Introduction:

Literal Meaning: Indemnity means Insurance or Security or Protection.

Principle: Indemnity is an obligation by a person (indemnitor/indemnifier) to provide
compensation for a particular loss suffered by another person (indemnitee/indemnity holder).
Indemnities form the basis of many insurance contracts; for example, a car owner may purchase
different kinds of insurance as an indemnity for various kinds of loss arising from operation of the car,
such as damage to the car itself, or medical expenses following an accident.
In an agency context, a principal may be obligated to indemnify their agent for liabilities incurred while
carrying out responsibilities under the relationship. While the events giving rise to an indemnity may be
specified by contract, the actions that must be taken to compensate the injured party are largely
unpredictable, and the maximum compensation is often expressly limited.

In the old English law, Indemnity was defined as “a promise to save a person harmless from the
consequences of an act. Such a promise can be express or implied from the circumstances of the case”.
This view was illustrated in the case of Adamson vs Jarvis 1872. In this case, the plaintiff, an auctioneer,
sold certain goods upon the instructions of a person. It turned out that the goods did not belong to the
person and the true owner held the auctioneer liable for the goods. The auctioneer, in turn, sued the
defendant for indemnity for the loss suffered by him by acting on his instructions. It was held that since
the auctioneer acted on the instructions of the defendant, he was entitled to assume that if, what he
did was wrongful, he would be indemnified by the defendant.
This gave a very broad scope to the meaning of Indemnity and it included promise of indemnity due to
loss caused by any cause whatsoever. Thus, any type of insurance except life insurance was a contract
of Indemnity. However, Indian contract Act 1872 makes the scope narrower by defining the contract of
indemnity as follow
Section 124 - A contract 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 is a
"contract of Indemnity".
Illustration - A contracts to indemnify B against the consequences of any proceedings
which C may take against B in respect of a certain sum of Rs 200. This is a contract of
indemnity.
This definition provides the following essential elements –
1. There must be a loss.
2. The loss must be caused either by the promisor or by any other person (in Indian context
loss is to be caused by only by a human agency.)
3. Indemnifier is liable only for the loss.
Thus, it is clear that this contract is contingent in nature and is enforceable only when the
loss occurs.
Rights of Indemnifier:
After compensating the indemnity holder, indemnifier is entitled to all the ways and means
by which the indemnifier might have protected himself from the loss.
Relevant Case Laws
Rights of the indemnity holder:
Section 125, defines the rights of an indemnity holder. These are as follows -
The promisee (Indemnity holder) in a contract of indemnity, acting within the scope of his
authority, is entitled to recover from the promisor (Indemnifier). These are:
1. Right of recovering Damages - all damages that he is compelled to pay in a suit in
respect of any matter to which the promise of indemnity applies.
2. Right of recovering Costs -all costs that he is compelled to pay in any such suit if, in
bringing or defending it, he did not contravene the orders of the promisor and has acted as it
would have been prudent for him to act in the absence of the contract of indemnity, or if the
promisor authorized him in bringing or defending the suit.
3. Right of recovering Sums -all sums which he may have paid under the terms of a
compromise in any such suite, if the compromise was not contrary to the orders of the
promisor and was one which would have been prudent for the promisee to make in the
absence of the contract of indemnity, or if the promisor authorized him to compromise the
suit.
Some of the important conditions which he ought to follow here are viz; that as per this
section, the rights of the indemnity holder are not absolute or unfettered. He must act within
the authority given to him by the promisor and must not contravene the orders of the

promisor. Further, he must act with normal intelligence, caution, and

care with which he would act if there were no contract of indemnity.
Therefore, at the same time, if he has followed all the conditions of the
contract, he is entitled to the benefits.
This was held in the case of United Commercial Bank vs Bank of India
AIR 1981. In this case, Supreme Court held that the courts should not grant
injunctions restraining the performance of contractual obligations arising
out of a letter of credit or bank guarantee if the terms of the conditions have
been fulfilled. It held that such LoCs or bank guarantees impose on the
banker an absolute obligation to pay.
In the case of Mohit Kumar Saha vs New India Assurance Co AIR
1997, Calcutta HC held that the indemnifier must pay the full amount of
the value of the vehicle lost to theft as given by the surveyor. Any
settlement at lesser value is arbitrary and unfair and violates art 14 of the
constitution.
When does the Commencement of liability arises:
In general, as per the definition given in section 124, it looks like an
indemnity holder cannot hold the indemnifier liable until he has suffered an
actual loss. This is a great disadvantage to the indemnity holder in cases
where the loss is imminent and he is not in the position to bear the loss.
In the celebrated case of Gajanan Moreshwar vs Moreshwar Madan,
AIR 1942, Bombay high court observed that the contract of indemnity
held very little value if the indemnity holder could not enforce his
indemnity until he actually paid the loss. If a suit was filed against him,
he had to wait till the judgement and pay the damages upfront before
suing the indemnifier. He may not be able to pay the judgement fees and
could not sue the indemnifier. Thus, it was held that if his liability has
become absolute, he was entitled to get the indemnifier to pay the amount.
Distinction between a contract of Indemnity and a contract of
Guarantee.

Contract of Indemnity (Section 124) Contract of Guarantee (Section 126)

It is a bipartite agreement between the indemnifier and It is a tripartite agreement between the Creditor,
indemnity-holder. Principal Debtor, and Surety.
Liability of the indemnifier is contingent upon the loss. Liability of the surety is not contingent upon any
loss.
Liability of the surety is co-extensive with that of th
principal debtor although it remains in suspende
Liability of the indemnifier is primary to the contract. animation until the principal debtor defaults. Thus,
is secondary to the contract and consequently if th
principal debtor is not liable, the surety will also n
be liable.
 The undertaking in a guarantee is collateral to th
The undertaking in indemnity is original. original contract between the creditor and th
principal debtor.
There is only one contract in a contract of indemnity - There are three contracts in a contract of guarantee
between the indemnifier and the indemnity holder. an original contract between Creditor and Princip
Debtor, a contract of guarantee between creditor an
surety, and an implied contract of indemni
between the surety and the principal debtor.
The reason for a contract of indemnity is to make good The reason for a contract of guarantee is to enable a
on a loss if there is any. third person get credit.
Once the indemnifier fulfills his liability, he does not Once the guarantor fulfills his liabilty by paying an
get any right over any third party. He can only sue the debt to the creditor, he steps into the shoes of th
indemnity-holder in his own name. creditor and gets all the rights that the creditor ha
over the principal debtor.

Contract of Guarantee.
Introduction:
A Contract to perform the promise, or discharge the liability, of a third person in case of his
default is called Contract of Guarantee. A guarantee may be either oral or written.
 The person who gives the guarantee is called the Surety
 The person on whose default the guarantee is given is called the Principal Debtor
 The person to whom the guarantee is given is called the Creditor.

MEANING AND DEFINITION OF CONTRACT OF GUARANTEE

A guarantee can be many a things. It can be assurance of a particular outcome or that

something will be performed in a specified manner. A guarantee is a way of assuming
responsibility for paying another’s debts or fulfilling another’s responsibilities. It can be a
promise for the execution, completion, or existence of something. A guarantee can also be a
promise or an assurance attesting to the quality or durability of a product or service.
The English law defines a ‘guarantee’ as a ‘promise to answer for the debt, default or
miscarriage of another’.

Section 126 of the Indian Contract Act, 1872[1] says that a Contract of Guarantee is a
contract to perform the promise or discharge the liability or a third person in case of his
default.
Illustration:
If A gives an undertaking stating that if ` 200 are lent to C by B and C does not pay, A will
pay back the money, it will be a contract of guarantee. Here, A is the surety, B is the principal
debtor and C is the creditor.
Surety is the person gives the guarantee, the Principal Debtor is one for whom the guarantee
is given and the creditor is the person to whom the guarantee is given. Contract Act uses the
word ‘surety’ which is same as ‘guarantor’ Prima facie, the surety is not undertaking to
perform should the principal debtor fail; the surety is undertaking to see that the principal
debtor does perform his part of the bargain. A contract of guarantee pre-supposes a principal
debt or an obligation that the principal debtor has to discharge in favour of the creditor.
Anything done, or any promise made, for the benefit of the principal debtor, is deemed
sufficient consideration to the surety for giving the guarantee. It is sufficient inducement that
the person for whom the surety has given guarantee has received a benefit or the creditor has
suffered an inconvenience. While Section 2 (d) of the ICA, 1872 says that past consideration
is good consideration, illustration (c) of Section 127 of the ICA, 1872 seems to negate this
point. Those who favor the validity of past consideration state that law is not supposed to be
guided by illustrations. But there have been conflicting judgments about whether past
consideration is good consideration.
Illustration:
B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will
guarantee the payment of the price of the goods. C promises to guarantee the payment in
consideration of A’s promise to deliver the goods. This deemed sufficient consideration for
C’s promise.
Illustration: A sells and delivers goods to B. C afterwards requests A to forbear to sue B for
the debt for a year, and promises that, if he does so, C will pay for them in default of payment
by B. A agrees to forbear as requested. This is a sufficient consideration for C’s promise.
Illustration: A sells and delivers goods to B. C afterwards, without consideration, agrees to
pay for them in default of B. The agreement is void.
The most basic function of a contract of guarantee is to enable a person to get a job, a loan or
some goods as the case may be. In case, a person is desirous of buying a car on a hire-
purchase agreement by making monthly payments over a period of time but the car dealer
asks for guarantee. Then someone would have to assure him that he will make the monthly
payments in case of default by the person who is buying the care. Such an undertaking results
in a contract of surety ship or guarantee. Guarantee is security in form of a right of action
against a third party called the surety or the guarantor.
ESSENTIALS OF CONTRACT OF GUARANTEE

1. Essentials of a valid contract: Since Contract of Guarantee if a species of a contract, the

general principles governing contracts are applicable here. There must be free consent, a
legal objective to the contract, etc. Though all the parties must be capable of entering
into a contract, the principal debtor may be a party incompetent to contract, ie., a minor.
This scenario is discussed later in this chapter.
2. A principal debt must pre-exist: A contact of gurantee seeks to secure payment of a
debt, thus it is necessary there is a recoverable debt. There can not be a contract to
guarantee a time barred debt.
3. Consideration received by the principal debtor is sufficient for the surety. Anything
done, or any promise made for the benefit of the principal debtor can be taken as
sufficient consideration to the surety for giving guarantee.

NATURE OF CONTRACT OF GUARANTEE

The contract of guarantee has to be clear. A letter clearly stating the intention to guarantee a
transaction will go on smoothly or one will behave appropriately conduct himself at work
place will suffice. But a promise to pay extra attention or to take care of it does not constitute
a guarantee.
In India, a contract of guarantee may be oral or written. It may even be inferred from the
course of conduct of the parties concerned. Under English Law, a guarantee is defined as a
promise made by one person to another to be collaterally answerable for the debt, default or
miscarriage of the third persons and has to be in writing.

There are three parties in a contract of guarantee; the creditor, the principal debtor and the
surety. In a contract of guarantee, there are two contracts; the Principal Contract between the
principal debtor and the creditor as well as the Secondary Contract between the creditor and
the surety. The contract of the surety is not contract collateral to the contract of the principal
debtor but is an independent contract. Liability of surety is secondary and arises when
principal debtor fails to fulfill his commitments. Even an acknowledgement of debt by the
principal debtor will bind the surety.
It is not essential that the Principal Contract must be in place/existence at the time of the
Contract of Guarantee being made. The original contract between the debtor and the creditor
 may be about to come into existence. Similarly, in certain situations, a surety may be called
upon to pay though the principal debtor is not liable at all. For example, in cases where the
principal debtor is a minor, the surety will be liable though the minor will not be personally
liable.
A contract of guarantee is to be enforced according to the terms of the contract.
A guarantee is a contract of strictissima juris that means liability of surety is limited by law; a
surety is offered protection by law and is treated as a favored debtor in the eyes of the law. A
contract of guarantee is not a contract ‘uberrimae fidei’ (requiring of utmost good faith). Still
the suretyship relationship is one of trust and confidence and the validity of the contract
depends upon the good faith of the creditor. However, it is not a part of the creditor’s duty to
inform the surety about all his previous dealings with the principal debtor.
In WYTHES vs. LABON CHARE 1858, Lord Chelmsford held that the creditor is not bound to
inform the matters affecting the credit of the debtor or any circumstances unconnected with
the transaction in which he is about to engage which will render his position more hazardous.
Since it is based on good faith, a contract of guarantee becomes invalid if the guarantee is
obtained from the surety by misrepresentation or concealment as given in Sections 142 and
143 of the ICA, 1872.

Illustration:
If a clerk in an office occasionally fails to account for some of the receipts for money
collected, he may be asked for surety. In case the person who steps up to be a surety for the
clerk in the office is not informed of the occasional lapses on part of the clerk which lead to
the requirement of a surety, any guarantee given by him is invalid as something of
importance and directly affecting his decision to act as a surety was concealed from him.
Illustration:
A guarantees to C payment for iron to be supplied by him to B to the amount of 2,000 tons. B
and C have privately agreed that B should pay ` five per ton beyond the market price, such
excess to be applied in liquidation of an old debt. This agreement is concealed from A. A is
not liable as a surety.
But where the surety ship is with regard to an advance to be made by a bank, the bank need not
disclose past indebtedness to the surety unless it relates to the particular
Transaction.
Under Indian Contract Act 1872 it is defines as:
Section 126:
"A contract of guarantee is a contract to perform the promise, or to discharge the liabilities
of a third person in case of his default. The person who gives the guarantee is called Surety,
the person in respect of whose default the guarantee is given is called Principal Debtor, and
the person to whom the guarantee is given is called Creditor. A Guarantee may be either oral
or written."
Illustration:
When A promises to a shopkeeper C that A will pay for the items being bought by B if B
does not pay, this is a contract of guarantee. In this case, if B fails to pay, C can sue A to
recover the balance.
In the case of Birkmyr vs Darnell 1704, where the court held that when two persons come to
a shop, one person buys, and to give him credit, the other person promises, "If he does not
pay, I will", this type of a collateral undertaking to be liable for the default of another is
called a contract of guarantee”.
Case laws:
In the case of Swan vs Bank of Scotland 1836, it was held that a contract of guarantee is a
tripartite agreement between the creditor, the principal debtor, and the surety
1. Distinct promise of surety - There must be a distinct promise by the surety to be
answerable for the liability of the Principal Debtor.
2. Liability must be legally enforceable - Only if the liability of the principal debtor is
legally enforceable, the surety can be made liable. For example, a surety cannot be
 made liable for a debt barred by statute of limitation.
3. Consideration - As with any valid contract, the contract of guarantee also must have
a consideration. The consideration in such contract is nothing but anything done or
the promise to do something for the benefit of the principal debtor.
Section 127 clarifies this as follows:
"Anything done or any promise made for the benefit of the principal debtor may be
sufficient consideration to the surety for giving the guarantee."
Illustrations:
1. A agrees to sell to B certain goods if C guarantees the payment of the price of the goods.
C promises to guarantee the payment in consideration of A's promise to deliver goods to B.
This is a sufficient consideration for C's promise.
2. A sells and delivers goods to B. C, afterwards, requests A to forbear to sue B for an year
and promises that if A does so, he will guarantee the payment if B does not pay. A forbears to
sue B for one year. This is sufficient consideration for C's guarantee.
3. A sells and delivers goods to B. Later on, C, without any consideration, promises to pay
A if B fails to pay. The agreement is void for lack of consideration.
It is pertinent to note that there is no uniformity on the issue of past consideration. In the case
of Allahabad Bank vs S M Engineering Industries 1992 Cal HC, the bank was not
allowed to sue the surety in absence of any advance payment made after the date of
guarantee. But in the case of Union Bank of India vs A P Bhonsle 1991 Mah HC, past
debts were also held to be recoverable under the wide language of this section. In general, if
the principal debtor is benefitted as a result of the guarantee, it is sufficient consideration for
the sustenance of the guarantee.
It should be without misrepresentation or concealment –
Section 142 specifies that a guarantee obtained by misrepresenting facts that are material to
the agreement is invalid, and section 143 specifies that a guarantee obtained by concealing a
material fact is invalid as well.
Illustrations: -
1. A appoints B for collecting bills. B fails to account for some of the bills. A asks B to get
a guarantor for further employment. C guarantees B's conduct but C is not made aware of B
previous mis-accounting by A. B, afterwards, defaults. C cannot be held liable.
2. A promises to sell Iron to B if C guarantees payment. C guarantees payment however, C
is not made aware of the fact that A and B had contracted that B will pay 5 Rs higher that the
market prices. B defaults. C cannot be held liable.
In the case of London General Omnibus vs Holloway 1912, a person was invited to
guarantee an employee, who was previously dismissed for dishonesty by the same employer.
This fact was not told to the surety. Later on, the employee embezzled funds but the surety
was not held liable.
Continuing Guarantee:
As per section 129, a guarantee which extends to a series of transactions is called a
continuing guarantee.
Illustrations –
1. A, in consideration that B will employ C for the collection of rents of B's zamindari,
promises B to be responsible to the amount of 5000/- for due collection and payment by C of
those rents. This is a continuing guarantee.
2. A guarantees payment to B, a tea-dealer, for any tea that C may buy from him from time to
time to the amount of Rs 100. Afterwards, B supplies C tea for the amount of 200/- and C
fails to pay. A's guarantee is a continuing guarantee and so A is liable for Rs 100.
3. A guarantees payment to B for 5 sacks of rice to be delivered by B to C over the period of
one month. B delivers 5 sacks to C and C pays for it. Later on B delivers 4 more sacks but C
fails to pay. A's guarantee is not a continuing guarantee and so he is not liable to pay for the 4
sacks.
Thus, it can be seen that a continuing guarantee is given to allow multiple transactions
without having to create a new guarantee for each transaction.
In the case of Nottingham Hide Co vs Bottrill 1873, it was held that the facts,
circumstances, and intention of each case has to be looked into for determining if it is a case
of continuing guarantee or not.
Revocation of Continuing Guarantee:
1. As per section 130, a continuing guarantee can be revoked at any time by the surety by
notice to the creditor.

4.
Once the guarantee is revoked, the surety is not liable for any future transaction however he
is liable for all the transactions that happened before the notice was given.
Illustrations –
1. A promises to pay B for all groceries bought by C for a period of 12 months if C fails to
pay. In the next three months, C buys 2000/- worth of groceries. After 3 months, A revokes
the guarantee by giving a notice to B. C further purchases 1000 Rs of groceries. C fails to
pay. A is not liable for 1000/- rs of purchase that was made after the notice but he is liable for
2000/- of purchase made before the notice.
This illustration is based on the old English case of Oxford vs Davies.
In the case of Lloyd's vs Harper 1880, it was held that employment of a servant is one
transaction. The guarantee for a servant is thus not a continuing guarantee and cannot be
revoked as long as the servant is in the same employment. However, in the case of Wingfield
vs De St Cron 1919, it was held that a person who guarateed the rent payment for his servant
but revoked it after the servant left his employment was not liable for the rents after
revocation.
2. A guarantees to B, to the amount of 10000 Rs, that C shall pay for the bills that B may
draw upon him. B draws upon C and C accepts the bill. Now, A revokes the guarantee. C
fails to pay the bill upon its maturity. A is liable for the amount upto 10000Rs.
2. As per section 131, the death of the surety acts as a revocation of a continuing guarantee
with regards to future transactions, if there is no contract to the contrary.
It is important to note that there must not be any contract that keeps the guarantee alive even
after the death. In the case of Durga Priya vs Durga Pada AIR 1928, Cal HC held that in
each case the contract of guarantee between the parties must be looked into to determine
whether the contract has been revoked due to the death of the surety or not. If there is a
provision that says death does not cause the revocation then the constract of guarantee must
be held to continue even after the death of the surety.
What are the Rights of the Surety?
A contract of guarantee being a contract, all rights that are available to the parties of a
contract are available to a surety as well. The following are the rights specific to a contract of
guarantee that are available to the surety.
Rights against principal debtor
1. Right of Subrogation:
As per section 140, where a guaranteed debt has become due or default of the principal
debtor to perform a duty has taken place, the surety, upon payment or performance of all that
he is liable for, is invested with all the rights which the creditor had against the principal
debtor. This means that the surety steps into the shoes of the creditor. Whatever rights the
creditor had, are now available to the surety after paying the debt.
In the case of Lampleigh Iron Ore Co Ltd, Re 1927, the court has laid down that the surety
will be entitled, to every remedy which the creditor has against the principal debtor; to
enforce every security and all means of payment; to stand in place of the creditor to have the
securities transferred in his name, though there was no stipulation for that; and to avail
himself of all those securities against the debtor. This right of surety stands not merely upon
contract but also upon natural justice.
In the case of Kadamba Sugar Industries Pvt Ltd vs Devru Ganapathi AIR 1993, Kar
HC held that surety is entitled to the benefits of the securities even if he is not aware of their
existence.
In the case of Mamata Ghose vs United Industrial Bank AIR 1987, Cal HC held that under
the right of subrogation, the surety may get certain rights even before payment. In this case,
the principal debtor was disposing off his personal properties one after another lest the surety,
after paying the debt, seize them. The surety sought for temporary injunction, which was
granted.
2. Right to Indemnity:
As per section 145, in every contract of guarantee there is an implied promise by the
principal debtor to indemnify the surety; and the surety is entitled to recover from the the
principal debtor whatever sum he has rightfully paid under the guarantee but no sums which
he has paid wrong fully.
Illustrations –
B is indebted to C and A is surety for the debt. Upon default, C sues A. A defends the suit
on reasonable grounds but is compelled to pay the amount. A is entitled to recover from B the
cost as well as the principal debt.
In the same case above, if A did not have reasonable grounds for defence, A would still be
entitled to recover principal debt from B but not any other costs.
A guarantees to C, to the extent of 2000 Rs, payment of rice to be supplied by C to B. C
supplies rice to a less amount than 2000/- but obtains from A, a payment of 2000/- for the
rice. A cannot recover from B more than the price of the rice actually supplied.
This right enables the surety to recover from the principal debtor any amount that he has paid
rightfully. The concept of rightfully is illustrated in the case of Chekkara Ponnamma vs A S
Thammayya AIR 1983. In this case, the principal debtor died after hire-purchasing four
motor vehicles. The surety was sued and he paid over. The surety then sued the legal
representatives of the principal debtor. The court required the surety to show how much
amount was realized by selling the vehicles, which he could not show. Thus, it was held that
the payment made by the surety was not proper.
Rights against creditor:
1. Right to securities:
As per section 141, a surety is entitled to the benefit of every security which the creditor has
against the principal debtor at the time when the contract of suretyship is entered into whether
the surety knows about the existence of such security or not; and if the creditor loses or
without the consent of the surety parts with such security, the surety is discharged to the
extent of the value of the security.
Illustrations –
C advances to B, his tenant, 2000/- on the guarantee of A. C also has a further security for
2000/- by a mortgage of B's furniture. C cancels the mortgage. B becomes insolvent and C
sues A on his guarantee. A is discharged of his liability to the amount of the value of the
furniture.
C, a creditor, whose advance to B is secured by a decree, also receives a guarantee from A.
C afterwards takes B's goods in execution under the decree and then without the knowledge
of A, withdraws the execution. A is discharged.
A as surety for B makes a bond jointly with B to C to secure a loan from C to B. Afterwards,
C obtains from B a further security for the same debt. Subsequently, C gives up the further
security. A is not discharged.
This section recognizes and incorporates the general rule of equity as expounded in the case
of Craythorne vs Swinburne 1807 that the surety is entitled to every remedy which the
creditor has against the principal debtor including enforcement of every security.
The expression "security" in section 141 means all rights which the creditor had against
property at the date of the contract. This was held by the SC in the case of State of MP vs
Kaluram AIR 1967. In this case, the state had sold a lot of felled trees for a fixed price in
four equal instalments, the payment of which was guaranteed by the defendant. The contract
 further provided that if a default was made in the payment of an instalment, the State would
get the right to prevent further removal of timber and the sell the timber for the realization of
the price. The buyer defaulted but the State still did not stop him from removing further
timber. The surety was then sued for the loss but he was not held liable.
It is important to note that the right to securities arises only after the creditor is paid in full. If
the surety has guaranteed only part of the debt, he cannot claim a proportional part of the
securities after paying part of the debt. This was held in the case of Goverdhan Das vs Bank
of Bengal 1891.
2. Right of set off.
If the creditor sues the surety, the surety may have the benefit of the set off, if any, that the
principal debtor had against the creditor. He is entitled to use the defences that the principal
debtor has against the creditor. For example, if the creditor owes the principal debtor
something, for which the principal debtor could have counter claimed, then the surety can
also put up that counter claim.
Rights against co-sureties.
1. Effect of releasing a surety
As per section 138, Where there are co-sureties, a release by the creditor of one of them
does not discharge the others; neither does it free the surety so released from his
responsibility to the other sureties.
A creditor can release a co-surety at his will. However, as held in the case of Sri Chand
vs Jagdish Prashad 1966, the released co-surety is still liable to the others for
contribution upon default.
2. Right to contribution:
As per section 146, where two or more persons are co-sureties for the same debt jointly or
severally, with or without the knowledge of each other, under same or different contracts, in
the absence of any contract to the contrary, they are liable to pay an equal share of the debt or
any part of it that is unpaid by the principal debtor.
Illustrations –
a. A, B, and C are sureties to D for a sum of 3000Rs lent to E. E fails to pay. A, B, and
C are liable to pay 1000Rs each.
b. A, B, and C are sureties to D for a sum of 1000Rs lent to E and there is a contract
among A B and C that A and B will be liable for a quarter and C will be liable for
half the amount upon E's default. E fails to pay. A and B are liable for 250Rs each
and C is liable for 500Rs.

As per section 147, co-sureties who are bound in different sums are liable to pay equally as
far as the limits of their respective obligations permit.
Illustrations –
1. A, B and C as sureties to D, enter into three several bonds, each in different penalty,
namely A for 10000Rs, B for 20000 Rs, and C for 30000Rs with E. D makes a
default on 30000Rs. All of them are liable for 10000Rs each.
2. A, B and C as sureties to D, enter into three several bonds, each in different penalty,
namely A for 10000Rs, B for 20000 Rs, and C for 40000Rs with E. D makes a
default on 40000Rs. A is liable for 10000Rs while B and C are liable for 15000Rs
each..
3. A, B and C as sureties to D, enter into three several bonds, each in different penalty,
namely A for 10000Rs, B for 20000 Rs, and C for 40000Rs with E. D makes a
default on 70000Rs. A, B and C are liable for the full amount of their bonds.
Discharge of Surety from Liability:
A surety is said to be discharged from liability when his liability comes to an end. Indian
Contract Act 1872 specifies the following conditions in which a surety is discharged of his
liability -
1. Section 130 - By a notice of revocation - discussed above.
 2. Section 131 - By death of surety - discussed above.
3. Section 133 - By variance in terms of contract - A variance made without the consent of
the surety in terms of the contract between the principal debtor and the creditor, discharges
the surety as to the transactions after the variance.
Illustrations :
a) A becomes a surety to C for B's conduct as manager in C's bank. Afterwards, B and
C contract without A's consent that B's salary shall be raised and that B shall be liable for
1/4th of the losses on overdrafts. B allows a customer to overdraft and the bank loses money.
A is not liable for the loss.
b) A guarantees C against the misconduct of B in an office to which B is appointed by
C. The conditions of employment are defined in an act of legislature. In a subsequent act, the
nature of the office is materially altered. B misconducts. A discharged by the change from the
future liability of his guarantee even though B's misconduct is on duty that is not affected by
the act.
c) B appoints C as a salesperson on a fixed yearly salary upon A's guarantee on due
account of sales by C. Later on, without A's consent, B and C contract that C will be paid on
commission basis. A is not liable for C's misconduct after the change.
d) C promises to lends 5000Rs to B on 1st March. A guarantee the repayment. C gives
the money to B on 1st January. A is discharged of his liability because of the variance in as
much as C may decide to sue B before 1st march.
4. Section 134 - By discharge of principal debtor - The surety is discharged by any contract
between the creditor and the principal debtor by which the principal debtor is discharged; or
by any action of the creditor the legal consequence of which is the discharge of the principal
debtor.
Illustrations:
x) A gives a guarantee to C for goods to be delivered to B. Later on, B contracts with C
to assign his property to C in lieu of the debt. B is discharged of his liability and A is
discharged of his liability.
y) A contracts with B to grow indigo on A's land and deliver it to B at a fixed price. C
guarantees A's performance. B diverts a stream of water that is necessary for A to grow
indigo. This action of B causes A to be discharged of the liability. Consequently C is
discharged of his suretyship as well.
z) A contracts with B to build a house for B. B is to supply timber. C guarantees A's
performance. B fails to supply timber. C is discharged of his liability.
If the principal debtor is released by a compromise with the creditor, the surety is discharged
but if the principal debtor is discharged by the operation of insolvency laws, the surety is not
discharged. This was held in the case of Maharashtra SEB vs Official Liquidator 1982.

Section 135 - By composition, extension of time, or promise not to sue - A contract between
the principal debtor and the creditor by which the creditor makes a composition with, or
promises to give time to, or promises to not sue the principal debtor, discharges the surety
unless the surety assents to such a contract.
It should be noted that as per section 136, if a contract is made by the creditor with a third
person to give more time to the principal debtor, the surety is not discharged. However, in
the case of Wandoor Jupitor Chits vs K P Mathew AIR 1980, it was held that the surety
was not discharged when the period of limitation got extended due to acknowledgement of
debt by the principal debtor.

Further, as per section 137, mere forbearance to sue or to not make use of any remedy that
is available to the creditor against the principal debtor, does not automatically discharge the
surety.
Illustration;
I) B owes C a debt guaranteed by A. The debt becomes payable. However, C does not
sue B for an year. This does not discharge A from his suretyship.
 It must be noted that forbearing to sue until the expiry of the period of limitation has the
legal consequence of discharge of the principal debtor and thus as per section 134, will
cause the surety to be discharged as well. If section 134 stood alone, this inference was
correct. However, section 137 explicitly says that mere forbearance to sue does not
discharge the surety. This contradiction was removed in the case of Mahanth Singh vs U B
Yi by Privy Council. It held that failure to sue the principal debtor until recovery is banned
by period of limitation does not discharge the surety.
4. Section 139 - By imparing surety's remedy - If the creditor does any act that is
inconsistent with the rights of the surety or omits to do an act which his duty to surety
requires him to do, and the eventual remedy of the surety himself against the principal
debtor is thereby impaired, the surety is dischared.
Illustrations:
p) C contracts with B to build a ship the payment of which is to be made in installments
at various stages of completion. A guarantee's C's performance. B prepays last two
installments. A is discharged of his liability.
q) A appoints M as an apprentice upon getting a guarantee of M's fidelity by B. A also
promises that he will at least once a month see M make up the cash. A fails to do this. M
embezzles. B is discharged of his suretyship.
r) A lends money to B with C as surety. A also gets as a security the mortgage to B's
furniture. B defaults and A sells his furniture. However, due to A's carelessness very small
amount is received by sale of the furniture. C is discharged of the liability. State of MP
vs Kaluram - Discussed above.
In the case of State Bank of Saurashtra vs Chitranjan Ranganath Raja 1980, the bank
failed to properly take care of the contents of a go-down pledged to it against a loan and the
contents were lost. The court held that the surety was not liable for the amount of the goods
lost.
Creditor's duty is not only to take care of the security well but also to realize it proper
value. Also, before disposing of the security, the surety must be informed on the account of
natural justice so that he can have the option to take over the security by paying off the debt.
In the case of Hiranyaprava vs Orissa State Financial Corp AIR 1995, it was held that if
such a notice of disposing off of the security is not given, the surety cannot be held liable for
the shortfall.
However, when the goods are merely hypothecated and are in the custody of the debtor, and
if their loss is not because of the creditor, the surety is not discharged of his liability.
Extent of Surety's Liability:
As per section 128, the liability of a surety is co-extensive with that of the principal
debtor, unless it is otherwise provided in the contract.
Illustration –
A guarantees the payment of a bill by B to C. The bill becomes due and B fails to pay. A is
liable to C not only for the amount of the bill but also for the interest. This
basically means that although the liability of the surety is co-extensive with that of the
principal debtor, he may place a limit on it in the contract. Co-extensive implies the
maximum extent possible. He is liable for the whole of the amount of the debt or the
promises. However, when part of a debt was recovered by disposing off certain goods, the
liability of the surety is also reduced by the same amount. This was held in the case of
Harigopal Agarwal vs State Bank of India AIR 1956.
The surety can also place conditions on his guarantee. Section 144 says that where a
person gives guarantee upon a contract that the creditor shall not act upon it until another
person has joined it as co-surety, the guarantee is not valid if the co-surety does not join. In
the case of National Provincial Bank of England vs Brakenbury 1906, the defendant
signed a guarantee which was supposed to be signed by three other co-sureties. One of them
did not sign and so the defendant was not held liable. Similarly, a surety may
specify in the contract that his liability cannot exceed a certain amount.
However, where the liability is unconditional, the court cannot introduce any conditions.
Thus, in the case of Bank of Bihar Ltd. vs Damodar Prasad AIR 1969, SC overruled
trial court's and high court's order that the creditor must first exhaust all remedies against
the principal debtor before suing the surety
Points to Note
 There are three parties in every Contract of Guarantee
 The liability arises right from the beginning. The surety becomes liable when the principle
debtor commits default in meeting the liability.
 Surety has the right to sue the third party (Principle Debtor) directly. The Law puts him
in the position of Creditor. Where as in Contracts of Indemnity, the Indemnifier
cannot sue the third party in his name. He has to sue in the name of the Indemnity-holder
or after obtaining the rights from him.
 Anything done, or any promise made, for the benefit of the principal debtor, may be a
sufficient consideration to the surety for giving the guarantee. The guarantor need not
personally derive any benefit from the guarantee.
 The liability of the surety is co-extensive with that of the principal debtor, unless it is
otherwise provided by the contract.
 The creditor can straightway proceed against the guarantor without first proceeding
against the principal debtor.
 The liability of the surety can never be greater than that of the principal debtor. The
surety can however may restrict his liability to part of the Principal debtor's liability by
contract.
 Surety's liability is distinct and separate.
In Contact, a bailment is the delivery of goods from 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 called the Bailor, and the person to whom the goods are
delivered is the Bailee.
Principle: It is to be noted that if a person is already in possession of goods of another
contracts to hold them as bailee, he thereby becomes the bailee and the owner of the goods as
bailor, though the goods are not delivered by way of bailment.
There are many instances of bailment in our daily lives – when we give our clothes for
laundry, when we use valet parking for our cars. We deliver our goods to another person or
leave them in the power of another person for a purpose and expect to receive our goods back
when the purpose has been achieved.
For example, a man visits a repair shop for getting his television set fixed. The television set
is left at the shop where the repair man examines it and fixes the problem. Once fixed, the
television set has to be returned to its owner. There is a contract of bailment between the man
and the repair-man.
Bailment is thus a process where the owner of certain goods places them in the temporary
possession of another person. In its simple terms, bailment means that a person delivers his
goods to another person or put them in another’s possession for a specific purpose and there
is an express or implied understanding between the two people that once the purpose has
been achieved, the goods will be returned to the owner – the person who bailed them.
Chapter IX (Section 148 – 181) of the Indian Contract Act, 1872 deals with the general rules
relating to bailment. The Chapter is not exhaustive on the topic of bailment – there are
various other Acts which deal with other types of bailment like the Carriers Act, 1865, the
Railways Act, 1890, the Carriage of Goods by Sea Act, 1925.
Nature and Scope of Contract of Bailment:
The word ‘bailment’ is derived from the French word ‘bailer’ which means ‘to deliver’.
Etymologically, it means any kind of ‘handing over’. In legal sense, it involves change of
possession of goods from one person to another for some specific purpose.
Section 148 of Indian Contract Act 1872 defines ‘Bailment’ as 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 direction of the person
delivering them.
The person who owns and delivers the goods is called the ‘bailor’. The person to whom the
goods are delivered is called the ‘bailee’.
Example: A man drops off his clothes for dry cleaning. He is the bailor and the purpose of
bailment is to have the particular set of clothes cleaned. The dry cleaner is the bailee – he is
the temporary custodian of the clothes and is responsible for keeping them safe and to return
them to the bailor once they have been cleaned.
Explanation to Section 148 states that if a person already in possession of the goods of
another person contracts to holds the goods as a bailee, he becomes the bailee even though
the goods may not have been delivered to him by way of bailment in the first place. For
example, a seller of goods becomes a bailee if the goods continue to be in his possession after
sale is complete. Here the original possession of goods was with the seller as the owner of
the said goods and after the sale, his possession is converted into a contract of bailment.
Example: A has a motorcycle that he sells to B who leaves the motorcycle in the possession
of A while he is out of town. Here, A becomes the bailee even though he was the owner
originally.
Halsbury defines Bailment as ‘delivery of personal chattels in trust on a contract, express or
implied, that the trust shall be duly executed and chattels redelivered in either their original or
altered form, as soon as the time of use, or condition on which they had been bailed has
elapsed or been performed respectively’.
Justice Blackstone defines Bailment as ‘a delivery of goods in trust, upon contract, either
expressed or implied, that the trust shall be faithfully executed on the part of the bailee’.
Bailment can also be described as ‘the delivery of goods to another person for a particular
use’.
NATURE OF BAILMENT
Bailment is a type of special contract and thus, all basic requirements of contract like consent
of parties, competency, etc are applicable to any contract of Bailment. A bailment is usually
created by an agreement between the bailor and bailee. Section 148 specifically talks of
bailment via a contract. But a valid bailment can also arise in absence of express
contracts or from invalid or voidable contracts.
In bailment, neither the property nor the ownership of the goods involved is transferred at any
point. Only the temporary possession of the bailed goods is transferred and the ownership of
such goods remains with the bailor. The bailor can demand to have the property returned to
him at any time.
WHAT MAY BE BAILED
Only ‘goods’ can be bailed and thus, only movable goods can be the subject matter of
bailment. Current money or legal tender cannot be bailed. Deposition of money in a bank is
not bailment as money is not ‘goods’ and the same money is not returned to the client.
But the coins and notes that are no longer legal tender and are more or less just objects of
curiosity, then they can be bailed.
Essentail Characteristics of bailment:
Section 148 of the Indian Contract Act, 1872 makes it very clear that there are three essential
features of Bailment, namely:
1) Delivery of Possession
2) Delivery upon Contract
3) Delivery for a purpose and Return of Goods
1) Delivery of Possession: The delivery of possession of goods is essential for bailment.
There must be transfer of possession of the bailed goods from bailor to bailee and the goods
must be handed over to the bailee for whatever is the purpose of bailment. Here, possession
means control over goods and an intention to exclude others from exercising similar control
over the same goods. Thus, the bailee must have actual physical control of the property with
the intent to possess it for a valid bailment.
As per Section 149, the delivery can also be made to the bailee by doing anything which has
the effect of putting the bailed goods in the possession of the intended bailee or any person
authorized by him for this purpose.
Thus, the delivery of possession can be actual or constructive. The delivery may either put
the bailee in the actual physical possession of the goods or put the bailee in a position of
power over such goods that may be possessed later. The essential of a bailment is the delivery
of goods for a temporary purpose.
Mere custody of goods is not the same as delivery of possession. A guest who uses the goods
of the host during a party is not a bailee. Similarly, it was held in Reaves vs. Capper [1838 5
Bing NC 136] that a servant in custody of certain goods by the nature of his job is not a
bailee. Similarly, a servant holding his master’s umbrella is not a bailee but is a custodian.
Similarly, hiring and storing goods in a bank locker by itself is not bailment thought there is
delivery of goods to the bank premises. The goods are in no way entrusted to the bank. A
bank cannot be presumed to know what goods are stored in any given locker at all the times.
If a bank is given actual and exclusive possession of the property inside a locker by the
person who hired the locker, only then can bailment under Section 148 can be presumed.
In Atul Mehra vs. Bank of Maharashtra [AIR 2003 P&H 11], it was held that mere hiring of a
bank’s locker and storing things in it would not constitute a bailment. But the position
changes completely if the locker in the safe deposit vault of the bank can be operated even
without the key of the customer.
Example: A hired a locker in a bank and kept some of his valuables in it. He was given one
key to open the locker. But the bank manager of the particular branch had fraudulently filed
the levers of the locks of the lockers. Thus, the lockers could be opened even without the key
of the customers. A’s valuables went missing. A’s control over the valuables in that locker
had gone because the locker could be operated even without A’s key. The bank was liable for
the loss of A’s belongings from the locker as it became a bailee. This example is similar to
the case of National Bank of Lahore vs. Sohan Lal [AIR 1962 Punj. 534]
Thus, it is clear that the nature of possession is very important to determine whether a
delivery is for bailment or not. If the owner continues to have control over the goods, there
can be no bailment.
To create a bailment, the bailee must intend to possess and in some way physically possess or
control the bailed goods or property. In a situation where a person keeps the goods in
possession of another person but in fact, continues to have control over such goods, there is
no delivery for the purpose of bailment.
The delivery of possession does not mean that the bailee now represents the bailor with
respected to the bailed goods. The bailee only has certain power over the property of the
bailor with his permission. The bailee has no power to make contracts on behalf of the bailor
or make the bailor liable for his own acts with the goods bailed.
Example: If a person delivers his damaged car to a garage for repair under his insurance
policy, the insurance company becomes a bailee and the garage a sub-bailee. If the car is
stolen from the garage or destroyed by fire in the garage, both – the insurance company and
the garage will be liable to the owner of the car, the bailor.
Delivery of possession, as required for bailment, can be made in two ways – Actual or
Constructive.
1. a) Actual Delivery: Here, the bailor hands over the physical possession of the goods
to the bailee.
Example: A’s watch is broken. When he leaves his watch at the showroom for repair, he has
given actual delivery of possession of goods to the showroom.
1. b) Constructive Delivery: Constructive delivery is an action that the law treats as the
equivalent of actual delivery. It can be difficult to deliver intangible
In constructive delivery, the physical possession of the goods may not be handed over. The
possession of the goods may remain with the bailor with the consent or authorization of the
bailee. In constructive delivery, an action on part of the bailor merely puts the bailee in
position of power with respect to the bailed goods. The bailor gives the bailee the means of
access to taking custody of it, without its actual delivery.
Example: A has rare coins in a locked safe-deposit box. Delivery of a safe deposit box is not
possible. When he hands over the keys to the box to B, it is taken as constructive delivery for
purpose of bailment.
Section 149 specifically deals with constructive delivery of goods. It states that anything done
which has the effect of putting the goods in the possession of the intended bailee or any other
person authorized to hold them on his behalf is to be treated as constructive delivery of the
goods.
Constructive delivery is legal fiction – thus, a legal delivery is presumed even where the
delivery of the actual goods has not taken place. Even the delivery of a railway receipt is
taken as the equivalent of delivery of the goods.
In Bank of Chittor vs. Narsimbulu [AIR 1966 AP 163], a person pledged cinema projector
with the bank but the bank allowed him to keep the projector so as to keep the cinema hall
functional. It was held that there was constructive delivery because action on part of the
bailor had changed the legal character of the possession of the projector. Even though the
actual and physical possession was with the person, the legal possession was with the bank,
the bailee.
2) Delivery upon Contract: It is necessary that the goods are delivered to the bailee and
returned to the bailor when the purpose is accomplished upon a contract. This means there
should a contract between the two parties for such transaction of delivery and subsequent

return. If there is no contract, there is no bailment. The contract giving rise to bailment can
be express or implied.
Property deposited in a court under orders is not property delivered under a contract. Such
delivery or transfer does not constitute bailment.
Exception to the delivery upon contract: A finder of goods is treated as a bailee even if there
is no contract of Bailment or delivery of goods under a contract. A finder of the goods is a
person who finds the goods belonging to some other person and keeps them under his
protection till the actual owner of the goods is found. An involuntary contract of bailment
arises and the finder automatically becomes bailee even in absence of bailment by the bailor
– the owner of the lost goods. Since the person is in the position of the bailee, he has all the
rights and duties of a bailee.
Under English Law: There can be bailment without a contract. If a person deposits or
delivers the goods under stressful circumstance like fire flood, riots or if the person who is
depositing the goods is incapable of appreciating the value of the action, it is still regarded as
bailment despite the absence of a contract. Delivery of goods to another under a mistake of
identity of the person is also treated as bailment without a contract as long as the bailor took
reasonable care to ascertain the identity.
th
Present Position in India: The Law Commission of India in its 13 report suggested that
bailment without contract should also be included in the Indian Contract Act, 1872 but no
concrete steps have been taken as yet. Presently, the Indian Courts have taken the position
that bailment can exist without a contract. In some of these cases, even the government has
been held liable as a bailor despite the absence of a contract.
The case of Lasalgoan Merchants Bank vs. Prabhudas Hathibhai is one the first where the
Courts started imposing the obligations of a bailee even without a contract. In State of
Gujarat vs. Memom Mahomed, the Supreme Court of India accepted this view and stated that
“…Bailment is dealt with by the Contract Act only in cases where it arises from a contract,
but it is not correct to say that there cannot be bailment without an enforceable contract.”
3) Delivery for a purpose and Return of Goods: There has to be a purpose for the bailment
of goods and it is mandatory that once such purpose is accomplishes, the goods have to be
returned to the bailor or be disposed off per his instructions. Bailment cannot arise if the
goods are not to bespecially accounted for after completion of such task or purpose. This is a
feature of bailment that distinguishes it from other relations like agency, etc.
The third essential of bailment is twofold –
 1. a) The delivery of goods must be for some specific task or performance. Delivery of
goods in bailment is not permanent. There has to be a purpose for the bailment of goods
and it is mandatory that once such purpose is accomplishes, the goods have to be returned
to the bailor or be disposed off per his instructions. A tailor is given a cloth for stitching a
shirt, a watch repair shop is given a watch to mend it.
1. b) That the goods must be returned to the bailor or be taken care of as per the
instructions of the bailor. If a person is not bound to return the goods to another, then the
relationship between them is not of bailment. If there is an agreement to return the
equivalent and not the same goods, it is not bailment. An agent who collects money on
behalf of his principal is not a bailee because he is not liable to return the same money
and coins.
Example: A tailor who receives a cloth for stitching is the bailee in this case. The tailor is
supposed to return the finished garment to the customer, the bailor, once the garment has
been stitched.
1. c) Return of goods in specie is also essential. The same goods that were bailed must be
returned to the bailor in the same condition after the accomplishment of purpose as
they were handed over to the bailee in the beginning. Any accruals to the goods must also
be handed over. If an animal gives birth during the period of bailment, the bailee must
return the animal with the offspring at the conclusion of the bailment.
The bailor can give other directions as to the disposal or return of the bailed goods. In case of
such agreement or instructions, the bailee must immediately dispose the goods after
completion of purpose as per the directions.
If the goods are not returned or dealt as per the directions of the bailor there is no bailment.
For example, depositing money into bank by a customer does not give rise to a contract of
bailment because the bank is not bound to return the same notes and coins to the customer.
This same point was also made in the case of Ichcha Dhanji [Link] [1888 13 Bom 338]
In Secy of State vs. Sheo Singh Rai [1880 ILR 2 All 756], a man delivered nine government
promissory notes to the Treasury Officer at Meerut for cancellation and consolidation into a
single note of Rupees 48,000 only. The notes were misappropriated by the servants of the
Treasury Officer. The man sued the State to hold it responsible as a bailee. But the action
failed as there can be no bailment without delivery of goods and a promise to the return the
same. The government was in no way bound to return the same notes or dispose the
surrendered notes in accordance with the instructions of the man.
FINDER OF LOST GOODS
 Finding is not keeping. A finder of lost goods is treated as the bailee of the goods found as
such and is charged with the responsibilities of a bailee, besides the responsibility of
exercising reasonable efforts in finding the real owner.
 However, he enjoys certain rights also. His rights are summed up hereunder:-
1. Right to retain the goods
2. Right to Sell -the finder may sell it:
(1) when the thing is in danger of perishing or of losing the greater part of its value;
(2) when the lawful charges of the finder in respect of the thing found, amount to 2/3rd of its
value.
Rights of Bailor
The Rights of Bailor under a contract of bailment are started as follows:
1. Rights of taking back the goods bailed:
The bailor has right to take back the goods bailed as soon as the purpose of bailment
is completed. If the bailee defaults in so returning, the bailor has right to receive
compensation.
2. Right in case of unauthorized use of goods:
The bailor is entitled to terminate the contract of bailment if the bailee makes the
unauthorized use of the goods bailed.
3. Right to goods bailed before stated period:
 The bailor may get back his goods before the time stated in the contract of bailment
with the consent of the bailee.
4. Right to Dissolution of contract:
The bailor may dissolve the contract if the conditions of bailment are disobeyed by
the bailee.
5. Right to Gratuitous goods:
The bailor has right it terminate the contract of gratuitous bailment at any time even
before the specified time, subject to the limitation that where such a termination of
bailment causes loss in excess of benefit, the bailor must compensate the bailee.
6. Right in share of Profit:
The bailor has share in the increase or profit gained from the goods bailed if there is
provision in the contract.
Right of Bailee
1. Right to recover damages:
A bailee has right to recover damages from the bailor if he suffers any loss due to
defects of the goods bailed.
2. Right to receive compensation:
A bailee is entitled to receive compensation from the bailor for any loss resulting from
the defect in the bailor’s title.
3. Right of Legal Action:
A bailee may take necessary legal action against the person who wrongfully deprives
him of the use of goods bailed or does them any injury (Sect. 180)
4. Right to recover Bailment Expenses:
Bailee is entitled to be reimbursed for all legitimate expenses incurred for any purpose
of bailment.
5. Right of Lien:
Where the bailee has rendered any service for the purpose of bailment, he has right to
retain such goods bailed until he receives due remuneration for his services in absence
of contract to the contrary. (Sect. 170)
6. Right of Indemnity:

The bailee has right to receive the amount of indemnity from bailor for any loss which
he may sustain by reason that the bailor was not entitled to make the bailment or to
receive back the goods, or to give directions respecting them. (Sect. 164)
Duties and Liabilities of Bailor
1. To disclose Facts:
The important duty of the bailor is to disclose the faults in the goods bailed in so for
as they are known to him; and if he fails to do that he will be liable to pay such
damages to the bailee as may have resulted directly from the faults. (Sect. 150)
Illustration
X hires a carriage of Y. The carriage is unsafe, though Y is not aware of it, and X is
injured. Y is responsible to X for the injury.
2. Payment of Extraordinary Expenses:
Section 158 provides that all the necessary expenses incurred by the bailee in
connection with the bailment, must be paid by the bailor.
3. To Indemnity Bailee:
The bailor is bound to pay the bailee for any loss which the bailee may sustain by
reason that the bailor was not entitled to make the bailment. (Sect. 164)
4. Warning to the Bailee:
When the things are is danger i.e explosive goods, the bailor must give extraordinary
warning to the bailee.
Duties and Responsibilities of Bailee
1. To take care of goods bailed:
The bailee is bound to take as much care of the goods entrusted to him as a man of
 ordinary prudence. (Sect. 151)
2. To avoid the inconsistent act:
A contract of bailment is voidable at the option of the bailor, if the bailee does any act
with regard to the goods bailed, inconsistent with the conditions of the bailment (Sect.
153)
3. The authorize use of goods:
If the bailee makes any unauthorized use of the goods bailed, he is liable to make
compensation to the bailor for any damage arising to the goods from or during such
use of them. (Sect. 154)
4. Not to mix bailor’s goods:
The bailee is bound to keep the goods of the bailor separate from his own where the
mixture without the consent of the bailor is inseparable, the bailor is entitled to be
compensated by the bailee for the loss of the goods. (Sect. 155, 156, 157)
5. To return the goods:
It is the duty of the bailee to return, or deliver the goods bailed according to the
bailor’s directions. (Sect. 160)
6. Responsibility in case of default:
If the goods are not returned, delivered or tendered due to default of the bailee, he is
responsible to the bailor for any loss of the goods from that time. (Sect. 161)
7. To return any profit from the goods:
The bailee is bound to deliver to the bailor, or according to his directions, any
increase or profit which may have accrued from the goods bailed. (Sect. 163)
8. Not to set up adverse title:
The bailee has no right to deny the bailor’s title or set up against the bailor his own
title or the right of a third party.
Agency
Introduction:
An agent is defined as a person employed to do any act for another or represent another in
dealings with third person. The person for whom such act is done, or who is so represented, is
called the “principal”
In other words, agency is the relationship which subsists between the principal and the agent,
who has been authorized to act for him or represent him in dealings with others.

e.g. Zia appoints Salman to sign the agreement on his behalf, here Zia is called the principal
and Salman is his agent.
Thus in agency there are in effect two contracts:-
i. the first made between the principal and the agent from which the agent derives his
authority to act for and on behalf of the principal; and
ii. the second, made between the principal and the third party through the work of the agent.
A. Who can be come an agent/principa
Any person who is eighteen years old and above and who is of sound mind may be a
principal. As between the principal and third persons, any person may become an agent, but
persons of unsound mind and who are below 18 years of age are not liable towards their
principal for acts done by them as agents.
eg. if A employs B (a minor) to buy some goods from C on his behalf and C supplies the
goods, A cannot allege that he is not liable to pay for the goods just because B is not at the
age of majority. A is still liable to pay C for the goods.
B. CREATION OF AGENCY
Like any other contracts, a contract of agency can be expressed or implied for the
circumstances and the conduct of the parties. In other words, the authority of an agent may be
expressed (given by words spoken or written) or implied (inferred from things spoken or
written or from the ordinary course of dealings).
No consideration is necessary to create an agency.
it is thus created :
By express appointment by the principal.
By implied appointment by the principal.
By ratification by the principal.
By necessity i.e. operation of law.
By the doctrine of estoppel.
1. BY EXPRESS APPOINTMENT
Express appointment may be in written or oral form. An example of an express appointment
made in writing is a Power of Attorney. Even a letter written or words spoken may be
effective in appointing an agent.
2. BY IMPLIED AGREEMENT
The Law can infer the creation of an agency by implication when a person by his words or
conduct holds out another person as having authority to act for him.
e.g. If he allows another person to order goods on his behalf and habitually pays for them, an
agency may be implied. In such terms he will be bound by the contracts as if he has expressly
authorised them.
2. BY RATIFICATION:
Agency by ratification can arise in any one of the following situations:-
i. An agent who was duly appointed has exceeded his authority or
ii. A person who has no authority to act for the principal has acted as if he has the authority.
iii.
it means where acts are done by one person on behalf of another but without his knowledge
or authority, he may elect to ratify or to disown the acts. If he ratifies them, the same effect
will follow as if they had been performed by his authority. When the principal accepts and
confirms such a contract, the acceptance is called ratification. Ratification may be expressed
or implied.
Ratification is retrospective i.e. it dates back to the time when the original contract was made
by the agent and not from the date of the principal’s ratification.
e.g. On 2 January 1996, A appointed B as his agent to buy a car not exceeding RM100,000/-.
 On 5 January B went to GRG Motors and ordered a car costing RM135,000/-, telling GRG
Motor’s salesman that he was buying the car on A’s behalf. On 12 January, GRG Motors
deliver the car to A. If A confirms and adopts the contract on 12 January, then B is said to be
an agent through ratification. A can also rejects the contract since B had exceeded his
authority.
Contract can be ratified under the following circumstances:-
The act must be [Link] agent must, at the time of the contract, expressly act as an
agent for the principal.
i.e. he must not allow the third party to think that he is the principal.
C. BY NECESSITY
An agency by necessity may be created if the following three conditions are met:-
1. It is impossible for the agent to get the principal’s instruction.
2. The agent’s action is necessary, in the circumstances, in order to prevent loss to the
principal with respect to the interest committed to his charge e.g. when an agent sells perishable
goods belonging to his principal to prevent from rotting.
3. The agent of necessity must have acted in good faith.
In an emergency an agent has authority to do all such acts for the purpose of protecting his
principal from loss as would be done by a person of ordinary prudence, his own case, under
similar circumstances.
A. BY ESTOPPEL:
A person cannot be bound by a contract made on his behalf without his authority. However, if
he by his words and conduct allows a third party to believe that the particular person is his
agent even when he is not, and the third party relies on it to the detriment of the third party, he
will be estopped or precluded from denying the existence of that person’s authority to act on his
behalf.
Section 182 in The Indian Contract Act, 1872
182. ‘Agent’ and ‘principal’ defined.—An ‘agent’ is a person employed to do any act for
another, or to represent another in dealings with third person. The person for whom such act is
done, or who is so represented, is called the ‘principal’. —An ‘agent’ is a person employed to
do any act for another, or to represent another in dealings with third person. The person for
whom such act is done, or who is so represented, is called the ‘principal’."
AGENT’S AUTHORITY- JUDICIAL INTERPRETATION:
Who Is An Agent?
An agent is one who is:
• Employed by another (the principal);
• To do any act for that principal; or
• To represent him in dealing with third persons.
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’. The
Indian Contract Act of 1872 does not make any distinction between different classes of agents.
On one hand an agent may be appointed by the principal, it also includes an employment by
any authority authorised by law to make the employment.
Agents are distinguished in respect of authority as general or special agents. The former
expression includes brokers, factors, partners, and all persons employed in a business of filling
a position of a generally recognised character, the extent of authority being apparent from the
nature of employment or position; the latter denotes an agent appointed for a particular
occasion or purpose, limited by the employment.
A special agent has only authority to do some particular act for some special occasion or
purpose which is not within the ordinary course of his business or profession. This distinction is
made to determine the authority of that agent. It has been stated: “A general agent has the full
apparent authority due to his employment or position and the principal will be bound by his acts
within that authority though he may have imposed special restrictive limits which are not
known to the other contracting party.
A special agent has no apparent authority beyond the limits of his appointment and the
principal is not bound by his acts in excess of those limits whether the other contracting party
knows of them or not.”
DUTIES & RIGHTS OF AN AGENT Under the Indian Law, the Agent has certain duties.
An agent is bound to conduct the business of his principal according to the directions given
by the principal, or, in absence of any such directions, according to the custom which
prevails. It is the duty of every agent to carry out the mandate of his principal.
An agent is bound to conduct the business of the agency with as much skill as is reasonable.
An agent is bound to render proper accounts to his principal on demand. It is the duty of an
agent, in cases of difficulty, to use all reasonable diligence in communicating with his
principal, and in seeking to obtain his instructions. If an agent deals on his own account in the
business of the agency, the principal may repudiate the transaction.
The important rights of an agent can be seen as well. In the absence of any special contract,
payment for the performance of any act is not due to the agent until the completion of such
act. An agent who is guilty of misconduct in the business of the agency is not entitled to any
remuneration in respect of that part of the business that he has misconducted. An agent may
retain all moneys due to himself in respect of advances made or expenses properly incurred
by him in conducting such business.
The employer of an agent is bound to indemnify him against the consequences of all lawful
acts done within the authority. Where one person employs another to do an act, and the agent
does the act in good faith, the employer is liable to indemnify the agent against the
consequences of that act. Where one person employs another to do an act which is criminal,
the employer is not liable to the agent. The principal must make compensation to his agent in
respect of injury caused to such agent by the principal’s neglect or want of skill.
AGENT’S AUTHORITY :
It has been seen in the case of Palestar Electronics Private Limited v. Additional
Commissioner (1978) 1 SCC 636 22, that the acts of the agent within the scope of his
authority bind the principal. Contracts entered into through an agent, and obligations arising
from acts done by the agent, may be enforced in the same manner, and will have the same
legal consequences, as if the contracts had been entered into and the acts done by the
principal in person as per Section 226 of the Indian Contract Act, 1872. It is necessary for
this effect to follow that the agent must have done the act within the scope of his authority.
The authority of an agent and more particularly its scope are subjects to some controversy.
(See Municipal Corporation, Delhi v. Jagdish Lal (1969) 3 SCC 389. Sardar Gurucharan
Singh v. Mahendra Singh (2004) 1 MPLJ 252 (MP) 3. The uncertainty is largely due to the
fact that the authority of an agent does not depend upon one source. It has been rightly
held in the case of Ramlesh v. Jasbir Singh, AIR 2004 P&H 216, that agency came into
being to promote and not to hinder commerce. The authority of an agent means his capacity
to bind the principal. It refers to “the sum total of the acts it has been agreed between
principal and agent that the agent should do on behalf of the principal.”( See Montrose, J.L.
Actual and Apparent Authority, (1938).. When the agent does any such acts, it is said he has
acted within his authority as was seen in the case of Nand Lal Thanvi v. LR of Goswami Brij
Bhushan. AIR 1973 All 302.
With regards to contracts and acts which are not actually authorised, the principal may be
bound by them, on the principle of estoppels, if they are within the scope of the agent’s
ostensible authority, but in no case is he bound by any unauthorised act or transaction with
respect to persons having notice that the actual authority is being exceeded.2
TYPES OF THE AUTHORITY OF AGENTS
1. ACTUAL AUTHORITY :
The authority conferred on an agent by the principal is termed as the actual authority. 27
Mulla, Dinshah Fardunji Mulla The Indian Contract Act Page 344 (13th Edition 2011)... It
can be classified into two categories, namely express and implied.2828 Section 186 of the
Indian Contract Act, 1872. An authority is said to be express when it is given by words
spoken or written.2929 Section 187 of the Indian Contract Act, 1872. A power of attorney
can be taken as an example of express authority as was seen in the case of Syed Abdul
Khader v. Rami [Link] 1979 SC [Link] scope of express authority is worked out by the
construction of words used in the documents.31Singh, Avtar Law of Contract and Specific
Relief Page 775 (Tenth Edition). A case on this point can be that of Attwood v. Munnings
(1827) 7 B&C 278. Where a principal, while going abroad, authorised his agent and partner
to carry on his business, and his wife to accept bills on his behalf for his personal business, he
was not held bound when his wife accepted bills on his behalf for the business, which the
agent was conducting and which was different from his personal business. In the case of Reid
v. Rigby (894) 2 QB 40. where the agent obtained a loan outside his authority by signing a
cheque on behalf of his principal to pay the principal’s workmen, the principal was held
bound. But where the third party has knowledge of the limitation of the agent’s authority or
could have discovered it by reasonable examination, he would be bound by it as held in the
case of Ferguson v. Um Chand Boid( 34 (1905) 33 Cal 343). An agent cannot borrow on
behalf of his 5 principal unless he has clear authority to do so. Where the agent has the power
to borrow, the fact that he borrowed beyond the authorised limit, does not prevent the third
party from holding the principal liable as was held in the case of Withington v. Herring. Put
(1829) 5 Bing 442. The fact that the agent has acted from improper motive does not take the
case beyond the scope of authority as seen in the case of Hambro v. Burnard (1904) 2 KB 10
(CA). An authority is said to be implied when it is to be inferred from the circumstances of
the case; and things spoken or written or the ordinary course of dealing, may be accounted
circumstances of the case. (See Section 187 of the Indian Contract Act, 1872) The distinction
between express and implied authority depends merely on whether the authority is delimited
by words or by conduct. In the case of Ramanathan v. Kumarappa AIR 1938 Cal 423. An
estate agent was appointed to find a purchaser for a certain property. He accepted a deposit
from a prospective customer and misappropriated it. The principal was held liable because an
estate agent has an implied authority to take a deposit. However, he cannot receive payment
or give any warranty unless actually authorised as held in the case of Foujdar Kameshwar
Dutt Singh v. Ghanshyamdas 39 1987 Supp SCC 689.
2. APPARENT AUTHORITY “Ostensible or apparent authority is the authority of an
agent as it appears to others. It often coincides with actual authority. Thus, when the
board (of directors) appoint one of their members to be a managing director they
invest him not only with implied authority, but also with ostensible authority to do all
such things as fall within the usual scope of that office.”40 Willis J held that once it is
established that the defendant was the real principal, the ordinary doctrine as to
principal and agent applied, that the principal is liable for all the acts of the agent
which are within the authority usually confined to an agent of that character,
notwithstanding limitations, as between the principal and the agent, 40 Denning LJ 6
upon that authority. In the case of Valapad Co-operative Stores Limited v. Srinivasa
Iyer,41 it was held: “The term ‘ostensible authority’ denotes no authority at all. It is a
phrase conveniently used to describe the position which arises when one person has
clothed another, or allowed him to assume an appearance of authority to act on his
behalf, without actually giving him any authority either express or implied, by which
appearance of authority a third party is misled into believing that a real authority
exis

Lord Ellenborough’s observation in the case of Pickering v. Busk.42 It depends upon

application of the principle of estoppel, for estoppel means only that a person is not
permitted to resist an inference which can reasonably be drawn from the principal’s
words or conduct. A case on this point is that of Egyptian International Foreign Trade
Company v. Soplex Wholesale Supplies Limited (The Raffaella)43 . The person
making the representation is estopped from denying the ostensible authority which
was thus created.44 Three things should be noted here. The representation must be
made by or with the authority of the principal. Ostensible authority cannot be created
by simply a representation of the agent.45 The third party must rely on a
representation of the agent’s authority to act as agent.46 The agent’s want of authority
must be unknown to the third party.47 Statutory Provision about Apparent Authority.
{ dear reader please see: 41 AIR 1964 Ker 176. 42 1812 KB 15. 43 [1985] 2
Lloyd’s Report 36. 44 Anson Law of Contract Page 671 (28th Edition) 45 Attorney
General for Ceylon v. Silva [1953] A.C. 461. 46 Farquharson Brothers v. King and
Company [1902]
A.C. 325. 47 Armagas Limited v. MundogasSA [1986] 1 A.C. 717.}
When an agent has, without authority, done acts or incurred obligations to third persons
on behalf of his principal, the principal is bound by such acts or obligations if he has by
his words or conduct induced such persons to believe that such acts and obligations were
within the scope of the agent’s authority.48 A case on this point is that of Bissessardas
Kasturchand v. Kabulchand49 where the court said: “Their Lordships of the Judicial
Committee of the Privy Council ruled that the right of a third party against the principal
 on the contract of his agent though made in excess of agent’s actual authority was
nevertheless to be enforced when the evidence showed that the contracting party had been
led into an honest belief in the existence of the authority to the extent apparent to him.’50
Where, however, a person contracting with the agent has actual or constructive notice of
any restriction on the agent’s ostensible authority, he is bound by the authority.51 The
ultimate question is whether the circumstances under which a servant has made a
fraudulent misrepresentation which has caused loss to an innocent party conducting with
him are such as to make it just for the employer to bear the loss.52.
( .see for note 48 Section 237 of the Indian Contract Act, 1872. 49 AIR 1945 Nag 121.
50 Ram Pertab v. Marshall ILR (1898) 26 Cal 701. 51 Sarshar Ali v. Roberts Cotton
Association (1963) 1 SC 244 (Pak). 52 Singh, Avtar Law of Contract and Specific
Relief Page 789 (Tenth Edition)}
3. USUAL OR INCIDENTAL AUTHORITY:
In certain circumstances, a principal may be liable for the unauthorized acts of an agent.
In these cases, the existence of the principal was unknown to the third party, so that it
could not be said that the principal held out the agent to have authority to act as agent and
was estopped. In the case of Watteau v. Fenwick53 it was said that an undisclosed
principal who employs an agent to conduct business is liable for any act of the agent
which is incidental to or usual in that business. Willis J. said-53 [1893] 1 Q.B. 346. 8
“The principal is liable for all the acts of the agent which are within the authority usually
confided to an agent of that character, notwithstanding limitations as between the
principal and the agent, put upon that authority.”
4. AGENT’S AUTHORITY IN AN EMERGENCY An agent has authority, in an
emergency, to do all such acts for the purpose of protecting his principal from loss as
would be done by a person of ordinary prudence, in his own case, under similar
circumstances.54 Under the English Law, an agency of necessity can arise in the case of a
carrier of goods or a master of ship who, under certain circumstances of necessity, is
empowered on behalf of the ship-owner or the owner of the goods carried to dispose of
the goods or to enter into such other contract as may be necessary, and will be considered
to have their authority to do so. The agency of necessity is frequently used to describe
cases where one person, in an emergency, performs services or incurs expenditure to
preserve the property or rights of another and seeks reimbursement,55 or when a person
claims to be protected against an action for wrongful interference with the property of
another by pleading necessity.56
{See:- 54 Section 189 of the Indian Contract Act, 1872. 55 Exall v. Partridge (1799) 8
T.R. 308. 56 Sachs v. Miklos [1948] 2 K.B. 23. 9 of business. This was seen in the case of
Naseem Bano v. Life Insurance Corporation of India.}
CONCLUSION Over the years, it has been seen that an agent plays several roles in a
contract. He has to step into the shoes of the principal, yet is excluded from liability
his actions in general. Hence, the limits of his authority have been a question of debate and
pondering for several decades since the emergence of the Agent-Principal relationship idea.
Several judges over a span of time, in various cases that have been covered in the
research paper have expressed varying opinions and views regarding the authority of an
agent. In lieu of simplifying the task of deciding this authority, several classes of agents were
also identified. The responsibilities and underlying powers of these agents differ, depending
on the work they carry out.
Overall, after this extensive study of the elaborate and complex nature of the Agent’s
contract we can see that courts, especially in judicial interpretation do not seek to
indemnify the agent against the losses caused due to his mistakes, but rather seek to
indemnify the third party from the same. At the same time, the principal maintains the
right to sue the agent and demand compensation in case the agent has exceeded his
authority without a very reasonable and essential reason for the same.
WHO CAN EMPLOY AN AGENT
 Any person, who is capable to contract may appoint as agent. Thus, a minor or lunatic
cannot contract through an agent since they cannot contract themselves personally either.
WHO MAY BE AN AGENT
 In considering the contract of agency itself (i.e., the relation between principal and agent),
the contractual capacity of the agent becomes important.
HOW AGENCY IS CREATED
 A contract of agency may be created by in any of the following three ways: - (1) Express
Agency (2) Implied Agency (3) Agency by Estoppel (4) Agency by Holding Out (5) Agency
of Necessity (6) Agency By Ratification: ( discussed above).
DUTIES OF AGENT
1. To conduct the business of agency according to the principal's directions.
2. The agent should conduct the business with the skill and diligence that is generally
possessed by persons engaged in similar business, except where the principal knows
that the agent is wanting in skill.
3. To render proper accounts.
4. To use all reasonable diligence, in communicating with his principal, and in seeking
to obtain his instructions.
5. Not to make any secret profits.
6. Not to deal on his own account.
7. Agent not entitled to remuneration for business misconducted.
 8. An agent should not disclose confidential information supplied to him by the principal
[Weld Blundell v. Stephens (1920) AC. 1956].
9. When an agency is terminated by the principal dying or becoming of unsound mind,
the agent is bound to take on behalf of the representatives of his late principal, all
reasonable steps for the protection and preservation of the interests entrusted to him.
RIGHTS OF AN AGENT
a. Right to remuneration
b. Right Of Retainer.
c. Right of Lien.
d. Right of Indemnification.
e. Right to compensation for injury caused by principal’s neglect.
PRINCIPAL'S DUTIES TO AGENT
 A principal is:
(i) bound to indemnify the agent against the consequences of all lawful acts done by
such agent in exercise of the authority conferred upon him;
(ii) liable to indemnify an agent against the consequences of an act done in good faith.
(iii) The principal must make compensation to his agent in respect of injury
caused to such agent by the principal's neglect or want of skill.
TERMINATION OF AGENCY
i. By revocation by the Principal.
ii. On the expiry of fixed period of time.
iii. On the performance of the specific purpose.
iv. Insanity or Death of the principal or Agent.
v. An agency shall also terminate in case subject matter is either destroyed or rendered
unlawful.
vi. Insolvency of the Principal. Insolvency of the principal, not of the agent, terminates
the agency.
NATURE O PARTNERSHIP
The term “Partnership” has been defined under section 4 of the Indian Partnership Act, 1932. It was in the year
1932 when a separate law of Partnership was passed, before that all the matters about the Indian Partnership were
dealt with by a chapter in the Indian Contract Act, 1872. Contract Act was not able to suit the needs of the
business community; therefore it became essential to come up with a new exhaustive amendment in the form of
Indian Partnership Act which may suit the needs of the business generation at that point of time.
Nature of Partnership
Whenever at least two people hold hands to set up a business and offer its benefits and misfortunes, it is called
Partnership. Section 4 of the Indian Partnership Act 1932 characterises partnership as the ‘connection between
people who have consented to share the benefits of a business carried on by all or any of them representing all’.
Partners are the people who have gone into partnership independently with each other. Partners all in all are
called ‘firm’.
Two or More Persons
There ought to be, at any rate, two people meeting up to frame the partnership for a shared objective. As it were,
the base number of partners in a partnership firm can be two. Indian Partnership Act, 1932 has put no
constraints on most extreme quantities of partners in a firm. Be that as it may, nonetheless, the Indian Companies
Act, 2013 puts a point of confinement on some of the partners in a firm as pursuing.
For Banking Business, Partners must be not exactly or equivalent to 10.
For Any Other Business, Partners must be not exactly or equivalent to 20.
On the off chance when the number of partners surpasses the limits, the partnership ends up unl
Defining Partnership
The term partnership has been explicitly established under section 4 of the Indian Partnership Act as follows.
 The partnership is the agreement between persons.
 Organised to carry on business activities.
 To share profits and losses.
 Mutual Agency.
Thus the four grounds determining the valid and binding partnership between the persons are as follows:
Agreement
Section 5 of the Indian Partnership clearly rules out that relation of partnership from the contract must be a
result of a valid agreement which must be mutually agreed by all the partners. In various judicial
pronouncements, it has been ruled that if there is no agreement, then the arrangement will not be considered as an
agreement.
It is to be noted that Partnership must not be created by any status. E.g. The members of HUF will not be
considered as the partners, also if husband and wife are carrying on any business, then they will also be not
considered as partners unless there is an agreement governing them. The requirements of the same have been
specified by the Supreme Court in CST vs K. Kelukutty(1). It has been clarified by the courts’, section 4 itself
uses the word “Who have agreed”. Therefore families carrying on business will not be governed by Partnership
provisions. The interests of partners in the firm are governed by the rules of Contract for which they have entered.
The partnership between Family Members can be termed as a partnership only after they agree to draft an
agreement and contract, then only they will be governed under the provisions of the Indian Partnership Act. Only
if the business was governed by an agreement and contract, then a partnership shall be recognised as a valid
partnership, which was held in Lakshmiah v Official Assignee of Madras wherein Court ruled that if there is
any specific agreement which governs the partnership principles then it doesn’t matter whether it is made between
a joint family or it is the collaboration of family members.
Therefore the above ground must be fully satisfied to register a firm or partnership under the provisions of the act.
Business
A motive of partnership firm and partnership as a whole must be to do business. This should not be judged with a
strict interpretation. In some of the judicial pronouncements, it has been ruled by the judiciary that the term
business is the activity which results in accruing more and more profits by a particular organisation. However, it
is not necessary that a business must have long chains and ventures. A partnership may even exist in a single
venture business. It is the carrying on business in a particular way, which constitutes a valid partnership. The
court in Khan vs Miah(2) has ruled as to what will qualify as a business entity in case of a partnership.
Sharing of profits
The word partnership per se means to part and which means division. The division of profits between two or
more members is a prerequisite to constitute a valid partnership as a whole. It has been ruled that any man who
has earned out of the activity of the partnership must share the same with the other partners. In 1860 when there
were no acts pertaining to the governance of partnership provisions then sharing of profits was regarded as the
most important test in determining the validity of a partnership which was also ruled in Cox vs Hickman(3).
Sharing of Losses
To establish a partnership it is not essential that the partners ought to consent to share the losses (Raghunandan
vs Harmasjee). It is available to at least one partner to consent to hold up under every one of the losses of the
business. The Act, accordingly, does not try to make consent to share losses, a test of the presence of partnership.
Section 13(6), nonetheless, gives that the partners are qualified for offer similarly in the benefits earned, and will
contribute likewise to the misfortunes continued by the firm, except if generally concurred. In this manner sharing
of mishaps might be viewed as noteworthy upon the sharing of profits and where nothing is said with regards to
the sharing of losses, consent to share profits suggests a consent to share mishaps too. It must be noticed that even
though an accomplice may not partake in the misfortunes of the business, yet his risk versus outcasts will be
boundless because there can’t be ‘constrained partnerships’ in our nation under the Partnership Act.
Mutual Agency
The fifth component in the meaning of a partnership gives that the business must be carried on by every one of
the partners or any (at least one) of them representing all, that is, there must be a mutual agency. In this manner
each partner is both an agent and principal for himself and different partners, for example, he can tie by his
demonstrations different partners and can be bound by the illustrations of various partners in the standard course
of business.
To test whether an individual is a partner or not, it ought to be seen, in addition to other things, regardless of
whether the component of agency exists, i.e. irrespective of whether the business is led for his benefit. It is based
on this test a widow of a perished partner or a chief having an offer in the profits isn’t an accomplice since
business is not carried for his or her sake. On the off chance that he/she accomplishes something, the firm isn’t
legitimately bound by that.
The significance of the component of mutual agency lies in the way that it empowers each accomplice to carry on
the business in the interest of others. Partners may concur among themselves that somebody of them will not go
into any agreements for the benefit of the firm, however by prudence of the guideline of mutual agency, such
accomplice can tie the firm opposite outsiders without notice in contracts made by the customary use of the
exchange.
Obviously, he can be caused subject by other accomplice’s to entomb for surpassing his power. Actually, the law
of partnership overseeing relations of the accomplice’s between and with the outside world is an augmentation of
the law of partnership. Where at least two people are locked in as partners in a standard exchange, every one of
them has a suggested expert from the others to tie all by contracts went into as per the ordinary course of business
in that exchange. The authority regarding the principle has been mentioned separately in Cox vs Hickman(3).
Thus as per the provisions of Indian Partnership, a partnership cannot be created in a nightmare. There are some
grounds on which it could be checked whether the partnership is justiciable or legally binding. A sort of business
association where at least two people pool cash, abilities, and different assets, and offer benefit and misfortune as
per terms of the partnership agreement.
Without such agreement, a partnership is accepted to leave, where the members in a venture consent to share the
related dangers and rewards proportionately. There are three relatively common partnership types: general
partnership (GP), limited partnership (LP) and limited liability partnership (LLP).
A fourth, the limited liability partnership (LLP), is not recognised in all states. The partnership could be divided
into four forms.
Partnership at will- which means while framing a partnership if there is no statement about the lapse of such a
partnership, we consider it a partnership freely. As indicated by Section 7 of the Indian Partnership Act 1932,
there are two conditions to be satisfied for a partnership to be a partnership freely. The conditions are when there
is no agreement about a fixed period for the presence of a partnership and No arrangement concerning the
assurance of partnership.
Partnership for Fixed Term- which means, Presently amid the production of a partnership, the partners may
concur on the term of this course of action. This would mean the partnership was made for a fixed term of time.
Subsequently, such a partnership won’t be a partnership voluntarily; it will be a partnership for a fixed term. After
the termination of such a span, the partnership will likewise end.
Particular Partnership- A partnership can be framed for carrying on consistent business, or it tends to be shaped
for one specific endeavour or undertaking. On the off chance that the partnership is framed distinctly to do one
business venture or to finish one endeavour, such a partnership is known as a specific partnership.
General Partnership- At the point when the reason for the development of the partnership is to do the business,
in general, it is said to be a general partnership.
To check the validity of partnership, the above essentials and grounds must be compiled, in order to form a
partnership and get it registered under the provisions of the Indian Partnership Act.
RELATIONS OF PARTNERS INTER SE
Introduction
There are two fundamental principles which govern the relation of partners to one another. The first principle
provides that all the partners in a partnership firm are free to form an agreement with regard to their mutual rights
and duties. However, there are certain duties mentioned in The Indian Partnership Act, 1932 which can not be
altered by entering into an agreement to the contrary. Section 11 of the Act gives statutory recognition to this
principle.
The second principle is of fundamental nature. It provides that the relation of partners to one another is of the
utmost good faith. It provides that every partner is an agent of each other, therefore, the contract entered by one of
the partners will bind all the partners. Thus, the relation of partners to one another is based on mutual trust and
confidence. The principle is recognised by Section 9 of the Partnership Act.
Duties of Partners
All the duties of partners emerge from the second principle i.e. the relation of partners to one another is of utmost
good faith.
Following are the duties of partners:
1. Duty to act in good faith
2. Duty not to compete
3. Duty to be diligent
4. Duty to indemnify for fraud
5. Duty to render true accounts
6. Duty to properly use the property of the firm
7. Duty not to earn personal profits
Duty to act in good faith
 Section 9 of the act provides that it is the duty of partners to act for the greatest common
advantage of the firm. Therefore, the partner should work to secure maximum profits for the firm.
A partner should not secure secret profits at the expense of the firm.
 In Bentley v. Craven,[1] there was a partnership in a sugar refinery firm. One of the partners was
skilled in buying and selling sugar. Therefore, he was entrusted with the task of buying and selling
sugar. However, the partner sold the sugar from his own stock and thus, gained profit. When the
partners discovered this fact, they brought an action to recover profits earned by the partner. It was
held by the court that the partner can not make secret profits and therefore, the firm was held entitled
for profits earned by the partner.
 The duty continues to exist even after the partnership has ceased to exist. The partners owe the duty
to legal representatives of the partner as well as the former partner.
Duty not to compete
 Section 16(b) of the act provides that if the partner makes a profit by engaging in a business which
is similar to or competing with the firm, then the partner should account for such profits.
 In Pullin Bihari Roy v. Mahendra Chandra Ghosal,[2] there was a partnership for buying and selling of
the salt. One of the partners while buying the salt for the firm, bought some quantity of salt for himself
and then gained profit by selling it on his personal account. He was held to be liable to account to his
co-partners for the profits earned.
 However, a partner can carry on any business which is outside the scope of the business of the firm.
 The duty can be altered by the partnership deed. The partners may enter into an agreement which
allows a partner to carry the business competing with the business or can restrict the partner from
carrying any business other than that of the firm. Section 11 provides that such an agreement will
be valid and can not be considered as a restraint in trade.
 If a person breaches such agreement and carries on a personal business which not competing to the
business of the firm then such a partner will not be liable to account for the profits, but his co-partners
can apply for dissolution of the partnership.
Duty to be Diligent
 Section 12(b) provides that a partner is bound to diligently attend his duties. Section 13(f) states that a
person should indemnify the firm for any loss caused to the firm because of his wilful neglect
 A partner cannot be made liable for mere errors of judgment or acts done in good faith.
 In Cragg v. Ford,[3] there was a partnership between the plaintiff and the defendant. The defendant
was the managing director of the firm and therefore, the conduct of dissolution was left on him.
Plaintiff advised the defendant to dispose of certain bales of cotton. However, the defendant said that
the same would only be done after the dissolution. Meanwhile, the prices of cotton fell and very less
amount was realised by selling the cotton as compared to which could have been otherwise realised.
 An action for indemnity under this head can be brought only by the firm or partners on behalf of the
firm. A partner can not bring an action for indemnity in his personal capacity.
Duty to indemnify for fraud
 Section 10 of the Indian Partnership Act, 1932, provides that if a loss is caused to the business of the
firm because of the act of the partner then he shall indemnify his co-partners for such loss.
 The purpose of this section is to induce partners to deal fairly and honestly with the customers.
 Illustration: A, B, C, and D entered into a partnership for the banking business. A committed fraud of
₹30,000 against one of the customers. As a result, all the co-partners i.e. B, C, and D were held liable.
 Here, A is bound to indemnify the firm for the loss caused to the firm because of fraud committed by
him.
 The liability to indemnify for fraud cannot be excluded by entering into an agreement to the
contrary. Because entering into any such agreement is opposed to public policy.
Duty to render true accounts
 Section 9 of the Act, provides that the partners are bound to disclose and provide full information
about the things that affect the firm to any partner or his legal representatives. This means that a
partner should not conceal things from other co-partners in relation to the business of the firm.
 Every partner has the right to access the accounts of the firm.
 In Law v. Law,[4] it was held by the court that if a partner is in possession of some extra information
then he is bound to deliver it to the co-partners. If the partner enters into a contract with other co-
partners without furnishing them the material details which is known to him but not his co-partners
then such a contract is voidable.
Duty to properly use the property of the firm
 Section 15 of the act, provides that property of the firm should be held and used by the firm only for
the business of the firm.
 A partner can not make use of the property for his personal purpose and if does so, then he will be
accountable to all the co-partners. He could be made liable for the losses caused because of any such
use.
 This duty can be avoided by entering into an agreement to the contrary.
Duty to account for personal profits
 Section 16 of the Partnership Act, provides that:
 If a partner makes the use of the property of the firm and earns profit out of it, then he should
account for the property. This duty arises because of the fiduciary relationship between the partners.
 Illustration: A, B, and C were partners in a firm. Goods were supplied to a person D. D paid some
extra commission to A, for using his influence to deliver the goods to D. Here, A has the duty towards
the co-partners to account for the commission.
 If a partner enters into a business which is competing with the business of the firm then the
partner should account for the profit earned from any such business.
 Illustration: A, B, and C were partners in the business of sale of bottles. B started to carry on the same
business and started to influence the customers to buy the bottle from him rather than the firm. Here, B
has a duty to account for the profits earned from the business.
 However, a competing business can be carried out after the dissolution of the partnership. The firm has
the right to put reasonable restrictions on carrying the competing business by the ex-partners such as,
any reasonable time for which the ex-partners can’t carry the competing business or the geographical
limits where he can’t carry the business.
 This is not a compulsory duty and thus, can be avoided by entering into an agreement to the contrary
Rights of Partners
Mutual Rights of the partners generally depend upon the provisions of the agreement. But subject to their
agreement, the law confers following rights on partners:
1. Right to take part in the conduct of the business
2. Right to be consulted
3. Right to access and inspect books
4. Right to indemnity
5. Right to share profits
6. Right to Interest
7. Right to remuneration
Right to take part in the conduct of the business
 Section 12(a) of the act, provides that every partner has a right to take part in the conduct to the
business of the firm.
 This right can be curtailed by the provisions of the agreement. Thus, allowing only a few partners to
actively participate in the functioning of the business.
 This right should be used by the partners for promoting the business of the firm and not for
damaging the business.
 In Suresh Kumar Sanghi v. Amrit Kumar Sanghi,[5] a partner in order to undermine the position of the
managing partner wrote to the principals to not supply motor vehicles to the firm and to the banker’s to
not to honour the cheques of the firm.
 The Delhi High Court provided an injunction against the partner saying that the partner’s act was to
damage the business of the firm.
Right to be consulted
 Section 12(c) provides for resolving disputes relating to the ordinary course of business between
the partners by the majority. It states that every partner shall have the right to express an opinion
before the matter is decided.
 If for example, there is a difference in opinion among the partners for introducing the son of one of the
partners for the purpose of learning business then the majority decision will prevail.
 However, if the dispute is related to the Fundamental matter of the business i.e. the nature of
the business then the consent of every partner is required.
 For Example: If a minor is to be included as a beneficiary in a partnership then the consent of all the
partners is required.
Right to access, inspect and copy books
 Section 12(d) of the act, provides the right to partners to access, inspect and copy account books.
 A partner can exercise this right by himself or by his agent but none of them is authorised to use
the gained information against the interest of the firm.
 Example: If a dormant partner wants to sell his shares to a co-partner and appoints an expert to inspect
the account and his share in the firm then, co-partners can not object to same.
 For raising an objection the co-partners should provide reasonable grounds such as protection of trade.
Right to be Indemnified
 Section 13(e) provides the right to be indemnified to the partners. This section provides the right
to indemnity under two circumstances:
 A partner is entitled to recover for any expenses incurred by him in the ordinary and proper conduct
of the business.
 Illustration: There was a partnership between A, B, C, and D. The firm has incurred a debt of
₹2,00,000 from the bank. A paid the debt in the name of the firm. In this case, B is entitled to be
indemnified from his co-partners.
 When a partner has incurred expenses in an emergency in order to protect the firm from loss;
provided that the partner must have acted in a reasonable manner.
 The right to be Indemnified is not lost with the dissolution of the firm. Settlement of accounts is
also not important to indemnify the partner.
 The rationale behind this right is that the burden of expenses of helping partnership should not
be borne by a single partner.
Right to share profits
 Section 13(b) of the Indian Partnership Act, provides that the partners are entitled to share the profits
and losses equally.
 Right to share profits is not affected by the fact that the partners have contributed unequally in the
firm, possess different skills, have laboured unequally in the firm.
 In Mansha Ram v. Tej Bhan, [6] where there was no satisfactory evidence to show that in what
proportion the partners were to divide the remuneration. It was held by the Punjab and Haryana High
Court that the partners were entitled to share equal profits irrespective of the fact that they had been
paid separately and had done unequal work.
 However, the right to share profits equally can be altered by the partners by entering into an agreement
to the contrary. Thus, the partners can fix the share of profits or agree to be paid by way of salary
rather than profits.
Right to Interest
 Interest on Capital: Section 13(c) provides that a partner is generally not entitled to claim on the
capital. But if there is an express agreement between partners that allows interest on capital then, such
an interest will be paid only out of the profits of the firm. Interest is not provided to the partner on
capital except when there is an express agreement or a usage to the effect, because a partner is deemed
to be an adventurer rather than the creditor.
  Interest on Advances: Section 13(d) states that a partner is entitled to the interest of six percent per
annum for the advances made by him to the firm beyond the capital he had agreed to subscribe.
 Illustration: A person X, invests ₹50,000 in a partnership firm and provides ₹60,000 to the firm
as advance. In this case, X will receive interest from the profits of the firm for ₹50,000 which he
had invested in the firm and will get 6% interest on the advances made by him to the firm.
 It must be noted that the interest in capital ceases after the dissolution of the firm, but the interest on
advances exist until it is paid. Thus, the dissolution of a firm has no impact on the Interest on
Advances.
Right to remuneration
 Section 13(a) provides that no partner in a firm is entitled to claim remuneration for taking part in the
conduct of business. However, the remuneration can be provided to certain partners along with the
share in profits if they have entered into an agreement to that effect or when such remuneration is
payable under the continued usage of the firm.
 For Example, there is a firm consisting of Active and Dormant partners. In such a case, the partners
can form an agreement entitling the active partners to receive a particular sum as remuneration.
What is Partnership Property?
It becomes important to determine the property of the firm as opposed to the personal property of partners.
For example, when the partnership is dissolved then the debts are first paid out of the property of the firm. Again,
the partnership property should be used only for the business purpose and not for personal purposes.
Concept and Nature of Partnership Property
A partnership is not a legal person and is, therefore, incapable of holding any personal property. Partnership
property is nothing but the joint property of all the partners, however, none of the partners can personally claim
the property. Thus, when one of the partners brings his personal property for the purpose of the partnership, he
loses his personal rights over it. He will only get the share of profits which may be agreed by the partners.
What constitutes the Partnership Property?
Generally, it is an agreement between the partners which specifies what shall constitute a partnership property.
Section 14 of the Act, provides what shall constitute the partnership property. It must be noted that this is subject
to the agreement, and the partners can explicitly mention in the contract that what will be the partnership
property. Hence, Section 14 will apply only in the cases when there was no agreement between the partners
stating that what would be the partnership property.
The property originally brought in
The property of the firm includes all property, rights, and interests which were originally brought into the stock of
the firm by the partners at the commencement of the business.
In Boda Narayana Murthy and sons v. Valluri Venkata Suguna,[7] there were five people who purchased a land
jointly and subsequently constructed a cinema hall with the joint money. Then all the five persons entered into a
partnership to form firm to exhibit the film there. It was held by the Andhra Pradesh High Court that the land and
the hall was not the property of the firm but subject to co-ownership, as there was no intention could be inferred
to convert the property into the firm’s property.
 Goodwill of the firm
Goodwill of the firm is treated as the property of the firm. Goodwill is nothing but the reputation of the firm.
When a partner buys the firm then he is entitled to the goodwill as well. say, for example, there were two partners
in a firm, A and B, B sold his partnership shares to A, A will be entitled to the goodwill of the firm as well i.e. B
cannot use the name of the firm when he opens the business and cannot represent himself as a partner of the firm.
If a person dies or retires, then he or his legal representatives will be entitled to claim for the goodwill. This is
because the goodwill of the firm is the result of his joint efforts along with other partners.
Property subsequently acquired
When a property is subsequently brought for the purposes of the firm or in the ordinary course of the business,
then it would constitute the property of the firm. Any property bought by the firm’s money will be the property of
the firm,
In Mohan Lal Bahri v. K.L. Bahri,[8] a chief working partner bought property by the firm’s money in his own
name without the consent of other partners. It was held by the court that, the fact that the property is not included
in the assets for income tax purposes is immaterial and hence, the property belonged to the firm and not to the
partner.
Partner’s property in the firm’s use
 Sometimes, the personal property of the partner may be used in a firm. If such property constitutes the property of
the firm or not will depend upon the agreement of the partnership and intention of the partners.
The mere use of a partner’s personal property does not mean that it is the firm’s property and the owner of the
property does not lose his rights over that property.
In Jai Narayan Mishra v. Hashmathunnisa Begum,[9] one of the partners had contributed the land for the use of
business and the other had constructed the cinema hall on land. There was no provision in the agreement stating
that the property would be treated as the property of the firm. It was held by the court that the properties were the
personal property of the partners and not the firm’s property.
Conversion of the joint into separate property
Where the property is bought by the partner from the partnership money but for the sole benefit of the partner,
then, in that case, a partner will become the debtor of the firm and the property would be the partner would be the
sole owner of any such property bought by him.
Change in the firm
When a partnership is created for a fixed period or for a particular adventure then such a partnership
automatically comes to an end after the expiry of such period or adventure. However, sometimes the partners
continue the partnership beyond the expired term. Section 17 of the Act provides that such a change in the firm
will not affect the mutual rights and duties of the partners unless the agreement alters it. The change in the firm
can be understood under three broad heads:
Change in Constitution
When there is a change in the constitution of the firm i.e. if a partner retires or a new partner is added, the mutual
rights and duties will remain the same as they were before the change.
After the expiry of the term
When the partnership is for a fixed term but the partners carry it on beyond such term then such partnership will
become the partnership at will and the mutual rights and duties remain the same.
When additional undertakings are carried out
Where the partnership was formed to carry out the specific adventures but carries out other adventures or
undertakings, then the partnership becomes the partnership at will and the rights and duties are not affected by
any such change.
Conclusion
In a partnership, the partners are free to form an agreement and decide the mutual rights and duties. Relation of
partners in the partnership is of utmost good faith, therefore, it is the duty of every partner to work for the greatest
common advantage of the firm and to work diligently in order to avoid any loses to the firm.
Mutual rights of the firm generally depend upon the provisions of the agreement but, there are certain rights
which are conferred by the act in the case when there is no explicit agreement between the partners, these rights
can be abrogated by entering into an agreement to the contrary.
While deciding the shares of the partners in a firm it becomes highly important to determine the partnership
property. Theoretically speaking, the partnership property is nothing but the joint property of all the partners.
If there is any change in the constitution of the firm or if the partnership continues after the expiry of the term or
undertaking for which it was constituted then it does not affect the mutual rights and duties of the partners.
RELATION OF PARTNERS WITH THIRD PARTY
Introduction
A partner is considered to be an agent of the firm as per Section 18 of the Indian Partnership Act, 1932, that
partner is granted a real or apparent authority to act on behalf of the firm and hence he represents the firm through
his actions. A partner is granted permission to make moves, conduct business as usual with certain limitations
being put in some ordinary or extraordinary situations. This will be talked about later in the article.
Partners to be an agent of the firms
As mentioned in Section 18 of the Partnership Act, 1932, a partner will be an agent of the firm for the purpose of
the business of the firm. A partnership in business means that it is a relationship in which all the partners have
 come together to share the profits of the business and the business can be carried out by all or by one who will act
on behalf of all. Going by the meaning of the definition it can be deduced that a partner is also an agent of the
firm.
Implied authority of partner as agent of the firm
Acts done by the partner of the firm in the usual course of business binds the firm but this implied authority
ceases to exist when there is already a contrary agreement in existence. Section 19(2) of the Indian Partnership
Act, 1932, puts forth a list of things which a partner cannot do on behalf of the firm:
[Link] a dispute relating to the business of the firm to arbitration,
[Link] a bank account on behalf of the firm in his own name,
[Link] or relinquish any claim or portion of a claim by the firm,
[Link] a suit or proceeding filed on behalf of the firm,
[Link] any liability in a suit or proceeding against the firm,
[Link] immovable property on behalf of the firm,
7,Enter into partnership on behalf of the firm,
[Link] immovable property belonging to the firm.
Extension and restriction of partner’s implied authority
The extension and restriction of the authority of a partner depends on the existing contract between the parties in
the firm. However, a partner can still carry out actions on his own authority if he has an express authority of a
partner which is either by an agreement or if the usage or custom of the trade permits him to.
Par tner’s authority in a n emergency
In cases of emergency, a partner has to do all such acts to protect the firm from occurring any loss which a person
of ordinary prudence will do under the similar circumstances and that action will be binding on the firm. The
requirements of the section are:
1. There was an emergency situation.
2. The partner acted in light of that situation.
3. The partner did that to protect the firm from losses.
4. The act was reasonable under those circumstances.
Mode of doing the act to bind the firm
Mentioned in Section 22 of the Indian Partnership Act, 1932, the act is done or executed by the partner in the firm
should be done in the name of the firm or should be done in a manner which expresses or implies an intention to
bind the firm.
Effect of admissions by a partner As talked about in Section 23 of the Indian Partnership Act, 1932,
admissions made by a partner concerning the affairs of the firms if made in the ordinary course of the
partnership business are evidence against the firm. Such admissions made by the partners will bind the
firm. However, the thing that needs to be noticed here is that if the
admission made by a person of the firm was before the time he became a partner then it cannot be considered to
be evidence against the firm.
Effect of notice to acting partner
Notice to one partner relating to the business of the firm operates as a notice to the firm. The partners to whom
such notice is given must be acting in the business at that time. So notice to a dormant or a sleeping partner would
not operate as a notice to the firm. A dormant or sleeping partner is someone who takes his share of the profit and
of losses but is not a party to the active share of the business or partnership.
Consider a situation where the firm has appointed a person to manage its work and the person does that. What
will happen if a notice is sent to such a person? This is clarified under Section 24 of the Indian Partnership Act,
1932, Section 24 explains what is the effect of the notice sent to an acting partner. It first explains what an acting
partner means. An acting partner is a person who habitually acts in the business of the firm of any matter relating
to the affairs of the firm operates as notice to the firm. If a notice is sent to such a person, it will be considered as
a notice sent to a firm.
The section also provides for an exception whereby a fraud is committed on the firm by or with the consent of
that partner.
Liability of a partner for acts of the firm
The liability of all the partners of a firm jointly or together is mentioned under Section 25 of the Indian
Partnership Act. It lays down the fact that every partner of the firm can be held liable jointly or severally
for all acts done by the firm while he or she is a partner of the firm. Such acts must be made in the name of
the firm and under an ordinary course of business of the firm. Partners can be held liable jointly or
individually depending on the act that has been performed and the decision made by the third party. This
means that even if a partner had no role to play while deciding the act on behalf of the firm, he or she can
be held liable to the third party if such act causes damage to them and they wish to sue all partners for the
same.
Liability of the firm
For wrongful acts of a partner
Section 26 of the same act deals with the liability of the firm as a whole for an act or omission of a partner in the
ordinary course of the business of the firm. Such an act may be passed with the authority of other partners and if
such act causes loss or damage to the third party, then the firm shall be held liable to the same extent to which the
partner is held liable. The reason is that such an act or omission is made in the name of the firm in due course of
the ordinary nature of business. The firm is here to be assumed as a separate entity with powers and can be sued
for the loss sustained by a third party. It establishes a relationship between the partner, the firm and the third
party.
For misapplication by partners
Under Section 27 of the Act, a firm can also be responsible for any misapplication made by the partner. If any
partner acts under relevant authority while receiving money or property from the third party and if such money or
property is further misapplied by the partner, then the liability for the same can be put on the firm if the loss is
sustained by the third party.
 Moreover, if the firm receives such money or property and while having custody of the same a partner having
authority misapplies it, then under this situation too the firm can be made liable for such misapplication by any
other third party.
Holding out
Section 28 deals with the concept of holding out. The first part deals with anyone who (irrespective of
whether he is a partner of the firm) conducts himself in a way as to represent himself as a partner of the firm
and on the basis of such representation, the third party in good faith gives credit to such person, then such
person shall be liable as if he were a partner of the firm under Section 25 of the Act for his conduct. It
does not matter whether such a person is aware that the third party gave credit on the basis of having
good faith in the representation made by him.
The second part of the section deals with a person who was a partner of the firm and after his death, his
partnership has been automatically cancelled. In such a situation if the firm still continues under the old name
consisting of the deceased partner’s name and if the business is done under such name, then this act of the firm
does not make the legal representatives of the deceased partner liable to any third party which sustained losses
due to such act of the firm on the grounds that the deceased partner is no longer holding any responsibility or
liability to the firm after his death. Hence, all acts after his death shall not hold out his legal representatives or his
estate to be liable to any extent either jointly or severally.
Minors admitted as partners
According to Section 30 of the Partnership Act, 1932, someone who is recognised as a minor by the law may not
be a partner of the firm but the minor with the consent of all the partners in the firm can be given the benefits of
the partnership. Minors are considered to be unfit to be able to make decisions for themselves by the law.
Keeping that in mind, when a minor is admitted in a partnership setup, he is liable for his shares in the partnership
but not liable for his actions.
After the minor has attained majority, at any time within six months or of his obtaining the knowledge that he has
been admitted to the benefits of the partnership, whichever date is later, the minor has to issue a public notice
announcing that he has elected to become a partner in the firm. Another option available to him is declaring that
he has elected not to become a partner in the firm, in case if he fails to give that notice, he shall be admitted into
the firm as a partner after the expiration of the said six-month term.
In cases when the minor decides to be a partner in the firm, as mentioned in Section 30 (7) of the said Act, the
minor from then onwards personally becomes responsible towards the third parties in relation to all the acts done
by the firm and his share in the profits and property remain the same as they were when he was a minor.
In cases when the minor chooses to not be a partner, this clause is talked about in Section 30(8) of the said Act,
what changes is that he becomes eligible to sue the partners of the firm regarding his share of the property and the
profit and his rights and liabilities continue the way they were when he was a minor and that is only subject to
change the day he gives out the public notice.
Conclusion
This article talks about different aspects of a partnership firm by taking references from the Indian
Partnership Act, 1932. This article discusses how partners are liable for the third parties, under what
circumstances can partners be granted permission to act on behalf of the firm, what limitations are put
forth by the said act while the partners act on behalf of the firm, what is implied authority in a partnership
setup, what are the options available to the partners in case of emergency; the article also discusses the
partners’ authority under emergency situations and how the partner is supposed to act in those
situations. This article also talks about how minors can be
included in a partnership setup and what stages they have to go through in order to avail their benefits and what
happens when a minor accepts or rejects being a partner to the firm.
Dissolution of a Partnership
Before the dissolution of the partnership, let us understand the difference between the ‘dissolution of the
partnership’ and the ‘dissolution of the partnership firm’. Dissolution of partnership means the end of the
partnership business and dissolution of partnership firm means the end of partnership business along with the
firm.
The dissolution of a partnership firm means termination of every contractual relationship between the partners
and that all the operations which are being performed in a company are suspended and all the assets and liabilities
are settled and disposed off.
The partnership may be dissolved due to the following reasons:
1. Due to the death of the partner.
2. Due to the admission of a new partner.
3. Due to the retirement of a partner.
4. Due to the bankruptcy of a partner.
5. Due to the expiry of the partnership period, if the partnership is for a particular
period. Modes of Dissolution

6. There are some modes by which a partnership can be dissolved and those are:
1. By an act of partners: when a partner agrees to dissolve a partnership at a particular time. Partners can
come into an agreement regarding a particular time period maybe five years. In which partners can end
the agreement at the end of the five years. Sometimes partners can dissolve it in the middle of the time
period under specific conditions.
2. By operation of law: a partnership is the consequence of an agreement which is governed by law.
Therefore if any unlawful activity is performed so it will be dissolved. You can make a valid
partnership for illegal work.
3. By the court’s decree: a partnership can be dissolved by the court and the court will only allow under
these conditions:
a. If the partner is incapable to work;
b. If the partner is mentally unstable;
c. If the partner misbehaves which creates a bad impact on the partnership;
d. If there is a breach of the agreement by a partner.
4. Statement of dissolution: dissolution can be done by filing the statement to the state’s secretary. The
form must contain the information regarding the partnership name, date and reason of dissolution.
Rights after Dissolution
Section 46 of the Indian Partnership Act, 1932 deals with the rights of partners after dissolution. After the
dissolution of the partnership, partners have certain rights regarding the same:
 1. Right to an equitable lien: on the dissolution of the firm, every partner is entitled to certain rights like
the right to have the property of the firm used in payments of debts and liabilities and rights to have
surplus distributed among all the partners.
2. Right to return of premium: at the time of the partnership, partners pay an amount in the form of
premium when the partnership dissolves. Partners get that premium according to the agreement.
3. Rights where partnership contract is revoked for fraud or for other reasons: if a partner agrees to join a
firm by fraud or by misrepresentation by the other partners, or if he finds so he has the right to put an
end to the partnership agreement.
4. Right to restrain the use of the firm’s name or property: after the dissolution of the partnership, the
partner has a right to stop other partners from using the same name of the firm.
5. The right to earn personal profit by using the firm’s name: if on the dissolution, the partner has a right
to use the name of the firm as he buys goodwill of the firm and can earn profit from it.
Liabilities after Dissolution
Section 45 of the Indian Partnership Act, 1932 deals with the liability for acts of partners done after the
dissolution. Liabilities are:
 The partners continue to be liable to the third party until the public notice of the dissolution is given, it
will not be applied to the partner who is dead or the partner who is insolvent or to the sleeping partner
or to the retired partner.
 After the dissolution of the partnership, the partner is liable to pay his debt and to wind up the affairs
regarding the partnership.
 After the dissolution, partners are liable to share the profit which they have decided in agreement or
accordingly.
 Case Laws
Narendra Bahadur Singh vs Chief Inspector Of Stamps, U.P. (1971)
In this case, the partnership was dissolved and with that, the third party (Narendra Bahadur Singh) was given with
all the assets (stocks) liabilities including all the debts as per the account and he was entitled to use the old name
of the firm and can carry out the business with all profit and losses.
The other three parties were not entitled to any profit, losses or any other liability. The capital, profit, and loss of
the other 3 people has agreed to receive and Narendra Bahadur Singh has agreed to pay the mentioned amount.
As to settle the amount securely, he hypothecated and charged certain property but it was said by the court that
the property of the firm is vested to all partners equally as you are not the only owner of the firm and the
settlement will be done according to the mode of settlement under Section 48 of Indian Partnership Act.
Santdas Moolchand J hangiani And … vs Sheod a yal Gurudasmal Mass and (1970)
In this case, there were two plaintiffs and one defendant who entered into a partnership and carried on partnership
business afterward they decided to dissolve it and settle the accounts of partnership. The plaintiff to whom a
certain amount was payable, filed a suit for damage and when the issues were observed by the judge said that it
was not only the deed of dissolution but also a bond.
He impounded the document and asked the plaintiff to pay the deficit stamp duty. In the end, it was said that the
deed of dissolution in this matter is not liable to be stamped as a bond and that it’s having been stamped as a deed
for dissolution is sufficient.
  B.K. Kapoor & Anr. vs Mrs. Tajinder Kapoor & Anr. (2008)
In this case, the plaintiff-respondent filed a suit for the dissolution of the partnership and claimed that as per the
terms of the agreement the plaintiff was entitled to 18% of the profit in the first Rs.75,000, 12% in the next
Rs.75,000 of book profit and 8% in the balance amount of book profit.
As the relation was not well mentioned in the plaint due to which it was difficult to continue the partnership. So a
notice of suit issued to the petitioners who moved an application under Section 8 of the Act claiming that the suit
raised is covered under the arbitrary agreement.
But in the end, it was held that the petitioners are seeking the dissolution on the just and equitable ground covered
under Section 44 of the arbitrary act and not as the term of the partnership deed and therefore the matter could not
be referred to the arbitration under section 8.
 N. Guruva Reddy vs The District Registrar (1976)
In this case, Guruva Reddy, son of Chenchu Rami Reddy and other six persons and legal heirs of Smt. P. Sri
Devamma was carrying a partnership business. The legal representative and five other partners show their desire
to retire from the partnership.
A dissolution of the partnership was executed. The dissolution was executed on the stamp paper. In the end, it
was said that a charge was created in favour of the partners in the respective amount, which are payable under the
deed of the dissolution.
Conclusion
It can be derived from the above explanation of dissolution of the partnership that with the dissolution of the
relationship between the partners they have certain rights and responsibilities which they need to fulfil and one
can claim for it with the help of the Indian Partnership Act, 1932 as it gives certain provision regarding the same.
The act clearly provides grounds for dissolution of the partnership, so that nobody can take advantage of the same
and it also helps to maintain a good environment in the firm.
SALE OF GOODS ACT,1930
Introduction
The contract of the sale of goods is governed by The Sale of Goods Act, 1930. The Act extends to the whole of
India except the state of Jammu & Kashmir. Till 1930, all the transactions related to the sale of goods was
regulated by The Indian Contract Act, 1872. In 1930, Sections 76-123 were replaced by the Act of 1930. A
contract for the sale of goods has certain unusual features such as transfer of ownership of the goods, delivery of
goods, rights and duties of the buyer and seller, remedies for breach of contract, conditions and warranties
implied under a contract for the sale of goods, etc. These unusualities are subjected to the provisions of the Sale
of Goods Act, 1930.
The Act deals with the subject-matter of movable property. This Act does not deal with the sale of immovable
property. The transaction relating to immovable properties, e.g., the sale, lease, gifts, etc., are governed by a
separate Act known as the Transfer of Property Act, 1882.
What is Contract of Sale: meaning & concept
Contract of the sale is an agreement between the buyer and the seller intending to exchange property. Section 4(1)
defines the contract of the sale as – a contract of the sale of goods is a contract whereby the seller transfers or
agrees to transfer the property in goods to a buyer for a price.
In other words, the essentials to constitute a contract of the sale are as follows:
Two parties
There must be 2 distinct parties i.e. a buyer and a seller, to effect a contract of the sale and they must be
competent to contract. ‘Buyer’ as defined under Section 2(1) means a person who buys or agrees to buy goods.
‘Seller’ has been defined under Section 13 which states that a person who sells or agrees to sell goods.
Goods
There must be some goods, the property which is or is to be transferred from the seller to the buyer. The subject-
matter as to the goods under the Contract of Sale must be movable property. This Act does not concern the
immovable property as its subject-matter.
Price
The most important essential for the enforceability of the Contract of Sale of goods is the price. The price can be
termed equivalent to the consideration. In the absence of such price or consideration, the transfer cannot be
termed as a sale. The transfer by way of the sale must be in exchange for a price. The payment of the price can be
made in two modes:
1. Paid fully in cash; or
2. Paid partly and rest promised to be paid partly in future.
The price can be determined through an instrument of agreement between the parties before the conveyance
(transfer) of the property.
Transfer of general property
There are two types of property on the basis of its nature, i.e., general property and special property. The subject-
matter of the contract of Sale of Goods deals with the special property. For the enforceability of such a contract,
there must be a transfer of special property from the seller to the buyer. For e.g., if A owns certain goods he has
general property in the goods. If he pledges them with B, B has a special property in the good
Formalities of the contract of sale of goods
Except where specifically mentioned by the law, there is no prescribed form required to draft a contract of the
sale of goods. The agreement between the parties, i.e., the buyer and the seller may be implied or may be
expressed acknowledged by the conduct of the parties. Section 5 of the Sale of Goods Act, 1930 describes as to
how the contract of the sale of goods can be framed. Therefore, the contract of the sale of goods can be made-
1. By an offer from the buyer to buy and seller to sell goods for a fixed consideration mentioned in the
agreement. Such an offer of buying or selling must have an acceptance of the opposite party. The
delivery of the goods can be executed in the following manner:
  immediate delivery of the goods; or
 immediate payment of the price or both; or
 by delivery or payment in instalments; or
 the delivery or payment or both to be postponed.
2. Subject to the provisions of any law for the time being in force, a contract of the sale may be made in writing
or by word of mouth, or partly in writing and partly by word of mouth or may be implied by the conduct of the
parties.
In nutshell, a contract of the sale may be made in any of the following modes:
1. There may be an immediate delivery of the goods; or
2. There may be an immediate payment of a price, but it may be agreed that the delivery is to be made at
some future date; or
3. There may be an immediate delivery of the goods and an immediate payment of the price; or
4. It may be agreed that the delivery or the payment or both are to be made in instalments; or
5. It may be agreed that the delivery or the payment or both are to be made at some future date.
Describe the goods
The Sale of Goods Act,1930 only deals with the movable property. The goods must be described clearly and
definite. It must be defined as in quality and quantity both. Goods are defined under the Section 2(7) of the said
Act. Thus, to call an element to be goods, it must have the following essentials:
1. it must be a movable property;
2. it includes stock, shares, growing crops, grass, things attached to or forming part of the land;
3. Such a good must be agreed to be severed before the sale or under the contract of sale;
4. It does not include actionable claims and money.
Goods [Section 2(7)]
The dictionary meaning of the term goods is merchandise or possession. The term “Goods” is one of the crucial
clauses in the Contract of Sale.
According to Section 2(7) of the Act, “goods” include-
 Any movable property except actionable claims and money;

 Stock and shares;

 The growing crops, standing timber, grass;
 The things that are attached or forming part of the land which is agreed to be severed from the land
before the sale. It has been held in the State of Maharashtra v. Champalal Kishanlal Mohta that things
which are attached to land are the subject matter of the contract of sale if they are severed before the
sale.
For eg: A resort was offering stay along with food at a consolidated charge. If customers do not take food, the
rebate on food is not allowed as the supply of food does not come under the definition of “goods” as per the Act.
It is concluded from the above definition that the Act deals with the sale of goods i.e. movable property only. On
the other hand sale of immovable property is governed by the Transfer of Property Act,1882. It is noted that the
actionable claims and money are excluded from the ambit of the definition. Actionable claims are the claim or
debt for which legal action can be taken and can be enforced. For eg: recovery of refund is an actionable claim
and is not included in the purview of the above definition. Further, the goods can be classified under several
categories. Let’s see below.
Types of goods
The classification of goods in terms of business law can be quite ticklish to understand. Section 6 of the Act
describes the types of goods. The goods are classified into existing goods, future goods, and contingent goods.
Let’s study all three briefly.
Existing Goods
If the goods are physically present at the time of contract and are in the legal possession or owned by the seller
during the formulation of the contract of sale is referred to as existing goods. The existing goods are further
classified into:
 Specific Goods [Section 2(14)]: Referring to Section 2(14) of the Act, the goods that are specifically
identified and agreed upon to be transferred at the time of the formation of the contract are called
specific goods.
Illustration- ‘A’ wants to sell his HP Laptop of a particular model number and advertises the same. ‘B’ agrees to
purchase the laptop. Both entered into the contract of sale. Here the laptop is a specific good.
 Ascertained Goods: The Act does not define the ascertained goods but is conferred by judicial
interpretation. The goods are said to be ascertained wherein some or whole part of goods is identified
and set aside for the purpose of the contract. Such goods are specifically earmarked for sale.
 Unascertained Goods: The goods that have not been specifically identified to be sold are known as
unascertained goods. For example, from 1000 quintals of wheat, the seller agreed to sell 500 quintals.
Here the goods are not specified. The seller has the liberty to choose from the bulk.
Future Goods [Section 2(6)]
The goods which are not in existence and to be manufactured or produced or acquired by the seller after entering
into the contract of sales are considered as future goods. It must be noted that there can only be an agreement to
sell contracts as there can be no actual sale in respect of future goods. This is defined under Section 2(6) of the
Sale of Goods Act.
Illustration – Amit is a manufacturer of chairs. Shyam ordered Amit to manufacture 200 units of chairs of specific
design and they made an agreement for the same. This is the sale with respect to future goods.
In the case of Union of India v. K.G. Khosla & Co. Ltd, goods were manufactured according to the specification
mentioned in the contract. Therefore, the goods are “future goods” within the meaning of Section 2(6) of the Act.
 Kinds of Delivery
There are different forms of delivery of goods according to the Sale of Goods Act, 1930:
Actual Delivery
Actual delivery takes place when the goods are physically handed over to the buyer or any person authorized by
him. Say for example A, the seller of furniture handed over the ordered furniture to B, the case is of actual
delivery of the goods.
Constructive Delivery
In the case of constructive delivery, the transfer of goods can be done without a change in the possession or
custody of goods. Acknowledgment and attornment can be called constructive delivery.
Constructive delivery can be effected in the following ways:
 Wherein the seller agrees to hold the sold goods as a bailee.

 Wherein the buyer who is in the actual possession of goods as a bailee of the seller holds the goods as
his own after the sale.
 Where a third party like transporter or agent, agrees to hold the goods for the buyer.
Symbolic Delivery
Symbolic delivery is made wherein the goods are heavy and bulky and it is difficult to hand over the goods to the
buyer physically. In this situation, the delivery is made by indicating or giving a symbol that the goods are under
the possession of the buyer. For example, the delivery of the keys of the warehouse where the goods are kept is
considered to be the symbolic delivery. A document like a bill of lading must be given to the buyer to make him
entitled to hold the delivered goods
Conclusion

 The agreement of the sale of goods must undergo certain stages and procedure to become a valid
contract.
 Before entering into the contract or finalizing the contract, the parties must check the credibility of the
document and finalize it then.
 There is no strict format as to the drafting of the contract of sale, it can be moulded as per the needs
and requirements of the parties.
 But there are certain clauses mentioned in this article which lays down paramount structure for the
important clauses of the contract of sale of goods.
 There is no legal framework as to the contents of a contract of sale of goods but the mentioning of
certain clauses makes the contract stronger.

Definition
Certain provisions need to be fulfilled as demanded in the contract of sale or any other contract. The condition is a
fundamental precondition on the basis of which the whole contract is based upon, on the other hand, warranty is the
written guarantee wherein the seller commits to repair or replace the product in case of any fault in the
product. Section 11 to 17 of the Sale of Goods Act enlightens the provisions relating to Conditions and Warranties.
Section 12 of the Act draws a demarcation between a condition and a warranty. The determination of condition or
warranty depends upon the interpretation of the stipulation. The interpretation should be based on its function rather
than the form of the word used.
Condition
In the context of the Sale of Goods Act, 1930, a condition is a foundation of the entire contract and integral part for
performing the contract. The breach of the conditions gives the right to the aggrieved party to treat the contract as
repudiated. In other words, if the seller fails to fulfil a condition, the buyer has the option to repudiate the contract or
refuse to accept the goods. If the buyer has already paid, he can recover the prices and also claim the damages for the
breach of the contract.
For example, Sohan wants to purchase a horse from Ravi, which can run at a speed of 50 km per hour. Ravi shows a
horse and says that this horse is well suited for you. Sohan buys the horse. Later on, he finds that the horse can run
only at a speed of 30 km/hour. This is the breach of condition as the requirement of the buyer is not fulfilled. The
conditions can be further classified as follows
Kinds of conditions
Expressed Condition
The dictionary meaning of the term is defined as a statement in a legal agreement that says something must be done or
exist in the contract. The conditions which are imperative to the functioning of the contract and are inserted into the
contract at the will of both the parties are said to be expressed conditions.

Implied Condition
There are several implied conditions which are assumed by the parties in different kinds of
contracts of sale. Say for example the assumption during sale by description or sale by sample.
Implied conditions are described in Section 14 to 17 of the Sale of Goods Act, 1930. Unless
otherwise agreed, these implied conditions are assumed by the parties as if it is incorporated in
the contract itself. Let’s study these conditions briefly:

Implied condition as to title

In every contract of sale, the basic yet essential implied conditions on the part of the seller are that-
1. Firstly, he has the title to sell the goods.
2. Secondly, in case of an agreement to sell, he will have the right to sell the goods at the time of performing
the contract.
Consequently, if the seller has no title to sell the given goods, the buyer may refuse or reject those goods. He is also
entitled to recover the full price paid by him.
In Rowland v. Divall (1923), the party bought a second-hand motor car from the former and paid for the same. After
six months, he was deprived of it as the seller had no title to sell the car. It was held that the aggrieved party is entitled
to recover the money.
  Implied condition as to the description
Moving to Section 15 of the Act, In the contract of sale, there is an implied condition that the goods should be in
conformity with the description. The buyer has the option to either accept or reject the goods which do not conform
with the description of the good. Say for example: Where Ram buys a new car which he thinks to be new from “B”
and the car is not new. Ram’ can reject the car.

Referring to Section 16(2) of the given Act, goods must be of merchantable quality. In other words, the goods are of
such quality that would be accepted by a reasonable person. For eg: A purchased sugar sack from B which was
damaged by ants. The condition of merchantability is broken here and it is unfit for use. It must be noted from this
section that the buyer has the right to examine the goods before accepting it. But a mere opportunity without an actual
examination would not suffice to deprive the buyer of his rights. If however, the examination does not reveal the
defect but within a reasonable time period the goods are found to be defective, He may repudiate the contract even if
he approves the goods.
The implied conditions especially in case of eatables must be wholesome and sound and reasonably fit for the purpose
for which they are purchased. For eg: Amit purchases milk that contains typhoid germs and because of its
consumption he dies. His wife can claim damages.
 Implied condition as to sale by sample
In the light of Section 17 of the Act, in a contract of sale by sample, there may be following implied conditions:
1. That the actual products would correspond with the sample with respect to the quality, size, colour etc.
2. That the buyer gets a reasonable opportunity to compare the goods with the sample.
3. Further, the goods are free from any defect rendering them unmerchantable.
For example, A company sold certain shoes made of a special kind of sole by sample sale for the French Army. Later
when the bulk was delivered it was found that they were not made from the same sole. The buyer was entitled to the
refund of the price and damages.
 Implied condition as to Sale by sample as well as a description
Referring to Section 15 of the Sale of Goods Act, 1930, in a sale by sample as well as description, the goods supplied
must be in accordance with both the sample as well as the description. In Nichol v. Godis(1854), there was a sale of
foreign refined rape-oil. The delivered oil was the same as the sample but it was having a mixture of other oil too. It
was held in this case that the seller was liable to refund the amount paid
Warranty
Warranty is the additional stipulation and a written guarantee that is collateral to the main purpose of the
contract. The effect of a breach of a warranty is that the aggrieved party cannot repudiate the whole contract
however, can claim for the damages. Unlike in the case of breach of condition, in the breach of warranty,
the buyer cannot treat the goods as repudiated.

Kinds of Warranty
Expressed Warranty
The warranties which are generally agreed by both the parties and are inserted in the contract, it is said to be expressed
warranties.
Implied Warranty

Implied warranties are those warranties which the parties assumed to have been incorporated in the contract of sale
despite the fact that the parties have not specifically included them in the contract. Subject to the contract, the
following are the implied warranties in the contract of sale:
 Warranty as to undisturbed possession
Section 14(2) of the given Act provides that there is an implied warranty that the buyer shall enjoy the uninterrupted
possession of goods. As a matter of fact, if the buyer having got possession of the goods, is later disturbed at any point,
he can sue the seller for the breach of warranty.
For eg: ‘X’ purchased a second-hand bike from ‘Y’. Unknown to the fact that the bike was a stolen one, he used the
bike. Later, he was compelled to return the same. X is entitled to sue Y for the breach of warranty.
 Warranty as to freedom from Encumbrances
In Section 14(3), there is an implied warranty that the goods shall be free from any charge or encumbrances that are in
favour of any third party not known to the buyer. But if it is proved that the buyer is known to the fact at the time of
entering into the contract, he will not be entitled to any claim.
For eg: A pledges his goods with C for a loan of Rs. 20000 and promises him to give the possession. Later on, A sells
those goods to B. B is entitled to claim the damages if he suffers any.
 Implied warranty to disclose Dangerous nature of the goods sold
If the goods sold are inherently dangerous or likely to be dangerous and the buyer is not aware of the fact, it is the duty
of the seller to warn the buyer for the probable danger. If there would be a breach of this warranty, the seller will be
liable.
For eg: A purchases a horse from B if the horse is violent and then It is the duty of the seller to inform A about the
probable danger. While riding the horse, A was inflicted with serious injuries. A is entitled to claim damages from B.

Difference between Condition and Warranty

BASIS FOR
CONDITION WARRANTY
COMPARISON

It is additional stipulation
It is a stipulation which forms the
Meaning complementary to the main purpose of
very basis of the contract.
the contract.

Section 12(2) of the Sale of Goods Section 12(3) of the Sale of Goods Act,
Provision
Act, 1930 defines Condition. 1930 defines Condition.

Purpose
Condition is basic for the It is a written guarantee for assuring the
 formulation of the contract. party.

Result of Breach of The whole contract may be treated Only damages can be claimed in case of
Contract as repudiated. a breach.

Remedies available to the Repudiation, as well as damages,

Only damages can be claimed.
aggrieved party can be claimed.

When does Condition sink to the level of Warranty?

Section 13 of the Act specifies the cases wherein a breach of Condition sink to the level of breach of Warranty. In the
first two following points, it depends upon the will of the buyer, but the last one is compulsory and acts as estoppel
against him:
1. When the buyer waives the condition, the condition is considered a warranty.
2. A condition would sink to the level of warranty where the buyer on his own will treat the breach of
condition as a breach of warranty.
3. Wherein the contract is indivisible and the buyer has accepted the whole or part of goods, the condition is
treated as a warranty. Consequently, the contract cannot be repudiated. However, the damages can be
claimed.

Conclusion
At the time of selling or purchasing goods, both the buyer and seller put forth some preconditions with regards to the
mode of payment, delivery, quality, quantity and other things necessary. These stipulations are either considered as
condition or warranty differing from case to case. These concepts are necessary to be understood as it protects the
rights of parties in case of breach of the contract.
THE RULE OF CAVEAT EMPTOR
Section 16 of the Sale of Goods Act states that, “subject to the provisions of this Act or any other law for
the time being in force, there is not implied warranty or condition as to the quality or fitness for any
particular purpose of goods supplied under a contract of sale”, brings the common law rule of Caveat
Emptor, which means ‘let the buyer beware’.[viii] When the sellers display their goods in the open market,
it is for the buyer to make a proper selection or choice of the goods. The buyer alone shall be responsible
for checking the quality and suitability of goods before a purchase is made. The said rule owes its origin to
the fact that in the early times most of the sales used to took place in the market.[ix]
However, the rule of caveat emptor has certain exceptions to it.
1. when a buyer brings the purpose of buying goods to the knowledge of the seller, relies on seller’s skill
and goods are of a description which is in the course of seller’s business, it becomes the duty of the seller
to deliver reasonably fit goods to the buyer;
2. Where the goods are sold by sample and the goods do not match with the sample;
3. Where the goods have been sold by both sample and description and the goods match with sample but
do not match with the sample; and
 4. When the goods have been sold by making some fraud or misrepresentation

Introduction
The term passing of goods or property means that there is a transfer of ownership which is governed by the principles
of the Sale of Goods Act, 1930. In order to understand the rights, duties and liabilities of both the seller and the buyer
it is very important to understand the concept of passing of property. It is a settled principle of law that along with the
ownership of the goods or property, the risk is also transferred from the seller to the buyer. This article will be dealing
with the various principles and provisions pertaining to Passing of property in the light of the Sale of Goods Act, 1930.

Types of Goods under the Act

There are three types of goods under the umbrella of the Sale of Goods Act, 1930 and they are as follows:
1. Existing Goods
2. Future Goods
3. Contingent Goods

Existing Goods
As per Section 6 of the Sale of Goods Act, 1930, those goods which are present (in existence) at
the time of formation of a contract are known as existing goods. The existing goods can be
further classified as:

Specific Goods
As per Section 2(14) of the Sale of Goods Act, 1930, specific goods are those goods which are specifically identified
and ascertained by the buyer which he intends to buy at the time when the contract of sale is formulated.

For example, Deepak wants to sell his old guitar. He put an advertisement in the local newspaper with its picture,
make and other details. Rahul agrees to buy the guitar and thereby formed a contract with Deepak. The guitar is a
‘Specific Good’ in this case.

Ascertained Good
Ascertained goods are not defined under the Sale of Goods Act, 1930 and many jurists have considered specific Goods
and ascertained Goods as alike. However, ascertained goods can be called those goods which are specifically selected
from a large set of goods.
For example, Deepak went to buy oranges in a wholesale market. He specifically selected 300 oranges from a larger
set of unspecified oranges. These 300 oranges will be ascertained goods.

Unascertained Good
Unascertained goods are those goods which are not specifically identified by the buyer at the time when the contract
for sale is formulated.
For example, Deepak from his 300 oranges wants to sell 100 oranges; however he doesn’t specify which oranges he
wants to sell. This is called a sale of unascertained goods
Future Goods
As per Section 2(6) of the Sale of Goods Act, 1930, future goods have been characterised as those goods which at the
time of formation of the contract will either be “manufactured, produced or acquired by the buyer”. There will not be
an actual sale in the sale of future goods, it will always be an “agreement to sell”. For example, Deepak has an orange
grove with oranges in it. He agrees to sell 500 oranges to a buyer once the oranges are ready for market. This is a sale
which will happen in the future. However, the goods have already been identified along with the agreement to sell.
Such goods are known as future goods.
Contingent Goods
Contingent goods are a subtype of future goods. In contingent goods, the sale happens in the future. The sale will
always come with some contingency clause in it. For example, if Deepak sells his oranges from his orange grove when
the trees are yet to produce oranges, then the oranges are contingent good. This sale of contingent goods will be
dependent on a condition that the trees will produce oranges, which may or may not happen.

Legal Principles regarding Transfer of Goods

There are four principles regarding the transfer of goods under the umbrella of The Sale of Goods Act, 1930, which
the article will be talking about and they’re as follows:
Transfer of property in sale of Specific or Ascertained
Goods
Section 19 to section 22 of The Sale of Goods Act, 1930 are a few sections which govern the transfer of goods in a
case where the goods are specific and ascertained in nature:

Property when intended to pass (Section 19)

Section 19 of The Sale of Goods Act, 1930, is divided into further subsections and they’re as follows:
1. Where a contract for sale of ascertained or specific goods exists, a specified time is fixed as per the
convenience and consensus of both the parties at which the property is intended to be transferred from the
seller to the buyer.
2. One has to pay attention to the circumstances and conduct of both the parties to the contract in order to
understand the true intention of the contracting parties. Also, the terms of the contract should be given
equal importance in the existing case.
3. Except if an alternate intention shows up, the principles laid under the Section 20 to 24 of the Act will help
in finding out the intention of the contracting parties in respect with the time at which the goods are about
to get transferred from the seller to the buyer.
 Specific goods in a Deliverable state (Section 20)
Section 20 of The Sale of Goods Act, 1930 relates to specific goods in a deliverable state, and it states:

In a contract for the sale of specific goods, which is unconditional in nature, the goods are transferred from the seller to
the buyer at the time of formation of the contract. However, the only precondition required for the transfer of property
is the fact that the goods must be existing in a deliverable state. The delay in the payment or delivery of goods or both
is not something which holds importance.
Example: A goes to a big electronic shop in order to buy a television set. He selects a big plasma Television set and
asks the shopkeeper to deliver the television at his house which is at the other end of the town. The shopkeeper agrees
to it. With this, “A” will become the owner of the television, and the Television set will become his property.

Specific goods to be put into a deliverable state (Section 21)

Section 21 of The Sale of Goods Act, 1930: certain goods to be put in a deliverable state:
Where there is an existence of a contract for the sale of specific goods, the property concerned in the transaction will
only be passed to the buyer, if the seller performs the necessary acts and omissions in order to put the goods in a
deliverable state. Also, it is mandatory for the seller to notify the buyer regarding the alterations.
Example: A goes to a mall to buy a smart television from an electronics store. He selects a big fancy smart TV from
the electronic section and asks for its home delivery. The manager agrees to deliver it to A’s home. However, at the
time where he selects the smart TV, it doesn’t have an operating system installed. The manager promises to install the
operating system and on the next day, he informs “A” that his smart TV is now installed with the operating system and
is ready for its delivery. Further, he asked for his permission to make the delivery.
In order to summarize the example, the goods will only be transferred to “A” if the manager has installed the operating
system making the smart TV ready for its use.

Specific goods are in a deliverable state but the seller has to do something
to ascertain the price (Section 22)
Section 22 of The Sale of Goods Act, 1930: Specific goods are in a deliverable state but the seller has to do something
to ascertain the price:

Where there is a contract for the sale of specific goods in a deliverable state, the seller is undoubtedly bound to weigh,
measure, test or do the necessary demonstration or anything which is required in reference with the sale of those
particular goods. He’ll be doing this to ascertain the appropriate value of the goods. The property in the goods will not
pass until such demonstration or particulars are done and the buyer has acknowledged it thereof.

Example: Rishabh sells a wooden bed to Deepak and agrees to assemble it in Deepak’s bedroom as it was a part of the
agreement. Rishabh delivers the wooden bed and makes a call to him informing Deepak that he will assemble the
wooden bed the next day. That night the wooden bed gets stolen from Deepak’s premises. In this case, Deepak will not
be liable for the loss since the wooden bed was not passed to him. According to the terms of the contract, the wooden
bed would be in a deliverable state only after it is assembled.

Transfer of property in sale of Unascertained Goods

Section 23 of The Sale of Goods Act, 1930 govern the transfer of goods in a case where the goods are unascertained in
nature:

Sale of unascertained goods and appropriation (Section 23)

Section 23 of The Sale of Goods Act, 1930, is divided into further subsections and they’re as follows:

Section 23(1) Sale of unascertained goods by description:

In a contract, for the sale of unascertained goods by description, if goods of a specific description are appropriated
either by the seller with the consent of buyer or by the buyer with the consent of the seller, then the goods are passed to
the buyer. The consent can be expressed or implied and can be given before or after the appropriation is made.

Section 23(2) Delivery to the carrier:

The seller has unconditionally appropriated the property if he delivers the property to the buyer/ carrier/ bailee for the
reason of transmission to the buyer, however, he doesn’t reserve the disposal rights to the property, then it can be said
that he has appropriated the contract

Goods sent on “sale or return”

When goods are disposed on the basis of “sale or return” by the seller, the ownership of the goods aren’t transferred to
the buyer unless the buyer gives assent to the goods. However, if these goods are held by its buyer without giving an
approval then they’re taken as goods whose ownership is yet to be transferred. In that case, they’re treated as goods
which belong to the seller and not the buyer.

Goods sent on approval or “on sale or return” (Section 24)

Section 24: In a case where the goods are delivered to the buyer either on approval or on “sale or return” or on other
comparable terms then:
(a) The goods therein will only pass to the buyer if the buyer either portrays his consent or acknowledges to the seller
or does any act by which the transaction would be adopted.
(b) The goods therein will only pass to the buyer if the buyer doesn’t express his consent or acknowledgement to the
seller that he intends to reject the goods, however, holds the goods without giving a notice to the buyer then on the
expiration of time frame for the return of the goods or if time hasn’t been fixed, then on the completion of a reasonable
time, the property will be passed to the buyer.
Example: “A” the seller of a precious necklace gives it to “B” the buyer on “Sale or return” basis. B after observing
the necklace finds it very beautiful and put forth his consent on buying the necklace. In this case, the goods will be
transferred to the buyer. However, if the buyer doesn’t wish to give the acknowledgement for the product then the
goods shall be duly returned back to B.
In case of right to disposal
The intention behind reserving the right of disposal of the goods is to make sure that the value of the product is paid
before the property is transferred to the buyer. However, under the prepared value system, the ownership follows the
possession. That is to say, the seller transfers the possession of the goods but retains the ownership until the buyer pays
the appropriate amount
Reservation of Right to Disposal (Section 25)

Section 25 of Sale of Goods Act, 1930 deals with the conditional appropriation of goods and is bifurcated into the
following subsections:

Section 25(1): As per the terms and conditions of the contract the seller of goods reserves the right of disposal of the
goods in a situation where the sale of specific goods is concerned. Despite the delivery of the goods, the goods will not
get transferred from the seller to the buyer unless the subsequent terms of the contract aren’t appropriated or fulfilled.

For example, A sends certain goods by rickshaw to B and instructs the rickshaw driver not to deliver the goods until B
pays him the price which was set between them as per the agreement. The rickshaw reaches the destination in time.
However, the buyer “B” refuses to pay the amount as he had no money with him at the moment. Here the rickshaw
driver can refuse to deliver the goods and the seller can rightly exercise his right to disposal.
Section 25(3): A few perspectives pertaining to the transfer of property during a sale of goods or property are
encapsulated in Sales of Goods Act, 1930. The liabilities of the buyer and seller are determined in consonance with the
provisions enshrined from section 18 to 25 of The Sale of Goods Act. The concept of possession of goods differs from
passing of the goods as the latter in essence means transfer of ownership from the seller to the buyer while the former
is confined to the custody of goods.

Cases pertaining to Transfer of Property

Badri Prasad Vs. State of Madhya Pradesh
In the case of Badri Prasad Vs. State of Madhya Pradesh, the appellant entered into a contract in respect of certain
forests in Madhya Pradesh. He was entitled to chop teak trees with girth over 12-inch. After the passing of the
Abolition of Proprietary Rights (Estates, Mahals. Alienated Lands) Act, the appellant was prohibited from cutting trees
in the exercise of his rights under the contract.
He filed a suit claiming specific performance of the contract on the grounds:
(1) The forest and trees did not vest in the State under the Act;
(2) Even if they vested, the standing timber, having been sold to the appellant, did not vest in the State;
(3) In any event, a new contract was completed on 5 February 1955, and the appellant was entitled to its specific
performance.
The court held: The forest and trees vested in the State under the Act. The plaintiff was entitled to cut teak trees of
more than 12-inch girth. However, it had to be ascertained which trees would be falling in that Description. Till this
was ascertained, they will not be ascertained goods as per Section 9 of the Sale of Goods Act.
Multanuak Chempalal Vs. C.P Shah & Co.
In the case of Multanuak Chempalal Vs. C.P Shah & Co., Section 26 of the Sale of Goods Act 1930 was discussed and
it was held that the risk passes only after the property in the agreement has been passed. Thus, the parties can enter
into a contract which provides for the passing of risk before the passing of property

Hoogly Chinsurah Municipality vs Spence Ltd

In the case of Hoogly Chinsurah Municipality vs Spence Ltd, the Hoogly Chinsurah Municipality contracted with
Spence Ltd to buy a tractor on the condition that if the municipality is not satisfied then it will reject the tractor. The
municipality took possession of the tractor, used it for a month and a half and then rejected it. The suit was filed upon
the unwillingness of Spence Ltd to accept it. The Court while dismissing the appeal held that, the municipality had not
only used the tractor but also extinguished a reasonable time. Hence the property in the tractor had passed to the
municipality and they could not reject it now

Conclusion
The Sale of Goods Act, 1930 tells us about a few views regarding the transfer of property during a contract pertaining
to the sale of goods. Section 18 to 25 of the Sale of Goods Act, 1930 provides the contracting parties several
principles, through which rights and liabilities of the buyer and seller are determined. Passing of the goods from the
seller to the buyer portrays the transfer of ownership from one party to another, which is without an exception a
different concept from that of the possession of goods as possession only involves custody of goods.

Introduction
A partnership is usually perceived to be a contract between two individuals for carrying out a business with the
objective of profit where the partners have unlimited liability for the acts and omissions of the firm and the other
partners. The partnership model was prominent during the medieval period. However, with the advent of the concept
of limited liability, the partnership model was regarded as risky and uncertain by businesses. Thus, it became
necessary to introduce the concept of limited liability partnerships
A limited liability partnership (hereafter LLP) confers limited liability on the partners while at the same time providing
them with the flexibility associated with partnership-based business models. The flexible character of an LLP has
made it one of the most preferred forms of business in modern times.
The Limited Liability Partnership Act, 2008 (hereinafter “the Act” provides the provisions relating to the regulation of
limited liability partnerships in India. This article highlights the salient features and the amendments to the Act and
provides a critical analysis of its effectiveness.
Limited liability partnership
Section 25 of the Indian Partnership Act, 1932 provides that every partner will be jointly and severally liable for the
acts done by the other partners in their capacity as partners. Section 9 of the British Partnership Act, 1890 provides
that every partner will be jointly liable for the firm’s contract and jointly and severally liable for the firm’s wrongs.
Thus, we see that the position of liability of partners in India is quite different from the liability of partners in England.
Businesses involving unlimited and personal liability are usually perceived to be risky, and therefore, the need arises
to provide an alternative with limited liability.
A limited liability partnership is a form of business organisation in which the partners can structure their business in
the traditional partnership form and enjoy limited liability at the same time. An LLP is a hybrid between a partnership
firm and a company.
As per Section 2(m) of the LLP Act, an LLP which is found, incorporated or registered in a foreign country and which
sets up business in India is known as a foreign limited liability company. Section 59 of the Act empowers the Central
Government to frame rules for regulating the conduct of business by foreign limited liability companies in India
Advantage of a Limited liability partnership
An LLP has the following advantages:
 Since the internal management in an LLP is regulated by the terms of the Limited Liability Partnership
Agreement (hereinafter LLP Agreement), it provides flexibility to the firm to adopt any form of
internal organisation.
 An LLP involves less statutory compliance as compared to a company registered under the Companies
Act, 2013.
 There is no ownership management divide in a limited liability partnership as every partner is an agent
of the firm but cannot be held liable for the wrongful acts of the other partners.
 An LLP has a distinct identity that is separate from its members. Therefore, it is a separate person in
the eyes of the law.
Disadvantage of a Limited liability partnership
An LLP has the following disadvantages
1. The documents that an LLP files with the Ministry of Corporate Affairs are public documents, and anyone
can obtain a copy of these documents by paying a nominal fee. The documents of a general partnership
are not public documents and are not available in the public domain.
2. The Act provides hefty penalties in case of non-compliance. The operation of an LLP involves
complex compliance, which can be a hindrance to the growth of the LLP.
3. The LLPs have a limited range of financing options. Venture capitalists and angel investors do not usually
invest in an LLP, and the only options left for the LLP are borrowing from financial institutions or taking
a loan from the partners.
The primary reason why venture capitalists (VCs) do not invest in an LLP is that the LLP Act provides that every
shareholder of an LLP is a partner of the LLP, and being a partner entails specific responsibilities that the VCs do not
want

Historical development
The concept of LLP was first emphasised by the Committee on Regulation of Private Companies and Partnerships.
The Committee, which was known as the Naresh Chandra Committee, stated in its report that the prospect of being a
partner was unattractive due to the unlimited liability attached to it. Businesses based on partnerships of professionals
could not grow due to the risk that is associated with unlimited liability. The concept of LLP would increase the
competitiveness of the partnerships of professionals and medium and small enterprises.
The Naresh Chandra Committee noted that, in view of the restrictions imposed by the regulatory laws,
professional firms are prohibited from engaging in any form of business. This was in contrast to trading and
manufacturing companies, which can register as private as well as public companies under the Companies [Link]
objective of the Companies Act, 2013 was to provide provisions for the regulation of companies, and hence it was
found that the Companies Act was not suitable for the regulation of LLPs. A need was felt for specific legislation
dealing with the incorporation and regulation of LLPs. Binding the internal management of an LLP with the provisions
of the Companies Act would have deprived it of its flexible character.
The need for specific legislation dealing with the LLP was emphasised by the Committee on New Company Law,
2005. The Committee was headed by Dr. J.J. Irani, the former director of Tata Sons. While the Naresh Chandra
committee had recommended that the concept of LLP should be introduced for the service sector, the Irani Committee
emphasised the need for the application of this concept to small enterprises too. The committee recommended that the
formation of LLP would help small enterprises to form agreements and joint ventures and get access to new
technology, and that would help them to face the intense global competition.
Objective of the Limited Liability Partnership Act, 2008
The object of the Act is to make provisions relating to the formation and regulation of limited liability partnerships. It
also lays down the provisions for matters which are incidental or connected with the formation and regulation of
limited liability partnerships. The concept of LLP provides opportunities for growth for small enterprises as well as
incentivises professionals having expertise in different fields to form a partnership. At the time when the LLP Act,
2008 was enacted, the Companies Act, 1956 was in force, and Section 11 of the Act provided that a partnership could
have a maximum of 20 partners. Thus, one of the primary objectives of the LLP Act was to dilute the upper limit of 20
partners in a partnership. Currently, Section 464 of the Companies Act, 2013 provides that there can be a maximum of.
hundred partners in a partnership firm

Nature and salient features of a limited liability

partnership
Chapter 2 of the Act deals with the nature of a Limited Liability Partnership. An LLP has the following salient
features:
 Section 3 of the Act provides that an LLP has a separate legal identity separate from its partners. It has
the capacity to own, acquire, and hold property in its name and to sue and be sued in its name.
 LLP enjoys perpetual succession, and a change in the partners does not affect the rights and liabilities of
an LLP. This means that an LLP continues even if any partner dies or retires or becomes insolvent or
insane.
 Section 4 of the Act exempts LLP from the application of the provisions of the Partnership Act, 1932.
 Partners in an LLP are the agents of the LLP but are not the agents of the other partners. Thus, a partner
cannot be held liable for other wrongful acts or omissions of other partners. The property of the LLP will
be used to settle any liabilities of the organisation if it fails to discharge its obligations.
 An LLP cannot be held liable for any unauthorised act of its partners provided that the claiming party was
aware that the partner was acting in an unauthorised manner.
 The liability of a partner is limited to the liability that he owes as a partner of the organisation and does not
extend to his individual or personal liability.
  The rights of a partner, such as the share of profit or loss, are partially as well as fully transferable.
However, the mere transfer of rights would not entitle the transferee to participate in the management of
the LLP.
 An LLP is required to maintain annual accounts and file annual statements of solvency with the
Registrar. The accounts of the LLP will also be subjected to scrutiny.
 If the government feels that the name of an LLP is closely resembling the name of any other incorporated
LLP or any other body corporate or the name of the concerned LLP is undesirable, then the government
can direct the LLP to alter its name. Furthermore, a limited liability partnership is mandated by the Act to
add “LLP” at the end of its name.
 There can be two ways leading to the winding up of an LLP. The first is where the partners of an LLP
voluntarily decide to dissolve the LLP. The second is where the National Company Law Tribunal
orders the winding up of the LLP.

Partner of a limited liability partnership

As per Section 5 of the Act, any person or body corporate can become a partner in an LLP. Thus, both natural as well
as legal persons, can be partners in an LLP. Section 5 provides the conditions upon which a person may be
disqualified from being a partner in an LLP. If a person becomes insolvent or a court of competent jurisdiction
declares him to be of unsound mind, then such a person will be disqualified from becoming a partner in an LLP.
Section 6 provides the conditions under which a partner can be held personally liable for the obligations of the LLP.
An LLP must have a minimum of two partners. If at any time the number of partners is reduced to 2 and the business
continues for a period extending to 6 months with only one partner, the single partner can be held personally liable
for the obligations of the company that were incurred during this period. However, it is necessary for the single
partner to have knowledge that the partnership firm has only one partner.
As per Section 22, the persons who subscribe to the incorporation document at the time of the registration of the LLP
are regarded as the partners of the LLP. The relationship between the partners and the LLP and the relations among
the partners of the LLP are regulated by virtue of the LLP agreement.
Section 25 provides that a partner has to inform the LLP about any change in his name or address within 15 days of
the change and a notice of such change has to be subsequently sent to the Registrar.
Designated partner
Section 7 of the Act provides that an LLP must have a minimum of two designated partners, of which one must be a
resident of India. It is essential that both the designated partners must be natural persons and not body corporate. If all
the members of the LLP are body corporates, then the nominees of the body corporates will serve as the designated
partners.
The explanation of Section 7 provides that a resident of India is a person who has stayed in the territory of India for a
minimum of 182 days in the preceding year.
The following persons are ineligible to be appointed as designated partners:
1. Minor
2. Any person declared bankrupt in the preceding 5 years
3. Any individual who has been imprisoned for a period extending 6 months
 4. Any person having a history of credited false in the preceding 5 year
Any vacancy for the post of a designated partner has to be filled within 30 days from the day on which the vacancy
arrives. If the vacancies are not filled or if there is only one designated partner in the LLP, then, as per Section 9, all
the partners will be deemed to be designated partners. Section 10 expressly provides that in case of violation of the
mandate of Section 7, the LLP and all the partners will be liable to punishment of a fine, up to 5 lakh rupees.
Role and duties of a designated partner
The LLP agreement specifies the duties of a designated partner. An LLP agreement is an agreement that is
entered into by the partners and the LLP. A designated partner is responsible for ensuring compliance with
all the provisions of the Act. Every designated partner is required to get a Designated Partner’s
Identification Number (DPIN).
Section 35 of the Act provides that a designated partner is responsible for ensuring that an LLP files its annual return
within 60 days of its financial year closure in such form as may be prescribed. This Section further provides that if the
LLP fails to file the return within 60 days, the designated partner can be punished with a fine of up to Rupees 1 lakh.
Under Section 47, it is the duty of a designated partner to provide all assistance to the inspector appointed under
Chapter IX for the purpose of investigating the affairs of the LLP.
Resignation or cessation of partnership
Section 24 lays down the procedure for the resignation of a partner. A partner willing to resign has to give a
30-day notice to the other partners expressing his intention to resign.
A person ceases to be a partner of an LLP upon his death or if he is declared insolvent or of unsound mind by a court
of competent jurisdiction. Where an individual ceases to be a partner of LLP, such former partner or any person
entitled to receive his share upon his insolvency or death, will receive the share of accumulated profit and the capital
contribution made by the former partner.
However, the former partner or the person entitled to his share will not enjoy the right to participate in the
management of the LLP.
Incorporation of a limited liability partnership
In order to start an LLP, it is essential to register the establishment under the Limited Liability Partnership Act, 2008

The following steps must be followed to register an LLP

Section 11 provides that an LLP is incorporated by filing the incorporation document with the

Registrar of the State in which the LLP plans to establish its registered office.

 Such an incorporation document must be subscribed to by at least two persons who are associated with
the purpose of carrying on a lawful business with the object of earning profit.
 A statement acknowledging that all the provisions of the Act have been complied with is required to be
submitted along with the incorporation document. Such a statement can be prepared by a chartered or
cost accountant, a company secretary, or an advocate involved in the LLP’s formation, along with any
person who has subscribed to the incorporation document.
If the person making the statement knows that the statement is false or is unsure about its truth, then such a person
may be punished with up to 2 years of imprisonment and a fine of up to Rupees 5 lakh.

 The incorporation document must specify the name and registered office of the LLP, the names and
addresses of all the partners, including the designated partners, and the proposed business of the
LLP.
 Once the conditions imposed by Section 11 are fulfilled within the prescribed time limit, the Registrar
will register the incorporation document and issue the certificate of incorporation to the LLP.

Conversion to a limited liability partnership

Chapter X of the Act envisages three types of conversion to a limited liability partnership. Conversion can be defined
as a process of transfer of assets, liabilities, privileges, interests and obligations of the firm or company to the LLP.
Conversion of a partnership firm to an LLP
Section 55 and Schedule 2 lay down the procedure for the conversion of a partnership firm to an LLP. The conversion
to an LLP will not affect the existing agreements that the partnership firm may have entered into, and it would be
deemed that the LLP was a party to such contracts.
Conversion of a private company to a Limited Liability
Partnership
Schedule III to the Act provides that a private company may be converted into an LLP if no security interest is
involved in its assets and if the partners of the proposed LLP comprise only the shareholders of the private company.

It is pertinent to note that a private company seeking to convert to an LLP must submit to the registrar a statement
signed by all its shareholders specifying the name and registration number of the company and the date on which it
was incorporated. Moreover, the statement and incorporation document as laid down under Section 11 have to be
submitted to the Registrar.
Thereafter, the Registrar can issue the certificate of registration or can refuse to register the LLP. The decision of the
Registrar to refuse to register the LLP can be challenged before the Tribunal.
Conversion of a Public Listed Company to an LLP
Section 57 read with the 4th Schedule lays down the procedure for the conversion of an unlisted public company to
an LLP. In order to be eligible to be converted into an LLP, there should be no security interest subsisting in the
assets of the company at the time of the application.
Upon being registered, the LLP is required to inform the Registrar of Firms in the case of conversion from a
partnership firm or the Registrar of Companies in the case of conversion from a private company or an unlisted public
company, within a time period of 15 days from the date of registration. Upon registration, holders of the private or
public company become the partners of the LLP and are bound by the provisions of the Act.
Hurdles in conversion
There are certain costs and risks associated with conversion to an LLP. It is also a very complex process as it requires
the consent of all the partners or members, including the minority shareholders. The company that converts to an
LLP will be deemed to have been dissolved and will be subsequently removed from the records of the registrar.

Moreover, one of the key conditions for conversion is that no security interest should be subsisting on any asset of
the company at the time when the company or firm makes the application for conversion. However, in today’s world,
it is very rare for a company to have all its assets free from any security interest.

Conversion to an LLP is a one-way process and any erring company cannot convert back to a partnership firm or a
public or private company.

Investigation of a Limited Liability Partnership

Chapter IX of the Act deals with the investigation.

Under Section 43, the Central Government is empowered to appoint inspectors for the purpose of carrying out an
investigation into the affairs of an LLP. The Central Government can also appoint inspectors if it is of the opinion that
the affairs of the LLP are being conducted in a manner that violates the provisions of the Act. Section 45 of the Act
provides that a body corporate or firm cannot be appointed as inspectors.

The central government can also exercise this power when a court or tribunal declares that the affairs of the LLP need
to be investigated. The tribunal can make such a declaration suo motu or upon receiving an application from not less
than 20% of the partners of the LLP. When the partners of an LLP make an application for an investigation into the
affairs of the LLP, they must also submit supporting evidence and must make a security deposit with the Central
Government.

Section 49 of the Act provides that the inspector will submit a report of his investigation to the Central Government
and the Central Government will provide a copy of the report to the LLP. Such a report will be admissible as
evidence in any legal proceeding before a court or tribunal.

If the Central Government is of the opinion, on the basis of the report of the inspector, that the LLP or any person or
entity associated with the LLP who has been investigated has committed the offence for which the investigation was
carried out, then the government can initiate the prosecution and it will be the duty of the partners, designated
partners, as well as the employees and agents of the company to provide all reasonable assistance to the government.
Powers of the inspectors
The inspectors have the power to investigate any entity which is either presently associated with the concerned LLP or
was associated with the LLP in the past.
Similarly, the inspector can also investigate any former or current partner of the LLP subject to the prior approval
of the central government. The Central Government will grant such approval only after providing an opportunity to
the concerned partner or designated partner to explain why such approval should be rejected.
If the inspector is of the opinion that any document relating to the LLP or its associated entity or any of its partners
may be destroyed, altered or secreted, then we can make an application to the Judicial Magistrate of the First Class or
the Metropolitan Magistrate for the seizure of such documents.
The Magistrate will consider the application and grant permission to the inspector to enter the place where the
documents are kept and seize the same. The inspector can keep the documents for such a period as he considers
necessary until the conclusion of the investigation. The Section also provides that no document can be seized for a
period of more than 6 months. The inspector has to return the documents to such person or entity from whose custody
they were seized,

Limited Liability Partnership (Amendment) Act, 2021

Start-up LLP and Small LLP
The Limited Liability Partnership (Amendment) Act, 2021, introduced the concept of small limited liability
partnerships. The newly inserted Section 2(ta) defines a small LLP as an LLP whose contribution is less than 25 lakhs
or whose contribution is less than a higher prescribed amount which is less than 5 crores and whose turnover is less
than 40 lakh Rupees or less than a higher prescribed amount which is less than 50 crores. The small LLP should also
meet any other prescribed criteria and conditions.
The Amendment also introduced the concept of start-up LLP. The term start-up LLP has been defined in the newly
inserted Section 76(A). A start-up LLP is an LLP that is incorporated under the 2008 Act and is recognised as a start-
up LLP by the Central Government.
The primary objective behind introducing the concept of start-up and small LLPs is to provide an edge over other
LLPs. The Amendment specifies that in the event of a default, a small or start-up LLP would be liable only to half of
the penalty that is prescribed for a general LLP. The special benefit is conferred on start-up and small LLPs as well as
the partners and designated partners of such LLPs. A maximum penalty of Rupees 1 lakh can be imposed on such an
LLP and a maximum penalty of Rupees 5 lakh can be imposed on the partner or any other member of such an LLP.
Resident of India
The Amendment also modifies the definition of the expression ‘resident of India’ provided under Section 7
of the principal Act. Subsequent to the Amendment, a resident of India, for the purpose of the Act, would be
a person who has lived within the territory of India for a minimum of 120 days in the preceding financial
year.
Punishment
Section 30 of the LLP Act, 2008 provided that in the event of any fraud committed by the LLP or its
partners, the LLP, as well as the partners of the firm who acted fraudulently, would bear unlimited liability.
Every person who acted fraudulently or was involved in the fraud will be liable for imprisonment for up to 2
years along with a fine which may extend up to Rupees 5 lakh
However, the Amendment increases the term of imprisonment from 2 years to 5 years.
As per Section 21 of the Act, an LLP that fails to specify its name, registrationaddress registered
office in its official correspondence and invoices would be liable to a fine that may extend up to Rupees 25,000.
The Amendment enhances the limit of this
The Amendment also empowers the Central Government to direct an LLP, whose name is identical to an existing LLP
or trademark, to change its name within 3 months. Where the LLP fails to change its name within the prescribed time
limit, the Central Government is empowered to allot a name to the LLP.
Appeal from the order of the National Company
Law Tribunal
The Amendment Act provides that a person aggrieved by the order of the National Company Law Tribunal (NCLT)
can prefer an appeal before the National Company Law Appellate Tribunal within 60 days from the order of the
NCLT. Where the order of the NCLT was passed based on the consent of the parties, no appeal can be preferred
against such an order. The NCLAT will provide an opportunity to the parties to be heard and thereafter pass an order
modifying, upholding or setting aside the order of the NCLT.
Special Courts
One of the most remarkable changes brought about by the Amendment Act is the modification of Section 77. Section
77 of the principal Act provides that the Judicial Magistrate of the first class or the Metropolitan Magistrate will
have the jurisdiction to try an offence under the LLP Act 2008.
The Amendment Act, however, provides for the setting up of special courts to try the offences under the Act. The
newly inserted Section 77A specifies that the special courts will have exclusive jurisdiction to try the offences
under the Act. The only exception is where the Registrar or any person of a higher rank than that of the Registrar
makes a complaint in writing.

Conclusion
The applicability of the LLP Act is not only limited to professional enterprises, and thus, it can be held that the Act
gives primacy to the suggestions of the Irani Committee over the Naresh Chandra Committee.

The 2021 Amendment brings the Act up to par with contemporary economic conditions. The introduction of concepts
such as start-up LLP and small LLP is in line with the government’s economic policy of promoting and incentivising
small enterprises and startups. The setting up of special courts will result in the speedy disposal of cases and will
improve the ease of doing business in India.
There is an urgent need for the Supreme Court to clarify its judicial stand on the issue of whether an LLP can enter
into a partnership or not.
 Comparative Table: Partnership and LLP
Aspect Partnership LLP
Formatio Two or more individuals or
A minimum of two designated partners are required
n entities join together
Unlimited liability for debts and
Liability Limited liability of partners
obligations
Manage All partners have an equal say in
Designated partners have executive authority
ment the management

Legal
Not a separate legal entity Separate legal entity
entity
Perpetual
Dissolves on the death or exit of a
Successio This continues even in the case of the death or exit of a partner
partner
n
Partners pay personal income
Taxation LLP pays taxes as a separate legal entity
tax on their share of profits or
losses
Transfer
of Requires the consent of all
Easier transfer of ownership through the transfer of partnership interest
ownershi partners
p
Capital Contribution is not mandatory,
Capital contribution is mandatory, but partners can allocate profits and
contributi but partners must share profits
losses unequally.
on and losses equally.
\
transaction.