LAW OF CONTRACT-II

UNIT-I SPECIAL CONTRACTS

Contract of Indemnity:(Sec-124)
▪ To make good the loss incurred by another person
▪ To compensate the party who has suffered some loss
▪ To protect a party from incurring a loss

‘Contract of Indemnity’ Definition

A contract is called as a ‘contract of indemnity’ if –

It is a contract by which one party (promisor) promises to save the other, from loss caused to him by the conduct of the promisor

himself, or by the conduct of any other person.

Ex:- A contracts to indemnify B, against the consequences of anyproceedings which C may take against B in respect of a claim of Rs.

12,000/-

A is the indemnifier; B is indemnified in respect of the consequence of the suit..

Modes of contract of indemnity

▪ Expressed: When a person expressly promises to compensate the other from loss.
▪ Implied: When the contract is to be inferred from the conduct of the parties or from the circumstances of the case.

Rights of indemnity Holder:

The law protects the needs and position of the indemnity holder. Section 125 of the Act is as follows-

“125. Rights of indemnity-holder when sued.—The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor—

(1) all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies;

(2) all costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to
act in the absence of any contract of indemnity, or if the promisor authorized him to bring or defend the suit;

(3) all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have been
prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorized him to compromise the suit.”

Liability of the indemnified

collectively, any and all liabilities, obligations, losses, damages (including natural resource damages), penalties, claims (including Environmental Claims), costs (including the costs of any investigation, study,
sampling, testing, abatement, cleanup, removal, remediation or other response action necessary to remove, remediate, clean up or abate any Hazardous Materials Activity), expenses and disbursements of any
kind or nature whatsoever (including the reasonable fees and disbursements of counsel for Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened by any
Person, and any fees or expenses incurred by Indemnitees in enforcing this indemnity), whether direct, indirect or consequential and whether based on Environmental Laws, on common law or equitable cause or
on contract or otherwise,

Contract of Guarantee : (Sn. 126)

A "contract of guarantee" is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the "surety", the
person in respect of whose default the guarantee is given is called the "principal debtor", and the person to whom the guarantee is given is called the "creditor". A guarantee may be either oral or
written.

Thus here we can infer that there the 3 parties to the contract

Principal Debtor – The one who borrows or is liable to pay and on whose default the guarantee is given

Creditor – The party who has given something of value to borrow and stands to receive the payment for such a thing and to whom the guarantee is given

Surety/Guarantor – The person who gives the guarantee to pay in case of default of the principal debtor

Also, we can understand that a contract of guarantee is a secondary contract that emerges from a primary contract between the creditor and the principal debtor.

Ex: Ankita advances a loan of INR 70000 to Pallav. Srishti who is the boss of Pallav promises that in case Pallav fails to repay the loan, then she will repay the same. In this case of a contract of guarantee,
Ankita is the Creditor, Pallav the principal debtor and Srishti is the Surety.

The essentials of a guarantee are:

1. There must be a principal debt.

2. There must be consideration: This may be anything done or

any promise made. e.g. "A" giving credit of goods to "B" is a sufficient consideration for ^C' to stand as surety.

3. The guarantee should not be obtained by misrepresentation or concealment.

4. Writing is not essential.

Continuing guarantee
Section 129 of ICA defines

continuing guarantee. A guarantee which extends to a series of transactions is called continuing guarantee. It is not confined to a single transaction. In this guarantee, surety is liable to pay the creditor for all the
transactions. However, it is very important to find out if the guarantee is a continuing one or not.
Difference between continuing guarantee and simple guarantee
• A continuing guarantee can be revoked by the surety any time either by the notice to the creditor or until the surety’s death. Whereas, simple guarantee can not be revoked in any circumstances.

• In continuing guarantee, the transaction can go for long period of time therefore the surety will be held liable for long time as well whereas in simple guarantee the surety liability is over when the debt is
paid or the performance is done.

Example of a continuing guarantee: A in consideration that B will employ C in collecting the rents of B’s zamindari, promises B to be responsible to the amount of Rs 5000 for the due collection and payment by C
of those rents. This is a continuing guarantee.

Section 130 of ICA explains the revocation by notice. A continuing guarantee may be revoked anytime by the surety for the future transactions only by notice to the creditor.

The main ingredients in this section is :

• As to future transactions

• Notice to the creditor

Distinction between Indemnity and Guarantee

Continuing guarantee extends to a series of transactions, surety has a right to withdraw such guarantee. As soon as the surety sends the notice of revocation to the creditor, the surety does not remain liable for
any transaction that happens after he has given notice, However, the surety continues to remain liable for any transactions that has already taken place. if the mode of revocation by notice is mentioned in the
contract, then notice must be given in that mode only and if no mode is given in the contract then the notice may be given in any form.

Contract of Indemnity and contract of Guarantee are the contingent contracts under the contract law. Guarantees and indemnities are a common way in which creditors protect themselves from the risk of debt
default. Lenders will often seek a guarantee and indemnity if they have doubts about a borrower's ability to fulfil its obligations under a loan agreement.

Indemnity under the law means protection of the losses or financial burden in the form of money. It is when one party promises to compensate for the losses that will occur due to the act of the promisor or other
party. Whereas guarantee is when a person gives the assurity to the other party that if the third party defaults he/she will be held responsible for that and will fulfil the obligations.

The English law definition of a contract of guarantee is “A Contract to perform the promise, or discharge the liability, of a third person in case of his default is called Contract of Guarantee” as per Section 126 of
Contract Act 1872. The definition of a contract of indemnity as laid down in Section 124 – “A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself,
or by the conduct of any other person, is called a contract of indemnity."

A guarantee may be either oral or written. A Contract of Guarantee is also called surety. There can be no contract of guarantee without a liability enforceable a law. The primary idea of surety ship is an undertaking
to indemnify if some other person does not fulfill his promise. Guarantee is a legal term more comprehensive and of higher import than either warranty or "security". A common example of guarantee is bank
guarantee.

In guarantee there are three parties involved, creditor, surety and principal debtor. Creditor is the one to whom the guarantee is given, surety is the party who gives the guarantee and principal debtor is the party
on whose default the guarantee is given. The person who gives the guarantee is called the Guarantor/Surety. The person on whose default the guarantee is given is called the Principal Debtor. The guarantor
promises to pay for someone else's debt if he or she should default on a loan obligation. In a contract of guarantee there are three contracts, between Principal Debtor and Creditor; between creditor and the
surety and between surety and principal debtor. A guarantor acts as a co-signer of sorts, in that they pledge their own assets or services if a situation arises in which the original debtor cannot perform their
obligations. For example Mr. A borrows $10m loan from Mr. B. Mr. C has given guarantee to Mr. B that “if Mr. A doesn’t pay him, he will pay”.

While an indemnity can only be written. In a contract of indemnity there is only one contract between the indemnified (promisee) and indemnifier (promisor), that the indemnifier will pay indemnity to the
indemnified when the predetermined condition is met. Indemnity is compensation for damages or loss, and in the legal sense, it may

also refer to an exemption from liability for damages. Indemnifier is the one who promises to indemnify whereas indemnified is the party whose loss will be compensated. One of the example of indemnity is the
insurance contract in which insurance company promises to pay for the damages.

In a contract of indemnity, the indemnifier assumes primary liability, whereas in a contract of guarantee, the debtor is primarily liable and the surety assumes secondary liability. Under a contract of indemnity,
liability of the promisor arises from loss caused to the promisee by the conduct of the promisor himself or by the conduct of a third person. In case of contract of guarantee the promisee only needs to compensate
when the debtor (primary promise) fails to fulfill his obligation. The guarantor (promisee) does not need to pay for the loss occurred because of a third person.

Kinds of Guarantees
There are two types of Guarantee:

Specific Guarantee Continuing Guarantee

When a guarantee is given only for a

When a guarantee is given on a series of the
specific/ particular transaction is
transaction then it is called continuing transaction.
called a specific guarantee.

Example
Example
“A” guarantees payment to “B”, for selling pens of
“A” guarantees the payment to be
Rs.1000 at the end of every month to “C”. so “B”
made by “B” to “C”, on the transfer of
started supplying pens to “C” on payment at Rs.
goods for july month. After the end of
1000. But after somedays “B” started supplying
the july month, “C” again send goods
the pens at Rs. 2000 to “C”. it was seen that “C”
to “B”. in this case “A” would be liable
was not able to pay for it. In this case, “A” would
for the default by “B” incurred in the
be liable for the payment of Rs. 1000 as per the
month of july only.
contract.

Rights of a Surety
Against the Creditor

• According to Section 141 of the Indian Contract Act, 1872, the surety has the right over the security of the debtor, which was kept in the form of security by the creditor against the debt.

• Exception: Even if the surety is not aware of the security which the creditors have kept, he would be liable to get it after the discharge of his obligation.

Against the Principal Debtor

• According to Section 140 of the Indian Contract Act, 1872, when a surety discharges his obligation towards the creditor on default, then the principal debtor is liable to pay the amount back to the surety.
Thus he holds the status of the creditor in this case. This is known as the right of subrogation.

• According to Section 145 of the Indian Contract Act, 1872, the principal debtor promises to indemnify the surety. In this situation, the surety has the right to recover the sum of money he has paid under
the guarantee.
Against co-sureties

• When a surety discharges his obligation towards the creditor and pays more on behalf of co-sureties then, he would be liable for the payment of extra sum from the co-sureties.

Rights of a Surety

• Surety’s liability is coextensive to that of the debtor’s liability. It means that in the case of default of the debtor, the degree of liability of the debtor towards the creditor is the same as the liability of surety
towards the creditor.

• Example – When “B” borrowed money from “C”, with “A” as the surety, then it was found that “B” was in default. In this case, “A” is bound to pay for the principal amount as well as the interest to be paid

Others
• Surety’s liability is coextensive to that of the debtor’s liability. It means that in the case of default of the debtor, the degree of liability of the debtor towards the creditor is the same as the liability of surety
towards the creditor.

• Example – When “B” borrowed money from “C”, with “A” as the surety, then it was found that “B” was in default. In this case, “A” is bound to pay for the principal amount as well as the interest to be paid.

Surety’s Liability
• Surety’s liability is coextensive to the liability of debtors according to the Section 128 of the Indian Contract Act, 1872
• Example – “B” the principal debtor is not paying back the sum of money borrowed and also the interest to “c” who is the creditor. In this case, “A” who is the surety would be liable to pay on the default
of “B”.

• In the above illustration, the surety has the right to recover the sum of money from the debtor.
• The surety has the right to limited liability.
• Example – “B” has taken a loan of amount rs 20,000 form “C”. Here “A” who is the surety, state that he would be liable on default of Rs 10,000. So in this case, “A” acted to be the surety for the limited
amount as stated.

• Surety’s liability towards the creditor comes to play as soon as the debtor is found in the state of default.
• If the contract between the creditor and the debtor is found to be void then the surety would be considered to be primarily liable.
• Example – “B” is a minor who enters into the contract. “B” took a loan of a certain amount from “C”. in this case, “A” who is the surety would be primarily liable as he has given a guarantee to the
contract.

Discharge of a surety:

Sections Provision

Section
Revocation by notice.
130

Section
Revocation on surety’s death.
131

Section A surety can be discharged when there is variation in the contract between
133 the debtor and creditor, and he was not made aware of it.

Section
A surety can be discharged, when the debtor is discharged by the creditor.
134

• A surety can be discharged, when a debtor enters into a contract

Section with the creditor without the consent of the surety.
135 • When the contract is to extend the time for the debtor to pay a
debt or a promise not to sue the debtor.

A surety can be discharged, when the creditor enters into a contract to

Section
extend the time for payment of the debt by the principal debtor with a third
136
party.

Section A surety can be discharged, when the creditor fails to take any legal action
137 on the principal debtor against the default.

Section When a creditor omits to do an act, which infringes his duty towards the
139 surety, then surety would be discharged.

Section When a surety pays the default amount of the debtor, he is liable to get all
140 the securities of the debtor that the creditor has against the debt.

Section
Surety has the right to get benefit from the creditor’s securities.
141

Contract of Bailment
Introduction
In law, the word bailment is used in its technical sense which means the change in the possession of goods i.e. one person transfers the goods to another person. On the other hand, Pledge is a kind of bailment in
which one person bails his goods to another person as security against loans. Both bailment and pledge are examples of specific contracts. The contract of bailment can be classified into three categories:

1. For the exclusive benefit of the bailor.

2. For the exclusive benefit of the bailee.

3. For the mutual benefit of both.

Definition of Bailment (sec-148)
Bailment as defined in sec-148 of the Indian contract act 1872 is the delivery of goods by one person to another for some specific purpose, upon a contract that these goods are to be returned when the
specific purpose is complete. For example, A delivering his car for Service at the service center is an example of bailment. The person delivering the goods is known as bailor and the person to whom
goods are delivered is known as bailee. However, if the owner continues to maintain control over the goods, there is no bailment

Ex: If A gives his car to B his neighbor for 10 days, but at the same time he keeps one key with himself and during this period of 10 days he used to take the car. Now this will not be a case
of bailment as A is keeping control over the property bailed.

Kinds of Bailment

Gratuitous Bailment
Under this Bailment, anyone, either the bailor or the bailee gets the sole benefit.

For sole benefit of Bailor

In this concept, the bailor transfer the goods to the bailee for some specific purpose which result in the benefit of bailor only i.e. bailee has no expectation in return.

Illustration

A and B are the neighbours. One fine day A gave his jewellery to B to keep it safe because A is going out of town for some days. B return A’s jewellery to A when he came back. Here there is no benefit of B in
keeping those goods i.e. B does not get anything in return.

For sole benefit of Bailee

In this concept, the bailor transfers the goods to the bailee for some specific purpose which result in the benefit of bailee only i.e. bailor does not get anything in return. The bailor only gets his goods back after
completion of the purpose.

Illustration

A gave his bike to B for 3 hours, because B wants to go to his parents home. Here A does not get anything in return by giving his bike to B, but he will get his bike back to him after the fulfilment of the purpose.

Non Gratuitous Bailment

Under this concept, both the bailor and the bailee get some rewards in return i.e. mutual benefit of both.

When bailor transfers his goods to the bailee for some specific purpose. After the completion of that specific purpose, the bailee returns the goods back to the bailor and in return gets the payment for his services.

Illustration

If A gives his car to B for repairing purpose. After the complete repair, B returns A’s car to him and A will pay B for his service.

Essentials of Valid Bailment

1. Agreement
2. Delivery of Goods
3. Purpose
4. Return of Goods

Agreement
For a valid contract of bailment, both the bailor as well as bailee have to enter into an agreement that the bailor will transfer goods to the bailee for a specific purpose and after the completion of the purpose
bailee will return the goods to the bailor and bailor will pay to the bailee for his services.

Illustration

If A and B want to enter into the contract of bailment with the purpose that B will repair A’s car, they have to enter into an agreement, which includes all the instruction and orders of A regarding the repairs and
usage of his property etc.

Delivery of Goods
For a valid bailment, it is necessary that the bailor will transfer i.e. deliver his goods to the bailee so that bailee can act towards completion of the purpose. The possession should be voluntary i.e. not by force,
coercion, undue influence etc.

Delivery of possession of goods can be actual or constructive

Actual delivery means when the bailor transfer the goods to the bailee that transfer should be in physical nature.

Illustration

If A wants B to repair his car, so A has to transfer the physical possession of the car to B, because without the physical po ssession B is unable to complete the purpose for which bailment took place.

Constructive delivery is the opposite of actual delivery. In constructive delivery, the document which shows the title of goods gets transferred, due to which indirectly the possession gets transferred.

Illustration

If A has a railways receipt i.e. document of title to goods, transfers the receipt to B, here B indirectly has the possession of goods, as he has the document of title to goods.

Purpose
Bailment takes place when the bailor transfers constructive to the bailee, the main reason why bailor transfer his goods is the performance of a specific purpose. And when that purpose gets completed the bailor
return the goods to the bailee.

Illustration

If A and B want to enter into the contract of bailment, A should transfer his goods and provide some purpose to B, so that B can act to complete that purpose.

Return of Goods
The contract of bailment comes to an end when the bailee after fulfilment of the purpose return the goods to the bailor or disposed of as per the direction of the bailor.

Illustration

If Ram transfers his gold to Shaam so that Shaam can make a ring from that gold. Shaam has to return the gold ring to Ram after the purpose for which they enter into an agreement gets accomplished.

Duties and Rights of Bailor

Duties of Bailor

Duty to disclose any defect

Section 150 of the Indian Contract Act states that, when the bailor transfers the possession of his goods to the bailee, he has to disclose the defect in goods while transferring them to the bailee. There are two
conditions regarding the bailor’s duty to disclose the defect:

In the case of Gratuitous Bailment

In the case of gratuitous bailment, it is the duty of the bailor to disclose the defect which he knows about the goods to bai lee while delivering the goods. If he fails to disclose the defect to the bailee and bailee
suffered an injury due to that failure makes bailor liable. But if bailor was also unaware of the defect, in that situation h e will not be held liable.

Illustration

• If A, the owner of the scooter allows B to use his scooter. A knows that brakes of the scooter are not working, he does not disclose the information to B. B met with an accident, A is liable to compensate
B for the injury he suffered.
• If A was also unaware of the defect in the scooter that he gave to B, in this case, A is not liable for the injury B suffered.

In case of Non-Gratuitous Bailment

This concept deals with the goods given on hire. Under this concept when the bailor gives his goods on hire to the bailee and if he fails to disclose the defect in the goods to the bailee. The bailor will be held
liable, even if the bailor is also unaware of the defect. It is the duty of the bailor to keep his goods fir and ready to use.

Illustration

If A hires a car from B, the gearbox of the car is not in good condition and suddenly the gear gets stuck. Due to that, A met with an accident. Here, even though B also does not know about it, he is liable. this
case, the plaintiff is the bailee and the defendant is the bailor. Plaintiff took the carriage cart on hire from the bailor. While the journey the carriage met with an accident because the carriage is not ready or fit
for that journey. Here the defendant is held liable because it is his duty to keep his good fit and should disclose the defect in the goods to the bailee i.e. plaintiff.

Duty to bear expenses

In the case of Gratuitous Bailment

It is the duty of the bailor to repay the amount which bailee incurred and paid in carrying and keeping the goods safe.

Illustration

If A gives his horse to B for two days. A should pay to B all the expenses, like the expenses incurred in feeding horse or an y other expenses.

In case of non-gratuitous bailment

In the case of non-gratuitous bailment, the ordinary expenses incurred on goods should be paid by the bailee only. But, the extraordinary expenses have to be paid by bailor

Illustration

If A hires a car from B. the expenses incurred in refuelling the tank of the car should be paid by A only. But, If A paid any expenses like the fine if car’s papers are not there, or any expenses paid like for repairs,
B has to repay that amount to A.

Duty to indemnify bailee

If the bailee has suffered any loss because of the goods bailed by the bailor. It is the duty of the bailor to indemnify bailee against that loss.

Illustration

If A, a friend of B asked B to give his cycle. Instead of giving his cycle, B gave C’s cycle to A. while riding, C caught A a nd handovers A to police. A has to pay fine. Here B has to indemnify i.e. to pay A against
the loss incurred.

Rights of Bailor

Right to claim Damages

When the bailor transfers the possession of his goods to the bailee and if bailee fails to protect the goods of the bailor, the bailor has the right to claim damages against bailee.
Illustration

If A gave his book to B for binding. If due to the fault of B, the book got damages i.e. some pages were missing. Here B is liable and A has a right to claim damages.

In this case, the plaintiff has delivered valuable gold for decorating goddess to the defendant. Due to the negligence of the defendant, the ornaments were lost. Here the plaintiff demanded the compensation
from the defendant. The court allowed the petition and as per section 151 of ICA, held the defendant liable.

Right to terminate the bailment

According to Section 153 of the Indian Contract Act, when the bailor transfers his goods to the bailee for some specific purpose and if bailee does any act which is against the terms and conditions on which bailor
transfer his goods, the bailor has a right to terminate the contract of bailment.

Illustration

If A gave his car to B for personal use. B started using it as a taxi. Here, A has a right to terminate the bailment.

Right to get back the possession of the Goods

The bailor transfers his goods to the bailee for some specific purpose, when bailee complete that purpose, the bailor has a right to get the possession of goods back from the bailee.

Illustration

If A went to a hotel and gave his key to the guard for valet parking. Here A has a right to demand his car back when he wants to leave.

Duties and Rights of Bailee

Duties of Bailee

Duty to take reasonable care

According to Section 151 of the Indian Contract Act, when the bailor transfers his goods to the bailee for some specific purpose. It is the duty of the bailee to keep those goods safe and protected. He has to
ensure to take standard care as a prudent man. If the bailee fails to keep the goods safe and protected he is liable to pay compensation to the bailor.

Illustration

If A bailed his gold to B, B has a duty to take proper care and protect the gold of A, like his own gold. If B fails to protect the gold or any damage occurred, B has to pay/ compensate A.A broker after the sale of
wools retained it in his store with the consent of the buyer. The store was wooden and surrounded by the fence having large gaps between them. An intruder enters the shop through the gaps i.e. from between
the fence, put fire in the store, all the wools gets destroyed. Here, the broker as a bailee having the possession of goods of the bailor is liable to pay compensation to the bailor because he fails to keep the goods
safe.

Duty to not to make unauthorized use of goods

As per according to section 154 of the Indian Contract Act, 1872, when the bailor transfer the possession of the goods to the bailee for some specific purpose, it is the duty of the bailee to not to make unauthorized
use of goods of bailor without his consent. If the bailee makes unauthorized use of the goods, he will be held liable to pay compensation to the bailor and as per section 153 of the contract act, the bailor can
terminate the contract of bailment.

Illustration

If A gave his scooter to B for the purpose of repairing. B use that scooter for personal use. Here B is liable for unauthorized use of the good. A is entitled to get compensation and has a right to terminate the
bailment contract.

Duty to not mix the goods

It is the duty of a bailee to not mix the bailor’s goods with his goods.

As per Section 155 of the Indian Contract Act, 1872, when the bailee mixes the goods of the bailor with his goods with the consent of the bailor, then the interest in mixed goods shall be shared in proportion.

Illustration

If A bails his goods to B. B with A’s consent mixed A’s goods with his goods. Here B will not be liable, as he has A’s consent.

Section 156 and 157 of the Indian Contract Act, 1872, deal with the condition when bailee mixes the goods without bailor’s consent.

There are two situations:

When goods can be separated (Section 156)

If goods mixed by the bailee can be separated, then the bailee has to bear the cost of separation.

Illustration

If A bails 100 packets of Lays chips to B. B without consent of A, mixed it with his 50 Diamond chips packets. Here B will be held liable for the cost incurred in separating the goods.

When goods cannot be separated (Section 157)

If goods mixed by bailee cannot be separated, then the bailee has to compensate to the bailor.

Illustration

If A bails 2lts. of petrol to D. D without consent of A mixed petrol with oil. Here, it is impossible to separate petrol from oil. B has to compensate A.
Duty to Return the goods
According to Section 160 of the Indian Contract Act, when the bailor transfers his goods to the bailee for some specific purpose, after completion of that purpose, it is the duty of the bailee to return goods to the
bailor.

Illustration

If A gave his book to B for Binding. It is the duty of B as a bailee to return the book after binding. If B fails to fulfil his duty, he will be held liable.

Duty to deliver the bailor increase or profit if any on the goods bailed
According to Section 163 of the Indian Contract Act, when the bailor transfer the goods to the bailee for some specific purpose and during the bailee possession, any increment happens to goods, it is the duty
of the bailee to return that increment to the bailor.

Illustration

A leaves a cow in the custody of B and cow gives birth to a calf. Then B is duty bound to hand over the bailed goods along wi th accretion to the bailor.

Rights of bailee

Right to claim damages

When the bailor transfers the possession of his goods to the bailee, he has to disclose the defect in goods while transferrin g them to the bailee. If the bailor fails to disclose the defect to the bailee and if bailee
suffered an injury then the bailee has the right to claim damages from the bailor.

Illustration

If A bails his car to B without disclosing the information that the brakes of the car are not working well. B met with an accident. Here B has a right to claim damages from A.

In this case, the plaintiff enjoying his holidays hire a motor launcher to enjoy the riverside from the defendant. The motor launcher was not fit to use and caught fire, the plaintiff suffered an injury. Here the
defendant was held liable.

Right to claim Reimbursement

According to Section 158 of the Indian Contract Act, if the bailee suffered any expenses to keep the goods of the bailor safe and protected, the bailee has a right to demand reimbursement from the bailor.

Illustration

If A bails his horse to B for some time. B suffers some expenses like food, shelter etc to keep the horse safe. Here B has a right to get reimbursed for all the expenses from A, which he suffered to keep the horse
safe.

Right to particular lien

According to Section 170 of Indian Contract Act, when bailor fails to pay lawful payment to the bailee for his services, the bailee has a right to lien/retain the goods until the time he receives his payment.

Illustration

A bails a piece of cloth to B, a tailor, to make a coat for him. B as per the conditions makes a coat, but A fails to pay B for his service, here B has a right to lien/retain A’s coat.

Right of bailor and bailee against the wrongdoer

According to Section 180 of Indian Contract Act, when the goods of the bailor are in the possession of the bailee and any third person wrongfully deprive the bailee of using the goods, then the bailee has a right
it uses remedies as the bailor might have used.

Illustration

If A bails his T.V. to B for repairs. C forcefully takes the possession of T.V. from B. here B is entitled to the remedies as similar to that of A.

Termination of Bailment
Section 153 of Indian Contract Act 1872 : "Termination of bailment by bailees act inconsistent with conditions" ... A contract of bailment is voidable at the option of the bailor, if the bailee does any act with regard
to the goods bailed, inconsistent with the conditions of the bailment.

Ex: A lets to B, for hire, a horse for his own riding. B drives the horse in his carriage. This is, at the option of A, a termination of the bailment. A lets to B, for hire, a horse for his own riding. B drives the horse in his
carriage. This is, at the option of A, a termination of the bailment."

A contract of bailment is terminated in the following cases:

1. On the Expiry of term: Where the bailment is for a specific period of time, it terminates on the expiry of that time.

2. On the Fulfilment of the Object: The bailment terminates as soon as the object for which the goods were bailed has been fulfilled.

3. On Inconsistent Act: If the bailee uses the goods in an inconsistent manner as to the terms of the contract, the bailment terminates.

4. On the Destruction of the Goods Bailed: When the goods bailed are destroyed or becomes incapable of use for the purpose of bailment due to the change in its nature, the bailment is terminated.

5. Gratuitous Bailment: In case of gratuitous bailment, the bailment can be terminated by a notice from the owner to the bailee provided the termination does not cause inconvenience to the bailee.

6. On the Death of the Bailor or the Bailee: A gratuitous bailment terminates on the death of the bailor or the bailee.

Concept of Finder of Goods

When a person found some goods which do not belong to him, that person is known as the finder of [Link] is the duty of the finder of goods to not to make unauthorised use of the goods and to f ind the real
owner and surrender him the goods. He is lawfully entitled to get reimbursement of the expenses which he incurred by him in the process of finding the owner.

Rights of Finder of Goods

Right to lien
According to Section 168 of the Indian Contract Act, 1872, the finder of goods has a right to get reimbursement of the amount which he incurred during the process of finding the owner of the goods. But if the
owner denied to reimburse him, he cannot sue the owner but he can retain goods till he gets paid for the expenses incurred by him.

Illustration

If A finds a wallet of B, he incurred Rs 70 as an expense to reach B’s address to return his wallet. A has the right to get paid his Rs 70. If B fails to pay him, A can retain his wallet.

Right to Sell
A finder of goods has a right to sell the goods found by him under the following circumstances

The goods are of perishing nature

Illustration

If A finds some tomatoes which belong to B. A tried hard to find B but was unable to find him. A can legally sell those tomatoes, as tomatoes are of perishing nature and the price he gets by the sale should be
returned to B.

When the owner does not pay lawful charges incurred by the finder

Illustration

If A finds B’s Watch on the road. A, to find B’s address, incurred 80 Rs. if B denied paying, A has a right to sell the watch of B and retain his payment and if he gets the extra amount, it should be returned to B.

Duties of Finder of Goods

• It is the duty of the finder of the goods to keep goods safe.

Illustration

If A finds B’s Jacket. It is his duty to keep that jacket safe.

• It is the duty of the finder of the goods to not to use the goods for his personal use

Illustration

If A finds B’s cycle. He has to keep that cycle safe and should not use it for his personal use.

• It is the duty of finder of goods to find the real owner

Illustration

• If A finds a gold ring in a party, it is his duty to find the real owner of the ring.

Pledge-sec-172
In the pledge, the pawnor transfer/bailed his goods to the Pawnee as security against the amount he takes from the Pawnee. The pawnor has a duty to pay the amount back to the Pawnee and the Pawnee has a
duty to return the goods after pawnor pays the amount. The Pawnee should not make unauthorized use of the goods bailed to him if he does he will be liable to pay compensation to the pawnor. The Pawnee has a
right to sell the goods after giving prior notice to the pawnor if he fails to pay the amount back.

Illustration

A borrowed Rs.100 from B and gave his cycle as a security for the repayment of the amount, in the condition that if A pays back to B he will get his cycle back. it is called the contract of Pledge.

Definition of pledge
As per section 172 of the Indian Contract Act, 1872, a Pledge is a contract where a person deposits an article or good with a lender of money as security for the repayment of a loan or performance of a promise. ... The
depositor or the bailor is the Pawnor and the bailee or the depositee is the Pawnee.

Rights and Duties of Pawnor

Rights of Pawnor

Right to redeem goods

It is the right of the pawnor to redeem his goods i.e. to get back from the Pawnee after he paid the amount to the pawnee.

Illustration

If A bailed his watch as security and took Rs.800 as a loan from N. A return the money to N. Here, A has a right to get his watch back.
Right to claim damages or compensation
It is the right of the pawnor to get the compensation if the Pawnee makes any unauthorised use of the goods or fails to keep the goods safe.

Illustration

If A bailed his Car as security and took Rs.1,30,000 as a loan from C on the terms that C will not use that car in any manner. C uses it as a taxi. Here A can claim damages as C made unauthorized use of the
goods.

Duties of Pawnor

Duty to pay the loan

It is the duty of the pawnor to pay the amount back to the pawnee so that he will get his goods back.

Illustration

If A bails his gold chain as security to B for a loan of Rs.3000 Here, A has a duty to pay back the amount of loan to B.

Duty to pay extraordinary expenses incurred by Pawnee.

It is the duty of the pawnor to pay the extraordinary expenses to the pawnee, which the Pawnee incurred in keeping the goods safe.

Illustration

If A bails his cow to B for Rs.8000. B paid all the expenses like food for cow, shelter etc. Here A has a duty to pay the expenses back to B.

Duty to pay claims and damages or compensation to Pawnee

The pawnor has a duty to pay the compensation or damages to the Pawnee if the Pawnee suffered any type of legal damages due to pawnor’s goods.

Illustration

If A bails his bike as security to B for the loan of Rs.50000 with the term that B can use his bike. A, however, didn’t disclose the fact to B that the breaks of the bike are not working well. B met with an accident
and suffered damage. Here it is the duty of A to compensate B for the damage he has suffered due to A’s goods.

Rights and Duties of Pawnee

Rights of Pawnee

Right to retain Goods

As per Section 173 of the Indian Contract Act, if the pawnor fails to pay the amount to the Pawnee, so the Pawnee has a right to retain the goods of the pawnor.

Illustration

If A bails his watch as security to B for the loan amount of Rs.500. If A fails to pay the amount or pays the amount after the time as per the terms and conditions, B has a right to retain the watch.

Right to get compensation

In the case, where pawnee suffered because of the goods of the pawnor, the Pawnee has a right to get the compensation against that damage from the pawnor.

Illustration

If A bails his bike as security to B for the loan of Rs.50000 with the terms that B can use his bike. A, however, didn’t disclose the fact to B that the brakes of the bike were not working well. B met with an accident
and suffered damage. Here, B has a right to claim compensation from A.

Right to Sell
As per section 176 of the Indian Contract Act, if the pawnor fails to pay the amount back to the Pawnee, the Pawnee has a right to sell the goods and reimburse his amount.

Illustration

If A bails his gold ring to B as a security for the loan amount of Rs.7000 if A fails to pay the amount back to B. B has a ri ght to sale the ring and get his amount back.

To get extraordinary expenses incurred by him

As per section 175 of the Indian Contract Act, if the pawnee has suffered any extraordinary expenses with respect to pawnor’s goods then he has a right to get paid back by the pawnor.

Illustration

If A bails his cow to B as security for Rs.18000 as a loan. B incurred expenses like food expenses, shelter expense etc. B has a right to get all the amount back from A.

Duties of Pawnee

Duty to take reasonable care

It is the duty of Pawnee to take reasonable care of the goods of pawnor, like his own goods.

Illustration

If A bails his gold to B for the amount of Rs.80, 000 as loan security. B has a duty to keep the gold of A safe and should ta ke reasonable care.

In this case, the bank was the Pawnee and the defendant was the pawnor, the pawnor bails his 5000 tins of groundnut oil as security against the amount of Rs. 75000. The defendant died. The bailed goods of
the defendant were lost from the possession of the bank. Later, after the given time limit bank files a case against the defendant as ask for the repayment of the amount. The bank states that, as the bank is the
Pawnee, they have the right to get their money back, but because they lost the goods of the plaintiff whose market value is Rs. 75000, that makes them not able to get their payment back, thus the petition got
dismissed

Duty to give back the goods after repayment of the loan

When the pawnor pays back the amount to the Pawnee, the Pawnee has a duty to give back the goods back to the pawnor.

Illustration

If A bails his watch to B as security for Rs.2000 as a loan. It is the duty of B to give back the watch to A when A repay Rs.200

Duty not to make unauthorized use of goods

It is the duty of the Pawnee to not to make any unauthorized use of pawnor’s goods. If the Pawnee makes unauthorized use of goods he will be liable to pay compensation to the pawnor.

Illustration

If A bails his car to B as a security against loan amount of Rs.90000. If B uses the car as a taxi without A’s Consent. Here, B will be liable for unauthorized use of the car.

Duty to give back the owner any increment in the goods

It is the duty of the Pawnee to give to the pawnor any increment in the goods during his possession.

Illustration

If A bails his cow to B as a security against loan amount of Rs.80000. During B’s possession cow gives birth to a calf. If A repays the amount, It is the duty of B to give that calf and the cow back to A.

Duty not to mix the goods

It is the duty of the Pawnee to not to mix the pawnor’s goods with his own goods.

Illustration

If A bails 100lt. of petrol to B against the loan of Rs.13000. It is the duty of the B to not mix the goods of A with his goods.

Pledge by Non Owner

Pledge by Mercantile agent

Section 178 of the Indian Contract Act states that the pledge between the mercantile agent and Pawnee can be valid if the agent has the possession of the goods with the consent of the owner and the Pawnee
acted good faith and does not know about the original title of the goods.

Illustration

If A is a mercantile agent of B bails the bike of B which is in his possession to D. D in good faith and does not know about the title of the bike accept as security. Here the pledge is considered as valid. But if B
knows about title, then the pledge will not be held valid.

Pledge by the person in possession under voidable contract

As per section 178 ‘A’ of the Indian Contract Act, the pledge between the pawnor having the possession of the goods under voidable contract and pawnee can be valid, provided that during the pledge the contract
has not been revoked and the pawnee acted in good faith and does not have any idea about the title of the goods.

Illustration

If A has possession of the watch under voidable contract, bails the watch to B. B in good faith and does not know a bout the title of the watch, accepts it. That pledge is considered as valid. But if B knows about
the title, then that pledge is not considered as valid.

Pledge where pledger has only a limited interest

As per Section 179 of the Indian Contract Act, the pledge between the pawnor having limited interest and Pawnee can be valid, if during the pledge the pawnee acted in good faith and does not know about the
title of the goods.

Illustration

If A finds a defective watch and spent Rs.50 in repairing that watch. Here A can have a limited interest on watch i.e. he can bail the watch in pledge for Rs.50 or less.

Pledge by a co-owner in possession

The pledge between a co-owner and Pawnee can be valid if he has the consent of other co-owner. But when the co-owner without the consent of other co-owner enters the contract of pledge, that contract can
be valid if the Pawnee acted in good faith and does not know about the title of the goods.
Illustration

Situation 1: If A and B jointly owned a car. The car is in the possession of A. One day A wants to bail the car for the purpose of the pledge, he has to take the consent of B.

Situation 2: if A enters into the pledge with C and bails the car to C, without the consent of B. That pledge is considered as valid only if C acts in good faith and does not know anything about the title of the
car.

Pledge by seller or buyer in possession

A seller, after selling his goods has the possession of the goods with the consent of the buyer or the buyer before completion of the sale has the possession of goods with the consent of the seller can enter into
the valid pledge. But if the party enter into a contract without the consent of the other party, that contract can be valid, if the Pawnee acted in good faith and does not know about the title of the goods.

Illustration

If A buys a cycle from B. A after purchase left the cycle in the possession of B. B bails the cycle in a pledge with C. C act in good faith and does not know about the title of the cycle. This is a valid pledge.

Relation Between Pledge and Bailment

Similarities
1. In Both, Pledge and Bailment only movable property delivered to the Pawnee/bailee.
2. In both cases, both the party enters into an agreement.
3. In both cases, bailee/pawnee has to return the goods to bailor/pawnor.
4. In both cases, bailor/pawnor has to pay any extraordinary expenses if incurred by bailee/pawnee.
5. In both cases, the bailee/pawnee has to compensate bailor/pawnor for any damage to goods or unauthorized use of goods.

Difference
1. The Pawnee cannot use the goods pawned, but in bailment, bailee can use the goods bailed if the terms of bailment so provide.
2. In Bailment, goods are bailed for some specific purpose, but in pledge, goods are bailed as a security for the loan.

UNIT-II CONTRACT OF AGENCY

CONTRACT OF AGENT
Introduction:
When one party delegates some authority to another party whereby the latter performs his actions in a more or less independent fashion, on behalf of the first party, the relationship between them is called an
agency. Agency can be express or implied. Chapter X of the Indian Contract Act, 1872 deals with the laws relating to Agency. It is important to know the law relating to agency because nearly all business
transactions worldwide are carried out through agency. All corporations, big or small, carry their work out through agency. Therefore, laws relating to the agency are an important area of Business Law.
Relationships relating to principal and agent involve three main parties: The Principal, the Agent, and a Third Party.

Definition of Agent (SEC-182)

An ‘agent’ is a person employed to do any act for another, or to represent another in dealings with third person. The person for whom such act is done, or who is so represented, is called the
‘principal’. —An ‘agent’ is a person employed to do any act for another, or to represent another in dealings with third person. The person for whom such act is done, or who is so
represented, is called the ‘principal’."
Illustrations
➢ A, a businessman, delegates B to buy some goods on his behalf. Here, A is the principal and B is the agent, and the person from whom the goods are bought is the ‘Third Person’.
➢ Joe appoints Mary to deal with his bank transactions. In this case, Joe is the Principal, Mary is the Agent and the Bank is the Third Party.
➢ Lavanya lives in Mumbai, but owns a shop in Delhi. She appoints a person Susan to take care of the dealings of the shop. In this case, Lavanya has delegated her authority to Susan, and she becomes
a Principal while Susan becomes an agent.

Section 183 in The Indian Contract Act, 1872

Any person who is of the age of majority according to the law to which he is subject, and who is of sound mind, may employ an agent. —Any person who is of the age of majority according to the law to which he is
subject, and who is of sound mind, may employ an agent."

Section 184 in The Indian Contract Act, 1872

As between the principal and third person any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principle according
to the provisions in that behalf herein contained. —As between the principal and third person any person may become an agent, but no person who is not of the age of majority and of sound mind can become an
agent, so as to be responsible to his principle according to the provisions in that behalf herein contained."

Sub-Agent
Section 191 in The Indian Contract Act, 1872
A ‘sub-agent’ is a person employed by, and acting under the control of, the original agent in the business of the agency. —A ‘sub-agent’ is a person employed by, and acting under the control of, the original agent in
the business of the agency.
Creation of Agency
An agency can be created by:

Direct (express) appointment– The standard form of creating an agency is by direct appointment. When a person, in writing or speech appoints another person as his agent, an agency is created between
the two.

Implication– When an agent is not directly appointed but his appointment can be inferred from the circumstances, an agency by implication is created.

Necessity– In a situation of necessity, one person can act on behalf of another to save the person from any loss or damage, without expressly being appointed as an agent. This creates an agency out of
necessity.
Estoppel– An agency can also be created by estoppel. In a situation where one person behaves in such a manner in front of a third person, as to make someone believe he is an authorized agent on behalf of
someone, an agency by estoppel is created.

Ratification– When an act of a person, who acted as another person’s agent (on his behalf) without his knowledge is later ratified by that person, this creates an agency by ratification between the two.

Rights and duties of Agent:

Agent’s duties to Principal

An agent has 6 duties towards his Principal:

1. He has to conduct the business of the Principal according to the directions of the Principal.
2. An agent is bound to conduct the business he is supposed to conduct with as much skill as a person on his position ordinarily holds.
3. An agent is supposed to show the relevant accounts to the Principal as and when the Principal demands.
4. An agent has the duty to communicate any difficulty whatsoever he may come across while doing the Principal’s business. He is supposed to perform due diligence in this regard.
5. If any material fact has been concealed or the business is not carried out in the manner that the Principal directed, the Principal can repudiate the contract between them.
6. If the agent carries out the business in the manner he wanted to perform it, rather than on the directions of the Principal, the Principal may claim from the agent any benefit he may have achieved
through doing so.

llustration
Hala directs her agent Saima to buy a certain house for her. Saima does not buy the house, and tells Hala that it cannot be bought due to certain reasons, but ends up buying the house herself. In this case,
Hala has the right to claim the house from Saima at the price which Saima bought it for herself.

Principal’s duties to Agent

The Principal has 4 duties towards the Agent:

1. The Principal is bound to indemnify the agent against any lawful acts done by him in the exercise of his authority as an agent.
2. The Principal is bound to indemnify the agent against any act done by him in good faith, even if it ended up violating the ri ghts of third parties.
3. The Principal is not liable to the agent if the act that is delegated is criminal in nature. The agent will also in no circumstances be indemnified against criminal acts.
4. The Principal must make compensation to his agent if he causes any injury to him because of his own competence or lack of ski ll.

Rights of an Agent
An agent has the following 5 rights:

1. Right of retainer– An agent has the right to retain any remuneration or expenses incurred by him while conducting the Principal’s business.
2. Right to remuneration– An agent, when he has wholly carried out the business of the agency has the right to be remunerated of any expenses suffered by him while conductin g the business.
3. Right of Lien on Principal’s property- The agent has the right to hold (keep with himself) any movable or immovable property of the Principal until his due remuneration is paid to him by the
Principal.
4. Right to be Indemnified– The agent has the right to be indemnified against all the lawful acts done by him during the course of conducting the Principal’s business.
5. Right to Compensation– The Agent has the right to be compensated for any injury or loss suffered by him due to the lack of skill and competency of the Principal.

DELEGATION OF AUTHORITY :
An agent, being himself a persoil who has got delegated authority from the principal cannot further delegate except with the permission of the principal. This is expressed by the Latin maxim 'delegatus non potest
delegate': a delegate cannot further, delegate, i.e., one cannot delegate that which one has himself undertaken to do Agency is a matter of trust and confidence and an agent is appointed only because I the
principal has got full confidence in his integrity or ability. So, the agent cannot without the permission of the principal, delegate his authority and ask some other person to do the work. To this rule the following
are the exceptions:

i) where the duties of the agent do not require any skill or discretion, and can

satisfactorily be performed by any one;

ii) , where the custom of the trade permits delegation;

iii) where the principal knows that the agent intends to delegate;

iv) where the nature of the business requires delegation;

v) where an emergency makes it necessary to delegate.

An agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally, unless by ordinary custom of trade asub-agent may, or, from the nature of the
agency, a sub-agent must be employed. A legal practitioner is permitted by the usage in the profession, to authorize any other practitioner to appear for him. But, in cases in which he has expressly undertaken to
appear personally, he has no such right to delegate his authority.

Principal Liabilities of Agent:

Section 238 in The Indian Contract Act, 1872

Effect, on agreement, of misrepresentation or fraud by agent.—Misrepresentation made or frauds committed, by agents acting in the course of their business for their principals, have the same effect on
agreements made by such agents as if such misrepresentations or frauds had been made or committed by the principals; but misrepresentations made, or frauds committed, by agents, in matters which do not fall
within their authority, do not affect their principals. —Misrepresentation made or frauds committed, by agents acting in the course of their business for their principals, have the same effect on agreements made
by such agents as if such misrepresentations or frauds had been made or committed by the principals; but misrepresentations made, or frauds committed, by agents, in matters which do not fall within their
authority, do not affect their principals." Illustrations

(a) A, being B’s agent for the sale of goods, induces C to buy them by a misrepresentation, which he was not authorized by B to make. The contract is voidable, as between B and C, at the option of C.

(b) A, the captain of B’s ship, signs bills of lading without having received on board the goods mentioned therein. The bills of lading are void as between B and the pretended consignor.

Relations of Principal and Agent with Third party:

 ➢ The relationship between the principal and third parties. The general rule is that the principal is liable to the third party for any act done by the agent which falls within the agent's authority. ... In
some cases the knowledge of the principal is deemed to be the knowledge of the agent, and vice versa.
➢ the third party considers the agent to be the principal. The agent usually makes such representation as per instructions of the principal or at times if he clearly wishes to bind himself only.
The agent is held personally liable in such cases, except in exceptional circumstances.
➢ where the agent discloses that he is only an agent but hides the identity of his principal, he is not liable personally. Thus, the principal when discovered is liable for the contract made by his agent
and is also responsible for the acts of the agent.
➢ contract is between the principal and the third party and also the rights and obligations arise between them only. The legal effect of such a contract is the same as if the principal himself directly
contracts with the third party.
➢ Where an agent seems to be contracting in his own capacity without disclosing that he is an agent or the name of his principal, he becomes personally liable. In this case, the third party may sue the
agent or the principal on discovering him or both

Termination of Agency:
An agency can be terminated or is terminated in 5 different ways:

1. When the agent’s authority is revoked by the Principal

2. When the agent renounces the business of the agency
3. When the business of the agency is completed
4. When either of the parties dies or becomes mentally disabled
5. When the Principal is adjudicated an insolvent.

UNIT-III CONTRACT OF SALE OF GOODS -I

Formation of contract:

Introduction

Our modern age has evolved into an age of trade and commerce and sale and purchase of goods are inseparable and a core element of trade and commerce. In a diverse country like India,
there is a need to set up rules and regulations governing different types of contract and sales of goods is one of them. A typical bargain between seller and buyer is termed as sale, laws relating to these
types of contracts are governed under Sale of Goods Act, 1930. This act came into force on 1st July 1930 and extends to the whole of India except Jammu and Kashmir. Before 1930, the issues related to the
sale of goods were governed by Indian Contract Act 1872 under section 76-123, but these were not enough to cover all aspects, so, the constituent assembly separated these sections and formulated a whole
new act in 1930 under the name, Sale of Goods Act 1930.

As defined under section 4(1), contact of sales of goods is a contract under which seller transfers or agrees to transfer certain goods in exchange for some consideration preferably money. According
to Blackstone, when ownership of any goods transferred in exchange for money, then a sale have been made. This contract can be absolute or conditional. When a person buys goods outrightly it is considered
as absolute but when a person buys goods on approval or trial basis then it is termed as a conditional contract.

In order to make sure all these essentials are met, there should be an ascertainment of the price which can be done in many ways, as per section 9 and 10 of Sales of Goods Act 1930:

• Contract- one of the basic method of ascertaining price is directly mentioning it in the contract of sale of goods. Reasonability of price does matter to the court of law. Seller and buyer can any price
which is to be paid by the buyer to the seller.
• A course of mutual dealing- in case there is no price or particular method to set price is laid down in the contract, it can be set by course of dealing between the parties through mutual understanding.
• Fixing a reasonable price– according to law of the land, when no price is set in the contract of sale of goods, at the time of execution of the contract the buyer must pay the reasonable price which is
subjective and depends upon the circumstances of the case.
• Fixing it in the manner agreed- price can also be set by any manner that is agreed in the contract.
• Fixing by third-party- acc to section 10, buyer and seller of the goods can also include the third party to ascertain the price of goods, but if the third party fails to do so, the contract becomes void. In
case there has been any transfer of goods than the buyer has to pay a reasonable price.

Subject Matter of Contract of Sale

The subject matter of contract of sale is always the goods. This is enshrined in the Sale of Goods Act, 1930 under Sections 6, 7 and 8. Thus every type of movable property falls within the deinition
of the ”goods” given under Section 2(7) of the Sales of Goods Act, 1930. Goodwill, patents, trademark, copyrights etc. are considered as movable properties. Though actionable claims and money have been excluded.
Money here means current money, but not the rare or old coins which may be treated as goods bought and sold as such.

(a) The Section 6 of the Act lays down following provisions –

(1) The subject matter of contract must always be goods. The goods may be existing or future goods.

(2) Like an ordinary contract, a contract of sale of goods can also be made with regard to the goods, the acquisition of which by seller depends upon a contingency, which may or may not happen. Thus, a
contract for sale of certain cloth to be manufactured by a certain mill is a valid contract. Such contacts are called contingent contracts.

(3) When the seller purports by his contract of sale to effect a sale of future goods, the contract will operate only as an agreement to sell the goods and not as sale.

(b) Destruction of subject matter of a contract (Sections 7 & 8)

(i) Goods not existing at the time of contract: If at the time a contract of sale is entered into, the subject-matter of a contract being speciic goods, which without the knowledge of the seller
have been destroyed or so damaged as not to answer to the description in the contract, and then the contract is void ab initio. The Section is founded on the rule that where both the parties to a contract are under
a mistake as to a matter of fact essential to a contract, the contract is void.

(ii) Goods perishing after the contract is made: Where there is an agreement to sell speciic goods and the goods, subsequently without any fault of the seller or the buyer perish or suffer such damages as
not to answer to the description in the agreement before the risk passes to the buyer, the agreement becomes void (Section 8). It may be noted that this would apply only if the risk had
not passed to the buyer. Generally, risk passes with property i.e., when the property in the goods sold has passed to the buyer bears the risk of subsequent destruction of, or damage to the goods.

Condition and Warranty

➢ The Sale of Goods Act 1930 provides the definition for a Condition as – ““A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat
the contract as repudiated” and for a Warranty as – “A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a
right to reject the goods and treat the contract as repudiated”.
➢ A Condition forms the core of the contract i.e. considered as an essential to the main purpose of the contract. Therefore, the repercussion would be repudiation of the contract or claim for
damages or both depending upon the breach and case. Breach of a Condition makes a contract voidadble on the part of non-defaulting party to the contract. However, a Warranty is treated as a
collateral to the main purpose of a contract and therefore, the repercussions of breach of warranty by one of the parties would be only a claim for damages by the non-defaulting party.
➢ A breach of Warranty by one of the parties does not make the contract a contract voidable and does not give any right to the non-defaulting party to repudiate the contract. The same position is
further, clarified by section 59 of Sale of Goods Act, which provides that when there is a breach of warranty by the seller, this breach does not provide the buyer with the right to breach the
 contract, he may only sue the seller for breach of Warranty in diminution or extinction of the price. Whether a particular stipulation in the contract is a Condition or a Warranty, depends on the
case to case.
➢ A breach of warranty by one party cannot treated as one of breach of condition, however, a breach of a Condition by one of th e parties to the contract can be treated as a breach of
Warranty. The Sale of Goods Act provides for the situations when a breach of a Condition by one of the parties can be treated as breach of warranty under a contract of sale of [Link]
situations being: –
- When the buyer himself waives the Condition, which gives right to the buyer to repudiate the contract on breach of that particular stipulation; or
- When the buyer treats the Condition as a Warranty and does not repudiate the contract on the basis of such breach; or
- Where the contract is non-severable and the buyer has accepted either the whole goods or any part under the contract; or
- Where the law itself excuses the fulfillment of a Condition.

EXPRESS AND IMPLIED CONDITONS AND WARRANTIES

Terms of a contract of sale of goods can be both express or implied. When a stipulation (Condition or Warranty) is expressively provided in the contract of sale of goods, it is considered as express stipulation.
On the other hand, when the contract does not expressively provide for an express Condition or Warranty, however, due to the nature of the nature of the contract or intention of the party there is existence of
a Condition or Warranty in the nature, it is known as implied Condition or Warranty. The Sale of Goods Act provides provisions for express and implied Conditions and Warranties.

IMPLIED CONDITIONS
Section 14 of the Sale of Goods Act states that, “an implied condition on the part of the seller that, in the case of a sale, he has a right to sell the goods a nd that, 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”, which means that it is an implied condition that the seller of a good has the right to sell
it or has the right to transfer the title of the property. Therefore, when the seller’s title to the property turns out to be defective or the seller does not have the right to transfer the property to the buyer, it
gives the right to the buyer to repudiate the contract of sale of goods and to claim the money from the seller in addition to damages, if any. A seller can only sell or transfer the oppression of the property
when he is the true owner of the property or has the right to transfer the property.

The Sale of Goods Act also provides for situations when goods are sold by description i.e. there is a contract of sell the goods by description given. In such situations, it is an implied condition that the goods
sold to the buyer should match the description given about the goods. If the goods do not match with the description given, in such cases the buyer can repudiate the contract making the contract voidable at
the option of buyer. The buyer cannot be compelled to accept the goods when the goods sold are not in accordance to the description provided.

Where goods are to be sold to the buyer as per the sample as well as the description given. However, if the goods sold to the buyer matches or are in accordance to the sample but are not in accordance with
the description given, the buyer can repudiate the contract on the breach of such stipulation. In such situations, the necessity of goods sold to the buyer to be in accordance with the sample as well as
description is treated as an implied condition and breach of the same gives the right to the buyer to repudiate the contract of sale of goods.

When goods are sold under the contract of sale of goods, the Sale of Goods Act enumerates certain implied conditions, breach of any would provide the right to repudiate the contract. Following are the
conditions: –

1. the bulk shall correspond with the sample in quality;

2. the buyer shall have a reasonable opportunity of comparing the bulk with the sample; and
3. the goods shall be free from any defect rendering the un-merchantable, which would not be apparent on reasonable examination of the sample. It can be concluded that this condition is applicable
where the defects are latent as the section states that which (defects) could not be discoverable by an ordinary examination of the goods. The buyer can repudiate the contract if the defects are
found after sometime due to potential existence of the defect but not presently evident.

Also, section 16 of the act mentions that there is no implied condition as to the quality or fitness of the goods for any particular purpose. However, section 16 also clarifies that the condition as to the
reasonable fitness of goods for a particular purpose may be implied if the buyer had made known to the seller to select the best goods and the seller has ordinarily been dealing in those goods. This implied
condition will also not apply if the goods have been sold under a trademark or a patent name. An implied condition as to quality or fitness for a particular purpose may be annexed by the usage of trade. In
case of eatables, there an implied condition that the eatables shall be wholesome.

IMPLIED WARRANTIES
The Sale of Goods Act enumerates an implied Warranty that the buyer shall have complete possession of the goods sold to him a nd shall enjoy quite possession of the such goods. In case of any kind of
disturbance, the buyer can sue the seller for the breach of Warranty and can claim damages arising out of such breach.

Section 14 of the Sale of Goods Act also provides for implied warranties. section 14 also provides for an implied warranty that the goods shall be free from any charge or encumbrance in favour of any third
party, not declared or known to the buyer before or at the time the contract is entered into.

The Sale of Goods Act also makes provisions for an implied warranty as to quality or fitness for a particular may be annexed or attached by the usage of trade. If goods sold are of dangerous nature and as per
the usage of trade the seller has to disclose the dangerous nature of goods and if the seller does not disclose, the buyer can sue the seller for breach of implied warranty.

THE RULE OF CAVEAT EMPTOR

Section 16 of the Sale of Goods Act states that, “subject to the provisions of this Act or any other law for the time being in force, there is not implied warranty or condition as to the quality or fitness for any
particular purpose of goods supplied under a contract of sale”, brings the common law rule of Caveat Emptor, which means ‘let the buyer beware’. When the sellers display their goods in the open market, it is for
the buyer to make a proper selection or choice of the goods. The buyer alone shall be responsible for checking the quality and suitability of goods before a purchase is made. The said rule owes its origin to the fact
that in the early times most of the sales used to took place in the market.

However, the rule of caveat emptor has certain exceptions to it.

1. when a buyer brings the purpose of buying goods to the knowledge of the seller, relies on seller’s skill and goods are of a description which is in the course of seller’s business, it becomes the duty of the
seller to deliver reasonably fit goods to the buyer;

2. Where the goods are sold by sample and the goods do not match with the sample;

3. Where the goods have been sold by both sample and description and the goods match with sample but do not match with the sample; and

4. When the goods have been sold by making some fraud or misrepresentation.

Hire Purchase Agreement

In a Hire Purchase Agreement, the owner hires goods to the hirer with an option to purchase the goods when he has made the payment of a certain sum. By this system, the purchaser who is unable to pay the full
price of the asset at one lump sum gets facilities to acquire an asset and after making the payment of an initial amount called premium, the purchaser pays the balance consideration money in installments. After
the payment of all the installments, the property in the goods passes to the hirer. The hirer has an option to return the goods during the period of hire. In a Hire – Purchase Agreement, the hirer has the right to
terminate the agreement for hire at his pleasure and is not bound to pay the value of the goods.

Hire Purchase is governed by the Hire Purchase Act In 1972. Hire Purchase agreements are of two types. In the first type goods are purchased by the financier from the dealer and the financier enters into a Hire
Purchase Agreement with the customer, under which the customer becomes the owner after paying all the installments for the goods. In the second type of Hire Purchase, the customer purchases the goods and
he executes a Hire Purchase Agreement with the financier in which he remains in possession of goods, subject to the payments by the customer to the financier. The financier has the right to seize the goods in the
event that the customer fails to fulfill the condition of repaying the financier.
Generally in the case of Hire Purchase Agreements entered into between the hirer and the financier the agreement has to fulfill the legal requirements of the Indian Contract Act 1872 and the Sale of Goods Act
1930. Under the Indian Contract Act the provision of hire purchase is covered in chapter 9 of the Indian Contract Act. A Hire Purchase Agreement is a contact of bailment. In case of breach of Hire Purchase
Agreement the owner is entitled to

(i) recover the goods by physical repossession or

(ii) abandon any claim to the goods and sue for damages.

When the hirer defaults in payment of installments the owner may resume repossession of the goods. However, the use of force while repossessing is not allowed. Use of physical force for resuming physical
possession of the goods can result in a criminal action. Possession of goods can be taken by approaching a civil court. In the event that the owner decides not to repossess the goods it has the option to claim
damages.

Stamp duty on Hire Purchase Agreement is payable under Article 5 Schedule 1 of the Stamp Act. Registration of Hire Purchase Agreement is not necessary.

UNIT-IV CONTRACT OF SALE OF GOODS -II

Property [Section 2(11)]

In the Act, property means ‘ownership’ or the general property i.e. all ownership right of the goods. A sale constitutes the transfer of ownership of goods by the seller to the buyer or an
agreement of the same.

Possession

Where a person, having bought or agreed to buy goods, obtains, with the consent of the seller, possession of the goods or the documents of title to the goods, the delivery or transfer by that
person or by a mercantile agent acting for him, of the goods or documents of title under any sale, pledge or other .. .
Rules relating to Passing of property:
passing of property is the transfer of the ownership on an agreed price. The ownership is transferred only when the proprietary of the property rights are transferred from the seller to the buyer. Point to be
noted is that the transfer of ownership is distinct from that of possession of goods where the latter means that the goods are subject only to custody or physical control. Under SOGA, 1930 the term property is not
a special property but a general property in goods.

Goods under transfer of property

There are usually 2 types of goods dealt under transfer of property in SOGA-

Specific goods: specific goods are goods that are identified at the time of making a contract and one can easily identify the exact piece to be delivered.

For example- A contracts with B for the sale of a jacket bearing a distinct number.

Unascertained goods: unascertained goods are goods that are not identified at the time of making the contract. it is difficult to separate the exact goods for which the sale of the contract was made.

For example- A contracts with B for the sale of a sack of grains out of many sacks lying in the storage. With no uniqueness of the sacks, one cannot identify the exact sack which was to be delivered.

Essentials of transfer of property

➢ First and the most important essential for the transfer of property under SOGA is that the ownership of the property which is to be transferred must be of ascertained [Link] is not possible to
transfer unascertained goods. For the transfer of such good, they have to be converted to ascertained good.

➢ The second essential is that property is transferred only when it is intended to transfer.

➢ Risk prima-facie passes with the property- the risk with the property remains with the seller only till the time the property is with him. As soon as the ownership is transferred, the risk also gets
transferred from the seller to the buyer.

➢ One special case with this is the delay in the transfer of goods. If the delivery is delayed due to the fault of the seller or buyer, the party responsible for the delay is responsible for any loss which
is incurred due to delay.

Rules determining the passing of the ownership from the buyer to the seller under SOGA, 1930

Ascertained good- Section 20 to 22 of SOGA, 1930, lays down a certain set of rules which are to be followed while passing of the ascertained property.

Passing of the property at the time of the contract- if the goods are in the deliverable state then the property of goods passes to the buyer irrespective of payment or the time of the delivery is postponed.

Goods not in deliverable state-it is mentioned in section 21 of SOGA when there are cases that property of the goods to be transferred is not in the deliverable state, then, in that case, it is important to
make the goods in the deliverable state first and by that time a notice must be served to the buyer.

When the price of the good is to be determined by the weight of the goods- this provision is contained under section 22 of SOGA, 1930, that if the goods are in the deliverable state but by any chance,
the seller has to weigh the goods to calculate the amount, the transfer will not be done till the calculation is complete and buyer has the notice regarding this.

Unascertained goods- under section 23 of SOGA, 1930,we can see the rules for the transfer of property for ascertained goods.

For the transfer of unascertained good there are two prerequisites need to be fulfilled:

1) The goods must be converted to ascertained property- the seller needs to identify the goods and keep them aside so as to avoid ambiguity. The exactly selected goods are to be transferred to the buyer. This
is a unilateral act where the seller makes the decision.

2) Goods must be appropriated to the contract- appropriation is where the goods are set aside with the consent of both buyer and seller. This is a bilateral act where both take a mutual decision

Sale by person not the owner-(sec-27)

Subject to the provisions of this Act and of any other law for the time being in force, where goods are sold by a person who is not the owner thereof and who does not sell them under the authority or
with the consent of the owner, the buyer acquires no better title to the goods than the seller had, unless the owner of the goods is by his conduct precluded from denying the seller’s authority to sell:
Provided that, where a mercantile agent is, with the consent of the owner, in possession of the goods or of a document of title to the goods, any sale made by him, when acting in the ordinary course of
 business of a mercantile agent, shall be as valid as if he were expressly authorised by the owner of the goods to make the same; provided that the buyer acts in good faith and has not at the time of the
contract of sale notice that the seller has no authority to sell.

nemo dat quod non habet

“nemo dat quod non habet” means no one can give what he does not have. This is a legal rule which states that purchasing a property from someone who doesn’t have a title denies the purchaser of
the property of an ownership title also. In simple words, if someone gets something because it was transferred to him- as a bequest, sale, gift, etc., he will only have that title which the previous owner
had and nothing more. The transferee derives his title from the transferor. This is also known as the derivative principle. The legal rule is also connected to the principle of “first in time is first in right.”

Ex:- X transfers his property to Y. Then X turns around and transfers the property to Z. Following the rule of nemo dat quod non habet, Y will get the right from X. Now Y have the rights and X have
none. So X cannot transfer Z the property. The rule of nemo dat has its base as a chain of transactions. The current owner should be able to trace his rights back in time to prove his legitimate acquisition.

Nemo Dat Rule in India

Section 27(1) Of the Sale of Goods Act, 1930 states that when any goods are sold by a person who is not the real owner of the goods and sells them without proper authority and consent from the real
owner, the buyer acquires no better title to the goods than the seller had. Further, Section 27 also provides an exception to the rule. Section 27 can be considered as a general rule which protects the
interest of the real owner. If there is any defect in the title of the seller, the buyer will also inherit the same defect from the seller. But, this section does not imply that the buyer title is always bad. The basic
principle of this rule is that the buyer cannot acquire a better title than the seller. For instance, if a thief sells off the stolen goods, the buyer will have the same title as the thief who sold him the goods.

Exception to the Rule

➢ Transfer by Estoppel.
- Estoppel by act or omission
- Estoppel by negligence
➢ Sale by Mercantile Agent
➢ Sale by Joint Owner
➢ Sale by a Person in Possession Under Voidable Contract
➢ Sale by a Seller in Possession
➢ Sale by Buyer in Possession
➢ Resale by Unpaid Seller
➢ Sale by Finder of Goods

Unpaid Seller
According to Section 45(1) of Sale of Goods Act, 1930 the seller is considered as an unpaid seller when:

a- When the whole price has not been paid and the seller has an immediate right of action for the price.

b- When Bills of Exchange or other negotiable instrument has been received as conditional payment, and the pre-requisite condition has not been fulfilled by reason of the dishonour of the instrument or otherwise.

Ex: X sold some goods to Y for $50 and received a cheque. On presentment, the cheque was dishonoured by the bank. X is an unpaid [Link] also includes a person who is in a position of a seller i.e agent,
consignor who had himself paid or is responsible for the price.

Rights Of Unpaid Seller

Rights against buyer
➢ Suit for the price
➢ Suit for damages
➢ Suit for interest Repudiation of the contract before the due date
➢ Suit for interest

Rights against goods:

➢ Lien:

1- In case the buyer is insolvent.

2- When the term of goods sold on credit is expired.

3- Goods sold without any stipulation as to credit.

➢ Stoppage:

1Unpaid seller.

[Link] insolvent.

[Link] should have passed to the buyer.

> Resale:

The unpaid seller can exercise his right under following conditions and circumstances-

1- Seller before reselling the goods needs to send a notice to the buyer except in the case of perishable goods, giving him last chance to pay the price and take back the goods within a reasonable time. If the
buyer does not pay the money back seller has the right to resell the goods. If the seller fails to give notice of his intention to resell, he cannot claim damages from the buyer and he has to give any profit.

2- If there is any loss in the resale of goods he can claim the loss from the buyer, on the contrary, if there is profit buyer cannot claim it.
3- Seller gives rightful ownership to buyer after the resale it does not matter notice of resale is given or not to defaulted buyer.

4- Sometimes the seller reserves exclusive right to resale the goods if the buyer makes a default in payment, in such cases the buyer cannot ask for profit on resale if no notice is served and seller has the exsive
right to resale.

Remedies for Breach

Statute of Sale of Goods, 1893. Three kinds of remedies are mentioned under the Sale of Goods Act, relating to the breach of contract.

• Seller’s Remedies against Buyer

• Buyer’s Remedies against Seller
• Remedies available to both Buyer and Seller

Seller’s Remedies against Buyer

➢ Suit for Price-(Sec-55)

➢ Damage for Non-Acceptance-(Sec-56)

Buyer’s Remedies against the Seller

➢ Damages for Non-Delivery-(Sec-57)

➢ Remedy for Breach of Warranty-(sec-59)
➢ Specific Performance-(Sec-57)

Remedies available to both Seller and Buyer

➢ Suit for Repudiation of Contract before the Date or Anticipatory Breach: (Sec-60)

➢ Interest by way of Damages and Special Damages: (Sec-62)

UNIT-V CONTRACT OF PARTNERSHIP

Introduction:
A partnership contract, also called the articles of partnership, is a document that establishes the terms of the partnership and the agreements between partners. A partnership
contract does not always have to be written. People can form a verbally binding contract just by forming an agreement in a business discussion.

Obviously, all partnership contracts and agreements should be in writing in case of disputes in the future. It’s best to have an attorney draft a partnership contract whenever your
form a new business with a partner.

Definition :
Section 4 of the Indian Partnership Act ,1932 defines ‘Partnership’ as under[6] :
‘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 ’
Nature of Partnership:
Partnership is a form of business organization , where two or more persons join together for jointly carrying on some business. It is an improvement over the ‘Sole –trade business ’, where
one single individual with his own resources, skill and effort carries on his own business. Due to the limitation of resources of only a single person being involved in the sole-trade business
, a larger business requiring more investments and resources than available to a sole-trader, cannot be thought of in such a form of business organisation. In partnership, on the other
hand , a number of persons could pool their resources and efforts and could start a much larger business, than could be afforded by any of these partners individually . In case of loss the
burden gets divided amongst various partners in a Partnership.

Formation of Partnership:

For the formation of a partnership under The Indian Partnership Act,1932 the following are the basic necessities:

• There should be at least 2 persons to form a partnership.

• There must be an agreement between these two or more persons. This agreement can be oral or written or by conduct. The partnership can be oral was seen in the
landmark case of where the partnership was formed by an oral agreement and the firm later applied for registration but the application was rejected.

• There are certain restrictions in keeping the firm name like the restriction of usage of words like an emperor, supreme, empress and other descriptive names,
restriction on keeping names of existing firms or names similar to existing firms, keeping fraudulent names etc.
• Also known as the cardinal principle of partnership law each partner must act as a principal and an agent to the partnership firm. This was seen in .
• The agreement must be there for carrying out a legal business or profession.
• The parties must be competent to enter into a partnership that is they should be a major person, a person of sound mind and should not be barred by law to
entered in such form of agreement. But as per section 30 of Indian Partnership Act,1932 a minor can be admitted as a partner to enjoy the benefits of
partnership but will not be liable for the losses incurred.
• The agreement must be there to share all the profits and losses of the business in a particular predefined ratio. If no ratio is decided it is assumed that the profit
and losses will be shared equally by all the partners.
• For formation of a partnership, all the partners should be jointly and severally liable for all the losses that take place.
• The partnership starts not when an agreement is made but after the business starts .
• A partner in the firm should perform functions other than advancing money and taking interest along with profits to become a partner. It was seen in the case .

Test of partnership:
The true test of a partnership is a way for us to determine whether a group or association of persons is a partnership firm or not. It also helps us recognize the partners of the firm and separate
them from the third parties.
The three important aspects of a true test of a partnership:

1 Agreement/Contract between Parties:

For there to be a partnership between two or more persons there has to be an agreement of partnership between them. The partnership cannot arise family status or any operation of law.
There has to be a specific agreement between the partners.

So if family members of a HUF are running a business together this is not a partnership. Because there is no agreement of partnership between them. The members of HUF are born into
the HUF, so they cannot be partners.

2 Profit Sharing:

Sharing of profits is an aspect of the true test of a partnership. However, profit sharing is only a prima facie evidence of a partnership. The Act does not consider profit sharing as a
conclusive evidence of a partnership. This is because there are cases of profit sharing that are still contradictory to a partnership. Let us see some such cases

• Sharing of profits/ gross receipts from a property that two or more persons own together or have a joint interest in is not a partnership
• A share of profits given to an agent or servant does not make him a partner
• If a share of the profit is given to a widow or child of a deceased partner does not make them partners
• Part of the profits shared with the previous owner as a part of goodwill or as a form of consideration will not make him a partner.

3] Mutual Agency:
This is the truest test of a partnership, it I the cardinal principle of a partnership. So if a partner is both the principle as well as an agent of the firm we can say that mutual agency
exists. This means that the actions of any partner/s will bind all the other partners as well.

Partnership and other associations

Structure of Corporations and Partnerships:

Corporations and partnerships differ in their structures, with corporations being more complex and including more people in the decision-making process. A corporation is an independent legal
entity owned by shareholders, in which the shareholders decide on how the company is run and who manages it. A partnership is a business in which two or more individuals share ownership.

In general partnerships, all management duties, expenses, liability and profits are shared between two or more owners. In limited partnerships, general partners share ownership responsibilities
and limited partners serve only as investors.

Business Startup Costs

Corporations are more expensive and complicated to form than partnerships. Forming a corporation includes a lot of administrative fees, and complex tax and legal requirements.
Corporations must file articles of incorporation, and obtain state and local licenses and permits. Corporations often hire lawyers for help with the process.

The U.S. Small Business Administration advises only established, large companies with multiple employees start corporations. Partnerships are less costly and simpler to form.
Partners must register the business with the state and obtain local or state business licenses and permits.

Liability of Corporations and Partnerships

In partnerships, the general partners are held liable for all company debts and legal responsibilities. General partners' assets may be taken to pay company debts. Partnerships
often include partnership agreements stating exactly what percent of the company each general partner is responsible for, and the percent can vary from partner to partner.

Corporations, on the other hand, do not hold individuals liable for the company's debt or legal obligations. The corporation is considered a separate entity and therefore the
corporation itself is responsible for assuming all debts and legal fees, and the shareholders are not at risk of losing personal assets.

Taxation of Corporations and Partnerships

Partnerships do not have to pay business taxes but instead the profits and losses are "passed through" to the individual general partners, according to the U.S. Small Business
Administration. Partnerships must file a tax return to report losses and profits to the Internal Revenue Service, and general partners include their share of profits and loss in the
return. Corporations are required to pay state and national taxes, and shareholders must also pay taxes on their salaries, bonuses and dividends. The corporate tax rate is usually
lower than the individual income tax rate, according to the SBA.

Management of Corporations and Partnerships

Partnerships have simpler management structures than corporations. In a partnership, all general partners decide how the company is run. General partners often assume
management responsibilities or share in the decision of hiring and monitoring managers.

Corporations are governed by shareholders, who conduct regular meetings to determine company management and policies. Shareholders are generally not involved in the day-to-
day management of the company but instead oversee managers who run the company.

REGISTRATION OF PARTNERSHIP

It is not compulsory under Indian Law to get a partnership firm registered but a registered firm enjoys various benefits over a non registered partnership firm.

In a registered partnership partner have a right to file a case against the firm or co-partners or any other 3rd party and can claim against any 3rd party in the court for the repayment or damages. A
number of steps are to be followed to get a firm registered and avail the benefits of a registered firm.

Thus Indian Partnership Act plays a vital role in governing partnership firms and their smooth functioning. The partnership is one of the most important forms of business organization and it’s easy
formation as laid by the laws under the Partnership act helps people form a partnership firm with any hindrance and conduct business for their living. More and more encouragement should be
made to partnership firms for registration and also the partners should know their rights and duties.

Under the Partnership Act, Registration is not compulsory, it is [Link] may be made by making an application to the Registrar of firms giving

details of:

i) Firm name.
ii) Place of business.

iii) Date of joining of partners, their names and addresses.

iv) Duration of the firm, etc.

This must be signed by the partners. The prescribed fee must be paid. The application must be filed with the original copy of the partnership deed, fee paid receipt etc. The
Registrar will register, if he is satisfied that all the formalities are complied with. Alterations or amendments may be made. But, the text of amendment must be filed with the
Registrar, who may record the same after observing the formalities.

Effects of Non registration:

Section 69 of the Indian Partnership Act, 1932 offers a detailed explanation of the consequences of not opting for firm registration. These are:

1] No suit in a civil court by the firm or other co-partners against any third party
If the firm registration is not done, then the firm or any other person on its behalf cannot file a suit against a third party for breach of contract which the firm has entered into. Further, the
person filing the suit on behalf of the firm should be in the register of the firm as a partner.

2] No relief to partners for set-off of claim

Without firm registration, any action brought against the firm by a third party having a value of more than Rs. 100 cannot be set-off by the firm or any of its partners. Pursuance of other
proceedings to enforce rights arising from the contract cannot be done either.

3] An aggrieved partner cannot bring legal action against other partner or the firm
A partner of the firm or any person on his behalf cannot bring legal action against the firm or against any partner (or alleged to be a partner) if firm registration is not done. However, if the
firm is dissolved, then such a person can sue the firm for dissolution it accounts and realization of his share in the firm’s property.

4] A third party can sue the firm

Even if the firm registration is not done a third party can bring legal action against the firm.

It is also, important to note that despite these disabilities, the non-registration of a firm does not affect the following rights:

1. The right of a third party to sue the firm or any partner

2. Partners’ right to sue the firm for dissolution or settlement of accounts (in case of dissolution)
3. The power of the Official Assignees, Receiver of Court to release the property of the insolvent partner and bring an action

4. The right of the firm and partners to sue or claim set-off of the value of the suit does not exceed Rs. 100.

Rights and duties of partners:

Rights of Partners:

➢ Right to participate in business.

➢ Right to express opinions.
➢ Right to access books and accounts.
➢ Right to share profits.
➢ Right to be indemnified.
➢ Right to interest on capital and advances.

Duties of Partners:

➢ General duties.
➢ General duties.
➢ Duty to act diligently.
➢ Duty to use the firm’s property properly.
➢ Duty to not earn personal profits or to compete.

Effect on Rights and Duties after a change in Firm

The nature of the existing relationship between partners will be affected whenever there is a change in the firm’s constitution. Such changes occur in the following situations:

1. Change in constitution of the firm due to incoming or outgoing or partner(s);

2. Expiry of the pre-determined term of the firm; and
3. Carrying out of additional business undertakings than originally agreed upon.
Mutual rights and duties of the partners will continue to be the same as they existed prior to such changes, but partners can change this by making a fresh partnership.

Partnership Property (Section 14)

The property of a firm is also known as partnership property, partnership assets, joint stock ,common stock, or joint estate. A partnership property includes all property and rights, and
interest in property that the partnership firm purchases.

These purchases can also be made for the purpose and in course of the business of the firm, including the goodwill of the firm. All partners collectively own such properties.
Hence, a partnership property comprises of the following items if there is no agreement between the partners showing any contrary intention:

• All property and rights and interest in property that the partners purchase in the common stock as their contribution to the common business.
• All property and rights and interest in property that the firm purchases either for the firm or for the purpose and in course of the business of the firm.
• Goodwill of the business.
Determining whether a particular property is partnership property depends on the true intention or agreement between the partners.

Hence, if a firm uses the property of a partner for its purposes, it does not make it a partnership property unless that was the real intention. At any time, the partners may agree to convert
the property of a partner or partners into partnership property.

If such a conversion is made in good faith, then it would be effectual between the partners and against the creditors of the firm. The partners may also agree to convert the separate property
of any partners into the property of the firm.

Application of Partnership Property (Section 15)

According to section 15, the partnership property should be held and used exclusively for the purpose of the firm. While all partners have a community of interest in the property, during
the subsistence of the partnership no partner has a proprietary interest in the assets of the firm.

Relation of Partners to Third Parties

A Partner is an Agent of the Firm (Section 18)

A partnership is a relationship between partners who agree to share the profits of the business. The business can be carried on by all of them or any of them acting for all. This definition
suggests that a partner can be an agent of the others.

Section 18 specifies that a partner is an agent of the firm for the purpose of business of the firm. This is actually one of the essential elements of a partnership.

Hence, a partner embraces the character of both, the principal and the agent. Therefore, if he acts for himself and in his own interest in the common concern of the partnership, then he is
acting as a principal. On the other hand, if he acts for and in the interest of his partners, then he is acting as an agent.

Implied Authority of a Partner (Section 19)

If a partner does an act in the usual course of business of the firm, then his act binds the firm. This authority of a partner to bind the firm is Implied Authority. Unless a contrary agreement
exists, implied authority does not empower a partner to (Section 19 – subsection 2 of the Indian Partnership Act, 1932):

• Submit a dispute, relating to the business of the firm, to arbitration

• Open a bank account in his name, on behalf of the firm
• Compromise or relinquish, full or part of a claim by the firm
• Withdraw a suit or proceedings filed on behalf of the firm
• Admit any liability in a suit or proceedings against the firm
• Acquire an immovable property on behalf of the firm
• Transfer an immovable property belonging to the firm
• Enter into a partnership on behalf of the firm
Section 22 of the Indian Partnership Act, 1932, adds that the act which was done by the partner to bind the firm must be done in the name of the firm or in any other manner which implies
an intention to bind the firm.

While the implied authority depends on the nature of the business of the firm, a partnership of a general commercial nature may allow the partner to:

• Pledge or sell the partnership property

• Purchase goods on behalf of the partnership
• Borrow money, contract and pay debts on account of the partnership
• Draw, make, sign, endorse, transfer, negotiate and procure negotiable papers in the name and on account of the partnership.
According to Section 20 of the Indian Partnership Act, 1932, the partners of a firm can make a contract to extend or restrict the implied authority of a partner.

These restrictions or extensions apply to a third party only when the third party is aware of the restrictions or does not know that he is dealing with a partner of the firm.

Partner’s Authority in an Emergency (Section 21)

As per Section 21 of the Indian Partnership Act, 1932, if there is an emergency, then every partner has the authority to do all such acts that a person of ordinary prudence would do to
protect the firm from a loss. Such acts bind the firm.

Kinds Of Partners
1. Working Partner

A Working Partner is one who contributes capital to the business and takes active part in its management. Hence, he is called active partner.

2. Sleeping Partner

A Sleeping Partner is one who contributes only capital to the business, but does not take part in its management. He is also called dormant partner or financing partner.

3. Nominal Partner

A Nominal Partner does not contribute capital. Neither does he take active part in the management. His contribution in a partnership is limited to allowing the other partners to make use of his
name.
 4. Partner by Estoppel

Partner by Estoppel is not a partner of the firm but by his words and conduct he leads the outsiders to believe that he is also a partner of the firm. Usually this arises, when the outgoing partner
fails to give notice about his retirement.

5. Limited Partner

In foreign countries like U.K., the law of the land permits the admission of partners with limited liability. But in India, no one can be a limited partner. There is only one exception. The liability of a
minor admitted for the benefits of partnership is limited to the extent of his capital contribution.

6. Secret Partner

A Secret Partner is actually a partner of the firm. But he does not hold out to the public as a partner of the firm but keeps his existence as secret. His liability is also unlimited.

7. Partner by Holding Out

Though a Partner by Holding Out is not a partner, he knowingly permits himself to be a partner of the firm by his activities.

8. Sub – Partner

A Sub-Partner has no direct contact with the firm. He is only next to a partner.

9. Partner in Profit

A Partner in Profit becomes a partner whenever the firm earns profit. His liability is also unlimited.

Minor As Partner:
However, according to the Partnership Act, a minor may be admitted to the benefits of a partnership. So while the minor will not be a partner he will enjoy all the benefits of a partnership. To admit all the minor to
the benefits of the partnership all of the partners of the firm must be in agreement.

Rights of a Minor Partner

Once the minor is given the benefits in a partnership there are certain rights that he enjoys. Let us take a look at the rights of a minor partner.

i. A minor partner will obviously have the right to his share of the profits of the firm. But the minor partner is not liable for any losses beyond his interests in the firm. So a minor partner’s
personal assets cannot be liquidated to pay the firms liabilities.
ii. He can also like any other partner inspect the books of accounts of the firm. He can demand a copy of the books as well.
iii. If necessary he can sue any or all of the other partners for his share of the profits or benefits.
iv. A minor partner on attaining majority has the right to become a partner of the firm. He has six months from attaining majority to decide if he will execute this right. Whether he decides
to become a partner or not he must give public notice about the same.

Liabilities of a Minor Partner

i. A minor cannot be held personally liable for the losses of the firm. And if the firm declares insolvency the minor’s share is kept with the Official Receiver
ii. After turning 18 the minor partner can choose to become a partner of the firm. But he may choose to not become a partner. In this case, the minor partner has to give a public notice
about this decision. And the notice has to be given within 6 months of gaining a majority. If such a notice is not given even after 6 months then the minor partner will become liable for
all acts done by the other partners till the date of such notice.
iii. Should the minor partner choose to become a partner he will be liable to all the third parties for the acts done by any and all partners since he was admitted to the benefits of
the partnership.

iv. If he becomes a full-time partner he will be treated as a normal partner and have all the liabilities of one. His share in the profits and property of the firm will remain the same as it was
when he was a minor partner.

Reconstitution of a Partnership Firm

Reconstitution of a partnership firm takes place whenever there is a change in the profit sharing ratio among the partners, admission of a new partner, retirement of a partner and death or
insolvency of a partner.

Forms of Reconstitution of a Partnership Firm

1. Change in the profit sharing ratio among the Existing Partners
Sometimes the partners may decide to change their profit sharing ratio due to factors like change in their roles in the firm, change in their capital contribution ratio, etc. Any change in the
old profit sharing ratio will amount to a reconstitution of the partnership firm.

For example, A, B, and C were partners in a firm sharing equal profits. Due to some reasons, C shifts to another city and is therefore unable to take part in the business actively. Thus, it is
decided that now the new profit sharing ratio shall be 2:2:1. This amounts to the reconstitution of a firm.

2. Admission of a Partner
When a firm requires additional capital or managerial help it can admit a new partner in its business. As per the Partnership Act, 1932, a new partner can only be admitted unanimously
unless otherwise provided in the partnership Deed When a new partner is admitted a new agreement is formed and thus the firm is reconstituted.

The new partner acquires the right to share the assets of the firm for which he brings in the capital and the right to share the future profits of the firm for which he brings Goodwill. On
admission of a new partner, the profit sharing ratio changes, the assets and liabilities are revalued and goodwill is calculated and distributed among the old partners in their sacrificing
ratios.

3. The Retirement of an Existing Partner

A partner may decide to retire or withdraw from the firm due to reasons such as his age, his bad health, change in firm’s nature of a business, etc. In case of Partnership at Will, a partner
may retire at any time. Retirement amounts to a reconstitution of a firm where the number of partners, their capital contribution ratio and also the profit sharing ratio changes. The
retiring partner is paid his share of capital, goodwill and revaluation profit or loss.

For example, X, Y, and Z are partners in the firm sharing profits in the ratio of 3:2:1. X chooses to retire and Y and Z decide to share the future profits equally. This is a reconstitution of
the firm where the number of partners and their profit sharing ratio both have changed.
4. Death or Insolvency of a Partner:
Death or insolvency of a partner also results in the reconstitution of the firm when the remaining partners wish to continue the firm. In case of insolvency, all dues are paid to the insolvent
partner and partnership agreement is aborted because as per the law an insolvent is incompetent to enter into a contract or an agreement.

In case of death, all dues are paid to the legal heir of the deceased partner.

Dissolution of a Firm
When the partnership between all the partners of a firm is dissolved, then it is called dissolution of a firm. It is important to note that the relationship between all partners should be
dissolved for the firm to be dissolved.

Modes of Dissolution of a Firm

A firm can be dissolved either voluntarily or by an order from the Court.

Voluntary Dissolution of a Firm (without the order of the Court)

Voluntary dissolution can be of four types.

1] By Agreement (Section 40)

According to Section 40 of the Indian Partnership Act, 1932, partners can dissolve the partnership by agreement and with the consent of all partners. Partners can also dissolve the
partnership based on a contract that has already been made.

2] Compulsory Dissolution (Section 41)

An event can make it unlawful for the firm to carry on its business. In such cases, it is compulsory for the firm to dissolve. However, if a firm carries on more than one undertakings and
one of them becomes illegal, then it is not compulsory for the firm to dissolve. It can continue carrying out the legal undertakings. Section 41 of the Indian Partnership Act, 1932, specifies
this type of voluntary dissolution.

3] On the happening of certain contingencies (Section 42)

According to Section 42 of the Indian Partnership Act, 1932, the happening of any of the following contingencies can lead to the dissolution of the firm:

• Some firms are constituted for a fixed term. Such firms will dissolve on the expiry of that term.
• Some firms are constituted to carry out one or more undertaking. Such firms are dissolved when the undertaking is completed.
• Death of a partner.
• Insolvent partner.
4] By notice of partnership at will (Section 43)

According to Section 43 of the Indian Partnership Act, 1932, if the partnership is at will, then any partner can give notice in writing to all other partners informing them about his intention
to dissolve the firm.

In such cases, the firm is dissolved on the date mentioned in the notice. If no date is mentioned, then the date of dissolution of the firm is the date of communication of the notice.

Dissolution of a Firm by the Court

According to Section 44 of the Indian Partnership Act, 1932, the Court may dissolve a firm on the suit of a partner on any of the following grounds:

1] Insanity/Unsound mind

If an active partner becomes insane or of an unsound mind, and other partners or the next friend files a suit in the court, then the court may dissolve the firm. Two things to remember here:

• The partner is not a sleeping partner

• The sickness is not temporary
2] Permanent Incapacity

If a partner becomes permanently incapable of performing his duties as a partner, and other partners file a suit in the court, then the court may dissolve the firm. Also, the incapacity may
arise from a physical disability, illness, etc.

3] Misconduct

When a partner is guilty of conduct which is likely to affect prejudicially the carrying on of the business, and the other partners file a suit in the court, then the court may dissolve the firm.

Further, it is not important that the misconduct is related to the conduct of the business. The court looks at the effect of the misconduct on the business along with the nature of the business.

4] Persistent Breach of the Agreement

A partner may willfully or persistently commit a breach of the agreement relating to

• the management of the affairs of the firm, or

• a reasonable conduct of its business, or
• conduct himself in matters relating to business that is not reasonably practicable for other partners to carry on the business in partnership with him.
In such cases, the other partners may file a suit against him in the court and the court may order to dissolve the firm. The following acts fall in the category of breach of agreement:

1. Embezzlement
2. Keeping erroneous accounts
3. Holding more cash than allowed
4. Refusal to show accounts despite repeated requests, etc.
5] Transfer of Interest
A partner may transfer all his interest in the firm to a third party or allow the court to charge or sell his share in the recovery of arrears of land revenue. Now, if the other partners file a suit
against him in the court, then the court may dissolve the firm.

6] Continuous/Perpetual losses

If a firm is running under losses and the court believes that the business of the firm cannot be carried on without a loss in the future too, then it may dissolve the firm.

7] Just and equitable grounds

The court may find other just and equitable grounds for the dissolution of the firm. Some such grounds are:

• Deadlock in management
• Partners not being in talking terms with each other
• Loss of substratum (the foundation of the business)
• Gambling by a partner on the stock exchange.

Limited Liability Partnership (LLP)

• LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership.

• The LLP can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its own name.

• The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP.

• Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s
wrongful business decisions or misconduct.

• Mutual rights and duties of the partners within a LLP are governed by an agreement between the partners or between the partners and the LLP as the case may be. The LLP, however, is not
relieved of the liability for its other obligations as a separate entity.

Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is called a hybrid between a company and a partnership.

➢ LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession.

LLP form is a form of business model which:

(i) is organized and operates on the basis of an agreement.

(ii) provides flexibility without imposing detailed legal and procedural requirements

(iii) enables professional/technical expertise and initiative to combine with financial risk taking capacity in an innovative and efficient manner

• Under “traditional partnership firm”, every partner is liable, jointly with all the other partners and also severally for all acts of the firm done while he is a partner.

• Under LLP structure, liability of the partner is limited to his agreed contribution. Further, no partner is liable on account of the independent or un-authorized acts of other partners, thus
allowing individual partners to be shielded from joint liability created by another partner’s wrongful acts or misconduct.

• A basic difference between an LLP and a joint stock company lies in that the internal governance structure of a company is regulated by statute (i.e. Companies Act, 1956) whereas for an
LLP it would be by a contractual agreement between partners.

• The management-ownership divide inherent in a company is not there in a limited liability partnership.

• LLP will have more flexibility as compared to a company.

• LLP will have lesser compliance requirements as compared to a company.

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