VENKATESWARA ACADEMYCHARTERED ACCOUNTANCY – COMMON PROFICIENCY TEST

MERCANTILE LAWSTUDY MATERIAL PREPARED BY

N.VENKATESWARAN. B.Sc.,FCA.,ACS.,CAIIB.,AMIMA.01/02/2009

CHAPTER – I – INTRODUCTIONLAW is a set of Rules framed and enforced by Government in the process of administration of justice to the public.

It include Rules, Regulations, Guidelines, Principles etc to regulate the relationship between public and the State and among public themselves.

It is that “body of principles recognized and applied by the State in the administration of justice” – SALMOND

It causes to issue orders regarding what is right and what is wrong. It can be implemented either through legislation or through practice. [Law of Equity, Law of

custom, Banking Law and Practice] It classified into CIVIL LAW and CRIMINAL LAW

MERCANTILE LAW is that part of CIVIL LAW which is framed to regulate Trade and Commerce in a society. It is also known as Commercial Law. It creates rights and obligations arising out of commercial transactions and also regulates them.

LAW OF CONTRACT – CONTRACT ACT 1872.It is the most important segment of Mercantile Law.It is that part of the law which deals with the general principles of –

1. Formation of contracts,2. Legal requirement of a valid contract,3. Performance of contract,4. Breach or non-performance of contract,5. Remedies for breach of contract,6. Discharge of contract7. Special types of contracts [Bailment, Pledge, Guarantee, Indemnity etc].

It applies to whole part of India except Jammu & Kashmir.While contractual rights are “Rights in Personam” [Rights enforceable only by one party to the agreement against the other party to that agreement-A is entitled to receive a sum of money from B. This right can be enforced only by A and not by others. This is “Right in Personam”] the rights to property are “Rights in rem” [Rights in respect of an asset or property. A owns a property. A’s right of possession is not only against his neighbour but against the whole world. This is “right in rem”. ]

Salmond says “Law of Contract is neither the whole law of agreements nor the whole law of obligations. It is the law of those agreements which create legal obligations and those obligations which have their sources in agreements.” There are several social agreements which do not give rise to legal obligations and certain obligations which do not arise from agreements-Torts or civil wrongs; Quasi contracts, Court decrees.

CONTRACT – Definition – Sec 2(h) – “Contract is an agreement enforceable by law”. Contract = Agreement + Legality/ obligationFrom the above definition it is clear that two important ingredients of contract are:

1.An agreement 2. That agreement must be enforceable by law.According to HALSBURY “A contract is an agreement made between two or more persons, which is intended to be enforceable by law and is constituted by acceptance by one party to an offer made to him by other party, to do or abstain from doing some act.AGREEMENT – Definition – Sec 2(e) [Agreement = Offer + Acceptance]Agreement is defined as “Every promise and / or set of reciprocal promises forming the consideration for each other”.PROMISE – Definition – Sec 2(b) Promise = accepted proposalPromise is defined as “a proposal when accepted, become promise”.PROPOSAL – When a person signifies to another his willingness to do or abstain from doing anything with a view to obtain the assent of the other to such act or abstinence, he is set to make a proposal. Agreement is an accepted proposal An agreement can be social or legal, A social agreement is not a contract and hence not enforceable in Court of Law, Agreements which are legal are enforceable in Court of Law, Hence, all contracts are agreements but all agreements are not contracts. Only those agreements

which are enforceable under law are contracts.ACCEPTANCE – When the person to whom the proposal is made signifies his assent there to, the proposal is said to be accepted. Only when the proposal is accepted it becomes promise.SUMMARY.There must be an offer or proposal from one person to the other,That other must accept such offer knowingly that such an acceptance will become agreement and give rise to a contract,But an agreement will become contract only if it is legally enforceable,But to be legally enforceable, the agreement has to pass through certain conditions as per Contract Act 1872,Such conditions are known as “Essential Elements of a Valid Contract”As per section 10 of the Contract Act, “All agreements are contract if they are made by the free consent of parties competent for a lawful consideration and with a lawful object and are not expressly declared to be void.”Essential elements of a valid contract are:

1. Offer and acceptance [Consensus ad idem],2. Intention to create legal relationship,[Balfour Vs Balfour (1919)]3. Lawful consideration,[Nudum Pactum]4. Parties competent to contract,[minor, lunatic]5. Free and genuine consent,[coercion, undue influence]6. Lawful object,[illegal, immoral, opposed to public policy]7. Agreement not declared as void or illegal,8. Certainty of meaning,9. Possibility of performance,[magic]

10. Necessary of legal formalities,[registration]FROM THE ABOVE FOLLOWING SITUATIONS ARISES:1.Offer and Acceptance: There must be at least two parties to an agreement, one of them making an offer known as “offeror” and the other accepting it known as “offeree”.‘A’ offers to sell his house for Rs.5lacs. ‘B’ makes a counter offer to buy that for Rs.4 lacs. A keeps silent. B send a cheque for Rs.4lacs and demand sale of that house. As there was no consensus on price this is not an agreement and hence can’t be a contract.2.Legal Relationship: Parties to the agreement must intend to create a legal relationship in case one party to the agreement fails to fulfill his obligations. [ Balfour couple went on a holiday to London from Ceylon. After vacation Mr.Balfour returned to Ceylon leaving his wife at London for medical reason. He promised to pay £30 per month and did so for few months and stopped. Wife sued for payment of arrears but the court held it is not justiciable as it was only family arrangement and not intended to be enforced through legal remedies.] [Weeks Vs. Taybold,(1905) Rose and Frank co Vs Crompton Bros.- In this case the agreement contained a clause “this agreement is not a formal or legal agreement and shall not be subject to legal jurisdiction. It was held that it is not a contract as there was no legal obnligation.]3.Lawful Consideration: Consideration is counter offer and it need not be in cash or kind. It may be an act or even abstinence. It is a promise to do or not to do something. It may be past, present or future. It must be real and legal.NUDEM PACTUM means a promise not supported by any consideration ( i.e. a bare promise), and hence not enforceable by law.4.Competency of Parties to the Contract: According to Sec11 of the Contract Act “Every person is competent to contract who is of the age of majority, who is of sound mind and is not disqualified from contracting by any law to which he is subject”.As per this section following persons are incompetent to contract:

1. A minor,2. A person of unsound mind,3. A person expressly declared as disqualified to enter into a contract under any law

[Insolvent, Lunatic, Idiot, Drunkard etc.]5.Free Consent: According to section 13 “Two or more parties are said to consent, when they agree upon the same thing in the same sense”CONSENSUS-AD-IDEM means the identity or agreement of mind between the parties to the agreement. It emphasizes that parties to the contract must agree upon the subject matter of the contract in the same manner, sense and at the same time.Under sec.14, the consent is said to be free, when it is not induced by:

1. Coercion, 2. Misrepresentation,3. Fraud,4. Undue influence,5. Mistake.

6.Agreement not declared as void or illegal: Void agreement is one without any legal effects. Illegal agreements are expressly or impliedly prohibited by law.7.Unlawful Object: When the object of the agreement is Illegal, immoral, opposed to public policy it is unlawful.8. Certainty of Meaning: As per Sec29 of the Act, “Agreements the meaning of which are not certain or capable of being made certain are void.”

9. Possibility of Performance: Any agreement which involves an act which is impossible of performance legally or physically is unenforceable. [A agrees with B to discover treasure by magic]10. Necessary of legal formalities: Contracts of Sale, mortgage, lease, gift of immovable assets, negotiable instruments are to be in writing and registered.11. Agreements not declared to be void or illegal: Sec 24 – 30 declares that agreements that are expressly declared void are not contracts.[Agreement in restraint of trade, marriage or legal proceedings.]Void ab initio: Agreement which is legally not enforceable even at the time of entering itself is called void –ab –initio.

TYPES OF CONTRACTS:Valid contract : An agreement enforceable by law. It refers to an agreement which fulfill all essentials of sec10.Un enforceable contract: It is a contract which is otherwise valid but can not be enforced due to technical defect.[Under stamped Pronote]Void Contract: A contract which ceases to be enforceable by law becomes void due to supervening impossibility of performance when it ceases to be enforceable.[sec2(j)- contract between to parties of different countries which declared war afterwards.]Voidable Contract: It is an “agreement which is enforceable at the option of one or more of the parties there to but not at the option of the other or others.” [sec.2(i)]A contract becomes voidable if,

1. There is flaw in consent, i.e consent is not free or obtained by undue influence, coercion, misrepresentation or fraud.[ A falsely induces B to buy a factory by giving false production details.]

2. One of the parties to the contract prevents the other from performing the contract,3. Where the person fails to perform his promise within a specified time

Remedy for a voidable contract is to repudiate the contract.It may be noted that only an aggrieved party can repudiate the contract.An aggrieved party can repudiate a voidable contract,

1. Within a reasonable time,2. Before any other person acquires any interest,3. He must restore any benefit derived by him from the other party to the contract.

Legal Necessities: An agreement may be oral or in writing. Where it is to be registered it must be properly registered.DISTINCTION BETWEEN VOID AND VOIDABLE CONTRACT:Through Definition: (1) As per Sec2(j) - A contract which ceases to be enforceable by law becomes void when it becomes so.As per Sec2(i)- Voidable contract is an agreement which is enforceable at the option of of one or more aggrieved parties to the contract but not by others.(2).Nature: A void contract is valid when it is made but subsequently become unenforceable on certain grounds, Grounds on which a contract will become unenforceable:– supervening impossibility, subsequent illegality, repudiation of voidable contract, a contingent

depending upon happening of an uncertain even, when such event becomes impossible.(3).Remedies or Rights: A void contract does not provide any legal remedy; they can not get it performed even if they want it,

Whereas a voidable contract remains valid until it is rescinded. If the aggrieved party does not rescind it within reasonable time, the contract remains valid(4).causes: Contract caused by coercion, undue influence, fraud and misrepresentation are voidable, but in case contract is caused by mistake of fact, it is void.

ILLEGAL CONTACT: It is a contract which the law prohibits from making. The court will not only refuse to enforce such a contract but also the connected contacts.All illegal agreements are void but all void agreements or contracts are not necessarily illegal.Example- contract to commit a crime, contracts which are immoral and opposed to Public Policy are illegal.Void and illegal agreements: sec2(g)- “An agreement not enforceable by law is void”. The reasons for such non enforceability under law is unlawfulness of object and the consideration.Though illegal and void agreements are not enforceable by law they differ as follows:Scope: An illegal agreement is always void but all void agreements need not be illegal. For example an agreement terms of which are not certain is void but not illegal.Effect on collateral transactions: Collateral transactions to a void but not illegal agreement CAN BE ENFORCED whereas in case of illegal agreements even they can not be enforced.Punishment: there is no punishment for parties to a void agreement but parties to an illegal agreement will be punished.Void-ab-initio: Illegal agreements are void-ab-initio Unenforceable contract: Where a contract is good in substance but due to any technical reason one or both parties can not seek legal remedy, it is described as an unenforceable contract. The technical reasons may be (a) not in writing (2) barred by limitation etc.Express contract: a contract which is spoken or written; where a proposal or acceptance is made in words the promise is said to be express.Implied contract: When law implies a contract even though parties never intended the contract is said to be implied contract, i.e. implied by law. As per section 9 of the Act, if a proposal or acceptance is made otherwise than in words, the promise is said to be implied. Wrong delivery creates implied contract even though there is no contract between the original supplier and the receiver of goods.Tacit contract: A contract is said to be tacit when it has to be inferred from the conduct of parties. E.g. sale of auction by hammer or bell.Executed contract – if the consideration for the promise is already performed , then such contract is called contract with executed consideration.Executory contract – if in a contract reciprocal promises or obligation which serves as consideration is to be performed in future.Unilateral contract – it is a one sided contract in which only one party has to perform his promise or obligation. To do or forbear.Bilateral contract – when both parties to the contract are yet to perform their part it is known as bilateral contract.Formal contracts – it includes contract of record and contract under common seal.(a) Contract of record: It is either a judgment of a court or a recognizance.It is an obligation imposed by a court on one in favour of others. It is not a contract in the real sense since it is not based upon any agreement between the parties. E.g. surety for bail.Contract under seal: a contract which derives its binding force from its form alone is known as contract under seal. It is signed, sealed and delivered. It is also called a special contract or deed. Such contracts are said to be completed only if all set formalities are completed. The following contracts must be under seal, Contracts made by company,

Contracts of lease of land for a period more than 3 years,Contracts of transfer of immovable properties, which are to be registered.Simple contracts: Contract which are not formal are simple. These are also known as “parol” contracts. They may be in expressed or implied. All simple contracts must be supported by consideration.

CHAPTER - II - OFFER AND ACCEPTANCE07/02/2009

Offer or Proposal is the starting point of a contract.OFFER – SEC-2(a) “When a person signifies to another his willingness to do or to abstain from doing anything with a view to obtaining the assent of the other to such act or abstinence he is said to make a proposal or offer”Proposal is “one’s willingness to do or not to do.An offer is a proposal by one party to another to enter into a legally binding agreement with him.There must be two parties to an offer – Person who makes an offer – Known as Offeror, Promisor or Proposor. Person to whom the offer is made – Known as offeree or PromiseeVarious types of offer are:-

1. General offer – an offer made to the public in general,2. Special Offer – an offer made to a specific or a definite person,3. Cross Offer – Exchange of identical offer without knowing each others offer or ignorance of

other’s offer. In this case there is no binding contract as one’s offer is not an acceptance of the other’s offer.

4. Counter Offer – It amounts to rejection of original offer and hence results no agreement.5. Standing, Open or continuing offer: An offer kept open for a period for acceptance [Example-

Tender for supply of goods.]6. Express and Implied offer” An express offer is made by word of mouth or writing whereas

implied offer is made by conduct, [Patient to Doctor, Passenger in a bus, Customer in a Restaurant]

7. Conditional offer: An offer to be valid may contain a condition and in that case it has to be accepted as per the condition specified. However no offer can contain a condition that non compliance of which would amount to acceptance.

An offer is different from: (a) A mere statement of intention, (2) An invitation to offer, (3) A mere communication of information, (4) Casual enquiry, (5) A Prospectus, (6) Advertisement.

Offer and an invitation to offer:1. While offer is to get the consent of the other party to whom it is made, an invitation to offer is

made to initiate the offer according to an invitation.2. Offer is made with an intention of performance, if accepted, whereas in case of an invitation to

offer there is no question of performance at that stage.3. Offer is made either in general or is specific to an individual, while an invitation to offer is

always general,4. Offer is a request, while invitation to offer is an information in general,5. In the case of an offer there are two or more parties, while in case of an invitation to offer thee

is only one,6. The object of an offer is to make a contract, whereas in case of invitation to offer no contract is

formed but information is given in general,

7. Communication of an offer is necessary, while there is no question of communication of offer in case of invitation of offer.

ESSENTIALS OF A VALID OFFER : 1. An offer must be capable of creating a legal relationship, [Balfaur v Balfaur]2. An offer must be distinguished from mere statement of intention, [Harris Vs Nichenson]3. An offer must be different from an invitation to receive offer, [price tags, advertisement]4. An offer may be express or implied 5. An offer may be general or specific,[ Mrs.Carlil V Carbolic Soap Ball Co.]6. An offer may be conditional, [Thompson V S.Railway]7. The terms of an offer must be certain, definite and not vague,[Tailor V Porington]8. An offer must be communicate to the other party to whom it is intended, [Lalman Shukla v

Gauri Dutt]9. The offer must be made with a view to get the consent offeree. [Haris V Nichenson]10. Offer should not seek consent through negative action or silence. [Silence is not consent]

Communication of offer: [sec-3]An offer can be communicated in any way which has the effect of presenting before the offeree, the offeror’s willingness to do or abstain from doing something. Thus an offer can be by words, spoken or written, or by conduct. As per sec-4 the communication of an offer is complete when it comes to the knowledge of the person to whom it is made [Offeree]. When a proposal is sent by post, its communication is complete when the letter reaches the person to whom it is made.

LAPSE OF AN OFFER: I t means an end of an offer. An offer must be accepted before I lapses. An offer may come to an end in any of the following ways. Sec-6, of the Act.

1. By communication through notice of revocation,2. By lapse of time,3. By failure to accept the condition precedent,4. By death or insanity of the offeror,5. -By counter offer by the offeree,6. By not accepting the offer, according to the prescribed or usual mode,7. By rejection of offer by offeree,8. By change in law.

ACCEPTANCE:WHEN THE PERSON TO WHOM THE OFFER IS MADE SIGNIFIES HIS CONSENT, SUCH CONSENT IS KNOWN AS ACCEPTANCE.As per sec2(b) “A proposal is said to be accepted, when the person to whom the proposal is made signifies his assent thereto”Acceptance is to offer is what a lighted matchstick to a train of gun powder.An offer when accepted becomes a promise.

1. Acceptance should be absolute and unqualified,2. Acceptance with a variation from offer is not acceptance but a counter offer.3. Acceptance must be communicated to the offeror. Thus an acceptance from an intended offeree

to the unknown offeror is not an acceptance.

4. Acceptance to be in the mode prescribed,[sec-7]. Where no mode is prescribed the acceptance must be in usual or reasonable manner. In case the acceptance is not in the prescribed mode, the offeror may accept or reject it. If he rejects the acceptance then he must inform the acceptor within a reasonable time.

5. Acceptance must be within reasonable time or before the offer lapses.6. Silence is not an acceptance.7. Acceptance can be by conduct also.8. An acceptance can be express or implied.9. the acceptance must show an intension that acceptor is willing to fulfill the terms of the offer,10. Acceptance must be absolute and unconditional.

A general offer can be accepted by any one having the knowledge of offer but a specific offer can be accepted only by the person to whom it is made.Communication of acceptance is complete as against the proposer, when it is put in course of transmission to him so as to be out of power of acceptor to withdraw the same.Communication of acceptance is complete as against the acceptor when it comes to the knowledge of proposer.REVOCATION [SEC-5]: Both offer as well as acceptance can be revoked. As per sec-5 of the Act, “An offer can be revoked any time before its acceptance”RULES AS TO REVOCATION OF OFFER :

1. Revocation of offer should always be express,2. Revocation of offer should move from the offeror,3. Notice of revocation of offer must be given through same channel, by which the original offer

was made,4. Offer can not be revoked once acceptance is complete against the offeror even if the letter of

offer is lost or delayed in transit. [The communication of acceptance is complete as against the offeror when the letter of acceptance is properly posted by acceptor, whereas it is complete as against the acceptor only when it is received by offeror.]

5. The effect of revocation is that both parties free themselves and no longer bound by any obligations to perform under the offer or acceptance as the case may be.

6. In fact, the offer or the acceptance comes to an end by valid revocation.7. Revocation of an offer means “withdrawal or taking back of an offer”

RULES AS TO REVOCATION OF ACCEPTANCE:Revocation of acceptance means withdrawal or taking back of the acceptance by the acceptor.As per sec-5 of the Act, “An acceptance may be revoked at any time before its communication is completed as against the acceptor, but not afterwards. Once the acceptance reaches the proposer, the acceptance can not be revoked”.

CHAPTER – III CONSIDERATION14/02/2009

CONSIDERATION is an essential element of a contract without which no single promise is legally enforceable. It is the foundation for every contract. Law enforces only those contracts which are made for consideration. [ Exceptions are listed in sec25]Consideration is the price agreed to be paid by the promisee for the obligation of the promisor,It is “some right, interest, profit or benefit accruing to the promisor or forbearance, detriment, loss or responsibility given, suffered or undertaken by the promisee” at the request of the promisor.

It means “something in return”.As per sec 2(d) of The Act, “when, at the desire of the promisor, the promisee or any other person has done or abstained from doing or does or abstains from doing, or promises to do or abstain from doing something, such act or abstinence or promise is called a consideration for the promise”.Thus a consideration must be:-

At the desire of the promisor, Promisee or any other person, Has done an act or abstinence or promise to do (i.e. past, present or future), Consideration need not be adequate but must be real, The promisor may or may not derive any benefit from the consideration given by the promisee. Performance of an act by a person who is legally bound to perform the same can not be

consideration for a contract, When a person promises to do more than he is legally bound to do so, such a lawful promise is

a consideration, Consideration must not be unlawful, immoral or opposed to public policy.

ESSENTIALS OF A VALID CONSIDERATION:1. Consideration must move at the desire or request of the promisor, [A sees B drowning

and saves his life; B can’t demand any payment because A did not seek his service.] case – DURGAPRASAD Vs BALDEO(1880)

2. Consideration may be from promisee or third party, even a stranger,[CASE LAW-CHINNAYYA Vs RAMAYYA – Gift by mother to daughter with an annuity to uncle]. In English Law consideration must move either from promisee or at the desire of the promisor.]

3. Consideration may be past, present or future,[ In English Law consideration must be present or future and can’t be past]

4. Consideration need not be adequate, [Where, in an agreement the consent of the promisor has been freely given, the inadequacy of the consideration will not render it invalid]

5. Consideration must be real and not illusory i.e. competent and of some value,6. Consideration may not be real because of (i) Physical impossibility, (ii) Legal

impossibility, (iii) Uncertainty, (iv) Illusory consideration.7. Consideration must be something which the promisor is not already bound to do – it is

because the performance of a pre existing obligation is no consideration.8. Consideration must be lawful. The consideration to an agreement is unlawful if it is –- Forbidden by law,- If permitted it will defeat the provisions of any law,- It is fraudulent,- If it involves or implies injury to any person or property of another,- Immoral or opposed to public policy or unlawful.

STRANGER TO A CONSIDERATION:Under Indian law even a stranger to the consideration can also enforce the contract even though he is only a beneficiary under the contract, which is not the case in English Law. [Case Law-CHINNAYYA Vs RAMAYYA (1882)]. In Indian Law consideration may move from a stranger but not so under English Law.

STRANGER TO A CONTRACT:Provisions Relating to Suit by a Third Party on an Agreement:As per English law, consideration must move from promisee and not from a third party; but in Indian law consideration may move from promisee or any other person. It means, a person can sue on a contract even if the consideration for the promise moves from a third party.Normally only a party to the contract can sue for its fulfillment.In English law a stranger to a contract can not sue on the contract because third party consideration is not permitted under that law;Under Indian law even third party to a contact has a right to sue if consideration flows from a stranger.As per general provisions of law only a party to a contract can sue for performance of other party. The exceptions to this law are:

1. In case of a trust, beneficiary can sue though he is not a party to the original contract, (Settlor and the Trustee are the party to the trust deed and beneficiary is not party to the contract);

2. Members of a family in case of a written settlement even though they are not party to the settlement;

3. Female member of a family for her marriage expenses;4. Assignee under a contract of assignment,5. In case of an estoppels by acknowledgement of liability or part performance there of, i.e. when

one admits it;6. In case of covenants on land deals,7. Contract entered by an agent can be enforced by the principal.

WHEN AN AGREEMENT WITHOUT CONSIDERATION IS VALID? OR Exception to the Rule-“No Consideration means no contract.”Sec 25 deals with exception to the Rule that agreement without consideration are void:As per this section in following cases agreement without consideration is valid:

1. Natural love and affection [sec.25 (1)],- An agreement without consideration will be valid if it is in writing, registered as per law, made on account of natural love and affection between parties standing in near relationship to each other. All these essentials must be present and not only one or other.

2. Compensation for voluntary services [sec.25 (2)], - finder of the lost goods- The Act is done voluntarily for the promisor and the promisor has agreed to compensate the person.

3. Promise to pay time barred debt [sec.25 (3)], - it must be in writing and signed by the promisor or his agent.

4. Completed gifts [explanation to Sec.25(1)],5. In case of agency [Sec.185],6. Guarantee made without consideration [Sec127]7. Remission – to receive less that what is due [Sec-63]

CHAPTER – IV OTHER ESSENTIAL ELEMENTS OF A CONTRACT21/02/2009

We have already seen that under Sec.10 of the Act, that an agreement to be a contract has to fulfill the following conditions also namely,

1. There must be free consent of parties,2. There must be consensus ad idem,3. There must be an intention to create legal relationship,

4. Parties must be competent to contract,5. Contract must be for lawful object supported by lawful consideration,6. And it should not have been expressly declared as void by law.

PERSONS COMPETENT TO CONTRACT:As per sec.11 of the Act, a person who complies with following conditions is competent to contract.

1. A minor i.e. a person who has not completed 18years of age [as per Indian Majority Act ix of 1875. But where a Guardian has been appointed by court under Guardian and Wards Act 1890 where the minor’s properties are managed under court supervision then he is minor till he completes 21 years.]

2. Person of sound mind at the time of making the contract [he is capable of understanding it and forming a rational judgment as to its effect upon his interest. A person usually of unsound mind but occasionally of sound mind can enter into a contract when he is of sound mind. So also a person usually of sound mind but occasionally of unsound mind can not enter into a contract when he is of unsound mind.]

3. Person who is not disqualified from contracting.[a bankrupt or insolvent]Position of Minor’s agreement.

1. An agreement entered into by a minor is altogether void against the minor. [Reason being that a minor is incapable of giving a promise imposing a legal obligation. CL: MOHORI Vs. DHARMO DAS GHOSE(1903). But this decision is no more in vogue and the present position is that if a guardian, on behalf of minor enters into an agreement for the benefit of minor, it is enforceable].

2. Minor can be a promise or beneficiary [Minor admitted to the benefit of partnership u/s.30 of Partnership Act. The infancy of one party to the contract does not affect other’s liability]

3. Minor can always plead minority. [In case of borrowing by a minor falsely representing that he is major or of full age, he can still plead minority and escape liability. But in case he had mortgaged or sold assets misrepresenting his full of age, then the lender or the buyer must be compensated.]

4. Ratification on attaining majority is not allowed. [A minor borrows on executing a promissory note. He attains full of age and execute another promissory note in place of the one already executed. The fresh one is also void, because there is no consideration. CL-Arumugan Vs. Duraisinga]

5. A person who supplies necessities of life to a minor or to whom the minor is legally bound to support, is entitled for reimbursement from minor’s property.[sec-68]}

6. Contract by guardian on behalf of minor is enforceable according to circumstances.7. No estoppels against a minor. Where a minor misrepresent his age and enters into a contract

still he can’t be made liable to the contract.8. No specific performance except in certain cases.9. Liability for torts [civil wrong] 10. No insolvency- a minor can’t be declared insolvent as he can’t contract debt.11. Minor can be an agent but he will not be liable to his principal for his acts. But he can deliver

and endorse negotiable instruments without himself being liable.12. Minor can’t bind parent or guardian. The parents will be liable only when the child is acting as

agent of parents.13. Where the contract is entered jointly by a minor and adult, the adult alone will be liable on the

contract.

14. Surety for a minor is liable to third party as if it is a direct contract.15. Minor through his guardian become a shareholder by transfer or transmission and not by direct

application.16. Minor is liable for his necessaries.

CONTRACT BY PERSON OF UNSOUND MIND:IDIOTS, LUNATICS AND DRUNKERED are persons of unsound mind.

Persons of unsound mind are those who are not capable of understanding it and forming a rational judgment as to its effect on his interests.

The liability for necessaries of life supplied to persons of unsound mind is also same as for minors.

Unsoundness of mind may arise from Idiocy, lunacy or insanity, drunkenness, Hypnotism and Mental decay.

CONTRACT BY DISQUALIFIED PERSONS: A person declared as “disqualified proprietor” can not enter into any contract related to

property. An alien enemy, during war, can’t enter into a contract with an Indian subject. A company can not enter into a contract which is ultravires its Memorandum. Municipal bodies are disqualified from contracts which are not within their statutory powers. Sovereign States, Ambassadors and Diplomats can not be proceeded against in Indian courts. Insolvents during his period of insolvency, Convicts until they are discharged or freed from punishment, Professional-Lawyers and Doctors in England or prohibited from entering into a contract for

their fees. But in India this is not applicable.

CHAPTER – V - FLAW IN CONSENT.28/02/2009

FREE CONSENT:As per section 13 of the Act “two or more persons are said to have consented when they agree upon the same thing in the same sense.”

1. When there is fundamental error as to the nature of the transaction, or to the person dealt with, or as to the subject matter of the agreement, they can not be said to have consensus ad idem.

2. When there is no consensus ad idem then there is no consent and hence there is no contract.3. Consent can be free or not free. Agreement with free consent will only result in valid contract.4. Consent is said to be free when it is obtained without coercion, undue influence, fraud

misrepresentation or mistake.[sec.14]5. When the consent is not free due to mistake, the agreement is void.6. In all other cases when consent is not free, the contract is voidable at the option of the party

whose consent was obtained by other means.ELEMENTS VITIATING FREE CONSENT:

COERCION: As per sec.15 of the Act, “ Coercion” is the committing, or threatening to commit any act forbidden by the Indian Penal Code (sec45 of IPC) or the unlawful detaining or threatening to detain any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.

An agreement induced by coercion is voidable and hence can be enforced only by the person coerced and not by the person who used coercion.[sec-19]

A person to whom the money has been paid or anything delivered under coercion, must repay or return it.(section 71)

Leading case is Ranganayakamma Vs Alwar[1889] The act of coercion may even proceed from or against a stranger to the contract ,

Duress and Coercion: In England coercion is known as duress. If the consent is obtained under fear caused by threats

of bodily harm it is known as duress. Hence scope of coercion is wider than duress. Coercion can be directed by or against third party to the contract but duress is caused among

the contracting parties or their family only, Coercion is aimed against person or property but duress is against life or liberty, In case of coercion no immediate violence is necessary but in case of duress there is immediate

violence.

UNDUE INFLUENCE: As per sec.16 of the Act, a contract is said to be induced by “undue influence” where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage of the other. A person is deemed to be in a position to dominate the will of the other, when he holds authority, real or apparent over the other, or when he stands in a fiduciary relation to the other.Examples of such relationships:Father and son / daughter,Solicitor and his client,Trustee and a beneficiary,Doctor and his patient,A person is deemed to be in a position dominate the will of the other if,

1. He holds a real or apparent authority over the other due to relationship;2. He stands in a “fiduciary” relationship, a relationship of mutual trust and confidence;3. He contracts with a person whose mental capacity is affected;

Undue influence is suspected under following situation:1. Inadequacy of consideration,2. Inequalities between parties to the contract,3. Fiduciary relationship exists between parties,4. Pardhanishin women is one of the party,5. Unconscionable [unfair] bargain.

Coercion and Undue influence – difference:1. Coercion is use of physical force but undue influence is by moral pressure.2. Coercion can proceed from or directed against third parties; but undue influence must be due to

the relationship between contracting parties only,3. When consent is given under coercion, the contract is voidable at his option. In case of undue

influence court may set aside or enforce it in modified form.4. Coercion involves criminal act but no such criminality act in undue influence.

FRAUD: Fraud is willful representation with intent to deceive the other to induce him to enter into a contract. As per sec.17 of the Act, “Fraud” means and includes any of the following acts committed by the party to a contract or with his connivance or by his agent with intent to deceive another party thereto his or his agent, or to induce him to enter into the contract.

1. The suggestion, as to a fact, of that which is not true by one who does not believe it to be true,2. The active concealment of a fact by one having knowledge or belief of that fact,3. A promise made without any intention of performing it,4. Any other act fitted to deceive,5. Any such act or omission as to law specially declared to be fraudulent.

Elements of fraud:1. The fraud must have been committed by a party to the contract or with his consent by his

agent. Fraud by stranger to a contract does not invalidate it.Case Law – River Silver Mining Co v. Smith L.R.4.H.L. Director of a company issued a false prospectus to Z on the basis of which Z subscribed to the shares. Contract can be avoided as directors are deemed to be the agents of the company.

2. There must be any one of the five above mentioned ingredients.3. The act of fraud must have been committed with intent to deceive and must actually deceive.

No cause of arises when there is fraud without damage or damage without fraud. The contract becomes void only when these two occur together.

4. The fraud must have been aimed at the other party or his agent and with a view to induce him into the contract. Hence the fraud must have been committed before the conclusion of contract.

5. The other party must have suffered loss.6. A mere silence is not fraud. – “Caveat Emptor” OR buyer beware.- There is no duty to speak in

case of every sale contract and hence mere silence does not amount to fraud. Similarly there is no duty to disclose facts which are within the knowledge of both parties. [Word v. HOBHS.(1878) 4 AC 13 – H sold some pigs to W which were to his knowledge suffering from fever. Pigs were sold ‘with all faults’ and H did not disclose the fact of fever to W. Held there was no fraud.

7. Silence is fraud where:(a)The circumstances of the case cast a duty on the person observing silence to speak – a contract of “uberrimae fidei” (contract of at most good faith). Following contracts fall within this group:Fiduciary relationship, Contracts of insurance, Contracts of marriage, Family settlements, Share allotment.(b) Where the silence itself is equivalent to speech;© Half truth,(d) Change of Circumstances

MISREPRESENTATION:07/03/2009Representation means a statement of fact with regard to an existing fact or some past event which materially induces the formation of the agreement. A wrong representation when made innocently with an honest belief as to its truth by a party without any intention to deceive the other is misrepresentation. [case law – Derry V Peek (1889)]According to sec18, misrepresentation means and includes:-The positive assertion – an absolute, full and clear statement of a fact;

“constructive fraud” – any breach of duty without an intent to deceive, or those cases where a statement when made was true but subsequently before it was acted upon, became false to the knowledge of the person making it.Mistake as to the substance – Mistake must have been such that there is a difference between the thing obtained and the thing bargained.Essential requirements of Misrepresentation:1. There should be a representation or assertion,2. Must relate to the matter of fact that has become untrue,3. It was made before completion of transaction and with a view to induce the other into the contract,4. Other party must have acted upon it,5. It must have been made by either the party or his agent.Consequences of Misrepresentation: The aggrieved party has following options –

May rescind the contract, Affirm the contract and insist on the misrepresentation being made good; He may rely on the misrepresentation, as a defense to an action on the contract;

Difference between misrepresentation and fraud:1. A false statement with intention to deceive is fraud; a false statement without that intention to

deceive is misrepresentation;2. In case of misrepresentation, party had the means of discovering the truth is a good plea, but in

case of fraud the contract is voidable.3. In case of fraud the affected party can claim damages which is not available in case of

misrepresentation;4. Fraud is a criminal action but misrepresentation is not;5. Fraud is of many types but misrepresentation is not.

MISTAKE Mistake is an erroneous belief about something.Mistake may be of two types – Mistake of Law and Mistake of Fact.Mistake of law is of THREE kinds-

1. Mistake of general law of the country,2. Mistake of foreign law,3. Mistake of private rights on a property or goods.

In case of mistake of general law of the country, the contract is binding since ignorance of law is not an excuse. As per sec21 “a contract is not voidable because it was caused by a mistake as to any law in force in India.”In case of mistake of foreign law and private rights of a party, it is to be treated as mistake of fact. Hence the agreement will be void only in case of bilateral mistake. MISTAKE OF FACT: SEC.20“Where both parties are under a mistake as to a matter of fact, essential to the agreement, the agreement is void.” Mistake of fact in the minds of both parties negatives consent and hence there is no consensus ad idem and the contract become void.Following four conditions must be fulfilled for a contract to be void under mistake:

1. Mistake is to the formation of the contract;2. Mistake is of both the parties;3. Mistake of fact and not of law;4. Mistake is about a fact essential to the agreement.

Any erroneous opinion about the price of the thing is not deemed to be a mistake as to a matter of fact.

BILATERAL MISTAKE:I. Mistake as to subject matter:-

1. Mistake as to the existence of the subject-matter as on the date of contract - the contract is void.

2. Mistake as to the identity of the subject- matter – the contract is void. Even if the mistake is caused by a third party the contract is void. Case Law – Henkel V Hope.

3. Mistake as to the price of the subject – matter. If there is a genuine mistake as to the price of a good for sale the contract is void.

4. Mistake as to the quantity of subject-matter: If the difference between the quantity ordered and sold the contract is void.[ Henkel Vs Pope. Three rifles ordered but 50 rifles supplied.]

5. Mistake as to the quality of the subject-matter: It does not affect the validity unless it is a mistake of both parties. But if the mistake is fundamental it is void.[example- the horse for sale is cart horse but buyer thought it as race horse.

II. Mistake as to the possibility of performing the contract:- Physical impossibility – Agreement is void. [case law-Griffith Vs Brymer – room booked but

coronation procession already cancelled.] Legal impossibility – Agreement is void.

UNILATERAL MISTAKE: Sec.22 – If one party alone is under a mistake of fact, the contract is not voidable. Where the unilateral mistake is fundamental and affects the character of the contract, the innocent party is freed from liability.Case of unilateral mistake where the contract would be void:Mistake as to the nature of contract – Blind or an illiterate man signing the document read over to him wrongly.Mistake as to the identity of the person contracted with – [case law- Cundy Vs Lindsay – A person ordering for goods to Lindsay by forging the signature of a big firm, getting the goods on credit , selling it to Cundy collected the money and ran away without paying Lindsay. Held Cundy has to return the goods to Lindsay he had no title to the goods.]

CHAPTER – VI. LEGALITY OF OBJECT AND CONSIDERATION . 14/03/2009

According to Sec23 “an agreement of which the object or consideration is unlawful is void.” Sec 26,27,28 and 30 of the Act deals with such situations.An agreement is unlawful in the following cases:

1. If it is forbidden by law;2. If it is of such a nature that if permitted it will defeat the provisions of any law;3. If it is fraudulent;4. If it involves or implies injury to the person or property of another;5. If the court regards it as immoral;6. If the court regards it as being opposed to public policy under following circumstances:

a) Trading with enemyb) Stifling prosecution – Preventing proceedings already initiated in the court from

running their normal course or to prevent the compromise of a prosecution is illegal and void. A pro note executed as consideration for compounding charge of grievous hurt is void. But an agreement for compounding of a compoundable offence is not void. A compromise agreement is made before any complaint is filed, it would not amount to stifling prosecution.

c) Maintenance and Champerty: Maintenance is an agreement whereby a person promises to maintain [finance] a suit in which he has no interest. Champerty is an agreement whereby a person assist another in litigation in exchange of a portion of the proceeds he will win in that case. In case of English law both are illegal. In India both are valid and not opposed to public policy unless unreasonable or made with a malicious motive.

d) Traffic relating to public office,e) Agreements tending to create interest opposed to duty,f) Agreements of marriage brokerage,g) Agreements tending to create monopolies,h) Agreements to influence elections to public offices,i) Agreement in restraint of personal liberty,j) Agreements interfering with marital duties.

As per Sec 28 of the Act, where the consideration or object of the agreement is unlawful in part, If the unlawful part is not separable, than whole agreement is void; If the unlawful part is separated from lawful part, then lawful part is enforceable and the

unlawful part is void.

CHAPTER VII - VOID AGREEMENT14/03/2009

As per Sec 2(g) “an agreement not enforceable by law is void.Only those agreements which fulfill the essentials laid down U/S.10 are enforceable by law.

An illegal agreement is forbidden by law, but a void agreement is not prohibited under law; In case of an illegal agreement, even the collateral transaction is not enforceable but in case of

void agreement collateral agreements are enforceable. [e.g. lending money to meet a loss in wager agreement and financing a smuggling activity.]

The following agreements are expressly declared void by the Act:1. Agreements made by incompetent parties [Sec-11]2. Agreements made under mutual mistake of fact – Bilateral mistake [Sec-20]3. Agreement, the consideration or object of which is unlawful.[Sec-23]4. Agreements made without consideration. [Sec-25]5. Agreements in restraint of marriage of any person other than a minor.[Sec-26]6. Agreements in restraint of trade subject to following exceptions: [Sec-27]

Statutory exceptions : Once there is a sale of goodwill the buyer of goodwill may enforce on the seller a reasonable restraint on his doing the similar business within reasonable area or period.Under Partnership Act 1932:

1. Any Partner may be restrained from doing similar to the business of the firm, [Sec 11(2)]2. An outgoing partner may be restricted from doing similar to the business of the firm within a

reasonable area or time.[Sec-36(2)]3. At the time of dissolution of the firm, some or all partners may agree not to carry on the firm’s

business for a reasonable time or within local limits.[Sec-54]4. Any partner who has sold his share of goodwill in firm’s business or accepted his share of

goodwill.[Sec-55(3)] Exceptions under the common law:

During employment between employer and employee – any such restraint is allowed only during the period of employment and not after cessation of employment unless the restraint is to protect employer’s goodwill and trade secrets.

Through Trade Agreements of Trade Associations for mutual benefit and not to create any monopoly.

Agreements in restraint of legal proceedings when they are referred to “arbitration” or “to sue in a particular court only.”[Sec-28]

UNCERTAIN AGREEMENTS [Sec-29] ;- “An agreement the meaning of which is not certain or capable of being made certain is void” An agreement with ambiguity in the wording – agreement to sell at concessional rate without mentioning the concession.An agreement to agree in future is void.

WAGER AGREEMENTS: Sec-30.Wager means a ‘bet’; it is a promise to give money or money’s worth upon the ascertainment of an uncertain event.Wager agreements are void; No suit will lie for recovery of money won on any wager.To be a wager, following conditions must be fulfilled:

1. There must be a promise to pay money or money’s worth;2. Promise must be conditional on an event happening or not happening;3. There must be uncertainty of event-past, present or future.4. Each party must stand to win or lose;5. There must be a common intention to bet;6. Parties should not have any other interest except for stake.

Effect of transactions collateral to wager: Except in Gujarat and Maharashtra, where wager is illegal and void, in all other places it is only void and not illegal. Hence except in those two states in other places collateral transactions to wager are enforceable.

Lottery: It is illegal and punishable u/s.294A of the Indian Penal Code.

INSURANCE CONTRACTS are not wager even though the object of these contracts is uncertain because they are based on insurable interest. In insurance contract, the insured has insurable interest on the asset insured but in a wager the parties should not have any other interest except the stake. Any insurance contract without insurable interest is void as it is a wager.

CHAPTER – VIII. CONTINGENT CONTRACTS22/03/2009

As per Sec 31 “A contract to do or not to do something if some event collateral to such contract does or does not happen”. It is a conditional contract in which performance become due only on the happening or non happening of some event which is of uncertain nature.Example – A contracts to pay B Rs.10,000/- if B’s house is destroyed by fire. A contract to pay a sum of money after a fixed time or on the death of a person is NOT a

contingent contract because these two are certain to happen. All insurance contracts except “Life Assurance” are contingent contract.

The event on which the performance of the contract is made to depend must be collateral to the contract. The event must be unessential to nature of the matter covered by the contract.

A contingent contract differs from a reciprocal promise as it creates obligation on one side only.

Essentials of a contingent contract:1. It must be a contract to do or not to do something,2. It must depend on the happening or non-happening of an uncertain future event,3. The event must be collateral or incidental to the contract.

A contingency dependent on the mere will and pleasure of one of the parties is not enough.RULES REGARDING CONTINGENT CONTRACTS:

1. Contingent contracts to do or not to do anything, if an uncertain future event happens, can not be enforced by law unless and until that event has happened; (Sec-32)\

2. Any contingent contract depending on the happening of an event can be enforced only on the happening of such an event. If that event becomes impossible of performance the contract becomes void. Once that event has happened that contract has become absolute.

3. Contingent contract based on uncertain future event does not happening, then such contract can be enforced only when such future event becomes impossible of happening and not before (Sec-33).

4. If the future event on which a contract is contingent upon how a person will act at an unspecified time the event shall be considered to become impossible when such person does anything which renders it impossible to do the specified future event within a definite time.(sec-34)

5. When a contract is made contingent on the happening of an uncertain event with in a fixed time, it becomes void when the time expires before that event happens or that the said event becomes impossible of happening with in the said fixed time.(sec-35)

6. A contract contingent upon an uncertain event not happening within a fixed time may be enforced when the fixed time has expired before that event has happened or it has become certain that the event will not happen.

7. Agreements are void when they are contingent on impossible events, whether or not the fact is known to the parties at the time when the contract is made.(sec36)

DIFFERENCE BETWEEN A WAGER AND A CONTINGENT CONTRACT:1. In a wagering contract there is a mutual promise but in a contingent contract mutual promises

are not necessary.2. In a wagering contract the parties must contemplate the determination of the uncertain event

but in contingent contract the future event is merely collateral to the contract;3. In wagering contract neither party intends to perform the contract but in contingent contract

parties intend to perform their respective obligations;4. Wagering contracts are void u/s.30 but contingent contracts are good unless they are bad in

law;5. In wagering contract the parties have no other interest except their stake but in contingent

contracts parties have interest in the occurrence or non occurrence of the event.6. In wagering contract there is a sense of contingency; in contingent contract there is no sense of

contingency.

CHAPTER – IX – PERFORMANCE OF CONTRACTS.22/03/2009

Performance of a contract consists in doing or causing to be done what the promisor has promised to do A contract is said to be performed when parties make “Actual Performance” or “Attempted Performance or offer to perform”. As per sec 37 of the Act, the parties to the contract either (i) perform their respective obligations or (ii) offer to perform the same, unless (iii) such performance is dispensed with or (iv) excused under this Act or any other law. A contract is said to performed through, (i) Actual performance or (ii) Attempted performance or offer to perform. Offer of performance is also known as “Tender”.Where a promisor has made an offer of performance and the offer has been refused, the promisor is not only not responsible for non-performance but also can sue the promisee for breach of contract.ESSENTIALS OF A VALID TENDER: [SEC38]

1. It must be unconditional [tender with a request for an acknowledgement is valid].2. It must be made at a proper time and place,3. Where no time is fixed it is reasonable to make the tender at any reasonable time.4. A person to whom the tender is made must have reasonable opportunity for inspection of the

goods.5. A tender must be whole and not of the part.6. A tender must be in the proper form,7. A tender must be to a proper person,8. Tender for delivery of the goods must be for the quantity and quality as stipulated in the

contract.9. A tender made to the one of the several joint promisees has the same legal consequences as a

tender to all of them, Effect of refusal to accept a tender [sec38]:Where a tender by a promisor is not accepted by the promisee,The promisor is not responsible for the non performance ; nor does he thereby lose his rights under the contract.CONTRACTS WHICH NEED NOT BE PERFORMED:

1. If the both parties to the contract agree for novation, rescission or alteration, the original contract need not be performed. [sec62]

2. If the promisee dispense with or remit the performance by the promisor in total or in part or extend the time for performance or accept any accord and satisfaction then the contract need not be performed,[sec63]

3. When a voidable contract is rescinded,[sec64]4. Where the failure of performance has been caused by promisee’s neglect or refusal.[sec67]

BY WHOM THE CONTRACT MUST BE PERFORMED:1. By the promisor himself, where his personal performance is essential;2. By the agent, where promisor’s personal skill is not essence of contract;3. By the representative,4. By the third person, if the promisee accepts such performance.

WHO CAN DEMAND PERFORMANCE ? Only the promisee or his agent can demand performance. In certain cases third person can to the contract can also demand performance.

TIME AND PLACE OF PERFORMANCE [SEC-46-50]:1. Where no time limit is fixed it must be done within a reasonable time,2. When it is to be performed on a particular day, then it must be performed on that day during

the usual business hours and at a place at which it is to be normally performed;3. Where the promise is to be performed only after the application by the promisee, the promisee

is bound to apply for the performance at proper time and place and within the usual hours of business [sec48].

4. Where no place is mentioned for performance, the promisor has to apply to promisee for fixing the place of performance and perform it at that place.[sec49]

5. A contract should be performed in the manner and at the prescribed time in the contract.[sec50]TIME AS THE ESSENCE OF THE CONTRACT:As per law, one who does not perform in full his own promise within the time specified can not maintain any action for the enforcement of a return promise [sec55]When time is the essence of the contract: The party has to perform his promise within the specified time failing which the contact become voidable at the option of the other party. The intention to make the time essence of the contract must be expressed in a very clear language. Time is always considered essence of the contract in the following cases:

1. Where the parties have expressly provided,2. Where delay operates as an injury,3. Where the party seek permission for extension of time

TIME IS NOT THE ESSENCE OF THE CONTRACT:When time is not the essence of contract, the promisee is not entitled to avoid the contract even if the promisor fails to perform it within the stipulated time.ACCEPTANCE OF PERFORMANCE OUT OF TIME: When the promisee accepts the performance at any time other than agreed time, it is treated as acceptance and the promisee can not demand any compensation for the delay unless at the time of such acceptance he gives notice to the promisor of his intention to do so.DEVOLUTION OF JOINT RIGHTS AND RESPOSIBILITIES:[SEC42-45]

1. If two or more persons have made joint promise, all of them must jointly perform the promise. If one of the joint promisor has died than his legal heirs along with other promisors or if all the promisors have died the legal representatives of all the promisors must jointly perform unless otherwise stated n the contract.[sec42]

2. In case of joint promisors, the promisee is entitled, in the absence of a contract to the contrary, to compel any one or more of the joint promisors to perform the promise. Thus in case of a joint promisors the liability to perform is joint and several. [sec-43]

3. When one of the several joint promisors have performed the whole of the promise, he is entitled to claim equal contribution from the other promisors.

4. If a joint promisor makes default in such contribution the remaining promisors must share the loss equally. This right of contribution exits between co-sureties also.

5. A release of one of the joint promisors by the promisee does not discharge the other promisors.[sec44]. Under English law discharge of one of the joint promisors will release all the joint promisors.

6. In case of joint promisees, all of them jointly or in case of death of any one or more, the legal representatives of deceased promisees together with other surviving promisees can jointly demand the performance. If some only join and demand performance, their suit is liable for dismissal[sec45]

PERFORMANCE OF RECIPROCAL PROMISE:Promises which form the consideration or part of the consideration for each other are known as reciprocal promises. Rules as regard to the performance of reciprocal promises are:-Simultaneous reciprocal promises are known as mutual and concurrent. As per sec51 both promises are to be performed simultaneously and one need not perform his part unless the other is also ready to perform.Conditional reciprocal promises: Where order in which the reciprocal promises are to be performed in a set order then it shall be performed in that order; when no order is fixed it shall be performed in their natural order.[sec52]When one party prevents the other from performing, the contract become voidable at the option of the party so prevented and he is entitled for compensation for any loss from the other party.Sequential reciprocal promises implies that the promisor who has to fulfill the first promise can not demand the performance of the other to perform unless he complete his promise first. He must also compensate the other party for his own non performance.[sec-54]Reciprocal promises when one is legal and the other is illegal, and if the legal part is separable from the illegal part, than the legal part is only enforceable. If both parts are not separable, than the whole contract is void.[sec57]In case of Alternative Promises, one part is legal and the other being illegal only the legal part is enforceable. [sec58]APPROPRIATION OF PAYMENTSWhere there are several debts and the payment made by the debtor is insufficient to meet the entire debt, the question arises as to which debt is to be appropriated first.Appropriation is the right given to the debtor for his benefit.Appropriation by debtor [sec59]: The debtor has a right to appropriate it either expressly or by implication towards any debt due to his creditor. Where debtor does not make any direction, the intention may be inferred from the nature of transaction.Appropriation by creditor.[sec60]: If the debtor does not give any direction, the creditor has the option to appropriate the amounts to the satisfaction of any legally and undisputed debt, even though such debt may be time barred debt. The creditor is entitled to appropriate payments in the manner most advantageous to him. Appropriation once made can not be altered.Appropriation by law [sec60]: Where neither party makes an appropriation, the payment shall be appropriated in the chronological order not withstanding some of them are time barred debts. Where all the debts are of equal standing, the payments will be equally distributed.Principal and interest: When the principal and interest are due, the debtor can decide that particular payment to be appropriated towards the principal, keeping the interest due. If the creditor accepts the payment, he has to accept the debtor’s appropriation. But if the payments are made without appropriation from debtor, the creditor can apply the payment first to interest and then to principal.Assignment of contract: Assignment means transfer. Assignment of contract stands for transfer of contractual rights and liabilities by a party to the contract to the some one who is not a party. On assignment an assignee can bring an action on his own initiative. The Act has no specific provisions dealing with assignment of contracts. The common rule as to assignment is:(i) Assignment can be by an act of parties or by operation of law. (ii) Contracts involving personal performance can not be assigned, (iii) Obligations under a contract can not be assigned with out the consent of the promisee, (iv) The creditor can assign the rights to any one, (v) Assignment by operation of law takes place due to death or insolvency of parties.

CHAPTER X. DISCHARGE OF CONTRACT04/04/2009

A contract is discharged when the rights and obligations created by it are extinguished.The various modes in which a contract may be discharged are:

1. Discharge by agreement. (sec 62,63)2. Discharge by operation of law;3. Discharge by breach, (sec 39)4. Discharge by performance, (sec 37, 38)5. Discharge by impossibility, (sec56)6. Discharge by lapse of time.

I.DISCHARGE BY AGREEMENT;A contract can be discharged with out performance by means of an agreement between parties.NOVATION: When a new contract, either between the same parties or between new parties, is entered into, to substitute the old contract, it is novation. The consideration for the new contract is the discharge of the old contract. Unless there is an extinguishment of all rights and obligations under the old contract, there is no novation. The old agreement should be valid and enforceable and when it become unenforceable the old one will revive. Essentials of novation are: (i) consent of all the parties to the old contract. (ii) New one is capable of being enforceable by law; (iii) new contract must be made before the expiry of the old contract.ALTERATION: It means a change in one or more terms of the contract made with the consent of all the parties. In alteration there is only a change in the terms of the contract and not in the parties. Alteration with the consent of all the parties discharges the original contract.RESCISSION: (sec-64) If all the parties to the original contract agree to rescind it, the original contract is discharges. Rescission means the cancellation of the contract. Discharge by rescission requires mutual consent and consideration. Rescission results in dissolution of the contract. A contract can be rescinded by (i) Mutual consent, (ii) By the aggrieved party in case of a breach of contract by the other party, (iii) By the party whose consent is not free.REMISSION: It means acceptance of lesser degree of performance than what was due under the contract. It is a unilateral act of promisee discharging the obligation of another. Indian law there is no need for fresh consideration for remission but in English law a person can not remit unless there is consideration for the fresh promise.WAIVER: It means abandonment of right. To constitute waiver there is no need for agreement or consideration. ACCORD AND SATISFACTION: Accord means to accept less than what is due under the old contract. Satisfaction means the fulfillment of the smaller obligation. An accord alone is not enforceable; but an accord followed by satisfaction discharges the pre existing obligation.(sec-63)

II.DISCHARGE BY PERFORMANCE.On the performance of the obligation undertaken by the parties, the contract is automatically discharged. If one party only performs, he alone is discharged and acquires a right of action against the other who is guilty of breach. Where a party has offered to perform the promise, but he was prevented by the other, he will be deemed to have performed the promise.

III.DISCHARGE BY OPERATION OF LAW: 1. On Insolvency, the rights and liabilities of the insolvent are transferred to the Official assignee

or the Official receiver.2. On Merger, the liabilities are merged with another and greater right is in position.3. Any material Alteration in a written contract made without the consent of the other has the

effect of discharging the other. “Material Alteration” is an alteration which significantly changes the rights and liabilities of the parties to the contract.

4. On Death of the promisor, where his personal performance is the essence of the contract, the contract is discharged.

IV.DISCHARGE BY BREACH:If any party fails to perform his obligations, there is a breach of contract. A breach of contract is actual or anticipatory. Actual breach of contract takes place when a person does not perform his obligations when it is due OR when one of the party perform, the other party alleges that it is not a proper performance as per terms of contract and such breach is of essential condition of contract. In such actual breach the contract is discharged. Anticipatory breach of contract involves refusal by the promisor to perform his part before the due date of performance. It is the premature destruction of the contract rather than a failure to perform. Consequences of anticipatory breach:To treat the whole contract as broken and to claim damages even though there is still time to perform the contract;To treat the contract as still alive and wait till the expiry of time period stated in the contract and then hold the other party responsible for failure. But if promisee elects this, the contract is still in force for the benefit of both parties and if some supervening impossibility of performance happens, the promisor is also entitled to take advantage of that situation. [Avery v Bowden(1856)]Measure of damages for Anticipatory breach: If the contract is ended immediately, the damage will be measured by the difference of price prevailing on the date of breach and the contract price;If the contract is kept alive, the damage will be the difference between the contract price and the price prevailing on the due date fixed for performance as per the contract.In case of an anticipatory breach, the aggrieved party may claim damage for breach, but he has to make good to the other party the benefits he might have received under the contract.

V.DICHARGE BY IMPOSSIBLITY OF PERFORMANCE:Impossibility of performance may appear on the face of the contract OR may exist unknown to the parties at the time of making the contract OR may arise subsequently after the contract is made.Agreements which are impossible on the face of the contract are void because Law does not compel the impossible.If, however, the promisor alone knows the impossibility then existing, the contract become voidable, and he is bound to compensate the promisee for any loss he may suffer on account of non performance of the promise.DOCTRINE OF FRUSTRATION: (sec-56) FRUSTRATION means the discharge of a contract rendered impossible of performance by external causes beyond the contemplation of the parties . Such impossibility should not be self

induced by the promisor. [Example- an actor contracts to perform for many days but could not do so on few days due to illness].Instances Covered Under the Supervening Impossibility of Performance:

1. A contract may become impossible of performance after the due date by:-2. Destruction of the subject matter,[case law-TAYLOR V CALDWELL(1863)- If the subject

matter of the contract is destroyed the contract is discharged]. But where only a part of the subject matter of the contract is destroyed and such destruction does not absolve the promisor from performing the balance part, he has to complete such balance part.

3. Death or personal incapacity,4. Change of law- subsequent impossibility created by change in law,5. Non-existence or non-occurring of a particular state of things,[ case law- KRELL V

HENRY (1903) – If a contract depends on the occurrence of an event, which does not in fact happen the contract is discharged, - hotel booking for viewing king’s coronation procession].

6. Declaration of war,

EXCEPTION TO THE PRINCIPLE OF SUPERVENING IMPOSSIBILITY:1. Difficulty of performance,2. Commercial impossibility,3. Impossibility due to failure of third person on whose work the promisor relied,4. Self induced impossibility,5. Failure of one of the object,6. Strikes, Lock-outs and Civil disturbances,

EFFECT OF IMPOSSIBLITY OF PERFORMANCE:Contract become void [sec-56(1) AND 56(2)]Benefit to be restored [sec65]Compensation for non-performance[sec-56(3)- this clause provides that a contract may be void due to impossibility of performance and yet compensation may be payable by the person who knows but hide it from the other.]

VI.DISCHARGE BY LAPSE OF TIME:Limitation Act 1940 lays down the time limit for every type of contract to be performed. A money debt gets time barred after 3 years. A mortgaged debt gets time barred after 12 years and so on. Thus if a contract is not performed and no legal action is initiated by the promisee within the period of limitation, he is deprived of his remedy at law and the contract is discharged by lapse of time.

CHAPTER XI. QUASI CONTRACTS.11-04-2009

In an ordinary contract, the parties make actual promises knowing fully well that legal relationship will come into existence. But sometimes there is no intention on the part of the parties to enter in to a contract but obligations resembling those created by contract are imposed by law. This is termed as quasi-contract.1. A quasi-contract is not in fact a contract at all, but merely resembles one and produces

similar effect.2. It is a contract implied by law.

3. Quasi-contracts are not founded on actual promises but created by circumstances.4. The aggrieved party is placed in the same position as if the actual contract exists on the

footing that such obligations must be fairly compensated. 5. The basis of quasi-contract is to prevent unjust enrichment out of other person’s loss.

CASES OF DEEMED QUASI-CONTRACTS:1. Claims for Necessaries Supplied [sec-68] – Necessary suited to the conditions of life of

minor, lunatic and their dependants- The goods supplied are necessary and not already possessed by him- The claim is only against their estate and not personally against them. The term necessary items is not confined to goods only and include education, house etc. The obligation under this section is to pay a reasonable price and not the agreed price. Similarly creditors are entitled to the value of the necessaries but not the interest there on.

2. Payment by an Interested Person [sec 69] – A person, who is interested in the payment of money which another is bound to pay by law to pay and who, therefore, pays it, is entitled to be reimbursed by the other.[ Payment of property tax by tenant ] The payment must be bona fide. If he has no interest in such payment, he ca not claim protection.

3. Obligation of a person enjoying benefit of non gratuitous act [sec-70] – Where a person lawfully does anything or delivers him any thing not intending to do so gratuitously, and such other person enjoys the benefit there of, the latter is bound to make compensation or restore the thing so done or delivered.[case law- Damodar Mudaliar V Secretary of State for India.(1894)- sec70 is not based on contract but embodies the equitable principles of restitution and prevention of unjust enrichment. It has no application to persons incompetent to contract. This section applies as much as to corporations and Governments as to individuals.

4. Responsibility of finder of goods,[sec -71] – A person who finds goods of another is subject to the same responsibility as a bailee. He can not appropriate the goods without taking proper steps to find out the owner. The finder of the goods is entitled to retain the goods against the owner until he receives the compensation from him. He is also entitled to the possession of the goods as against the whole world except the true owner. He can enjoy the goods if (i) the thing found is in danger (ii) The owner can not be found out, (iii) where the owner is found but he refuses to pay lawful charges of the finder and such charges amount to two-third of of the value of the thing found. [case law – Hollins V Fowler –employee picked a diamond ring from shop floor and gave it to shop owner and demanded it later when he could not find the true owner even after reasonable search.]

5. Money paid by mistake or under coercion[sec72]: - A person to whom money or a thing has been paid or delivered by mistake or under coercion must repay or return it. Payment by mistake here must refer to a payment which was not legally due. Mistake must be as to the existence of the obligation and not merely as to some collateral matter. Mistake must be either of a fact or law.[case law- Sales Tax Officer v Kanhaiya Lal Mukund Lal Saraf(1959) – If a person pays money to another by mistake or under coercion than money must be repaid to him.

Any person injured by the failure to discharge of a quasi-contract is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and broken his contract.Quantum meruit: What one deserves- it is available only if (i) original contract is discharged and (ii) the claim is brought by party not in default. Damages are compensatory in nature while quantum meruit is restitutory.

CHAPTER XII – REMEDIES FOR BREACH OF CONTRACT.18/04/2009

Both parties to a contract have to perform their obligations. When one of them repudiates to perform his obligations, he is said to have committed breach of contract. In such a case, the law provides the following remedies to the injured party.Cancellation or Rescission: Rescission is the revocation of a contract. When one party commits a breach, the other can treat the contract as rescinded and he is freed from all obligations under the contract. The party rescinding a voidable contract shall if he has received any benefit there under from the other must restore such benefit form whom it is received.[sec64] Also a person who has rightfully rescinds the contract is entitled to a compensation for any damage sustained by him through the non fulfillment of the contract[sec75]. [Example- singer’s contract with a theatre].Rescission will be granted by court only if the contract is voidable and where the contract is unlawful for causes not apparent on its face and the defendant is more to blame that the plaintiff.Rescission will not be granted by court where, (i) the plaintiff has impliedly or expressly ratified the contract; (ii) parties can not be restored to their original position; (iii) third parties have acquired right in good faith and for value; (iv) only a part of the contract is sought to be rescinded and that part is not severable from the rest of the contract.Restitution: sec-65. When an agreement is discovered to be void or when it becomes void, any person who has received any advantage is bound to restore it or make compensation for it.[Example- A sells his horse receive Rs.5000/-. The horse is dead at the time of contract but known only latter. A has to return the money to the buyer.]Specific Performance: This is a discretionary remedy allowed by court only in few cases where,(i) Monetary consideration is not adequate; (ii) Actual damage is not ascertainable.Specific performance will not be granted where, (i) contract needs personal performance; (ii) Damages are an adequate remedy.Injunction: It is an order of the court restraining the wrong doer from doing or continuing the wrongful act. It is usually granted to enforce negative stipulations in cases where damages are inadequate. It is a preventive relief particularly in case of anticipatory breach of contract.[case law-Warner Bros v Nelson.]Quantum Meruit: It means “payment in proportion to the work done”. It arises where a contract, partly performed by one party, has been discharged by the breach of the other party. This right is founded not on the original contract but on the implied agreement to pay for what has been done.Damages: A person who commits a breach of contract must make compensation to the injured party. The amount of damage is compensation in money as a substitute for the promised performance. Awarding damages is to put the injured person in a position as if he would have been if performance has been rendered as promised. The court will compel the party in breach to make good the loss to the other party by paying the damages. The damages are of four kinds:-

1. General or ordinary damages – These arise naturally in the usual course of things of the breach of contract. These are awarded with a view to compensate the injured and not with a view to punish the party at default. It is usually assessed on the basis of actual loss suffered.

2. Special damages- this arise due to the unusual circumstances affecting the injured. The condition is that the special circumstances must be known the party against whom the special damages are claimed and that too at the time of the entering into the original contract and not subsequently.

3. Vindictive or exemplary damages- These are awarded with a view to punish the wrong doer. They are normally awarded only in actions of tort – breach of duty. Generally

exemplary damages are awarded only in case of (i) breach of contract to marry and (ii) breach of contract by a banker having sufficient funds in the customers account but dis honour his cheques.

4. Nominal damages – These are awarded where the injured party has not suffered substantial damages. Where the breach is technical, or the injured has no intention of performing the contract or injured is not able to prove the actual damage or it was more due to the fault of the injured the court will order only nominal damages.

MEASURE OF DAMAGES: The principle on which the damages are awarded is that the injured party must be placed in the same position as he would have occupied if the breach has not taken place.The leading case is – Hadley V. Baxandale.(1854) Unless the special circumstances are brought to the notice of the parties, special damages can not be claimed. Sec.73 dealing with the measure of damage is based on this decision. The rules laid down are as follows:

1. Restitution: The injured party is entitled to be placed in the same position as if the contract had been performed.

2. General Damages: The injured party is entitled to only such damages which arise naturally in the usual course of things as a result of such breach. Such compensation is not to be given for any remote and indirect loss.

3. Special Damages: Where a party claims special damages he must prove that the other party knew that at the time of making the contract that special loss was likely to result from the breach of the contract.

4. Remote Damages: Law normally does not award indirect or remote damages which are not direct consequent flow out of the breach.

5. Performance Obligation: A person who claims damages for a breach of a contract should have performed or ever ready to perform his part of the obligations arising under the contract.

6. Mitigation of Loss: A person who sues for damages for a breach is bound to take all reasonable steps to mitigate (reduce in effect) the loss and can not claim as damages any sum which is due to his own neglect. A plaintiff can not be allowed to accumulate damages by his own inaction.

7. Liquidated Damages: Where the parties already agree about the damages for breach of contract, no additional amount will be awarded.

8. Vindictive Damages: Vindictive or exemplary damages are allowed only in case of breach of contract of marriage or wrongful refusal by the bank to honour the customer’s cheque. Such damages are awarded by way of a lesson or punishment to the wrong doer.

9. Damages in Quasi Contract: Where an obligation created by the quasi contract is not discharged, the compensation is the same as in the case of a regular contract.

10. Difficulty in calculating damages is no ground for refusing damages.PENALTY AND LIQUIDATED DAMAGES: SEC-74

Where the parties provide before hand, the amount of compensation payable may be penalty or liquidated damages. The Indian law does not make any distinction. Sec 74 only states that the court will never allow damages more than what is agreed but it may allow less. As per this sec the injured party can only claim reasonable compensation and will not realize any penalty.Distinction between liquidated damages and penalty:

1. Both are payable on the occurrence of a breach of contract.2. If the sum payable is for in excess of actual damage it is penalty;

3. If the sum expressed is payable on a certain date and a further sum is payable in the event of default, the latter sum is penalty, since mere delay in payment is unlikely to cause damage.

4. The expression used by parties is not final; if the sum is exorbitant, the court will regard it as penalty even if it is termed as liquidated damages.

5. The essence of penalty is stipulation as a terrorem of the offending party. The essence of liquidated damages is a genuine pre estimate of the damage.

6. English law distinguishes between penalty and liquidated damages but no such distinction in Indian law. The courts in India ascertain the actual loss and award the same after ensuring that it does not exceed the already agreed amount.

Rules regarding payment of interest:1. Any stipulation for increased rate of interest from beginning in case of default is penalty;2. In case of stipulation of increased interest from the date of default is treated as penalty if such

rate is unreasonable.;3. Stipulation of payment of compound interest in case of default at the same rate as simple

interest is not penalty but at an increased rate is penalty.4. When in a contract no interest is payable, but interest is payable upon default, the such

stipulation is penalty.5. An agreement to pay interest with a proviso that a reduced rate will be accepted if repayments

are regular is not a penalty.THE SALE OF GOODS ACT 1930

CONTRACT OF SALE OF GOODS.25/04/2009

Sale of Goods Act, 1930 contains 66 sections and came into force from 01/07/1930 and extends to all Sates except J&K.“A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to a buyer for a price”. Here contract means an agreement enforceable by law; Goods means any kind of movable assets other than Money and other Actionable claim. Property means the title or ownership rights; Price means money equivalent payable for the transfer of goods.Sale or Absolute sale: Where the property in the goods is immediately transferred from the seller to the buyer and nothing is left on the part of the seller to perform, there is a sale or absolute sale.Where the transfer of property in the goods shall take place in future or on the fulfillment of certain conditions it is an “Agreement to sell” or a conditional sale. An agreement to sell becomes sale once the condition set for transfer of property is fulfilled and the ownership is transferred.ESSENTIALS OF A CONTRACT OF SALE:

1. A Valid Contract – it must fulfill all conditions of sec10 of Contract Act.2. Two parties – As it is a contract there must be at least two parties to it. Exceptions to this

rule are: In case of sale in execution of decree, the present owner himself can but it. A part owner can sell his part to another owner, A partner may buy goods from his own firm and vice versa, Where a pawnee sells the goods pledged to him, the pawnor may himself buy those goods, Where there is a sale by auction, the seller may reserve the right to make bid and buy own

goods.3. Agreement for the transfer of ownership – There must be an immediate transfer or an

agreement to transfer general property in the goods.

4. Goods – All type of movable assets except money and actionable claims. The seller must be the owner of the goods which he wants to transfer. A debt is not goods as it is only assignable as per Transfer of Property Act but can not be sold. Growing Crops are also goods as it can be severed before sale. Shares and Stocks are also goods. Right in partnership is also goods.

5. Money, Actionable Claims and Immovable Property are excluded from the definition of “goods”

6. Price – For a Valid contract of sale consideration for transfer must be money paid or promised. However the consideration can be partly in money and partly in goods.

7. A contract of sale can be expressed or implied.DISTICTION BETWEEN SALE AND AGREEMENT TO SELL:

PARTICULARS SALE AGREEMENT TO SELLNature Of Contract Executed ExecutoryTransfer Of Property Immediate In future or subject to

completion of conditionsRisk Of Loss On buyer as it passes with the

ownershipOn seller as ownership has not passed.

Consequences Of Breach By Seller to Sell

Buyer may sue for delivery as well as claim damages

Only personal remedy against seller for damages.

Consequences Of Breach By Buyer to Accept the Goods.

Seller may sue only for the price and can not repossess the goods.

Seller can only sue for damages and not for price but can repossess the goods.

Insolvency of the Buyer Seller is bound to deliver the goods and rank for a ratable dividend for the price.

Seller need not part with the goods.

Insolvency of Seller Buyer is entitled to recover the goods as the property of the goods is with the buyer

If the buyer has already paid the price, he can only claim ratable dividend from seller’s estate.

General and Particular Property It creates “Right in rem”. The buyer gets absolute ownership against the whole world.

It creates only “Right in Personam”. The buyer can only sue for breach.

Right of Resale. Seller can not resell even if he is in possession of goods and if he do so the new buyer do not get good title. Original buyer gets the right to sell.

Seller can sell the goods to a new buyer but by doing so he is liable for breach. The new buyer gets good title. Original buyer can not sell the goods as he does not get title.

.The difference between Sale and Bailment are as follows:1. In sale property in the goods is transferred but in a bailment only possession is transferred.2. In sale buyer being the owner, he can deal with the goods in any way, but a bailee can only

deal with the goods according to the directions of bailor.3. Goods once sold are not returned unless there is breach of any condition; bailee must return

the goods to bailor.4. In a sale consideration is price but in bailment the consideration is undertaking to return the

goods.

Sale and Gift – Sale is for price consideration whereas gift is without price consideration.Sale and Barter – where consideration for transfer of goods is delivery of other goods it is barter, whereas consideration for sale is price money or partly in goods and partly in money.Sale and Mortgage –

1. In a sale there is transfer of whole interest in the goods but in mortgage there is transfer of limited interest only.

2. In sale buyer becomes absolute owner but in mortgage ownership still remains with mortgagor,

3. In sale consideration is price but in mortgage consideration is loan amount and securing of the debt.

Sale and contract for work and Labour: Sale involves delivery of goods but a contract for work and labour involves skill and labour by one party and material supplied by another, the delivery of goods being subsidiary or incidental to the contract. Where there is transfer of property for money it is sale; where the substance of contract is exercise of skill or labour it is not sale.DISTINCTION BETWEEN SALE AND HIRE PURCHASE:

PARTICULARS SALE HIRE PURCHASENature of contract Executed contract Executory contractTermination of contract Buyer can not terminate and has

to pay the priceThe hire purchaser can stop payment at any time

Risk of loss due to insolvency of buyer

Seller takes the risk Seller has no risk as he can take back the goods.

Implied conditions and warranties.

A sale is subject to these provisions of the Act.

It is not subject to these conditions of the Act but subject only to the provisions of Hire Purchase Agreement.

Effect of payments. Payment is towards the price of goods.

Payment is towards hire charges.

Resale The buyer can resell the goods even before all installments are paid.

The hire purchaser can sell only after payment of all installments

A contract of sale is made by an offer to buy or sell for a price and completed when such offer is accepted by the other party. A contract of sale may be expressed or implied.Classification of goods – Existing goods, Future goods and Contingent goods.The existing goods can be further divided into – Specific goods, Ascertained goods, Unascertained goods.Existing goods – Goods owned and possessed by the seller at the time of making the contract of sale. “Specific Goods” are those goods which are identified and agreed upon at the time of contract of sale. Goods, merely in an identifiable position, does not make the them specific.“Ascertained Goods” are those goods which are identified after the contract of sale. Here the goods are almost of same type but the buyer has to select keeping in mind the defective pieces.“Unascertained Goods” are those which are not separately identified at the time of contract.“Future Goods” are those goods which are to be produced or acquired by the seller after entering into the contract. The contract for sale of future goods is always an agreement to sell.

“Contingent Goods” are a type of future goods, the acquisition of which by the seller depends upon a contingency which may or may not happen. Examples – Goods to arrive, Future crops, eggs.Goods perishing before the making of contract:Sec-7.Where there is a contract of sale of specific goods and the goods are destroyed without the knowledge of seller before entering into the contract, then the contract is void. If the buyer had the knowledge of the perishing of goods, but not the seller, he but not the seller will be estopped from setting up a contract.Goods perishing before sale but after agreement to sell: Sec-8.It deals with a case where the goods are in existence at the time of making the contract but perish without the fault of either party before the transfer of the property. In this situation performance on either side is excused as from the time of the perishing of the goods.According to sec8, a contract can be avoided on the grounds of impossibility of performance on following conditions:

1. It is an agreement to sell and not a sale,2. Loss must relate to specific goods,3. Goods must have perished before the risk passes to the buyer,4. The perishing was not due to the fault of anyone,

If the specific goods agreed to be sold, subsequently perish, If it is due to the fault of any party, the party in default is liable for non delivery or to pay

for the goods as the case may be, If there is no such fault, If the risk has not passed on to the buyer, the agreement is avoided and the seller is not

liable for non delivery, but has to bear the loss; If the risk is passed on to the buyer, then he must pay for the goods even though it is not

delivered.

PRICE is the money consideration for sale of goods. Sec 9 provides following mode of fixing the price. Price may be expressly provided in the contract, Contract may provide the manner in which the price is to be determined, The price may be determined in the course of dealing between the parties. Price may be fixed by the valuation of third party, The price is to be paid by cash, cheque or draft or letter of credit o bank guarantee or by

any other mode.

CONDITIONS AND WARRANTIES25/04/2009

A statement made before entering into the contract with a view to induce the other party to enter into a contract is known as “Representation”. A representation may be a mere expression of an opinion or commendation by the seller of his goods. Such representation may or may not be a part of the contract. Where it is not a part of the contract it has no legal implications. If it forms an integral part of the contract and the other party relies upon that representation, then it is “stipulation” and such stipulation may be either treated as condition or warranty. [Sec12]“A stipulation in a contract of sale with reference to goods which are subject matter there of may be condition or a warranty”[Sec12(1)]. Some of them are essential to the main purpose of the

contract known as “conditions” whereas others which are only collateral to the main purpose are called “warranties”.

Condition: “A condition is a stipulation essential to the contract, the breach of which gives rise to a right to treat the contract as repudiated”[Sec-12(2)]Essentials of a condition are-

1. It is essential to the main purpose of the contract,2. Non fulfillment of condition causes irreparable damages to the aggrieved party,3. The breach of condition gives a right to the aggrieved party to rescind the contract and

recover damages.Warranties:[Sec-12(3)] “ A warranty is a stipulation collateral the main purpose of the contract, the breach of which gives rise only to a claim for damages but not to a right to rescind the contract and return the goods.”The Essentials of a warranty are-

1. It is only collateral to the main purpose of the contract,2. Its breach causes only damage to the aggrieved party and not defeat the main purpose of

the contract,3. The aggrieved party can only claim damages for the breach of warranty and can not

repudiate the contract.Whether a stipulation in a contract is condition or warranty depends on each case.Stipulation as to time – (1) As to time of payment, (2) As to performance of the contract.Unless it is specifically agreed, stipulation as to time of payment is only warranty.DIFFERENCE BETWEEN A CONDITION AND WARRANTY.

1. Condition is essential to the main purpose of the contract while warranty is only a collateral.

2. Breach of condition gives right to the aggrieved party to repudiate the contract and claim damages whereas the breach of warranty gives right to claim damages only.

3. The aggrieved party may treat the breach of condition as breach of warranty only and merely claim damages but a breach of warranty can not be treated as breach of condition.

4. A buyer can elect to waive the condition and treat the breach of condition as breach of warranty;

5. Where the contract of sale is not severable, and the buyer has accepted he goods or pat thereof, breach of any condition can only be treated as breach of warranty,

6. Where the contract is divisible, the buyer can accept part of the goods and reject the balance.

7. Conditions and warranties can be expressed or implied.IMPLIED CONDITIONS:

1. Condition as to title (ownership) – Sec-14.(1).The seller must have the right to sell. Nobody holds a title superior to that of vendor. (2). Right to sell means not mere possession of defect free title to goods; it also means that the seller should not infringe on the trade mark of other seller.

2. Sale by description (Sec 15) - Where goods are sold by description, implied condition is that goods shall correspond with the description. The word description includes anything said as to quality, fitness place of origin, source of manufacture, mode of packing etc. the seller must supply the goods which answer the description given in the contract. Sale by description includes many situations. (1) Buyer has

never seen the goods and buys the on the basis of description given by the seller. (2) Where buyer has seen the goods but rely not on what he has seen and only on the statement of seller; (3) Packing of the goods also forms part of the description.

3. Sale by sample as well as by description [Sec 15] – Implied condition is that the goods sold must correspond both with the sample as well as with the description.

4. Condition as to quality or fitness – Generally there is no implied condition as to the quality or fitness under a contract of sale. The implied condition as to quality or fitness will operate only if following conditions are fulfilled:

a) The buyer requires the goods for a particular purpose,b) The buyer makes known to the seller the particular purpose,c) The buyer relies on the seller’s skill or judgment,d) The sellers’ business is to sell such goods.e) Where an article is fit for one purpose only and turns out to be unfit for that purpose,

then the condition as to fitness is breached. Where the goods are usable for various purposes, the buyer must inform the seller his specific purpose and if this is not done the buyer will have no remedy merely because it was unfit for his purpose. Leading case – Grant V Australian Knitting Mills LTD(1936)

f) The seller always deals with normal and not with abnormal cases. If a person is buying an article is suffering from an abnormality and it is not made known to the seller, implied condition as to fitness will not apply.

g) Generally where goods are sold under its patent or trade mark name, there is no implied condition as to its fitness for any particular purpose. However where the buyer asks the seller to supply an article by trade name but indicate to seller that he relies on his skill and judgment for its fitness to the purpose on hand, the implied condition as to quality and fitness will apply.

5. Conditions as to merchantability: The implied condition is that the goods sold should be of merchantable quality and the requirements are that (1) the goods are sold by description and (2) the seller deals in the goods of that description. The term merchantable means the goods comply with the description mentioned in the contract. Goods are un merchantable because (1) it has defect in its conditions, (2) it infringes a trade mark, (3) it is unfit for use,(4) its usage is injurious in a way.A seller who deals in goods by description is bound to deliver goods of merchantable quality. Case law – MORELLI Vs FITCH AND GIBBONS(1928). Condition as to merchantability would not be applicable where the buyer has examined the goods and satisfied about its condition. But where the goods have patent defects which could not be discovered with such latent examinations, there is an implied condition that goods are free from patent defects. Another implied condition is that the goods must be wholesome and should be fit for consumption.6. Sale by sample:- The implied condition in case of sale by sample are – (1) bulk will correspond with sample in quality, (2) buyer shall have reasonable opportunity of verifying the bulk with sample, (3) goods shall be free from any defect making them un merchantable.(4) where the contra is severable, buyer can retain the goods which corresponds with the sample and reject the rest. (5)where it is not severable, the buyer can reject the whole or accept the whole and claim for damages for the inferior.

7. Conditions implied by custom or usage of trade: An implied condition as to quality or fitness for a particular purpose may be annexed by custom or usage of trade.[Sec16(3)]

IMPLIED WARRANTIES:1. Implied warranty of quite possession – the buyer shall have the peaceful possession and

enjoyment of the goods sold to him. If there is breach of this warranty, the seller is liable to the buyer in damages.

2. Implied warranty of freedom from encumbrances: -Goods sold by seller must be free from all charges and encumbrances. This warranty is not applicable where it is declared to the buyer about the previous encumbrances.

3. Implied warranties annexed by usage of trade. A warranty as to fitness for a particular purpose may be annexed to the contract of sale by a custom or usage of trade.[Sec-16(3)]

Implied conditions and warranties in a contract of sale may be negatived or varied by (1) express agreement. (2) course of dealing between parties, (3) custom or usage of trade.CAVEAT EMPTOR: “LET BUYER BEWARE”

It is not a part of seller’s duty to give the buyer, an article suitable for a particular purpose unless such purpose is made known to the seller. There is no implied condition or warranty as to the quality or fitness for any particular purpose of goods supplied under a contract of sale.[Sec16]

At common law it is presumed that where the buyer could examine the goods even though he did not, he relied upon his own skill and judgment.

This rule has no application where the seller has undertaken and the buyer has left it to the seller, to supply goods to be used for a purpose known to both parties at the time of the sale.

Exceptions to the rule of caveat emptor [sec16]: 1. Where the buyer relies on the skill and judgment of the seller,2. Where the goods are bought by description, the goods shall be of merchantable quality,3. Where the consent of the buyer was obtained by seller by fraud,4. Where by usage of trade implied conditions and warranties may be annexed by the usage of

trade,

TRANSFER OF OWNERSHIP02/05/2009

Performance by seller in a contract of sale consists of a) Transfer of possession of goods and b) Transfer of property (ownership) in the goods. The transfer of possession is different from transfer of property. When property passes from seller to buyer the following happens:Risk of Loss: The risk of loss also passes along with passing of property in the goods;Only Owner can Sue: Where the goods are destroyed or damaged by third party, only the owner can sue;Insolvency of Buyer or Seller: In such a case the question of rights of Official Receiver taking over of the goods depends up on the ownership in goods at that time.Suit for Price: Seller can sue for the price only when the goods have become the property of buyerTime When Property Passes: [sec-18]Generally the property in goods passes to buyer immediately after sale or at a future time or on the performance of some condition.

Rules Relating to Passing of Property are:In case of unascertained goods no property passes unless and until the goods are ascertained. The individuality of the thing must be established before property in it can pass from seller to buyer.

In Case of Ascertained Goods: In case of sale of specific or ascertained goods, the property in them passes as per the intention of the contracting parties.Rules as to Passing of Property: [sec.20-24]Fundamental rule is that the property shall pass when the parties intend it to pass.

1. In case of Specific Goods in Deliverable State, the property passes to the buyer when the contract is made. It is immaterial that the time of payment and/or the delivery is postponed. The goods are said to be in “deliverable state” if the buyer would under the contract be bound to take delivery.[sec20]

2. Specific Goods not in Deliverable state: where the goods are not in deliverable state, the property does not passes to buyer until the seller put the goods in deliverable state and the buyer has the notice there of.[sec-21]

3. When the Goods are to be measured , tested etc.: When the goods under sale are specific and in deliverable state but still it is to be weighed or measured or tested to do some other thing for ascertaining its price, then the property passes only when such a thing is done and the buyer has the notice of the same.[sec-22]

4. Unascertained goods and its appropriation: Where the goods are unascertained or future goods by description, when the goods are unconditionally appropriated to the contract either by the seller with the consent of buyer or by the buyer with the consent of seller, the property in goods passes to the buyer. It is essential that the appropriation of the goods must take place before the breach of contract by any one. The selection of the goods by one and its adoption by the other converts agreement to sell as sale. The assent may be expressed or implied.[sec-23]

5. Where the seller delivers the goods to the buyer or to carrier to other bailee for the purpose of transmission to the buyer and does not reserve the right to recall or disposal, he is deemed to have unconditionally appropriated the goods to the contract. In this situation the carrier at once become the agent of buyer.

6. Seller is deemed to have reserved the right of disposal or recall to him self (a) if the RR or LR or BL is drawn deliverable the order of himself or his agent.(b) if the seller draw a Bill of Exchange for the price and send it along with RR or LR, property in the goods does not pass to the buyer unless he accepts the Bill of Exchange.

7. Goods Sent on Approval or “On Sale or Return” [Sec-24] – Such a sale is only a conditional sale.

8. Property in the goods passes on to buyer –a) When he signifies his approval or acceptance to the seller,b) Do any other act adopting the transaction; e.g. sells or pledge them to third parties.c) Retains the goods without giving notice of rejection for an unreasonable time;

Passing of risk: Risk prima facie passes with the property. Thus delivery of goods is immaterial.The exception to the general rule that risk passes with the property are: [SEC-26]

a) Where the parties have come to an agreement to the contrary,b) Where the delivery is delayed due to the fault of buyer or seller,c) The rule does not affect the rights and liabilities of the seller or buyer as bailee of goods for

the other even when the risk is passed.

C.I.F.CONTRACT: COST, INSURANCE AND FREIGHT.Seller has to pay for cost, insurance and freight. Price quoted includes all these expenses. The property in the goods under CIF contract passes to the buyer as soon as the goods are shipped, unless the seller retains a right of disposal. All CIF contracts are sale by description.F.O.B CONTRACT: “Free on Board” – The seller must put the goods on board of a ship at his own expenses and must inform the buyer. The carriage cost to be bourn by the buyer. The seller does not insure the goods and it is to be done by buyer. Payment in an FOB contract becomes payable immediately on the delivery of the goods to the carrier.Ex-ship Contracts: Here the seller undertakes to give delivery from a ship which has arrived at the port of delivery. The seller has to pay the freight. Till this is done the buyer need not pay for the goods. The goods will be at seller’s risk during the voyage. The property in the goods passes to the buyer only when it is delivered to the buyer at the port of delivery.SALE BY NON OWNERS:In case of transfer of ownership from seller to buyer it is presumed that seller is the full owner of the goods and on transfer the buyer gets absolute title. But where the seller is not an absolute owner of goods, the buyer will not get a better title than the seller. “Nemo Dat Quod Non Habet” meaning “No one can pass a better title than he himself has” or “A person who has no title to property can convey none”[sec-27]. Exceptions to this rule are:

1. Sale by mercantile agent , provided the buyer has acted in good faith, the agent has possession of goods or documents of title with the consent of true owner and he has no notice of from seller that the agent has no authority,

2. Sale Under Implied Authority of Owner or Title by Estoppel: 3. Under certain circumstances the true owner may be prevented by his conduct from denying

the seller’s authority to sell even though he did not have the ownership.[sec-27]4. Sale by one of the joint owners: Where one of the joint owners, who has the sole

possession of goods with the consent of the other owners, transfer to the buyer the property in the goods then such transfer is valid provided the buyer buys the goods in good faith and with out notice of the seller’s defect of title.

5. Sale by a person in possession of goods under a voidable contract: [sec-29] 6. This exception is limited to contracts of sale voidable under Sec19 and 19A of Contract Act

i.e. on the ground of coercion, fraud, misrepresentation, and undue influence and not in respect of any other voidable contract. In order to attract this provision following conditions must be satisfied:

(i) The goods must be in the possession of buyer, (ii) the possession must have been under a voidable contract under Sec19 and 19A, (iii) The contract must not have been rescinded at the time of sale, (iv) The buyer must buy the goods in good faith and without notice of seller’s defective title. If the contract under which the seller obtains goods is void, then even an innocent buyer from such a seller does not acquire good title.

7. Sale by Seller in possession after sale: [Sec-30(1)]Where a seller may continue to hold possession of sold goods or documents of title of them, he may sell them to a third person and if the person obtains delivery of goods without notice of previous sale and in good faith, he gets a good title.

8. Sale by buyer in possession after sale: [Sec-30(2)]9. Where a buyer having agreed to buy, obtains with the consent of seller possession of the

goods or documents of title to goods and sells them to a bonafide third party, the sale is valid even though he has entered into only an agreement to sell.

10. Sale by an unpaid seller: Where an unpaid seller who has right of lean or stoppage of goods in transit, resells the goods, the new buyer acquires a good title thereto as against the original buyer.

11. Exemption under other Acts: U/S.169 of Contract Act, a finder of lost goods may sell the goods under certain conditions and the buyer will acquire better title. U/S 176 of Contract Act, a Pawnee has the power to sell the goods pawned under certain circumstance.

12. Official Liquidators, Receivers, Custom officers etc are permitted to sell others’ goods and pass on better title.

PERFORMANCE OF THE CONTRACT.09/05/2009

A contract of sale demands delivery of goods by seller and payment for the goods by buyer.Delivery means voluntary transfer of possession of goods by one person (seller or his agent) to another (buyer or his agent) Mode of delivery: (a) Physical or actual delivery, (b) Symbolic delivery – giving godown keys, delivery of documents of title etc. (c) Constructive delivery or delivery by attornment – person who is already in possession of the goods on behalf of seller transfer the ownership by acknowledging that he hold the goods for buyer – warehouse receipt.RULES REGAEDING DELIVERY:

1. MODE OF DELIVERY – Sec-33 – Actual, Symbolic and Constructive.2. Delivery of goods and payment of price must be simultaneous unless otherwise agreed.3. Effect of part delivery : A delivery of the part of the goods has the same effect as a

delivery of the whole for the purpose of passing of property. But a part delivery of goods with an intention of severing it from the whole does not operate it as a delivery of the reminder.[Sec-34]

4. Buyer to apply for delivery : In the absence of an agreement to the contrary, the seller is under no obligation to deliver the goods unless the buyer applies for delivery.[Sec-35]

5. Place of delivery: Unless otherwise agreed, goods sold are to be delivered at the place at which they are at the time of sale, goods agreed to be sold are to be delivered at the place at which they are at the time of agreement to sell, where it is future goods same are to be delivered at the place at which they are to be manufactured or procured.[Sec-36(1)]

6. Time of delivery: Delivery to be made within reasonable time [Sec-36(2)7. Manner of delivery: Where the goods are in third party custody, there is no delivery

unless and until such third person acknowledges to the buyer that he holds the goods on his behalf. [Sec-36(3)]

8. Expenses of delivery: unless otherwise agreed, the expenses of putting the goods in deliverable state shall be borne by seller. The expenses incidental to receiving delivery must be borne by buyer.[Sec-36(5)]

9. Delivery of wrong quantity: The delivery must always be for the exact quantity ordered and must be of the same description contracted. Where the delivery is for lesser quantity the buyer has the option to reject all or to accept and pay for what is delivered only. By accepting the lesser quantity the buyer is not debarred from suing for damages for short

delivery. Excess delivery: In this case the buyer has three options namely (1) to accept all and pay for the same at agreed price;(2) accept only the contracted quantity and reject the balance (3) to reject the whole. Mixed delivery: Where the goods of different description other than contracted are included in the delivery, the buyer can either reject the whole and repudiate the contract or accept those which conform to the contract and reject the rest and sue for damages. [Sec-37]

10. Installments deliveries: [Sec-38] In the absence of an agreement to the contrary, the buyer is not bound to accept the delivery in installments. Where it is agreed for delivery by installment and its payment also in installments, the failure of a party to deliver or pay for one or more installments does not necessarily put an end to the contract.

11. Delivery to carrier or warehouse : [Sec-39] Where the goods are entrusted with the carrier or warehouse for delivery to the buyer or for safe custody on behalf of buyer, it is prima facie deemed to be delivery of goods to buyer. In the eyes of the law they become bailee of the buyer.

12. Goods delivered at a distance place : Where the seller of the goods agrees to deliver the goods at his own risk at a place other than that where that is sold, the buyer shall take risk of any natural deterioration in the goods incident to the transit unless otherwise agreed.[Sec-40]

13. Examining the goods on delivery : Where there has been no previous examination of the goods the mere fact that the buyer has taken delivery of them does not amount to an acceptance until he has had a sufficient opportunity of examining the goods to ensure that they correspond with the contract.[Sec-41]

14. When acceptance is complete on delivery : The buyer is deemed to have accepted the goods if he (1) intimates the seller of his acceptance, or (2) does any act in relation to those goods which is inconsistent with the ownership of them; or (3) he retains the goods beyond reasonable time with out intimation to seller of his non acceptance. [Sec-42]

15. Buyer is not bound to return the rejected goods : It is sufficient for the buyer to inform seller about his refusal to accept the goods nd he need not return the rejected goods.[Sec-43]

16. Liability of buyer for neglecting or refusing delivery of goods : When the seller has arranged for delivery of the goods or informed the buyer of his readiness to do so, and the buyer does not take delivery within a reasonable time, then buyer is liable to seller (1) for any loss incurred by hin due to his neglect or refusal to take delivery and (2) to pay reasonable charge if any for the care and custody of those goods. The seller is entitled to the above remedies even though buyers refusal amounts to repudiation of the contract.[Sec-44]

RIGHTS OF UNPAID SELLER.16/05/2009

As per Sec-45, where the whole of the price has not been paid or when a negotiable instrument paid for the price has not been honoured , the seller remains as an unpaid seller. Where the whole of the price is tendered but the seller refuses that, he is not an unpaid seller. If there is a period of credit for payment and it remains unpaid even after the due date in spite of all the conditions attached to the payment are fulfilled, then also the seller is an unpaid seller.

Rights of unpaid seller: Against the goods: (a) When the property in the goods are not transferred. - (1) Right of lien, (2)Right of stoppage of goods in transit, (3) Right of resale. The rights of unpaid seller do not depend on the agreement between the parties and it arises by the implication of law.(b) When the property in the goods is passed.- (1) Right of with holding the delivery.Against the buyer personally: (1) Right to sue for the price; (2) to claim damages; (3) to claim interest.Right of lien: [SEC – 47 TO 49]‘Lien’ is the right to retain possession of goods until payment is received. This right can be exercised where (1) goods are sold without any credit or (2) goods are sold on credit but the credit period has expired, or (3) the buyer has become insolvent. Right of lien is linked with possession and not title. Once the possession is lost the lien is lost. The lien of the unpaid seller is for the price only and does not extend to any other charges. Right of lien is indivisible in nature. This right is available even after part delivery on the remaining goods unless the agreement is contrary to that.[Sec48]Termination of lien: Right of lien is lost if possession of goods is lost. Unpaid seller losses lien:-1. By delivery to carrier: Where the seller has delivered the goods to the carrier for transmission

to the buyer without retaining the right of lien then he looses the right of lien. But he has the right of stoppage in transit where by he can repossess the goods and exercise right of lien. But if the seller takes back the goods from the carrier for any other purpose he can not revive the lien.

2. By delivery to he buyer: Right of lien is lost if when the goods are delivered to the buyer or his agent. But the seller’s lien is not lost if the goods are taken by buyer with out the consent of seller.

3. By waiver: Where the seller has waived the right of lien expressly or impliedly the lien is terminated.

4. By tender of price: Where the buyer has paid for the goods the right of lien is lost.Right of Stoppage in Transit: [Sec-50-52]Secondly the unpaid seller has Right of stoppage in transit. The right of stoppage means the right to stop further transit, to resume possession, and exercise right of lien. The right of stoppage in transit arises only after the unpaid seller has parted with the goods, it has not reached buyer or his agent, in the possession of carrier or bailee and the buyer has become insolvent in between.Duration of transit: The capacity in which the carrier holds the goods in duration of transit is:

1. When goods are under seller’s lien as seller’s agent,2. When the seller does not retain the right of stoppage in transit, the carrier is buyer’s agent,3. When carrier is an independent contractor, the unpaid seller can exercise the right of

stoppage in transit. The transit comes to an end (a) if goods are received by buyer or his agent, (b) the carrier inform the buyer or his agent that the goods have reached destination and he holds them on his behalf, (c) the carrier wrongfully rejects to deliver the goods. The transit does not come to an end if the buyer rejected the goods and the carrier holds the goods with himself.

4. the unpaid seller may exercise his right of stoppage in transit by (a) actually taking possession of the goods or (b) giving notice of his claim to the carrier.

Right of Resale: [Sec-54] The unpaid seller can exercise the right of resale and the rules applicable are:

1. Where the goods are of perishable nature no notice to the buyer is essential. 2. When the unpaid seller has exercised the right of lien or stoppage in transit, he has to give

notice to buyer of his intention to resell the goods. In this situation he can also recover the loss if any from buyer on account of resale.

3. When the unpaid seller has expressly reserved the right of resale in the original agreement itself.

The unpaid seller has got the right of withholding the delivery of goods if the property in the goods have not passed on to the buyer.Rights of unpaid seller against the buyer personally:(1) Suit for price; [Sec-55] (2) Suit for damages for non acceptance; [SEC-56] (3) Suit for interest;

[Sec-61] An unpaid seller can recover interest only if he has recovered the price.Effect of sub sale or pledge by buyer: [Sec-53] The right of unpaid seller for lien on the goods or stoppage in transit is not affected by any sale or pledge by the buyer. That is to say the subsequent buyer or Pawnee gets the title subject to the rights of the unpaid seller. However subsequent sale or pledge with the consent of unpaid seller will defeat the seller’s lien.CONSEQUENCES OF BREACH OF THE CONTRACT OF SALE:SELLER’S REMEDIES: (i) Suit for price; (ii) Suit for interest; (iii) Suit for damages for non acceptance of goods; (iv) Suit for damages for repudiation of contract by the buyer before due date. This situation is to be treated as anticipatory breach under the Contract Act.BUYER’S REMEDY: (i) Suit for damages for non delivery of goods [sec-57]; (ii) Suit for specific performance [sec-58]; (iii) Suit for breach of warranty[sec59]; (iv) Suit for damages for repudiation of contract by the seller before the due date[sec-60]; (v) Suit for interest [sec-61].

INDIAN PARTNERSHIP ACT 1932.GENERAL NATURE OF A PARTNERSHIP.

23/ 05 /2009 Partnership is an agreement between two or more persons to share the profits of a business that must be carried on by all or any of them acting for all. The essential elements of Partnership are: Agreement – Partnership always arises out of a contract between partners; it is a creation only of a mutual agreement. It is voluntary and contractual. It may be oral or writing. Sharing profit of business: There must be a business and it includes every trade, occupation and profession. Thus the existence of business is essential. The motive of the business is sharing of the gains made in business. It is to be noted that sharing of losses is not an essential element. However in case of losses, same is to be shared in the same ratio of sharing of profits.Business carried on by all or any of them acting for all: This is the cardinal principle of law. Each partner carrying on the business is the principal as well as the agent for all the other partners. Thus the acid test for the partnership is “mutual agency” rather than sharing of profits. Hence the act of one partner in the partnership business is binding on all the partners.Distinction between partnership and firm: Persons who have agreed together to run the business are called “Partners” and “collectively” the name under which the business is carried on is “firm”.Partnership is thus that invisibility which binds the partners together and firm is the visible form of those partners who are thus bound together.

A partnership differs from a Joint Stock Company in the following areas:1. Personality: A “firm” is not a legal entity where as a registered company is a distinct judicial

person from its members. Hence a member of a company can enter into a contract with the company but a partner can not enter into a contract with the firm.

2. Agency: In a partnership every partner is an agent of the other but in a company every member is not an agent of the other members.

3. Distribution of profits: Firm’s profits are distributed among partners as per agreement but there is no compulsion as to distribution of company’s profits. Normally only some portion of profits are distributed as dividend.

4. Extent of liability: In a firm, liability of partners’ is unlimited but from 01/04/2009 Limited liability partnership has come into existence. In company, shareholders’ liability is limited to unpaid share capital on his shares.

5. Property: The firm’s property is “joint estate” of all the partners and it does not belong to a body distinct in law from its members. In case of company, its property is different from that of its members who can receive it only in the form of dividend or return of capital.

6. Transfer of shares: A share in a partnership can not be transferred without the consent of other partners but in a company a shareholder can transfer his shares subject to provisions in the Articles.

7. Management: Subject to an agreement, all partners are entitled to participate in the management of the firm. In case of a company all members can not participate in the management but only the elected BOARD of Directors only can manage.

8. Number of membership: In case of firms carrying on business other than banking, the partners should not exceed 20 and in case of banking it should not exceed 10. in case of a private company the membership is minimum 2 and maximum 50 excluding present and past employees of the company. In case of public company the minimum membership is 7 and maximum is unlimited.

PARTNERSHIP vs. CLUB: A club is an association of person with object being not of earning of profit but promoting of a common goal. In a Club, members are not agent of others. There is no mutual agency among members. A member of a club has no interest in the property of the club.PARTNERSHIP Vs HINDU UNDIVIDED FAMILY: 1. Creation: The relation of partnership is created by agreement but the right in HUF is created by

status, i.e. by birth.2. Death: Death of a partner ordinarily leads to dissolution of partnership, but the death of a

member in HUF does not dissolve the family business.3. Management: The right of management in HUF business generally vests with Karta, the eldest

male member of HUF. In case of partnership the management rests with all the partners.4. Authority to bind the firm: Every partner by his act can bind the firm, but in HUF only the

Karta has got the authority.5. Liability: In a partnership, the liability of a partner is unlimited, but in HUF only the liability of

the Karta is unlimited. The liabilities of other members are limited to their share in the profits of the family business only.

6. Calling for accounts: Members of HUF are not entitled to ask for account evening case of separation, but every partner can bring suit against the firm for accounts, provided he also seeks the dissolution of the firm.

7. Governing law: Partnership is governed by the Partnership Act and HUF business is governed by Hindu Law[Mithakshara school and Dayabagha school]

8. Minor’s capacity: In a partnership minor can not become a partner but can be admitted only to the benefits of partnership, that too with the consent of all the partners only. In case of HUF business, a minor becomes a member of the business by the incidence of his birth. He need not wait for attaining majority.

9. Continuity: HUF has continuity till it is divided. The status of the HUF is not affected by the death of a member but a firm, subject to the contract between partners, gets dissolved on the death or insolvency of any partner.

PARTNERSHIP Vs CO-OWNERSHIP: 1. Partnership always arises out of agreement but co ownership may arise either from agreement

or by the operation of law.2. In a partnership there is community of interest but in co ownership there is no need for sharing

of profits or losses. 3. In a partnership every partner is an agent of other partners but in a co owner is not an agent of

other co owner.4. A partner can transfer his share in the firm only with the consent of other partners but a co

owner can transfer his share without the consent of other co owner. PARTNERSHIP Vs ASSOCIATION: Partnership is for sharing of gain in business but Association is completing a social goal.Partnership does not exist between members of mutual insurance society.In a trade combine, the relationship among members is not that of partnership.TYPES OF PARTNERS: Active partner: A partner who actively participate in the firm’s business.Sleeping or Dormant partner: A partner who lend his name or capital to the firm but does not take active part in the management.Partner by estoppel or holding out: When a person (1) represents himself or(ii) knowingly permits himself to be represented as a partner in a firm (when in fact he is not) he is liable like a partner in the firm to any one who on the faith of such representation has dealing with the firm and suffered damage.[sec-28] It is only the person to whom the representation has been made and who has acted there on has right to enforce liability arising out of “holding out”. This rule is also applicable to a former partner retiring without giving proper notice.Sub partnership: It arises consequent upon the agreement between a partner and a stranger, the latter is vested with interest jointly with that partner so for as his share in the firm is concerned. This will not make the stranger a partner of the main firm. A sub partner can claim his share only from the partner with whom he has entered in to an agreement and he has no right against the main firm and he can not take part in the business of the firm or demand for its accounts.MINOR’S POSITION IN A PARTNERSHIP: Minor can not become a partner but can only be admitted to the benefits of the partnership with the consent of all the partners. His Rights are: (1) Agreed share of his profits of the firm. (2) Call for and inspect the books of accounts and take copy. (3) He can sue for the accounts or payment of his share only when severing his connection with the firm,(4) On attaining majority he may with in 6 months by giving notice to elect to become a partner or not . if he elects he is entitled to his share as minor and if he does not, his share of assets of the firm is not liable to any acts of the firm after the date of his public notice.

Liabilities: (1) Only the minor’s share of assets is liable for the acts of the firm and he is not personally liable. (2) Within 6 months of his attaining majority, or his obtaining knowledge of his admission to the partnership, whichever date is later, he may elect not to become partner by giving public notice and his notice shall decide his position. If he fails to give notice he will become partner on the expiry of the six months. If he elects to become partner or fails to give notice, he becomes personally liable to third parties for all the acts of the firm. Where the minor decides to severe his connections with the firm, (1) His rights and liabilities continues to be those of a minor up to the date of giving public notice. (2) His share will not be liable for any acts of the firm done after that date of notice, (3) He shall be entitled to sue the other partners for his share of profits and property and for copy of accounts.

RELATIONSHIP BETWEEN PARTNERS.23/05/2009

Mutual Rights and Duties of Partners: These are governed by their contract and implied by the course of dealing. The contract may restrict a partner from doing any business other than that of the firm while being a partner.[Sec-11]Rights of Partners: (i) Right to take part in the conduct of business. In case if a partner is restrained by others from taking part in business, the aggrieved partner can sue for dissolution or sue for accounts with out dissolution. This right is subject to the contract between the partners.(ii) Every partner has a right to be consulted on every business matter of the firm and in case of difference in views, every partner has a right to express his views and the decision will be based on majority opinion and such majority decision must be taken in good faith. Any change in the nature of business or in the nature of firm must be based on unanimous decision of all partners only. (iii) Right of access to books: Every partner, whether active or sleeping, is entitled to access any books of the firm, inspect them and take a copy of hem and this right must be exercised Bona fide.(iv) Right to remuneration: Where it is customary to pay remuneration for conducting the business of the firm, a partner can claim it even in the absence of a contract for the payment of the same. Otherwise a partner is not eligible to claim salary for conducting the business as he is entitled to share the profit only. (v) Right to share profits: Subject to the contract between them, partners have to share the profits equally and contribute to the loss also equally. There is no relationship between their capital contribution and sharing of the profit. (vi)Right to interest on Capital: Unless provided in the deed of partnership no interest on capital of partners is payable. If interest is payable, the same is to be paid out of profit only and not in case of loss. Interest on capital stops when the dissolution of the firm starts. (vii) Right to interest on loans: Every partner is entitled for interest on loan he has given to the firm at a rate agreed between them or at 6%p.a. if no rate is agreed. Interest on loan is payable even if there is no profit in the firm. Interest on partners’ loan is payable even after dissolution till date of final repayment. (viii) Right to be indemnified: Every partner has the right to be indemnified by the firm in respect of all payments made by him and all liabilities incurred by him in the ordinary and proper conduct of business of the firm and in respect (ix) Right to stop admission of a new partner: Every partner has right to prevent the introduction of a new partner. A new partner can be admitted only with consent of all partners and the new partner’s liability for the act of the firm will commence from his date of admission to the partnership.[Sec-31] (x) Right to retirement: Every partner has a right to retire with the consent of other partners by giving notice to that effect. [Sec-32(1)] (xi) Right not to be expelled: Every partner has the right not to be expelled from the firm by the majority of partners.[Sec-33] (xii) Right of outgoing partner to carry on competing business: Any out going partner can carry on business competing with that of the firm and even solicit customers of the old firm subject to the

agreement to the contrary.[Sec-36(1)]. (xiii) Right of out going partner to share subsequent profit: Where any partner has ceased to be the partner but his due are not yet settled by the firm and the firm continues with the business as usual, the out going partner or his estate will be entitled for his share of profit or 6% return whichever is higher.[Sec-37] (xiv) Right to dissolve the firm: A partner has the right to dissolve the partnership with the consent of all other partners.[Sec-40] DUTIES OF PARTNERS:1. Partners are bound to carry on the business of the firm (i) to the greatest common advantage of

the firm, (ii) to be just and faithful to each other, (iii) to render true account of the firm to other partners.[Sec-9]

2. Every partner is liable to indemnify the firm for any damage caused to it by his fraud in the conduct of the business.[Sec-10]

3. Every partner is bound to attend diligently to his duties relating to the firm.[Sec-12(b)].4. A partner is not entitled to any remuneration for participating in the business.[Sec-13(a)]5. Every partner is bound to let his partners have the advantage of his knowledge and skill.6. Every partner, subject to the agreement, has to contribute equally to the loss of the firm.7. Every partner has to indemnify the firm for any loss caused to it by his willful neglect[Sec-

13(f)]8. If a partner derives a profit for himself through the connections of the firm, then he is bound to

account for the profit and refund the profit to the firm.[Sec-16(a).]9. If a partner carries on business of the same nature as and competing with that of the firm, then

he must account for and pay to firm all profits made by him in the business [Sec-16(b)]. The firm will not be liable for any loss.

PARTNERSHIP PROPERTY: The property of the firm includes all property, rights and interests brought in by partners as their contribution to the common business. (ii) All the property, rights and interests acquired by the firm during the course of business. (iii) Goodwill of the business. Whether a particular property is or is not the property of the firm ultimately depends on the agreement of the partners. Hence the mere fact that a property of the partner is used by the firm for its business shall not by itself make it the property of the firm.Goodwill: Goodwill of a business is subject to a contract between the partners to be regarded as “property” of the firm. When the firm is dissolved every partner has got a right, in the absence of any agreement to the contrary, to have the goodwill of the business sold for the benefit of all the partners. Goodwill can be sold separately or along with the other properties of the firm. PERSONAL PROFITS EARNED BY PARTNERS: Where a partner derives any profit for him from any transaction of the firm or from the use of the property or business connection of the firm or firm name, he must account for that profit and pay it to the firm. Where a prtner a partner carries on a competing business, he must account for and pay to the firm all profits made by him in the business. At the same time he is not required to account for the profits of non competing business, even if his connection with the firm helps him to promote his private business. It may be noted that as per Sec-11 (2), partners may among themselves contract not to carry any private business. Any breach of this provision may give right only to sue for damages from the defaulting partner and not for accounting of profits to his co partners by the defaulting partner unless such private business is in competition to firm’s business.Rights and duties of partners after change in the constitution of the firm: Change in constitution of the firm arises due to (1) where new partner is admitted; (2) where any partner goes out or dies; (3) where there is a change in business carried on by the firm; (4) where the business is carried on after the expiry of the term fixed for the purpose. As per Sec-17, (a)

where change in constitution occurs due to first three reasons mentioned above, the mutual rights and duties of partners in the reconstituted firm remain the same as they were before. (b) In respect of last reason, the mutual rights and duties will continue as the same before expiry of time but notice from the retiring partner is not required. ( c) where the firm carries out other ventures than the original one undertaken, the mutual rights and duties of partners in respect of new ventures also will remain as in respect of the original ventures.The above mentioned rules are subject to contract between the parties.RELATION OF PARTNERSTO THIRD PARTIES: [Sec-18]Every partner, as for his acts for himself and in his own interest in the common concern of the partnership, he may deemed a principal and so far as he acts for his partners, he may be deemed as an agent. He has a community of interest with other partners, whereas ordinary agent has his interest alone in mind. A partner is an agent of the firm for the business of the firm only.IMPLIED AUTHORITY OF A PARTNER OF THE FIRM:The act of a partner which is done “in the usual way” business of the kind carried on by the firm binds the firm, provided that the act is done in the firm name or any manner expressing or implying an intention to bind the firm. Such an authority of a partner to bind the firm is called his implied authority. The word “in the usual way” indicate that if a usual act is done in an unusual way, the outsider may well be put on caution and enquiry in to the unusual circumstances under which he being called upon to act. It is his duty to ask whether the partner has authority to act so in the unusual manner. If the outsider chooses to neglect what is unusual, he can not seek to charge persons other than the one with whom he is dealing. If the “act is outside the usual course of the business of the firm”, it will not bind the firm even if it is prudent or beneficial to the firm unless it is ratified by all the partners. “Power to do the usual does not include power to do the unusual” A partner has implied authority to bind the firm by all acts done by him in all matters connected with the firm’s business and which are done in the usual way and are not in their nature beyond the scope of partnership. ACTS BEYOND IMPLIED AUTHORITY: [Sec-20] If there is no usage or custom to the contrary, the implied authority of the partner does no empower him to:

1. Submit a dispute relating to the firm to arbitration,2. Open a bank account on behalf of the firm in his own name,3. Compromise or relinquish any claim by the firm against the third party,4. Withdraw a suit or proceedings filed on behalf of the firm,5. Admit any liability in a suit or proceedings against the firm,6. Acquire immovable property on behalf of the firm,7. Transfer immovable property belonging to the firm,8. Enter into partnership on behalf of firm.

Extension and restriction of partner’s implied authority: Partners’ implied authority can be extended or restricted by a contract between them. However a third party is not affected by a secret limitation of a partner’s implied authority unless he had actual notice of it. This extension or restriction is possible only with the consent of all the partners.Acts in emergency: Sec-20 Each partner can bind the firm by all his acts done in an emergency, with a view to protect the firm from any loss, provided he has acted as a prudent man.Admission by partner – its effects (Sec-23) An admission or representation by a partner will not however, bind the firm if his authority on the point is limited and the other party knows of this restriction. However a provision of this section is not applicable to disputes between partners.

Notice to an acting partner: [Sec-24] Any notice by third parties to an active partner, on matters relating to firm’s business, operates as notice to the firm, except in the case of a fraud on the firm committed by or in connivance of that partner. Thus notice to one is notice to the rest of partners just as notice to the agent is a notice to the principal. But his notice must be actual and not constructive, it must relate to the firm’s business and not to other matters, it must be given to an active partner and not to a sleeping partner. The only exception is in case of fraud.LIABILITY OF PARTNERS TO THIRD PARTIES:[sec-25 – 27]Contractual liability: For the acts of the firm done during his partnership, every partner is severally and jointly liable. The “act of the firm” means any act or omission by all the partners or any partner or agent of the firm. It is necessary that to bind a partner with liability the act must have been done while he was a partner. Also it is immaterial when the damage arose but he act must have been done while he was a partner.Liability for tort or wrongful act: The firm is liable to the same extent as the partner for any wrongful act done by a partner during the normal course of business of the firm with the authority of the partners. The method employed by or the partner in doing it was un authorized or wrongful would not affect the question.Liability for misappropriation by a partner: There are two situations dealt with. (a) when a partner acting within his apparent authority receives money or other property from a third person and misapplies it or (b) where a firm in the ordinary course of business received money or property from a third person and the same is misapplied by a partner, while it is in the custody of the firm. In both cases the partner responsible for the act is liable to make good the loss. The first case covers the misapplication of money or property belonging to the third party made by the partner receiving the same. For this provision to be attracted it is not necessary that the money should have actually come into the possession of the firm. On the other hand provision of clause (b) would be attracted when such asset has come in to the custody of the firm and it is misapplied by any of the partners. In both cases firm will be liable. In case of (a), if receipt of money by one partner is outside the scope of his apparent authority, his receipt can not be regarded as a receipt by the firm and other partners are not liable.RIGHTS OF TRANSFER OF A PARTNER’S SHARE [SEC-29]: A share in a partnership is transferable like any other assets, but the transferee or assignee of a partner’s share can not become a partner in the firm unless he is admitted by all other partners. The buyer or assignee of the partner’s share can enjoy only the rights to receive the share of the profits of the partner. During the continuance of the partnership business the transferee is not entitled to (a) interfere in the conduct of the business, (b) require for accounts, (c) inspect books of the firm. The transferee can only receive the share of the transferor profit as agreed by the other partners and he can not challenge the accounts. On the dissolution of the firm or on retirement of the transferor partner the transferee is entitled to (a) receive the share of transferor’s share of assets of the firm, (b) an account of the firm from the date of dissolution. A partner’s interest in the partnership can be regarded as an existing interest and tangible property which can be assigned. The partners are entitled to determine their rights and obligations among themselves as per contract between them.LEGAL CONSEQUENCES OF PARTNER COMING IN GOING OUT [SEC-31-38]Introduction of a new partner: Subject to the contract between the partners, the liabilities of new partner ordinarily commence from the date of his admission to the partnership. In case the liability is to be back dated, the creditors consent is also required.Retirement of a partner: A partner may retire (a) with the consent of all other partners, (b) by virtue of an express agreement between the partners, (c) in the case of a partnership at will, by

giving notice in writing to all other partners. The retiring partner is liable to the third party for the act of the firm after his retirement till the public notice of his retirement is give. If the latter deals with the firm without knowing that the retired partner was a partner than the retired partner was not liable.Rights of outgoing partner: Subject to the contract to the contrary, an outgoing partner can carry on business competing with that of the firm. but he can not use the name of the firm or can not represent as a partner of that firm.The retiring partner has the right to receive his share of assets of the firm. The assets are to be valued as on date of retirement and not as per books of accounts.When the firm’s business is continued even after retirement, the retiring partner is entitled to his normal share of profit or 6% per annum on the amount of his share of firm’s property whichever is higher.In case there is an agreement among the partners that the share of retiring partner will by purchased by any of the existing partner than the firm will not be liable to the retiring partner. Only the partner who agree to buy retiring partner’ share will be personally liable. Liabilities of an outgoing partner: A retiring partner continues to be liable to third party for the acts of the firm after his retirement until public notice of his retirement is given. As regards to the act of the firm done before his retirement he continues to be liable unless otherwise agreed.Expulsion of partner: No partner can be expelled by a majority of partners except in exercise, (a)in good faith , (b) the power of expulsion must have been there in contract. The test of good faith lies in (i) expulsion must be in the interest of partnership, (ii) the partner to be expelled must be served with a show cause notice, (iii) that partner to be given an opportunity of being heard. If a partner is otherwise expelled, the expulsion is null and void and the affected partner can seek judicial dissolution. The invalid expulsion of a partner does not put an end to the partnership. [sec33] Insolvency of a partner: When a partner is adjudicated as insolvent, he ceases to be a partner on the date of the order of adjudication. His estate will not be liable for the act of the firm done after that date. The firm is also not liable for any act of that partner after such date. “Ordinarily but not invariably” the insolvency of a partner results in dissolution of the firm. [sec-34]Death of a partner: Where as per contract the firm is not dissolved after the death of a partner, the estate of the deceased partner is not liable for the act of the firm after his death. In case of death there is no need for public notice.Revocation of continuing guarantee by change in firm[sec-38] : A continuing guarantee given to a firm or to third party in respect of the transaction of a firm is, in the absence of of an agreement to the contrary, stands revoked as to future transactions from the date of any change in the constitution.Summary: The mutual rights and duties of partners are regulated by the agreement between them. Such an agreement maybe implied also. As regards to the third parties, a partner is the agent of the firm for all purposes within the scope of the partnership concern.

REGISTRATION AND DISSOLUTION OF A FIRM30/05/2009

Mode of Effecting Registration: Registration of a firm can be affected at any time. It is not necessary that the fir is to be registered from the very beginning. The procedure for registration of a firm (sec-38) includes filing of a statement in the prescribed form stating there in (1) Name of the firm, (2) the principal place of business, (3) addresses of other places of business, (4) the date of

joining of all the partners, (5) the names of all the partners and their permanent addresses (6) the duration of the firm along with prescribed fee. Each partner or their agents specifically authorized for this purpose must sign the statement. The registration will come into effect from the date of filing the statement in complete respect with the Registrar and not from the date of entering in the register. Subsequent alterations in the name, place, constitution, etc, of the firm or its partners must also be registered. Under English law registration is compulsory but not so under Indian law.Consequences of Non Registration: Indian Partnership Act does not make the registration of firms compulsory nor does it impose any penalty for non registration. Sec 69 of the Act deals with the disabilities arising out of non registration. These disabilities are (i) the firm or its partner can not bring an action against the third party for breach of contract entered into by the firm, unless the firm is registered and the partners suing are shown as partners in the firm.(ii) if any action is brought in by any third party, then neither the firm nor the partners can claim any set off, (iii) any partner of unregistered firm is prevented from bringing any legal action against the firm. (iv) even in case of unregistered firm, any partner can sue for the dissolution of the firm or for accounts of the firm when it is dissolved. (v) non registration of the firm does not affect the right of third parties against the firm or its partners. When ever a new partner is introduced, it should be registered with registrar of firms.Dissolution of the firm takes place: [Sec-39-44]1. As a result of an agreement of the partners,2. Adjudication of all or all but one partner as insolvent,3. Subject to an agreement, dissolution of the firm takes place due to the efflux of the agreed time

or completion of the venture or death of a partner or insolvency of a partner.4. A partner giving notice to other partners his intention to dissolve the firm,5. By the intervention of the court due to (i) a partner becoming of unsound mind, (ii) permanent

incapacity of a partner, (iii) misconduct of a partner affecting the business,(iv) willful or persistent breaches of agreement by a partner, (v) transfer or sale of the whole interest of a partner, (vi) improbability of carrying on of the firm’s business due to persistent loss, (vii) if the court feels for any reason that it should be dissolved.

Consequences of dissolution:[Sec-45-52]The firm and its partners are liable to third party for all the transactions entered until public notice is given. The above rule is subject to following exemptions namely (i) the estate of the deceased partner, (ii) an insolvent partner, and (iii) a dormant partner. On dissolution every partner has right to (i) have the property of the firm is applied for payment of the debts of the firm and (ii) to have the surplus distributed amongst the partners.The mutual agency among the partners continue (i) so far as may be necessary to wind up the firm, (ii) to complete the unfinished transactions pending on the date of dissolution and no other.Subject to an agreement between partners, the partners have to follow the set rules for distribution of assets of the firm: 1. Losses including the deficiencies of capital are to be paid out of profits, then out of capital, and

lastly by the partners individually in the proportions in which they were entitled to share profits.

2. The assets of the firm, including the amount contributed by the partners to make up the deficiencies of capital must be applied in the following manner: (i) in paying the debts of the third parties; (ii) paying to each partner ratably partner’s loan, (iii) paying ratably partners’ capital (in the ratio of their capital) (iv) distributing the residual profits among the partners in the profit sharing ratio.

3. In case the assets of the firm are insufficient to pay off firm’s liabilities including the capital of the partners, each partner would individually liable to bring towards the losses including the deficiencies of capital in the profit sharing ratio.

4. Where there are joint debts due from the firm and also separate debts due from any partner: (i) The property of the firm shall be first applied in payments of the debts of the firm and if there is surplus, the share of each partner shall be applied to the payment of his private debt or paid to him;(ii) The separate debts of any partner is paid out of his personal assts first and the remaining balance, if any, is used in the payments of the debt of the firm.

5. A partner paying goodwill on entering into partnership for a fixed period, subject to an agreement to the contrary is entitled to proportionate refund of the goodwill from the partner(s) who have enjoyed it before, if the dissolution of the firm take place before such time decided. This rule is not applicable in case the dissolution is due to (i) death of one of the partners, (ii) due to the misconduct of the partner paying the premium.

Goodwill on dissolution: [Sec-55]What the purchaser of the goodwill acquires is: (i) right to carry on the same business in the old name, (ii) to represent himself as successor of the firm to others. The partners selling the goodwill of the firm can (i) carry on similar business; (ii) compete with the old business which has been sold;(iii) advertise for their new business.Mode of giving public notice: Public notice is always to be given in the (i) Official Gazette and (ii) at least in one vernacular newspaper circulating in the district where the firm to which it relates has its place or principal place of business. In the case of registered firm notice is also to be given to registrar of firms.