UNIT - I

Definition of Contract:
The term ‘contract’ is defined in Section 2 (h) of the Indian Contract Act, as under:
“An agreement enforceable by law is a contract.”
This means that contract is a combination of an agreement and the enforceability of
the agreement We can say that:
Contract = An agreement + Enforceability.
The definitions of the terms ‘agreement’ and ‘promise’ are relevant to understand the
meaning of contract.
The term ‘agreement’ is defined in Section 2 (e) of the Indian Contract Act, as under:
“Every promise and every set of promises forming the consideration for each other, is
an agreement.”
And the term ‘promise’ is defined in Section 2 (b) of the Indian Contract Act, as
under: “A proposal, when accepted, becomes a promise.”
The above two mentioned provisions show that an agreement is an accepted proposal
(offer). Thus, every agreement consists of an offer from one party and its acceptance by the
other. We can say that:
Agreement = Offer + Acceptance.
Every agreement is not a contract. It is regarded as contract only when it is
enforceable by law. The conditions of enforceability of agreement are laid down in Section
10 of the Indian Contract Act.

DEFINITION OF A CONTRACT
A contract is a binding agreement. By one definition a contract is "a promise or a set
of promises for the breach of which the law gives a remedy, or the performance of which the
law in some way recognizes as a duty; Contracts arise out of agreements; hence a contract
may be defined as an agreement creating an obligation.
The contract may be oral or written. The major types of contract are as under:
➢ Void Contract
➢ Voidable Contract
➢ Valid Contract
➢ Unilateral Contract
➢ Bilateral Contract
➢ Express Contract
➢ Tacit Contract

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 ➢ Contingent Contract
➢ Implied Contract
➢ Executed Contract
➢ Executory Contract
➢ Quasi Contract etc.

Definition of Agreement
When a person (promisor) offers something to someone else (promisee), and the
concerned person accepts the proposal with equivalent consideration, this commitment is
known as the agreement. When two or more than two persons agree upon the same thing in
the same sense (i.e. Consensus ad idem), this identity of minds is agreement. The following
are the types of agreement are as under:
➢ Wagering Agreement
➢ Void Agreement
➢ Voidable Agreement
➢ Implied Agreement
➢ Express Agreement
➢ Conditional Agreement
➢ Illegal Agreement.
It can also be defined as the contract which lacks enforceability by law is known as the
agreement.
ESSENTIAL ELEMENTS OF A VALID CONTRACT
The following are the essential elements of a valid contract.
1. Offer and Acceptance
Basically, a contract unfolds when an offer by one party is accepted by the other party. The
accepted offer should be without any qualification and be definite. An offer needs to be clear,
definite, complete and final. It should be communicated to the offeree. A proposal when
accepted becomes a promise or agreement. The offer and acceptance must be ‘consensus ad
idem’ which means that both the parties must agree on the same thing in the same sense i.e.
identity of wills or uniformity of minds.
2. Intention to Create Legal Relationship
The intention of the parties to a contract must be to create a legal relationship between them.
Agreements of social nature, as they do not contemplate legal relationship, are not contracts.
For instance, if a father fails to give his daughter the promised pocket money, the daughter

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cannot sue the father, because it was purely a domestic arrangement. Thus, it is clear that all
agreements, which do not result in legal relations, are not contracts.
3. Capacity to Contract
If an agreement is entered between parties who are competent enough to contract, then the
agreement becomes a contract.
4. Genuine and Free Consent
Free consent is another essential element of a valid contract. An agreement must have been
made by free consent of the parties. The contract would be void in case of mutual mistakes.
When consent is obtained by unfair means, the contract would be voidable.
5. Lawful Object
Objectives of an agreement should be lawful. It must not be illegal or immoral or opposed to
public policy. It is lawful unless it is forbidden by law. When the object of a contract is not
lawful, the contract is void.
6. Lawful Consideration
Something in return is Consideration. In every contract, agreement must be supported by
consideration. It must be lawful and real.
7. Certainty and Possibility of Performance
The agreements, in which the meaning is uncertain or if the agreement is not capable of being
made certain, it is deemed void. T&C of the contract should always be certain and cannot be
vague. Any contract that are uncertain are considered void. The terms of the agreement must
also be capable of performance and should not enforce impossible act.
8. Legal Formalities
Legal formalities if any required for particular agreement such as registration, writing, they
must be followed. Writing is essential in order to effect a sale, lease, mortgage, gift of
immovable property etc. Registration is required in such cases and legal formalities in the
relevant legislation should be strictly followed.
KINDS OF CONTRACT

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• On the basis of validity
o Valid Contract: An agreement which is enforceable by law, is a valid
contract.
o Void Contract: The contract which is no longer enforceable in the court of
law is a void one.
o Voidable Contract: A contract in which one of the parties to the contract has
a choice to avoid performing his/her part, then it is termed as a voidable
contract. When the consent of the party is not free, the contract becomes
voidable, at the option of the aggrieved party.
o Illegal Contract: A contract which is forbidden by law is termed as an illegal
contract.
o Unenforceable Contract: The contract whose substance is good, but due to
some issues, it is not enforceable, is called an unenforceable contract.
• On the basis of formation
o Express Contract: When the terms of the contract are expressed orally or in
writing, it is known as an express contract.
o Implied Contract: The contract which is constituted by implication of law or
action, is an implied one.

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 o Quasi-Contract: These are not a real contract, but are identical to a contract,
which is formed out of some circumstances.
• On the basis of Performance
o Executed Contract: When the contract is performed, it is known as an
executed contract.
o Executory Contract: When the obligation in a contract, is to be performed in
future, it is described as an executory contract.
o Unilateral Contract
o Bilateral Contract
DISCHARGE OF A CONTRACT
A contract creates certain obligations on one or all parties involved. The discharge of a
contract happens when these obligations come to an end. There are many ways in which a
contract is discharged. In this article, we will look at various such scenarios.
1] Discharge by Performance
When the parties to a contract fulfil the obligations arising under the contract within the time and
manner prescribed, then the contract is discharged by performance.
Example: Peter agrees to sell his cycle to John for an amount of Rs 10,000 to be paid by John
on the delivery of the cycle. As soon as it is delivered, John pays the promised amount.
Since both the parties to the contract fulfil their obligation arising under the contract, then it is
discharged by performance. Now, discharge by the performance of a contract can be by:
➢ Actual performance
➢ Attempted performance
As shown in the example above, actual performance is when all the parties to a contract do
what they had agreed for under the contract. On the other hand, it is possible that when the
promisor attempts to perform his promise, the promisee refuses to accept it. In such cases, it is
called attempted performance or tender.

2] Discharge by Mutual Agreement

If all parties to a contract mutually agree to replace the contract with a new one or annul
or remit or alter it, then it leads to a discharge of the original contract due to a mutual agreement.
Example: Peter owes Rs 100,000 to John and agrees to repay it within one year. They document
the debt under a contract. Subsequently, he loses his job and requests John to accept Rs 75,000
as a final settlement of the loan. John agrees and they make a contract to that effect. This
discharges the original contract due to mutual consent.

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3] Discharge by the Impossibility of Performance
If it is impossible for any of the parties to the contract to perform their obligations, then
the impossibility of performance leads to a discharge of the contract. If the impossibility exists
from the start, then it is impossibility ab-initio. However, the impossibility might also arise later
due to:
➢ An unforeseen change in the law
➢ Destruction of the subject-matter essential to the performance
➢ The non-existence or non-occurrence of a particular state of things which was
considered a given for the performance of the contract
➢ A declaration of war
Example: Peter enters into a contract with John to marry his sister Olivia within one year.
However, Peter meets with an accident and becomes insane. The impossibility of performance
leads to a discharge of the contract.
4] Discharge of a Contract by Lapse of Time
The Limitation Act, 1963 prescribes a specified period for performance of a contract. If
the promisor fails to perform and the promisee fails to take action within this specified period,
then the latter cannot seek remedy through law. It discharges the contract due to the lapse of
time.
Example: Peter takes a loan from John and agrees to pay instalments every month for the next
five years. However, he does not pay even a single instalment. John calls him a few times but
then gets busy and takes no action. Three years later, he approaches the court to help him
recover his money. However, the court rejects his suit since he has crossed the time-limit of
three years to recover his debts.
5] Discharge of a Contract by Operation of Law
A contract can be discharged by operation of law which includes insolvency or death of the
promisor.
6] Discharge by Breach of Contract
If a party to a contract fails to perform his obligation according to the time and place
specified, then he is said to have committed a breach of contract.
Also, if a party repudiates a contract before the agreed time of performance of a contract, then he
is said to have committed an anticipatory breach of contract.
In both cases, the breach discharges the contract. In the case of:
an actual breach, the promisee retains his right of action for damages.
an anticipatory breach of contract, the promisee cannot file a suit for damages. It also
discharges the promisor from performing his part of the contract.

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7] Discharge of a Contract by Remission
A promisee can waive or remit the performance of promise of a contract, wholly or in
part. He can also extend the time agreed for the performance of the same.
In example 3 above, Peter only repays a part of the money he owes to John. However, John
agrees to accept it as a final settlement of the debt. John’s act of remission discharges the
contract.
8] Discharge by Non-Provisioning of Facilities
In many contracts, the promisee agrees to offer reasonable facilities to the promisor for
the performance of the contract. If the promisee fails to do so, then the promisor is discharged of
all liabilities arising due to non-performance of the contract.
Example: Peter agrees to fix John’s garage floor provided he keeps his car out for at least 6
hours. Peter approaches him a few times but John is reluctant to get his car out. John fails to
provide reasonable facilities to Peter (an empty floor). This discharges him of all obligations
arising under the contract.
9] Discharge of a Contract due to the Merger of Rights
In some situations, it is possible that inferior and superior right coincides in the same
person. In such cases, both the rights combine leading to a discharge of the contract governing
the inferior rights.
Example: Peter rents John’s apartment for two years. One year into the contract, he offers to
buy the property from John, who agrees. The enter a sale contract and Peter becomes the owner
of the apartment. Here Peter has two rights; one accorded by the lease agreement making him
the renter and second by the sale agreement making him the owner. The former being an inferior
right merges with the superior one and discharges the lease contract.

OFFER AND ACCEPTANCE

There must be an agreement for a legally binding contract to exist
➢ For an agreement to arise it must be shown that one person has made an offer and
there has been an
acceptance of that offer by the person to whom the offer was directed
➢ The following cases concern situations where one party says there is an agreement
and the other party says there is not
➢ Often this is not an issue, it is obvious there is a contract, but a dispute arises later on
➢ The first question may be whether there is an offer and an acceptance of that
offer
What is an offer?

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 An offer is a proposal by one party to enter into a legally binding contract with another.
If the other person accepts a contract is made
The person making the offer must intend that it can be converted into a binding
obligation by acceptance
When the courts are required to determine whether statements amount to offers,
we see them distinguishing them from other commonly occurring categories of
statements ie. mere puffs, invitations to treat and statements supplying
information
Puffs can be easily dismissed as they are statements that no reasonable person would
take seriously, many
advertisements contain puffery
Rules as to Offer
1. May be made to one or more people
2. All major terms must be included
3. May specify conditions to be followed
4. Must be communicated to offeree
5. May be revoked or lapse
Invitations to Treat or Statements of supplying – An invitation to treat is just an
indication of willingness to deal or trade and statements that purely provide information
without intending to make an offer, are not offers

 Gibson v Manchester

 Harvey v Facey

Shop displays, catalogues and advertisements – In general shop displays,

catalogues and advertisements are invitations to treat, the offer is made when
the buyer takes the item to the register and acceptance is the shop employees
selling the item to the consumer

 Pharmaceutical Society of Great Britain v Boots Cash Chemists

 Partridge v Crittenden

Auction Sales – In the case of typical auction sale, the auctioneer’s call for bids is an
invitation to treat, where a bid is made, it is an offer from the bidder to the buyer at
the price offered. The auctioneer may then either accept or reject the offer on behalf
of the principal

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  Harris v Nickerson
Online Auctions – auctions conducted online, like eBay, create binding contracts with
the buyer and the seller as the online site creates a framework for the auction in
which the buyer and the seller were willing participants

 Smythe v Thomas

 Tenders – A statement that goods are to be sold by tender is usually regarded as

an invitation to treat. A party submitting a tender makes the offer and there is
no contract until the person who called for tenders accepts the tender

 Harvela Investments v Royal Trust Co of Canada

Persons as to who an offer can be made

An offer can be made to:
o A specific person or persons
o A particular class of persons
o To the ‘world at large’ – it may be accepted by anyone who reads the advertisement

 Carlill v Carbolic Smoke Ball Co

 Distinguish from: Lenard v Pepsi Co

Communication of an offer
The offer must be communicated, brought to the notice of the person to whom it was
made
➢ Unless an offer is communicated there can be no acceptance therefore no contract
➢ Cannot take up an offer you don’t know about

 R v Clarke

Revocation of the Offer

An offer is revoked when the offeror formally withdraws the offer
➢ On revocation the offer comes to an end and cannot be subsequently be accepted
➢ The offeror can give notice of the revocation of the offer at any time before
acceptance
➢ The revocation must be communicated to the offeree

 Byrne v Lean Van Tienhoven

Options

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 A promise to keep an offer open for a period of time is not enforceable unless the offeree
provides consideration
➢ Needs to be paid for (consideration) to create an enforceable contract
➢ Or it is invalid (gratuitous) and the promise to keep the offer open is unenforceable

 Goldsbrough, Mort v Quinn

Lapse of an Offer
An offer will lapse:
a) If not accepted within the time stated
b) If not accepted within a reasonable time, where no time for acceptance has been
stated
c) If a counter-offer is made

 Hyde v Wrench
A request for information is not a counter offer: it is not unusual for the offeree to
want to clarify or seek more information about the terms of the offer

 Steven Jaques v McLean

d) An offer will lapse on the death/incapacitation of either party before acceptance

 Carter v Hyde pg. 81

ACCEPTANCE
An agreement is concluded when the offeree communicates an unconditional acceptance
of the offer to the offeror
➢ The form of acceptance will vary according to whether it is a unilateral offer
(performance of the act is acceptance) or bilateral (a verbal or written
response communicated to the offeror or by conduct)
Rules as to Acceptance
1. The acceptance of an offer must be communicated to the offeror for there to be a
binding contract
➢ Can be communicated by express words or in writing, by conducts or by
performance of an act
2. Acceptance can be implied from the conduct of parties

 Empirnall Holdings v Machon Paull Partners

3. Acceptance cannot be inferred from the silence or inaction of the offeree

 Felthouse v Bindley
4. There can be no acceptance is the offeree is unaware of the offer

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  R v Clarke
5. In a unilateral contract the offeror has waived its right to communication of acceptance

 Carlill v Carbolic Smoke Ball Co

6. Acceptance must be unconditional
➢ Where the acceptance is made “subject to contract” or “subject to a formal
contract to be drawn up by our solicitors”, then there will be no binding agreement
between parties until a formal document has been drafted and signed

 Masters v Cameron – Three alternatives possible

7. Acceptance must follow the conditions, if any, stated in the offer

 Gilbert J McCaul v Pitt Club

8. Acceptance can be made only by the party to whom the offer was made
9. Acceptance can be revoked at any time prior to acceptance being communicated
10. Acceptance must be made within the time prescribed or, if no time has been
prescribed, within a reasonable time
11. Communication of acceptance must be made in a regular and authorised manner
12. The postal acceptance rule
➢ Where acceptance by post is contemplated by the parties, acceptance is complete
as soon as the letter of acceptance is posted
➢ Where the postal acceptance rule applies, a person who makes an offer cannot
revoke the offer once the offeree has posted the letter of acceptance (this creates
a binding contract)

 Henthorn v Fraser

 Adams v Lindsell

 Holwell Securities v Hughes

 Elizabeth City Centre v Corralyn

13. Electronic or instantaneous communications
➢ Where this type of communication is used as method of acceptance, the
usual applies – acceptance is effective only when it is communicated to the
offeror

 Brinkibon v Stahag Stahl – common law: contract formed where acceptance received

Statutory Reform – The Electronic Transactions Act 1999

• The Act contains rules that aim to “facilitate the use of electronic transactions”

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 • An electronic communication will commonly be email
• Section 14 says an electronic communication is dispatched when it leaves an
information system under the control of the originator
• Section 14A says an electronic communication is received by an addressee when
it enters the information system designated by the addressee for the purpose of
electronic communication
➢ In practical terms a person is deemed to have received an email or other
electronic communication when it enters their electronic or email system,
whether or not they have seen or read it, provided that the communication
was sent to the email specified by the person
• Under Section 14B, the place of dispatch and the place of receipt shall be
where the originator and the addressee have their place of business
Vagueness, Uncertainty, Incompleteness
• If the “contract” is too vague, uncertain or incomplete it will not be enforceable
• Courts will attempt to make the contract work if it senses the parties have agrees
on the essentials BUT will not make the contract for the parties

 Council of the Upper Hunter v Australian Chilling and Freezing pg. 92

 Godecke v Kirwan pg. 92

 ANZ Banking Group v Frost pg. 93

Definition of Contingent Contract -

According to Section 31 of Indian Contract Act, 1872. A contingent contract is a contract
to do or not to do something , if some even, collateral to such contract does or does not
happen.
Example -
A contracts to pay B RS. 10000 if B's house is burnt. This contingent contract.
Elements of contingent contract -
The following are the essential elements of Contingent Contract
1. There should be a contract to do or not to do something, if some event, does or does not
happen.
2. Event should be collateral to such contract.

Enforcement of contracts contingent on an event happening -

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 According to Section 32 of the said Act, Contingent contracts to do or not to do
anything in an uncertain future event happens, cannot be enforced by law unless and until that
event has happened. If the event becomes impossible, such contracts becomes impossible,
such contracts become void.

Illustration :
A) A make a contract with B to buy B's horse if A survives C. This contract cannot be
enforced by law unless and until C dies in A's lifetime .
B) A makes a contract with B to sell a horse to B at a specified price, if C, to whom the horse
has been offered, refuses to buy him. The contract cannot be enforced by law unless and until
C refuses to buy the horse.
C) A contracts to pay B a sum of money when B marries C, C dies without being married to
B. The contract becomes void.
Elements
i) When any contract to do and if an uncertain future event happens, cannot be enforced by
law, unless and until that event has happened
ii) When any contract not to do anything in an uncertain future event happens, cannot be
enforced by law unless and until that event has happened. such contract becomes impossible.
Enforcement of Contracts contingent on an event not happening (Section 33)
Contingent contracts to do or not to do anything if an uncertain future event does not
happen, can be enforced when the happening of that event becomes impossible, and not
before.
Illustration
A agrees to pay B a sum of money if a certain ship does not return. The ship is sunk.
The contract can be enforced when the ship sinks.
Essentials --
i) Contingent contract to do anything if an uncertain future event does not happen can be
enforced when the happening of the event becomes impossible and not before.
ii) Contingent contract not to do anything if an uncertain future event does not happen can be
enforced when the happening of that event becomes impossible and not before.
When event on which contract is contingent to be deemed impossible, if it is the future
conduct of a living person (Section 34) -
If the future event on which a contract is contingent is the way in which a person
will act at an unspecified time, the event shall be considered to become impossible when such
person does anything which renders it impossible that he should so act within any definite

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time, or otherwise than under future contingencies.
Illustration
A agrees to pay B a sum of money if B marries C, C married D. The marriage of B to C
must now be considered impossible , although it is possible that D may Die and C may
afterwards marry B.
When contracts become void which are contingent on happening of specified event
within fixed time (Section 35) –
Contingent contracts to do or not to do anything, if a specified uncertain event happens
within a fixed time become void if at the expiration of the time fixed such event has not
happened, or if, before the time fixed, such event becomes impossible.
When Contracts may be enforced, which are contingent on specified event not
happening within fixed time - Contingent contracts to do or not to do anything if a specified
uncertain event does not happen within a fixed time may be enforced by law when the time
fixed has expired and such event has not happened or before the time fixed has expired if it
becomes certain that such event will not happen.
Examples
i) A promises to pay B a sum of money if certain ship returns within a year. The contract
may be enforced if the ship regards within the year and becomes void if the ship is brunt with
in the year.
ii). A promise to pay B a sum of money if a certain ship does not return within a year. The
contract may be enforced if the ship does not return within a year or is burnt within the year
Agreements contingent on impossible event void (Section 36) -
Contingent agreements to do or not to do anything if an impossible event happens
are void whether the impossibility of the event is known or not to the parties to agreement at
the time when it is made
Examples -
i) A agrees to pay B, 1000 rupees if two straight lines should enclose a space. The agreement
is void.
ii) . A agrees to pay B 1000 rupees if B will marry A's daughter C. C was dead at the time of
the agreement the agreement is void
QUASI CONTRACT
Even in the absence of a contract, certain social relationships give rise to certain
specific obligations to be performed by certain persons. These are known as quasi contracts
as they create same obligations as in the case of regular contract.
Quasi contracts are based on principles of equity, justice and good conscience.

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Salient features of quasi contracts are:
In the first place, such a right is always a right to money and generally, though not
always, to a liquidated sum of money.
Secondly, it does not arise from any agreement of the parties concerned, but it
imposed by the law; and
Thirdly, it is a right which is available not against the entire world, but against a
particular person or persons only, so that in this respect it resembles a contractual right.
TYPES OF QUASI CONTRACT
There are five circumstances which are identified by the Act as quasi contracts. These
five circumstances do not result in regular contracts.
Claim for necessaries supplied to persons incapable of contracting: Any person supplying
necessaries of life to persons who are incapable of contracting is entitled to claim the price
from the other person’s property. Similarly where money is paid to such persons for
purchase of necessaries, reimbursement can be claimed.
For example if ‘A’ supplies necessaries of life to ‘B’ a lunatic or to his wife or child whom
‘B’ is liable to protect and maintain, then ‘A’ can claim the price from the property of ‘B’.
For such claim to be valid ‘A’ should prove the supplies were to the actual requirements of
‘B’ and his dependents. No claim for supplies of luxury articles can be made. If ‘B’ has no
property ‘A’ obviously cannot make his claim.
Right to recover money paid for another person: A person who has paid a sum of money
which another is obliged to pay, is entitled to be reimbursed by that other person provided the
payment has been made by him to protect his own interest. Here the person who makes the
payment must honestly believe that his own interest demands payment. [Muni Bibi vs.
Trilokinath].
In a case the plaintiff agreed to purchase certain mills and to save it from being sold to
outsiders paid certain arrears of municipal dues. Here the payment made by the plaintiff was
held to be recoverable as he had interest in the property as prospective buyer.
Obligation of person enjoying benefits of non-gratuitous act: In term of section 70 of the
Act “where a person lawfully does anything for another person, or delivers anything to him
not intending to do so gratuitously and such other person enjoys the benefit thereof, the latter
is bound to pay compensation to the former in respect of, or to restore, the thing so done or
delivered.
The above can be illustrated by a case law where ‘K’ a government servant was
compulsorily retired by the government. He filed a writ petition and obtained an injunction
against the order. He was reinstated and was paid salary but was given no work and in the

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mean time government went on appeal. The appeal was decided in favour of the government
and ‘K’ was directed to return the salary paid to him during the period of
reinstatement.[Shyam Lal vs. State of U.P. A.I.R (1968) 130]
Responsibility of finder of goods: In terms of section 71 ‘A person who finds goods
belonging to another and takes them into his custody is subject to same responsibility as if he
were a bailee’.
Thus a finder of lost goods has:
to take proper care of the property as men of ordinary prudence would take
no right to appropriate the goods and
to restore the goods if the owner is found.
Where ‘P’ a customer in ‘D’s shop puts down a brooch worn on her coat and forgets
to pick it up and one of ‘D’s assistants finds it and puts it in a drawer over the week end. On
Monday, it was discovered to be missing. ‘D’ was held to be liable in the absence of ordinary
care which a prudent man would have taken.
Liability for money paid or thing delivered by mistake or by coercion: In termsof Section
72 of the Act, “a person to whom money has been paid or anything delivered by mistake or
under coercion, must repay or return it. Every kind of payment ofmoney or delivery of goods
for every type of ‘mistake’ is recoverable. [Shivprasad vs Sirish Chandra A.I.R. 1949 P.C.
297]
A payment of municipal tax made under mistaken belief or because of mis-
understanding of the terms of lease can be recovered from municipal authorities. The above
law was affirmed by Supreme Court in cases of Sales tax officer vs. Kanhaiyalal A.I.R.1959
S.C.835
Similarly any money paid by coercion is also recoverable. The word coercion is not
necessarily governed by section 15 of the Act. The word is interpreted to mean and include
oppression, extortion, or such other means [Seth Khanjelek vs National Bankof India]. In a
case where ‘T’ was traveling without ticket in a tram car and on checking he was asked to pay
` 5/- as penalty to compound transaction. T filed a suit against the corporation for recovery on
the ground that it was extorted from him. The suit was decreed in his favour. [Trikamdas vs.
Bombay Municipal Corporation A.I.R.1954]
In all the above cases the contractual liability arose without any agreement between the
parties.
PERFORMANCE CONTRACT
What is Performance of Contract?

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 The term ‘Performance of contract‘ means that both, the promisor, and the promisee
have fulfilled their respective obligations, which the contract placed upon them. For
instance, A visits a stationery shop to buy a calculator. The shopkeeper delivers the calculator
and A pays the price. The contract is said to have been discharged by mutual performance.

Section 27 of Indian contract Act says that

The parties to a contract must either perform, or offer to perform, their respective
promises, unless such performance is dispensed with or excused under the provisions of this
Act, or any other law.
Promises bind the representatives of the promisor in case of the death of the latter
before performance, unless a contrary intention appears in the contract.
Thus, it is the primary duty of each contracting party to either perform or offer to
perform its promise. For performance to be effective, the courts expect it to be exact and
complete, i.e., the same must match the contractual obligations. However, where under the
provisions of the Contract Act or any other law, the performance can be dispensed with or
excused, a party is absolved from such a responsibility.

Example
A promises to deliver goods to B on a certain day on payment of Rs 1,000. A expires before
the contracted date. A‘s representatives are bound to deliver the goods to B, and B is bound to
pay Rs 1,000 to A‘s representatives.
Types of Performance
Performance, as an action of the performing may be actual or attempted.
Actual Performance
When a promisor to a contract has fulfilled his obligation in accordance with the
terms of the contract, the promise is said to have been actually performed. Actual
performance gives a discharge to the contract and the liability of the promisor ceases to exist.
For example, A agrees to deliver10 bags of cement at B’s factory and B promises to pay the
price on delivery. A delivers the cement on the due date and B makes the payment. This is
actual performance.
Actual performance can further be subdivided into substantial performance, and partial
Performance
Substantial Performance
This is where the work agreed upon is almost finished. The court then orders that the
money must be paid, but deducts the amount needed to correct minor existing defect.

17
Substantial performance is applicable only if the contract is not an entire contract and is
severable. The rationale behind creating the doctrine of substantial performance is to avoid
the possibility of one party evading his liabilities by claiming that the contract has not been
completely performed. However, what is deemed to be substantial performance is a question
of fact to be decided in both the case. It will largely depend on what remains undone and its
value in comparison to the contract as a whole.
Partial Performance
This is where one of the parties has performed the contract, but not completely, and
the other side has shown willingness to accept the part performed. Partial performance may
occur where there is shortfall on delivery of goods or where a service is not fully carried out.
There is a thin line of difference between substantial and partial performance. The two
following points would help in distinguishing the two types of performance.
Partial performance must be accepted by the other party. In other words, the party who is
at the receiving end of the partial performance has a genuine choice whether to accept or
reject. Substantial performance, on the other hand, is legally enforceable against the other
party.
Payment is made on a different basis from that for substantial performance. It is made
on quantum meruit, which literally means as much as is deserved. So, for example, if half of
the work has been completed, half of the negotiated money would be payable. In case of
substantial performance, the party that has performed can recover the amount appropriate to
what has been done under the contract, provided that the contract is not an entire contract.
The price is thus, often payable in such circumstances, and the sum deducted represents the
cost of repairing defective workmanship.
Attempted Performance
When the performance has become due, it is sometimes sufficient if the promisor
offers to perform his obligation under the contract. This offer is known as attempted
performance or more commonly as tender. Thus, tender is an offer of performance, which of
course, complies with the terms of the contract. If goods are tendered by the seller but refused
by the buyer, the seller is discharged from further liability, given that the goods are in
accordance with the contract as to quantity and quality, and he may sue the buyer [Link]
of contract if he so desires. The rationale being that when a person offers to perform, he is
ready, willing and capable to perform. Accordingly, a tender of performance may operate as a
substitute for actual performance, and can effect a complete discharge.
In this regard, Section 38 of Indian Contract Act says:

18
‘Where a promisor has made an offer of performance to the promisee, and the offer has not
been accepted, the promisor is not responsible for non-performance, nor does he thereby lose
his rights under the contract. For example, A contracts to deliver to B, 100 tons of basmati
rice at his warehouse, on 6 December 2015. A takes the goods to B‘s place on the due date
during business hours, but B, without assigning any good reason, refuses to take the delivery.
Here, A has performed what he was required to perform under the contract. It is a case of
attempted performance and A is not responsible for non-performance of B, nor does he
thereby lose his rights under the contract.’
REMEDIES FOR BREACH OF CONTRACT
When a promise or agreement is broken by any of the parties we call it a breach of
contract. So when either of the parties does not keep their end of the agreement or does not
fulfil their obligation as per the terms of the contract, it is a breach of contract. There are a
few remedies for breach of contract available to the wronged party. Let us take a look.
1] Recession of Contract
When one of the parties to a contract does not fulfil his obligations, then the other party can
rescind the contract and refuse the performance of his obligations.
As per section 65 of the Indian Contract Act, the party that rescinds the contract must restore
any benefits he got under the said agreement. And section 75 states that the party that
rescinds the contract is entitled to receive damages and/or compensation for such a recession.
2] Sue for Damages
Section 73 clearly states that the party who has suffered, since the other party has broken
promises, can claim compensation for loss or damages caused to them in the normal course
of business.
Such damages will not be payable if the loss is abnormal in nature, i.e. not in the ordinary
course of business. There are two types of damages according to the Act,
Liquidated Damages: Sometimes the parties to a contract will agree to the amount payable in
case of a breach. This is known as liquidated damages.
Unliquidated Damages: Here the amount payable due to the breach of contract is assessed by
the courts or any appropriate authorities.
3] Sue for Specific Performance
This means the party in breach will actually have to carry out his duties according to the
contract. In certain cases, the courts may insist that the party carry out the agreement. So if
any of the parties fails to perform the contract, the court may order them to do so. This is a
decree of specific performance and is granted instead of damages.

19
For example, A decided to buy a parcel of land from B. B then refuses to sell. The courts can
order B to perform his duties under the contract and sell the land to A.

4] Injunction
An injunction is basically like a decree for specific performance but for a negative
contract. An injunction is a court order restraining a person from doing a particular act.
So a court may grant an injunction to stop a party of a contract from doing something he
promised not to do. In a prohibitory injunction, the court stops the commission of an act and
in a mandatory injunction, it will stop the continuance of an act that is unlawful.
5] Quantum Meruit
Quantum meruit literally translates to “as much is earned”. At times when one party
of the contract is prevented from finishing his performance of the contract by the other party,
he can claim quantum meruit.
So he must be paid a reasonable remuneration for the part of the contract he has already
performed. This could be the remuneration of the services he has provided or the value of the
work he has already done.

CAPACITY TO CONTRACT
Section 11 of the Contract Act requires that parties must be competent to
contract. Competence of the parties to make a contract is one of the most essential elements
of a valid contract.
Competence to contract is defined in Section 11 of the Indian Contract Act, 1872:
“Every person is competent to contract who is of the age of majority according to the law to
which he is subject, and who is of sound mind and is not disqualified from contracting by any
law to which he is subject.”
Thus, section 11 declares the following persons to be competent to contract:
➢ Who attained the Age of Majority
➢ Who is of sound mind
➢ Who has not been disqualified by law
Incompetent to Contract
The persons incompetent to contract are:
➢ Minors
➢ Persons of unsound mind, and
➢ Persons disqualified by law
1). Minors

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Age of Majority
The age of majority is generally eighteen as Section 3 of Indian Majority Act, 1875 states that
“Every person domiciled in India shall attain the age of majority on his completing the age of
eighteen years and not before.”[2] except when a guardian of a minor’s person or property
has been appointed by the court, in such case it is 21
Nature of minor’s agreement is that, any agreement made with a minor in India is void-ab-
intio i.e. void from the beginning.

Effects of Minor’s Agreement

1. No estoppel against minor: There can be no estoppel against minor i.e., if a minor by
misrepresenting his age induces another to contract with him , then also he cannot be made
liable.
2. No liability in contract or in tort arising out of contract: A minor is incapable of giving
consent, and the nature of minor’s agreement is a nullity and cannot be enforced.
3. Doctrine of Restitution: If an infant by misrepresenting his age, obtains property or
goods, then he can be compelled to restore it, but only so long as the same is traceable in his
possession, this is called as the equitable Doctrine of Restitution. Where the infant has
converted or sold the goods, he cannot made to repay the value of goods as that would lead to
enforcing a void contract. When the infant has obtained the cash instead of goods , then in
this case again the Doctrine of Restitution is not applied
Liability for necessaries (Section 68)
Section 68 of the Indian Contract Act, 1872 talks about the liability of the persons
incompetent to contract for the necessaries supplied to them.
Section 68: Claim for necessaries supplied to person incapable of contracting, or on his
account-“If a person, incapable of entering into a contract, or any one whom he is legally
bound to support, is supplied by another person with necessaries suited to his condition in
life, the person who has furnished such supplies is entitled to be reimbursed from the
property of such incapable person.”
2). Persons of unsound mind
The agreement with a person of unsound mind in India, is void. According to Section
12 of the Indian Contract Act, a person is said to be of a sound mind if at the time of making
the contract, the person is able to understand the contract and is capable of making a rational
decision considering the effects of the same. A person who is usually of unsound mind, but
occasionally of sound mind, may make a contract when he is of sound mind. A person who is

21
usually of sound mind, but occasionally of unsound mind, may not make a contract when he
is of unsound mind. Persons of unsound mind includes an idiotic, lunatic and intoxicated
person.
3). Persons disqualified by law
Apart from minors and persons of unsound mind, there are also other persons such as
Foreign sovereigns, convicts, alien enemy, insolvents and so on are disqualified from
contracting partly or wholly or they are not competent to contract. Therefore, contracts by
such persons are void.
CONSIDERATION
A contract, in order to be valid requires nine essential elements. One of those
essential elements is Consideration. Subject to certain exceptions, an agreement made
without consideration in nudum pactum (a nude contract) and is void. Consideration is a
technical term used in the sense of quid pro quo (something in return). When a party to an
agreement promises to do something, he must get ‘something’ in return. That ‘something’ is
de􀆗ned as a Consideration.
Example: A agrees to sell his car to B for Rs. 50,000. The car is a consideration for B and
the Price of 50,000 is a consideration for A.
I. Definition
Consideration has been variously de􀆗ned. The simplest definition is by Blackstone,
“Consideration is the recompense given by the party contracting to the other”. In other
words, it is the price of the promise.
Section 2(d) if The Indian Contract Act, 1872 defines it as follows: “when at the desire of the
promisor, the promise or any other person has done or abstained from doing, or does or
abstains from doing, or promises to do or to abstain from doing, or does or abstains from
doing, or promises to do or to abstain from doing, something, such act or abstinence or
promise is called consideration for the promise.
Analyzing the above definition, Consideration can be:
An act of doing something – In this case, the consideration is in affirmative or
positive form. Example: A promises to B to guarantee payment of the price of goods
which B sells on credit to C. here selling of goods by B to C is Consideration for A’s
promise.
An Abstinence or forbearance means abstaining or refraining from doing
something – In this case, the consideration is in negative form. Example: A promises
to B not to 􀆗le a suit against him if he pays him Rs.500. the abstinence of A is the
consideration for B’s payment.

22
 A return promise – Example: A agrees to sell his horse to B for Rs.10000. here B’s
promise to pay the sum of Rs.10,000 is the consideration for A’s promise to sell the
horse, and A’s promise to sell the horse is the consideration for B’spromise to pay the
sum of Rs.10, 000.
II. Why consideration is needed
The reason why law only enforces those promises which are made for consideration is
that gratuitous or voluntary promises are often made rashly and without due deliberation.
Consideration is needed because in an agreement both the parties are required to be income
sort of obligation or burden which would make them perform the promise made. Without
consideration, the agreement may just become a gift.
If A promises to pay B Rs. 100 for nothing, B neither doing or promising to do
anything in return to compensate A for his money, A’s promise has no force of law.
III. Legal Requirements
A consideration in order to be a valid one requires certain rules to be followed while
made. They are listed as:
1. The consideration must move at the desire of the promisor.
The definition in sec. 2(d) clearly emphasizes that an act or abstinence which is to be
a consideration for the promise must be done or promised to be done in accordance with the
desire of the promisor. If such consideration is made at the will of a third party or without the
desire of the promisor, it will not be a good consideration. Example. A saves B’s goods from
a 􀆗re without being asked to do so. A cannot demand payment for his service.
B spent some money on the improvement of a market at the desire of the Collector of the
district. In consideration of this D who was using the market promised to pay some money to
B. Held, the agreement was void being without consideration as it had not moved at the
desire of D.
2. The consideration may move from the promise or any other person.
This means as long as there is a consideration it is immaterial who has furnished it. In
English law, consideration must move from thermoses, but under Indian Law, consideration
may move from the promise or even a stranger. But the stranger to the consideration cannot
sue until he’s a party to the contract.
Example: ‘A’ by gift deed transferred certain property to her daughter with the direction that
the daughter should pay an annuity to ‘A’s brother as had been done by ‘A’. Whereas
daughter executed writing in favour of brother to pay the annuity. Afterwards, she refused
tofu􀆗l her promise saying that no consideration had moved from A’s brother. The court held

23
that ’A’s brother was entitled to maintain the suit. [Chinmaya v. Ramayya (1882) 4
Mad.137]
4. The consideration may be an act, abstinence or forbearance or a return promise
It may be noted that the following are a good consideration for a contract:
a. Forbearance to sue – Forbearance to sue has always been regarded as valuable
consideration. It is indeed, a kind of abstinence, which is so very clearly recognized as good
consideration in the definition itself. “Forbearance to sue “means the plaintiff has a certain
right of action against the defendant or any other person and on a promise by the defendant
he refrains from bringing the action. This results in a bene􀆗t to the person not sued and a
detriment to the person who could sue.
b. Compromise of a disputed claim – Compromise can also fall under the principle of
forbearance; as such, the same applies to bona 􀆗de compromise of a disputed claim. The
claim should be reasonable and the person claiming should believe that it is a valid claim.
c. Composition with creditors – A debtor who is financially challenged may call upon his
creditors and request them to accept a lesser amount in satisfaction of their debts. If the
creditors agree to it, the agreement is binding both upon the debtor and the creditor and this
amounts to a compromise of the claims of the creditors.
5. The consideration may be past, present or future
The words used in sec 2(d) are “… has done or abstained from doing (past), or does
something or abstains from doing (present), or promises to do or abstain from doing
something(future) something…” this clearly states that consideration may be past present or
future.
a. Past – if the consideration by a party to an agreement was given in the past, i.e., before the
date of promise, it is called past consideration. Example: A renders some service to B at the
latter’s desire. After a month B promises to compensate A for the services rendered to him. It
is past consideration.
b. Present or executed – When the consideration is given at the same time the promise is
made. It is called present or executed consideration. The best example of such consideration
would be a cash sale. When we buy something inconsideration for money from a shop it is a
present consideration.
c. Future or Executory – When the consideration from one party to the other is to pass
subsequently to the making of the contract, it is a future consideration. Example: D promised
to deliver certain goods to P after a week; P promises to pay the price after a fortnight. The
promise of D is supported by the promise of P. consideration in this case is future or
Executory.

24
6. Consideration need not be adequate
- Privacy
It is however not necessary that consideration must be adequate to the promise made.
Consideration as considered to be “something in return”, it need not necessarily be equal to
the value to the “something given”. But it should be something to which the law attaches
value. The adequacy of consideration depends upon the parties, how valuable it is to them
while entering the agreement, not for the court when it is sought to be enforced.
Example: A purchases a table from B for Rs. 500. It is a di􀆗cult task for the court to
ascertain whether the value of the table is worth the price is given or not.
7. Consideration should not be illusory but real
Although the consideration accepted may not be adequate but it should be real and not
illusory and should be competent and of some value in the eye of law. There is no real
consideration in the following cases.
a. Physically Impossible – A promises to put life in B’s dead wife on behalf of Rs. 500. This
is physically impossible to perform.
b. Legally Impossible – A owes to B Rs. 100. He promises to pay Rs. 510 to C, the servant
of B, who in return promises to discharge A from his debt. This is legally impossible because
C cannot give a discharge for a debt due to B.
c. Uncertain Consideration – A engages B for doing certain work and promises to pay a
“reasonable” sum. There is no recognized way to ascertain the “reasonable” remuneration.
This consideration is uncertain consideration.
8. Consideration should not be something which the promisor is already bound to do
A person may already be bound to do something by law or by contract. A promise to do
something which he is already bound to do is not a good consideration. Likewise, a promise
to perform a public duty by a public servant is not a good consideration.
9. Consideration must not be illegal, immoral or against the public policy
Sec 23 of the Contract Act 1872 refers that consideration to an agreement should not
be something illegal, immoral or something against the public policy. The court should
decide whether the consideration promised is lawful or unlawful. Where it is unlawful the
courts should not allow the action on the agreement.
IV. Stranger to a Contract
It is a general rule that only the parties to a contract can sue or be sued. This rule is
called the privity of contract. The rule of Privity of contract means, that a relationship
subsisting between two parties who have entered into contractual obligations. Lord Justice

25
Denning has criticized the rule in a number of cases and has observed that “the privity
principle has never been able to supplant another principle whose roots go much deeper.”
This rule has the following two consequences.
A person who is not a party to a contract cannot sue upon it even though the contract
is for his bene􀆗t and he provided consideration.
A contract cannot confer rights or impose obligations under it on any other person
other than the parties to it.
An agreement (Section 2(e))
An Agreement is a promise between two entities creating mutual obligations by law. Section
2(e) of the Indian Contract Act, 1872 defines an agreement as ‘Every promise and every set
of promises, forming the consideration for each other, is an agreement’.
To form an agreement, the following ingredients are required:
• Parties: There need to be two or more parties to form an agreement.
• Offer/ Proposal: When a person signifies to another his willingness of doing or
omitting to do something with a view to obtain other’s assent. [Section 2(a)]
• Acceptance: When the person to whom the proposal is made signifies his assent
for the same thing in the same sense as proposed by the offeror. [Section 2(b)]
• Promise: When a proposal is accepted, it becomes a promise. [Section 2(b)]
• Consideration: It is the price for the promise. It is the return one gets for his act or
omission. [Section 2(d)]
An agreement is, therefore, a promise or set of promises forming consideration for all the
parties. [Section 2(e)]
Agreement = Promise or set of promises (offer + acceptance) + Consideration (for all the
parties)
Types of Agreement
There are many types of Agreement, on the grounds of enforceability agreement has two
types which are as follows :
A) Valid Agreement
B) Void Agreement
A) Valid Agreement :
Valid agreement is said to be valid if it can be enforceable in the Court of Law.
Section 2(h) of the Indian Contract Act, 1872 says that, "an agreement enforceable by law is
a contract"
B) Void Agreement :
According to Section 2(g) of the Indian Contract Act, 1872 an agreement is not

26
enforceable by law is said to be void.
Section 24 to 31and 56 of the Indian Contract Act, 1872 lay down the provisions
relating to the agreements which are declared void are as follows :
(i) If consideration and objects are unlawful in part. ( Section 24)
(ii) Agreement without consideration(Section 25)
(iii) Agreement in restraint of marriage (Section 26)
(iv) Agreement in restraint of trade (Section 27)
(v) Agreement in restraint of legal proceedings (Section 28)
(vi) Uncertain Agreements (Section 29)
(vii) Wagering Agreement (Section 30)
(viii) Agreement contingent on impossible event (Section 31)
(ix) Agreement to do impossible acts (Section 56)
(x) Agreement to minor
(xi) When both parties are under mistake of law.
All agreements are not enforceable by law and therefore, all agreements are not contracts.

27
 UNIT – II
AN OVERVIEW OF THE INDIAN PARTNERSHIP ACT, 1932
An Act was enacted in 1932 and it came into force on the 1st day of October 1932.
The present Act superseded the earlier law, which was contained in Chapter XI of the Indian
Contract Act, 1872.
This Act is not complete and has the intention to define and amend laws relating to
Partnership.
INTRODUCTION
Partnership results from a contract and is governed by the Partnership Act 1932. The
partnership is also governed by the general provision of the Indian Contract Act on such
matters where the Partnership Act is silent. It is expressly mentioned that the provision of
India Contract Act which is not repealed will be applicable on Partnership until and unless
such provision is in contrary to any provision of Partnership Act, 1932. The rules of contract
regarding the capacity to contract, offer, acceptance etc will also be applicable to the
partnership. But the rules regarding the status of minor will be governed by the Partnership
Act, 1932 since Section 30 of the Act talks about the position of the minor.

NATURE OF BUSINESS
It is a business organization where two or more persons agreed to join together to
carry out the business for the purpose of earning the profits. It is an extension of a sole
proprietorship. It is better than sole proprietorship because in sole proprietorship the business
is carried out by the individual with limited capital and limited skill. Due to the limited
resources of a single individual carrying a sole proprietorship, a larger business requiring
more resources and investment than available to the sole proprietor cannot be thought of such

28
business. On the other hand in partnership, a number of partners join together with their
capital to form an agreement and carry out a business jointly.
MEANING
According to Section 4 of the Partnership Act,1932
“Partnership is the relation between persons who have agreed to share the profits of a
business carried on by all or any one of them acting for all”.
ESSENTIAL REQUIREMENTS OF A PARTNERSHIP
• There must exist an agreement between the partners.
• The motive is to earn the profit and share between the partners.
• The agreement must be to carry out the business jointly or by any of them acting
on the behalf of all.
Examples
A and B buy 100 tons of oil which they agree to sell for their joint account. This forms a
partnership and A and B are considered as partners.
A and B buy 100 tons of oil and agreed to share it among them. It does not form a partnership
as they had no intention to carry out business.
NUMBER OF MEMBERS
Any two or more persons may form a partnership. There is no limit imposed on the
minimum and the maximum number of partners under the Partnership Act,1932. According
to Companies Act 2013, the maximum number of 100 must not exceed in case of partnership
and minimum is 2 partners.
If in any case, it exceeds the maximum limit then it will amount to the illegal
association under Section 464 of Companies Act,2013. According to Section 11 of
Companies Act the maximum number of partner in case of:
• Banking purpose-10 persons
• Other purposes- 20 persons
AGREEMENT
The partnership is an agreement in which two or more person has decided to carry out
business and share the profit and losses equally. To create a legal relationship it is necessary
to form a partnership agreement.
The partnership agreement becomes the foundation or the basis on which it is based. It
can be either written or oral. The written agreement is known as a partnership deed.
Partnership deed mainly consists of the following details:
• Name and address of its firm and business
• Name and address of its partner

29
 • Capital contributed by each partner
• Profit and loss sharing ratio
• Rate of interest on capital, loan, drawings etc
• Rights, duties and obligation of partners
• Settlement of accounts on the dissolution of the firm
• Salaries, commission payable to partners
• Rules to be followed in case of admission, retirement and death of a partner
• Mode of settlement on disputes among partner.
• Any other affecting the rights of the partners

SECTION 27 OF THE INDIAN CONTRACT ACT,1872

Agreement in restraint of trade is void
All the agreements which restrain the person from carrying any lawful profession, trade or
business are void.
But Section 11 of the Partnership Act states that the partners can restrain each other from
carrying a business other than the firm. but such restraint must contain in the partnership
deed.
RIGHTS OF THE PARTNERS
• Right to participate in the conduct of business (Section 12(a)): each partner has a
right to participate in the conduct of the business. A partner right to participate in
business is curtailed in a case where some of them only participate in the business
affairs of the firm. this right can be curtailed only when the partnership deed states
so.
• Rights to access and inspect books and accounts (Section 12(d)): This right is also
given to the active and dormant partner. Each partner has a right to access and
inspect the book of account of the firm. In case of death of a partner, his legal heir
can inspect the copies of accounts.
• Right to be indemnified: The partners have a right to be indemnified for the
decision taken in the course of the business. But such a decision is to be taken in
the case of urgency and should be of such nature that the ordinarily prudent person
would take.
• Rights to express his opinion (Section 12(c)): Each partner has a right to express
his opinion with regard to the business affairs. They also have the right to
participate in the decision-making process.

30
 • Rights to get interested on capital or advances: Generally, partners are not entitled
to get any interest on the capital that they invest .but when they agree to give
interest, then such interest would be paid from the capital. They are also entitled to
6%interest on the advances made towards the business of the firm.
• Right to share profit and loss: The partners share the profit and losses equally in
the absence of any deed. But when there is a partnership deed prescribing the ratio
of profit and losses it will be shared in accordance with the partnership deed.
RELATIONS OF PARTNERS TO THIRD PARTIES
Section 18 to 22 of the Act talks about the relation of partners third parties
➢ Section 18 prescribes that the partners are an agent of the firm for the purpose of
conducting the affairs of the business. The partners act as the principal and agent as
well. when he performs the act in his own interest he is the principal and when he
does in the interest of another partner then he is an agent. He is not an agent for the
dealings or the transactions between the partners themselves.
➢ Section 19 states that any act which is performed by the partners in the usual course of
its business binds the firm itself. The authority to bind the firm is implied authority
➢ Section 20 states that partners can make a contract to restrict or expand the implied
authority of a partner.
➢ Section 21 states that if any act is done by any partners in case of an emergency which
a prudent man would do, then such acts need to bind the firm.
➢ Section 22 specifies that if any act is done by any partner then it must be done in the
name of the firm or in such manner which binds the firm.
DUTIES OF PARTNERS
The rights and duties are correlated with each other. When the rights are given to the partners
then there must be some which the partners should perform..the various duties of partners are
as follows:
• Duty to act diligently (Section 12(b)): It is the duty of the partners to act with due
care and diligence because his actions will affect all other partners. If his wilful act
causes a loss or injury to other partners he is entitled to pay compensation to the
affected partners.
• Duty to indemnify fraud (Section 10): whenever any fraud is committed by
partners then every partner is liable to indemnify the firm for losses because the
firm is liable for the wrongful acts of the partners. If the fraud causes the losses to
other partners he is entitled to indemnify for the loss caused.

31
 • Duty to use the firm property exclusively for the purpose of business (Section 15):
The partners can use the firm property for the purpose of the business but not for
its personal purpose. The partner must use the property in a lawful manner. they
must not earn a person gains from such property.
• Duty to hand over personal gains (Section 16): All the partners should act towards
achieving the common goal. they must not engage in other profession or engage in
any competitive business venture. If they earn any personal gains from the conduct
of business then they should hand over to all the partners.
• General duties (Section 9): It is the duty of all partners to make all the efforts to
achieve a common goal, to render a true account and provides all the information
affecting a firm to partners, or his representative.

Definition of Partnership
Partnership Firms in India are governed by the Indian Partnership Act, 1932. As per
Section 4 of the Indian Partnership Act:-
“Partnership is the relation between persons who have agreed to share the profits of a
business carried on by all or any of them acting for all”
Thus as per the above definition, there are 5 elements which constitute of a partnership
namely: (1) There must be a contract; (2) between two or more persons; (3) who agree to
carry on a business; (4) with the object of sharing profits and (5) the business must be
carried on by all or any of them acting for all.
5 ESSENTIAL ELEMENTS OF A PARTNERSHIP FIRM
1. Contract for Partnership
Partnership is the result of a contract. It does not arise from status, operation of law or
inheritance. Thus, at the time of death of the father, who was a partner in the partnership
firm, the son can claim share in the partnership property but cannot become a partner
unless he enters into a contract for the same with other persons concerned.
Similarly, the members of a HUF carrying on a family business cannot be called partners
for their relation arises not from any contract but from status. Thus, a “contract” is the
very foundation of partnership.
2. Maximum No. of Partners in a Partnership is 20
Since partnership is the result of a contract, at least two people are necessar y to constitute
a partnership. The Indian Partnership Act, 1932 does not mention anything about
the maximum no. of partners in a partnership firm but as per the Companies Act, a

32
partnership consisting of more than 10 persons for a banking business and more than 20
persons for any other business would be considered as illegal. Hence, these should be
regarded as the maximum limits to the number of partners in a partnership firm.
Only, the persons competent to contract can enter into a contract of partnership. Persons
may be natural or artificial. A Company may, being an artificial legal person, enter into a
contract of partnership, if authorized by its Memorandum of Association to do so. There
could even be a partnership between 2 companies (Steel bros & Co. Ltd. Vs
Commissioner of Income Tax)
A partnership firm, since it is not recognized as a legal person having a separate legal
entity from that of its partners cannot enter into contract of partnership with another
partnership firm or individuals (Duli Chand vs Commissioner of Income Tax)
When a partnership firm (under a firm name) enters into a contract of partnership with
another partnership firm or individual, in that case, in the eyes of the law the members of
the firms or firm become partners in their individual capacity (Jadavji Narsidas & Co. Vs
Commissioner of Income Tax)

3. Carrying on of Business in a Partnership

The third essential element of a partnership is that the parties must have agreed to carry
on a business. The term “business” is used in its widest sense and includes every trade,
occupation or profession. Therefore, if the purpose us to carry on some charitable work, it
will not be a partnership.
Similarly, if a number of persons agree to share the income of a certain property or to
divide the goods purchased in bulk amongst them, there is no partnership and such
persons cannot be called partners because in neither case they are carrying on a business.
Thus, where A and B jointly purchased a tea shop and incurred additional expenses for
purchasing pottery and utensils for the job, contributing the money in equal proportions
and then leased out the shop on rent which was shared equally by them , it was held that
they are only co-owners and not partners as they never carried on any business.
4. Sharing of Profits
This essential element provides that the agreement to carry on business must be with the
object of sharing profits amongst all the partners. Thus, there would be no partnership
where the business is carried on with a philanthropic motive and not for making a profit
or where only one of the persons is entitled to the whole of the profits of the
business. The partners may however, agree to share the profits in any ratio they like.
Sharing of losses not necessary

33
To constitute a partnership, it is not essential that the partners should agree to share the
losses (Raghunandan vs Harmasjee). It is open to one or more partners to agree to bear all
the losses of the business.
Moreover, the manner in which the profits/losses are to be shared should be expressly
stated in the partnership deed. In the absence of this being mentioned in the partnership
deed, the provisions of the Partnership Act, 1932 would apply which state that the
profits/losses should be distributed equally among all partners.
However. it must be noted that although a partner may not share in the losses of a
business, yet his liability towards the outsiders shall be unlimited. In case the partners
intent to limit their liability towards the outsiders, a new concept of partnership i.e.
Limited Liability Partnerships have been introduced in India. In a Limited Liability
Partnership, the liability of the partners towards the outiders is limited.

5. Mutual Agency in a Partnership

The fifth element in the definition of partnership provides that the business must be
carried on by all the partners or any (one or more) of them acting for them all, i.e. there
must be a mutual agency.
Thus, every partner, is both an agent and principal for himself and other partners, i.e. he
can bind by his acts the other persons and can be bound by the acts of other partners. The
importance of the element of mutual agency lies in the fact that it enables every partner to
carry on the business on behalf of others.

Different Kinds of Partners that are found in Partnership Firms

The different kinds of Partners that are found in Partnership Firms are as follows!
1. Active or managing partner:
A person who takes active interest in the conduct and management of the business of the firm
is known as active or managing partner.
He carries on business on behalf of the other partners. If he wants to retire, he has to give a
public notice of his retirement; otherwise he will continue to be liable for the acts of the firm.
2. Sleeping or dormant partner:
A sleeping partner is a partner who ‘sleeps’, that is, he does not take active part in the
management of the business. Such a partner only contributes to the share capital of the firm,
is bound by the activities of other partners, and shares the profits and losses of the business.
A sleeping partner, unlike an active partner, is not required to give a public notice of his
retirement. As such, he will not be liable to third parties for the acts done after his retirement.

34
3. Nominal or ostensible partner:
A nominal partner is one who does not have any real interest in the business but lends his
name to the firm, without any capital contributions, and doesn’t share the profits of the
business. He also does not usually have a voice in the management of the business of the
firm, but he is liable to outsiders as an actual partner.
Sleeping vs. Nominal Partners:
It may be clarified that a nominal partner is not the same as a sleeping partner. A sleeping
partner contributes capital shares profits and losses, but is not known to the outsiders.
A nominal partner, on the contrary, is admitted with the purpose of taking advantage of his
name or reputation. As such, he is known to the outsiders, although he does not share the
profits of the firm nor does he take part in its management. Nonetheless, both are liable to
third parties for the acts of the firm.

4. Partner by estoppel or holding out:

If a person, by his words or conduct, holds out to another that he is a partner, he will be
stopped from denying that he is not a partner. The person who thus becomes liable to third
parties to pay the debts of the firm is known as a holding out partner.
There are two essential conditions for the principle of holding out : (a) the person to be held
out must have made the representation, by words written or spoken or by conduct, that he was
a partner ; and (6) the other party must prove that he had knowledge of the representation and
acted on it, for instance, gave the credit.
5. Partner in profits only:
When a partner agrees with the others that he would only share the profits of the firm and
would not be liable for its losses, he is in own as partner in profits only.
6. Minor as a partner:
A partnership is created by an agreement. And if a partner is incapable of entering
into a contract, he cannot become a partner. Thus, at the time of creation of a firm a minor
(i.e., a person who has not attained the age of 18 years) cannot be one of the parties to the
contract. But under section 30 of the Indian Partnership Act, 1932, a minor ‘can be admitted
to the benefits of partnership’, with the consent of all partners. A minor partner is entitled to
his share of profits and to have access to the accounts of the firm for purposes of inspection
and copy.
He, however, cannot file a suit against the partners of the firm for his share of profit and
property as long as he remains with the firm. His liability in the firm will be limited to the
extent of his share in the firm, and his private property cannot be attached by creditors.

35
On his attaining majority, he has to decide within six months whether he will become regular
partner of withdraw from partnership. The choice in either case is to be intimated through a
public notice, failing which he will be treated to have decided to continue as partner, and he
becomes personally liable like other partners for all the debts and obligations of the firm from
the date of his admission to its benefits (and not from the date of his attaining the age of
majority). He also becomes entitled to file a suit against other partners for his share of profit
and property.
7. Other partners:
In partnership firms, several other types of partners are also found, namely, secret
partner who does not want to disclose his relationship with the firm to the general public.
Outgoing partner, who retires voluntarily without causing dissolution of the firm, limited
partner who is liable only up to the value of his capital contributions in the firm, and the like.
However, the moment public comes to know of it he becomes liable to them for meeting
debts of the firm. Usually, an outgoing partner is liable for all debts and obligations as are
incurred before his retirement. A limited partner is found in limited partnership only and not
in general partnership.
Types Of Partnership
oPartnership at will- (Sec. 7)where time is not mentioned in agreement
oParticular partnership - (Sec. 8)partner in a specific venture only
oPartnership for fixed term - (Sec. 7).
Rights of Partners in a Business Partnership
1. Right to Take Part in the Conduct of the Business
Sec. 12(a) stipulates that each partner in a business partnership have the right to take part in
the business proceeding. But this right is subject to a contract to the contrary. However, this
right may be waived by a partner himself.
2. Right to be Consulted
In case of matters affecting the business, each partner can has the right to be consulted.
Further, every partner has the right to express his views in front of other partners also.
Sometimes, difference of opinion arises among the partners. If it is over an ordinary matter,
the same may be settled by a majority of the partners, whereas if it is over a fundamental
matter, it can be settled only with the consent of all the partners.
3. Right to have Access to Books
Every partner in a business partnership can access and inspect any of the books of the firm as
per law. It can be exercised either by the partner himself or by his authorized agent. The

36
partners cannot object to inspection of books by the agent of a partner, unless they have a
reasonable ground for believing that the trade secrets might be leaked out.
4. Right to Share Profits
Every partner is entitled to have equal share in the profits of the firm. At the same time, the
partners are equally liable to all the losses sustained by the firm unless otherwise agreed upon
as per the partnership agreement.
5. Right to Interest on Capital
Ordinarily, no interest is payable to the partners. However, if it is allowed by an express or
implied agreement or by the custom of trade, a partner can charge interest on capital. In such
a case also, interest shall be paid only out of profits.
6. Right to Interest on Advance
A partner who contributes additional advance to the firm apart from the amount of his capital
for the purpose of business is entitled to get there on an interest at the rate of 6% per annum.
It is payable out of the property of the firm as if it were an expense. Thus it is payable even if
there are no profits.
7. Right to be Indemnified
The partner of a firm is entitled be indemnified by the firm in the following circumstances:
Expenses incurred in the ordinary course of business, and
Expenses incurred in an emergency.
8. Right to the Use of the Partnership Property
In the absence of any contract to the contrary, each partner is presumed to have an equal
share in the property of the partnership and is entitled to have them held and used only for the
purpose of the business. Partners should not use it as their own [Link] at any point of
time, a partner uses the property of the business firm to his own benefit either directly or
indirectly, the profits thus earned are accountable to the firm.
9. Power in an Emergency
As per the Indian Partnership Act, a partner is vested with the powers to initiate action to
safeguard the firm from loss.
10. No New Partner to be Introduced
New partners may not be introduced in a partnership without the consent of every individual
partners. They have the right to object such admission unless there is an express contract
allowing such introduction.
11. No Liability before Joining the Firm
Unless there is a contract to the contrary, new partner will not have any liability for any act of
the firm done before he become a partner.

37
12. Right to Retire
Retirement from a partnership is a partner’s right. Partner can retire from partnership in any
of the following modes.
➢ With the consent of all the partners, or
➢ As per the agreement between the partners, or
➢ In case of partnership- at-will, by giving prior notice to the other partners regarding
the intention of his retirement.
13. Right not to be Expelled
Every partner has a right not to be expelled from the firm unless there is a clause in the
partnership agreement that give power to the majority of the partners to expel him in good
faith.

14. Right to Carry on Competing Business

Outgoing partners cannot be restricted as they are not bound by the partnership
agreement. They have the right to carry on a business competing with that of the firm. But he
should not use the name of the firm or solicit the firm’s customers who were dealing with the
firm. However, he may agree with the partners that he will not carry on any competing
business.
15. Right to Share Subsequent Profits After Retirement
Where a partner has died or ceased to be a partner, the surviving or continuing
partners may carry on the regular business with the firm’s property without any final
settlement of accounts between them. In such cases, the outgoing partner or his estate then in
the absence of a contract to the contrary is entitled to such share of the profits as is
proportionate to his share in the property of the firm, or interest at the rate of 6% per annum
on the amount of his share in the property of the firm.

DUTIES OF A PARTNER
The following are the duties of a partner in a partnership firm.
Section 9: General duties of a partner
Partners are legally bound to carry on the business of the partnership firm. The general
responsibilities of a partner are listed below.
1. A partner is required to carry on the business to the highest common advantage.
2. A partner is required to be just and faithful to each other
3. A partner has to render to any other partner or his legal representative about the true
account and all the information of all the things affecting the partnership firm.

38
Section 10: To indemnify for fraud
According to Section 10, a partner of the partnership firm is liable to compensate the firm for
any damages caused to its business or the firm because of a partner’s fraud in the conduct of
the business of the firm.
Section 13(f): To indemnify for willful neglect
According to the Section, a partner of a partnership firm must compensate the firm for any
damages or loss caused to it by willful neglect in the conduct of the business of the firm.
Section 12(b) & Section 13(a): To attend duties diligently without remuneration
According to Section 12(b) of the Indian Partnership Act, every partner is legally bound to
attend to his duties diligently to his duties relating to the conduct of the firm’s business.
Moreover, Section 13(a) enumerates that a partner is not, however, generally entitled to
remuneration for participating in the conduct of the business. A partner is also bound to let
his partners have the advantage of his knowledge and skill.
Section 13(b): To share losses
All the partners of a partnership firm are liable to contribute equally to the injury sustained by
the firm.
Section 16(a): To account for any profit
If a partner of a partnership firm derives any profit for himself for any transaction of the firm
or from the use of the property or business connection of the firm or firm’s name, then the
partner is bound to account for that profit and refund it to the firm.
Section 16(b): To account and pay for profits of competing for business
If a partner carries on a company of the same nature as the firm and competes with that of the
firm, the partner must be accountable for and pay to the firm all the profits made in the
business by the partner. The partnership firm will not be held liable for any losses caused in
the business.
Dissolution of a Partnership firm and Settlement of accounts on dissolution
• The dissolution of a partnership firm is said to be dissolved when the relationship
between the partners is terminated. In case of dissolution, the firm ceases to exist.
The process of dissolution includes disposing of the assets and the liabilities are paid
off. The firm discontinues all of its activities and no partner has any relation with the
other partners. The dissolution of a partnership firm is different from the dissolution
of the partnership. In case of dissolution of a partnership, the partnership agreement
among the partners is terminated due to the following reasons:
• Admission of a new partner
• Insolvency, retirement or death of a partner

39
 • Change in existing profit ratio
• On completion of a specific venture for which the partnership was formed.
• On the expiry of the period for which partnership was formed.
The other partners can continue the business by entering into a new agreement. A partnership
can be dissolved without dissolving the firm. The dissolution of partnership means a change
in partnership whereas the dissolution of a partnership firm means discontinuance of a firm’s
business.
According to Sec 39 of The Partnership Act, 1932 the dissolution of the partnership between
all the partners of a firm is called the ‘dissolution of the firm‘.
After this, A partnership firm cannot do any kind of business activity with anybody. It can
only dispose of the assets of the firm to realize the amount, pay the liabilities of the firm, and
discharge the claims of the partners.
The dissolution of the partnership firm can take place in the following ways:
1. Dissolution by Agreement: A partnership firm may be dissolved if all the partners agree
for the dissolution or in accordance with the terms of the agreement.
2. Dissolution by notice: When a partnership is formed at will, the dissolution of the firm
may take place if any of the partners gives a notice in writing to the other partners indicating
his intention to dissolve the firm.
3. Contingent Dissolution: In this case, a partnership may be dissolved on the happening of
any of the following contingencies:
• On the expiry of the term, if the partnership is formed for a fixed term.
• On the completion of a specific venture for which the partnership was formed.
• On the death of a partner
• On the insolvency of a partner
4. Compulsory Dissolution: The compulsory dissolution of the firm takes place in the
following cases:
• When all the partners or all but one partner are declared insolvent
• When the business of the firm becomes illegal due to some reason.
• When the business of the firm becomes unlawful due to the happening of an event.
5. Dissolution by Court: The dissolution of a partnership firm may be ordered by the court
on the following grounds:
• When a partner becomes insane
• When a partner becomes permanently incapable of performing his duties as a partner.
• When a partner is guilty of misconduct which is more likely to affects the reputation
and business of the firm.

40
 • When a partner continuously commits a breach of the partnership agreement.
• When a partner transfers the whole of his interest or share in the firm to a third party.
• When the business of the firm cannot be carried on except at a loss.
• When the court’s opinion regarding the dissolution of the firm to be just and equitable
on any ground.
Settlement of accounts on dissolution
According to Sec. 48 of The Indian Partnership Act,1932, the following procedure is to be
followed for the settlement of accounts between partners after the dissolution of the firm:
1. Losses including deficiencies of capital shall be first paid out from the profits, next from
the capital, and if necessary, by the personal contribution of partners in their profit-sharing
ratio.
2. The assets of the firm, including any sum contributed by the partners to make up
deficiencies of capital, will be applied in the following manner:
• Payment of the debts of the firm to the third parties
• Payment of advances and loans given by the partners
• Payment of capital contributed by the partners
• The surplus, if any, will be divided among the partners in their profit-sharing ratio.
Difference between the Dissolution of Partnership and Dissolution of Firm

Basis Dissolution of Partnership Dissolution of Firm

1. Closure of The business of the firm continues there is no The business of the firm
business closure. gets discontinued.

2. Settling of There is a revaluation of assets and liabilities.

The liabilities are paid-off
assets and Hence, they are shown at revalued figures in the
and assets are realized.
liabilities Balance Sheet.

In this case, there is no intervention by the court as

3. Intervention The court may or may not
the dissolution of partnership takes place by the
by court intervene in this case.
mutual consent of all the partners.

The relationship between the partners continues to The relationship between

4. Relationship
exist though it may change its form. the partners ceases to

41
 exist.

5. The closing The books need closure as

There is no closure of books as the business
of Books the business ceases to
continues.
of accounts continue.

Partnership Is Dissolved In The Following Circumstances:

Partnership is dissolved in the following circumstances:
1) At the time of admission of a new partner;
2) On the retirement/death of an old partner;
3) At the time of change in profit sharing ratio among existing partners;
4) If any partner is declared insolvent;
5) On the expulsion of any partner;
6) On the expiry of the period of partnership.
Thus this is clear from the above discussion that in the case of dissolution of the partnership
the firm may continue under a new agreement whereas in the case of dissolution of
partnership firm the business of the firm comes to an end.
There are two basic ways that the partnership can be wound up:
Creditor’s Petition
Partner’s Petition
Creditor’s Petition
A creditor can petition to wind up the partnership but not issue bankruptcy petitions against
the individual partners. Or the creditor can issue a
petition to wind up the partnership concurrently with a bankruptcy petition against one or
more of the individual partners.
Partner’s Petition
The partners can petition to wind up the partnership but not issue bankruptcy petitions against
the individual partners. Or the partners can issue a petition to wind up the partnership
concurrently with a bankruptcy petition against the individual partners.
Partnership Winding Up
Where the partners have decided that the partnership has no viable future or purpose then a
decision may be made to cease trading and wind up the

42
partnership. Clearly such a decision should not be taken lightly and is recommended that all
other options are carefully considered and compared to the objectives of the partnership and
the individual partners.

The Winding-Up Process

The partnership is treated much like an unregistered company and is wound up in the same
way as a company. The tasks of the liquidator are therefore to
Realise the assets in the partnership including any deficiencies due on the partner’s
individual capital accounts (the partners will have to pay such deficiencies if required). All
debtors, property and other assets will be collected
by the liquidator.
Investigate the conduct of the "officers of the partnership" just as the liquidator in a
company liquidation must do. Interestingly the liquidator can initiate actions against the
partners to seek to disqualify them as partners in a partnership (Insolvent Partnerships Order
1994)
2.2. The liquidator must also ascertain whether any transactions have taken place that put the
partners (individually or collectively) into a better position than they should be then such
transactions (known as preferences or transactions at undervalue). If such transactions have
been completed before the winding up, they can be un-done. The court can order that the
partners reverse the transaction.
Reconstitution Of A Firm
A change in the constitution of the firm occurs when a new
partner is admitted or an old partner retires or dies. The
partnership is reconstituted on:
Admission
Retirement
Death of a partner.
Amalgamation of two partnership firms.
Change in the profit sharing ratio between the partners.

Sale of Goods Act 1930 Summary

Scope of the Act
The sale of Goods Act deals with ‘Sale of Goods Act,1930,’contract of sale of goods is a
contract whereby the seller transfers or agrees to transfer the property in goods to the buyer

43
for a price.” ‘Contract of sale’ is a generic term which includes both a sale as well as an
agreement to sell.

Essential elements of Contract of sale

1. Seller and buyer
There must be a seller as well as a buyer. ‘Buyer’ means a person who buys or agrees
to buy goods [Section 2910].’Seller’ means a person who sells or agrees to sell goods
[Section 29(13)].
2. Goods
There must be some goods. ’Goods’ means every kind of movable property other than
actionable claims and money includes stock and shares, growing crops, grass and things
attached to or forming part of the land which are agreed to be severed before sale or under the
contract of sale [Section 2(7)].
3. Transfer of property
Property means the general property in goods, and not merely a special property
[Section 2(11)]. General property in goods means ownership of the goods. Special property in
goods means possession of]. General must be either a transfer of ownership of goods or an
agreement to transfer the ownership of goods. The ownership may transfer either
immediately on completion of sale or sometime in future in agreement to sell.
4. Price
There must be a price. Price here means the money consideration for a slae of goods
[Section 2(10)]. When the consideration is only goods, it amounts to a ‘barter’ and not sale.
When there is no consideration, it amounts to gift and not sale.
5. Essential elements of a valid contract
In addition to the aforesaid specific essential elements, all the essential elements of a
valid contract as specified under Section 10 of Indian Contract Act,1872 must also be present
since a contract of sale is a special type of a contract.
Meaning and types of goods
Meaning of goods [Section 2(7)]
Goods means every kind of movable property other than actionable claims and money, and
includes the following:
• Stock and share
• Growing crops, grass and thing attached to or forming part of the
land which are agreed to be served before sale or under the
Contract of sale.

44
Types of Goods [Section 6]
[Link] Goods
Existing goods mean the goods which are either owned or possessed by the seller at
the time of contract of sale. The existing goods may be specific or ascertained or
unascertained as follows:
a) Specific Goods [Section 2(14)]
These are the goods which are identified and agreed upon at the time when a contract of sale
is made-For example, specified example, specified.
b) Ascertained Goods
Goods are said to be ascertained when out of a mass of unascertained goods, the quantity
extracted for is identified and set aside for a given goods, the part of the goods lying in bulk
are identified and earmarked for sale, such goods are termed as ascertained goods.
c) Unsanctioned Goods
These are the goods which are not identified and agreed upon at the time when a contract of
sale is made e.g., goods in stock or lying-in lots.
2. Future Goods [Section 2(6)]
Future goods mean goods to be manufactured or produced or acquired by the seller after the
making of the contract of sale. There can be an agreement to sell only. There can be no sale
in respect of future goods because one cannot sell what he does not possess.

3. Contingent Goods [Section 6(2)]

These are the goods the acquisition of which by the seller depends upon a contingency which
may or may not happen.
Price of Goods
Meaning [Section 2(10)]
Price means the money consideration for a sale of goods.
Modes of determining Price [Section 9(1)]
There are three modes of determining the price as under:
• It may be fixed by the contract or
• It may be left to be fixed in an agreed manner
• It may be determined by the course of dealing between the parties.
• Thus, the price need not necessarily be fixed at the time of sale.

Consequences of not determining the Price in any of the Mode [Section 9(2)]

45
Where the price is not determined in accordance with Section 9(1), the buyer must pay seller
a reasonable price. What is a reasonable price is a question of fact dependent on the
circumstances of each particular case? It may be noted that a reasonable price need not be
market price.
Consequence of not Fixing Price by third party [Section 10(1)]
The agreement to sell goods becomes void if the following two conditions are fulfilled.
• If such agreement provided that the price is to be fixed by the valuation of a
third party,
• If such third party cannot or does not make such valuation.
Duty of buyer
➢ A buyer who has received and appropriated the goods, must pay a reasonable price
therefor.
➢ Right of party not at fault to sue
➢ Where such a third party is prevented from making the valuation by fault of the seller
or buyer, the party not at fault may maintain a suit for damages against the party in
fault.
Conditions and Warranties
It is usual for both seller and buyer to make representations to each other at the time
of entering into a contract of sale. Some of these representations are mere opinions which do
not form a part of contract of sale. Whereas some of them may become a part of contract of
sale. Representations which become a part of contract of sale are termed as stipulations which
may rank as condition and warranty e.g., a mere commendation of his goods by the seller
doesn’t become a stipulation and gives no right of action to the buyer against the seller as
such representations are mere opinion on the part of the seller. But where the seller assumes
to assert a fact of which the buyer is ignorant, it will amount to a stipulation forming an
essential part of the contract of sale.
Meaning of Conditions [Section 12(2)]
➢ A condition is a stipulation
Which is essential to the main purpose of the contract
The breach of which gives the aggrieved party a right to terminate the
contract.
Meaning of Warranty [Section 12(3)]
A warranty is a stipulation
Which is collateral to the main purpose of the contract

46
The breach of which gives the aggrieved party a right to claim damages but not a right to
reject goods and to terminate the contract.
Conditions to be treated as Warranty [Section 13]
In the following three cases a breach of a condition is treated as a breach of a warranty:
Where the buyer waives a condition; once the buyer waives a condition, he cannot
insist on its fulfilment e.g., accepting defective goods or beyond the stipulated time amount to
waiving a condition.
Where the buyer elects to treat breach of the condition as a breach of warranty. where he
claims damages instead of repudiating the contract.
Where the contract is not severable and the buyer has accepted the goods or part thereof, the
breach of any condition by the seller can only be treated as breach of warranty. It cannot be
treated as a ground for rejecting the goods unless otherwise specified in the ground the buyer
after purchasing the goods finds that some condition is not fulfilled, he cannot reject the
goods. He has to retain the goods entitling him to claim damages.

Express and Implied Conditions and Warranties

In a contract of sale of goods, conditions and warranties may be express or implied.
[Link] Conditions and Warranties.
These are expressly provided in the contract. For example, a buyer desires to buy a
Sony TV Model No. [Link], model no. is an express condition. In an advertisement for
Khatna fans,guatantee for 5 years is an express warranty.
2. Implied Conditions and Warranties
These are implied by law in every contract of sale of goods unless a contrary intention
appears from the terms of the contract. The various implied conditions and warranties have
been shown below:
Implied Conditions
1. Conditions as to title [ Section 14 (a)]
There is an implied condition on the part of the seller that
In the case of a sale, he has a right to sell the goods, and
In the case of an agreement to sell, he will have a right to sell the goods at the time when the
property is to pass.
2. Condition in case of sale by description [Section 15]
Where there is a contract of sale of goods by description, there is an implied condition
that the goods shall correspond with description. The main idea is that the goods supplied
must be same as were described by the seller. Sale of goods by description include many

47
situations as under:
I. Where the buyer has never seen the goods and buys them only on the basis of description
given by the seller.
ii. Where the buyer has seen the goods but he buys them only on the basis of description
given by the seller.
iii. Where the method pf packing has been described.
3. Condition in case of sale by sample [Section 17]
A contract of sale is a contract for sale by sample when there is a term in the contract,
express or implied, to that effect. Such sale by sample is subject to the following three
conditions:
The goods must correspond with the sample in quality.
The buyer must have a reasonable opportunity of comparing the bulk with the sample.
The goods must be free from any defect which renders them unmerchantable and
which would not be apparent on reasonable examination of the sample. Such defects are
called latent defects and are discovered when the goods are put to use.
4. Condition in case of sale by description and sample [Section 15]
If the sale is by sample as well as by description, the goods must correspond with the
sample as well as the description.
5. Condition as to quality or fitness [Section 16(1)]
There is no implied condition as to the quality or fitness for any particular purpose of
goods supplied under a contract of sale. In other words, the buyer must satisfy himself about
the quality as well as the suitability of the goods.
Exception to this rule
There is an implied condition that the goods shall be reasonably fit for a particular purpose
described if the following three conditions are satisfied:
1. The particular for which goods are required must have been
disclosed (expressly or impliedly) by the buyer to the seller.
2. The buyer must have relied upon the seller’s skill or judgement.
3. The seller’s business must be to sell such goods.
6. Condition as to merchantable quality [Section 16(2)]
Where the goods are bought by description from a seller who deals in goods of that
description, there is an implied condition that the goods shall be of merchantable quality. The
expression ‘merchantable quality’ means that the quality and condition of the goods must be
such that a man of ordinary prudence would accept them as the goods of that description.
Goods must be free from any latent or hidden defects.

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7. Condition as to wholesomeness
In case of eatables or provisions or foodstuffs, there is an implied condition as to
wholesomeness. Condition as to wholesomeness means that the goods shall be fit for human
consumption.
8. Conditions implied by custom [Section 16(3)]
Condition as to quality or fitness for a particular purpose may be annexed by the
usage of trade.
Implied warranties
a) Warranty as to quiet possession [Section14(b)]
There is an implied warranty that the buyer shall have and enjoy quiet possession of
the goods. The reach of this warranty gives buyer a right to claim damages from the seller.
b) Warranty of freedom from encumbrances [Section 14(c)]
There is an implied warranty that the goods are free from any charge or encumbrance
in favour of any third person if the buyer is not aware of such charge or encumbrance. The
breach of this warranty gives buyer a right to claim damages from the seller.
• Warranty as to quality or fitness for a particular purpose annexed
by usage of trade [Section 16(3)]
• Warranty to disclose dangerous nature of goods
In case of goods of dangerous nature, the seller fails to do so, the buyer may make him liable
for breach of implied warranty.

Transfer of property in goods

Meaning of Passing of Property/Transfer of Property
Passing of property implies transfer of ownership and not the physical possession of
goods. For example, where a principal sends goods to his agent, he merely transfers the
physical possession and not the ownership of agent, the principal is the owner of the goods
but is not having possession of goods and the agent is having possession of goods but us not
the owner.

Significance of Transfer of Property

The time of transfer of ownership of goods decides various rights and liabilities of the
seller and the the becomes very important to know the exact time of transfer of ownership of
goods from seller to buyer to answer the following questions:

49
[Link] shall bear the risk?
It is the owner who has to bear the risk and not the person who merely has the possession.
[Link] can take action against third party?
It is the owner who can take action and not the person who merely has the possession.
[Link] a seller can sue for price?
The seller can sue for the price only if the ownership of goods has been transferred to the
buyer.
4. In case of insolvency of a buyer whether the official receiver or assignee can take the
possession of goods from seller?
The Official Receiver or Assignee can take the possession of of goods from seller only if the
ownership of goods has been transferred to the buyer.
5. In case of insolvency of a seller whether the official receiver or assignee can take the
possession of goods from buyer?
The official receiver or assignee can take the possession of goods from buyer only if the
ownership of goods has not been transferred to the buyer.

Rules relating to Passing of Property/Transfer of Ownership from seller to buyer

For the purposes of ascertaining the time at which the ownership is transferred from seller to
the buyer, the goods have been classified into the following three categories:
a) Specific or ascertained goods
Specific goods mean goods identified and agreed upon at the time when a contract of sale is
made. [Section 2(14)]
b) Unascertained goods
c) Goods sent ‘on approval’ or ‘on sale on return’ basis.

Performance of the Contract

It is the duty of the seller and buyer that the contract is performed. The duty of the
seller is to deliver the goods and that of the buyer to accept the goods and pay for them in
accordance with the contract of sale.
Unless otherwise agreed, payment of the price and the delivery of the goods and
concurrent conditions, i.e., they both take place at the same time as in a cash sale over a shop
counter.
Delivery (Sections 33-39)
Delivery is the voluntary transfer of possession from one person to another. Delivery
may be actual, constructive or symbolic. Actual or physical delivery takes place where the

50
goods are handed over by the seller to the buyer or his agent authorized to take possession of
the goods.
[Link] delivery takes place when the person in possession of the goods
acknowledges that he holds the goods on behalf of and at the disposal of the buyer. For
example, where the seller, after having sold the goods, may hold them as bailee for the buyer,
there is constructive delivery.
[Link] delivery is made by indicating or giving a symbol. Here the goods themselves
are not delivered, but the “means of obtaining possession” of goods is delivered, e.g., by
delivering the key of the warehouse where the goods are stored, bill of lading which will
entitle the holder to receive the goods on the arrival of the ship.
Rules as to delivery
The following rules apply regarding delivery of goods:
(a)Delivery should have the effect of putting the buyer in possession.
(b)The seller must deliver the goods according to the contract.
(c) The seller is to deliver the goods when the buyer applies for delivery; it is the duty of the
buyer to claim delivery.
(d) Where the goods at the time of the sale are in the possession of a third person, there will
be delivery only when that person acknowledges to the buyer that he holds the goods on his
behalf.
(e) The seller should tender delivery so that the buyer can take the goods. It is no duty of the
seller to send or carry the goods to the buyer unless the contract so provides. But the goods
must be in a deliverable state at the time of delivery or tender of delivery. If by the contract
the seller is bound to send the goods to the buyer, but no time is fixed, the seller is bound to
send them within a reasonable time.
(f) The place of delivery is usually stated in the contract. Where it is so stated, the goods must
be delivered at the specified place during working hours on a working day. Where no place is
mentioned, the goods are to be delivered at a place at which they happen to be at the time of
the contract of sale and if not then in existence they are to be delivered at the place at which
they are manufactured or produced.
(g) The seller has to bear the cost of delivery unless the contract otherwise provides. While
the cost of obtaining delivery is said to be of the buyer, the cost of the putting the goods into
deliverable state must be borne by the seller. In other words, in the absence of an agreement
to the contrary, the expenses of and incidental to making delivery of the goods must be borne
by the seller, the expenses of and incidental to receiving delivery must be borne by the buyer.
(h) If the goods are to be delivered at a place other than where they are, the risk of

51
deterioration in transit will, unless otherwise agreed, be borne by the buyer.
(I) Unless otherwise agreed, the buyer is not bound to accept delivery in instalments.
Acceptance of Goods by the Buyer
Acceptance of the goods by the buyer takes place when the buyer:
(a) intimates to the seller that he has accepted the goods; or
(b) retains the goods, after the lapse of a reasonable time without intimating to the seller that
he has rejected them; or
(c) does any act on the goods which is inconsistent with the ownership of the seller, e.g.,
pledges or resells.
If the seller sends the buyer a larger or smaller quantity of goods than ordered, the buyer may:
(a) reject the whole; or
(b) accept the whole; or
(c) accept the quantity be ordered and reject the rest. If the seller delivers with the goods
ordered, goods of a wrong description, the buyer may accept the goods ordered and reject the
rest, or reject the whole.
Where the buyer rightly rejects the goods, he is not bound to return the rejected goods to the
seller. It is sufficient if he intimates the seller that he refuses to accept them. In that case, the
seller has to remove them.
Instalment Deliveries
When there is a contract for the sale of goods to be delivered by stated instalments
which are to be separately paid for, and either the buyer or the seller commits a breach of
contract, it depends on the terms of the contract whether the breach is a repudiation of the
whole contract or a severable breach merely giving right to claim for damages.

Suits for Breach of Contract

➢ Where the property in the goods has passed to the buyer, the seller may sue him for
the price.
➢ Where the price is payable on a certain day regardless of delivery, the seller may sue
for the price, if it is not paid on that day, although the property in the goods has not
passed.
➢ Where the buyer wrongfully neglects or refuses to accept the goods and pay for them,
the seller may sue the buyer for damages for non-acceptance.
➢ Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the
buyer may sue him for damages for non-delivery.

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 ➢ Where there is a breach of warranty or where the buyer elects or is compelled to treat
the breach of condition as a breach of warranty, the buyer cannot reject the goods. He
can set breach of warranty in extinction or diminution of the price payable by him and
if loss suffered by him is more than the price he may sue for the damages.
➢ If the buyer has paid the price and the goods are not delivered, the buyer can sue the
seller for the recovery of the amount paid. In appropriate cases the buyer can also get
an order from the court that the specific goods ought to be delivered.
Anticipatory Breach
➢ Where either party to a contract of sale repudiates the contract before the date of
delivery, the other party may either treat the contract as still subsisting and wait till
the date of delivery, or he may treat the contract as rescinded and sue for damages for
the breach.
➢ In case the contract is treated as still subsisting it would be for the benefit of both the
parties and the party who had originally repudiated will not be deprived of:
(a) his right of performance on the due date in spite of his prior repudiation; or
(b) his rights to set up any defence for non-performance which might have actually arisen
after the date of the prior repudiation.
Measure of Damages
The Act does not specifically provide for rules as regards the measure of damages
except by stating that nothing in the Act shall affect the right of the seller or the buyer to
recover interest or special damages in any case were by law they are entitled to the same. The
inference is that the rules laid down in Section 73 of the Indian Contract Act will apply.

Unpaid seller and his rights

Meaning of an Unpaid Seller [Sec 45(1)(2)]
The seller of goods is deemed to be an ‘unpaid seller’-
When the whole of the price has not been paid or tendered
When a bill of exchange or other negotiable instrument (such as cheque) has been received as
conditional payment, and it has been dishonoured [Section 45(1)].
The term ‘seller ’includes any person who is in the position of a seller (for instance,
an agent of the seller to whom the bill of lading has been endorsed, or a consignor or agent
who has himself paid, or is directly responsible for the price) [Section 4592)].

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Who is an Unpaid seller?
As defined by Section 45 of Sale of Goods Act, 1930, a person has sold some goods and has
not got the whole price and if the transaction is done through negotiable instruments like
cheque, bill of exchange and a promissory note, then the person can be said as an unpaid
seller.
Illustration- If A is a seller and he delivers the goods to B and transfers the possession, and
if B hasn’t paid the sum then A becomes an unpaid seller.
Rights of an unpaid seller
Section 46 of the Sale of Goods Act 1930, discusses the rights of an unpaid seller. This can
be of two types:
• Against the goods – jus in rem ( right against property)
• Against the buyer – jus in personam (right against the person)
Right against the goods
• Right to a lien which means the seller has the right on the possession over the
goods.
• Right to stoppage in transit which means the seller can call up the carrier
transporter and tell not to deliver the goods.
• Right to resale means the seller can again sell the goods as he has the possession of
the goods.
And the rights like the right to lien, the right to stoppage in transit and the right to resale are
also applicable for the agreement which is made for sale.
Rights against the buyer
• The seller has the right to sue the buyer for the price if the seller has already sold
the goods and the buyer hasn’t paid the sum.
• The seller has the right to sue for the damages, for e.g. if the seller has sent the
carrier for the delivery and the buyer isn’t available to receive the delivery and the
goods returned back by the carrier to the seller then he can sue the buyer for
damages like the packing of goods, transportation charges and so many.
• If the buyer hasn’t paid the price of the goods to the seller after the delivery within
a stipulated time period as given in the contract, then the seller can sue for the
interest on the buyer.
Rights of an Unpaid Seller [Section 46-52,54-56,60-61]
The rights of an unpaid seller can broadly be classified under the following two
categories:
• Rights against the goods.

54
 • Rights against the buyer personally
I Rights against the goods where the property in the goods has passed to the buyer.

a) Right of Lien [Section 47,48 and 49]

Meaning of Right of Lien:
The right of lien means the right to retain the possession of the goods until the full price is
received.
Three circumstance under which right of lien can be exercised [Section 47(1)]
1. Where the goods have been sold without any stipulation to credit;
2. Where the goods have been sold on credit, but the term of credit has expired;
3. Where the buyer becomes insolvent.
Other provisions regarding right of lien [Sections 47(2),48,49(2)]
[Link] seller may exercise his right of lien, even if he possesses the goods as agent or bailee
for buyer [Section 47(2)]
2. Where an unpaid seller has made part delivery of the goods, he may exercise his right of
lien on the remainder, unless such part delivery has been made under such circumstances as
to show agreement to waive the lien [Section 48].
3. The seller may exercise his right of lien even though he has obtained a decree for the price
of the goods [Section 49(2)].
Circumstances under which right of lien in the following cases:
[Link] he delivers the goods to a carrier or other bailee for the purpose of transmission to
the buyer without reserving the right of disposal of the goods[Section 49(1)(a)].
[Link] the buyer or his agent lawfully obtains possession of the goods [Section 49(1)(b)]
[Link] the seller waives his right of lien[Section 49(1)(c)].

55
[Link] the buyer disposes of the goods by sale or in any other manner with the consent of
the seller[Section 53(1)].
[Link] document of title to goods has been issued or lawfully transferred to any person as
buyer or owner of the goods and that person transfers the document by way of sale, to a
person who takes the document in good faith and for consideration.[Proviso to Section
53(1)].
b) Right of Stoppage of Goods in Transit
The right of stoppage of goods means the right of stopping the goods while they are in
transit, to regain possession and to retain them till the full price is paid.
Conditions under which right of stoppage in transit can be exercised [Section 50]
The unpaid seller can exercise the right of stoppage in transit only if the following conditions
are fulfilled:
1. The seller must have parted with the possession of goodies. the goods must not be in the
possession of seller.
[Link] goods must be in the course of transit.
[Link] buyer must have become insolvent.
c)Right of Resale [Section 46(1) and 54]
An unpaid seller can resell the goods under the following three circumstance:
1. Where the goods are of a perishable nature.
2. Where the seller expressly reserves a right of resale if the buyer commits a default in
making payment.
3. Where the unpaid seller who has exercised his right of lien or stoppage in transit gives a
notice to the buyer about his intention to resell a buyer does not pay or tender within a
reasonable time.
II Rights against the goods where the property in the goods has not passed to the buyer
Right of withholding delivery [Section 46(2)]
Where the property in the goods has not been passed to the buyer, the unpaid seller,
cannot exercise right of lien, but get a right of withholding the delivery of goods, similar to
and co-extensive with lien and stoppage in transit where the property has passed to the buyer.
Rights of Unpaid Seller against the Buyer Personally
The unpaid seller, in addition to his rights against the goods as discussed above, has
the following three rights of action against the buyer personally:
1. Suit for price (Sec. 55). Where property in goods has passed to the buyer; or where the
sale price is payable ‘on a day certain’, although the property in goods has not passed; and the
buyer wrongfully neglects or refuses to pay the price according to the terms of the contract,

56
the seller is entitled to sue the buyer for price, irrespective of the delivery of goods. Where
the goods have not been delivered, the seller would file a suit for price normally when the
goods have been manufactured to some special order and thus are unsaleable otherwise.
2. Suit for damages for non-acceptance (Sec. 56). Where the buyer wrongfully neglects or
refuses to accept and pay for the goods, the seller may sue him for damages for non-
acceptance. The seller’s remedy in this case is a suit for damages rather than an action for the
full price of the goods.
3. Suit for Interest [Section 61(2)]
In case of breach of the contract on the part of seller, the buyer may sue the seller for interest
from the date on which the payment was made.

Law on Sales
1] The Duty of the Buyer and Seller (Section 31)
It is the duty of the seller to deliver the goods and the buyer to pay for them and accept them, as
per the terms of the contract and the law on sales.
2] Concurrency of Payment and Delivery (Section 32)
The delivery of goods and payment of the price are concurrent conditions as per the law on sales
unless the parties agree otherwise. So, the seller has to be willing to give possession of the goods
to the buyer in exchange for the price. On the other hand, the buyer has to be ready to pay the
price in exchange for possession of the goods.
Rules Pertaining to the Delivery of Goods
The Sale of Goods Act, 1930 prescribes the following rules regarding delivery of goods:
a. Delivery (Section 33)
The delivery of goods can be made either by putting the goods in the possession of the buyer or
any person authorized by him to hold them on his behalf or by doing anything else that the
parties agree to.
b. Effect of part-delivery (Section 34)
If a part-delivery of the goods is made in progress of the delivery of the whole, then it has the
same effect for the purpose of passing the property in such goods as the delivery of the whole.
However, a part-delivery with an intention of severing it from the whole does not operate as a
delivery of the remainder.
c. Buyer to apply for delivery (Section 35)
A seller is not bound to deliver the goods until the buyer applies for delivery unless the parties
have agreed to other terms in the contract.
d. Place of delivery [Section 36 (1)]

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When a sale contract is made, the parties might agree to certain terms for delivery, express or
implied. Depending on the agreement, the buyer might take possession of the goods from the
seller or the seller might send them to the buyer.
If no such terms are specified in the contract, then as per law on sales
• The goods sold are delivered at the place at which they are at the time of the sale
• The goods to be sold are delivered at the place at which they are at the time of the
agreement to sell. However, if the goods are not in existence at such time, then
they are delivered to the place where they are manufactured or produced.
e. Time of Delivery [Section 36 (2)]
Consider a contract of sale where the seller agrees to send the goods to the buyer, but not time of
delivery is specified. In such cases, the seller is expected to deliver the goods within a
reasonable time.
f. Goods in possession of a third party [Section 36 (3)]
If at the time of sale, the goods are in possession of a third party. Then there is no delivery unless
the third party acknowledges to the buyer that the goods are being held on his behalf. It is
important to note that nothing in this section shall affect the operation of the issue or transfer of
any document of title to the goods.
g. Time for tender of delivery [Section 36 (4)]
It is important that the demand or tender of delivery is made at a reasonable hour. If not, then it
is rendered ineffectual. The reasonable hour will depend on the case.
h. Expenses for delivery [Section 36 (5)]
The seller will bear all expenses pertaining to putting the goods in a deliverable state unless the
parties agree to some other terms in the contract.
i. Delivery of wrong quantity (Section 37)
• Sub-section 1 – If the seller delivers a lesser quantity of goods as compared to the
contracted quantity, then the buyer may reject the delivery. If he accepts it, then
he shall pay for them at the contracted rate.
• Sub-section 2 – If the seller delivers a larger quantity of goods as compared to the
contracted quantity, then the buyer may accept the quantity included in the
contract and reject the rest. The buyer can also reject the entire delivery. If he
wants to accept the increased quantity, then he needs to pay at the contract rate.
• Sub-section 3 – If the seller delivers a mix of goods where some part of the goods
are mentioned in the contract and some are not, then the buyer may accept the
goods which are in accordance with the contract and reject the rest. He may also
reject the entire delivery.

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 • Sub-section 4 – The provisions of this section are subject to any usage of trade,
special agreement or course of dealing between the parties.
j. Installment deliveries (Section 38)
The buyer does not have to accept delivery in installments unless he has agreed to do so in the
contract. If such an agreement exists, then the parties are required to determine the rights
and liabilities and payments themselves.
k. Delivery to carrier [Section 36 (1)]
The delivery of goods to the carrier for transmission to the buyer is prima facie deemed to be
‘delivery to the buyer’ unless contrary terms exist in the contract.
l. Deterioration during transit (Section 40)
If the goods are to be delivered at a distant place, then the liability of deterioration incidental to
the course of the transit lies with the buyer even though the seller agrees to deliver at his own
risk.
m. Buyers right to examine the goods (Section 41)
If the buyer did not get a chance to examine the goods, then he is entitled to a reasonable
opportunity of examining them. The buyer has the right to ascertain that the goods delivered to
him are in conformity with the contract. The seller is bound to honor the buyer’s request for a
reasonable opportunity of examining the goods unless the contrary is specified in the contract.
Acceptance of Delivery of Goods (Section 42)
A buyer is deemed to have accepted the delivery of goods when:
• He informs the seller that he has accepted the goods; or
• Does something to the goods which is inconsistent with the ownership of the
seller; or
• Retains the goods beyond a reasonable time, without informing the seller that he
has rejected them.
Return of Rejected Goods (Section 43)
If a buyer, within his right, refuses to accept the delivery of goods, then he is not bound
to return the rejected goods to the seller. He needs to inform the seller of his refusal though. This
is true unless the parties agree to other terms in the contract.

Refusing Delivery of Goods (Section 44)

If the seller is willing to deliver the goods and requests the buyer to take delivery, but the buyer
fails to do so within a reasonable time after receiving the request, then he is liable to the seller
for any loss occasioned by his refusal to take delivery. He is also liable to pay a reasonable
charge for the care and custody of goods.

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Modes of Delivery of goods
Delivery of goods may be made in any of the following three ways:
1. Actual Delivery: Also known as physical delivery, actual delivery takes place when the
goods are physically handed over by the seller or his/her authorized agent to the buyer or
his/her agent authorized to take possession of the goods.
For example, A, the seller of a car hands it over to B, the buyer; it is a case of actual delivery
of the goods.
2. Symbolic Delivery: Where the goods are bulky and heavy and it is not possible to
physically hand them over to the buyer, delivery thereof may be made by indicating or giving
a symbol. Here the goods itself are not delivered, but the means of obtaining possession of
goods is delivered.
For example, delivering the keys of the warehouse where the goods are stored, or the keys of
a purchased car to its buyer, bill of lading which will entitle the holder to receive the goods
on arrival of the ship.
3. Constructive Delivery: In this case neither physical nor symbolic delivery is made. In
constructive delivery the individual possessing the products recognizes that he holds the
merchandise for the benefit of, and at the disposal of the purchaser. Constructive delivery is
also called attornment.
Constructive delivery may be effected in the following three ways.
▪ Where the seller, after having sold the goods, agrees to hold them as bailee for
the buyer
▪ Where the buyer, who is already in possession of the goods as bailee of the
seller, holds them as his own, after the sale, and
▪ Where a third party, for example, a carrier/transporter, who holds the goods, as
bailee for the seller, agrees and acknowledges holding them for the buyer
Sale of Goods
Express and Implied Conditions / Warranties : A Sale
Conditions and warranties may be express or implied.
Express conditions and warranties are which, are expressly provided in the contract. Implied
conditions and warranties are those which are implied by law or custom; these shall prevail in
a contract of sale unless the parties agree to the contrary.
i) Condition as to title -- In every contract of sale, unless the circumstances of the contract
are such as to show a different intention, there is an implied condition on the part of the
seller, that

60
 • In case of a sale, he has a right to sell the goods, and
• In case of an agreement to sell, he will have a right to sell the goods at the time when
the property is to pass.
The words 'right to sell' contemplate not only that the seller has the title to what he
purports to sell, but also that the seller has the right to pass the property. If the seller's
title turns out to be defective, the buyer may reject the goods.
Let us try to understand this with the help of an example. Let us say that person A bought a
tractor from another person B. The person B had no title to the tractor. Person A then goes on to
use the tractor for three months. Three months later, the legal owner of the tractor spots it and
demands it back from A. In this, the law holds that A is bound within the law to hand over the
tractor to the real owner of the tractor. A has the right to sue B, for the recovery of the purchase
price.
ii) Condition as to Description -- In a contract of sale by description, there is an implied
condition that the goods shall correspond with the description. The term ' sale by description'
includes the following situation ;
Where the buyer has not seen the goods and buys them relying on the description given by
the seller. Where the buyer has seen the goods but he relies not on what he has seen but what
was stated to him and the deviation of the goods from the description is not apparent. Packing
of goods may sometimes be a part of the description. Where the goods do not conform to be
method of packing described (by the buyer or the seller) in the contract, the buyer can reject
the goods.
Let us consider an example. Suppose a ship was contracted to be sold as “copper-fastened
vessel” but actually it was only partly copper-fastened. This means that the goods did not
correspond to the description and hence they can be returned or if the buyer took the goods, he
could claim damages for breach.
iii) Condition as to Quality or Fitness -- Where the buyer, expressly or by implication,
makes known the seller the particular purpose for which goods are required, so as to show
that the buyer relies on the seller's skill or judgment and the goods are of a description which
it is in the course of the seller's business to supply (whether or not as the manufacturer of
producer), there is an implied condition that the goods shall be reasonably fit for such
purpose. In other words, this condition of fitness shall apply, if:
• The buyer makes known to the seller the particular purpose for which the goods are
required,
• The buyer relies on the seller's skill or judgment ,

61
 • The goods are of a description which he sellers ordinarily supplies in the course of his
business, and
• The goods supplied are not reasonably fit for the buyer's purpose.
For example, A purchases a hot water bottle from a chemist. The bottle burst and injured A’s
wife. A breach of condition as to the fitness was thus committed. Hence A is liable for a refund
of the price and also the damages.
iv ) Condition as to Merchantability -- Where the goods are bought by description from a
seller, who deals in goods of that description (whether or not as the manufacturer or
producer) there is an implied condition that the goods shall be of merchantable quality.
Merchantable quality ordinarily means that the goods should be such as would be
commercially saleable under the description by which they are known in the market at their
full value.
For example, A purchases a certain quantity of black yarn from B who is a dealer in yarn. A
finds the black yarn to be damaged by the white ants. Thus the condition as to merchantability
has been broken and A is entitled to reject it as unmerchantable.
v) Condition as to Wholesomeness -- In case of sale of eatable provisions and foodstuff,
there is another implied condition that the goods shall be wholesome. Thus, the provisions or
foodstuff must not only correspond to their description, but must also be merchantable and
wholesome. By 'wholesomeness' it means that goods must be for human consumption.
For example, A supplies B with milk. The milk contains bacteria and B’s wife consumes the
milk and is diagnosed with a disease. She later succumbs to the disease. Hence, there was a
breach of condition as to the fitness of the supplies and A was liable to pay damages to B in this
case.
vi) Condition Implied by Custom or Trade Usage: An implied warranty or condition as to
quality or fitness for a particular purpose may be annexed by the usage of trade. In certain
sale contracts, the purpose for which the goods are purchased may be implied from the
conduct of the parties or from the nature or description of the goods. In such cases, the parties
enter into the contract with reference to those known usage. For instance, if a person buys a
perambulator or a medicine the purpose for which it is purchased is implied from the thing
itself; the buyer need not disclose the purpose to the seller.
vii) Conditions in a Sale by Sample: A contract of sale is a contract for sale by sample
where there is a term in the contract, express or implied to that effect. Usually, a sale by
sample is implied when a sample is shown and the parties intend that the goods should be of
he kind and quality as the sample is.

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 For example, a company sells certain belts made up of a special material by sample for the
Indian Army. The belts are found to be made up of plastic of cheaper quality, not discoverable
by ordinary inspection. In this case, the buyer is entitled to the refund of the price plus damages.
viii) Conditions in a sale by Sample as well as by Description: A vast majority of cases
where samples are shown, are sales by sample as well as by description. In a contract for sale
by sample as well as by description, the goods supplied must correspond both with the
sample as well as with the description.
For example, A agrees to sell a certain oil described as refined rapeseed oil to B, warranted only
equal to sample. The goods that A tenders are found to be equal to the sample but containing a
mixture of hemp oil. In such a case B can reject the goods.
Implied Warranties
A condition becomes a warranty when --
a) the buyer waives the conditions or opts to treat the breach of the condition as a breach of
warranty; or
b) The buyer accepts the goods or a part thereof, or is not in a position to reject the goods.
Implied Warranty of Quiet Possession -- In every contract of sale, unless there is a contrary
intention, there is implied warranties that the buyer's shall have and enjoy quiet possession of
the goods. If the buyer's right to possession and enjoyment of the goods is in any way
disturbed as consequences of the seller's defective title, the buyer may sue the seller for
damages for breach of this warranty.
Implied Warranty of Freedom from Encumbrances -- The buyer is entitled to a further
warranty that the goods shall be free from any charge or encumbrance in favor of any third
party not declared or known to buyer before or at the time when the contract is made. If the
buyer is required to discharge the amount of the encumbrance it shall be a breach of this
warranty and the buyer shall be entitled to damages for the same.

CONDITION WARRANTY

A condition is of primary importance. A warranty is of secondary importance.

Breach of condition leads to termination of the In case of a breach of warranty, the injured
contract. party is liable to be compensated.
The injured party can refuse to accept the goods
The Injured party can only claim damages in
as well as claim damages in case of breach of
case of breach of warranty.
condition.

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The injured party can refuse to accept goods not The Injured party cannot refuse to accept the
fulfilling the condition of the contract. goods not fulfilling the warranty.

A condition can be treated as a warranty on the

A warranty cannot be treated as a condition.
wish of the buyer.

Defined in Section 12(2) of the Sale of Goods Defined in Section 12(3) of the Sale of Goods
Act, 1930. Act, 1930.

INTRODUCTION TO INSURANCE
Every risk involves the loss of one or other kind. In older time, the contribution by the
person was made at the time of loss. Today, only one business, which offers all walks of life,
is insurance business. Owing to growing complexity of life, trade and commerce, individual
and business firms and turning to insurance to manage various risks. Every individual in this
world is subject to unforeseen uncertainties which may make him and his family vulnerable.
At this place, only insurance helps him not only to survive but also recover his loss and
continue his life in a normal manner.
Insurance is an important aid to commerce and industry. Every business enterprise
involves large number of risks and uncertainties. It may involve risk to premises, plant and
machinery, raw material and other things. Goods may be damaged or may be destroyed due
to fire or flood. Some risk can be avoided by timely precautions and some are unavoidable
and are beyond the control of a business. These unavoidable risks can be protected by
insurance.
What is Insurance
In D.S. Hamsell words, insurance is defined “as a social device providing financial
compensation for the effects of misfortune, the payment being made from the accumulated
contributions of all parties participating in the scheme”
In simple terms “Insurance is a co-operative device to spread the loss caused by a
particular risk over a number of persons, who are exposed to it and who agree to insure
themselves against the risk”

Thus, the insurance is

(a) A cooperative device to spread the risk;
(b) The system to spread the risk over a number of persons who are insured against the
risk;
(c) The principle to share the loss of the each member of the society on the basis of
probability of loss to their risk; and

64
 (d) The method to provide security against losses to the insured
Insurance may be defined as form of contract between two parties (namely insurer and
insured or assured) whereby one party (insurer) undertakes in exchange for a fixed amount of
money (premium) to pay the other party (Insured), a fixed amount of money on the
happening of certain event (death or attaining a certain age in case of life) or to pay the
amount of actual loss when it takes place through the risk insured (in case of property)
Terminology used in definition of Insurance
- Insurer or insurance company – The agency involved in Insurance business is
known as insurer
- Insured/ Assured – The person who gets his property/life insured is known as
insured
- Policy - The agreement or contract which is put in writing is known as a Policy
- Premium – The consideration in return of which the insurer undertakes to make
goods the loss or give a certain amount in case of life insurance is known as
premium

Assurance and Insurance

The two words were used synonymously at one time, but there is fine distinction
between the two. ‘Assurance’ is used in those contracts which guarantee the payment of a
certain sum on the happening of a specified event which is bound to happen sooner or later,
for example attaining a certain age or death. Thus life policies comes under ‘assurance’.
Insurance, on the other hand, contemplates the granting of agreed compensation of the
happening of certain events stipulated in the contract which are not expected but which may
happen, for example risk relating to fire, accident or marine.
Nature of Insurance
Following are the main characteristics of insurance which are applicable to all types of
insurance (life, fire, marine and general insurance).
1. Sharing of Risks - Insurance is a device to share the financial losses which may
occur to individual or his family on the happening of certain events
2. Cooperative Device – Insurance is a co-operative device to spread the loss caused by
a particular risk over a large caused by a particular risk over a large number of persons
who are exposed to it and who agree to insure themselves against the risk.
3. Value of Risk – Risk is evaluated at the time of insurance. There are several methods
of valuing the risk. Higher the risks, higher will be premium

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4. Payment on Contingency -If the contingency occurs, payment is made; payment is
made only for insured contingency. If there is no contingency, no payment is made. In
life insurance contract, payment is certain because the death or the expiry of term will
certainly occur. In other insurance contract like fire, marine, the contingency may or may
not occur
5. Amount of Payment of Claim - The amount of payment depends upon the value of
loss occurred due to the particular insured risk. The insurance is there up to that amount.
In life insurance insurer pay a fixed sum on the happening of an event or within a
specified time period.
Example – In fire insurance, if fire occurs and half the property is destroyed, but the
whole property is insured, then payment of claim will be made only for that half
building that is destroyed not the whole amount of insured.
6. Insurance is different from Charity - In charity, there is no consideration but
insurance is not given without premium
7. Large number of Insured Person - Insurance is spreading of loss over a large
number of persons. Larger the number of persons, lower the cost of insurance and amount
of premium and in case lower the number of persons, higher the cost of insurance and
amount of premium.
8. Insurance is different from Gambling - In gambling, there is no guarantee of gain,
by bidding the person expose himself to risk of losing. Whereas in insurance, by getting
insured his life and property, he protect himself against the risk of loss.
Functions of Insurance
Functions of insurance can be divided into parts;
I Primary functions.
II Secondary functions.

I Primary Functions
1. Certainty of compensation of loss: Insurance provides certainty of payment at the
uncertainty of loss. The elements of uncertainty are reduced by better planning and
administration. The insurer charges premium for providing certainty.
2. Insurance provides protection: The main function of insurance is to provide
protection against risk of loss. The insurance policy covers the risk of loss. The
insured person is indemnified for the actual loss suffered by him. Insurance thus
provide financial protection to the insured. Life insurance policies may also be used as
collateral security for raising loans.

66
 3. Risk sharing: All business concerns face the problem of risk. Risk and insurance are
interlinked with each other. Insurance, as a device is the outcome of the existence of
various risks in our day to day life. It does not eliminate risks but it reduces the
financial loss caused by risks. Insurance spreads the whole loss over the large number
of persons who are exposed by a particular risk.
II Secondary Functions
1. Prevention of losses: The insurance companies help in prevention of losses as they
join hands with those institutions which are engaged in loss prevention measures. The
reduction in losses means that the insurance companies would be required to pay
lesser compensations to the assured and manage to accumulate more savings, which
in turn, will assist in reducing the premiums
2. Providing funds for investment: Insurance provide capital for society. Accumulated
funds through savings in the form of insurance premium are invested in economic
development plans or productivity projects.
3. Insurance increases efficiency: The insurance eliminates the worries and miseries of
losses. A person can devote his time to other important matters for better achievement
of goals. Businessman feel more motivated and encouraged to take risks to enhance
their profit earning. This also helps in improving their efficiencies.
4. Solution to social problems: Insurance takes care of many social problems. We have
insurance against industrial injuries, road accident, old age, disability or death etc.
5. Encouragement of savings: Insurance not only provides protection against risks but
also a number of other incentives which encourages people to insure. Since regularity
and punctuality of payment of premium is a perquisite for keeping the policy in force,
the insured feels compelled to save.
Principles of Insurance
The basic principles which govern the insurance are -
(1) Utmost good faith
(2) Insurable interest
(3) Indemnity
(4) Contribution
(5) Subrogation
(6) Causa proxima
(7) Mitigation of loss
1. Principle of utmost good faith : A contract of insurance is a contract of ‘Uberrimae
Fidei’ i.e., of utmost good faith. Both insurer and insured should display the utmost

67
 good faith towards each other in relation to the contract. In other words, each party
must reveal all material information to the other party whether such information is
asked or not. There should not be any fraud, non-disclosure or misrepresentation of
material facts.
Example – in case of life insurance, the insured must revel the true age and details of
the existing illness/diseases. If he does not disclose the true fact while getting his life
insured, the insurance company can avoid the contract.
Similarly, in case of the insurance of a building against fire, the insured must disclose
the details of the goods stored, if such goods are of hazardous nature
A material fact means important facts which would influence the judgment of the
insurer in fixing the premium or deciding whether he should accept the risk, on what
terms. All material facts should be disclosed in true and full form
2. Principle of Insurable Interest: This principle requires that the insured must have an
insurable interest in the subject matter of insurance. Insurance interest means some
pecuniary interest in the subject matter of contract of insurance. Insurance interest is
that interest, when the policy holders get benefited by the existence of the subject
matter and loss if there is death or damage to the subject matter.
For example – In life insurance, a man cannot insured the life of a stranger as he has no
insurable interest in him but he can get insured the life of himself and of persons in
whose life he has a pecuniary interest. So in the life insurance interest exists in the
following cases:-
- Husband in the life of his wife and wife in the life of her husband
- Parents in the life of a child if there is pecuniary benefit derived from the life of a
Child
- Creditor in the life of debtor
- Employer in the life of an employee
- Surety in the life of a principle debtor
In life insurance, insurable interest must be present at the time when the policy is
taken. In fire insurance, it must be present at the time of insurance and at the time if loss if
subject matter. In marine insurance, it must be present at the time of loss of the subject
matter.
3. Principle of Indemnity : This principle is applicable in case of fire and marine
insurance only. It is not applicable in case of life, personal accident and sickness
insurance. A contract of indemnity means that the insured in case of loss against
which the policy has been insured, shall be paid the actual cost of loss not exceeding

68
 the amount of the insurance policy. The purpose of contract of insurance is to place
the insured in the same financial position, as he was before the loss.
Example – A house is insured against fire for Rs. 50000. It is burnt down and found that
the expenditure of Rs. 30000 will restore it to its original condition. The insurer is
liable to pay only Rs. 30000.
In life insurance, principle of indemnity does not apply as there is no question of
actual loss. The insurer is required to pay a fixed amount upon in advance in the event
of accident, death or at the expiry of the fixed term of the policy. Thus, a contract of a
life insurance is a contingent contract and not a contract of indemnity.
4. Principle of Contribution: The principle of contribution is a corollary to the doctrine of
indemnity. It applies to any insurance which is a contract of indemnity. So it does not
apply to life insurance. A particular property may be insured with two or more insurers
against the same risks. In such cases, the insurers must share the burden of payment in
proportion to the amount insured by each. If one of the insurer pays the whole loss, he is
entitled to contribution from other insurers
Example – B gets his house insured against fire for Rs. 10000 with insurer P and for Rs.
20000 with insurer Q. a loss of Rs. 15000 occurs, P is liable to pay for Rs. 5000 and Q is
labile to pay Rs 10000. If the whole amount of loss is paid by Q, then Q can recover Rs. 5000
from P. The liability of P &Q will be determined as under:
Sum insured with Individual insurer (i.e. P or Q ) x Actual Loss = Total sum insured

Liability of P = 10000 x 15000 = Rs.5000

30000

Liability of Q = 20000 x 15000 = Rs.10000

30000
The right of contribution arises when:
(a) There are different policies which related to the same subject matters;
(b) The policies cover the same period which caused the loss;
(c) All the policies are in force at the time of loss; and
(d) One of the insurer has paid to the insured more than his share of loss.
5. Principle of Subrogation: The doctrine of subrogation is a collorary to the principle of
indemnity and applies only to fire and marine insurance. According to doctrine of
subrogation, after the insured is compensated for the loss caused by the damage to the

69
 property insured by him, the right of ownership to such property passes to the insurer
after settling the claims of the insured in respect of the covered loss.
Example – Furniture is insured for Rs. 1 lacs against fire, it is burnt down and the
insurer pays the full value of Rs. 1 Lacs to the insured, later on the damage Furniture
is sold for Rs. 10000. The insurer is entitled to receive the sum of Rs. 10000.
A loss may occur accidentally or by the action or negligence of third party. If the
insured suffer a loss because of action of third party and he is in a position to recover
the loss from the insurer then insured cannot take action against third party, his right
is subrogated (substituted) to the insurer on settlement of the claim. The insurer,
therefore, can recover the claim from the third party.
If the insured recovers any compensation for the loss (due to third party), from the
third party, after he has already been indemnified by the insurer, he holds the amount
of such compensation as the trustee if the insurer.
The insurer is entitled to the benefits out of such rights only to the extent of the
amount he has paid to the insured as compensation
6. Principle of Causa Proxima: Causa proxima, means proximate cause or cause
which, in a natural and unbroken series of events, is responsible for a loss or damage.
The insurer is liable for loss only when such a loss is proximately caused by the peril
insured against. The cause should be the proximate cause and cannot the remote
cause. If the risk insured is the remote cause of the loss, then the insurer is not bound
to pay compensation. The nearest cause should be considered while determining the
liability of the insured. The insurer is liable to pay if the proximate cause is insured.
Example – In a marine insurance policy, the goods were insured against damage by sea
water, some rats on the board made a hole in a bottom of the ship causing sea water to pour
into the ship and damage the goods. Here, the proximate cause of loss is sea water which is
covered by the policy and the hole made by the rats is a remote cause. Therefore, the insured
can recover damage from the insurer
Example – A ship was insured against loss arising from collision. A collision took palce
resulting in a few days delay. Because of the delay, a cargo of oranges becomes unsuitable
for human consumption. It was held that the insurer was not liable for the loss because the
proximate cause of loss was delay and not the collision of the ship.
7. Principle of Mitigation of Loss: An insured must take all reasonable care to reduce
the loss. We must act as if the property was not insured.
Example – If a house is insured against fire, and there is accidental fire, the owner
must take all reasonable steps to keep the loss minimum. He is supposed to take all

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 steps which a man of ordinary prudence will take under the circumstances to save the
insured property.
Benefits of Insurance or Role and Importance of Insurance
Benefit of insurance can be divided into these categories -
1. Benefits to Individual
2 Benefits to Business or Industry
3. Benefits to the Society
It can be explained as under -
1. Benefits to Individual
(a) Insurance provides security & safety : Insurance gives a sense of security to the
policy holder. Insurance provide security and safety against the loss of earning at
death or in old age, against the loss at fire, against the loss at damage, destruction of
property, goods, furniture etc.
Life insurance provides protection to the dependents in case of death of policyholders
and to the policyholder in old age. Fire insurance insured the property against loss on
a fire. Similarly other insurance provide security against the loss by indemnifying to
the extent of actual loss.
(b) Encourage Savings : Life insurance is best form of saving. The insured person must
regularly save out of his current income an amount equal to the premium to be paid
otherwise his policy get lapsed if premium is not paid on time.
(c) Providing Investment Opportunity : Life insurance provides different policies in
which individual can invest smoothly and with security; like endowment policies,
deferred annuities etc. There is special exemption in the Income Tax, Wealth Tax etc.
regarding this type of investment
2 Benefits to Business or Industry
(a) Shifting of Risk : Insurance is a social device whereby businessmen shift specific
risks to the insurance company. This helps the businessmen to concentrate more on
important business issues.
(b) Assuring Expected Profits : An insured businessman or policyholder can enjoy
normal expected profits as he would not be required to make provisions or allocate
funds for meeting future contingencies.
(c) Improve Credit Standing : Insured assets are easily accepted as security for loans by
the banks and financial institutions so insurance improve credit standing of the
business firm

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 (d) Business Continuation – With the help of property insurance, the property of
business is protected against disasters and chance of closure of business is reduced
3. Benefits to the Society
(a) Capital Formation : As institutional investors, insurance companies provide funds
for financing economic development. They mobilize the saving of the people and
invest these saving into more productive channels
(b) Generating Employment Opportunities : With the growth of the insurance
business, the insurance companies are creating more and more employment
opportunities.
(c) Promoting Social Welfare : Policies like old age pension scheme, policies for
education, marriage provide sense of security to the policyholders and thus ensure
social welfare.
(d) Helps Controlling Inflation : The insurance reduces the inflationary pressure in two
ways, first, by extracting money in supply to the amount of premium collected and
secondly, by providing funds for production narrow down the inflationary gap.
Type of Insurance
Insurance cover various types of risks and include various insurance policies which
provide protection against various losses.
There are two different views regarding classification if insurance:-
I. From the business point of view; and
II From the risk points of view
I. Business point of view
The insurance can be classified into three categories from business point of view
1. Life insurance;
2. General Insurance; and
3. Social Insurance.
1. Life Insurance: The life insurance contract provide elements of protection and
investment after getting insurance, the policyholder feels a sense of protection
because he shall be paid a definite sum at the death or maturity. Since a definite sum
must be paid, the element of investment is also present. In other words, life
insurance provides against pre-mature death and a fixed sum at the maturity of policy.
At present, life insurance enjoys maximum scope because each and every person
requires the insurance.
Life insurance is a contract under which one person, in consideration of a premium
paid either in lump sum or by monthly, quarterly, half yearly or yearly instalments,

72
 undertakes to pay to the person (for whose benefits the insurance is made), a certain
sum of money either on the death of the insured person or on the expiry of a specified
period of time.
Life insurance offers various polices according to the requirement of the persons -
- Term Assurance
- Whole Life
- Endowment Assurance
- Family Income Policy
- Life Annuity Joint Life Assurance
- Pension Plans
- Unit Linked Plans
- Policy for maintenance of handicapped dependent
- Endowment Policies with Health Insurance benefits
2. General Insurance: The general insurance includes property insurance, liability
insurance and other form of insurance. Property insurance includes fire and marine
insurance. Property of the individual and business involves various risks like fire,
theft etc. This need insurance Liability insurance includes motor, theft, fidelity and
machine insurance
Type of General Insurance policies available is -
- Health Insurance
- Medi- Claim Policy
- Personal Accident Policy
- Group Insurance Policy
- Automobile Insurance
- Worker’s Compensation Insurance
- Liability Insurance
- Aviation Insurance
- Business Insurance
- Fire Insurance Policy
- Travel Insurance Policy
3. Social Insurance: Social insurance provide protection to the weaker sections of the
society who are unable to pay the premium. It includes pension plans, disability
benefits, unemployment benefits, sickness insurance and industrial insurance.
II Risk Points of View
The insurance can be classified into three categories from Risk point of view

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 1. Property Insurance
2. Liability Insurance
3. Other forms of Insurance
1. Property Insurance: Property of the individual and business is exposed to risk of
fire, theft marine peril etc. This needs insurance. This is insured with the help of:-
(i) Fire Insurance
(ii) Marine Insurance
(iii) Miscellaneous Insurance
(i) Fire Insurance: Fire insurance covers risks of fire. It is contract of indemnity.
Fire insurance is a contract under which the insurer agrees to indemnify the
insured, in return for payment of the premium in lump sum or by instalments,
losses suffered by the him due to destruction of or damage to the insured property,
caused by fire during an agreed period of time. It includes losses directly caused
through fire or ignition. There are various types of fire insurance policies.
- Consequential loss policy
- Comprehensive policy
- Valued policy
- Valuable policy
- Floating policy
- Average policy
(ii) Marine Insurance: Marine insurance is an arrangement by which the insurer
undertakes to compensate the owner of the ship or cargo for complete or partial
loss at sea. So it provides protection against loss because of marine perils. The
marine perils are collisions with rock, ship attack by enemies, fire etc. Marine
insurance insures ship, cargo and freight.
The following kinds of marine policies are -
- Voyage policy
- Time policy
- Valued policy
- Hull Policy
- Cargo Policy
- Freight Policy
(iii) Miscellaneous Insurance: It includes various forms of insurance including
property insurance, liability insurance, personal injuries are also insured. The
property, goods, machine, furniture, automobile, valuable goods etc. can be

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 insured against the damage or destruction due to accident or disappearance due to
theft.
Miscellaneous insurance covers
- Motor
- Disability
- Engineering and aviation risks
- Credit insurance
- Construction risks
- Money Insurance
- Burglary and theft insurance
- All risks insurance
2. Liability Insurance: The insurer is liable to pay the damage of the property or to
compensate the loss of personal injury or death. It includes fidelity insurance,
automobile insurance and machine insurance.
The following are types of liability Insurance:-
- Third party insurance
- Employees insurance
- Reinsurance
3. Other forms of Insurance: It include export credit insurance, state employee
insurance etc. whereby the insurer guarantees to pay certain amount at the happening
of certain events.
The following are other form of Insurance-
- Fidelity Insurance
- Credit Insurance
- Privilege Insurance

DOCTRINE OF CAVEAT EMPTOR

What is Doctrine of Caveat Emptor?
The doctrine of ‘Caveat Emptor’ means “let the buyer beware“.
In other words, the buyer must take care of his own interest while purchasing the goods.
While purchasing the goods the buyer should check the goods carefully.

If a buyer purchases the goods and after it, he comes to know that these are defective. In this
case, the seller will not be responsible for this defect.

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The object of this principle is to make the buyer more careful in purchasing. It is his duty that
he should check the quality and fitness of the commodity which he needs.
Example of Doctrine Of Caveat Emptor
Mr Anuj went to the market and purchased a Car to take a part in Car race competition. But
he did not tell the seller that for which purpose he is buying. When he reached home, he came
to know that this car is not suitable for car race competition. Due to the principle of Caveat
Emptor, Mr Anuj can neither reject the bike nor can claim for compensation.
Example to Doctrine of Caveat Emptor
There was a sale by sample by a woolen manufacturer of cloth to merchant, who was also a
tailor. The cloth was required for making liveries But the fact was not made known to the
seller. On account of the latent defect in the cloth, liveries could not be made out of it. But
there was nothing to show that it was unfit for other purposes. Held the buyer was without
remedy due to non-communication of the purpose for which the cloth was required.
Exceptions to the Doctrine of Caveat Emptor
The following are some of the exemptions to doctrine of Caveat Emptor.
Exceptions of Doctrine Of Caveat Emptor
However, in the following exceptions, the Doctrine of caveat emptor is not applicable.
1. Fitness for buyer’s purpose – Sec. 16(1)
2. Sale under a Trade or Patent name – Sec. 16(1)
3. Merchantable Quality – Sec. 16(2)
4. Usage of Trade – Sec. 16(3)
5. Consent by Fraud.
Fitness for buyer’s purpose
When the seller is aware of the purpose for which the buyer requires the product and when
the buyer relies on the judgement and skill of the seller, there is an implied condition that the
product purchased serves the purpose for which it was bought. When the goods are sold
under a trade name or patent mark, this condition does not apply.

Sale under a trade or patent name

When the buyer purchases products from the seller who sells goods of trade or patent mark,
there is an implied condition that the product is of merchantable quality.

Merchantable Quality
There is a custom or tradition where a seller has been dealing in goods which are according to
the accepted description. For instance, a bicycle would be one that is technically made for

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 transport by peddling and that is in condition corresponding to its product description. It is a
reasonably good product and the buyer may well assume it to be so.

Usage of Trade
An implied warranty or condition as to its quality and fitness for a particular purpose may be
annexed by the usage of trade.

Consent by Fraud
It happens when the seller knowingly conceals the defects which could not be discovered by
the buyer with the reasonable application of skill and judgement at the time of purchase. The
consent is obtained by fraud and, hence, the seller cannot charge the buyer for his negligence
to examine.

Differences Between Sale And Agreement To Sell

SALE AGREEMENT TO SELL
In the agreement to sell the parties agree to
In the contract of sale, the exchange of goods exchange the goods for a price depending on the
takes place immediately. fulfilment of certain conditions at a future
specified date.
The nature in the sale is absolute. The nature of the agreement to sell is conditional.
It is an executed contract. It is an executory contract.
Transfer of risk doesn’t take place, until and
Transfer of risk takes place immediately.
unless the goods are transferred.
The right to sell remains with the buyer The right to sell remains with the seller.
Here the seller has the right to sue for the
Here the seller has the right to sue for damages.
price.
It creates a right in rem. It creates a right in personam.
The seller has the right to resell the same goods if
The seller has no right to resell.
the conditions are not fulfilled.
On the off chance that the products are
annihilated, the misfortune is borne by the The loss falls on the seller despite the fact that the
buyer despite the fact that the merchandise is merchandise is in the ownership of the buyer.
in the ownership of the seller.

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 UNIT - III
NEGOTIABLE INSTRUMENT’S INTRODUCTION ACT
A negotiable instrument is a piece of paper which entitles a person to a sum of money
and which is transferable from person to person by mere delivery or by endorsement and
delivery. The person to whom it is so transferred becomes entitled to the money also to the
right to further transfer it. Thus, negotiable instruments play a major role in the trade world.
The maxim of law nemo dat quod non-habet (no one can transfer a better title than he
himself has). This is the general principle relating to transfer of property is that no one can
become the owner of any property unless he purchases it from the true owner or with his
authority.
According to professor Goode, instrument is described as a document of title of
money Therefore an instrument is a document which physically expresses the payment
obligation. An instrument will be in deliverable state only if it is signed by the possessor or it
should be with the authority of that person. The instrument clearly states the contractual right
to payment and the right will be transferred only after the complete delivery. The person who
has that entitlement and posses the instrument is consider as the true owner.

PURPOSE
Main purpose of negotiable instruments is to avoid the carriage of higher amount of
money and to reducing the risk of theft; robbery etc.
To give legal effect to negotiable instruments there is legislation and the name of that
legislation is The Negotiable Instruments Act, 1881.

INTRODUCTION TO NEGOTIABLE INSTRUMENTS ACT, 1881

The Negotiable Instruments Act was enacted, in India, in [Link] to its enactment,
the provision of the English Negotiable Instrument Act were applicable in India, and the
present Act is also based on the English Act with certain modifications. It extends to the
whole of India except the State of J&K.

What are Negotiable Instruments?

Documents of a certain type, used in commercial transactions and monetary dealings,
are called Negotiable instruments. The word 'negotiable' means transferable from one person
to another and the term 'instrument' means 'any written doc. by which a right is created in
favor of some person.' Thus, the negotiable instrument is a doc. by which rights vested in a
person can be transferred to another person in accordance with the provisions of the

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Negotiable Instruments Act, 1881.

DEFINITION
According to section 13 of Negotiable Instruments Act, 1881- A 'negotiable instrument'
means a promissory note, bill of exchange or cheque payable either to order or to bearer.

MAIN FEATURES OF A NEGOTIABLE INSTRUMENT

An instrument may be negotiable either by
# Statute - Promissory notes, bills of exchange and cheques are negotiable instruments under
the Negotiable Instruments Act, 1881; or
# By usage - Bank notes, bank drafts, share warrants, bearer debentures, dividend warrants,
scripts and treasury bills.
# An instrument is to be called 'negotiable' if it possesses the following

Characteristic Features
# Freely transferable - Transferability may be by
1. delivery, or
2. By endorsement and delivery.

a. Holder's title free from defects: The holder (of the negotiable instrument) in due course
acquires a good title not withstanding any defect in a previous holder's title.
b. The Holder can sue in his own Name - Another characteristic feature of a negotiable
instrument, is that its holder in due course, can sue on the instrument in his own name.
c. A negotiable instrument can be transferred infinitum, i.e., can be transferred any number of
times till its maturity.
d. A negotiable instrument is subject to certain presumptions.
Presumptions
1. Consideration: Every negotiable instrument is deemed to have been drawn and accepted,
endorsed, negotiated, or transferred for consideration.
2. Date: Every negotiable instrument must bear the date on which it is made or drawn.
3. Acceptance: Every bill of exchange was accepted within a reasonable time after the date
mentioned therein and before the date of its maturity.
4. Transfer: Every transfer should be made before the expiry.

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MEANING OF ENDORSEMENT
# When a maker or holder writes the person name on the face or back of the instrument &
puts his signatures thereto for the purpose of negotiation, it is called endorsement
# Person who signs endorser
# To whom it is endorsed â endorsee.

Essentials of valid endorsement:

[Link] the back or face of the instrument.
[Link] be made by maker or holder.
[Link] be properly signed by the endorser
[Link] must be for the entire negotiation instrument.
[Link] specific form of words is necessary for endorsement.

EFFECTS OF ENDORSEMENT
➢ The property in instrument is transferred from endorser to endorsee.
➢ The endorsee gets right to negotiate the instrument further.
➢ The endorsee gets the right to sue in his own name to all other parties.

Promissory Note [Section 4]

Definition According to section 13 of Negotiable Instruments Act, 1881- A
promissory note is an instrument in writing (not being a bank note or a currency note)
containing an unconditional undertaking, signed by the maker to pay a certain sum of money
to, or to the order of, a certain person or to the bearer of the instrument.
A promissory note is a promise in writing by a person to pay a sum of money to a
specified person or to his order.[3]
Maker: The person who makes the promissory note and promises to pay is called the maker.
Payee: The person to whom the payment is to be made is called the payee.

ESSENTIALS OR CHARACTERISTICS OF A PROMISSORY NOTE

From the definition, it is clear that a promissory note must have the following essential
elements.
1. In writing - A promissory note must be in writing. Writing includes print and typewriting.
2. Promise to pay - It must contain an undertaking or promise to pay. Thus, a mere
acknowledgement of indebtedness is not sufficient. Notice that the use of the word â promise
is not essential to constitute an instrument as promissory note.

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3. Unconditional - The promise to pay must not be conditional. Thus, instruments payable on
performance or non- performance of a particular act or on the happening or non-happening of
an event are not promissory notes.
4. Signed by the Maker â- The promissory note must be signed by the maker, otherwise it is
of no effect.
5. Certain Parties - The instrument must point out with certainty the maker and the payee of
the promissory note.
6. Certain sum of money - The sum payable must be certain or capable of being made
certain.
7. Promise to pay money only - If the instrument contains a promise to pay something in
addition money, it cannot be a promissory note.
8. Number, place, date etc. - These are usually found in a promissory note but are not
essential in law. If a promissory note does not bear a date, it is deemed to have been made
when it was delivered.
9. Installments - It may be payable in installments.
10. It may be payable on demand or after a definite period - Payable 'on demand' means
payable immediately or any time till it becomes time-barred. A demand promissory note
becomes time barred on expiry of 3 years from the date it bears.
11. It cannot be made payable to bearer on demand or even payable to bearer after a certain
period
12. It must be duly stamped under the Indian Stamp Act - It means that the stamps of the
requisite amount must have been affixed on the instrument and duly cancelled either before
or at the time of its execution. A promissory note, which is not so stamped, is a nullity.[4]

BILL OF EXCHANGE [SECTION 5]

According to section 5 of Negotiable Instruments Act, 1881- A 'bill of exchange' is an
instrument in writing, containing an unconditional order, signed by the maker, directing a
certain person to pay a certain sum of money only to or to the order of a certain person, or to
the bearer of the instrument. It is also called a Draft.
CHARACTERISTIC FEATURES OF A BILL OF EXCHANGE:
1. It must be in writing.
2. It must contain an order to pay and not a promise or request.
3. The order must be unconditional.
4. There must be three parties, viz., drawer, drawee and payee.
5. The parties must be certain.

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6. It must be signed by the drawer.
7. The sum payable must be certain or capable of being made certain.
8. The order must be to pay money and money alone.
9. It must be duly stamped as per the Indian Stamp Act.
10. Number, date and place are not essential.

PARTIES TO A BILL OF EXCHANGE

Drawer: The maker of a bill of exchange is called the drawer.
Drawee: The person directed to pay the money by the drawer is called the drawee.
Payee: The person named in the instrument, to whom or to whose order the money are
directed to be paid by the instruments are called the payee.

CHEQUE [SECTION 6]
According to section 6 of Negotiable Instruments Act, 1881- A cheque is defined as 'a
bill of exchange drawn on a specified banker and not expressed to be payable otherwise than
on demand.
Thus, a cheque is a bill of exchange with two added features, viz.:
# it is always drawn on a specified banker; and
# It is always payable on demand and not otherwise.

ESSENTIALS OF CHEQUE
[Link] Writing: The cheque must be in writing. It cannot be oral.
2. Unconditional: The language used in a cheque should be such as to convey an
unconditional order.
3. Signature of the Drawer: It must be signed by the maker.
4. Certain Sum of Money: The amount in the cheque must be certain.
5. Payees Must be certain: It must be payable to specified person.
6. Only Money: The payment should be of money only.
7. Payable on Demand: It must be payable on demand.
8. Upon a Bank: It is an order of a depositor on a bank.
PARTIES TO A CHEQUE
Drawer: Drawer is the person who draws the cheque.
Drawee: Drawee is the drawer banker on whom the cheque has been drawn.
Payee: Payee is the person who is entitled to receive the payment of a cheque.

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 DIFFERENCE BETWEEN CHEQUE AND BILL OF EXCHANGE
BASIS FOR
CHEQUE BILL OF EXCHANGE
COMPARISON
A document used to make easy
A written document that shows the
payments on demand and can be
Meaning indebtedness of the debtor towards the
transferred through hand delivery
creditor.
is known as cheque.
Section 6 of The Negotiable Section 5 of The Negotiable Instrument Act,
Defined in
Instrument Act, 1881 1881
Validity Period 3 months Not Applicable
Payable to bearer on Cannot be made payable on demand as per
Always
demand RBI Act, 1934
Not Applicable, as it is always
Grace Days payable at the time of 3 days of grace are allowed.
presentment.
A cheque does not require
Acceptance BOE needs to be accepted.
acceptance.
Stamping No such requirement. Must be stamped
Crossing Yes No
Drawee Bank Person or Bank
If the cheque is dishonored it If a BOE is dishonored it can be noted or
Noting or Protesting
cannot be noted or protested. protested.

DIFFERENCE B/W BILL OF EXCHANGE AND PROMISSORY NOTE

Basis For Comparison Bill Of Exchange Promissory Note

A promissory note is a written
BOE is an instrument in writing
promise made by the debtor to pay a
Meaning showing the indebtedness of a buyer
certain sum of money to the creditor
towards the seller of goods.
at a future specified date.
Section 5 of Negotiable Instrument Section 4 of Negotiable Instrument
Defined in
Act, 1881. Act, 1881.
Three parties, i.e. drawer, drawee and
Parties Two parties, i.e. drawer and payee
payee

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 Drawn by Creditor Debtor
Liability of Maker Secondary and conditional Secondary and conditional
Can maker & payee be the same
Yes No
person?
Promissory Note cannot be drawn in
Copies Bill can be drawn in copies
copies
Notice is necessary to be given to all Notice is not necessary to be given to
Dishonor
the parties involved. the maker.

DIFFERENCE B/W CHEQUE AND PROMISSORY NOTE

Basis For Comparison  Cheque Promissory Note
A promissory note contains promise to
Order And Promise It contains order to pay.
pay.
In case of cheque there may be three In case of promissory note are only two
Number Of Parties
parties, the drawer, drawee and payee. parties, the maker and the payee.
Cheque is used because it is a simple and
It is used for receiving and giving
Object easy medium of exchange and serving of
credit.
metallic money.
Crossing A cheque may be crossed. A pro-note cannot be crossed.
A cheque is often drawn as payable to A pro-note cannot be drawn payable to
Payable To Bearer
bearer. bearer.
Its payment can be stopped by giving the A pro-note payment cannot be stopped
Stop Payment
notice to the bank. if once issued.
In case of cheque when it is dishonored, In case of promissory note liability is
Liability Nature
the drawer is liable. primary.
Promissory note may be drawn on any
It is drawn on a printed form issued by a
Use Of Form paper and there is no need of any
particular bank.
particular form.
A cheque is always drawn to a particular A promissory note can be drawn on any
Drawee
bank where account is available. person.
In case of cheque drawee and payee can In case of pro-note there are two parties
Drawer and Payee
be the same person. and maker cannot be the payee.

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TYPES OF NEGOTIABLE INSTRUMENTS
According to the Negotiable Instruments Act, 1881, the negotiable instruments
include promissory note, bill of exchange and cheque only. However, some other documents
are also recognized as negotiable instruments on the basis of custom and usage, like hundis,
treasury bills, share warrants, etc., provided they are featured with negotiability.
In the Negotiable Instruments Act (Section 4), 1881, a promissory note is defined as
“an instrument in writing (not being a bank note or a currency note) contains an
unconditional undertaking, signed by the maker, to pay a certain sum of money only to or to
the order of a certain person or to the bearer of the instrument”.

PARTIES TO A PROMISSORY NOTE

There are basically two parties involved in a promissory note:
1. The Maker or Drawer – the person who prepares the note and promises to pay the
amount mentioned therein.
2. The Payee – the person to whom the amount is payable.
BILL OF EXCHANGE
In the Negotiable Instruments Act (Section 5), 1881, a bill of exchange is defined as
“an instrument in writing contains an unconditional order, signed by the maker, directs a
certain person to pay a certain sum of money only to or to the order of a certain person, or to
the bearer of the instrument”.
PARTIES TO A BILL OF EXCHANGE
There are basically three parties involved in a bill of exchange:
1. The Drawer – The person who makes the order for making payment.
2. The Drawee – The person to whom the order to pay is made.
3. The Payee – The person to whom the payment is to be made.
The drawer can also make a bill in his own name where he himself becomes the payee. In this
case, the words in the bill would be Pay to us or order. In a bill of exchange where a time
period is mentioned is called a Time Bill. However, a bill may be made payable on demand
also which is called a Demand Bill.
CHEQUE
In the Negotiable Instruments Act, 1881 a cheque is defined as a bill of exchange
drawn on a specified banker and not expressed to be payable otherwise than on demand.
Actually, a cheque is an order made by the account holder of the concerned bank directing his
banker to pay on demand, the specified amount, to or to the order of the person named therein
or to the bearer.

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 This is the basic format of cheque. However, it differs from bank to bank regarding
their fonts, logo, MICR code and such other basic features of a cheque.
FEATURES OF A CHEQUE
· A cheque must be in written form and duly signed by the drawer.
· A cheque must contain an unconditional order.
· A cheque is issued on a specified banker only.
· The amount specified there in the cheque is always certain and must be clearly
mentioned both in figures and words.
· The payee must be always certain.
· A cheque is payable on demand.
· The cheque must properly dated.
TYPES OF CHEQUE
OPEN CHEQUE
An open cheque is the cheque which can be encashed over the counter at the bank.
The holder of an open cheque can receive its payment over the counter at the bank, deposit
the cheque in his own account or pass it to someone else by signing behind the cheque.
CROSSED CHEQUE
Since an open cheque can be encashed by anyone whoever will present it at the
counter of the bank, it is risky to issue such cheques and the risk can be mitigated by issuing
another type of cheque called ‘Crossed cheque’. The payment of a crossed cheque is not
made over the counter at the bank as it is only credited to the bank account of the payee
mentioned therein the cheque. Moreover, a cheque can be crossed by drawing two transverse
parallel lines across the cheque,
with or without the writing ‘Account payee’ or ‘Not Negotiable’ and sometimes, bank’s name
is also specified in between those two transverse parallel lines.
BEARER CHEQUE
A bearer cheque is such a type of cheque which is payable to any person who presents it for
payment at the counter of the bank. It can be transferred by mere delivery and needs no
endorsement.
ORDER CHEQUE
An order cheque is a cheque which is payable only to a particular person. In case of an order
cheque, the word ‘bearer’ may be cut out or cancelled and the word ‘order’ may be written
over there. The payee may transfer an order cheque to someone else by signing his or her
name behind the cheque.
ANTE-DATED CHEQUES

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A cheque in which the drawer mentions the date earlier to the date of presenting if for
payment.
For example, a cheque issued on March 20, 2020 may bear a date March 5, 2020.
STALE CHEQUE
A stale cheque is the cheque which is issued at some particular date and must be presented
before at bank for payment within a stipulated period as, no payment will be made after
expiry of that period and the cheque will automatically stand cancelled.
MUTILATED CHEQUE
When a cheque is torn into two or more pieces or is in deteriorated condition and presented
for payment, such a cheque is called a mutilated cheque. The bank has a right not to make
payment against such a cheque without getting confirmation of the drawer. However, if a
cheque is torn at the corners and no material fact is lost, the bank can initiate the payment
against such a cheque.

CROSSING OF CHEQUE
DEFINITION: Crossing of a cheque is nothing but instructing the banker to pay the
specified sum through the banker only, i.e. the amount on the cheque has to be deposited
directly to the bank account of the payee.
Hence, it is not instantly encashed by the holder presenting the cheque at the bank counter. If
any cheque contains such an instruction, it is called a crossed cheque.
The crossing of a cheque is done by making two transverse parallel lines at the top left
corner across the face of the cheque.
TYPES OF CROSSING
The way a cheque is crossed specified the banker on how the funds are to be handled,
to protect it from fraud and forgery. Primarily, it ensures that the funds must be transferred to
the bank account only and not to encash it right away upon the receipt of the cheque. There
are several types of crossing
General Crossing: When across the face of a cheque two transverse parallel lines are drawn at
the top left corner, along with the words & Co., between the two lines, with or without using
the words not negotiable. When a cheque is crossed in this way, it is called a general

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crossing.

RESTRICTIVE CROSSING: When in between the two transverse parallel lines, the words
‘A/c payee’ is written across the face of the cheque, then such a crossing is called restrictive
crossing or account payee crossing. In this case, the cheque can be credited to the account of
the stated person only, making it a non-negotiable instrument.

SPECIAL CROSSING: A cheque in which the name of the banker is written, across the
face of the cheque in between the two transverse parallel lines, with or without using the
word ‘not negotiable’. This type of crossing is called a special crossing. In a special crossing,
the paying banker will pay the sum only to the banker whose name is stated in the cheque or
to his agent. Hence, the cheque will be honoured only when the bank mentioned in the
crossing orders the same.

NOT NEGOTIABLE CROSSING: When the words not negotiable is mentioned in

between the two transverse parallel lines, indicating that the cheque can be transferred but the

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transferee will not be able to have a better title to the cheque.

DOUBLE CROSSING: Double crossing is when a bank to whom the cheque crossed
specially, further submits the same to another bank, for the purpose of collection as its agent,
in this situation the second crossing should indicate that it is serving as an agent of the prior
banker, to whom the cheque was specially crossed.

The crossing of a cheque is done to ensure the safety of payment. It is a well-known

mechanism used to protect the parties to the cheque, by making sure that the payment is made
to the right payee. Hence, it reduces fraud and wrong payments, as well as it protects the
instrument from getting stolen or encashed by any unscrupulous individual.
ENDORSEMENT OF INSTRUMENTS
The act of a person who is a holder of a negotiable instrument in signing his or her name
on the back of that instrument, thereby transferring title or ownership is an endorsement. An
endorsement may be in favour of another individual or legal entity. An endorsement provides a
transfer of the property to that other individual or legal entity. The person to whom the
instrument is endorsed is called the endorsee. The person making the endorsement is the
endorser. Let us discuss the Endorsement of Instruments here in detail.

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ENDORSEMENT OF INSTRUMENTS
TYPES OF ENDORSEMENT
Blank Endorsement – Where the endorser signs his name only, and it becomes payable to
bearer.
Special Endorsement – Where the endorser puts his sign and writes the name of the person
who will receive the payment.
Restrictive Endorsement – Which restricts further negotiation.
Partial Endorsement – Which allows transferring to the endorsee a part only of the amount
payable on the instrument.
Conditional Endorsement – Where the fulfilment of some conditions is required.
1. Blank Endorsement or General Endorsement
An endorsement is blank or general where the endorser signs his name only, and it becomes
payable to bearer. Thus, where a bill is payable to “Ram or order”, and he writes on its back
“Ram”, it is an endorsement in blank by Ram and the property in the bill can pass by a
mere presentation.
We can convert a blank endorsement into an endorsement in full. We can do so by writing above
the endorser’s signature, a direction to pay the instrument to another person or his order.
2. Special or Full Endorsement
An endorsement “in full” or a special endorsement is one where the endorser puts his signature
on the instrument as well as writes the name of a person to whom order the payment is to be
made.
A bill made payable to Ram or order, and endorsed “pay to the order of Shyam” would be
specially endorsed and Shyam endorses it further. We can turn a blank endorsement into a
special one by adding an order making the bill payable to the transferee.
3. Restrictive Endorsement
An endorsement is restrictive which restricts the further negotiation of an instrument.
Example of restrictive endorsement: “Pay to Mrs. Geeta only” or “Pay to Mrs Geeta for my use”
or “Pay to Mrs Geeta on account of Reeta” or “Pay to Mrs. Geeta or order for collection”.
4. Partial Endorsement
An endorsement partial is one which allows transferring to the endorsee a part only of the
amount payable on the instrument. This does not operate as a negotiation of the instrument.
Example: Mr. Mohan holds a bill for Rs. 5,000 and endorses it as “Pay Sohan or order Rs.
2500”. The endorsement is partial and invalid.
5. Conditional or Qualified Endorsement

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Where the endorser puts his signature under such writing which makes the transfer of title subject
to fulfilment of some conditions of the happening of some events, it is a conditional endorsement.
Negotiation Back
Where an endorser negotiates an instrument and again becomes its holder, we know it as
negotiation back to that endorser. After negotiation back, none of the intermediary endorsees are
then liable to him.
For example, Ram, the holder of a bill endorses it to Bala, Bala endorses to Kala, and
Kala to Lala, and endorses it again to Ram. Ram, being a holder in due course of the bill by the
second endorsement by Lala, can recover the amount thereof from Bala, Kala, or Lala and
himself being a prior party is liable to all of them.
Therefore, Ram having been relegated by the second endorsement to his original
position, cannot sue Bala, Kala, and Lala. Where an endorser so excludes his liability and
afterwards becomes the holder of the instrument, all the intermediate endorsers are liable to him.
“the italicized portion of the above Section is important”.
An illustration will make the point clear. Ram is the payee of a negotiable instrument.
He endorses the instrument ‘sans recourse’ to Bala, Bala endorses to Kala, Kala to Lala, and
Lala again endorses it to Ram.
In this case, Ram is not only reinstated in his former rights but has the right of an
endorsee against Bala, Kala, and Lala.

NEGOTIATION OF LOST INSTRUMENT OR THAT OBTAINED BY UNLAWFUL

MEANS
When a negotiable instrument has been lost or has been obtained from a maker, acceptor
or holder by means of fraud, or for an unlawful act, no possessor or endorsee, is entitled to
receive the amount due thereon from such maker, acceptor, or holder from any party prior to
such holder.
He cannot do so unless such possessor or endorsee is, or some person through whom he
claims was, a holder in due course.
HOLDER IN DUE COURSE
“Holder in due course”.—“Holder in due course” means any person who for
consideration became the possessor of a promissory note, bill of exchange or cheque if
payable to bearer, or the payee or indorsee thereof, if 1[payable to order], before the amount
mentioned in it became payable, and without having sufficient cause to believe that any
defect existed in the title of the person from whom he derived his title.

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 Holder in Due Course is a legal term to describe the person who has received a
negotiable instrument in good faith and is unaware of any prior claim, or that there is a defect
in the title of the person who negotiated it.
For example; a third-party check is a holder in due course.
The 3rd party who gets the check is not aware of any prior issues with a check, such as it was
overdue, dishonored when presented for payment, had any claims against it,
Ad by Value impression
Holder in Due Course called protected holder or bona fide holder for value.
So Holder in Due Course means;
If payment is not made on a negotiable instrument when it is due, the holder can use the court
system to enforce the instrument.
Various parties, including both signers and non-signers, may be liable for it.
Accommodation parties (i.e., guarantors) can also be held liable.

The holder of a negotiable instrument means any person entitled in his name to the
possession thereof and to receive or recover the amount due thereon from the parties thereto.
➢ A person is called the holder of a negotiable instrument if the following conditions are
satisfied:
➢ He must be entitled to the possession of the instrument in his name and under a legal
title.
➢ He must be entitled to receive or recover the amount from the parties concerned in his
name.
➢ The holder in due course is a particular kind of holder. The holder of a negotiable
instrument is called the holder in due course if he satisfied the following conditions;

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 ➢ The negotiable instrument must have the holder in due course. The negotiable
instrument must be regular and complete in all respects.
➢ He obtained the instrument for valuable consideration.
➢ He becomes the holder of the instrument before its maturity before the amount
mentioned in it becomes payable.
➢ He has no cause to believe that any defect existed in the title of the person from whom
he derived his title.
WHAT IS HOLDER OF VALUE
Where the value of a bill has at any time been given its holder is deemed to be a
holder for value as regards the acceptor and all parties to the bill who become parties before
such time.
The person who claims himself for value needs not himself give value. It may give the prior
party.
REQUIREMENTS FOR HOLDER IN DUE COURSE STATUS
➢ To qualify as an HDC, the transferee must meet the requirements established by the
UCC
➢ The person must be the holder of a negotiable instrument that was taken:
➢ For value.
➢ In good faith.
➢ Without notice that it is overdue, dishonored, or encumbered in any way, and
➢ Bearing no apparent evidence of forgery, alterations, or irregularity.

DIFFERENCES BETWEEN HOLDER AND HOLDER IN DUE COURSE

The definition of the terms ’’holder” and holder in due course we may derive the following
points of difference between them.
Consideration
The existence of consideration is not essential in the case of the holder but a holder in due
course obtains the instrument after paying its full value.
Possession
The person entitled to be called holder in due course must become the possessor of
the instrument before it becomes payable.
Whereas in case of holder neither actual possession nor any time limit within which it
must be acquired is required.
The defect in the transferor’s title

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 The most important point of difference is that the holder in due course acquires an
instrument without having sufficient cause to believe that any defect existed in the title of the
transferor.
It means the holder in due course must obtain an instrument after taking all possible
care about the transferors’ good title. This condition is not essential in the case of the holder.
A holder in due course possesses the right to sue upon the instrument in his name to
recover the amount of the instrument from a liable party to pay others on.
Contract of Agency
Meaning
Agency is an agreement by which a relation based upon an expressed or implied.
There is one person the agent, who is authorized to act under the control of and for another,
principal in negotiating and making contract with third person.
According to Indian Contract Act, 1872 “Contract of agency is a contract by which a person
employs another person to do any act for himself or to represent him dealing with third
person”.
According to Black Law’s Dictionary “A fiduciary relationship created by express or
implied contract or by law in which one party may act on behalf of another party and bind the
other party by words or actions”
The principal is only responsible up to the extent to which the agent is assigned rights to do
act beyond this boundary the principal isn’t responsible but the agent is self-responsible.
While making contract there may be or may not be consideration. Agency is process
of delegating the authority by a principal to the agent to act and represent from his behalf.
The act done and representation made by an agent aren’t the act of the agent but arte
regarded as the act of principal. Therefore rights and duties created by agent are the right and
duties of the principal. However some acts relating to personal skill cannot be done through
agency.
FOLLOWING ACT CAN BE DONE THROUGH AGENCY
➢ To do at for himself.
➢ To run commercial transaction by agent.
➢ To do transaction with third person.
➢ To establish legal relation with principal and third person.
We may note that the contract relating to agency is legally recognized in following criteria:-
Whatever a person can lawfully do he may also does the same through an agent.
He who acts through another is considered to have acted personally.
All Contracts are agreements but all agreements are not contracts.

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GENERAL RULE OF AGENCY
➢ No essential of consideration
➢ Delegation of Authority
➢ Contractual capacity
➢ Agent can appoint sub agent with permission of Principal
➢ If the agent has removed, subagent is automatically terminated
DISTINCTION BETWEEN AGENT AND SERVANT
Agent is a person who represents another in matter to relating contracts but servant is
person employed by someone to do in a house for a payment.
An agent is bound by lawful instructions of principal but is not under a direct control and
supervision. He has a discretionary (Sobibek) power whereas servant acts under direct control
and supervision of his owner. He has no discretionary power.
An agent is employed with an authority to bring the principal into legal relations with
third parties. He represents his principal in dealings with third party but servant does not
ordinarily do this kind of acts.
Mistakes made by an agent with authority are attributed to his principal. The agent
isn’t responsible personally for the act done but mistakes made by servant may make his
master liable only when it is committed at the time of employment.
Agent is a representative of the principal with a high status. A servant may act as an agent
office master with low standard.
An agent may work for several principals at some time. A servant usually provides
services for only one master.
An agent generally received commission for the acts done from his principal. A
servant generally receives salary as remuneration from his master.
MODEL/ METHODS OF CREATING AGENCY
Modes mean the way and methods. There are various ways or modes by which the
relationship of principal and agent may arise.
By Express Agreement
Normally the authority given by principal to his agent is an express authority in such
case; the agent may be appointed either by the words spoken or written or conduct of
activities. For e.g. power of attorney.
By Implied Agreement
Implied agreements are unexpressed agreement. Implied agreements/agency arises
from the conduct, situation or relationship of the parties. It may be inferred from
circumstances (aasaamaney paristhiti utpana huna sakney) of the case; and things spoken

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or written or the ordinary course (j hudai aaeyko cha) of dealing may be accounted as
circumstance of the case. Implies agency may come from different cases.
Agency by Estoppel (bibandhan)
If a person represents by words or conducts that another person is his agent and third party
reasonably believes on such representation and enters into an agreement, the person who
represents so is bound by the act of other this is known as the agency by estoppel. In this case
of agency by estoppel, the third party must act in good faith and must rely on a representation
of the agents authority to act as an agent.
Agency by Holding Out
This may arise from the relation of employer and employee. A manager is an agent of the
company. The agency that is held due to any kind of business relationship is known as
agency by holding out.
Agency by Necessity
In certain urgent circumstance the law confers (pridit garcha) an authority on a
person to act as an agent for the benefit of another such agency is called an agency of
necessity (aawosakta ley janmayeko). In such cases, the agent must act in good faith and
have to protect and preserve the interest of the principal.
For example:- ‘A’ a common interest carrier carries dairy product of ‘B’ from Kathmandu to
Narayanghat because of landslide, the carrier sold all dairy product on the way (transit)
otherwise there was chance of damage of all goods. In such case ‘B’ cannot sue (birodh hak
dabi) against ‘A’ because of no authority. Here ‘A’ is treated as an agent of ‘B’ by necessity.
Agency of Ratification (Later Acceptance) (pustikaran dawaraa abhikaran)
Even if the agent enters into a contract without the authority of the principal, the
principal may subsequently ratify i.e. adopt the benefits and liabilities of a contact made on
the principal’s behalf. It may occur in two ways:-
Firstly, when a person acts one behalf of another without authority of the principal and
principal adopt the transaction.
Secondly, when a person is an agent of another but he exceeds his authority and acts
on behalf of principal and principal adopts the transaction.
In either cases if act is done on behalf of another (principal) and later principal adopts or
rectifies the transaction there is an agency relationship between the parties. (if one person
does something without the permissions or authority of another person and another
person makes good response for that work then it is known as Agency of
Ratification. In this case person is known as ‘Agent’ and another person is ‘Principal’.
Though another person (principal) gives positive response to person (agent) the date

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when person ‘agent’ starts the work for another person (principal) should be called
the agency)
Requisites for Valid Ratification
➢ The principal must be named.
➢ Ratification must be done by the person to whom act is done.
➢ Ratification must be done by a person with full knowledge of material facts or with
intent to take the risk of any irregularity.
➢ Ratification must be by a person competent to have authorized the transactions.
➢ Void or illegal contract cannot be ratified by the principal.
RIGHTS OF AGENT
There are number of rights which an agent has against his principal and third parties. These
are as follows:-
Right to get remuneration
If it is provided in the contract of agent agent has right to receive reasonably remuneration for
his work for principal.
Right of Lien (dharanadhikar)
If agent is not paid lawful charges remunerations or expenses by his principal and of goods of
principal are under his control he can retain (rakhna) the goods until the lawful charges is
paid by principal. This right last (lambina sakcha) till the lawful charges are fully satisfied.
Right to get indemnity
If principal removes the agent without concrete reason agent has right to clain
compensation from his principal. Therefore, agent has also right to continue business
performance until nothing is wrong done by agent.
Duties of Agent
An agent owes a number of duties to his principal who varies in degree according to
the nature of agency and circumstances of a case. These duties are as follows
Duty to follow instructions/directions:-The first and foremast duty of an agent is to act
strictly within the scope to the authority conferred (pradat garieyko) upon him and to carry
out the instructions of the principal.
To act under the terms of the contract:- An agent is obliged to perform each and every
term mentioned in the contract towards his principal.
Duty to communication:- In cases of difficulty, it will be also the agent’s duty to
communicate the principal and obtain his instructions while carrying the business agency.

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Not to delegate his authority:- An agent must not delegate his authority to delegate
authority agent must have the permission of principal. As much as possible agent himself
performs on behalf of principal.
Duty not to make secret profit from agency:-An agent’s duty is to be loyal to his principal.
It an agent makes secret profit from its agency, the principal can demand all the profits from
the agent.
Duty to follow customs:- Where, however the principal has not given any instructions it is
the duty of agent to follow the customs prevailing in the same kind of business at the place
where the agent conducts his business.
Duty to carry out the work with reasonable care, skill and diligence:- Agent is always
bound to act with reasonable care, skill and diligence as he possesses and to make
compensation to his principal in respect of direct consequences of his neglect or want of skill
or misconduct.
Duty to keep and render separate and correct accounts:- An agent must keep the money
and property of the principal separate. He must keep true, correct and proper accounts of his
all transactions o0n behalf of his principal and to be prepared all times to produce them to his
principal.
Duty to act with good faith:- An agent must act in good faith while representing the
principal. Agent should not have any intention to cause harm to the principal.
Not disclose confidential information:- Though the agent may have authority from his
principal to deal on his accounts, agents are not allowed to disclose or leak the confidential
information of the principal. It is the duty of agent to maintain privacy and secrecy of such
confidential information of the principal.

TYPES OF AGENT
The agent within the limit of authority, acts on behalf of the principal and binds him
or brings the principal in a contractual relation with third person. The principal is liable
for the act of agent to the third persons. Agent can be classified into different types of basis
which are as follows:-
On the Basis of Limit of Authority
Specific Agent: - A specific agent is one who is appointed to perform a particular act or to
represent in some particular transactions. For example, an agent appointed for sale of
particular house.

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General Agent: - A person hired to carry on a series of transaction relating to particular
business, he is the one who has authority to do all acts connected with a particular trade,
business or employment. For example, A manager of a firm.
Universal Agent:- This agent is appointed to do all acts and whose authority is unlimited and
can do everything which the principal lawfully do.

On the Basis of Nature of Act/Business

Mercantile Agent: - He is the agent appointed for mercantile or business activities. The
business activities consist of both trade activities and commerce activities. There are different
types of mercantile agent. They are as follows :-
Factor: - The agent to whom goods are entrusted for the purpose of selling them. He can sell
the goods in his own name and can do such things as are usual and necessary in the course of
such businesses.
Broker: - A broker is an agent who is employed to buy or sell goods on behalf of another. He
is a middleman for purchase or sale of goods but he is not entrusted with the possession of
goods and he doesn’t sell or purchase the goods himself. He is appointed to bring about a
contractual relation between principal and third parties.
Commission Agent: - Agents who act on behalf of another for commission of his act or
service. Generally this type of agent buys or sells goods in the foreign market on behalf of his
principal.
Auctioneer: - An auctioneer is an agent appointed by a seller to sell his goods by public
auction for commission. He sales good by auction to the highest bidder in public competition.
Del-Credence Agent (Thap Dasturi Abhikartaa):- An agent who in extra commission
guarantees his principal the person with whom he enters into contract on behalf of the
principal shall perform their obligations otherwise he (agent) will be liable. He is surety
(state of being sure) also.
Bankers: - Bank and Bankers is the agent of the customers because the relationship between
banker and customer is generally creditor and debtors. The bankers collect cheque, draft or
bills or buys and sales securities on behalf and get commissions from the customer as
considerations for services.
Non-Mercantile Agent:- The agent who is unrelated with business activities. It includes
estate agent, house agent, election agent, promoter, insurance agents, solicitors, clearing and
forwarding agent etc. These include attorneys.

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Termination of Agency (Abhikaran ko samapti)
The parties by an agreement can create a contract of agency. Similarly, by an
agreement they can terminate it. If agency is made for some specific purpose and for a fixed
time period the agency terminates when purposes are achieved or time is lapse (bityeo
bhaney).
There are various modes in which the agency can be terminated:-
➢ By the act of the parties
➢ Mutual Agreement
➢ Revocation by the principal (Adhikar firta lieyra)
➢ Renunciation (Paritayg) by the agent
➢ Rescinding (Cancel) the authority by the principal
By operation of law
By performance: - If agency is made for certain purpose on the completion of achievements
of purpose the agency is terminated.
By expiry of time fixed: - If time is fixed for the agency, whether or not purposes are
fulfilled, and the agency is terminated after expiry of time fixed.
Insanity of principal (unsound mind):- If the principal become insane the contract can be
terminated. Not only principal it also applies in case of agent as well.
Death of either party: - The death of the principal or agent terminates the contract of
agency.
Insolvency of principal: - After the insolvency or bankruptcy of principal if agent acts on
behalf of principal he himself will be liable for that not the principal. So after the insolvency
the contract of agency terminates.
Destruction of the subject matter:- If the subject matter for which agency was created,
destroyed it terminates the contract of agency.
By dissolution of company: - If the company dissolves the agent will have no more authority
provided by the company or principal, and then contract of agency terminates.
By the happening of any event rendering the agency unlawful: - If subsequent (pachi) to
the contract, law change in such way which invalidated the transaction, then the agency also
terminates. Subsequent to the contract, if principal and agent became alien enemy the contract
of agency also terminated.

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 UNIT - IV
Formation of a Company
The procedure or formation of a company may be divided into four stages:

1. Promotion

2. Incorporation

3. Raising of capital

4. Commencement of business

1. Promotion:

It is the first stage in the formation of a company. In this stage the idea of carrying on a
business is conceived by a person or a group of persons called promoters. They make detailed
investigation about the workability of the idea, amt of capital required, operating expense etc
etc..

Before a company an be formed, there must be some persons who have an intention to form a
company and who take the necessary steps to carry that intention into operation. Such
persons are called promoters.

The promoter is the person who brings a company into existence.

II. Incorporation

2. Incorporation:

A company is said to be incorporated when it is registered with the registrar under the
companies act. The certificate of incorporation is the birth certificate of the company. A
company comes into existence from the date mentioned in the certificate.

Procedure for Registration

The promoter has to first decide the proposed form of company as whether it is to be a public
company or a private company.

They may form the company with limited liability , unlimited liability or limited by
guarantee.

They have to decide the name of the company agreeable and desirable to all. For eg if the
name proposed is identical with or closely resembles the name of an existing company , it is
undesirable.

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For getting registration an application has to be made to the registrar.

The application shall be accompanied by the following documents:

1. Memorandum of association

2. Articles of association

3. A statement of nominal capital

4. A notice of address of the registered office of the company.

5. A list of directors and their consent to a act signed by them

6. A declaration that all the requirements of the act have been complied with. Such
declaration shall be signed by an advocate of high court or supreme court or a chartered
accountant who is engaged in the formation of company

Certificate of Incorporation:

If the registrar is satisfied that all the requirements of the act have been complied with he
shall register the company and issue a certificate of incorporation.

Conclusive Proof

Once a company is registered incorporation cannot be challenged subsequently. The

certificate of incorporation is a conclusive evidence of the fact that:

1. all the requirements of the act have been complied with.

2. company is duly registered.

3. company came into existence on the date of certificate.

Advantages of Incorporation:

1. Transferability of shares

2. Separate legal entity

3. Perpetual succession

4. Common seal

5. Separate property

6. Capacity to sue

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3. Raising of Capital:

After incorporation a company can raise capital by issuing shares. A private company cannot
issue shares to public.

In case of public company a copy of prospectus is filed with the registrar and it will be issued
to the public. Those who are intended in purchasing share are required to send their
application money to company's banker.

On the last date fixed for the receipt of application if the company has received application
equal to minimum subscription the directors will start with allotment of shares.

4. Commencement of Business:

A private company may commence its business immediately after incorporation.

But a public company cannot commence business immediately after incorporation but it has
to obtain a certificate of commencement from the registrar.

Meaning and Nature of Company

According to the Companies Act, 1956, “A company is a person, artificial, invisible,
intangible, and existing only in the contemplation of the law. Being a mere creature of the
law, it possesses only those properties which the character of its creation confers upon it
either expressly or as incidental to its very existence.”

It can clearly be defined that −

•A company is defined as a group of people that contributes money or the worth of
money to a common stock to employ it in some trade or business. The people in this
group share the profit or loss (as the case may be) arising as a result.
• The common stock is usually denoted in terms of money and is the capital of the
company.
• The persons who contribute to the common stock are the members.
• The proportion of the capital entitled to each member is called the member’s share.
• Shares are always transferrable subject to the restrictions and liabilities offered by the
rights to transfer shares.
The main characteristics of a company are discussed below.
Incorporated Association
• A company can be created only under the registration of the Company Act.
• It comes into existence from the date when the certificate of incorporation is issued.
• At least seven persons are required to form a public company.
• At least two persons are required to form a private company.

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 • These persons will subscribe to the memorandum of associations and also comply
with the other legal requirements of the Company Act in respect of registration to
form and incorporate the company, with or without liability.
Artificial Legal Person
A company can be considered as an artificial person (a person who cannot act on his own
will). It has to act through a board of shareholders elected or selected by the members of the
company.
• The board of directors works as the only brain of the company.
• It has the rights to acquire and dispose the properties, to enter into contract with third
parties in its own name, and can sue and can be sued in its own name.
• However, it cannot be considered as a citizen as it cannot enjoy the rights of a citizen.
Separate Legal Entity
A company is perceived to be a distinct legal entity and one that does not depend on its
members. The money credited by the creditors of the company can be recovered only from
the company and the properties owned by the company.
• Individual members cannot be sued.
• Similarly, the company in any way is not liable for the individual debts of the
members.
• The properties of the company can only be used for the development, betterment,
maintenance, and welfare of the company and cannot be used for personal benefits of
the shareholders.
• A member cannot claim any ownership rights over the company either single-
handedly or jointly.
• The members of the company can enter into contracts with the company in the same
manner as any other individual can.
• The Income Tax Act also recognizes company as a separate legal entity.
• The company has to pay income tax as it earns profits and when dividends are paid to
the shareholders, the shareholders also have to pay income tax based on the
dividends earned. This highlights the fact that the shareholders and the company are
two separate individual entities.
Perpetual Existence
•A company is said to be a stable form of business organization.
•A company’s life does not depend upon the death, insolvency or retirement of any or
all of its shareholders or directors.
• It is created by law and can only be dissolved by law.
• Members can join or leave the company but the company can continue forever.
Common Seal
• A company cannot sign documents by itself.
• It acts through natural persons who are called its directors.
• A common seal is used with the name of the company engraved on it as a substitute of
its signature.
• To be legally binding on the company, a document has to carry the company seal on
it.
Limited Liability
• A company may be limited by shares or by guarantee.
• In a company limited by shares, the liability of members is limited to the unpaid
value of the shares.

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 • In a company limited by guarantee, the liability of members is limited to such an
amount as the members may undertake to contribute to the asset of the company in
the events of it being wound up.
Transferrable Shares
• The shares can be freely transferred in case of a public company.
• The right to transfer shares is a statutory right and it cannot be taken away by any
provision.
• However, the manner in which such transfer of shares is to be made should be
provided and it may also contain bona fide and reasonable restrictions on the rights
of members for transfer of their shares.
• However, in case of private companies, the article shall restrict the rights of the
members to transfer their shares in companies with its statutory description.
• If a company refuses to register the transfer of shares, a shareholder may apply to the
Central Government in order to make the right to transfer shares legal.

Delegated Management
• Any company can be considered as an autonomous, self-governing and self-
controlling organization.
• Due to the presence of a large number of members, all members cannot take part in
the management of different affairs of the company.
• Control and management is therefore delegated to the elected representatives called
directors, who are elected by the shareholders.
• The directors supervise the day-to-day work and progress of the company.

Classification of Companies
All the companies must be registered under the Companies Act. A certificate of
incorporation must be issued by the registrar of the company after registration. Different
jurisdictions can form different companies. Some of the most common types of companies
are as follows −

Private Company
• A company is said to be a private company if it does not allow its shareholders to
transfer shares.
• If any transfer of shares is allowed, the company limits the number of its members to
50 and does not entertain any invitations to the public for subscribing any shares of
the company.
• These types of companies offer limited liabilities to their shareholders but also place
some restrictions on their ownership.
• A private company can have a minimum of 2 members and a maximum of 50
members, excluding the employees and the shareholders.
• A private company is desirable in those cases where it is intended to take the
advantage of corporate life, has limited liability and the control of the business is in
the hands of few persons.
• In private sector, an individual can gain control of the entire business firm.

Public Company

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 • At least seven members are needed to form a public company.
• The maximum number of members remains unrestricted in the case of public
companies.
• A Prospectus is issued by the public companies to invite people to buy the shares of
the company.
• The liability of the members is limited by the value of the shares they purchase.
• The shares of a public company are sold and bought freely without any obstruction in
the stock market.
Companies Limited by Guarantee
•Every member of these companies promises to pay a fixed amount of money in the
event of liquidation of the company.
• This amount is denoted as guarantee.
• There is no liability to pay anything more than the value of the share and the
guarantee. Some of the substantial resultants of companies limited by guarantee are
charities, community projects, clubs, societies, etc.
• Most of these companies are not into any profit-making.
• These types of companies can be considered as private companies offering limited
liabilities to their members.
• A guarantee company substitutes share capitals with guarantors willing to pay a
guarantee amount upon the liquidation of the company.
Companies Limited by Share
In the case of companies limited by shares, the shareholders pay a nominal value of
money contributing to the share capital. The payments can be done either at a time or by
installments.
• The members do not have to pay anything more than the fixed value of the share.
Companies limited by shares are the most popular among the registered companies.
• These types of companies are required to have the suffix ‘Limited’ at the end of their
names so that the people know that the liability of its members is limited.
Unlimited Company
• Unlimited companies are the companies where the liabilities of the shareholders are
unlimited as in the case of partnership firms.
• Such companies are permitted under the Companies Act but are not known.
• These types of companies are incorporated either with or without a share capital.
• The shareholders are liable to donate whatever sums are required to pay the
outstanding debts of the company, should it go into formal liquidation and if there is
any need to meet the insufficiency of assets to pay the debts and liabilities and the
fixed cost of liquidation.
• The members or shareholders have no direct liability to the creditors or security
holders of an unlimited company.

MEMORANDUM AND ARTICLES OF ASSOCIATION

Memorandum of Association is a document which actually forms the charter of the

company and defines its powers and objects. It is the basic document and it states how the

company is to be constituted and what work it will perform at the same time. It contains rules

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regarding the capital structure, the liability of the members, the objects clause, and other

important matters of the company.

It delimits the area beyond which the company cannot go.

FORMS OF MEMORANDUM:

According to Sec. 14 of the Companies Act, Memorandum of Association will be in

such one of the forms which are laid down in Tables B, C, D and E in Schedule I to the

Companies Act:

Table B = It relates to Memorandum of Association of a company limited by shares.

Table C = It relates to Memorandum and Articles of Association of a company limited by

guarantee and not having a share capital.

Table D = It relates to Memorandum and Articles of Association of the company limited by

guarantee and having a share capital.

Table E = It relates to Memorandum and Articles of Association of an unlimited company.

CONTENTS OF MEMORANDUM:

Sec. 13 of the Companies Act states that the Memorandum of Association of every

company must contain:

(a) Name clause:

It must contain the name of the company with the word ‘Limited’ in case of a Public Limited

Company and with the word ‘Private Limited’ in case of a Private Limited Company.

(b) Situation clause:

The name of the State where the Registered Office of the company is situated. In order to

determine the jurisdiction of the court and of the Registrar of this company, it is very

important.

(c) Object clause:

The Memorandum must contain the objects of the company and which must be

classified as:
(i) The main objects of the company to be pursued by the company;

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(ii) Objects incidental or ancillary to the attainment of the main objects; and

(iii) Other objects which are not included in (i) and (ii) above.

(d) Area of operation clause:

The state or states to whose territories the objects of the company extend (except in case of

trading corporation) must be contained.

(e) Liability clause:

A limited company must state in its Memorandum that the liability of its members is limited

and a guarantee company must state the liability of its members if the company goes into

liquidation.

(f) Capital clause:

In the case of a company having a share capital, it must mention the amount of share capital

by which the company proposes to be Registered and division thereof into share of a fixed

amount.

(g) The Association and Subscription clause:

The Memorandum must contain this clause which informs the consent of the members

relating to formation and the number of shares taken by each of them. Each member is to take

at least one share of the company and to state his name, address, description, number of

shares taken by him along with the name, address and description of the witness.

Printing and Signing of Memorandum:

Sec. 15 lays down that the Memorandum of Association shall be:

(i) Printed,

(ii) Divided into paragraphs, numbered consecutively, and

(iii) Signed by seven members in case of private company.

Every member must sign and add his address, his occupation, description in the presence of

at least one witness who also must attest his signature and add his address, description and

occupation, if any.

Alteration of the Memorandum:

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The following procedures have been laid down by the Companies Act in order to alter the

Memorandum of Association of the company.

The provisions of the Memorandum, for the purpose of alteration, may be divided into

two:

(1) Provision which must be included in the Memo (viz., the name, object, place of registered

office etc.);

(2) Other provision (viz., appointment of manager, managing director etc.).

Needless to mention here that provisions coming under (2) stated above can be altered in the

same manner as provision of Articles of Association unless otherwise provide in the Act.

But provisions coming under (1) stated above are called ‘Conditions contained in the

Memorandum’ and may be altered in the following ways:

(a) Change of Name:

Sec. 21 lays down that a company may change its name by special provisions provided the

Company Law Board approves of the change. But no such approval is necessary in case of

addition or deletion of the word ‘Private’ when a public company is converted into a private

company, or vice versa.

Sec. 22 states that if, by inadvertence, a company is registered with a name which is identical

with or closely resembles the name of tin existing company, the name may be changed by an

ordinary resolution, with the previous approval of the Company Law Board. If the company

takes no steps in the matter, the Board may direct it to change its name within a prescribed

period.

Similarly, Sec. 23 lays down that when the name is validly changed, the Registrar shall enter

the new name in the register of companies and shall issue a fresh certificate of incorporation.

The Registrar shall also make the necessary alteration in the Memorandum of Association of

the company.

(b) Change of object:

Secs. 17 to 19 of the Companies Act state how the object clause of a Memorandum can

be changed in order to enable the company:

(i) To carry on its business more economically and more efficiently;

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(ii) To attain its main purpose by new or improved means;

(iii) To enlarge or change the local area of its operation;

(iv) To carry on some business which—under existing circumstances—may conveniently or

advantageously be combined with the objects specified in the Memorandum;

(v) To restrict or abandon any of the objects specified in the Memorandum;

(vi) To sell or dispose of the whole or any part of the undertaking of the company; or

(vii) To amalgamate with any other company or body of persons.

Procedure of Alteration:

(i) A special resolution must be passed [Sec. 17(1)].

(ii) The alteration must be confirmed by the Company Law Board on petition [Sec. 17(2)].

(iii) Notice must be given to every person whose interest will be affected by the alteration and
consent of the creditors of the company must be obtained or claims have been discharged or

secured [See. 17(3)].

(iv) Notice must be given to the Registrar of companies so that he can appear before the

Company Law Board and state his objections and suggestions, if any, in regard to the

confirmation of the alteration [Sec. 17(4)].

(v) The Company Law Board may make an order confirming the alteration either wholly or

in part and on such terms and conditions, as it thinks fit [Sec. 17(5)].

A certified copy of the Company Law Board’s order along with a printed copy of the

Memorandum as altered shall be filed with the Registrar within 3 months of the date of the

order after the Board has confirmed the alterations and the certificate of the Registrar of

Companies is conclusive evidence of the alteration.

(c) Change of Registered Office:

Change of registered office includes:

(i) Change of registered office from one place to another place in the same city, town or

village;

(ii) Change, of registered office from one town to another town of the same State; and

(iii) change of registered office from one state to another State.

(d) Alteration of Capital Clause this may include:

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(i) Alteration including increase of capital;

(ii) Reduction of capital;

(iii) Variation of shareholders’ right;

(iv) Creation of Reserve Capitals.

ARTICLES OF ASSOCIATION

Articles of Association contain the rules and regulations which are to be followed for the

internal management of the company based on the Memorandum of Association. In other

words, it is a document which contains rules, regulations, bye-laws etc. of the company.

FORM OF ARTICLES

Sec. 30 of the Companies Act lays down the model form of Articles, for use in the case of

companies not limited by shares, which are given in Schedule I to the Act. The Articles must

(i) be printed, (ii) be divided into paragraph and numbered consecutively, and (iii) be signed

by each member of the Memorandum in the presence of at least one witness who shall attest

the signature, add his address and description and occupation.

MODEL FORM OF ARTICLES

Table A = It deals with regulations for management of a company limited by shares;

Table B = It contains a model form of Memorandum and Articles of Association of company

limited by shares;

Table C = It contains model form of Memorandum and Articles of Association of a company

limited by guarantee and not having a share capital;

Table D = It presents model form of Memorandum and Articles of Association of a company

limited by guarantee and having a share capital;

Table E = It gives the model form of Memorandum and Articles of Association of an

unlimited company.

CONTENTS OF ARTICLES

The Articles of Association of a public limited company usually contain:

(a) Number and value of shares, share capital, variation of shareholders’ right, payment of

commission, share certificate;

(b) Preliminary contracts, if any;

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(c) Loan on shares;

(d) Calls on shares;

(e) Transfer and Transmission of shares;

(f) Forfeiture of shares;

(g) Share Warrants;

(h) Alteration of capital;

(i) General meeting;

(j) Voting rights of members;

(k) Directors, their remuneration etc.;

(l) Secretary and Manager;

(m) Dividend and Reserves;

(h) Accounts and Audit; and

(o) Winding-up.

PROCEDURE OF ALTERATION

According To Sees. 40 and 192 (1) and (2) of the Companies Act, a company may

alter the rules and regulations that are contained in its Articles anytime by passing a special

resolution. Similarly, any new regulation may also be adopted which could have been

lawfully included in the original Articles.

Although, a copy of the special resolution altering the Articles must be filed with the

Registrar within 30 days of its passing, together with every copy issued thereafter. Sec. 31(2)

also states that any alteration made in the Articles shall be as valid as if originally contained

in the Articles and shall be subject in like manner to alteration by special resolution.

Limitations of Alteration:

The following points should carefully be considered:

(i) Articles must not conflict with Memorandum;

(ii) It must not sanction anything illegal;

(iii) It must not be inconsistent with the Act;

(iv) It must not increase the liability of members;

(v) It must be altered by special resolution only;

(vi) It must not cause breach of contract;

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(vii) It must be for the benefit of the company;

(viii) It may be effected with retrospective effect.

DIFFERENCES BETWEEN MEMORANDUM OF ASSOCIATION AND ARTICLES
OF ASSOCIATION

The distinction between the two-may be summed up as:

(1) The Memorandum is the fundamental charter which states the objects and power of the

company while the Articles are the rules and regulations which control the internal

management of the company.

(2) An Article may be altered by a special resolution and consent of Company Law Board is

not necessary. But Memorandum may be altered by a special resolution subject to sanction of

the court or Company Law Board.

(3) Any act beyond the powers of Memorandum (ultra vires) is void and that is not ratified by

the members even by a unanimous resolution. But any acts beyond the Articles can be ratified

by the member provided these are within the jurisdiction of the Memorandum.

(4) Any rule in the Articles Contrary to the Memorandum is invalid.

(5) The Memorandum is practically a contract between the company and the outsiders but

Articles deal with the contract between the company and the shareholders.

(6) There are certain clauses which cannot be altered without the sanction of the Central

Government and the court (e.g., the object clause, the liability clause etc.) and there are other

clauses which can be altered easily (e.g., the name clause). But that is not applicable in case

of the Articles. It can be altered by a special resolution.

(7) The Memorandum is governed by the Companies Act whereas the Articles are governed

by both the Companies Act and the Memorandum as well.

BASIS FOR ARTICLES OF

MEMORANDUM OF ASSOCIATION
COMPARISON ASSOCIATION

Meaning Memorandum of Association is a Articles of Association is a

document that contains all the document containing all the
fundamental information which are rules and regulations that
required for the incorporation of the governs the company.
company.

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BASIS FOR ARTICLES OF
MEMORANDUM OF ASSOCIATION
COMPARISON ASSOCIATION

Defined in Section 2 (56) Section 2 (5)

Type of Information Powers and objects of the company. Rules of the company.
contained

Status It is subordinate to the Companies Act. It is subordinate to the

memorandum.

Retrospective Effect The memorandum of association of the The articles of association

company cannot be amended can be amended
retrospectively. retrospectively.

Major contents A memorandum must contain six clauses. The articles can be drafted as
per the choice of the
company.

Obligatory Yes, for all companies. A public company limited by

shares can adopt Table A in
place of articles.

Compulsory filing at Required Not required at all.

the time of
Registration

Alteration Alteration can be done, after passing Alteration can be done in the
Special Resolution (SR) in Annual Articles by passing Special
General Meeting (AGM) and previous Resolution (SR) at Annual
approval of Central Government (CG) or General Meeting (AGM)
Company Law Board (CLB) is required.

Relation Defines the relation between company Regulates the relationship

and outsider. between company and its
members and also between
the members inter se.

Acts done beyond Absolutely void Can be ratified by

the scope shareholders.

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POSITION, APPOINTMENT & POWERS OF DIRECTORS UNDER THE
COMPANIES ACT, 2013
A corporation is an artificial person which is intangible and invisible. For making any
decision and to have knowledge and intention, a living person has a mind and hands by which
he carries out his actions. But a corporate body being an artificial person has none of these.
So it needs to act through a living person. The company’s business is entrusted in the hands
of directors.
Section 2(34) of the Companies Act, 2013 defines a director.
Appointment of Directors
The appointment of Directors of a company is strictly regulated by the Company’s Act, 2013.
COMPANY TO HAVE BOARD OF DIRECTORS
Every company is required to have a Board of directors and it should be consisting of
individuals as directors and not an artificial person. Section 149 lays down the minimum
number of directors required in a company as follows:
1. Public Company– At least 3 directors
2. Private company- At least 2 directors
3. One person company– Minimum 1 director
There can be a maximum of 15 directors. A company may appoint more than 15 directors
after passing a special resolution.
The Central Government may prescribe a class or classes of a company have a
minimum one women director. Every company is also required to have a minimum of one
director who has stayed in India in the previous year for a period of 182 days or more.
INDEPENDENT DIRECTORS
The provisions of Independent Directors has been laid down under section 149(4) of
the Companies Act, 2013. This section lays down that at least one-third of the total number
of directors should be independent directors in every listed company The Central
Government may prescribe the minimum number of independent directors in public
companies.
WHO IS AN INDEPENDENT DIRECTOR?
Sub-section (6) of section 149, defines that an independent director stands for a director
other than a managing director, whole-time director or a nominee director:
1. Who is a person with integrity and has relevant expertise and experience.
2. Who has not been a promoter of the company, its subsidiary or holding company
either in past or present.

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 3. Who himself or his relative has no pecuniary relationship with the company, its
holding or subsidiary company, directors or promoters.
4. Who himself or his relative, do not hold the position in key managerial personnel, or
not an employee of the company.
The independent director has to declare his independence at the first meeting of the Board
and subsequently every year at the first meeting of the Board in the financial year.
An independent director holds office for a term of five years on the Board. He is also
eligible for being reappointed after passing a special resolution, but no independent director is
to hold the office for more than two consecutive terms.
ELECTION OF INDEPENDENT DIRECTORS
The independent directors are to be selected from a data bank which contains certain
information such as name, address and qualifications of persons who are eligible and willing
to act as an independent director. The data bank is maintained by anybody, institute or
association with expertise in the creation and maintenance of data bank and notified by the
Central Government. A company has to pick up a person with due diligence, as stated
in section 150.
The appointment has to be approved by the company in general meeting, and the manner and
procedure for selection of independent directors who fulfil the qualification stated
under section 149 may be prescribed by the Central Government.
APPOINTMENT OF DIRECTORS THROUGH ELECTION BY SMALL
SHAREHOLDERS
A listed company is required to have one director who should be elected by small
shareholders as per section 151 of the Companies Act, 2013. Small shareholders in this
context are referred to shareholders holding shares of the value of maximum Rs. 20,000.
FIRST DIRECTORS
The subscribers of the memorandum appoint the first directors of a company. They
are generally listed in the articles of the company. If the first director is not appointed, then
all the individuals, who are subscribers become directors. The first director holds the office
only up to the date of the first annual general meeting, and the subsequent director is
appointed as per the provisions laid down under section 152.
APPOINTMENT AT THE GENERAL MEETING
Section 152 lays down the provision that directors should be appointed by the
company in the General Meetings. The person so appointed is assigned with a director
identification number. He also has to make sure in the meeting that he is not disqualified
from becoming a director.

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The individual appointed has also to file his consent to act as a director within 30 days with
the registrar.
ANNUAL ROTATION
The retirement of the directors by annual rotation can be prescribed by the company
in the Articles. If not so, only one-third of the directors can be given a permanent
appointment. The tenure of the rest of them must be determined by rotation.
At an annual general meeting, one-third of such directors will go out, and the directors who
were appointed first and has been in the office for the longest period will retire in the first
place. When two or more directors have been in the office for an equal period of time, their
retirement will be determined by mutual agreement, or by a lot.
REAPPOINTMENT [SECTION 152]
The vacancies created should be filled up at the same general meeting. The general meeting
may also adjourn the reappointment for a week. When the meeting resembles and no fresh
appointment is made neither there is any resolution for the appointment, then the retiring
directors are considered to be reappointed.
The exception to this practice is that the retired directors will not be considered to be
reappointed when:
1. The appointment of that director was put to the vote but lost.
2. If the director who is retiring has addressed to the company and its board in writing
that he is unwilling to continue.
3. If he is disqualified.
4. When an ordinary or special resolution is required for his appointment.
5. When a motion for appointment of two or more directors by a single resolution is void
due to being passed without unanimous consent under section 162.
FRESH APPOINTMENT
When it is proposed that a new director should be appointed in the place of retiring
director, then the procedure laid down under section 160 of the Companies Act, 2013 is
followed:
1. A written notice for his appointment as a director should be left at the office of the
company at least 14 days prior to the date of the meeting along with a deposit of
Rs.1,00,000.
2. That amount should be refunded to the person if he is elected as a director, or
3. He gets more than 25% of the total valid votes cast.

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APPOINTMENT BY NOMINATION
The appointment of Directors can also be made with respect to the Company’s articles
and not only through the general meetings. When an agreement between the shareholders has
been included in the articles that entitles every shareholder with more than 10% share to be
appointed as a director, then they can be nominated as director.
Also, subject to the articles of the company, the Board can appoint any nominated person by
an institution in pursuance of law, as a director.
APPOINTMENT BY VOTING ON AN INDIVIDUAL BASIS
The appointment of a director is made by voting at the general meeting as laid down
under section 162 of the Companies Act, 2013. The candidates have to vote individually and
the wishes of the shareholders regarding each proposed director are required.
Appointment by proportional representation
As per section 163 of the Companies Act, 2013, the article of a company can enable the
appointment of directors through the system of voting by proportional representation. This
system of voting is used to make effective minority votes. This system of proportional
representation can be followed by a single transferable vote or by the system of cumulative
voting or other means.

APPOINTMENT OF DIRECTORS BY BOARD

Generally, the appointment of the directors is done in the annual general meeting of the
shareholders but there are two instances when the Board can also appoint a new director:
1. If the article empowers the Board to appoint additional directors along with
prescribing the maximum number.
2. Section 161 of the Act also authorises the directors to fill casual vacancies.
APPOINTMENT BY TRIBUNAL
Under section 242(j) of the Companies act 2013, the Company Law Tribunal has the power
to appoint directors.
Disqualifications
The minimum eligibility requirement for the appointment of directors has been laid down
under section 164 of the Companies Act, 2013. The disqualification for a person to be
appointed as a director are:
1. Unsoundness of mind.
2. If he is an undischarged insolvent.
3. When is applied to be declared as insolvent and such application is pending.

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 4. When he is sentenced for imprisonment for an offence involving moral turpitude for a
period of a minimum of 6 months.
5. If the Tribunal or court has passed an order disqualifying him for being appointed as a
director.
6. If he has not paid his calls in respect to any shares of the company.
7. When he is convicted of an offence which deals with related party transaction.
8. When he has not complied with the requirements of Director Identification Number.
REMOVAL OF DIRECTORS
The removal of directors takes place by:
1. Shareholders
2. Company Law Tribunal
3. Resignation
Removal by Shareholders
Section 169 of the Companies Act 2013 provides that a director can be removed from his
office before the expiration of his term of office by an ordinary resolution. This section does
not apply when:
1. The director is appointed by the tribunal in pursuance of section 242.
2. The company has adopted the system of electing two-thirds of his directors by the
method of proportional representation.
To remove a director, special notice is required, and such notice should contain the intention
to remove the director and the notice should be served at least 14 days prior to such meeting.
As soon as the company receives such notice, the copy of such notice is furnished to the
director concerned. Then the concerned director has the right to make a presentation against
the resolution in the general meeting. If a director makes a representation, then its copy needs
to be circulated among the members.
REMOVAL OF DIRECTORS BY COMPANY LAW TRIBUNAL
The removal of directors by the Company Law Tribunal can be done under section
242(2)(h). When an application is made to the tribunal for relief from oppression or
mismanagement, then it may terminate any agreement of the company which has been made
with a director. When the appointment of a director is terminated then he cannot serve the
managerial position of any company for five years without leave of the Tribunal.
Resignation
Earlier, there was no provision for the resignation that by what procedure a director can
resign. The resignation was recognised under the provisions laid down under section 318 of

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the Companies Act, 2013. Under this section, it was held that when a director resigns his
office, he is not entitled to compensation.
If the articles mention the provisions for resignation then it will be followed. In the case
of Mother Care (India) Pvt. Ltd. v. Ramaswamy P Aiyar, the court held that the
resignation of a director is effective even if he is the only director in the office.
Now, after the Act of 2013, section 168 lays down the provisions that:
1. The director can resign from his office by giving written notice to the company.
2. On receiving the notice, the board has to take notice of it.
3. The registrar needs to be informed by the company within the prescribed time period.
4. The fact of resignation needs to be placed by the company in the director’s report in
the immediately following general meeting.
5. The director has to send his copy of the resignation to the registrar along with the
detailed reasons within 30 days of the resignation.
Even after resignation, the director is held responsible for any wrong associated with him and
which happened during his tenure.
Powers of Directors
General powers vested under section 179
Section 149 of the Companies Act, 2013 empowers the directors with the general power
vested in the Board. The Board of directors is entitled to exercise all the powers and do all
required actions which a company is authorised to exercise. But, such action is subject to
certain restrictions.
The powers of directors are co-extensive with the powers of the company itself. The director
once appointed, they have almost total power over the operations of the company.
There are two limitations on the exercise of the power of directors which are as follows.
1. The board of directors are not competent to do the acts which the shareholders are
required to do in general meetings.
2. The powers of directors are to be exercised in accordance with the memorandum and
articles.
The individual directors have powers only as prescribed by memorandum and articles.
The intervention of shareholders in exceptional cases
In following exceptional situations the general meeting is competent to act in matters
delegated to the Board:
1. When directors have acted mala fide.
2. When directors have due to some valid reason become incompetent to act.

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 3. The shareholders can intervene when directors are unwilling to act or there is a
situation of deadlock.
4. The general meetings of shareholders have residuary powers of a company.
RESTRICTIONS ON POWERS UNDER THE STATUTORY PROVISION
The Companies Act 2013 also lays the manner in which the powers of the company is to be
exercised. There certain powers which can be exercised only when its resolution has been
passed at the Board’s meetings. Those powers such as the power:
1. To make calls.
2. To borrow money.
3. To issue funds of the company.
4. To grant loans or give guarantees.
5. To approve financial statements.
6. To diversify the business of the company.
7. To apply for amalgamation, merger or reconstruction.
8. To take over a company or to acquire a controlling interest in another company.
The shareholders in a general meeting may impose restrictions on the exercise of these
powers.

POWERS TO BE EXERCISED WITH GENERAL MEETING APPROVAL

Section 180 of the Companies Act 2013 states certain powers which can be exercised by the
Board only when it is approved in the general meeting:
1. To sale, lease or otherwise dispose of the whole or any part of the company’s
undertakings.
2. To invest otherwise in trust securities.
3. To borrow money for the purpose of the company
4. To give time or refrain the director from repayment of any debt.
When the director has breached the restrictions imposed under the sections, the title of lessee
or purchaser is affected unless he has acted in good faith along with due care and diligence.
This section does not apply to the companies whose ordinary business involves the selling of
property or to put a property on lease.
POWER TO CONSTITUTE AN AUDIT COMMITTEE
The board of directors are empowered under section 177 to constitute an audit
committee. It needs to be constituted of at least three directors, including independent
directors. In the committee, the independent directors need to be in the majority. The

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chairperson and members of the audit committee should be persons with the ability to read
and understand the financial statements.
The audit committee is required to act in accordance with the terms of reference
specified by the Board in writing.
Power to constitute Nomination and Remuneration Committees and STAKEHOLDERS
RELATIONSHIP COMMITTEE
The Board of directors can constitute the Nomination and Remuneration
Committee and Stakeholders Relationship Committee under section 178. The Nomination
and Remuneration Committee should be consisting of three or more non-executive directors
out of which one half are required to be independent directors.
The Board can also constitute the Stakeholders Relationship Committee, where the
board of directors consist of more than one thousand shareholders, debenture holders or any
other security holders. The grievances of the shareholders are required to be considered and
resolved by this committee.

POWER TO MAKE A CONTRIBUTION TO CHARITABLE OR OTHER FUNDS

The Board of directors of the company is empowered under section 181 to contribute
to the bona fide charitable and other funds. When the aggregate amount of contribution, in
any case, exceeds the 5% of the average net profit of the company for the immediately
preceding financial years, then the prior permission of the company in a general meeting is
required.
POWER TO MAKE A POLITICAL CONTRIBUTION
Under section 182 of the Companies Act 2013, the companies can make a political
contribution. The company making a political contribution should be other than a government
company or a company which has been in existence for less than three years.
Also, the amount of contribution should not exceed 7.5% of the company’s net profit
in the three immediately preceding financial years. The contribution needs to be sanctioned
by a resolution passed by the Board of Directors.
POWER TO CONTRIBUTE TO NATIONAL DEFENCE FUND
The Board of Directors is empowered to make contributions to the National Defence
Fund or any other fund approved by the Central Government for the purpose of National
defence under section 183 of the Companies Act 2013. The amount of contribution can be
the amount as may be thought fit. This total amount of contribution made should be disclosed
in the profit and loss account during the financial year which it relates to.
Duties of a director:

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Every company director has a personal responsibility to ensure that all the statutory
documents are filed with the Registrar and the Commission as and when required under the
Ordinance. In particular:

1. Audited accounts (only for public limited companies including association not for
profit); and private limited companies having paid up capital of Rs. 7.5 million or
above);
2. Annual returns (Form A/B);
3. Particulars of directors or other officers (Form 29); and
4. Notice of change of registered office (Form 21)
Section 77: Directors Not to Refuse Transfer of Shares:

The directors of a company shall not refuse to transfer any shares or debentures that are fully
paid unless the transfer deed is for any reason defective or invalid.

Section 146: Commencing Business

With respect to the procedure for commencement of business, the Chief Executive or one of
the directors and the secretary are to file with the registrar a declaration that the conditions for
commencement of business as are mentioned in this section have been complied with.

Section 156: Statutory Meeting of the Company

With respect to the statutory meeting of company the directors have the following duties:

1. At least three directors, one of whom is to be the Chief Executive shall certify the
statutory report.
2. The statutory report is to be forwarded to every member of the company at least
twenty one days before the meeting.
3. At least five certified copies of the statutory report are also to be delivered to the
registrar for registration.
4. At the commencement of the meeting and throughout its duration, a list caused to be
prepared by the directors showing the names, occupations, nationality and address of
the members, and the number of shares held by them respectively is to be produced.
Section 177: Retiring Directors Continue to Perform Functions:

The retiring directors shall continue to perform their functions until their successors are
elected. Moreover, the continuing directors are required to take immediate step to hold the
election of directors and in case of any impediment report the circumstances of the case to the
registrar within fifteen days of the expiry of the term laid down in section 180.

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Section 178: Election of directors.

The directors of a company are required to fix the number of elected directors of the company
not later than thirty-five days before the convening of the general meeting at which directors
are to be elected.

Section 205: Register of Directors:

The directors are required to furnish to the company the particulars of their appointment or
any change therein, as the case may be.

Section 230: Maintaining Books of Accounts

The directors are responsible for compliance with the statutory requirements regarding
preparation and maintenance of proper books of account and circulation of financial
statements that give a true and fair view.

Section 231: Facilitating Inspection of Books of Accounts

With respect to inspection of books of accounts and books and papers of a company by the
registrar or by any officer authorized in this behalf by Commission, every director of the
company is bound to:

1. Produce all such books of accounts and books and papers as are in his custody or
under his control.
2. Furnish information, statements and explanations relating to the affairs of the
company required by the abovementioned persons; and
3. Provide reasonable assistance for such inspection
Section 233: Annual Accounts and Balance Sheet

The directors of every company are required to lay before the company in annual general
meeting audited balance sheet and profit and loss account etc.

Section: 236: Directors Report

The directors are required to make out and attach to every balance sheet a report with respect
to the state of the company’s affairs and other information and such report is signed by the
chairman of the directors or the chief executive of the company on behalf of the directors if
authorized in that behalf.

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Section 241: Authentication of Balance Sheet

The directors shall approve, and the Chief Executive and at least one director shall sign, the
balance sheet and profit and loss account or income and expenditure account of the company.

Section 261: Furnishing Information, Documents etc. to the Registrar

Every director is bound to furnish to the best of his power, such information, explanation or
document as may be required by the registrar.

Section 362: Declaration of Solvency in case of Voluntary Winding-up

In case of voluntary winding up its directors may make a declaration that after a full inquiry
into the affairs of the company, they are of the opinion that the company has no debts and it
will be able to pay all its debts in full within such period not exceeding twelve months from
the commencement of winding up.

SHARES

INTRODUCTION

Section 2(47) of the Companies Act, 2013 defines Shares as “A share in the company
includes stock until it has been explicitly distinguished between the stock and the share either
implicitly or explicitly”. Shares can be taken as goods according to the Sales of Goods Act,
1930, they are also considered as movable property abide by the limitations of the articles of
the association of the company.[1] Though the real meaning of Capital is cumbersome, under
The Act, it means that the value of the assets contributed to the company by those who
subscribe for its shares. The real thing which would matter is the value because assets will
change in the form of course of business.

WHAT IS A SHARE CAPITAL?

Share Capital is the amount of money that a company receives by the sale of its
shares. The company uses this amount of money as the capital of the company to commence
business and gain profits in its business. This capital is also used to acquire movable and
immovable properties that are required for running the business.

THE USAGE OF SHARE- CAPITAL UNDER COMPANIES ACT

The Share-Capital under Companies Act, 2013 is significantly used in memorandum of

association in which a company limited by shares or by guarantee must state in its

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memorandum of association, the amount of share-capital and the division thereof into shares
of fixed amount.

It is used in Articles of Association when a company with unlimited liability and having
share capital must state its authorized capital in its articles of association.

Finally, it is used in Prospectus, The amount of capital and the number of shares in which the
capital is dividend must be stated in the prospectus, the statement in lieu of prospectus and
the annual return of the company.

NATURE AND FORMS OF SHARE CAPITAL

Authorized, Nominal or Registered capital

The amount of company with which registration of a company could take place, such capital
is authorized capital. It is the amount of total value of shares that the company is authorized
to offer for subscription.

Issued Capital

It is authorized capital which is actually issued to the public for sale. Generally, a company
does not issue the shares for its total authorized capital at one time. It rather invites front eh
public for a part of its capital and the subscription for the remaining capital is called for as
and when required.

Subscribed Capital

Subscribed Capital is the part of issued Capital which is generally accepted and willfully
taken by the public. If the public accepts the total issued capital, then the issued capital shall
be equal to the Subscribed Capital.

Allotted Capital

It is the same as the Subscribed capital, Allotted capital is that part of the issued capital for
which the public has subscribed and which has been allotted to the public.

Uncalled Capital

The part of the allotted capital which has not been called up by the company is the ‘uncalled
capital’.

KINDS OF SHARE CAPITAL

Section 86 of the Companies Act, 2013 deals with the kinds of Share Capital. The Share-
Capital of a company limited by share is of two kinds.

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Equity share Capital:

Every company requires substantial working capital to keep their business smooth. This
capital is used when a company faces financial restrictions to keep its regular operations
active. More often, companies use their equity shares to raise the required capital known as
equity share capital. The share Capital which is not limited by shares is called an Equity
Share Capital.

Preference Share Capital:

Preference shares are the shares which promise the holder a fixed dividend, whose payment
takes priority over that of ordinary share dividends. Capital raised by the issue of preference
shares is called preference share capital. A preferential Share-capital is that part of the capital
of a company that carries preferential rights to be paid a fixed amount and on a winding up,
or upon repayment of capital, to be repaid the capital paid up.

ALTERATION OF THE SHARE-CAPITAL.

Section 61 of the Companies Act, 2013 deals with the Alteration of Share-capital. It is
mandatory for a company limited by the shares or by guarantee, and having a share capital, to
have ‘a capital’ clause in its memorandum of association that states the authorized or nominal
capital of the company and its division into shares of the specified value.

A company can alter a share capital without confirming it to the Company Law Tribunal by
passing an ordinary resolution. The company has a share capital has converted any of its
shares into stock and has given notice of the conversion to the registrar, all the provisions of
the act which are applicable shall cease to apply so much the share capital converted into the
stick. ALTERATION CAN BE DONE IN THE FOLLOWING WAYS:

• It may increase its share Capital by such amount as it thinks expedient by issuing new
shares.
• It may consolidate and divide all or any of its share capital into shares of larger
amounts than it’s existing shares.
• It may cancel the which are not taken or agreed not to be taken by any person.
REDUCTION OF SHARE CAPITAL

Section 66 of the Companies Act, 2013 deals with the reduction of Share Capital. A company
limited by shares or guarantee which has share capital can reduce the share capital in any
manner by a special resolution.[14] The reduction can be made through by passing a special
resolution and having a share capital. For a company to reduce its share capital, it needs to

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pass a special resolution. It may also pass an application to the National Company Law
Tribunal for confirmation after passing the resolution.

Reduction occurs due to various reasons. If a company has suffered a loss in its business, it
might try to improve its image by reducing its capital and writing- the loss in its final
accounts.

Over-capitalization is not good for business. If a company has more capital than that is
required for its operation, it can reduce its share capital for optimum utilization. Finally,
reduction may also occur when a company’s fixed assets have been over-valued, they can be
valued appropriately by a reduction in the capital of the company.

Certificate of Shares
1. A certificate issued under the common seal, if any, of the company or signed by two
directors or by a director and the Company Secretary, wherever the company has appointed a
Company Secretary, specifying the shares held by any person, shall prima facie evidence of
the title of the person to such shares.
2. A duplicate certificate of shares may thus issued, if such certificate —
a. proved to have lost or destroyed; or
b. has defaced, mutilated or torn and thus surrendered to the company.
3. Notwithstanding anything contained in the articles of a company, the manner of issue of a
certificate of shares or the duplicate thereof, the form of such certificate, the particulars to
enter in the register of members and other matters shall thus may prescribed.
4. Where a share is held in depository form, the record of the depository is the prima facie
evidence of the interest of the beneficial owner.
Punishment for fraud under Certificate of Shares
If a company with intent to defraud issues a duplicate certificate of shares, the company shall
be punishable with fine which shall not be less than five times the face value of the shares
involved in the issue of the duplicate certificate but which may extend to ten times the face
value of such shares or rupees ten crores whichever is higher and every officer of the
company who is in default shall be liable for action under section 447.
Voting Rights
1. Every member of a company limited by shares and holding any preference share
capital therein shall, in respect of such capital, have a right to vote only on resolutions placed
before the company which directly affect the rights attached to his preference shares,
2. Any resolution for the winding up of the company or for the repayment or reduction of
its equity or preference share capital and his voting right on a poll shall be in proportion to his
share in the paid-up preference share capital of the company.

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3. The proportion of the voting rights of equity shareholders to the voting rights of the
preference shareholders shall be in the same proportion as the paid-up capital in respect of the
equity shares bears to the paid-up capital in respect of the preference shares.
4. The dividend in respect of a class of preference shares has not been paid for a period of
two years or more, such class of preference shareholders shall have a right to vote on all the
resolutions placed before the company.
Variation of Shareholders Rights
1. Where a share capital of the company is divided into different classes of shares, the rights
attached to the shares of any class may be varied with the consent in writing of the holders of
not less than three-fourths of the issued shares of that class or by means of a special
resolution passed at a separate meeting of the holders of the issued shares of that class,—
a. if provision with respect to such variation thus contained in the memorandum or articles of
the company; or
b. in absence of such provision in memorandum or articles,
if such variation thus not prohibited by terms of issue of shares of that class:
Provided that if variation by one class of shareholders affects the rights of any other class of
shareholders, the consent of three-fourths of such other class of shareholders shall also
obtained and the provisions of this section shall apply to such variation.
RIGHTS OF SHAREHOLDERS
Where the holders of not less than ten per cent of the issued shares of a class did not
consent to such variation or vote in favor of the special resolution for the variation, they may
apply to the Tribunal to have the variation cancelled, and where any such application is made,
the variation shall not have effect unless and until it is confirmed by the Tribunal:
Provided that an application under this section shall be made within twenty-one days
after the date on which the consent was given or the resolution was passed, as the case may
be, and may be made on behalf of the shareholders entitled to make the application by such
one or more of their number as they may appoint in writing for the purpose.
The decision of the Tribunal on any application shall be binding on the
shareholders. The company shall, within thirty days of the date of the order of the Tribunal,
file a copy thereof with the Registrar.
PUNISHMENT FOR FRAUD UNDER RIGHTS OF SHAREHOLDERS
Where any default is made in complying with the provisions of this section, the
company shall be punishable with fine which shall not be less than twenty-five thousand
rupees but which may extend to five lakh rupees and every officer of the company who is in
default shall be punishable with imprisonment for a term which may extend to six months or
with fine which shall not be less than twenty-five thousand rupees but which may extend to
five lakh rupees, or with both.

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DEBENTURES
The word 'debenture' is derived from the Latin term 'debere' which means 'to borrow'.
A debenture is a certificate of loan issued by a Company to the holder of the debenture. It is
undoubtedly a kind of security.
DEFINITIONS
The term 'debenture' has been defined in s.2(30) of the 2013 Act which states-
"Debenture includes debenture stocks, bonds and any other securities of a Company, whether
constituting a charge on the Company's assets or not."
CHARACTERISTICS OF A DEBENTURE:
1. Debentures are generally issued in a series, but a single debenture may be issued in case of
sole-lender of the Company.
2. Debenture is usually in the form of a certificate issued under the seal of the Company.
3. Debenture is an acknowledgement of indebtedness.
4. It generally creates a charge on the undertaking of the Company or on some of its assets.
5. The holder of debentures is the creditor of the Company and not its members.
6. A debenture carries no voting rights at any meeting of a Company.
IV. KINDS OF DEBENTURES:
1. REGISTERED AND BEARER DEBENTURES:
From point of view of transferability of ownership, debentures may either be
registered or they may be bearer debentures. Registered debentures are payable to a registered
holder and are transferable in the same manner as shares. The bearer debentures are payable
to bearers and are transferable like negotiable instruments by mere delivery.
2. Redeemable and Irredeemable Debentures:
From the point of view of redeemability, debentures are generally redeemable as they
are issued on the terms that the Company is bound to repay the amount of debenture at a
fixed date, or upon demand or after notice, or under a system of periodical drawings. An
irredeemable debenture is also known as a perpetual debenture and no time is fixed for the
Company to repay the loan, although it may choose to pay it back any time it likes.
3. Secured and Unsecured Debentures:
On the basis of security, when debentures are secured by a mortgage or a charge on
the property of the Company, they are called secured debentures, but when they are not so
secured, they are called unsecured or naked debentures, containing a mere promise to pay.

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4. Convertible Debentures:
A convertible debenture contains an option entitling the holder to convert the whole
or part of his debts, on certain dates or during certain period, into shares of the Company at
stated rates of interest.
5. Rights Debentures:
Offer debentures to existing equity shareholders on right basis, in proportion to their
shareholding, subject to a minimum of 1 debenture to each equity shareholder.
V. Contents of Debentures:
1. A promise by the Company to repay the principal amount on a certain fixed date.
2. A promise to pay interest at a fixed rate.
3. A charge on the Company's assets.
4. A provision that the debenture is issued subject to conditions which are endorsed on it.
VI. Debenture Stock:
Companies desiring to raise larger sums of money from the public may decide to issue
debenture stock instead of debentures. Debentures are issued when the amount borrowed
consists of a number of separate debts of equal amount, whereas in case of debenture stock,
the whole amount borrowed is regarded as consolidated into on single composite debt, each
debenture stockholder receiving a debenture stock certificate testifying the amount of his
contribution or holding.
VII. Issue of Debentures:
The power to issue debentures is usually set out in the memorandum of association.
The debentures can be issued in the same manner as shares in the Company. But unlike
shares, they can be issued at a discount, if the articles of association so authorise. Debentures
can also be issued at a premium. The interest payable on debentures is debt and can therefore,
be paid out of the capital.
VIII. Debenture Trust Deed:
S.71(7) of the 2013 Act provides for a debenture trust deed for securing any issues of
debentures which shall be open for inspection to any member or debenture holder of the
Company and he shall be entitled to obtain copies of such trust deed on payment of
prescribed fees.
S.71(10) provides that in case of failure to pay, the Company is liable to pay interest on the
debenture when it is due and the Tribunal, after hearing the parties, may order the Company
to pay the principal with interest.

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IX. Debenture Trustees:
S.71(5) provides for the appointment of debenture trustees and enumerates the duties
of such trustees. It provides that no Company shall issue a prospectus or a letter of offer to
the public for subscription of its debentures, unless the Company has, before such issue,
appointed one or more debenture trustees for such debentures and the trustees have given
their consent to the Company to be so appointed.
X. Liability of the Company to Create Security and Debenture Redemption Reserve:
After issuing of debentures, the Company shall create a debenture redemption reserve
and adequate amounts shall be credited from out of its profits every year until such
debentures are redeemed. Where the Company fails to redeem the debentures on the date of
maturity, the Tribunal may direct the Company to redeem the debentures with interests due
thereon. In case of default in complying with the order of the Tribunal, the officer in charge
shall be punishable with imprisonment of upto 3 years and a fine not less than Rs. 2, 00, 000
and not exceeding Rs. 5, 00, 000.
XI. Re-issue of Redeemed Debentures:
A Company which has redeemed some of the debentures of a series to reissue the
redeemed debentures unless-
i. the articles of association or the conditions of issue otherwise provide,
ii. the Company is under a contract not to reissue the redeemed debentures, or
iii. the Company has, by resolution or otherwise manifested an intention to cancel the
redeemed debentures.
XII. Register of Debenture Holders: S.88(5)
A Company issuing debentures has to maintain a register of debenture-holders just as it
maintains a register of members of the Company.
XIII. Remedies Available to Debenture Holders against Non-Payment:
1. A debenture holder may either sue the Company for non-payment of principal and interest
or in the alternative, file a petition to the Tribunal u/s.272 for winding up of the Company for
its inability to pay off its debts.
2. A debenture holder can act as a debenture trustee, appoint a receiver or sell the Company's
property.
3. In case of non-payment by the Company due to insolvency, the debenture holders may ask
for valuation of security pledged by the Company and get payment of principal. They shall
not be entitled for payment of interest after the date of liquidation of the Company.
4. The secured debenture holder can apply to the Tribunal to foreclose the interest of the
Company in the assets charged.

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5. Since the debenture holders are beneficiaries under the debenture trust deed, if it is
executed, the remedy to enforce the debenture securities may vest in the trustees. [Narotoma
Das Topani v. Bombay Dyeing & Manufacturing Co. Ltd.]

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