, the same rules shall prevail and be observed withregard to-(a) Debts provable;(b) The valuation of annuities and future and contingent

liabilities; and(c) The respective rights of secured and unsecured creditors; as

are in force for the time being under the law of insolvencywith respect to the estates of persons adjudged insolvent:

The security of every secured creditor shall be deemed to besubject to a pari passu charge in favour of the workmen to theextent of the workmen’s portion therein, and, where a securedcreditor, instead of relinquishing his security and proving hisdebt, opts to realise his security,-(a) The liquidator shall be entitled to represent the workmen

and enforce such charge;(b) Any amount realised by the liquidator by way of

enforcement of such charge shall be applied rateably for thedischarge of workmen’s dues; and

(c) So much of the debt due to such secured creditor as couldnot be realised by him by virtue of the foregoingprovisions of this proviso or the amount of theworkmen’s portion in his security, whichever is less, shallrank pari passu with the workmen’s dues for the purposesof section 529A.

(2) All persons who in any such case would be entitled toprove for and receive dividends out of the assets of thecompany, may come in under the winding up, and makesuch claims against the company as they respectively areentitled to make by virtue of this section:

If a secured creditor instead of relinquishing his security andproving for his debt proceeds to realize his security, he shall beliable to pay 53[his portion of] the expenses incurred by theliquidator (including a provisional liquidator, if any) for thepreservation of the security before its realization by the securedcreditor.]


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For the purposes of this provision, the portion of expensesincurred by the liquidator for the preservation of a securitywhich the secured creditor shall be liable to pay shall be thewhole of the expenses less an amount which bears to suchexpenses the same proportion as the workmen’s portion inrelation to the security bears to the value of the security.For the purposes of this section, section 529A and section 530,-(a) “Workmen”55, in relation to a company, means the

employees of the company, being workmen within themeaning of the Industrial Disputes Act, 1947 (14 of 1947);

(b) “Workmen’s dues”, in relation to a company, means theaggregate of the following sums due from the company toits workmen, namely:-

(i) All wages or salary including wages payable for time orpiece work and salary earned wholly or in part by way ofcommission of any workman, in respect of servicesrendered to the company and any compensation payable toany workman under any of the provisions of theIndustrial disputes Act, 1947 (14 of 1947);

(ii) All accrued holiday remuneration becoming payable to anyworkman, or in the case of his death to any other personin his right, on the termination of his employment before,or by the effect, of, thewinding up order or resolution;

(iii) Unless the company is being would up voluntarily merelyfor the purposes of reconstruction or of amalgamationwith another company, or unless the company has, at thecommencement of the winding up, under such a contractwith insurers as is mentioned in section 14 of theWorkman’s Compensation Act, 1923 (8 of 1923), rightscapable of being transferred to an vested in the workman,all amounts due in respect of any compensation or liabilityfor compensation under the said Act in respect of thedeath or disablement of any workman of the company;

(iv) All sums due to any workman from a provident fund, apension fund, a gratuity fund or any other fund for thewelfare of the workmen, maintained by the company;

(c) “Workmen’s Portion”, in relation to the security of anysecured creditor of a company, means the amount whichbears to the value of the security the same proportion asthe amount of the workmen’s dues bears to the aggregateof-(i) The amount of workmen’s dues; and(ii) The amounts of the debts due to the secured creditors.

Preferential Payments (Section 530)In a winding up, there shall be paid in priority to all otherdebts-(a) All revenues, taxes, cesses and rates due from the company

to the Central or a State Government or to a local authorityat the relevant date as defined in clause (c) of sub-section(8), and having become due and payable within the twelvemonths next before that date;

(b) All wages or salary (including wages payable for time orpiece work and salary earned wholly or in part by way ofcommission) of any employee, in respect of services

rendered to the company and due for a period notexceeding four months within the twelve months nextbefore the relevant date subject to the limit specified insub-section (2);

(c) All accrued holiday remuneration becoming payable to anyemployee, or in the case of his death to any other person inhis right, on the termination of his employment before, orby the effect of, the winding up order or resolution;

(d) Unless the company is being would up voluntarily merelyfor the purposes of reconstruction or of amalgamationwith another company all amounts due in respect ofcontributions payable during the twelve months nextbefore the relevant date, by the company as the employerof any persons, under the Employees’ State Insurance Act,1948 (34 of 1948), or any other law for the time being inforce;

(e) Unless the company is being wound up voluntarily merelyfor the purposes of reconstruction or of amalgamationwith another company, or unless the company has, at thecommencement of the winding up, under such a contractwith insurers as is mentioned in section 1459 of theWorkmen’s Compensation Act, 1923 (8 of 1923), rightscapable of being transferred to and vested in the workman,all amounts due in respect of any compensation or liabilityfor compensation under the said Act in respect of thedeath or disablement of any employee of the company;

(f) All sums to any employee from a provident fund, pensionfund, a gratuity fund or any other fund for the welfare ofthe employees, maintained by the company; and

(g) The expenses of any investigation held in pursuance ofsection 235 or 237, in so far as they are payable by thecompany.

(2) The sum to which priority is to be given under clause (b)of sub-section (1), shall not, in the case of any oneclaimant, exceed such sum as may be notified61 by theCentral Government in the Official Gazette.

(3) Where any compensation under the Workmen’sCompensation Act, 1923 (8 of 1923) is a weekly payment,the amount due in respect thereof shall, for the purposesof clause (e) of sub-section (1), be taken to be the amountof the lump sum for which the weekly payment could, ifredeemable, be redeemed if the employer made anapplication for thatpurpose under the said Act.

(4) Where any payment has been made to any employee of acompany,-

(i) On account of wages or salary; or(ii) To him, or in the case of his death, to any other person in

his right, on account of accrued holiday remuneration, outof money advanced by some person for that purpose, theperson by whom the money was advanced shall, in awinding up, have a right of priority in respect of themoney so advanced and paid, up to the amount by whichthe sum in respect of which the employee or other personin his right, would have been entitled to priority in the


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winding up has been diminished by reason of the paymenthaving been made.

(5) The foregoing debts shall-(a) Rank equally among themselves and be paid in full, unless

the assets are insufficient to meet them, in which case theyshall abate in equal proportions; and

(b) So far as the assets of the company available for paymentof general creditors are insufficient to meet them, havepriority over the claims of holders of debentures underany floating charged created by the company, and be paidaccordingly out of any property comprised in or subject tothat charge.

(6) Subject to the retention of such sums as may be necessaryfor the costs and expenses of the winding up, theforegoing debts shall be discharged forthwith so far as theassets are sufficient to meet them, and in the case of thedebts to which priority is given by clause (d) of sub-section(1), formal proof thereof small not be required except inso far as may be otherwise prescribed.

(7) In the event of a landlord or other person distraining orhaving distrained on any goods or effects of the companywithin three months next before the date of a winding uporder, the debts to which priority is given by this sectionshall be a first charge on the goods or effects so distrainedon, or the proceeds of the sale thereof

(8) For the purposes of this section-(a) Any remuneration in respect of a period of holiday or of

absence from work through sickness or other goods causeshall be deemed to be wages in respect of services renderedto the company during that period;

(b) The expression “accrued holiday remuneration” includes, inrelation to any person, all sums which, by virtue either orhis contract of employment or of any enactment (includingany order made or direction given under any enactment),are payable on account of the remuneration which would,in the ordinary course, have become payable to him inrespect of a period of holiday, had his employment withthe company continued until he became entitled to beallowed the holiday;

You must understand that• The expression “employee” does not include a

workman; and• The expression “the relevant date” means-

(i) In the case of a company ordered to be wound upcompulsorily, the date of the appointment (or firstappointment) of a provisional liquidator, or if no suchappointment was made, the date of thewinding up order, unless in either case the company hadcommenced to be wound up voluntarily before that date;and

(ii) In any case where sub-clause (i) does not apply, the date ofthe passing of the resolution for the voluntary winding upof the company.

This section shall not apply in the case of a winding the datedreferred to in sub-section (5) of section 230 of the Indian

Companies Act, 1913 (7 of 1913) occurred before the com-mencement of this Act, and in such a case, the provisionsrelating to preferential payments which would have applied ifthis Act had not been passed, shall be deemed to remain in fullforce.There is another important term which you could find in regardto winding up of company.

Defunct companyA company is a said to be ‘defunct ’ when it is not carrying onbusiness or when it is not in operation. Sec. 560 deals withdefunct companies. If a company has ceased to carry onbusiness, the registrar may strike it off the register as a defunctcompany in accordance with Sec. 560.

Practical ProblemsAttempt the following problems, giving reasons1. S, a builder, wrote to a hotel company offering to take 300

shares in the company, if a contract for the renovation ofthe hotel was given to him. His offer was accepted. 300shares were allotted to him and the directors passed aresolution that S should have the contract. S paid hisdeposit on shares and attended 2 meetings of theshareholders. No such contract was made and the companywent into liquidation. Is S liable as contributory.[Hint. No ( Aldborough Hotel Co., Re. Simpson’s Case)]

2. A creditor of a company applied for winding up of thecompany for its inability to pay his claim after properdemand had been made by him and on the lapse of the 3weeks from the dare of such demand. It was proved to thesatisfaction of the tribunal during inquiry, that thecompany was commercially solvent, will the tribunal orderfor the winding up of the company?[Hint. The tribunal may order for the winding up of thecompany Secs. 433 (e) and 434].

3. An application was made by a father as guardian of hisminor daughter for shares and the company registered theshares in the name of the daughter describing her asminor. The company went into liquidation and the fatherof the minor was placed on the list of contributories. Thefather resists this. Decide.[Hint. The father cannot be placed on the list ofcontributories ( Palaniappa Mudaliar v. Official Liquidator,Pasupathi Bank Ltd)].

4. Ever since its incorporation in 1969 and for 30 yearsthereafter, a company never met either in a shareholders’ orin a directors’ meeting, did not file for more than 10 yearsany summaries or list of shareholders, treated thecompany’s properties as though they were properties asthough they were properties belonging to the individualmembers, and sales, transfers and various dealing withthese properties took place for all over those 30 years as willthe registrar be justified in striking off the name of thecompany from the register?[Hint. Yes. ( Rai Sahib V.N. Mandal’s Estates Ltd. Re.)].

5. A company, in ignorance of the fact that it had been struckoff the register, borrowed money on the security of a


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charge on it property. On an application by the company,the tribunal restored it to the register. Is the charge valid?[Hint. Yes (Boxco Ltd., Re.)]

References:• Kapoor, N.D. (2003), “Elements of Mercantile Law,”


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LESSON 37:TUTORIAL

THE COMPANIES ACT, 1956

You are the company secretary of XYZ Ltd., a listed company,which is making a takeover bid to acquire control of ABC Ltd.,another listedCompany. XYZ Ltd. presently has no stake in ABC Ltd. AdviseyourBoard of directors in respect of the following queries:(i) Govinda, your director, desires to be appointed on the

Board of ABC Ltd. during the offer period.(ii) Your company after acquiring control of ABC Ltd. desires

to dispose of some assets of ABC Ltd., not in theordinary course of business and its intention to dispose ofsuch assets is not stated in the offer document.

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11.555 189

LESSON 38:CONSUMER PROTECTION ACT

Learning ObjectivesAt the end of this chapter, you will be able to know about:• The object of the Consumer Protection Act• Salient features of the Act• The procedure and authorities for filing a complaint

under the Act

IntroductionThe earlier principle of “Caveat Emptor” or “let the buyerbeware” which was prevalent has given way to the principle of“Consumer is King”. The origins of this principle lie in the factthat in today’s mass production economy where there is littlecontact between the producer and consumer, often sellers makeexaggerated claims and advertisements, which they do notintend to fulfill. This leaves the consumer in a difficult positionwith very few avenues for redressal. The onset on intensecompetition also made producers aware of the benefits ofcustomer satisfaction and hence by and large, the principle of “consumer is king” is now accepted. The need to recognize andenforce the rights of consumers is being understood andseveral laws have been made for this purpose. In India, we havethe Indian Contract Act, the Sale of Goods Act, the DangerousDrugs Act, the Agricultural Produce (Grading and Marketing)Act, the Indian Standards Institution (Certification Marks) Act,the Prevention of Food Adulteration Act, the Standards ofWeights and Measures Act, the Trade and Merchandise MarksAct, etc which to some extent protect consumer interests.However, these laws required the consumer to initiate action byway of a civil suit, which involved lengthy legal process proving,to be too expensive and time consuming for lay consumers.Therefore, the need for a more simpler and quicker access toredressal to consumer grievances was felt and accordingly, it leadto the legislation of the Consumer Protection Act, 1986.

Object of the Consumer Protection Act, 1986The main objective of the act is to provide for the betterprotection of consumers. Unlike existing laws, which arepunitive or preventive in nature, the provisions of this Act arecompensatory in nature. The act is intended to provide simple,speedy and inexpensive redressal to the consumers’ grievances,and reliefs of a specific nature and award of compensationwherever appropriate to the consumer. The act has beenamended in 1993 both to extend its coverage and scope and toenhance the powers of the redressal machinery.The basic rights of consumers as per the Consumer ProtectionAct (CPA) are1. The right to be protected against marketing of goods and

services which are hazardous to life and property2. The right to be informed about the quality, quantity,

potency, purity, standard and price of goods, or services soas to protect the consumer against unfair trade practices

3. The right to be assured, wherever possible, access to varietyof goods and services at competitive prices

4. The right to be heard and be assured that consumers’interests will receive due consideration at appropriateforums

5. The right to seek redressal against unfair trade practices orrestrictive trade practices or unscrupulsous exploitation ofconsumers

6. The right to consumer education

Extend and Coverage of the Act:-The salient features of the Act are summed up as under:-

- The Act applies to all goods and services unlessspecifically exempted by the Central Government.- It covers all the sectors whether private, public orcooperative.- The provisions of the Act are compensatory in nature.It enshrines the following rights of consumers:-- Right to be protected against the marketing of goods andservices which are hazardous to life and property.-Right to be informed about the quality, quantity, potency,purity, standard and price of goods or services so as toprotect the consumer against unfair trade practices;-Right to be assured , wherever possible , access to a varietyof goods and services at competitive prices;-Right to be heard and to be assured that consumers’interests will receive due consideration at appropriateforums;-Right to seek redressal against unfair trade practicesunscrupulous exploitation of consumers; and-Right to consumer education-The Act envisages establishment of Consumer ProtectionCouncils at the Central and State levels, whose main objectswill be to promote and protect the rights of the consumers

The CPA extends to the whole of India except the State ofJammu and Kashmir and applies to all goods and servicesunless otherwise notified by the Central Government.

Definitions of Important TermsBefore studying the provisions of the CPA, it is necessary tounderstand the terms used in the Act. Let us understand someof the more important definations.

Complainant Means

1. A consumer; or2. Any voluntary consumer association registered under the

Companies Act,1956 or under any other law for the timebeing in force; or


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3. The Central Government or any State Government, whoor which makes a complaint; or

4. One or more consumers where there are numerousconsumers having the same interest

Complaint means any allegation in writing made by a complain-ant that :-1. An unfair trade practice or a restricted trade practice has

been adopted by any trader2. The goods bought by him or agreed to be bought by him

suffer from one more defects3. The services hired or availed of or agreed to be hired or

availed of by him suffer from deficiency in any respect4. The trader has charged for the goods mentioned in the

complaint a price excess of the price fixed by or under anylaw for the time being in force or displayed on the goodsor any package containing such goods.

5. Goods which will be hazardous to life and safety whenused, are being offered for sale to the public incontravention of the provisions of any law for the timebeing in force, requiring traders to display information inregard to the contents, manner and effect of use of suchgoods ;with a view to obtaining any relief provided by lawunder the CPA.

Goods means goods as defined in the Sale of Goods Act, 1930.Under that act, goods means every kind of movable propertyother than actionable claims and money and includes stocks andshares, growing crops, grass and things attached to or formingpart of the land which are agreed to be severed before sale orunder the contract of sale.Service is defined to mean service of any description which ismade available to potential users and includes the provision offacilities in connection with banking, financing, insurance,transport, processing, supply of electrical or other energy, boardor lodging or both, housing construction, entertainment,amusement or the purverying of news or other informationbut does not include the rendereing of any service free of chargeor under a contract of personal service.Consumer dispute means dispute where the person againstwhom a complaint has been made, denies or disputes theallegation contained in the complaint.Restrictive Trade Practice means any trade practice which requiresa consumer to buy, hire, or avail of any good or as the case maybe, services as a condition precedent for buying, hiring oravailing of any other goods or services.Unfair Trade Practice means unfair trade practice as definedunder the Monopolies and Restrictive Trade Practices Act. TheMRPT act has defined certain practices to be unfair tradepractices. The detailed definition is given in the ConsumerProtection Act, 1986 as amended by the Consumer Protection(Amendment) Act. 1993. It means a trade practice which, for thepurpose of promoting the sale, use or supply of any goods orfor the provision of any service, adopts any unfair method orunfair or deceptive practice including any of the followingpractices, namely: -

(a) False or misleading representation,(b) Bargain price(c) Offering of gifts, prize, contest etc.(d) Non compliance of product safety standard.(e) Hoarding or destruction of goods.The Act may be consulted before filing a complaint for unfairtrade practice.Defect means any fault, imperfection or shortcoming in thequality, quantity, potency, purity or standard which is required tobe maintained by or under any law for the time being in force orunder any contract, express or implied, or as is claimed by thetrade in any manner whatsoever in relation to any goods.Deficiency means any fault, imperfection or shortcoming orinadequacy in the quality, nature and manner of performancewhich is required to be maintained by or under any law for thetime being in force or has been undertaken to be performed bya person in pursuance of a contract or otherwise in relation toany service.

Who is a Consumer?All of us are consumers of goods and services. For the purposeof the Consumer Protection Act,the word “Consumer” hasbeen defined separately for “goods” and “services”.For the purpose of “goods”, a consumer means a personbelonging to the following categories:(i) One who buys or agrees to buy any goods for a

consideration which has been paid or promised or partlypaid and partly promised or under any system of deferredpayment;

(ii) It includes any user of such goods other than the personwho actualy buys goods and such use is made with theapproval of the purchaser.

Note :- A person is not a consumer if he purchases goods forcommercial or resale purposes However, the word “commer-cial” does not include use by consumer of goods bought andused by him exclusively for the purpose of earning his liveli-hood, by means of self employment.- For the purpose of “services”, a “consumer” means a personbelonging to the following categories:(i) One who hires or avails of any service or services for a

consideration which has been paid or promised or partlypaid and partly promised or under any system of deferredpayment;

i.It includes any beneficiary of such service other than the onewho actually hires or avails of the service for consideration andsuch services are availed with the approval of such person.

Who Can file a ComplaintThe following can file a complaint under the Act:-

- A consumer- Any voluntary consumer organization registered underthe Societies Registration Act,1860 or under the CompaniesAct,1956 or under any other law for the time being in force.- The Central Government


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- The State Government or Union TerritoryAdministrations.- One or more consumers on behalf of numerousconsumers who are having the same interest(Class action complaints)

Structure

-To provide simple, speedy and inexpensive redressal ofconsumer grievances, the Act envisages a three- tier quasi-judicial machinery at the National, State and District levels.

• National Consumer Disputes Redressal Commission -known as “National Commission”.

• Consumer Disputes Redressal Commissions known as“State Commission.

• Consumer Disputes Redressal Forums- known as “DistrictForum.-The provisions of this Act are in addition to and not inderogation of the provisions of any other law for the timebeing in force

What Constitutes a Complaint?Under the Act, a complaint means any allegation in writingmade by a complainant in regard to one or more of thefollowing:-

- Any unfair trade practice as defined in the Act or restrictivetrade practices like tie-up sales adopted by any trader.- One or more defects in goods. The goods hazardous tolife and safety, when used,are being offered for sale topublic in contravention of provisions of any law for thetime being in force.- Deficiencies in services.- A trader charging excess of price.

(i) Fixed by or under any law for the time being in force; or(ii) Displayed on goods; or(iii) Displayed on any packet containing such good;

Where to file a complaintConsumer Protection CouncilsThe interests of consumers are enforced through variousauthorities set up under the CPA. The CPA provides for thesetting up of the Central Consumer Protection Council, theState Consumer Protection Council and the District Forum

Central Consumer Protection CouncilThe Central Government has set up the Central ConsumerProtection Council which consists of the following members :-(a) The Minister in charge of Consumer Affairs in the Central

Government who is its Chairman, and(b) Other official and non-official members representing varied

interestsThe Central council consists of 150 members and its term is 3years. The Council meets as and when necessary but at least onemeeting is held in a year.

State Consumer Protection CouncilThe State Council consists of :-(a) The Minister in charge of Consumer Affairs in the State

Government who is its Chairman, and(b) Other official and non-official members representing varied

interestsThe State Council meets as and when necessary but not lessthan two meetings must be held every year.Redressal Machinery under the ActThe CPA provides for a 3 tier approach in resolving consumerdisputes. The District Forum has jurisdiction to entertaincomplaints where the value of goods / services complainedagainst and the compensation claimed is less than Rs. 5 lakhs,the State Commission for claims exceeding Rs. 5 lakhs but notexceeding Rs. 20 lakhs and the National Commission for claimsexceeding Rs. 20 lakhs.

District ForumUnder the CPA, the State Government has to set up a districtForum in each district of the State. The overnment mayestablish more than one District Forum in a district if it deemsfit. Each District Forum consists of :-(a) A person who is, or who has been, or is qualified to be, a

District Judge who shall be its President(b) Two other members who shall be persons of ability,

integrity and standing and have adequate knowledge orexperience of or have shown capacity in dealing withproblems relating to economics, law, commerce,accountancy, industry, public affairs or administration, oneof whom shall be a woman.

Appointments to the State Commission shall be made by theState Goverrnment on the recommendation of a SelectionCommittee consisting of the President of the State Committee,the Secretary - Law Department of the State and the secretary incharge of Consumer AffairsEvery member of the District Forum holds office for 5 years orupto the age of 65 years, whichever is earlier and is not eligilbefor re-appointment. A member may resign by giving notice inwriting to the State Government whereupon the vacancy will befilled up by the State Government.The District Forum can entertain complaints where the value ofgoods or services and the compensation, if any, claimed is lessthan rupees five lakhs. However, in addition to jurisdiction overconsumer goods services valued upto Rs. 5 lakhs, the DistrictForum also may pass orders against traders indulging in unfairtrade practices, sale of defective goods or render deficientservices provided the turnover of goods or value of servicesdoes not exceed rupees five lakhs.A complaint shall be instituted in the District Forum within thelocal limits of whose jurisdiction -(a) The opposite party or the defendant actually and

voluntarily resides or carries on business or has a branchoffice or personally works for gain at the time ofinstitution of the complaint; or


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(b) Any one of the opposite parties (where there are more thanone) actually and voluntarily resides or carries on businessor has a branch office or personally works for gain, at thetime of institution of the complaint provided that theother opposite party/parties acquiescence in suchinstitution or the permission of the Forum is obtained inrespect of such opposite parties; or

(c) The cause of action arises, wholly or in part.

State CommissionThe Act provides for the establishment of the State ConsumerDisputes Redressal Commission by the State Government inthe State by notification. Each State Commission shall consistof:-(a) A person who is or has been a judge of a High Court

appointed by State Government (in consultation with theChief Justice of the High Court ) who shall be itsPresident;

(b) Two other members who shall be persons of ability,integrity, and standing and have adequate knowledge orexperience of, or have shown capacity in dealing with,problems relating to economics, law, commerce,accountancy, industry, public affairs or administration, oneof whom must be a woman.

Every appointment made under this hall be made by the StateGovernment on the recommendation of a Selection Committeeconsisting of the President of the State Commission, Secretary -Law Department of the State and Secretary in charge ofConsumer Affairs in the State.Every member of the District Forum holds office for 5 years orupto the age of 65 years, whichever is earlier and is not eligilbefor re-appointment. A member may resign by giving notice inwriting to the State Government whereupon the vacancy will befilled up by the State Government.The State Commission can entertain complaints where the valueof goods or services and the compensation, if any claimedexceed Rs. 5 lakhs but does not exceed Rs. 20 lakhs;The State Commission also has the jurisdiction to entertainappeal against the orders of any District Forum within the StateThe State Commission also has the power to call for the recordsand appropriate orders in any consumer dispute which ispending before or has been decided by any District Forumwithin the State if it appears that such District Forum hasexercised any power not vested in it by law or has failed toexercise a power rightfully vested in it by law or has acted illegallyor with material irregularity.

National CommissionThe Central Government provides for the establishment of theNational Consumer Disputes Redressal Commission TheNational Commission shall consist of :-(a) A person who is or has been a judge of the Supreme

Court, to be appoint by the Central Government (inconsultation with the Chief Justice of India ) who be itsPresident;

(b) Four other members who shall be persons of ability,integrity and standing and have adequate knolwiedge or

experience of, or have shown capacity in dealing with,problems relating to economics, law, commerce,accountancy, industry, public affairs or administration, oneof whom shall be a woman

Appointments shall be by the Central Government on therecommendation of a Selection Committee consisting of aJudge of the Supreme Court to be nominated by the ChiefJustice of India, the Secretary in the Department of LegalAffairs and the Secretary in charge of Consumer Affairs in theGovernment of India.Every member of the National Commission shall hold officefor a term of five years or upto seventy years of age, whicheveris earlier and shall not be eligible for reappointment.The National Commission shall have jurisdiction :-(a) To entertain complaints where the value of the goods or

services and the compensation, if any, claimed exceedsrupees twenty lakhs:

(b) To entertain appeals against the orders of any StateCommission; and

(c) To call for the records and pass appropriate orders in anyconsumer dispute which is pending before, or has beendecided by any State Commission where it appears to theNational Commission that such Commission has exerciseda jurisdiction not vested in it by law, or has failed to exercisea jurisdiction so vested, or has acted in the exercise of itsjurisdiction illegally or with material irregularity.

Complaints may be filed with the District Forum by :-1. The consumer to whom such goods are sold or delivered

or agreed to be sold or delivered or such service providedor agreed to be provided

2. Any recognised consumer association, whether theconsumer to whom goods sold or delivered or agreed tobe sold or delivered or service provided or agreed to beprovided, is a member of such association or not

3. One or more consumers, where there are numerousconsumers having the same interest with the permissionof the District Forum, on behalf of or for the benefit of,all consumers so interested

4. The Central or the State Government.On receipt of a complaint, a copy of the complaint is to bereferred to the opposite party, directing him to give his versionof the case within 30 days. This period may be extended byanother 15 days. If the opposite party admits the allegationscontained in the complaint, the complaint will be decided onthe basis of materials on the record. Where the opposite partydenies or disputes the allegations or omits or fails to take anyaction to represent his case within the time provided, thedispute will be settled in the following manner :-I. In case of dispute relating to any goods : Where the

complaint alleges a defect in the goods which cannot bedetermined without proper analysis or test of the goods, asample of the goods shall be obtained from thecomplainant, sealed and authenticated in the mannerprescribed for referring to the appropriate laboratory for thepurpose of any analysis or test whichever may be necessary,


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so as to find out whether such goods suffer from any otherdefect. The appropriate laboratory’ would be required toreport its finding to the referring authority, i.e. the DistrictForum or the State Commission within a period of forty-five days from the receipt of the reference or within suchextended period as may be granted by these agencies.

How to File a ComplaintProcedures for filing complaints and seeking redressal aresimple.

• There is no fee for filing a complaint before theDistrict Forum, the State Commission or the NationalCommission. ( A stamp paper is also not required)There should be 3 to 5 copies of the complaint onplain paper.

• The complainant or his authorized agent can presentthe complaint in person.

• The complaint can be sent by post to the appropriateForum / Commission.

• A complaint should contain the followinginformation

(a) The name, description and the address of the complainant.(b) The name , description and address of the opposite party

or parties, as the case may be, as far as they can beascertained;

(c) The facts relating to complaint and when and where itarose;

(d) Documents, if any, in support of the allegations containedin the complaint.

(e) The relief which the complainant is seeking.• The complaint should be signed by the complainant

or his authorized agent.• The complaint is to be filed within two years from the

date on which cause of action has arisen.

Relief Available to the ConsumersDepending on the nature of relief sought by the consumer andfacts, the Redressal Forums may give orders for one or more ofthe following reliefs:-(a) Removal of defects from the goods,(b) Replacement of the goods;(c) Refund of the price paid;(d) Award of compensation for the loss or injury suffered;(e) Removal of defects or deficiencies in the services;(f) discontinuance of unfair trade practices or restrictive trade

practices or direction not to repeat them;(g) Withdrawal of the hazardous goods from being offered to

sale; or(h) Award for adequate costs to parties.

Procedure for Filing the AppealProcedure for filing the appeal :-

- Appeal against the decision of a District Forum can befiled before the State Commission within a period of thirtydays. Appeal against the decision of a State Commission

can be filed before the National Commission within thirtydays. Appeal against the orders of the NationalCommission can be filed before the Supreme Court withina period of thirty days.• There is no fee for filing appeal before the State

Commission or the National Commission.• Procedure for filing the appeal is the same as that of

complaint, except the application should beaccompanied by the orders of the District/StateCommission as the case may be and grounds for filingthe appeal should be specified.

Speedy DisposalThe thrust of the Act is to provide simple, speedy and inexpen-sive redressal to consumers’ grievances. To ensure speedydisposal of consumers’ grievances, the following provisionshave been incorporated in the Act and the rules farmedthereunder:-

• It is obligatory on the complainant or appellant or theirauthorized agents and the opposite parties to appearbefore the Forum/Commission on the date ofhearing or any other date to which hearing could beadjourned.

• The National Commission, State Commission andDistrict Forums are required to decide complaints, asfar as possible, within a period of three months fromthe date of notice received by the opposite party wherecomplaint does not require analysis or testing of thecommodities and within five months if it requiresanalysis or testing of commodities.

• The National Commission and State Commissions arerequired to decide the appeal as far as possible, within90 days from the first date of hearing.

Read the following questions for a better understanding of theAct:Q1. I have instituted a complaint before the Consumer Court

against a Medical Practitioner. My complaint has beenchallenge on the ground that a Medical Practitioner cannotbe sued under the Consumer Act. What does law provide?

A. Yes, a medical practitioner can be sued under the ConsumerProtection Act 1986 for his or her professional negligenceresulting in damage to patient. Section 2 (d) in defining aconsumer in Clause (ii) uses the expression ‘hires and availsof”. The word “hire” means employ of wages or fees”.Secondly the words “any service” in s. 2 (d) (ii) in ConsumerProtection Act. A eloquent to bring the delinquent medicalpractitioners within the ambit of Consumer Protection Act.Thirdly, s. 2 (o), Consumer Protection Act which defines serviceexempts only two types of services, one “service free of charge”and another “contract of personal service” postulates arelationship of master and servant. A medical man whoseservice is requisitioned for a patient answers the clause “ contractof service” but never “a contract of personal service”. So, anegligent medical professional can be proceeded under theConsumer Protection Act 1986.


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Q2. I had purchased seeds from a party. The seeds did notgerminate. The other party took the plea that I was not aconsumer. Whether purchase of seeds for the purpose ofagriculture is purchase for commercial purpose?

A. Purchase made for agriculture is not for commercial purpose.Therefore, the complainant is a consumer and entitled to seekredressal of his grievance in a Consumer Court against the partywhich supplied defective seed to him.Q3. I had got a confirmed ticket on Sahara Airways. The flight

was later cancelled on account of technical snag. Is it adeficiency in service?

A. Cancellation of flight on account of technical snag is notdeficiency in service as it is due to unavoidable circumstances.However, you ought to be allowed refund of the fare but nocompensation can be granted on account of any loss suffered byyou (if any) because of the said cancellation.Q4. I was allotted a Maruti Car. There was a delay in delivery of

the car. Subsequently, the dealer called upon me to makefurther payment as the price of the car had gone up. Am Iliable to bear the price increase on account of delay causedby the dealer?

A. You are not liable to pay any price increase in the abovementioned circumstances since the increase in price is totally onaccount of the delay on the part of the dealer for which aconsumer cannot be made to suffer.Q5. Does rejection of application for grant of loan by a Bank

constitute deficiency in service for which I can approach theConsumer Court?

A. The Bank has a wide discretion in the matter of grantingloans and advances and continuing disbursement of loanssanctioned .The Consumer Courts cannot sit in judgement overthe discretion exercised by the Bank and as such you will notsucceed in any such action, if taken by you.Q6. The transformer, which was supplying electricity to me, got

burned and was replaced by the department after abouttwo months. However, However I was billed withconsumption charges. Am I liable to pay any such chargeswhen there was no consumption of electricity by me?

A. When the electricity was not supplied and the electricity billsproduced by you showed that there was no consumption ofelectricity by you and admittedly the reason for that was burningof the transformer, you are not liable to pay any minimumcharges.Q7. I had applied for electricity connection. However, power

supply was not provided to me. Can I seek redressal of mygrievance in Consumer Court?

A. Your grievances is that you application for electricity connec-tion was not granted. Electricity may be a service but the hiringof the service is not complete till the Electricity Board sanctionsservice. Hence, you can’t approach a Consumer Court forredressal of your said grievance. Your remedy is to file a civil suitin the Court of law against the Electricity Board.Q8. Can Consumer Forums adjudicate disputes involving scale

of pay?

A. No, Consumer Forums do adjudicate dispute-involving scaleof pay.Q9. I had applied for subscription in Rajlakshmi scheme of

UTI. The essence of the scheme was that the sum ofmoney deposited with the UTI would grow 21 times in 28years. However subsequently, the UTI extended thematurity date by two years. Can I approach a ConsumerCourt?

A. Unilateral alteration of terms of payment by the UTI in theirabove scheme is “Deficiency in Service” for which you can seekrelief in a consumer court.Q10. My car met with an accident. The insurance claim was

rejected on the ground that my driver was not holdingvalid driving license. Should I approach a Consumer Courtfor seeking the Insurance claim?

A. The Consumer Court will not be able to grant you any reliefsince the driver employed by you did not have a driving license.You were bound under law to check the ability of the personemployed by you and the failure in holding a license for drivingwell debar you from claiming the Insurance Claims.Q11. I had purchased a fridge, which suffered from several

defects, and those defects could not be removed or repairedby the Company. Can I seek redressal of my grievance?

A. You can certainly seek redressal before the Consumer Forum.In a similar case as yours, the Forum appointed a LocalCommissioner who corroborated the version of the complain-ant. It was held by the Forum that the fridge was found to bedefective within the period of warranty. The opposite party wasdirected to replace the unit with a new one.Q12. I filed a complaint before the State Commission regarding

payment of policy amount in death claim, which wasallowed to me by the State Commission. I wish to fileanother complaint claiming the Double Accident Benefit.Can I do so?

A. It is well-settled principal of law that one can not educate thesame cause of action before a court of law or before anotheradjudicating Forum after it had already been adjudicating uponearlier. This is the basis for the relevant provisions under theCode of Civil Procedure, 1908 (CPC) which embody a soundprincipal of law to obviate multiplicity of litigation. Eventhough Consumer Forums are not governed by the CPC yet thesound principles of law and procedure embody in that CPC arefollowed by the Forums. Consequently, second complaint filedon the same cause of action would not be maintainable.Q13. I had applied for allotment for a plot and paid Rs.100 as

registration fees. At the time of draw my name was notincluded. I lodged a complaint before the ConsumerForum, wherein the Housing Board argued that I was nota “Consumer” since no allotment had taken place. What isthe correct position in law?

A. Where the complainant had paid for the cost of applicationform as well as the registration fee, he is the potential user andthe nature of transaction is covered by the expression “serviceof any description”. As such the complaint is maintainable. TheHousing Board is deemed to have undertaken to include yourname in the draw of lots for allotment of a plot. However,


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your application has not been considered because your namewas not included in the draw. The only inference that can bedrawn is that the person who prepared the list was negligent indischarge of his duty. You can proceed on this ground.Q14. My grievance is that I had registered with the M.I.G.

scheme of the Haryana Housing Board and the board hadescalated the price of the flats three times within a periodof two years. Does my case lie within the jurisdiction ofConsumer Forums?

A. It has been laid down that under Consumer Protection Actthe pricing policy of flats cannot be adjudicated upon byConsumer Forums. The question of pricing of the flat byHousing Board is not a Consumer dispute. If any amount hasbeen illegally charged from you by Housing Board , you canrecover the same through a civil court.Q15. A Complainant filed a case against our company who’s

grievance related to transactions dating back to years 1994-95 while the complaint was filed in the year 1999. Is thecomplaint within time?

A. Session 24 A of the Consumer Protection Act, 1986provides a limitation period of two years within which thecomplaint is required to be filed . In the light of the above, thecomplaint is time barred and hence not maintainable.Q16. My grievance is that I am not getting regular supply of

water. What can I do against the concerned GovernmentAuthority before a Consumer Forum?

A. The Government supplying water is performing a statutoryfunctions which can not termed to be rendering of service.Hence the Consumer Forums have no jurisdictions to entertainsuch a complaint.Q17. My grievance is that a Hospital where I was treated

declined to give me the medical records pertaining to mytreatment and operation for Ulcer. Can it be termed adeficiency is service on the part of the hospital?

A. There is no negligence on the part of the hospital by reasonof such failure to supply the said papers unless there was a legalduty cast on the hospital to furnish such documents to thepatients, which has to be seen from their Rules and Regula-tions.Q18. A registered letter sent to me was not delivered. What is

the liability of an employee of the Post Office in thismatter?

A. Section 6 of the Indian Post Office Act 1878 provides thatthe Government shall not incur any liability by reasons of theloss, mis-delivery or delay or damage to any postal article incourse of transmission by post except in so far as such liabilityis made in express terms to be undertaken by the Governmentand no Officer the Post Office shall incur any liability by reasonof such loss, mis-delivery , delay or damage unless he hadcaused the same fraudulently or by his willful act or default. Inview of the said Section 6, your complaint is not maintainableunless there is allegation an of fraud or willful act of negligenceof any postal employee.

Q19. A Superfast Train in which I was travelling was delayed forlong hours without any reason. Can this be a ground forfiling a complaint against the Railways?

A. Additional charges are taken by the Railways from thepassengers travelling by a Superfast Train. If the trains aredelayed for long hours and the delay has not been properlyexplained it amounts to deficiency in service and therefore theRailway is bound to refund the excess charges.Q20. I am a shareholder of HLL. Despite having made all the

payments, the share certificates were delivered very late. Ihave claimed the loss in terms of the escalation in themarket price of the share. Is my claim valid?

A. Share market is a speculative market and there is bound to befluctuation in value of shares of the company depending onmarket condition. Merely because the value of the share wentup you are not entitled to get compensation at the increasedrate, as damages are remote damages.Q21. I had paid the telephone bill but inspite of that the

telephone department disconnect my telephone withoutany notice. Can the department disconnect the telephonewithout notice to the subscriber?

A. Disconnection cannot be effected without notice to thesubscriber. The Department is bound by law to give such anotice. You can seek compensation for the same alongwithrestoration of the connection.Q22. I had bought a scooter in last May, after some months it is

creating problem to me. When I complained to Servicecenter they serviced it and say the problem was removed.But last week it is creating the same problem again. When Icomplained them they return me the Scooter next day andthey say again that the problem was removed. But today itis creating the same problem to me. Can I go to file a casein consumer forum.

A. You can definitely file a case before the Consumer Forumbut the ideal remedy at this stage would be to complain to thecompany i.e. Bajaj Scooters Ltd. against the service center andwait for their response. In case nothing is done even after this,then it will be prudent to file a case in the Consumer Forum.Q23. We have been buying Parag milk packet 500 ml from a

retailer. The packet though gives only 400ml. What actioncan we take against the company.

A. There is clear case of cheating and you can file a criminalcomplaint under Section 421 of the Indian Penal Court. Besidesfiling a Criminal complaint, you can also approach a ConsumerCourt for this purpose. You must collect adequate evidencebefore doing the same, i.e.; retain a sealed packet of Parag Milkwhich indicates the quantity of 500ml but actually weighs400ml.Q24. I had deposited a booking amount with Pal-Peugeot,

letter the same was cancelled but no refund has come sofar, for the last two years. The matter was referred to DelhiConsumer forum who referred to than (Maharashtra)consumer forum. Documents were sent to them but of noavail, again it was sent by us to Delhi as the deposit wasmade to Premnath Motors Delhi but Delhi Consumerforum has again written to follow than.


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A. You should file an appeal before the State Commissionagainst the order of the Consumer Forum. Since the cause ofaction arose at Delhi, i.e.; the Distributor was located at Delhiand money also seems to have been paid at Delhi the DelhiConsumer Forum had the jurisdiction in case the distributors(who work at Delhi) have been made parties to the saidpetition. You should file an appeal against both the manufac-turers as well as the distributors, i.e.; Prem Nath Motors againstthe order.Q25. I purchased on 1.1.2000 from a shop in Panjim, Goa a

bottle of Scotch Whiskey. I find that it is not original inthat it tastes too sweat. It appears to be spurious. I havewritten letters to the MD, Goa Tourism but there is noreply. What remedy is available to me to the relief.

A. You can certainly file a complaint before the ConsumerForum against supply of Spurious Whisky supplied to you aswell as also lodge a Criminal Complaint in this regard. How-ever, the difficulty (which is a major one) is that since the bottleof Whisky has been open, it will be virtually impossible toprove that the contents of the Whisky are the same as they werewhen the bottle was sealed. Since, the legal system is totallybased on evidence / proof, it would not be a worthwhileexercise to institute any legal proceedings in the facts andcircumstances of the present case.Q26. I understand that under the Consumer Protection Act, a

complain has to be made within 2 years from the date onwhich the cause of action arose. What happens in a casewhere the 2 year period has elapsed because the I spent thetime writing(and replying to) to the manufacturer in thehope that he would replace the good? What argument can Igive to the Forum in response to the plea of 2 years whichI know will be taken by the manufacturer?

A. It is correct that the Consumer Protection Act, provides for alimitation period of two years for filing a complaint and thesaid period starts from the date when the cause of action arose.The same is provided under Section 24-A of the ConsumerProtection Act, 1986. However, the Consumer Forum has thepower to entertain a complaint even after the said period in caseit is convinced that the complaint could not be filed within thesaid period on account of certain sufficient cause. Thus youwould have to give a good explanation in order to have thedelay condoned from the Consumer Forum. In case the onlyground pleaded by you is that you were corresponding with theManufacturer and hoping to get the goods replaced, the samewould not be construed as sufficient reasons for condoning thedelay.Q27. Can I claim for replacement. If they do not replace the

vehicle can I move to consumer forum. Who should Imake a party i.e. the dealer, or the LML company or bothof them. The dealer is in Karol Bagh the company office inGreater Kailash and factory’s regd. office in Kanpur inwhich Jurisdiction/Zone should I file the complaint. Orany other detail which you feel Justified to provide me.

A. You should again inform the Company about all the factsand steps taken by them for removing the defect in writing andfurther pursue the matter with the Company and try to get thedefect rectified. In case your efforts fail you can file the complaint

with Consumer Forum at Delhi by making both the Companyand the Dealer as parties to the complaint. Replacement isallowed by Forum if the defect is such that it is not possible torectify the same. Give the Delhi address of the company and filethe complaint at Delhi.Q28. I injured my knee in a game of football on 31st December

1997. It was diagnosed as ACL TEAR. For that I wasoperated upon in the knee on 2nd March 1998. After theoperation my knee developed stiffness, which is unusual insuch cases even after undergoing physiotherapy for twomonths I was unable to bend or straighten my knee. Soafter two months of operation my knee was manipulatedunder anesthesia to relieve stiffness. A plaster was put onthe knee for one month. I was told to start walking . Iused to walk with a limp. For about 8 months I continuedto walk with a limp but then my condition deteriorated &in March-99 I had to start using crutches to move around.To find out the cause of this pain I underwentinvestigative arthoscopy in June-99 which revealed thefollowing 1. ACL Laxity 2. meniscus tear 3. patellofemoralosteoarthritis . I was advised by the doctor to dophysiotherapy, and take painkillers for the pain, I am stilldoing physiotherapy, but neither the pain has reduced noram I able to walk without crutches, this whole experiencehas affected my life badly. Can I sue the doctors fornegligence / inefficiency. My both operations were carriedout in military hospitals, and they were done free of costsince I am serving in army. So I can not go to Consumerprotection court. Please advise?.

A. You can file a writ petition in the High Court of judicatureagainst the hospital, making doctors responsible for yourcondition a party. You can also seek damages alongwith theappropriate action against the doctors and the management inthe writ petition .

References• http://www.vakilno1.com/consumerprotect_qns.htm• http://fcamin.nic.in/cpa.htm• http://www.indiainfoline.com/lega/cptc/ch01.html

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LESSON 39:FEMA AND TRADE AND COPYRIGHTS ACT

Learning ObjectivesAfter reading the lesson, you will be able to know about the:• The brief outline of Fema• The brief outline of Trade and Copyrights Act

IntroductionToday, we will discuss the two Acts as outlined above in briefjust to give you an idea as to the purpose of these Acts and thebrief introduction of these Acts.Let us first talk about FEMA

FEMA (Foreign Exchange ManagementAct)The Foreign Exchange Management Act (FEMA) is a law toreplace the draconian Foreign Exchange Regulation Act, 1973.Any offense under FERA was a criminal offense liable toimprisonment, whereas FEMA seeks to make offenses relatingto foreign exchange civil offenses. Unlike other laws whereeverything is permitted unless specifically prohibited, underFERA nothing was permitted unless specifically permitted.Hence the tenor and tone of the Act was very drastic. Itprovided for imprisonment of even a very minor offense.Under FERA, a person was presumed guilty unless he provedhimself innocent whereas under other laws, a person ispresumed innocent unless he is proven guilty.With liberalization, a need was felt to remove the drasticmeasures of FERA and replace them by a set of liberal foreignexchange management regulations. Therefore FEMA wasenacted to replace FERA.FEMA extends to the whole of India. It applies to all branches,offices and agencies outside India owned or controlled by aperson resident in India and also to any contravention thereunder committed outside India by any person to whom thisAct applies.FEMA contains definitions of certain terms, which have beenused throughout the Act. The meaning of these terms maydiffer under other laws or under common language. But for thepurposes of FEMA, the terms will signify the meaning asdefined there under. Let us take up some of the more impor-tant ones.“Authorized person” means an authorized dealer, moneychanger, off-shore banking unit or any other person for thetime being authorized to deal in foreign exchange or foreignsecurities;“Capital Account Transaction” means a transaction which altersthe assets or liabilities, including contingent liabilities, outsideIndia of persons resident in India or assets or liabilities in Indiaof persons resident outside India, and includes transactions byway of giving guarantees or surety for any debt, obligation orother liability of (1) a person resident outside India or (2) of a

person resident in India and owed to a person resident outsideIndia.“Currency” includes all currency notes, postal notes, postalorders, money orders, cheques, drafts, travelers cheques, lettersof credit, bills of exchange and promissory notes, credit cards orsuch other similar instruments, as may be notified by theReserve Bank;“Currency Notes” means and includes cash in the form of coinsand bank notes;“Current Account Transaction” means a transaction other than acapital account transaction and includes :-

i. Payments due in connection with foreign trade, othercurrent business, services, and short-term banking andcredit facilities in the ordinary course of business,

ii. Payments due as interest on loans and as net incomefrom investments,

iii. remittances for living expenses of parents, spouse andchildren residing abroad,

iv. expenses in connection with foreign travel, educationand medical care of parents, spouse and children;

“Export”, with its grammatical variations and cognate expres-sions, means :-

i. The taking out of India to a place outside India anygoods,

ii. Provision of services from India to any person outsideIndia;

“Foreign currency” means any currency other than Indiancurrency;“Foreign Exchange” means foreign currency and includes :-i. Deposits, credits and balances payable in any foreign

currency,ii. Drafts, travelers cheques, letters of credit or bills of

exchange, expressed or drawn in Indian currency butpayable in any foreign currency,

iii. Drafts, travelers cheques, letters of credit or bills ofexchange drawn by banks, institutions or personsoutside India, but payable in Indian currency;

“Foreign Security “ means any security, in the form of shares,stocks, bonds, debentures or any other instrument denomi-nated or expressed in foreign currency and includes securitiesexpressed in foreign currency, but where redemption or anyform of return such as interest or dividends is payable in Indiancurrency;“Import”, with its grammatical variations and cognate expres-sions, means bringing into India any goods or services;“Indian currency” means currency which is expressed or drawnin Indian .rupees but does not include special bank notes and


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special one rupee notes issued under section 28A of the ReserveBank of India Act, 1934 by the Ministry of Finance.“Person” includes an individual, a Hindu undivided family, acompany, a firm, an association of persons or a body ofindividuals, whether incorporated or not, every artificial juridicalperson and any agency, office or branch owned or controlled bysuch person;

“Person Resident in India” Means

i. a person residing in India for more than one hundred andeighty-two days during the course of the precedingFinancial year but does not include :-(a) a person who has gone out of India or who stays

outside India,i. For or on taking up employment outside India, orii. For carrying on outside India a business or vocation

outside India, oriii. For any other purpose, in such circumstances as would

indicate his intention to stay outside India for anuncertain period;

a. A person who has come to or stays in India, otherwisethan

i. For or on taking up employment in India, orii. For carrying on in India a business or vocation in

India, oriii. For any other purpose, in such circumstances as would

indicate his intention to stay in India for an uncertainperiod;

i. Any person or body corporate registered or incorporated inIndia,

ii. An office, branch or agency in India owned or controlled bya person resident outside India,

iii. An office, branch or agency outside India owned orcontrolled by a person resident in India.

“Repatriate to India” means bringing into India the realizedforeign exchange and

i. The selling of such foreign exchange to an authorizedperson in India in exchange for rupees, or

ii. The holding of realized amount in an account with anauthorized person in India to the extent notified bythe Reserve Bank, and includes use of the realizedamount for discharge of a debt or liabilitydenominated in foreign exchange and the expression“repatriation” shall be construed accordingly:

“Security” means shares, stocks, bonds and debentures,Government securities, savings certificates, deposit receipts inrespect of deposits of securities and units of the Unit Trust ofIndia or of any mutual fund and includes certificates of title tosecurities, but does not include bills of exchange or promissorynotes other than Government promissory notes or any otherinstruments which may be notified by the Reserve Bank assecurity for the purposes of this Act;“Service” means service of any description which is madeavailable to potential users and includes the provision of

facilities in connection with banking, financing, insurance,medical assistance, legal assistance, chit fund, real estate,transport, processing, supply of electrical or other energy,boarding or lodging or both, entertainment, amusement or thepurveying of news or other information, but does not includethe rendering of any service free of charge or under a contract ofpersonal service;“Transfer” includes sale, purchase, exchange, mortgage, pledge,gift, loan or any other form of transfer of right, title, posses-sion or lien.What this Act actually regulates?

Regulation and Management of Foreign ExchangeExcept with the general or special permission of the ReserveBank, no person can :-

a. Deal in or transfer any foreign exchange or foreignsecurity to any person not being an authorized person;

b. Make any payment to or for the credit of any personresident outside India in any manner;

c. Receive otherwise through an authorized person, anypayment by order or on behalf of any person residentoutside India in any manner;

d. Where any person in, or resident in India receives anypayment by order or on behalf of any person residentoutside India through any other person (including anauthorized person) without a corresponding inwardremittance from any place outside India, then, suchperson shall be deemed to have received such paymentotherwise than through an authorized

e. Enter into any financial transaction in India asconsideration for or in association with acquisition orcreation or transfer of a right to acquire, any assetoutside India by any person

Financial transaction means making any payment to, or for thecredit of any person, or receiving any payment for, by order oron behalf of any person, or drawing, issuing or negotiating anybill of exchange or promissory note, or transferring any securityor acknowledging any debt.No person resident in India can acquire, hold, own, possess ortransfer any foreign exchange, foreign security or any immovableproperty situated outside India except with the general or specialpermission of the Reserve Bank.Any person may sell or draw foreign exchange to or from anauthorized person if such sale or drawal is a current accounttransaction. However, the Central Government may, in publicinterest and in consultation with the Reserve Bank, imposesuch reasonable restrictions for current account transactions asmay be prescribed.Any person may sell or draw foreign exchange to or from anauthorized person for a capital account transaction. The ReserveBank may, in consultation with the Central Government, specify

a. Any class or classes of capital account transactionswhich are permissible;

b. The limit up to which foreign exchange shall be admissible for such transactions:


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However, the Reserve Bank cannot impose any restriction onthe drawal of foreign exchange for payments due on account ofamortization of loans or for depreciation of direct investmentsin the ordinary course of business.The Reserve Bank can, by regulations, prohibit, restrict orregulate the following :-

a. Transfer or issue of any foreign security by a personresident in India;

b. Transfer or issue of any security by a person residentoutside India;

c. Transfer or issue of any security or foreign security byany branch, office or agency in India of a personresident outside India;

d. Any borrowing or lending in foreign exchange inwhatever form or by whatever name called;

e. Any borrowing or tending in rupees in whatever formor by whatever name called between a person residentin India and a person resident outside India;

f. Deposits between persons resident in India andpersons resident outside India;

g. Export, import or holding of currency or currencynotes;

h. Transfer of immovable property outside India, otherthan a lease not exceeding five years, by a personresident in India;

i. Acquisition or transfer of immovable property inIndia, other than a lease not exceeding five years, by aperson resident outside India;

j. Giving of a guarantee or surety in respect of any debt,obligation or other liability incurred (i) by a personresident in India and owed to a person residentoutside India or (ii) by a person resident outside India.

A person resident in India may hold, own, transfer or invest inforeign currency, foreign security or any immovable propertysituated outside India if such currency, security or property wasacquired, held or owned by such person when he was residentoutside India or inherited from a person who was residentoutside India.A person resident outside India may hold, own, transfer orinvest in Indian currency, security or any immovable propertysituated in India if such currency, security or property wasacquired, held or owned by such person when he was residentin India or inherited from a person who was resident in India.The Reserve Bank may, by regulation, prohibit, restrict, orregulate establishment in India of a branch, office or other placeof business by a person resident outside India, for carrying onany activity relating to such branch, office or other place ofbusiness.Every exporter of goods must :-

a. Furnish to the Reserve Bank or to such other authoritya declaration in such form and in such manner as maybe specified, containing true and correct materialparticulars, including the amount representing the fullexport value or, if the full export value of the goods is

not ascertainable at the time of export, the value whichthe exporter, having regard to the prevailing marketconditions, expects to receive on the sale of the goodsin a market outside India;

b. Furnish to the Reserve Bank such other information asmay be required by the Reserve Bank for the purposeof ensuring the realization of the export proceeds bysuch exporter.

The Reserve Bank may, for the purpose of ensuring that thefull export value of the goods or such reduced value of thegoods as the Reserve Bank determines, having regard to theprevailing market-conditions, is received without any delay,direct any exporter to comply with such requirements as itdeems fit.Every exporter of services shall furnish to the Reserve Bank orto such other authorities a declaration in such form and in suchmanner as may be specified, containing the true and correctmaterial particulars in relation to payment for such services.Where any amount of foreign exchange is due or has accrued toany person resident in India, such person shall take all reason-able steps to realize and repatriate to India such foreignexchange within such period and in such manner as may bespecified by the Reserve Bank.What if the Contravention of The Act takes place? What are thepenalties for it ?If any person contravenes any provision of this Act, orcontravenes any rule, regulation, notification, direction or orderissued in exercise of the powers under this Act, or contravenesany condition subject to which an authorization is issued by theReserve Bank, he shall, upon adjudication, be liable to a penaltyup to thrice the sum involved in such contravention where suchamount is quantifiable, or up to two lakh rupees where theamount is not quantifiable, and where such contravention is acontinuing one, further penalty which may extend to fivethousand rupees for every day after the first day during whichthe contravention continues.Any Adjudicating Authorityadjudging any contravention may, if he thinks fit in addition toany penalty which he may impose for such contravention directthat any currency, security or any other money or property inrespect of which the contravention has taken place shall beconfiscated to the Central Government and further direct thatthe foreign exchange holdings, if any, of the persons commit-ting the contraventions or any part thereof, shall be broughtback into India or shall be retained outside India in accordancewith the directions made in this behalf.“Property” in respect of which contravention has taken place,shall include deposits in a bank, where the said property isconverted into such deposits, Indian currency, where the saidproperty is converted into that currency; and any other propertywhich has resulted out of the conversion of that property.If any person fails to make full payment of the penaltyimposed on him within a period of ninety days from the dateon which the notice for payment of such penalty is served onhim, he shall be liable to civil imprisonment.No order for the arrest and detention in civil prison of adefaulter shall be made unless the Adjudicating Authority has


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issued and served a notice upon the defaulter calling upon himto appear before him on the date specified in the notice and toshow cause why he should not be committed to the civilprison, and unless the Adjudicating Authority, for reasons inwriting, is satisfied :-

a. That the defaulter, with the object or effect ofobstructing the recovery of penalty, has after the issueof notice by the Adjudicating Authority, dishonestlytransferred, concealed or removed any part of hisproperty ; or

b. That the defaulter has, or has had since the issuing ofnotice by the Adjudicating Authority, the means to paythe arrears or some substantial part thereof and refusesor neglects or has reused or neglected to pay the same.

A warrant for the arrest of the defaulter may be issued by theAdjudicating Authority if the Adjudicating Authority issatisfied, by affidavit or otherwise, that with the object or effectof delaying the execution of the certificate the defaulter is likelyto abscond or leave the local limits of the jurisdiction of theAdjudicating Authority.Where appearance is not made pursuant to a notice issued andserved, the Adjudicating Authority may issue a warrant for thearrest of the defaulter.A warrant of arrest issued by the Adjudicating Authority mayalso be executed by any other Adjudicating Authority withinwhose jurisdiction the defaulter may for the time being befound.Every person arrested in pursuance of a warrant of arrest shallbe brought before the Adjudicating Authority issuing thewarrant as soon as practicable and in any event within twenty-four hours of his arrest (exclusive of the time required for thejourney). However, if the defaulter pays the amount entered inthe warrant of arrest as due and the costs of the arrest to theofficer arresting him, such officer shall at once release him.When a defaulter appears before the Adjudicating Authoritypursuant to a notice to show cause or is brought before theAdjudicating Authority, the Adjudicating Authority shall givethe defaulter an opportunity showing cause why he should notbe committed to the civil prison.Pending the conclusion of the inquiry, the AdjudicatingAuthority may, in his discretion, order the defaulter to bedetained in the custody of such officer as the AdjudicatingAuthority may think fit or release him on his furnishing thesecurity to the satisfaction of the Adjudicating Authority for hisappearance as and when required.Upon the conclusion of the inquiry, the Adjudicating Authoritymay make an order for the detention of the defaulter in the civilprison and shall in that event cause him to be arrested if he isnot already under arrest. However in order to give a defaulter anopportunity of satisfying the arrears, the Adjudicating Author-ity may, before making the order of detention, leave thedefaulter in the custody of the officer arresting him or of anyother officer for a specified period not exceeding fifteen days, orrelease him on his furnishing security to the satisfaction of theAdjudicating Authority for his appearance at the expiration ofthe specified period if the arrears are not satisfied.

When the Adjudicating Authority does not make an order ofdetention, he shall, if the defaulter is under arrest, direct hisrelease.Every person detained in the civil prison in execution of thecertificate may be so detained ;-

a. Where the certificate is for a demand of an amountexceeding rupees one crore, up to three years, and

b. In any other case, up to six monthsHowever he shall be released from such detention on theamount mentioned in the warrant for his detention being paidto the officer-in-charge of the civil prison.A defaulter released from detention shall not, merely by reasonof is/release, be discharged from his liability for the arrears, buthe shall not be liable to be arrested under the certificate inexecution of which he was detained in the civil prison.A detention order may be executed at any place in India in themanner provided for the execution of warrant of arrest underthe Code of Criminal Procedure, 1973.Any such contravention may, on an application made by theperson committing such contravention, be compounded (i.e.fine paid in lieu of imprisonment) within one hundred andeighty days from the date of receipt of application by theDirector of Enforcement or such other officers of the Director-ate of Enforcement and officers of the Reserve Bank as may beauthorized in this behalf by the Central Government in suchmanner as may be prescribed.Where a contravention has been compounded, no proceedingor further proceeding, as the case may be, shall be initiated orcontinued, as the case may be, against the person committingsuch contravention, in respect of the contravention so com-pounded.What are the adjudication authorities and where the appeal canbe filed?

Adjudication and AppealFor the purpose of adjudication, the Central Government may,by an order published in the Official Gazette, appoint as manyofficers of the Central Government as it may think fit, as theAdjudicating Authorities for holding an inquiry in the mannerprescribed after giving the person alleged to have committedcontravention, against whom a complaint has been made areasonable opportunity of being heard for the purpose ofimposing any penalty.However where the AdjudicatingAuthority is of opinion that the said person is likely to abscondor is likely to evade in any manner, the payment of penalty, iflevied, it may direct the said person to furnish a bond orguarantee for such amount and subject to such conditions as itmay deem fit.No Adjudicating Authority shall hold an enquiry except upon acomplaint in writing made by any officer authorized by a generalor special order by the Central Government.The said person may appear either in person or take theassistance of a legal practitioner or a chartered accountant of hischoice for presenting his case before the Adjudicating Authority.Every Adjudicating Authority shall have the same powers of acivil court and :-


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a. All proceedings before it shall be deemed to be judicialproceedings within the meaning of sections 193 and228 of the Indian Penal Code;

b. Shall be deemed to be a civil court for the purposes ofsections 345 and 346 of the Code of CriminalProcedure, 1973.

c.Every Adjudicating Authority shall deal with the complaint asexpeditiously as possible and endeavor shall be made todispose off the complaint finally within one year from the dateof receipt of the complaint. However, where the complaintcannot be disposed off within the said period, the AdjudicatingAuthority shall record periodically the reasons in writing for notdisposing off the complaint within the said period.The Central Government shall, by notification, appoint one ormore Special Directors (Appeals) to hear appeals against theorders of the Adjudicating Authorities under this section andshall also specify in the said notification the matter and places inrelation to which the Special Director (Appeals) may exercisejurisdiction.Any person aggrieved by an order made by the AdjudicatingAuthority, being an Assistant Director of Enforcement or aDeputy Director of Enforcement, may prefer an appeal to theSpecial Director (Appeals).Every appeal must be filed within forty-five days from the dateon which the copy of the order made by the AdjudicatingAuthority is received by the aggrieved person and it shall be insuch form verified in such manner and be accompanied by suchfee as may be prescribed. However, the Special Director (Ap-peals) may entertain an appeal after the expiry of the said periodof forty-five days if he is satisfied that there was sufficient causefor not filing it within that period.On receipt of an appeal, the Special Director (Appeals) may aftergiving the parties to the appeal an opportunity of being heard,pass such order thereon as he thinks fit confirming, modifyingor setting aside the order appealed against.The Special Director (Appeals) shall send a copy of every ordermade by him to the parties to appeal and to the concernedAdjudicating Authority.Every Special Director (Appeals) shall have the same powers ofa civil court and :-

d. All proceedings before it shall be deemed to be judicialproceedings within the meaning of sections 193 and228 of the Indian Penal Code;

e. Shall be deemed to be a civil court for the purposes ofsections 345 and 346 of the Code of CriminalProcedure, 1973.

The Central Government shall, by notification, establish anAppellate Tribunal to be known as the Appellate Tribunal forForeign Exchange to hear appeals against the orders of theAdjudicating Authorities and the Special Director (Appeals)under this Act.The Central Government or any person aggrieved by an ordermade by the Adjudicating Authority or Special Director(Appeals), may prefer an appeal to the Appellate Tribunal.

However, any person appealing against the order of theAdjudicating Authority or the Special Director (Appeals) levyingany penalty, shall while filing the appeal, deposit the amount ofsuch penalty with such authority as may be notified by theCentral Government. Where in any particular case, the AppellateTribunal is of the opinion that the deposit of such penaltywould cause undue hardship to such person, the AppellateTribunal may dispense with such deposit subject to suchconditions as it may deem fit to impose so as to safeguard therealization of penalty.An appeal to the Appellate Tribunal must be filed within aperiod of forty-five days from the date on which a copy of theorder made by the Adjudicating Authority or the SpecialDirector (Appeals) is received by the aggrieved person or by theCentral Government and it shall be in such form, verified insuch manner and be accompanied by such fee as may beprescribed. The Appellate Tribunal may entertain an appeal afterthe expiry of the said period of forty-five days if it is satisfiedthat there was sufficient cause for not filing it within thatperiod.On receipt of an appeal, the Appellate Tribunal may, after givingthe parties to the appeal an opportunity of being heard, passsuch orders thereon as it thinks fit, confirming, modifying orsetting aside the order appealed against.The Appellate Tribunal shall send a copy of every order madeby it to the parties to the appeal and to the concerned Adjudicat-ing Authority or the Special Director (Appeals), as the case maybe.The appeal filed before the Appellate Tribunal shall be so dealtwith by it as expeditiously as possible and endeavour shall bemade by it to dispose the appeal finally within one hundred andeighty days from the date of receipt of the appeal. Where anyappeal could not be disposed oft’ within the said period of onehundred and eighty days, the Appellate Tribunal shall record itsreasons in writing for not disposing off the appeal within thesaid period.The Appellate Tribunal may, for the purpose of examining thelegality, propriety or correctness of any order made by theAdjudicating Authority in relation to any proceeding, on itsown motion or otherwise, call for the records of such proceed-ings and make such order in the case as it thinks fit.Let us talk about some other miscellaneous provisions in brief.

MiscellaneousWhere any document

a. Is produced or furnished by any person or has beenseized from the custody or control of any person, ineither case, under this Act or under any otherlaw; or

b. Has been received from any place outside India (dulyauthenticated by such authority or person and in suchmanner as may be prescribed) in the course ofinvestigation of any contravention under this Actalleged to have been committed by any person,

and such document is tendered in any proceeding under thisAct in evidence against him, or against him and any other


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person who is proceeded against jointly with him, the court orthe Adjudicating Authority, as the case may be shall :-

a. Presume, unless the contrary is proved, that thesignature and every other part of such documentwhich purports to be in the handwriting of anyparticular person or which the court may reasonablyassume to have been signed by, or to be in thehandwriting of, any particular person, is in thatperson’s handwriting, and in the case of a documentexecuted or attested, that it was executed or attested bythe person by whom it purports to have been soexecuted or attested.

b. Admit the document in evidence notwithstanding thatit is not duly stamped if such document is otherwiseadmissible in evidence.

c. Unless the contrary is proved, the truth of the contentsof such document.

For the purposes of this Act, the Central Government may,from time to time, give to the Reserve Bank such general orspecial directions as it thinks fit, and the Reserve Bank shall, inthe discharge of its functions under this Act, comply with anysuch directions.Where a person committing a contravention of any of theprovisions of this Act or of any rule, direction or order madethere under is a company, every person who, at the time thecontravention was committed, was in charge of, and wasresponsible to the company for the conduct of the business ofthe company as well as the company, shall be deemed to beguilty of the contravention and shall be liable to be proceededagainst and punished accordingly.However any such person will not be liable to punishment if heproves that the contravention took place without his knowledgeor that he exercised due diligence to prevent such contravention.Where a contravention of any of the provisions of this Act orof any rule, direction or order made thereunder has beencommitted by a company and it is proved that the contraven-tion has taken place with the consent or connivance of, or isattributable to any neglect on the part of, any director, manager,secretary or other officer of the company, such director, man-ager, secretary or other officer shall also be deemed to be guiltyof the contravention and shall be liable to be proceeded againstand punished accordingly.The same provisions also apply to a firm or other associationof individuals.Notwithstanding anything contained in any other law for thetime being in force, no court shall take cognizance of an offenceunder FERA and no adjudicating officer shall take notice of anycontravention under section 51 of the repealed FERA after theexpiry of a period of two years from the date of the com-mencement of this Act.If any difficulty arises in giving effect to the provisions of thisAct, the Central Government by order do anything notinconsistent with the provisions of this Act for the purpose ofremoving the difficulty.The Central Government may bynotification make rules to carry out the provisions of thisAct.The Reserve Bank may by notification make regulations to

carry out the provisions of this Act and the rules madethereunder.This was all about the FEMA.Let us now talk of the Trade, Patents and Copyrights Act asprevalent In India.

Trade, Patents and Copy Rights ActThese Acts are covered under the Intellectual Property Rights.

Do you know what is Intellectual Property Rights(IPR)?IPR is a general term covering patents, copyright, trademark,industrial designs, geographical indications, protection of layoutdesign of integrated circuits and protection of undisclosedinformation (trade secrets).

Legislations covering IPRs in India are the Following

Patents: The Patents Act,1970 and was amended in 1999 and2002. The amended Act after the amendments made in 2002came in to force on May 20, 2003.Design: A new Design Act 2000 has been enacted supersedingthe earlier Designs Act 1911.Trade Mark: A new Trademarks Act, 1999 has been enactedsuperseding the earlier Trade and Merchandise Marks Act, 1958.The Act came in force from September 15, 2003Copyright: The Copyright Act, 1957 as amended in 1983, 1984and 1992, 1994,1999 and the Copyright Rules, 1958.Layout Design of Integrated Circuits: The SemiconductorIntegrated Circuit Layout Design Act 2000. (Enforcementpending)Protection of Undisclosed Information: No exclusive legisla-tion exists but the matter would be generally covered under theContract Act, 1872.Geographical Indications: The Geographical Indication ofGoods (Registration and Protection) Act 1999.

Administration of IPRs in the CountryPatents, designs, trademarks and geographical indications areadministered by the Controller General of Patents, Designs andTrade Marks which is under the control of the Department ofIndustrial Policy and Promotion, Ministry of Commerce andIndustry. Copyright is under the charge of the Ministry ofHuman Resource Development. The Act on Lay out Design ofIntegrated Circuits. Will be implemented by the Ministry ofCommunication and Information Technology.Let us now concentrate on the outline of Trade and CopyrightsAct.

CopyrightsIndia’s copyright law, laid down in the Indian Copyright Act,1957 as amended by Copyright (Amendment) Act, 1999, fullyreflects the Berne Convention on Copyrights, to which India isa party. Additionally, India is party to the Geneva Conventionfor the Protection of rights of Producers of Phonograms andto the Universal Copyright Convention. India is also an activemember of the World Intellectual Property Organization(WIPO), Geneva and UNESCO.The copyright law has been amended periodically to keep pacewith changing requirements. The recent amendment to thecopyright law, which came into force in May 1995, has ushered


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in comprehensive changes and brought the copyright law in linewith the developments in satellite broadcasting, computersoftware and digital technology. The amended law has madeprovisions for the first time, to protect performer’s rights asenvisaged in the Rome ConventionSeveral measures have been adopted to strengthen and stream-line the enforcement of copyrights. These include the setting upof a Copyright Enforcement Advisory Council, trainingprograms for enforcement officers and setting up special policycells to deal with cases relating to infringement of copyrights.

Trade MarksTrademarks have been defined as any sign, or any combinationof signs capable of distinguishing the goods or services of oneundertaking from those of other undertakings. Such distin-guishing marks constitute protect able subject matter under theprovisions of the TRIPS Agreement. The Agreement providesthat initial registration and each renewal of registration shall befor a term of not less than 7 years and the registration shall berenewable indefinitely. Compulsory licensing of trademarks isnot permitted.Keeping in view the changes in trade and commercial practices,globalization of trade, need for simplification and harmoniza-tion of trade marks registration systems etc., a comprehensivereview of the Trade and Merchandise Marks Act, 1958 was madeand a Bill to repeal and replace the 1958 Act has since beenpassed by Parliament and notified in the Gazette on 30.12.1999.This Act not only makes Trade Marks Law, TRIPS compatibilitybut also harmonizes it with international systems and practices.Work is underway to bring the law into force.

Geographical IndicationsThe Agreement contains a general obligation that parties shallprovide the legal means for interested parties to prevent the useof any means in the designation or presentation of a good thatindicates or suggests that the good in question originates in ageographical area other than the true place of origin in a mannerwhich misleads the public as to the geographical origin of thegoo. There is no obligation under the Agreement to protectgeographical indications which are not protected in their countryor origin or which have fall en into disuse in that country.A new law for the protection of geographical indications, viz.the Geographical Indications of Goods (Registration and theProtection) Act, 1999 has also been passed by the Parliamentand notified on 30.12.1999 and the rules made thee undernotified on 8-3-2002.

PatentsThe basic obligation in the area of patents is that, invention inall branches of technology whether products or processes shallbe patent able if they meet the three tests of being newinvolving an inventive step and being capable of industrialapplication. In addition to the general security exemption whichapplied to the entire TRIPS Agreement, specific exclusions arepermissible from the scope of patent ability of inventions, theprevention of whose commercial exploitation is necessary toprotect public order or morality, human, animal, plant life orhealth or to avoid serious prejudice to the environment.Further, members may also exclude from patent ability of

diagnostic, therapeutic and surgical methods of the treatmentof human and animals and plants and animal other thanmicro-organisms and essentially biological processes for theproduction of plants and animals.The TRIPS Agreement provides for a minimum term ofprotection of 20 years counted from the date of filing.India had already implemented its obligations under Articles70.8 and 70.9 of TRIP Agreement.A comprehensive review of the Patents Act, 1970 was alsomade and a bill to amend the Patents Act, 1970 was introducedin Parliament on 20 December, 1999 and notified on 25-6-2002to make the patent law TRIPS compatible.


Sultan Chand and Sons, New Delhi.• http://www.vakilno1.com• http://www.saarclawnet.com/saarclawnet/osca20.html• http://dipp.nic.in/ipr.htm

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LESSON 40:

Group Discussion on the Intellectual Property Rights.

Notes: