LL.B. (HONS.

) — SEMESTER II
PAPER 2.1

CONTRACTS – II
Special Contracts

Comprehensive Examination Notes

Indian Contract Act 1872 | Sale of Goods Act 1930

Partnership Act 1932 | Negotiable Instruments Act 1881

★ Sections ★ Landmark Cases ★ Flowcharts ★ Distinctions ★ Model Answers

All 6 Units Covered | With Case Laws & Critical Analysis

Contracts-II | Special Contracts | LL.B. Semester II Page 1

 TABLE OF CONTENTS
UNIT 1: Indemnity and Guarantee
• 1.1 Contract of Indemnity – Definition, Rights, Liabilities
• 1.2 Contract of Guarantee – Definition, Characteristics
• 1.3 Kinds of Guarantee
• 1.4 Rights, Liabilities and Discharge of Surety
• 1.5 Distinction: Indemnity vs Guarantee

UNIT 2: Bailment and Pledge

• 2.1 Definition and Essential Requisites of Bailment
• 2.2 Kinds of Bailment
• 2.3 Rights and Duties of Bailor and Bailee
• 2.4 Termination of Bailment
• 2.5 Pledge – Definition, Rights, Pledge by Non-Owners

UNIT 3: Contract of Agency

• 3.1 Definition and Creation of Agency
• 3.2 Rights and Duties of Agent
• 3.3 Delegation – Sub-Agent, Substituted Agent
• 3.4 Personal Liability of Agent
• 3.5 Relations of Principal with Third Parties
• 3.6 Termination of Agency

UNIT 4: Sale of Goods Act, 1930

• 4.1 Formation of Contract of Sale
• 4.2 Conditions and Warranties
• 4.3 Caveat Emptor
• 4.4 Transfer of Property and Risk
• 4.5 Sale by Non-Owners
• 4.6 Delivery of Goods
• 4.7 Rights of Unpaid Seller

UNIT 5: Indian Partnership Act, 1932

• 5.1 Definition and Nature of Partnership
• 5.2 Test of Partnership – True Test
• 5.3 Registration of Firms
• 5.4 Rights and Duties of Partners
• 5.5 Implied Authority of Partner
• 5.6 Kinds of Partners
• 5.7 Minor as Partner
• 5.8 Reconstitution and Dissolution of Firm

UNIT 6: Negotiable Instruments Act, 1881

• 6.1 Definition and Characteristics of Negotiable Instruments
• 6.2 Promissory Note, Bill of Exchange, Cheque
• 6.3 Holder and Holder in Due Course
• 6.4 Negotiation and Endorsement
• 6.5 Dishonour and Discharge
• 6.6 Crossing of Cheques
• 6.7 Liability of Parties – Section 138 (Dishonour of Cheque)

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 UNIT – 1
INDEMNITY AND GUARANTEE
Indian Contract Act, 1872 — Sections 124–147

1.1 CONTRACT OF INDEMNITY

Section 124, ICA 1872

Definition (Section 124): A contract of indemnity is one by which one party promises to save the
other from loss caused to him by the conduct of the promisor himself, or by the conduct of any
other person. The party who promises to indemnify is called the Indemnifier; the party who is
indemnified is called the Indemnity Holder (or Indemnified).

A. Essential Elements of Contract of Indemnity

1. Two Parties: Indemnifier and Indemnity Holder.
2. Promise to save from loss: The loss may be caused by the promisor or a third party.
3. Valid Contract: All essentials of a valid contract (offer, acceptance, consideration, competence, free
consent) must be present.
4. Express or Implied: Indemnity may be express (written/oral) or implied by circumstances.
5. English Law vs. Indian Law: English law is broader — covers loss from accidental fire, Act of God,
etc. Indian law (Sec. 124) confines indemnity to human conduct only.

B. Rights of Indemnity Holder (Section 125)

Section 125, ICA 1872

When the Indemnity Holder has acted within the scope of his authority, he is entitled to recover from the
Indemnifier:
1. All damages which he may be compelled to pay in any suit in respect of any matter to which the
promise to indemnify applies.
2. All costs which he may be compelled to pay in bringing or defending such a suit, if the indemnifier
did not authorize the filing of the suit.
3. All sums which he may have paid under the terms of any compromise of any such suit, if the
compromise was not contrary to the orders of the indemnifier.

KEY POINT: The indemnity holder can sue the indemnifier even before he has suffered actual loss
— per the principle laid in Gajanan Moreshwar v. Moreshwar Madan (1942 Bom HC).

C. Liability of Indemnifier
The Indian Contract Act does not explicitly define the liability of an indemnifier, but courts have held:
• The indemnifier is liable as soon as the liability of the indemnity holder becomes certain and absolute.
• The indemnifier cannot compel the indemnity holder to pay the amount first and then claim
reimbursement.
• The right to indemnity can be enforced even before actual payment.

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 CASE: Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri
Citation: AIR 1942 Bom 302

Held: The court held that if the liability of the indemnified has become absolute and certain, he can compel
the indemnifier to pay, even before he has suffered actual loss.

Principle: An indemnity holder may enforce his right before actual payment where liability is established.

CASE: Adamson v. Jarvis

Citation: (1827) 4 Bing 66

Held: An auctioneer who sold goods on instructions of a principal who had no title was held entitled to be
indemnified against loss suffered.

Principle: Agent acting on principal's instructions entitled to indemnity even if acts are unlawful, provided
agent acts in good faith.

1.2 CONTRACT OF GUARANTEE

Section 126, ICA 1872

Definition (Section 126): A contract of guarantee is a contract to perform the promise, or

discharge the liability, of a third person in case of his default. The person who gives the guarantee
is called the Surety; the person in respect of whose default the guarantee is given is called the
Principal Debtor; and the person to whom the guarantee is given is called the Creditor.

A. Essential Characteristics of Contract of Guarantee

1. Three Parties: Surety, Principal Debtor, and Creditor — all three must be parties.
2. Three Contracts: There are three contracts: (a) between creditor and principal debtor, (b) between
surety and creditor, and (c) implied contract between surety and principal debtor.
3. Consideration: Sec. 127: Anything done or any promise made for the benefit of the principal debtor
is sufficient consideration to the surety. No separate consideration from surety needed.
4. Primary and Secondary Liability: Principal debtor has primary liability; surety has secondary
(conditional) liability — activated only on default.
5. No Misrepresentation: Guarantee obtained by misrepresentation (Sec. 142) or concealment (Sec.
143) of material facts is invalid.
6. Written or Oral: Unlike English law, under Indian law a guarantee need not be in writing — it may
be oral (Sec. 126).
7. Existing Debt: The guarantee must be for an existing debt, present or future obligation, or a
contingent liability.

Section 127, ICA 1872

Consideration for Guarantee — Anything done or promise made for the benefit of the principal debtor is
sufficient consideration for the surety, even without direct benefit to the surety.

B. Kinds of Guarantee
Type Description Example

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 Specific/Simple Guarantee Given for a single and specific transaction. Ends when
Guaranteeing
the transaction
repayment
is complete.
of a single loan.

Continuing Guarantee (Sec. 129)

Extends to a series of transactions. Surety is liableGuaranteeing
for all transactions
a shopuntil
credit
revocation.
limit.

Retrospective Guarantee Given for an existing debt (past transaction). Guaranteeing old outstanding dues.

Prospective Guarantee Given for a future debt or obligation. Guaranteeing future credit sales.

Limited Guarantee Liability of surety is limited to a specific amount. Surety guarantees up to Rs. 50,000.

Unlimited Guarantee Surety liability is co-extensive with that of the principal

All amounts
debtor. due from principal debtor.

C. Rights of Surety
(i) Rights Against the Creditor:
• Right of Subrogation (Sec. 140): On paying the debt, surety steps into the shoes of the creditor and
can exercise all rights the creditor had against the principal debtor.
• Benefit of Securities (Sec. 141): Surety is entitled to the benefit of every security which the creditor
has against the principal debtor, even if the surety was unaware of such security. Loss/release of
security by creditor discharges surety pro tanto.
• Right to Set-off: Surety can avail any set-off or counterclaim available to the principal debtor.

(ii) Rights Against the Principal Debtor:

• Right of Indemnity (Sec. 145): In every contract of guarantee, there is an implied promise by the
principal debtor to indemnify the surety. Surety can recover all sums rightfully paid.
• Right of Subrogation (Sec. 140): After payment, surety can sue the principal debtor in the creditor's
name.

(iii) Rights Against Co-Sureties:

• Contribution (Sec. 146–147): Co-sureties are liable to contribute equally (Sec. 146). If they have
bound themselves in different amounts, they contribute proportionally to the maximum amount each
agreed to pay (Sec. 147).

D. Discharge of Surety
The surety is discharged from liability in the following circumstances:

Ground of Discharge Section Explanation

Revocation of Continuing Guarantee 130 Surety may revoke at any time as to future transactions by notice to creditor.

Death of Surety 131 Death discharges surety as to future transactions under a continuing guarante

Variance in Terms (Alteration) 133 Any material variation in terms of contract (without surety's consent) discharge

Release of Principal Debtor 134 If creditor releases principal debtor, surety is also discharged.

Composition with Principal Debtor 135 Any arrangement to give time or not to sue principal debtor (without consent o

Creditor's Act Impairing Surety's Remedy

139 Any act/omission by creditor that impairs surety's eventual remedy against PD

Loss of Security 141 If creditor loses or parts with security without surety's consent, surety is discha

Guarantee Obtained by Misrepresentation

142 Guarantee obtained by misrepresentation is invalid.

Guarantee Obtained by Concealment 143 Creditor's concealment of material facts invalidates guarantee.

Failure of Consideration 142 No consideration makes the guarantee void.

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 CASE: State Bank of India v. Indexport Registered
Citation: AIR 1992 SC 1740

Held: The Supreme Court held that the surety cannot be discharged on the ground that the creditor has not
taken adequate steps to recover from the principal debtor.

Principle: Creditor is not obliged to first exhaust remedies against principal debtor before proceeding
against surety.

CASE: Bank of Bihar v. Dr. Damodar Prasad

Citation: AIR 1969 SC 297

Held: The creditor is not required to exhaust all remedies against the principal debtor before proceeding
against the surety.

Principle: Surety's liability is co-extensive with that of the principal debtor.

E. Distinction: Contract of Indemnity vs. Contract of Guarantee

Basis Contract of Indemnity Contract of Guarantee

Parties Two parties — indemnifier and Three parties — creditor, principal

indemnity holder. debtor, and surety.

Number of Contracts Only one contract. Three contracts (principal debt,

surety-creditor, surety-PD).

Primary Liability Indemnifier is primarily liable. Principal debtor is primarily liable;

surety secondarily.

Purpose Save from loss. Give security to creditor.

Request May or may not be at request of Always at request of principal

debtor. debtor.

Existing Debt No existing debt necessary. Presupposes an existing debt or

liability.

Rights After Payment No right of subrogation. Surety gets right of subrogation

after payment (Sec. 140).

Writing Requirement Need not be in writing (Indian Need not be in writing (Indian
Law). Law); must be in writing under
English Law.

FLOWCHART: How a Contract of Guarantee Works

PRINCIPAL DEBTOR borrows / incurs liability → CREDITOR

▼
SURETY guarantees repayment to CREDITOR (Sec. 126)

▼
PRINCIPAL DEBTOR DEFAULTS

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 CREDITOR demands payment from SURETY

▼
SURETY pays CREDITOR

▼
SURETY gets Right of Subrogation (Sec. 140) — can recover from PRINCIPAL DEBTOR

▼
SURETY entitled to securities held by CREDITOR (Sec. 141)

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 UNIT – 2
BAILMENT AND PLEDGE
Indian Contract Act, 1872 — Sections 148–181

2.1 DEFINITION OF BAILMENT

Section 148, ICA 1872

Section 148: A bailment is the delivery of goods by one person to another for some purpose, upon
a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of
according to the directions of the person delivering them. The person delivering the goods is the
Bailor; the person to whom they are delivered is the Bailee.

2.2 ESSENTIAL REQUISITES OF BAILMENT

1. Delivery of Goods: There must be delivery of movable goods — actual or constructive. Sec. 149:
Delivery may be by doing anything which has the effect of putting goods in the possession of the
bailee.
2. Goods Must be Movable: Bailment applies only to movable property, not immovable property.
3. Purpose: Goods must be delivered for a specific purpose (e.g., custody, repair, carriage, pledge).
4. Return Obligation: After the purpose is over, goods must be returned or disposed as directed by
the bailor. If goods are consumed/destroyed, it is not bailment — it is a sale or loan.
5. No Transfer of Ownership: Ownership remains with the bailor; only possession passes to the
bailee.
6. Contractual Relationship: Bailment is based on a contract — express or implied.

2.3 KINDS OF BAILMENT

Type Basis Examples Section

Gratuitous Bailment Without any reward/benefit Lending a book to a friend; free storage—

Non-Gratuitous BailmentFor reward/mutual benefit Car at parking lot, goods with carrier —

For Exclusive Benefit of Bailor

Bailee serves bailor only Depositing luggage at station Sec. 150

For Exclusive Benefit of Bailee

Bailor derives no benefit Lending a bicycle —

For Mutual Benefit Both parties benefit Goods sent to tailor, vehicle repair —

Pledge (Pawn) Security for debt/performance

Pledging jewels for loan Sec. 172

2.4 DUTIES AND RIGHTS OF BAILOR

Duties of Bailor:
• [Sec. 150] Disclose faults in goods — gratuitous bailment: disclose all known defects; non-gratuitous:
disclose all defects even unknown.
• [Sec. 158] Pay necessary expenses in gratuitous bailment (extraordinary expenses not covered by
bailee's duty).
• [Sec. 159] Demand return of goods only at reasonable time in gratuitous bailment.

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 • [Sec. 164] Indemnify bailee for any loss suffered due to defective title.
• [Sec. 163] Receive back goods at proper time.

Rights of Bailor:
• Right to demand return of goods after purpose is accomplished.
• Right to claim damages for unauthorized use by bailee (Sec. 154).
• Right to claim damages for mixture of goods without consent (Sec. 155–157).
• Right to terminate gratuitous bailment at will (Sec. 159).
• Right to enforce bailee's duties.

2.4 DUTIES AND RIGHTS OF BAILEE

Duties of Bailee:
• [Sec. 151] Take as much care of goods as a person of ordinary prudence would take of his own
goods — uniform standard of care.
• [Sec. 154] Not to make unauthorized use of goods. Any unauthorized use makes bailee liable for
damages.
• [Sec. 155–157] Not to mix goods without bailor's consent. Three situations: (a) consent given —
share proportionally; (b) without consent but separable — separate at own cost; (c) inseparable —
compensate bailor.
• [Sec. 160] Return goods on time — failure makes bailee responsible as bailor.
• [Sec. 163] Return increase or profit accrued from goods to bailor.

Rights of Bailee:
• [Sec. 165] Deliver goods to any joint bailor even without consent of others.
• [Sec. 170] Lien on goods — particular lien (non-gratuitous bailment) for charges in respect of goods
held.
• [Sec. 171] General lien — bankers, factors, wharfingers, attorneys, and policy-brokers have general
lien.
• [Sec. 167] Right to apply to court if uncertain about bailor's title.
• [—] Right to sue bailor for breach of warranty of title (Sec. 164).

KEY POINT: KEY: Standard of Care — Sec. 151 imposes ONE uniform standard: care of a
prudent man over his own goods. It does not vary with type of bailment — overturning the old
three-tier English law standard.

CASE: Ram Gulam v. Govt of UP

Citation: AIR 1950 All 206

Held: Government held not liable as bailee for ornaments stolen while in police custody since the goods
were not voluntarily deposited.

Principle: There must be voluntary delivery to create a bailment.

CASE: Ultzen v. Nicols

Citation: [1894] 1 QB 92

Held: A waiter taking a coat from a customer at a restaurant was held to be a bailee. Customer was entitled
to return of the coat.

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 Principle: Bailment may arise from conduct without express contract.

2.5 TERMINATION OF BAILMENT

Bailment comes to an end in the following ways:
• On expiry of the fixed period (Sec. 160).
• On accomplishment of the purpose for which goods were bailed.
• Inconsistent use of goods by bailee — bailor can terminate (Sec. 153).
• Destruction of goods — bailment ends automatically.
• By notice — gratuitous bailment can be revoked at any time (Sec. 159).
• Death of bailor or bailee in gratuitous bailment (Sec. 162).

2.6 PLEDGE (PAWN)

Sections 172–181, ICA
1872

Section 172: The bailment of goods as security for payment of a debt or performance of a promise
is called a pledge. The bailor in pledge is called the Pawnor; the bailee is called the Pawnee.

A. Rights of Pawnee (Creditor)

• [Sec. 173] Right of Retainer: Pawnee may retain goods for payment of debt, interest, and all
expenses incurred in respect of possession.
• [Sec. 174] Retainer for Subsequent Advances: Pawnee may retain goods for any subsequent
advances made, in the absence of contract to the contrary.
• [Sec. 175] Extraordinary Expenses: Pawnee entitled to receive from pawnor extraordinary
expenses incurred for preservation of goods.
• [Sec. 176] Right to Sue / Sell: If pawnor defaults, pawnee may: (a) sue and retain goods as
collateral, OR (b) sell goods after reasonable notice to pawnor.

B. Rights and Duties of Pawnor (Debtor)

• Right to redeem goods on payment of debt + interest + expenses before sale.
• Right to receive surplus proceeds if sale price exceeds debt.
• Liability to pay deficiency if sale price is less than debt.
• Right to demand return of goods on repayment.
• Duty not to impair the pledge.

C. Pledge by Non-Owners (Special Cases)

Case Section Condition

Pledge by person in possession under

178Avoidable contract
Pawnee must act in good faith; pawnor's title not yet avoided.

Pledge by mercantile agent 178 Agent must have possession with owner's consent in ordinary course of busin

Pledge by seller remaining in possession

178A after sale Valid pledge if pawnee acts in good faith without notice of prior sale.

Pledge by buyer before property passes

178A Valid if seller's consent exists for sale.

Distinction: Bailment vs. Pledge

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 Basis Bailment Pledge

Purpose Custody, carriage, repair, etc. Security for debt/performance.

Right to Sell Bailee has NO right to sell. Pawnee CAN sell after notice
(Sec. 176).

Right of Use Bailee may use as per terms. Pawnee CANNOT use goods
pledged.

Return Return goods after purpose. Return on repayment.

Parties Bailor and Bailee. Pawnor and Pawnee.

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 UNIT – 3
CONTRACT OF AGENCY
Indian Contract Act, 1872 — Sections 182–238

3.1 DEFINITION OF AGENT AND PRINCIPAL

Section 182, ICA 1872

Section 182: An Agent is a person employed to do any act for another or to represent another in
dealings with third persons. The person for whom such act is done, or who is so represented, is
called the Principal.

Section 183: Any person who is of the age of majority and of sound mind can appoint an agent.
Section 184: Any person may become an agent — even a minor can be an agent (though not
personally liable).

KEY POINT: The test of agency: Does the alleged agent have authority to create legal relations
between the principal and third parties? — Consideration is NOT necessary for creation of agency.

3.2 CREATION OF AGENCY

Agency may be created by any of the following modes:
1. By Express Agreement (Sec. 182): Oral or written appointment. A formal document is called a
Power of Attorney.
2. By Implied Agreement (Sec. 187): Inferred from conduct, situation, or necessity. Includes: agency
by estoppel, agency by holding out.
3. Agency of Necessity (Sec. 188): In emergencies, a person may act as agent without authority —
e.g., master of ship sells cargo to save the voyage.
4. Agency by Ratification (Sec. 196–200): Principal may subsequently ratify an unauthorized act.
Ratification relates back to original act (relates back doctrine).
5. Agency by Operation of Law: Created by law — e.g., partners are agents of the firm; promoters
are agents before incorporation.

Conditions for Valid Ratification (Sec. 196–200):

• Principal must have been in existence at the time of the act.
• Principal must have had contractual capacity.
• The agent must have purported to act as agent (disclosed agency).
• Ratification must be of the whole act — not a part.
• Ratification must be within a reasonable time.
• Act must not be void or illegal.
• No injury to third parties.

3.3 DUTIES OF AGENT (Sections 211–221)

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 • [Sec. 211] Follow principal's instructions: Conduct the business as directed; in absence, follow
usage/custom.
• [Sec. 212] Skill and diligence: Exercise such skill and diligence as is generally possessed by
persons engaged in similar business.
• [Sec. 213] Render accounts: Render proper accounts to principal on demand.
• [Sec. 214] Communicate: Communicate with principal in case of difficulty; not act on own judgment
in emergency without communication.
• [Sec. 215] Not deal on own account: Must not deal on his own account in business for principal
without disclosure.
• [Sec. 216] Disclose secret profits: Account for and pay secret profits to principal.
• [Sec. 218] Not delegate: Delegate authority only in permitted cases.
• [Sec. 222] Indemnify: Compensate principal for loss caused by breach of duty or willful misconduct.

3.3 RIGHTS OF AGENT

• [Sec. 217] Retainer: Retain monies received on principal's account for advances/expenses.
• [Sec. 219] Remuneration: Receive agreed or reasonable remuneration. Not entitled if guilty of
misconduct.
• [Sec. 220] Lien: General lien on property of principal until remuneration is paid.
• [Sec. 222] Indemnity against consequences of lawful acts: Principal must indemnify agent for
acts done in course of agency.
• [Sec. 223] Indemnity against consequences of acts done in good faith.
• [Sec. 224] Compensation for injury caused by principal's neglect/want of skill.

3.4 DELEGATION OF AUTHORITY

"Delegatus non potest delegare" — A delegate cannot further delegate. Generally, an agent
cannot delegate his authority to a sub-agent. However, Sec. 190 permits delegation where:
(a) Express permission of principal; (b) Business custom; (c) Nature of act requires delegation; (d)
Emergency; (e) Ministerial/mechanical acts.

• Sub-Agent (Sec. 191): Employed by agent; acts under agent's control. Agent is responsible to
principal for sub-agent's acts. Sub-agent is responsible to agent only (not directly to principal), unless
fraud or wilful wrong.
• Substituted Agent (Sec. 194): Named by agent on principal's instruction. Acts directly for principal;
principal is bound; agent is not responsible for substituted agent's acts.

3.5 PERSONAL LIABILITY OF AGENT (Sec. 230)

General Rule: An agent is not personally liable on contracts made for a disclosed principal.

Exceptions — Agent IS personally liable when:

• Agent contracts in his own name (Sec. 230).
• Principal is undisclosed.
• Principal is foreign principal.
• Agent acts for a principal who cannot be sued (e.g., foreign sovereign).
• Express agreement of personal liability.
• Agent acts outside scope of authority.

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 • Principal ratification is refused.
• Trade custom imposes personal liability.

3.6 RELATIONS OF PRINCIPAL WITH THIRD PARTIES

• [Sec. 226] Acts of Agent within authority: Principal bound by all acts of agent within scope of
actual or apparent authority.
• [Sec. 227] Acts beyond authority: Where agent exceeds authority, the divisible part within authority
binds the principal.
• [Sec. 228] Notice to agent = Notice to principal (within scope of agency).
• [Sec. 229] Misrepresentation or fraud by agent: Principal liable if done within scope of authority,
even if principal did not authorize.
• [Sec. 237] Liability of principal for estoppel: If principal negligently allows agent to hold out
authority, third parties acting on apparent authority can hold principal liable.

3.7 TERMINATION OF AGENCY (Sec. 201–210)

Modes of Termination:
Mode Section Details

By Act of Parties — (a) Revocation by principal (Sec. 203); (b) Renunciation by agent (Sec. 206)

By Operation of Law — Death or insanity of principal or agent (Sec. 201); insolvency; destruction of subject m

Irrevocable Agency (Sec. 202) 202 Agency coupled with interest — principal CANNOT revoke; e.g., agent has interest in

Revocation with Compensation 205 If agency is for fixed period and revoked without sufficient cause, principal must comp

Notice Required (Sec. 208) 208 Termination effective only on communication to agent and to third parties who dealt w

CASE: Watteau v. Fenwick

Citation: [1893] 1 QB 346

Held: An innkeeper employed as agent could bind his undisclosed principal (hotel owner) for purchases
within usual authority, even though principal had restricted his authority.

Principle: Third parties can rely on apparent/usual authority of an agent even against an undisclosed
principal.

CASE: Keighley Maxsted & Co v. Durant

Citation: [1901] AC 240

Held: Ratification is not possible when the agent at the time of contracting did not disclose that he was
acting as agent for another.

Principle: Undisclosed principal cannot subsequently ratify agent's unauthorized act.

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 UNIT – 4
CONTRACT OF SALE OF GOODS
The Sale of Goods Act, 1930

4.1 FORMATION OF CONTRACT OF SALE

Section 4, Sale of
Goods Act 1930

Section 4(1): A contract of sale of goods is a contract whereby the seller transfers or agrees to
transfer the property in goods to the buyer for a price.

Sale vs. Agreement to Sell:

• Sale (Sec. 4(3)): Property in goods passes to buyer immediately — executed contract.
• Agreement to Sell (Sec. 4(3)): Property to pass at future time or subject to condition —
executory contract.

Basis Sale Agreement to Sell

Transfer of Property Immediate — on making of Future — after fulfillment of

contract. condition.

Risk of Loss Passes with property to buyer. Remains with seller until property
passes.

Rights on Default Buyer can sue for specific delivery; Either party can sue only for
seller can sue for price. damages.

Insolvency of Buyer Seller must deliver — has right to Seller need not deliver; reclaim
price. goods.

Insolvency of Seller Buyer can claim goods from official Buyer can only claim rateable
receiver. dividend.

Nature Executed contract. Executory contract.

4.2 SUBJECT MATTER OF CONTRACT OF SALE (Sec. 6–8)

• [Sec. 6] Existing Goods: Goods owned or possessed by seller at time of contract; includes specific,
ascertained, and unascertained goods.
• [Sec. 6] Future Goods: Goods to be manufactured, produced, or acquired after the contract —
agreement to sell only.
• [Sec. 7] Perishing of specific goods before contract: If goods perish before contract (unknown to
seller), contract is void.
• [Sec. 8] Perishing of goods after contract: If specific goods perish before risk passes to buyer
(without fault), agreement to sell becomes void.

4.3 CONDITIONS AND WARRANTIES

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 Condition (Sec. 12(2)): A stipulation essential to the main purpose of the contract. Breach gives
right to treat contract as repudiated AND claim damages.

Warranty (Sec. 12(3)): A stipulation collateral to the main purpose. Breach gives right to claim
damages only — cannot repudiate contract.

Implied Conditions (Sec. 14–17):

• [Sec. 14(a)] Right to Sell: Seller must have right to sell goods at time of sale.
• [Sec. 14(b)] Quiet Possession: Buyer shall have and enjoy quiet possession of goods.
• [Sec. 14(c)] Freedom from Encumbrances: Goods shall be free from charge/encumbrance in favor
of any third party.
• [Sec. 15] Sale by Description: Goods must correspond with description. (Arcos v. Ronasen — "a
thing is sold by description even if buyer sees the goods if the buyer relies on the description")
• [Sec. 16(1)] Merchantable Quality: When goods are bought by description from seller dealing in
such goods, they must be of merchantable quality.
• [Sec. 16(2)] Fitness for Purpose: Where buyer makes known purpose to seller and relies on seller's
skill/judgment, implied condition that goods shall be reasonably fit.
• [Sec. 17] Sale by Sample: Bulk must correspond with sample in quality; buyer must have reasonable
opportunity to compare; goods must be free from defect not apparent on reasonable examination.

Implied Warranties:
• Quiet possession (Sec. 14(b)).
• Freedom from encumbrances (Sec. 14(c)).
• Warranty as to quality/fitness by usage of trade (Sec. 16(4)).
• Warranty in sale by sample — freedom from latent defect.

CASE: Priest v. Last

Citation: [1903] 2 KB 148

Held: A buyer bought a hot water bottle for use as such. It burst and injured him. Held: implied condition of
fitness for purpose — seller liable.

Principle: If buyer discloses purpose and relies on seller's skill, there is implied condition of fitness.

CASE: Grant v. Australian Knitting Mills

Citation: [1936] AC 85

Held: Dr Grant contracted dermatitis from underpants with excess sulphite. Condition of merchantable
quality applied even to goods worn next to skin.

Principle: Goods must be fit for purpose even in non-obvious applications if normal use is established.

4.4 DOCTRINE OF CAVEAT EMPTOR (Section 16)

"Caveat Emptor" = Let the Buyer Beware. The buyer must inspect goods and satisfy himself —
seller gives no warranty as to quality or fitness unless expressly stipulated. The buyer buys at his
own risk.

Exceptions to Caveat Emptor (Where doctrine does NOT apply):

Contracts-II | Special Contracts | LL.B. Semester II Page 16

 1. When buyer discloses the purpose and relies on seller's skill and judgment (Sec. 16(1)).
2. When goods are bought from seller who deals in goods of that description — merchantable quality
(Sec. 16(2)).
3. Sale by sample — goods must correspond with sample (Sec. 17).
4. Sale by description — goods must correspond with description (Sec. 15).
5. When seller actively conceals a defect or makes a fraudulent misrepresentation.
6. Usage of trade may impose implied warranty (Sec. 16(4)).

4.5 TRANSFER OF PROPERTY (PASSING OF PROPERTY)

IMPORTANCE: Risk passes with property (Sec. 26). Hence it is critical to determine when property
passes.

Specific/Ascertained Goods (Sec. 19–20):

• [Sec. 19] Property passes when parties intend it to pass. Intention gathered from conduct, terms, and
circumstances.
• [Sec. 20] If specific goods in deliverable state — property passes when contract is made, even if
payment/delivery is postponed.
• [Sec. 21] If goods need weighing/measuring to ascertain price — property passes when done and
buyer notified.
• [Sec. 22] If seller has to do something to put goods in deliverable state — property passes when
done and buyer has notice.

Unascertained Goods (Sec. 23):

Property passes when goods are appropriated (set aside/identified) to the contract, with express or
implied assent of both parties. Called "appropriation."

Goods Sold on Approval / "On Sale or Return" (Sec. 24):

• Property passes when buyer signifies approval or does any act adopting the transaction.
• If buyer retains goods beyond fixed time (or reasonable time if no fixed time), property passes.

4.6 SALE BY NON-OWNERS (Nemo Dat Rule)

Nemo dat quod non habet — No one can give what he does not have. Only owner can pass valid
title.
Section 27: Sale of goods by a non-owner gives buyer no better title than the seller.

Exceptions (Sec. 27–30):

Exception Section Condition

Sale by owner with consent 27 Owner's conduct precludes him from denying seller's authority.

Sale by mercantile agent 27 (proviso) Agent must have possession with owner's consent; buyer acts in good faith.

Sale under voidable contract29 Title not avoided at time of sale; buyer has no notice of defect in title.

Sale by seller in possession 30(1)

after sale Buyer/pledgee takes in good faith and without notice of prior sale.

Sale by buyer in possession 30(2)

after agreement toSeller/pledgee
buy in good faith and without notice of lien.

Sale by court (official liquidator/receiver)

— Authorized by law; passes good title.

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 4.7 RIGHTS OF UNPAID SELLER (Sec. 45–54)
Section 45, Sale of
Goods Act 1930

Sec. 45 — Unpaid Seller: A seller is "unpaid" when:

(a) Whole price has not been paid or tendered; OR
(b) Conditional payment (e.g., cheque) was given but dishonoured.

Rights of Unpaid Seller AGAINST GOODS:

• [Sec. 46(1)(a)] Right of Lien (Sec. 47–49): Right to retain goods until payment. Available when:
goods sold without credit; credit period has expired; buyer is insolvent.
• [Sec. 46(1)(b)] Right of Stoppage in Transit (Sec. 50–52): Right to resume possession of goods
while in transit if buyer is insolvent. Transit ends when buyer gets possession or carrier acknowledges
holding for buyer.
• [Sec. 46(1)(c)] Right of Resale (Sec. 54): Right to resell perishable goods, or if buyer does not pay
within reasonable notice period. Must give notice to buyer (except perishables).

Rights of Unpaid Seller AGAINST BUYER (Sec. 55–56):

• Suit for Price (Sec. 55): When property has passed, seller may sue buyer for price even if no
delivery.
• Suit for Damages for Non-Acceptance (Sec. 56): When buyer wrongfully refuses to accept and
pay, seller may sue for damages.

FLOWCHART: Rights of Unpaid Seller

CONTRACT OF SALE — Seller delivers goods

▼
BUYER fails to pay price

▼
SELLER = UNPAID SELLER (Sec. 45)

▼
Is property in goods passed to buyer?

▼
YES → Lien (Sec. 47) | Stoppage in Transit (Sec. 50) | Resale (Sec. 54)

▼
After property passed → Suit for price (Sec. 55) | Suit for damages (Sec. 56)

▼
NO (goods still in transit) → Stoppage in Transit

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 UNIT – 5
CONTRACT OF PARTNERSHIP
The Indian Partnership Act, 1932

5.1 DEFINITION AND NATURE OF PARTNERSHIP

Section 4, Indian
Partnership Act 1932

Section 4: "Partnership" is the relation between persons who have agreed to share the profits of a
business carried on by all or any of them acting for all. Persons who have entered into partnership
with one another are called individually "partners" and collectively "a firm", and the name under
which their business is carried on is called the "firm name."

5.2 ESSENTIAL ELEMENTS OF PARTNERSHIP

1. Agreement: Must be by agreement — express or implied; not status or operation of law. Hindu
Undivided Family is NOT a partnership.
2. Two or More Persons: Minimum 2 persons. Maximum: Banking business — 10 persons; any other
business — 20 persons (now Companies Act 2013 allows up to 50 for non-banking firms under new
rules).
3. Business: Must carry on a "business" — includes every trade, occupation, and profession. Not a
single transaction (unless it forms a series by nature).
4. Sharing of Profits: Must agree to share profits. Sharing of gross returns alone is not partnership.
Loss-sharing is not essential — but the sharing must be of profits.
5. Mutual Agency (TRUE TEST): The business must be carried on by all or any of them acting for all.
Each partner is an agent of the firm and of the other partners — this is the TRUE TEST of partnership
(Sec. 18).

KEY POINT: TRUE TEST OF PARTNERSHIP: Is the relation of mutual agency present? The
sharing of profits is only prima facie evidence — not conclusive (Cox v. Hickman, 1860).

5.3 TEST OF PARTNERSHIP (Sec. 6)

Section 6 provides that in determining whether a group is a partnership, regard shall be had to the real
relationship between the parties — not merely the documents used.

Profit sharing is NOT conclusive evidence of partnership in these cases:

• Lender receiving interest as share of profits.
• Employee/servant receiving wages as share of profits.
• Widow/child receiving annuity out of profits.
• Seller of goodwill receiving a share of profits.
• Members of HUF carrying on business.

CASE: Cox v. Hickman

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 Citation: (1860) 8 HLC 268

Held: Creditors of a business who received share of profits in repayment of debt were held NOT to be
partners — there was no mutual agency.

Principle: Sharing of profits alone is not sufficient to constitute partnership — mutual agency is the true
test.

CASE: Mollow v. Court of Wards

Citation: (1872) 4 PC 419

Held: Court held that mere sharing of profits does not create partnership without the element of mutual
agency.

Principle: Partnership requires both profit-sharing AND mutual agency.

5.4 PARTNERSHIP vs. OTHER ASSOCIATIONS

Basis Partnership Company HUF Co-ownership

Creation By agreement By registration By birth/status By agreement or

under Companies law
Act

Legal Entity Not a separate Separate legal Not separate entity Not a separate
legal entity entity entity

Liability Unlimited Limited (usually) Karta's unlimited Proportionate

share

Max Members 50 (non-banking) No limit (public All male lineal No limit

company) descendants

Mutual Agency Yes No No No

Registration Optional Compulsory Not required Not required

5.5 REGISTRATION OF FIRMS (Sec. 58–71)

Sec. 58: Registration is NOT compulsory — it is optional. A firm may be registered at any time.

Procedure for Registration:

1. File a statement with the Registrar of Firms in the prescribed form.
2. Statement must contain: firm name, place of business, date of joining of partners, names and
addresses of partners, duration of firm.
3. Each partner must sign the statement.
4. Registrar records entry in Register of Firms — the firm is registered.
5. Certificate of Registration is issued.

Effect of Non-Registration (Sec. 69):

An unregistered firm suffers the following disabilities:
• Sec. 69(1): No partner of an unregistered firm can sue another partner or the firm to enforce rights
arising from a contract.
• Sec. 69(2): The firm cannot file a suit against a third party to enforce a right arising from a contract.

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 • Sec. 69(3): A claim of set-off exceeding Rs. 100 cannot be enforced by an unregistered firm.

Non-registration does NOT affect:

• Right to file suits not exceeding Rs. 100.
• Criminal proceedings.
• Insolvency proceedings.
• Dissolution suits.
• Third parties' suits against the firm.
• Rights in torts.

5.6 RIGHTS AND DUTIES OF PARTNERS

Rights of Partners (Subject to contract):
• [Sec. 12(a)] Right to take part in conduct of business.
• [Sec. 12(b)] Right to express opinion — differences decided by majority; no change in nature of
business without unanimity.
• [Sec. 12(c)] Right to inspect and copy books.
• [Sec. 12(d)] Right to share profits.
• [Sec. 13(b)] Right to interest on capital at 6% p.a. only from profits.
• [Sec. 13(c)] Right to interest on advances/loans at 6% p.a.
• [Sec. 13(e)] Right to indemnity for liabilities incurred in ordinary course of business.
• [Sec. 30] Right to admit minor with consent of all partners.

Duties of Partners:
• [Sec. 9] Carry on business to greatest common advantage; be just and faithful to each other; render
true accounts and full information.
• [Sec. 10] Indemnify the firm for any loss caused by wilful neglect.
• [Sec. 13(a)] Attend to the firm's business diligently.
• [Sec. 16] Account for profits from competing business or use of firm name/property.
• [Sec. 11] Duty not to carry on competing business without consent of partners.

5.7 IMPLIED AUTHORITY OF A PARTNER (Sec. 19)

Sec. 19: Subject to the provisions of Sec. 22, the act of a partner which is done to carry on, in the
usual way, business of the kind carried on by the firm, binds the firm. The authority so implied is the
implied authority.

Acts within Implied Authority:

• Buy and sell goods of a kind the firm deals in.
• Draw, accept, endorse negotiable instruments in firm name.
• Engage servants for firm business.
• Pay and receive money and give receipt.
• Compromise or compound claims (trading firm).

Acts OUTSIDE Implied Authority (Sec. 19(2)):

• Submit a dispute to arbitration.
• Open bank account in own name on behalf of firm.

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 • Acquire immovable property.
• Compromise claim of or against firm.
• Withdraw suit filed on behalf of firm.
• Admit liability in a suit against the firm.
• Enter into partnership on behalf of firm.
• Execute a negotiable instrument so as to bind the firm (unless trading firm).

5.8 KINDS OF PARTNERS

Type Description

Active/Working Partner Takes active part in management; fully liable.

Sleeping/Dormant Partner Contributes capital but takes no active part; equally liable.

Nominal Partner Lends name only — no capital, no profit; liable to third parties.

Partner in Profits Only Shares profits but not losses (Sec. 4 proviso).

Sub-Partner A partner who shares his own profits with an outsider — outsider not a partner of the firm.

Partner by Estoppel (Holding Out) Not an actual partner but holds himself out as one — liable to any person who gave credit on fa

Incoming Partner Admitted to existing firm — not liable for acts before admission (Sec. 31).

Outgoing/Retiring Partner Retires from firm — remains liable for past acts; may remain liable for future unless notice given

Minor Partner (Sec. 30) Admitted to benefits of partnership only with consent of all. Not personally liable; only share is li

5.9 MINOR AS PARTNER (Section 30)

Sec. 30: A minor cannot be a full partner (lacks contractual capacity) but may be admitted to the
benefits of partnership with the consent of all existing partners.

Position of Minor:
• Entitled to share in profits and property of firm.
• Has access to accounts, not management.
• NOT personally liable for debts of the firm.
• Only his share in the firm is liable for firm debts.
• Cannot be made personally liable by any agreement.

Position After Attaining Majority (within 6 months):

• Must give public notice whether he chooses to become a partner or not.
• If he becomes a partner — liable from date of his admission to benefits.
• If he elects to leave — his share is not liable for future acts; entitled to his share from dissolution.
• If he fails to give notice — deemed to have elected to become a partner from expiry of 6 months.

5.10 RECONSTITUTION OF FIRM

• [Sec. 31] Admission of Partner: With consent of all existing partners. Incoming partner is not liable
for past acts.
• [Sec. 32] Retirement of Partner: With consent of all; or as per partnership deed; or by giving notice
if partnership is at will.

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 • [Sec. 33] Expulsion: Only if expressly authorized by partnership deed; must be in good faith and
majority decision.
• [Sec. 34] Insolvency of Partner: Insolvent partner ceases to be a partner; estate not liable for future
acts.
• [Sec. 35] Death: Firm dissolved unless otherwise agreed.
• [Sec. 37] Liability of Retired Partner: Retired partner remains liable until public notice of retirement
is given.

5.11 DISSOLUTION OF FIRM (Sec. 39–55)

Mode Section Details

Dissolution by Agreement 40 All partners consent.

Compulsory Dissolution 41 All or all-but-one become insolvent; business becomes unlawful.

Contingent Dissolution 42 Happening of contingency — death, insolvency of partner, expiry of term (if agreed).

Dissolution by Notice 43 Partnership at will — any partner may dissolve by notice.

Dissolution by Court (Sec. 44)

44 (a) Insanity; (b) Permanent incapacity; (c) Misconduct; (d) Persistent breach of agreeme

Consequences of Dissolution:
• [Sec. 45] Partners remain liable for acts done by any partner in winding up — until notice of
dissolution given.
• [Sec. 46] Right of partners to have business wound up after dissolution.
• [Sec. 48] Settlement of accounts: liabilities paid first, then capital returned, surplus divided in
profit-sharing ratio.
• [Sec. 53] Restraint of trade clause — reasonable restraint on partners after dissolution is valid.

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 UNIT – 6
NEGOTIABLE INSTRUMENTS ACT, 1881
Sections 1–147 | Key Amendments

6.1 MEANING AND CHARACTERISTICS OF NEGOTIABLE

INSTRUMENT
Section 13, NI Act 1881

Section 13(1): A "negotiable instrument" means a promissory note, bill of exchange or cheque
payable either to order or to bearer.

Characteristics of Negotiable Instruments:

(a) Freely transferable by delivery or endorsement and delivery;
(b) Transferee gets a good title free from defects (if holder in due course);
(c) Holder can sue in his own name;
(d) Presumption of consideration, date, time, endorsement, capacity, etc.

6.2 PROMISSORY NOTE (Sec. 4)

Sec. 4: A promissory note is an instrument in writing (not being a banknote or a currency note)
containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only
to, or to the order of, a certain person, or to the bearer of the instrument.

Essentials of Promissory Note:

1. Must be in writing.
2. Unconditional promise to pay (not merely an acknowledgment of debt).
3. Must be signed by the maker.
4. Must be for a fixed sum of money only.
5. Payable to a definite person or his order, or to bearer.
6. Stamp duty must be paid as required under Indian Stamp Act.
7. Must be delivered to the payee.
Parties: Maker (debtor who promises to pay) and Payee (creditor to whom payment is promised). Two
parties.

6.3 BILL OF EXCHANGE (Sec. 5)

Sec. 5: A bill of exchange is an instrument in writing containing an unconditional order, signed by
the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a
certain person or to the bearer of the instrument.

Parties to Bill of Exchange:

1. Drawer: Person who makes/draws the bill (creditor).
2. Drawee: Person on whom the bill is drawn — directed to pay (debtor).

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 3. Payee: Person to whom payment is to be made.
Note: Drawer and Payee can be the same person. Drawee on accepting becomes "Acceptor."

6.4 CHEQUE (Sec. 6)

Sec. 6: A cheque is a bill of exchange drawn on a specified banker and not expressed to be
payable otherwise than on demand. A cheque also includes an electronic image of a truncated
cheque and a cheque in the electronic form (after 2002 Amendment).

Distinction: Cheque vs. Bill of Exchange

Basis Cheque Bill of Exchange

Drawee Always a bank. Any person.

Payable Always on demand. On demand or after a fixed period.

Acceptance Not required. Must be accepted by drawee.

Days of Grace Not allowed. 3 days of grace allowed (Sec. 22).

Notice of Dishonour Not mandatory. Must be given (Sec. 92–98).

Stamp Duty Not required. Required under Stamp Act.

Countermand Drawer can stop payment. Drawer cannot countermand.

6.5 CROSSING OF CHEQUES

Crossing is a direction to the paying banker to pay the amount only through a banker, not directly over the
counter.

Type of Crossing Method Effect

General Crossing (Sec. 123)Two parallel transverse lines (with orPayable

withoutthrough
"& Co." aorbank;
"Not Negotiable")
not negotiable if stated.

Special Crossing (Sec. 124) Banker's name written between lines

Payable only through the specified bank.

Not Negotiable Crossing (Sec.

"Not
130)
Negotiable" written between lines
Transferee gets no better title than transferor — protects true owne

Account Payee Crossing "Account Payee" written between lines

Must be credited to payee's account only — not negotiable.

Double Crossing Two special crossings Not allowed — except one bank collecting for another.

6.6 HOLDER AND HOLDER IN DUE COURSE

Holder (Sec. 8): A person entitled in his own name to possession of the instrument and to receive the
amount. May be a payee, indorsee, or bearer.

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 Holder in Due Course (Sec. 9): A person who obtains an instrument for value, before maturity, in
good faith, and without any notice of defect in the title of the transferor.

Privileges of HDC (Sec. 53, 58, 118–119):

• Gets good title even if transferor's title was defective.
• Instrument deemed to have been obtained for valuable consideration.
• Prior parties cannot raise defences of want of consideration, fraud, etc. against HDC.
• HDC can sue all prior parties in his own name.

Basis Holder Holder in Due Course

Consideration May be without consideration. Must have given valuable

consideration.

Good Faith Not required. Must take in good faith.

Notice of Defect Not relevant. Must have no notice of defect.

Before Maturity Not necessary. Must obtain before maturity.

Title Gets title of transferor. Gets perfect title — even if

defective before.

6.7 NEGOTIATION AND ENDORSEMENT (Sec. 14–15, 46–60)

Negotiation (Sec. 14): Transfer of instrument to another person to make that person the holder. Bearer
instrument: by delivery; Order instrument: by endorsement + delivery.

Kinds of Endorsement:
Type Description Effect

Blank/General (Sec. 16) Endorser signs only — no payee named. Converts instrument to bearer.

Full/Special (Sec. 16) Payee's name specified in endorsement. Payable to specified person.

Restrictive (Sec. 50) "Pay A only" — restricts further [Link] further transfer.

Conditional/Qualified Endorsement with condition attached. Endorser not liable if condition not met.

Sans Recours (Sec. 52) "Without recourse" — endorser excludes own

Endorser
[Link] liable on dishonour.

Partial (Sec. 56) Endorsement for only part of amount. Invalid — not allowed.

Facultative Endorser waives notice of dishonour. Endorser liable even without notice.

6.8 DISHONOUR AND NOTICE OF DISHONOUR (Sec. 91–98)

Dishonour by Non-Acceptance (Sec. 91): When drawee does not accept within 48 hours of
presentment, or gives qualified acceptance.
Dishonour by Non-Payment (Sec. 92): When maker/acceptor fails to pay on due date.

Notice of Dishonour (Sec. 93): Must be given by holder to all prior parties to charge them. Not required
for: makers, acceptors, drawee in cheque case if drawer has no funds.
Noting and Protest (Sec. 99–104A): Formal record of dishonour by Notary Public — required for foreign
bills.

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 6.9 SECTION 138 — DISHONOUR OF CHEQUE (Criminal Liability)
Section 138, NI Act
1881

Section 138 (Inserted by Amendment Act, 1988; amended 2002, 2015):

Where any cheque drawn by a person on an account maintained by him with a banker for payment
of any amount of money to another person from out of that account for the discharge, in whole or in
part, of any debt or other liability, is returned by the bank unpaid — the drawer is deemed to have
committed an offence and shall be punished with imprisonment up to 2 years, or fine up to twice
the cheque amount, or both.

Conditions for Applicability of Sec. 138:

1. Cheque must be drawn for discharge of existing liability/debt (not for gift).
2. Cheque must be presented within 3 months from date of issue.
3. Cheque must be returned unpaid by bank (insufficient funds, stop payment, etc.).
4. Holder must send written notice of dishonour to drawer within 30 days of receipt of dishonour memo.
5. Drawer must fail to pay within 15 days of receiving notice.
6. Holder must file complaint within 1 month of expiry of 15-day notice period.

FLOWCHART: Section 138 — Dishonour of Cheque

Cheque issued by Drawer to Payee (for debt/liability)

▼
Cheque presented to bank within 3 months

▼
Bank returns cheque dishonoured

▼
Payee sends written notice to Drawer within 30 days

▼
Drawer fails to pay within 15 days of notice

▼
Payee files complaint in Magistrate's Court within 1 month

▼
Prosecution under Sec. 138 — up to 2 years imprisonment / fine up to 2x cheque amount

CASE: Meters and Instruments (P) Ltd. v. Kanchan Mehta

Citation: AIR 2018 SC 353

Held: SC held that in Sec. 138 cases, a Magistrate can pass sentence / acquit without taking full evidence if
default is not serious.

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 Principle: Streamlining cheque bounce cases for faster disposal.

CASE: Kusum Ingots & Alloys Ltd v. Pennar Peterson Securities Ltd
Citation: AIR 2000 SC 954

Held: SC held that mere signature on a cheque does not give rise to presumption under Sec. 139 that it
was for an enforceable debt if the signatory proves it was a gift.

Principle: Sec. 138 applies only for discharge of a legally enforceable debt.

CASE: Dashrath Rupsingh Rathod v. State of Maharashtra

Citation: AIR 2014 SC 3519

Held: SC held that jurisdiction lies only at the place where cheque is presented — not at payee's residence
or where cheque was handed over.

Principle: Later overruled by 2015 amendment — now jurisdiction is where payee/holder is located (Sec.
142-A).

6.10 KEY SECTIONS QUICK REFERENCE TABLE — NI ACT 1881

Section Subject

4 Promissory Note

5 Bill of Exchange

6 Cheque

8 Holder

9 Holder in Due Course

13 Negotiable Instrument (definition)

14–15 Negotiation

16 Endorsement in Blank and Full

22 Days of Grace

26 Minor — liability on NI

36 Liability of Prior Parties to HDC

46–60 Transfer by Negotiation

78 To Whom Instrument Payable

91–98 Dishonour — Notice

99–104A Noting and Protest

118–119 Presumptions

123–131 Crossing of Cheques

138 Dishonour of Cheque — Criminal Liability

139 Presumption in Sec. 138 cases

140 Defence of accused in Sec. 138

141 Offences by Companies — liability of directors

142 Cognizance and jurisdiction for Sec. 138

142-A Jurisdiction — location of payee (2015 Amendment)

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 143 Speedy trial of Sec. 138 offences

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 MASTER TABLE OF LANDMARK CASE LAWS
Case Act/Unit Principle

Gajanan Moreshwar v. Moreshwar MadanICA / Unit 1 Indemnity holder can sue before actual payment.

Adamson v. Jarvis ICA / Unit 1 Agent acting in good faith entitled to indemnity.

SBI v. Indexport Registered ICA / Unit 1 Creditor need not exhaust remedies against PD before suing surety.

Bank of Bihar v. Dr. Damodar Prasad ICA / Unit 1 Surety's liability co-extensive with that of PD.

Ram Gulam v. Govt of UP ICA / Unit 2 Voluntary delivery required for bailment.

Ultzen v. Nicols ICA / Unit 2 Bailment may arise by conduct without express contract.

Watteau v. Fenwick ICA / Unit 3 Undisclosed principal bound by agent's usual authority.

Keighley Maxsted & Co v. Durant ICA / Unit 3 Cannot ratify without agent disclosing agency at time of act.

Priest v. Last SGA / Unit 4 Implied condition of fitness for purpose.

Grant v. Australian Knitting Mills SGA / Unit 4 Merchantable quality extends to non-obvious applications.

Arcos v. Ronasen SGA / Unit 4 Sale by description — goods must comply strictly.

Cox v. Hickman IPA / Unit 5 Profit sharing alone ≠ partnership; mutual agency is the test.

Mollow v. Court of Wards IPA / Unit 5 Confirmed: mutual agency is the true test.

Meters & Instruments v. Kanchan Mehta NIA / Unit 6 Magistrate may pass sentence in Sec. 138 without full evidence.

Kusum Ingots v. Pennar Peterson NIA / Unit 6 Sec. 138 applies only for legally enforceable debt.

Dashrath Rupsingh Rathod v. Maharashtra

NIA / Unit 6 Jurisdiction (later overruled by 2015 Amendment Sec. 142-A).

IMPORTANT SECTIONS AT A GLANCE

Act Section Subject

ICA 1872 124 Contract of Indemnity — definition

ICA 1872 125 Rights of Indemnity Holder

ICA 1872 126 Contract of Guarantee — definition

ICA 1872 127 Consideration for Guarantee

ICA 1872 129 Continuing Guarantee

ICA 1872 130–131 Revocation / Death of Surety

ICA 1872 133–143 Discharge of Surety (all grounds)

ICA 1872 140–141 Subrogation / Securities

ICA 1872 145 Surety's right of indemnity against PD

ICA 1872 148 Bailment — definition

ICA 1872 151 Standard of care — bailee

ICA 1872 154 Unauthorized use — bailee's liability

ICA 1872 170–171 Particular and General Lien

ICA 1872 172 Pledge — definition

ICA 1872 176 Pawnee's right to sell on default

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 ICA 1872 182 Agent and Principal — definition

ICA 1872 196–200 Ratification of agency

ICA 1872 202 Irrevocable agency (Agency coupled with interest)

ICA 1872 211–222 Duties of Agent

SGA 1930 4 Sale and Agreement to Sell

SGA 1930 12 Condition and Warranty

SGA 1930 14–17 Implied Conditions and Warranties

SGA 1930 16 Caveat Emptor + exceptions

SGA 1930 19–24 Passing of Property

SGA 1930 27–30 Sale by Non-Owners

SGA 1930 45 Unpaid Seller — definition

SGA 1930 47–54 Rights of Unpaid Seller against goods

SGA 1930 55–56 Rights of Unpaid Seller against buyer

IPA 1932 4 Definition of Partnership

IPA 1932 6 Determining existence of partnership

IPA 1932 18–19 Partner as agent; Implied authority

IPA 1932 28 Partner by Holding Out (Estoppel)

IPA 1932 30 Minor as Partner

IPA 1932 31–37 Reconstitution — incoming/outgoing partners

IPA 1932 40–44 Dissolution

IPA 1932 58–65 Registration

IPA 1932 69 Effect of Non-Registration

NI Act 1881 4–6 Promissory Note, BoE, Cheque

NI Act 1881 8–9 Holder and HDC

NI Act 1881 13 Negotiable Instrument

NI Act 1881 118–119 Presumptions

NI Act 1881 123–131 Crossing of Cheques

NI Act 1881 138–143 Dishonour of Cheque — criminal liability

EXAM TIPS: Always state the section number when defining legal terms. Use FIRAC (Facts, Issue, Rule,
Application, Conclusion) for problem/case questions. For essay questions — define, explain elements, mention
exceptions, cite landmark cases, and conclude. For short notes — definition + 3-4 key points + 1 case law. Read
question carefully to identify whether it asks about "rights", "liabilities", "duties", "kinds", or "distinctions."

Contracts-II | Special Contracts | LL.B. Semester II Page 31