MERCANTILE LAWS

MERCANTILE LAWS

The Institute of Chartered Accountants of India

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ISBN : 978-81-8441-034-1 Published by The Publication Department on behalf of CA. R. Devarajan, Director, Board of Studies, The Institute of Chartered Accountants of India, A94/4, Sector-58, Noida-201 301, India. Designed & Printed at Repro India Limited, 50/2, Mahape, Navi Mumbai - 400 710. September / 2009 / 40000 Copies (Reprint)

PREFACE

Law in a broader sense includes rules, regulations, guidelines, principles which seek to regulate relations

of citizens with the State. There are also laws, which regulate business as they form an integral part of the society. The laws that govern and regulate trade and commerce are commonly known as ‘Mercantile Laws’. These laws deal with rights and obligations of parties to a mercantile agreement. The law of merchant was originally developed out of procedures and progress of trade and commerce in England. The Mercantile Laws in India are mainly based upon the English laws. The subject, Mercantile Laws is vast and expansive and a number of enactments were passed. As a student aspiring to became a Chartered Accountant, he should have knowledge of those legal frameworks, which influences the business transactions. The syllabus has been segregated into three chapters covering The Indian Contract Act, 1872, The Sale of Goods Act, 1930 and The Indian Partnership Act, 1932. The level of knowledge that has been prescribed for this paper is that of basic knowledge. We hope that the introduction to mercantile laws will set a good foundation for understanding the nuances of trade and commerce. The content of different chapters are as under : 1.

The Indian Contract Act, 1872 : This is one of the oldest in the Indian law regime, passed by the legislature of pre-independence India and received its assent on 25th April, 1872. The statute contains essential principles for formation of contract. The Law of Contract does not involve or bind the state or persons that are not parties to the contract. It is, therefore, said to be a part of “Private Law”. It contains a number of principles subject to which the parties may create rights and duties for themselves. Hence, a contract is voluntary and require an exercise of the will of the parties.

2.

The Sale of Goods Act, 1930 : The Law relating to this statute was contained in the Chapter VII of the Indian Contract Act, 1872. Subsequently, it was separated with the Indian Sale of Goods Bill, which received its assent on 15th March, 1930. It came into force on the 1st of July, 1930 as the Indian Sale of Goods Act, 1930. In due course, the word “Indian” was omitted by the Indian Sale of Goods (Amendment) Act, 1963 (33 of 1965) and it became “The Sale of Goods Act, 1930”. This Act has seen several amendments and adaptation orders in due course. The latest one of such was the Multimodal Transportation of Goods Act, 1993.

3.

The Indian Partnership Act, 1932 : The law relating to partnership in India was in Chapter XI of the Indian Contract Act, 1872. On 1st day of October, 1932 the Indian Partnership Act, 1932 came into force by repealing the aforesaid chapter in the Indian Contract Act, 1872.

SYLLABUS Mercantile Laws (40 Marks) Objective : To test the general comprehension of elements of mercantile laws.

Contents 1. The Indian Contract Act, 1872: An overview of Sections 1 to 75 covering the general nature of contract, consideration, other essential elements of a valid contract, performance of contract and breach of contract. 2. The Sale of Goods Act, 1930: Formation of the contract of sale – Conditions and Warranties – Transfer of ownership and delivery of goods – Unpaid seller and his rights. 3. The Indian Partnership Act, 1932: General Nature of Partnership – Rights and duties of partners – Registration and dissolution of a firm.

CONTENTS Chapter 1 - The Indian Contract Act, 1872 Introduction

1

Unit 1 : Nature of Contracts 1.1. 1.2. 1.3 1.4. 1.5 1.6 1.7 1.8

What is Contract? Essential Elements of a Valid Contract Types of Contract Proposal/Offer Acceptance Communication of Offer and Acceptance Revocation of Offer and Acceptance Summary

4 5 6 8 10 11 11 12

Unit 2 : Consideration 1.9 1.10 1.11 1.12 1.13

What is Consideration ? Legal Requirements regarding Consideration Suit by a Third Party on an Agreement Validity of an Agreement without Consideration Summary

14 15 16 16 17

Unit 3 : Other Essential Elements of a Valid Contract 1.14 1.15 1.16 1.17 1.18 1.19 1.20 1.21

Capacity to Contract Free Consent Elements Vitiating Free Consent Lawful Object and the Consideration Unlawful Object Unlawful Consideration Agreements Expressly Declared Void Summary

19 22 22 26 27 27 31 33

Unit 4 : Performance of Contract 1.22 1.23 1.24 1.25 1.26 1.27 1.28 1.29 1.30

By whom Contract may be Performed ? Distinction between Succession and Assignment Effect of Refusal to Accept Offer of Performance Effect of a Refusal of Party to Perform Promise Liability of Joint Promisors Rights of Joint Promisees Time and Place for Performance of the Promise Performance of Reciprocal Promises Effect of Failure to Perform at a Time Fixed in a Contract in which Time is Essential

36 38 38 38 39 40 40 40 42

CONTENTS 1.31 1.32 1.33 1.34 1.35

Impossibility of Performance Appropriation of Payments Contracts which need not be Performed Restoration of Benefit under a Voidable Contract (Section 64) Obligations of Person who has Received Advantage under Void Agreement or One Becoming Void 1.36 Discharge of a Contract 1.37 Summary

43 43 44 45 46 47 48

Unit 5 : Breach of Contract 1.38 1.39 1.40 1.41 1.42

Anticipatory Breach of Contract Actual Breach of Contract Liability for Damages How to Calculate the Damage ? Summary

50 50 51 51 52

Unit 6 : Contingent and Quasi-Contracts 1.43 1.44 1.45 1.46 1.47 1.48 1.49 1.50 1.51

What is a Contingent Contract ? Essentials of a Contingent Contract Rules Relating to Enforcement What is a Quasi-Contract ? Types of quasi-contracts Wagering Agreement and Contingent Contract Summary Multiple Choice Questions Answers

54 54 55 55 56 57 57 58 77

Chapter 2 - The Sale of Goods Act, 1930 Introduction

79

Unit 1 : Formation of the Contract of Sale 2.1

Definitions

82

2.2

Contract of Sale

84

2.3

Essentials of Contract of Sale

84

2.4

Sale and an Agreement to Sell

84

2.5

Distinction between Sale and an Agreement to Sell

85

2.6

Sale distinguished from other similar Contracts

85

2.7

Formalities of Contract of Sale

87

2.8

Subject matter of Contract of Sale

87

2.9

Ascertainment of Price (Sections 9 & 10)

88

CONTENTS 2.10 Stipulation as to Time (Section 11)

88

2.11 Summary

88

Unit 2 : Conditions & Warranties 2.12 Conditions and Warranties

90

2.13 When a Condition may be Treated as Warranty?

90

2.14 Express and Implied Conditions and Warranties

91

2.15 Implied Warranties

92

2.16 Caveat Emptor

92

2.17 Summary

93

Unit 3 : Transfer of Ownership & Delivery of Goods 2.18 Passing of Property (Sections 18 - 24)

95

2.19 Reservation of Right to Disposal (Section 25)

96

2.20 Passing of Risk (Section 26)

97

2.21 Transfer of Title (Sections 27 - 30)

97

2.22 Rules regarding Delivery of Goods (Sections 33 - 39)

99

2.23 Acceptance of Delivery of Goods

100

2.24 Summary

100

Unit 4 : Unpaid Seller 2.25 Unpaid Seller

102

2.26 Rights of an Unpaid Seller

102

2.27 Distinction between Right of Lien and Right of Stoppage in Transit

104

2.28 Effect of Sub-Sale or Pledge by the Buyer (Section 53)

104

2.29 Rights of Parties in case of Breach of Contract

105

2.30 Auction Sale

106

2.31 Summary

106

2.32 Multiple Choice Questions

107

2.33 Answers

117

Chapter 3 - The Indian Partnership Act, 1932 Introduction Unit 1 : General Nature of a Partnership 3.1 What is Partnership? 3.2 Essential Elements of Partnership 3.3 True Test of Partnership 3.4 Partnership distinguished from other forms of Organisation 3.5 Types of Partners

119 122 122 123 124 126

CONTENTS 3.6

Minor’s Position in Partnership

127

3.7

Summary

128

Unit 2 : Relations of Partners 3.8

Mutual Rights and Duties of Partners

130

3.9

Partnership Property (Section 14)

133

3.10 Personal Profit Earned by Partners (Section 16)

134

3.11 Rights and Duties of Partners after a change in the Constitution

134

of the Firm (Section 17) 3.12 Relation of Partners to Third Parties (Sections 18 to 30)

135

3.13 Implied Authority of a Partner of the Firm

135

3.14 Acts beyond Implied Authority (Section 19)

136

3.15 Extension and Restriction of Partners’ Implied Authority (Section 20)

136

3.16 Acts in Emergency (Section 21)

137

3.17 Notice to an Acting Partner - its effect (Section 24)

137

3.18 Liability to Third Parties (Sections 25 to 27)

138

3.19 Rights of Transferee of a Partner’s Share (Section 29)

139

3.20 Legal Consequences of Partner Coming in and Going Out (Sections 31-38)

139

3.21 Summary

143

Unit 3 : Registration and Dissolution of a Firm 3.22 Mode of Effecting Registration

145

3.23 Consequences of Non-Registration

145

3.24 Dissolution of Firm (Sections 39-47)

146

3.25 Consequences of Dissolution (Sections 45-52)

147

3.26 Mode of giving Public Notice (Section 72)

150

3.27 Summary

151

3.28 Multiple Choice Questions

151

3.29 Answers

155

Additional Question Bank

156

THE INDIAN CONTRACT ACT, 1872

CHAPTER – 1 INTRODUCTION The term ‘contract’ means, in ordinary sense, any agreement between any two persons. For business persons, making of contracts with others is a very important process to put into effect their business plans. Those who enter into contracts expect that the commitments made shall be fulfilled. The law of contracts seeks to regulate the behaviour of persons who make contracts. It also determines the circumstances under which a promise or an agreement shall be legally binding on the person making it. It also provides the remedies, which are available in a Court of Law against a person who fails to fulfil his contracts. The law relating to contracts is contained in the Indian Contract Act, 1872. The Act came into force on the first day of September 1872, and it applies to the whole of India except the State of Jammu and Kashmir. The Contract Act is not a complete and exhaustive law on all types of contracts. It lays down general principles of contract law. In this chapter we shall study the provisions of the Act in the following order : Unit 1 - Nature of contracts Unit 2 - Consideration Unit 3 - Other essential elements of a Valid Contract Unit 4 - Performance of contract Unit 5 - Breach of contract Unit 6 - Contingent and Quasi-Contracts

CHAPTER – 1


Unit 1 Nature of Contracts

THE INDIAN CONTRACT ACT, 1872 Learning Objectives

Understand meaning of the terms ‘agreement’ and ‘contract’ and note the distinction between the two.

Note the essential elements of contract.

Be clear about various types of contract.

Understand the concept of offer and acceptance and rules of communication and revocation thereof.

THE LAW OF CONTRACT : GENERAL PRINCIPLES As a result of increasing complexities of business environment, innumerable contracts are entered into by the parties in the usual course of carrying on their business. ‘Contract’ is the most usual method of defining the ‘give and take’ rights and duties in a business transaction. This branch of Private law is different from other branches of law in a very important respect. It does not prescribe so many rights and duties, which the law will protect or enforce; it contains a number of limiting principles subject to which the parties may create rights and duties for themselves. In a sense, parties to a contract are the makers of law for themselves. They can frame any rules they desire to the subject matter of their agreements, and law takes cognizance of their decision unless they are not legally prohibited. All agreements are not studied under the Indian Contract Act, 1872, as some of those are not contracts. Only those agreements, which are enforceable at law, are contracts. This unit refers to the essentials of a legally enforceable agreement or contract. It sets out rules for the offer and acceptance and revocation thereof. It states the circumstances when an agreement is voidable or enforceable by one party only, and when the agreements are void, i.e. not enforceable at all.

1.1

WHAT IS CONTRACT?

Section 2(h) of the Act defines the term contract “as an agreement enforceable by law”. Section 2(e) defines agreement as “every promise and every set of promises, forming the consideration for each other”. Again Section 2(b) defines promise in these words:

“When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. Proposal when accepted, becomes a promise”. From the above, it is obvious that an agreement is a promise or a set of reciprocal promises, that a promise is the acceptance of a proposal. There must be an offer or a proposal which the other person accepts and when he accepts he knows that the acceptance will give rise to a binding contract. But as Section 2(h) requires an agreement to be worthy of being enforceable by law before it is called ‘contract’, there arises an important question : On what conditions does the Indian Contract Act recognise the “agreement” of the parties (which contains a promise) as a “contract”? The answer to this question will form the subject of our discussion in this Unit.

4

COMMON PROFICIENCY TEST

1.2

ESSENTIAL ELEMENTS OF A VALID CONTRACT

According to Section 10, “All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.” The following essential elements must co-exist in order to make a valid contract: 1.

Proper offer and proper acceptance with intention to create legal relationship.

2.

Lawful consideration.

3.

Capacity.

4.

Free consent.

5.

Lawful agreement.

1.

In the first instance, the parties ought to have the intention to create a legal obligation between them through the form of offer an acceptance. They should have intention to impose duty on the promisor to fulfil the promise and bestow a right on the promisee to claim its fulfilment. It must not be merely a moral one but it must be legal.

2.

The second aspect to look for is the presence of “lawful consideration” which is an essential element of a valid contract. Consideration is a technical word meaning thereby quid pro quo i.e. something in return. It must result in benefit to one party and detriment to the other party or a detriment to both. Example : A agrees to sell his books to B for Rs. 100, B’s promise to pay Rs. 100 is the consideration for A’s promise to sell his books and A’s promise to sell the books is the consideration for B’s promise to pay Rs. 100. If the two essential elements are there we can say that there is a contract which prima-facie will hold good; or at least we can say that there is an existence of contract, although some more necessary elements of validity may be wanting.

3.

Thirdly, the parties to a contract must have capacity (legal ability) to make valid contract. In every case there must be assent of the parties. The assent presupposes a free, fair, and serious exercise of the reasoning faculty. If, therefore, either of the parties to an agreement is deprived of the use of his understanding or if he be deemed by law not to have attained it, there can be no such agreement which shall bind him. Section 11 of the Indian Contract Act specifies that every person is competent to contract provided, (a) he is of the age of majority according to the law to which he is subject and (b) he is of sound mind and (c) he is not disqualified from contracting by any law to which he is subject. In other words (a) a minor, (b) a person of unsound mind (a person of unsound mind can enter into a contract during his lucid intervals) and (c) a person disqualified from contracting by any law to which he is subject, e.g. an alien enemy, foreign sovereigns and accredited representatives of a foreign state, insolvents and convicts are not competent to contract.

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THE INDIAN CONTRACT ACT, 1872 4.

The consent of the parties must be genuine. The term ‘consent’ means parties to a contract must agree upon the same thing in the same sense, i.e. there should be consensus-adidem. Consent is said to be not free when it is vitiated by coercion, undue influence, fraud, misrepresentation or mistake. In such cases, the contract becomes voidable at the option of the party whose consent is not free. Example: A threatened to shoot B if he (B) does not lend him Rs. 2,000 and B agreed to it. Here the agreement is entered into under coercion and hence voidable at the option of B.

5.

The agreement must not be one, which the law declares to be either illegal or void. A void agreement is one, which is without any legal effects. Illegal agreement is an agreement expressly or impliedly prohibited by law. Example: Agreements in restraint of trade, marriage, legal proceedings etc. are void agreements. Those agreements prohibited by the Indian Penal Code e.g. Threats to commit murder or publishing defamatory statements or agreements which are opposed to public policy are illegal in nature.

1.3 1.

TYPES OF CONTRACT Void Contract : It is a contract without any legal effect and cannot be enforced in a Court of Law. Section 2(j) defines a void contract as “a contract which ceases to be enforceable by law becomes void when it ceases to be enforceable”. Examples : Where both parties to an agreement are under a mistake of fact, (Section 20), when the consideration or object of an agreement is unlawful, (Section 23), an agreement made without consideration, (Section 25), agreement in restraint of marriage (Section 26), trade (Section 27), legal proceedings (Section 28), agreement by way of wager (Section 30) are instances of void contract.

2.

Voidable Contract : As per Section 2(i), “an agreement which is enforceable by law at the option of one or more the parties but not at the option of the other or others is a voidable contract.” Examples : A contract brought about as a result of Coercion, Undue influence, Fraud or misrepresentation would be voidable at the option of the person whose consent was caused by any one of these factors.

Void and Voidable contract : Distinction (a) Definition : As per Section 2(j) and (i) a contract which ceases to be enforceable by law becomes void when it ceases to be enforceable and a voidable contract is an agreement which is enforceable by law at the option of one or more of the parties thereon, but not at the option of other or others. (b) Nature : A void contract is valid when it is made but subsequently becomes unenforceable on certain grounds such as supervening impossibility, subsequent illegality, repudiation of a voidable contract, a contingent contract depending upon happening of an uncertain event, when occurrence of such event becomes impossible.

6


A voidable contract on the other hand is voidable at the option of the aggrieved party, and remains valid until rescinded by him. Contract caused by coercion, undue influence, fraud, misrepresentation are voidable. But in case contract is caused by mistake it is void. (c) Rights : A void contract does not provide any legal remedy for the parties to the contract. They even cannot get it performed when they so desire. The aggrieved party in a voidable contract gets a right to rescind the contract. When such party rescind it, the contract becomes void. In case aggrieved party does not rescind the contract within a reasonable time, the contract remains valid. 3.

Illegal contract : It is a contract which the law forbids to be made. The court will not enforce such a contract and also connected contracts. All illegal agreements are void but all void agreements or contracts are not necessarily illegal. Examples : Contract to commit crime. Contract that is immoral or opposed to public policy are illegal in nature.

Void and Illegal agreements : distinction. According to Section 2 (g) of the Indian Contract Act, an agreement not enforceable by law is void. The Act has specified various factors due to which an agreement may be considered as void agreement. One of these factors is unlawfulness of object or consideration of the contract i.e., illegality of the contract which makes it void. Despite the similarity between an illegal and a void agreement that in either case the agreement is void and cannot be enforced by law, the two differ from each other in the following two respects : (a) Scope : An illegal agreement is always void while a void agreement may not be illegal being void due to some other factor e.g., an agreement the terms of which are not certain is void but not illegal. (b) Effect on collateral transaction : If an agreement is merely void and not illegal, the collateral transactions to the agreement may be enforced for execution but collateral transaction to an illegal agreement also becomes illegal and hence cannot be enforced. (c) Punishment : Unlike illegal agreements, there is no punishment to the parties to a void agreement. (d) Void-ab-initio : Illegal agreements are void from the very beginning, but sometimes valid contracts may subsequently become void. 4.

Unenforceable contract : Where a contract is good in substance but because of some technical defect i.e., absence in writing, barred by limitation etc. one or both the parties cannot sue upon it, it is described as an unenforceable contract. Contracts may also be classified according to formation namely, Express Contracts and Implied Contracts.

5.

Express Contracts : A contract which is made by words either spoken or written is said to be an express contract. According to Section 9 insofar as the proposal or acceptance of any promise is made in words, the promise is said to be express.

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Implied Contract : By implied contract means implied by law (i.e.) the law implies a contract though parties never intended. According to Section 9 insofar as such proposal or acceptance is made otherwise than in words, the promise is said to be implied. For example, A delivers by mistake goods at B’s warehouse instead of at C’s place. Here there is an obligation on the part of B to return the goods to A, though they never intended to enter into a contract.

7.

Tacit Contract : A contract is said to be tacit when it has to be inferred from the conduct of the parties. Examples obtaining cash through automatic teller machine, sale by fall of hammer at an auction sale. Besides contracts may be classified on the basis of performance. Such contracts may be executed, executory, unilateral and bilateral.

8.

Executed Contract : If the consideration for the promise in a contract (i.e., any act or forbearance) is given or executed, such type of contract is called contract with executed consideration.

9.

Executory Contract : It is so called because the reciprocal promises or obligation which serves as consideration is to be performed in future.

10. Unilateral Contract : A unilateral contract is a one-sided contract in which only one party has to perform his promise or obligation to do or forbear. 11. Bilateral Contract : Where the obligation or promise in a contract is outstanding on the part of both the parties, it is known as bilateral contract. Formal Contracts : The English Law classifies the contract into (i) formal contracts and (ii) simple contracts. Formal Contracts include (a) Contract of record and (b) Contract under Seal. (a) Contract of Record : A contract of record is either a judgement of a court or a recognisance. A judgement is an obligation imposed by a Court upon one or more persons in favour of another or others. As a matter of fact it is not a contract in the real sense, since it is not based upon any agreement between the two parties. A recognisance is a written acknowledgement of a debt due to the State. It is usually met with the connection with criminal proceedings. Contracts of record derive their binding force from the authority of the Court. (b) Contract under Seal : A contract under seal is one which derives its binding force from its form alone. It is written and is signed, sealed and delivered by the parties. It is also called a deed or a speciality contract. Now we shall discuss the term ‘offer’ and ‘acceptance’ referred to earlier, in detail.

1.4

PROPOSAL/OFFER

The words proposal and offer are used interchangeably and it is defined under Section 2(a) of the Indian Contract Act, 1872 as when one person signifies to another his willingness to do or to abstain from doing anything with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal. Thus, for a valid offer, the party making it must 8


express his willingness ‘to do’ or ‘not to do’ something. But mere expression of willingness does not constitute an offer. For instance, where ‘A’ tells ‘B’ that he desires to marry by the end of 2004, it does not constitute an offer of marriage by ‘A’ to ‘B’. Therefore, to constitute a valid offer expression of willingness must be made to obtain the assent (acceptance) of the other. Thus, if in the above example, ‘A’ further adds, ‘Will you marry me’, it will constitute an offer. Thus “doing” is a positive act and “not doing”, or “abstinence” is a negative act; nonetheless both these acts have the same effect in the eyes of law. Classification of Offer : (a) General Offer : It is an offer made to the public in general and hence anyone can accept and do the desired act. Section 8 of the Indian Contract Act points out that performance of the conditions of a proposal is an acceptance of the proposal. (b) Special Offer : When offer is made to a definite person, it is known as specific offer and such offer can be accepted only by that specified person. (c) Cross Offfers : When two parties exchange identical offers in ignorance at the time of each other’s offer, the offers are called Cross offers. There is not biding contract in such a case, as one’s offer cannot be construed as acceptance by the other. (d) Counter Offer : When the offeree offers to qualified acceptance of the offer subject to modifications and variations in the terms of original offer, he is said to have made a counter offer. Counter-offer amounts to rejection of the original offer. (e) Standing, Open or Continuing offer : An offer is allowed to remain open for acceptance over a period of time is known as a standing, open or continuing offer. Tender for supply of goods is a kind of standing offer. Rules as to offer : (a) The offer must be capable of creating legal relation : A social invitation, even if it is accepted, does not create legal relations because it is not so intended. An offer, therefore, must be such as would result in a valid contract when it is accepted. (b) The offer must be certain, definite and not vague : If the terms of an offer are vague or indefinite, its acceptance cannot create any contractual relationship. Thus, where A offers to sell B a 100 quintals of oil, there is nothing whatever to show what kind of oil was intended. The offer is not capable of being accepted for want of certainty. But if the agreement contains reference for ascertaining a vague term, the agreement is not void on the ground of its being vague. If in the above example, A is a dealer in coconut oil only, it shall constitute a valid offer since the nature of A’s trade affords an indication as to which oil is being offered. (c) The offer may be expressed or implied. (d) The offer must be distinguished from an invitation to offer. (e) An offer may be specific or general. (f)

The offer must be communicated : An offer, to be complete, must be communicated to the person to whom it is made. Unless an offer is communicated, there can be no acceptance

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THE INDIAN CONTRACT ACT, 1872 by it. An acceptance of an offer, in ignorance of the offer, is not acceptance and does not create any right on the acceptor. (g) The offer must be made with a view to obtaining the consent of the offeree. (h) An offer may be conditional. (i)

The offer should not contain a term the non compliance of which would amount to acceptance. Thus a man cannot say that if acceptance is not communicated by a certain time the offer would be considered as accepted.

Offer and Invitation to Offer : An offer should be distinguished from an invitation to offer. An offer is definite and capable of converting an intention into a contract. Whereas an invitation to an offer is only a circulation of an offer, it is an attempt to induce offers and precedes a definite offer. Acceptance of an invitation to an offer does not result contract and only an offer emerges in the process of negotiation. When a person advertises that he has a stock of books to sell or houses to let, there is no offer to be bound by any contract. Such advertisements are offers to negotiate-offers to receive offers. In order to ascertain whether a particular statement amount to an ‘offer’ or an ‘invitation to offer’, the test would be intention with which such statement is made. Does the person who make the statement intend to be bound by it as soon as it is accepted by the other or he intends to do some further act, before he becomes bound by it? In the former case, it amounts to an offer and in the latter case, it is an invitation to offer.

1.5

ACCEPTANCE

(A) Meaning : A proposal or offer is said to have been accepted when the person to whom the proposal is made signifies his assent to the proposal to do or not to do something [Section 2 (b)]. The rules regarding acceptance are : 1.

Acceptance must be absolute and unqualified : As per Section 7 an acceptance is valid when it is absolute and unqualified and is expressed in some usual and reasonable manner, unless the proposal prescribed the manner in which it is to be accepted. Thus, if A enquiries from B, “will you purchase my dog for Rs. 100” ? and B replies, “I shall purchase your dog for Rs. 100 provided you purchase my cat for Rs. 60”. B in such a case would not be said to have accepted the proposal of A. Also an acceptance with a variation is no acceptance. It is simply a counter proposal which shall have to be accepted by the original proposer before a contract can be deemed to have come into existence. A counter proposal is the offer by the offeree and can result in a contract only if it is accepted by the other party.

2.

Communicated to Offeror: It must further be remembered that an acceptance must be communicated to the person who made the offer. An offer made by the intended offeree without the knowledge that an offer has been made to him cannot be deemed as an acceptance thereto.

3.

Acceptance must be in the mode prescribed: Where the mode of acceptance is prescribed in the proposal, it must be accepted in that manner. But if the proposer does not insist on the proposal being accepted in the manner prescribed after it has been accepted otherwise,

10


i.e., not in the prescribed manner, the proposer is presumed to have consented to the acceptance. 4.

Time: Acceptance must be given within a reasonable time and before the offer lapses.

5.

Mere silence is not acceptance

6.

Acceptance by conduct: The assent means that acceptance has been signified either in writing or by word of mouth or by performance of some act. Therefore, when, a person performs the act intended by the proposer as the consideration for the promise offered by him, the performance of the act constitutes acceptance. For example, when a tradesman receives an order from a customer and executes the order by sending the goods, the customer’s order for goods constitutes the offer, which has been accepted by the tradesman subsequently by sending the goods. It is a case of acceptance by conduct.

1.6

COMMUNICATION OF OFFER AND ACCEPTANCE

When the contracting parties are face to face, there is no problem of communication, because there is instantaneous communication of offer and acceptance. In such a case the question of revocation does not arise since the offer and its acceptance are made instantly. The difficulty arises when the contracting parties are at a distance from one another and they utilise the services of the post office or telephone. In such cases it is very much relevant for us to know the exact time when the offer or acceptance is made or complete. Communication of offer : The communication of an offer is complete when it comes to the knowledge of the person to whom it is made (Sect. 4). An offer may be communicated either by words spoken or written or it may be inferred from the conduct of the parties. When a proposal is made by post its communication will be complete when the letter containing the proposal reaches the persons to whom it is made. For example, A makes proposal to B to sell his house for Rs. two lakhs. The letter is posted on 10th March. This letter reaches B on 12th March. The offer is said to have been communicated on 12th, when B receives the letter. Communication of acceptance : Communication of an acceptance is complete : (i) as against the proposer, when it is put in course of transmission to him so as to be out of the power of the acceptor to withdraw the same; (ii) as against the acceptor, when it comes to the knowledge of the proposer. When a proposal is accepted by a letter sent by the post the communication of acceptance will be complete as against the proposer when the letter of acceptance is posted and as against the acceptor when the letter reaches the proposer.

1.7

REVOCATION OF OFFER AND ACCEPTANCE

Under Section 4, the communication of a revocation is complete :– (i)

as against the person who makes it, when it is put into a course of transmission to the person to whom it is made so as to be out of the power of the person who makes it; (ii) as against the person to whom it is made, when it comes to his knowledge.

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THE INDIAN CONTRACT ACT, 1872 Let us consider the illustration. If you (proposer) revoke your proposal by a telegram, the revocation will be complete so far as you are concerned, when you have dispatched the telegram. But in so far as I (acceptor) am concerned, it will be complete when I actually receive the telegram. As regards the revocation of acceptance, I revoke my acceptance by a telegram my revocation of acceptance is complete as against myself, as soon as I have dispatched the telegram, and as against you when it reaches you. Under Section 5, a proposal may be revoked at any time, before the communication of its acceptance is complete as against the proposer. An acceptance may be revoked at any time before the communication of acceptance is complete as against the acceptor. The law relating to the revocation of offer is the same in India as in England, but the law relating to the revocation of acceptance is different. In India, acceptance by a letter can be revoked by a telegram, if it reaches earlier than, or at the same time as the letter, but in England acceptance once posted cannot be revoked subsequently even by a telegram, even if it reaches earlier than the letter.

1.8

SUMMARY

Contract : A Contract is an agreement enforceable by law [Section 2(h)]. An agreement is enforceable by law, if it is made by the free consent of the parties who are competent to contract and the agreement is made with a lawful object and is for a lawful consideration, and is not hereby expressly declared to be void. [Section 10]. All contracts are agreements but all agreements are not contracts. Agreements lacking any of the above said characteristics are not contracts. A contract that ceases to be enforceable by law is called ‘void contract’, [Section 2(j)] but an agreement which is enforceable by law at the option of one party thereto, but not at the option of the other is called ‘voidable contract’ [(Section 2(i)]. Offer and Acceptance : Offeror undertakes to do or to abstain from doing a certain act if the offer is properly accepted by the offeree. Offer may be expressly made or may even be implied in conduct of the offeror, but it must be capable of creating legal relations and must intend to create legal relations. The terms of offer must be certain or at least be capable of being made certain. Acceptance of offer must be absolute and unqualified and must be according to the prescribed or usual mode. If the offer has been made to a specific person, it must be accepted by that person only, but a general offer may be accepted by any person. Communication of offer and acceptance, and revocation thereof (a) Communication of an offer is complete when it comes to the knowledge of the offeree. (b) Communication of an acceptance is complete : As against the offeror when it is put in the course of transmission to him and as against the acceptor, when it comes to the knowledge of the offeror. (c) Communication of revocation of an offer or acceptance is complete : As against the person making it, when it is put into a course of transmission so as to be out of power of the person making it and as against the person to whom it is made, when it comes to his knowledge. 12


CHAPTER – 1


Unit 2 Consideration

THE INDIAN CONTRACT ACT, 1872 Learning objectives

Understand the concept of consideration, its importance for a contract and its double aspect.

Clearly understand how consideration may move from a third party and how this makes the contract valid.

Learn about the peculiar circumstances when a contract is valid even without consideration.

Be aware of the rule ‘A stranger to a contract cannot sue’ and exceptions thereof.

Consideration is an essential element of a contract without which no single promise will be enforceable. Having a double aspect of a benefit to the promisor and a detriment to the promisee, it has to be really understood in the sense of some detriment as envisaged by English Law. In this Unit we shall examine the terms of the Indian definition and try to understand the concept of consideration, and also the legal requirements regarding consideration.

1.9

WHAT IS CONSIDERATION ?

Consideration is, in a sense, the price agreed to be paid by the promisee for the obligation of the promisor. Consideration has, therefore, been defined in an English judgment as “some right, interest, profit or benefit accruing to one party (i.e., promisor) or forbearance, detriment, loss or responsibility given, suffered or undertaken by the other (i.e., the promisee)” at the request of the promisor. Section 2(d) defines consideration as follows : “When at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing or promises to do or abstain from doing something, such an act or abstinence or promise is called consideration for the promise”. (1) That is to say, consideration is the doing or not doing of something which the promisor desires to be done or not done. (2) Consideration must be at the desire of the promisor. (3) Consideration may move from promisee or any other person. (4) Consideration may be past, present or future. (5) Consideration need not be adequate, but should be real. For example, A promises to carry B’s goods free of charge, and B allows A to carry the same. Here A will be the promisor and B will be the promisee. The question that arises in this case is does B offer any consideration as against A’s promise to carry his goods ? The answer must be in the affirmative, because the detriment or the disadvantage which B suffers in parting with the goods so that goods may be carried by A is sufficient consideration as against A’ promise to carry. So the essence of consideration is detriment suffered or burden taken by the promisor. The promisor may or may not derive any benefit from the consideration given by the promisee. But in most cases, the promisor derives some benefit from the consideration which may be said to be quid pro quid from the promise of the promisor.

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1.10 LEGAL REQUIREMENTS REGARDING CONSIDERATION (i)

Consideration must move at the desire of the promisor : Consideration must be offered by the promisee or the third party at the desire or request of the promisor. An act done at the desire of a third party is not a consideration.

(ii) Consideration from promisee or any other person : In India, consideration may proceed from the promisee or any other person who is not a party to the contract. The definition of consideration as given in Section 2(d) makes that proposition clear. According to the definition, when at the desire of the promisor, the promisee or any other person does something such an act is consideration. In other words, there can be a stranger to a consideration but not stranger to a contract. (iii) Executed and executory consideration : A consideration which consists in the performance of an act is said to be executed : When it consist in a promise, it is said to be executory. The promise by one party may be the consideration for an act by some other party, and vice versa. For example, A pays Rs. 5,000 to B and B promises to deliver to him a certain quantity of wheat within a month. In this case A pays the amount, whereas B merely makes a promise. Therefore, the consideration paid by A is executed, whereas the consideration promised by B is executory. (iv) Past Consideration : The words “has done or abstained from doing” [as contained in Section 2(d)] are a recognition of the doctrine of past consideration. In order to support a promise, a past consideration must be moved by a previous request. It is the general principle that consideration is given and accepted in exchange for the promise. The consideration, if past, may be the motive but cannot be the real consideration of a subsequent promise. But in the event of the services being rendered in the past at the request or the desire of the promisor the subsequent promise is regarded as an admission that the past consideration was not gratuitous. (v) Adequacy of consideration: Consideration need not be any particular value. It need not be approximately equal value with the promise for which it is exchanged but it must be something which the law would regard as having some value. It may be noted in this context that Explanation 2 to Section 25 states that an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate. (vi) Performance of what one is legally bound to perform : The performance of an act by a person who is legally bound to perform the same cannot be consideration for a contract. Hence, a promise to pay money to a witness is void, for it is without consideration. Hence such a contract is void for want of consideration. Similarly, an agreement by a client to pay to his counsel after the latter has been engaged, a certain sum over and above the fee, in the event of success of the case would be void, since it is without consideration. But where a person promises to do more that he is legally bound to do, such a promise provided it is not opposed to public policy, is a good consideration. (vii) Consideration must not be unlawful, immoral, or opposed to public policy.

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1.11 SUIT BY A THIRD PARTY ON AN AGREEMENT Though under the Indian Contract Act the consideration for an agreement may proceed from a third party, the third party cannot sue on agreement. Only a person who is party to a contract can sue on it. The aforesaid rule is, however, subject to the following exceptions: (1) In the case of trust, a beneficiary can enforce his right under the trust, though he was not a party to the contract between the settler and the trustee. (2) In the case of a family settlement, if the terms of the settlement are reduced into writing, the members of family who originally had not been parties to the settlement may enforce the agreement. (3) In the case of certain marriage contracts, a female member can enforce a provision for marriage expenses, made on the partition of the Hindu undivided family. (4) In the case of assignment of a contract, when the benefit under a contract has been assigned, the assignee can enforce the contract. (5) In the case of an estoppel by acknowledgement of liability or part performance thereof, that is when, one admits the liability. For example, if L gives to M Rs. 2,000 to be given to N, and M informs N that he is holding the money for him, but afterwards M refuses to pay the money N will be entitled to recover the same from the former. (6) In the case of covenant running with the land, the person who purchases land with notice that the owner of land is bound by certain duties affecting land, the covenant affecting the land may be enforced by the successor of the seller.

1.12 VALIDITY OF AN AGREEMENT WITHOUT CONSIDERATION The general rule is that an agreement made without consideration is void (Section 25). In every valid contract consideration is very important. A contract may only be enforceable when an adequate consideration is there. However, the Indian Contract Act contains certain exceptions to this rule. In the following cases, the agreement though made without consideration, will be valid and enforceable. 1.

Natural Love and Affection : A written and registered agreement based on natural love and affection between the parties standing in near relation (e.g., husband and wife) to each other is enforceable even without consideration.

2.

Compensation for past voluntary services : A promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, is enforceable under Sec. 25(2). In order that a promise to pay for the past voluntary services is binding, the following essential factors must exist : (i)

The services should have been rendered voluntarily.

(ii) The services must have been rendered for the promisor. (iii) The promisor must be in existence at the time when services were rendered.

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(iv) The promisor must have intended to compensate the promisee. 3.

Promise to pay time barred debt : Where a promise in writing signed by the person making it or by his authorised agent, is made to pay a debt barred by limitation it is valid without consideration [Section 25(3)].

4.

Agency : According to Section 185 of the Indian Contract Act, no consideration is necessary to create an agency.

5.

Completed gift : In case of completed gifts, the rule no consideration no contract does not apply. Explanation (1) to Section 25 states “nothing in this section shall affect the validity as between the donor and donee, of any gift actually made.” Thus, gifts do not require any consideration.

1.13 SUMMARY The students may note that : (a) Consideration is a price for the promise of the other party and it may either be in the form of ‘benefit’ or some ‘detriment’ to the parties. (b) Consideration must move at the desire of the promisor. (c) It may be executed or executory. (d) Past consideration is valid provided it moved at the previous request of the promisor. (e) It must not be something which the promisor is already legally bound to do. (f)

It may move from the promisee or any third party.

(g) Inadequacy of consideration is not relevant. (h) Consideration must be legal. (i)

The general rule of law is “No Consideration, No Contract” but there are a few exceptional cases where a contract, even though without consideration is valid.

(j)

In some exceptional cases the contract may be enforced by a person who is not a party to the contract.

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CHAPTER – 1


Unit 3 Other Essential Elements of a Valid Contract

Learning objectives

Note the various ingredients of incapacity to contract.

Be clear about the legal consequence of contract with a minor.

Be familiar with the concept of ‘consensus ad idem’ i.e. parties agreeing upon the same thing in the same sense.

Try to grasp the characteristics of different elements vitiating free consent and particularly distinguish amongst fraud, misrepresentation and mistake.

Understand the circumstance when object and consideration become unlawful.

Be aware of the agreements opposed to public policy.

It has already been considered that an agreement results from a proposal by one party and its acceptance by another. We have already discussed offer, acceptance and consideration in detail. We shall now discuss in detail the elements which constitute a valid contract enforceable in law. Section 10 of the Indian Contract Act provides that an agreement in order to be a contract, must satisfy the following conditions: (1) it must be made by the free consent of the parties; (2) the parties must be competent to contract; (3) it must be made for a lawful consideration and with a lawful object; (4) it should not have been expressly declared as void by law. Also, there must be consensus ad idem or identity of minds in the sense that parties have agreed about the subject matter of the contract at the same time and in the same sense, as evidenced by offer and acceptance (Section 13). It has also been observed that the agreement must import an intention to create legal relationship between the parties, and that agreements relating to social matters are not enforceable by law.

1.14 CAPACITY TO CONTRACT Who is competent to contract? Every person who (a) has attained the age of majority, (b) is of sound mind and (c) is not otherwise disqualified from contracting, is competent to contract. (Section 11) (a) Age of majority : In India, the age of majority is regulated by the Indian Majority Act (Act IX of 1875). Every person domiciled in India attains majority on the completion of 18 years of age. (b) Sound mind : A person is said to be of sound mind for the purposes of making a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgement as to its effect upon his interests.

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THE INDIAN CONTRACT ACT, 1872 A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind. (a)

Position of Minor’s agreement 1.

An agreement entered into by a minor is altogether void : The word void when used in relation to a minor it should be understood as “void as against the minor”. Contract with or by a minor is altogether void. The Indian Contract Act simply says that only a person who is a major is competent to contract. The main reason for holding a minor’s agreement void is that where an agreement by a minor involves a promise on his part or his promise is a necessary part of the agreement it is void because a minor is incapable of giving a promise imposing a legal obligation.

2.

Minor can be a beneficiary : Though a minor is not competent to contract, nothing in the Contract Act prevents him from making the other party bound to the minor. Thus, a promissory note duly executed in favour of a minor is not void and can be sued upon by him, because he though incompetent to contract, may yet accept a benefit. A minor cannot become partner in a partnership firm. However, he may with the consent of all the partners, be admitted to the benefits of partnership (Section 30 of the Indian Partnership Act).

3.

Minor can always plead minority : A minor’s contract being void, any money advanced to a minor on a promissory note or otherwise, cannot be recovered. Even when a minor procures a loan by falsely representing that he is full age, it will not stop him from pleading his minority in a suit to recover the amount and the suit will be dismissed. But where a minor had fraudulently mortgaged and sold certain properties, the Court held that on the cancellation of the agreement at the instance of the minor the lender and purchaser must be compensated.

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4.

Ratification on attaining majority is not allowed : As a minor’s agreement is void he cannot validate it by ratification on attaining majority. For instance, a minor borrows money and executes a promissory note. On attaining majority, he executes a fresh promissory note in substitution of the one executed as a minor. The second promissory note is also void being without consideration. But a person who supplies necessaries of life to a minor or to one whom the minor is legally bound to support, according to his situation in life, is entitled to be reimbursed from the property of the minor not on the basis of any contract but on the basis of an obligation resembling a contract (Section 68).But a minor’s property in liable for necessaries and no personal liability is incurred by him.

5.

Contract by guardian - how far enforceable : Though a minor’s agreement is void, his guardian can, under certain circumstances enter into a valid contract on the minor’s behalf. Where the guardian makes a contract for the minor, which is within his competence and which is for the benefit of the minor, there will be valid contract which the minor can enforce. For instance a guardian can make an enforceable contract of marriage for a minor. COMMON PROFICIENCY TEST

But all contracts made by guardian on behalf of a minor are not valid. For instance, the guardian of a minor has no power to bind the minor by a contact for the purchase of immovable Property. But a contract entered into by a certified guardian (appointed by the Court) of a minor, with the sanction of the court for the sale of the minor’s property, may be enforced by either party to the contract. 6.

Liability for necessaries : Under Section 68, any person would be entitled to reimbursement out of the minor’s estate, for necessaries supplied to him or to his family. Necessaries as defined by the English Sale of Goods Act, also means, goods suitable to the condition in the life of infant as required by him at the time of sale of delivery. It includes not only food and clothing but also education and instruction. Necessaries also include ‘goods’ and services. If minor had obtained payment fraudulently by concealment of age, he may be compelled to restore the payment but he cannot be compelled for an identical sum, if any, as it would amount to enforcing a void contract.

(b) Contract by a person of unsound mind : A person of unsound mind too is, under the Indian Contract Act, incapable of entering into a contact. Although a contract by a person who is not of sound mind is void, such a person can enter into a valid contract during an interval of lucidity. The test of unsoundness of mind is whether or not the person is capable of understanding the business and of forming a rational judgement as to its effect upon his interest. Idiots, lunatics and drunken persons are examples of those having an unsound mind. The presence of absence of the capacity mentioned in this Section at the time of making the contract is in all cases a question of fact. Where a person is usually of sound mind, the burden of proving that he was of unsound mind at the time of execution of a document lies on him who challenges the validity of the contract. For example, a patient in a lunatic asylum, who is at intervals of sound mind may contract during such intervals. The liability for necessaries of life supplied to persons of unsound mind is the same as for minors (Section 68). (c) Contract by disqualified persons : Besides minors and persons of unsound mind, there are also other persons who are disqualified from contracting, partially or wholly, so that the contracts by such person are void. If, by any provincial legislation, a person is declared ‘disqualified proprietor’, he is not competent to enter into any contract in respect of the property. An alien enemy, during war, cannot enter into a contract with an Indian subject. He cannot sue in Indian Courts without a licence from the Central Government either, this disability being a matter of public policy. Similarly, a statutory corporation cannot enter into a contract which is ultra vires its memorandum. Likewise, municipal bodies are disqualified from entering into contracts which are not within their statutory powers. Sovereign States, Ambassadors and Diplomatic Couriers enjoy certain special privileges with the result that they cannot be legally proceeded against in Indian Courts. However, they can, at their will enter into contracts which may be enforceable in Indian Courts. MERCANTILE

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1.15 FREE CONSENT According to Section 13, “two or more persons are said to have consented when they agree upon the same thing in the same sense (Consensus-ad-idem). Consequently, when parties to a contract make some fundamental error as to the nature of the transaction, or as to the person dealt with or as to the subject-matter of the agreement, it cannot be said that they have agreed upon the same thing in the same sense. And if they do not agree in the same sense, there cannot be consent. A contract cannot arise in the absence of consent. If two persons enter into an apparent contract concerning a particular person or ship, and it turns out that each of them, misled by similarity of name, had a different person or ship in his mind, no contract would exist between them as they were not ad idem, i.e., of the same mind. Again, ambiguity in the terms of an agreement, or an error as to the nature of any transaction or as to the subject-matter of any agreement may prevent the formation of any contract on the ground of absence of consent. As has been said already, one of the essential elements of a contract is consent and there cannot be a contract without consent. Consent may be free or not free. Only free consent is necessary for the validity of a contract. Consent is free when it is not caused by coercion, undue influence, fraud, misrepresentation or mistake (Section 14). When consent is not caused by any of these factors, it is said to have been freely given. When consent is not free due to mistake, the agreement is void but in all other cases, the contract is voidable at the option of the party whose consent was obtained by coercion, etc.

1.16 ELEMENTS VITIATING FREE CONSENT We shall now explain these elements one by one. (a) Coercion : Section (15) : “Coercion” is the committing, or threatening to commit, any act forbidden by the Indian Penal Code (45 of 1860), or the unlawful detaining, or threatening to detain any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. For example, X says to Y: “I shall kill your son, or I shall not return the documents of title relating to your wife’s property, unless you agree to sell your house to me for Rs. 5,000". Y says, “All right, I shall sell my house to you for Rs. 5,000 : do not kill my son or do not detain my wife’s documents of title”. X has employed coercion; he cannot therefore enforce the contract. But Y can enforce the contract if he finds the contract to his benefit. An agreement induced by coercion is voidable and not void. That means it can be enforced by the party coerced, but not by the party using coercion. Where husband obtained a release deed from his wife and son under a threat of committing suicide, the transaction was set aside on the ground of coercion, suicide being forbidden by the Indian Penal Code. A person to whom money has been paid or anything delivered under coercion, must repay or return it. (Section 71). (b) Undue influence (Section 16) : A contract is said to be induced by “undue influence” where the relations subsisting between the parties are such that one of the parties is in a position to 22


dominate the will of the other and uses that position to obtain an unfair advantage of the other. A person is deemed to be in a position to dominate the will of the other, when he holds authority real or apparent over the other, or when he stands in a fiduciary relation to the other. Examples: 1. A father, by reason of his authority over the son can dominate the will of the son. 2. Again by reason of fiduciary relationship, a solicitor can dominate the will of his client and 3. A trustee can dominate the will of the beneficiary. 4. Similarly, a person whose mental capacity is affected by age, illness or distress may be a prey to undue influence. For instance, a doctor is deemed to be in a position to dominate the will of his patient enfeebled by protracted illness. The essential ingredients under this provision are: (i)

One of the contracting parties dominates the will of another, or has a real or apparent authority over the other, or stands in a fiduciary position to the other. That means one party is dominating the other party.

(ii) The dominating party has taken an unfair advantage over the weaker party. (c) Fraud (Section 17) : As per the Act “Fraud” means and includes any of the following acts committed by a party to a contract, or with his connivance or by his agent with intent to deceive another party thereto or his agent, or to induce him to enter into the contract : (i)

the suggestion, as to a fact, of that which is not true by one who does not believe it be true;

(ii) the active concealment of a fact by one having knowledge or belief of the fact; (iii) A promise made without any intention of performing it; (iv) any other act fitted to deceive; (v) any such act or omission as the law specially declared to be fraudulent. The fraud, which results into a contract, is only covered by this section. Any fraud committed by a party which does not lead the other party to enter into a contract is not covered by this section.

Mere silence amounting to fraud? Mere silence as to facts likely to affect the willingness of a person to enter into a contract is no fraud; but where it is the duty of a person to speak, or his silence is equivalent to speech, silence amounts to fraud. [Read the illustrations under the Explanation to Section 17 of the Indian Contract Act.] Exceptions to this rule : (i)

Where the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak. Duty to speak arises when one contracting party reposes trust and confidence in the other or where one party has to depend upon the good sense of the other (e.g. Insurance Contract).

(ii) Where the silence is in itself, equivalent to speech. (d) Misrepresentation (Section 18): Where a person asserts something which is not true, though he believes it to be true, his assertion amounts to misrepresentation. Misrepresentation may be either innocent or without reasonable ground. Misrepresentation is MERCANTILE

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THE INDIAN CONTRACT ACT, 1872 misstatement of facts by one, which misleads the other who, consequently, can avoid the contract. For example, A makes a positive statement to B that C will be made the director of a company. A makes the statement on information derived, not directly from C but from M. B applies for shares on the faith of the statement which turns out to be false. The statement amounts to misrepresentation, because the information received second-hand did not warrant A to make the positive statement to B [Section 18(1)]. Distinction between Coercion and Undue influence : Coercion

Undue Influence

(a) It involves the physical force It involves moral or mental pressure. or threat. The aggrieved party is compelled to make the contract against its will. (b) It involves committing or threatening No such illegal act is committed or a to commit an act forbidden by Indian threat is given. Penal Code or detaining or threatening to detain property unlawfully. (c) It is not necessary that there must be Some sort of relationship between the some sort of relationship between the parties is absolutely necessary. parties. (d) Coercion need not proceed from the Undue influence is always exercised promisor nor need it be directed between parties to the contract. against the promisor. (e) The contract is voidable at the option Where the consent is induced by of the party whose consent has been undue influence, the contract is either obtained by the coercion or enforce voidable or the court may set it aside. it in a modified form. (f) In case of coercion where the contract The court has the discretion to direct is rescinded by the aggrieved party, as the aggrieved party to return the per Section 64, any benefit received has benefit in whole or in part or not to to be restored back to the other party. give any such directions. Distinction between fraud and misrepresentation : The principal difference between fraud and misrepresentation is that in the case of fraud the person making representation does not believe it to be true. And in the case of misrepresentation he believes it to be true. But in both cases, it is mis-statement of fact which misleads the other party. Again fraud not only affords a ground for avoiding the contract, it also enabled the party defrauded to bring an action in tort for damages whereas misrepresentation merely affords a ground for avoiding the contract and not for bringing an action in tort. When recession is claimed, it is only necessary to prove that there was misrepresentation then however honestly it may 24


have been made, however, free from blame the person who made it may be, the contract, having been obtained by misrepresentation, cannot stand. But in order to sustain an action for deceit, there must be proof of fraud; and fraud is proved only when it is shown that a false statement has been made knowingly or without belief in its truth, or recklessly, carelessly whether it is true or false. Again in case of misrepresentation the fact that the plaintiff had that means of discovering the truth by exercising ordinary diligence, can be good defence against the repudiation of the contract, whereas such a defence cannot be set up in the case of fraud other than fraudulent silence [Exception to Section 19]. Misrepresentation as to law : Misrepresentation as to fact renders a contract, voidable misrepresentation as to law does not, ordinary, make the contract voidable. But a deliberate misrepresentation in matter of law is certainly a cause for avoiding a contract. Consequences of coercion, fraud, misrepresentation etc. (Section 19) : It has already been considered that when consent to an agreement is caused by coercion, undue influence, fraud or misrepresentation, though the agreement amounts to a contract, such a contract is voidable at the option of the party those consent was so obtained. The party, however, may insist that the contract should be performed and that he should be put in the same position in which he would have been, if the representation made had been true. For instance, A fraudulently informs B that A’s estate is free from encumbrance. B thereupon agrees to buy the estate. The estate is, however, subject to mortgage. B may either avoid the contract, or may insist on its being carried out and the mortgage-debt redeemed. But a person who had the means of discovering the truth with ordinary diligence cannot avoid a contract on the ground that his consent was caused by misrepresentation or silence amounting to fraud. For example, A by a misrepresentation leads B to believe erroneously that 750 tons of sugar is produced per annum at the factory of A. B examines the accounts of the factory, which should have disclosed, if ordinary diligence had been exercised by B, that only 500 tons had been produced. Thereafter B purchases the factory. In the circumstance, B cannot repudiate the contract on the ground of A’s misrepresentation. Where a party to a contract perpetrates fraud or misrepresentation, but the other party is not, in fact, misled by such fraud or misrepresentation, the contract cannot be avoided by the latter. (Explanation to Section 19). Thus when a seller of specific goods deliberately conceals a fault in order that the buyer may not discover it even if he inspects the goods but the buyer does not in fact, make any inspection, the buyer cannot avoid the contract, as he is not in fact deceived by the conduct of the seller. A student was induced by his teacher to sell his brand new car to the later at less than the purchase price to secure more marks in the examination. Accordingly the car was sold. However, the father of the student persuaded him to sue his teacher. State on what ground the student can sue the teacher? Yes, A can sue his teacher on the ground of undue influence under the provisions of Indian Contract Act, 1872. A contract brought as a result of coercion, undue influence, fraud or misrepresentation would be voidable at the option of the person whose consent was caused. (e) Mistake as per Section 20 : When both the parties to an agreement are under a mistake to a matter of act essential to the agreement the agreement is altogether void. The Court will MERCANTILE

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THE INDIAN CONTRACT ACT, 1872 enforce a voidable contract if not avoided, but will not recognise an agreement that is void. For instance, A agrees to sell to B a specific cargo of goods supposed to be on its way from England to Bombay. It turns out that before the day of the bargain, the ship conveying the cargo had been cast away and the goods lost. Neither of the parties was aware of these facts. The agreement was void. Both the parties must be under mistake. A unilateral mistake, that is to say, mistake of one party, does not render the agreement void (Section 22). A agrees to purchase from B 18 carat gold thinking to be pure gold; B has not been instrumental to the creation of such an impression. It is a valid contract between A and B. Notice that the mistake must be as to a fact, not law. A and B wrongly believe that a particular debt is not barred by the Law of Limitation and on the basis of such belief enter into a contract. The contract is valid, mistake being not of fact but of law. A question of foreign law is, however, a question of fact. Again, the existence of a particular private right is a matter of fact, though depending on rules of law. Thus, a man’s promise to buy property which, unknown to him already belongs to him is not binding on him. Further, the mistake must be as to an essential fact. Whether the fact is essential or not depends on whether a reasonable man would regard the fact as an essential in the circumstances. A mere wrong opinion as to the value is not an essential fact. For instance, A and B both believe that a particular kind of rice is being sold in the market at Rs. 1,780 per quintal and A sells rice of that kind to B at Rs. 1,780 per quintal. But, in fact, the market price was Rs. 1,900. The contract is valid. Mistake renders the agreement void; neither party can enforce the contract against the other. (You should carefully consider the difference in the effect of coercion, undue influence, fraud and misrepresentation, on the one hand, and the effect of mistake, on the other, on an agreement.)

1.17 LAWFUL OBJECT AND THE CONSIDERATION We shall now discuss the next two ingredients of a valid contract, viz., lawful object and lawful consideration. There are certain provisions of law which are general in character are applicable to the community as a whole. Subject thereto, an individual generally has the right to adjust his rights and obligations as he may wish. But this contractual freedom or the right of individuals to make by an agreement what in effect is law between themselves, is not absolute. In other words there is a limitation on the contractual freedom of an individual. The necessity for it will be clear from the following illustration: Suppose, A agrees to pay Rs. 100 to B on B’s stealing C’s purse. In this case, the Court obviously cannot compel A to pay B, if B has stolen the purse because it will be encouraging theft which is hit by the Indian Penal Code. Object means purpose or design. The term ‘consideration’ is defined in Section 2(d) and the various forms it may take have been considered earlier in this Study Module. Where A agrees to sell goods to B, and B, who is insolvent assigns the benefit of the contract for Rs. 100 with a view to defrauding his creditors, the consideration for the assignment; viz., the sum of Rs. 100 is lawful but the object viz., defrauding the creditors, is unlawful as it is intended to defeat the provisions of the insolvency law.

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1.18 UNLAWFUL OBJECT The limits to contractual freedom are set out in Section 23 of the Act. An agreement, the object or consideration of which is unlawful is void. “Consideration or object is unlawful if it is forbidden by law; or it would; if permitted defeat the provisions of any or law or is fraudulent; or involves injury to the person or property of another, or is immoral; or opposed to public policy.” In the following examples, the agreement is void because the object is unlawful: (1) A, B and C enter into an agreement for the division among them of gains acquired or to be acquired by fraud. The agreement is void, as its object, viz., acquisition of gains by fraud is unlawful. (2) A promises to B to abandon a prosecution which he had instituted against B for robbery and B promises in lieu thereof to restore the value of the property robbed. The agreement is void as its object, namely, the stifling of prosecution, is unlawful.

1.19 UNLAWFUL CONSIDERATION The following is an example of the agreement which is void because of unlawful consideration. A promises to obtain for B an employment in the public service and B promises, in return, to pay Rs. 1,000 to A. The agreement is void, as the consideration thereof is unlawful. Here A’s promise to procure for B an employment in the public services is the consideration for B’s promise to pay Rs. 1,000. The consideration, being opposed to public policy, is unlawful. The seven circumstances which would make consideration as well as an object unlawful are discussed below : (i)

Forbidden by law : Acts forbidden by law are those which are punishable under any statute as well as those prohibited by regulations or orders made in exercise of the authority conferred by the legislature. Let us consider an example. A licence to cut grass is given to X by the Forest Department under the Forest Act. One of the terms of licence is that the licencee should not assign his interest under the licence without the permission of the Forest Officer, and a fine is prescribed for a breach of this condition. But the observance of the conditions of the licence is not obligatory under the Forest Act. If A in breach of the condition, agrees to assign his interest under the licence to B, that agreement will be valid. Here, the assignment is not prohibited by law, the condition against assignment has been imposed only for administrative purpose or solely for the protection of revenue.

(ii) Defeat of the provision of law : The term ‘law’ includes any legislative enactment or rule of the Hindu and Muslim Laws or any other rule for the time being in force in India. Legislative enactment would be defeated by an agreement by a debtor not to plead limitation, as the object is to defeat the provisions of the Limitation Act. The Hindu Law is defeated by an agreement to give as son in adoption in consideration of annual allowance to the natural parents. (iii) Defeat of any rule for the time being in force in India : Example - A Receiver being an officer of the Court, the Court has also the jurisdiction to determine his remuneration, and MERCANTILE

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THE INDIAN CONTRACT ACT, 1872 the parties cannot by any of theirs add to or derogate from the functions of the Court without its authority. A promise, therefore, to pay the salary of a receiver without the leave of the Court, even if unconditional, being in contravention of law, is not binding on the promisor. The object of consideration in all the agreements aforementioned being unlawful, these are void. (iv) Fraudulent : The following are examples of agreement the object or consideration whereof is unlawful on the ground of fraud (1) A, an agent for a zamindar agrees for money without the knowledge of his principal, to obtain for B a lease of land belonging to his principal. The agreement between A and B is void, as the consideration is fraudulent. (2) An agreement between A and B to defraud a department of Government by submitting a tender in the name of one of them only, though they were both partners in the transaction is void, as the object is fraudulent. (v) Injury to the person or property of another : The general term “injury” means criminal or wrongful harm. In the following examples, the object or consideration is unlawful as it involves injury to the person or property of another. (1)

An agreement to print a book in violation of another’s copyright is void, as the object is to cause injury to the property of another. It is also void as the object of the agreement is forbidden by the law relating to copyright.

(2) A promises to repay his debt by doing manual labour daily for a special period and agrees to pay interest at an exorbitant rate in case of default. Here A’s promise to repay by manual labour is the consideration for the loan, and this consideration is illegal as it imposes what, in substance, amounts to slavery on the part of A. In other words, as the consideration involves injury to the person of A, the consideration is illegal. Here the object too is illegal, as it seeks to impose slavery which is opposed to public policy. Hence the agreement is void. (vi) Immoral : The following are the illustrations of agreements where the object or consideration is unlawful, being immoral. (1) A landlord cannot recover the rent of a house knowingly let to prostitute who carries on her vocation there. Here, the object being immoral, the agreement to pay rent is void. (2) Where P had advanced money to D, a married woman to enable her to obtain a divorce from her husband and D had agreed to marry him as soon as she could obtain the divorce, it was held that P was not entitled to recover the amount, since the agreement had for its object the divorce of D from her husband and the promise of marriage given under these circumstances was against good morals. (vii) Agreement opposed to public policy : The expression ‘public policy’ can be interpreted either in a wide or in a narrow sense. The freedom to contract may become illusory, unless the scope of ‘public policy’ is restricted. In the name of public policy, freedom of contract is restricted by law only for the good for the community. In law, public policy covers certain specified topics, e.g., trading with an enemy, stifling of prosecutions, champerty, maintenance, interference with the course of justice, marriage brokerage, sales of public

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offices, etc. Agreements tending to create interest against duty, agreements tending to create monopolies and agreements not to bid at an auction are also opposed to public policy. An attempt to enlarge the scope of the doctrine is bound to result in the curtailment of individual freedom of contract. Public policy, on this account, has been described as an unruly horse which, if not properly bridled, may carry its rider, he knows not where. It being an untrustworthy guide for regulating the relations between parties it should not be invoked except within the prescribed limits described below. (a) Trading with enemy : Any trade with person owing allegiance to a Government at war with India without the licence of the Government of India is void, as the object is opposed to public policy. Here the agreement to trade offends against the public policy by tending to prejudice the interest of the State in times of war. (b) Stifling prosecution : An agreement to stifle prosecution tends to be a perversion or an abuse of justice; therefore, such an agreement is void. The principle is that one should not make a trade of felony. The compromise of any public offence is generally illegal. Under the Indian Criminal Procedure Code, there is, however, a statutory list of compoundable offences and an agreement to drop proceeding relating to such offences with or without the permission of the Court, as the case may be, in consideration the accused promising to do something for the complainant, is not opposed to public policy. Thus, where A agrees to sell certain land to B in consideration of B abstaining from taking criminal proceeding against A with respect to an offence which is compoundable, the agreement is not opposed to public policy. But, it is otherwise, if the offence is uncompounable. (c) Champerty and maintenance : Maintenance is the promotion of litigation in which one had no interest and champerty is bargain whereby one party agrees to assist the other in recovering property, with a view to sharing the profits of litigation. Agreements tending to champerty and maintenance are void in England but in India they are not necessarily void. Thus, in India, an agreement to share the subject of litigation, if recovered in consideration of the party’s supplying the funds in good faith to carry it on, is not itself, opposed to public policy. But where such advances are made by way of gambling in litigation, the agreement to share the subject of litigation is certainly opposed to public policy and therefore void. (d) Interference with the course of justice : An agreement whose object is to induce any judicial officer of the State to act partially or corruptly is void, as it is opposed to public policy; so also is an agreement by A to reward B, who is an intended witness in a suit against A in consideration of B’s absenting himself from the trial. For the same reasons, an agreement which contemplates the use of under-hand means to influence legislation is void. Similarly, an agreement to induce any executive officer of the State to act partially or corruptly is void. (e) Marriage brokerage contracts : An agreement to negotiate marriage for reward, which is known as a marriage brokerage contract, is void, as it is opposed to public policy. For instance, an agreement to pay money to a person hired to procure a wife is opposed to public policy and therefore void.

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THE INDIAN CONTRACT ACT, 1872 (f)

Interest against obligation : The following are examples of agreement that are void as they tend to create an interest against obligation. The object of such agreements is opposed to public policy. (1) An agreement by an agent to receive without his principal’s consent compensation from another for the performance of his agency is invalid. (2) A, who is the manager of a firm, agrees to pass a contract to X if X pays to A Rs. 2,000 privately; the agreement is void.

(g) Sale of public offices : An agreement to traffic in public office is opposed to public policy, as it interferes with the appointment of a person best qualified for the service of the public. Public policy requires that there should be no money consideration for the appointment to an office in which the public is interested. The following are the examples of agreements that are void; since they are tantamount to sale of public offices. (1) An agreement to pay money to a public servant in order to induce him to retire from his office so that another person may secure the appointment is void. (2) An agreement to procure a public recognition like Padma Vibhushan for reward is void. (h) Agreement for the creation of monopolies : Agreements having for their object the establishment of monopolies are opposed to public policy and therefore void. It is also hit by the MRTP Act. (i)

Agreement in restraint of marriage (Section 26) : Every agreement in restraint of marriage of any person other than a minor, is void. So if a person, being a major, agrees for good consideration not to marry, the promise is not binding.

(j)

Agreement in restraint of trade (Section 27) : An agreement by which any person is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. But this rule is subject to the following exceptions, namely, where a person sells the goodwill of a business and agrees with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer or his successor in interest carries on a like business therein, such an agreement is valid (goodwill is the advantage enjoyed by a business on account of public patronage and encouragement from habitual customers). The local limits within which the seller of the goodwill agrees not to carry on similar business must be reasonable. Under Section 36 of the Indian Partnership Act, if an outgoing partner makes an agreement with the continuing partners that he will not carry on any business similar to that of the firm within a specified period or within specified local limits, such an agreement, though in restraint of trade, will be valid, if the restrictions imposed are reasonable. Similarly, under Section 11 of that Act an agreement between partners not to carry on competing business during the continuance of partnership is valid. But an agreement of service by which an employee binds himself, during the term of his agreement, not to compete with his employer is not in restraint of trade. For example, B, a physician and surgeon, employs A as an assistant for a term of three years and A agrees not to practice as a surgeon and physician during these three

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years. The agreement is valid and A can be restrained by an injunction if he starts independent practice during this period. Similarly, an agreement by a manufacturer to sell during a certain period his entire production to a wholesale merchant is not in restraint of trade. Likewise an agreement among the sellers of a particular commodity not to sell the commodity for less than a fixed price is not an agreement in restraint of trade. (k) Agreement in restraint of legal proceedings (Section 28) : An agreement in restraint of legal proceeding is the one by which any party thereto is restricted absolutely from enforcing his rights under a contract through a Court or which abridges the usual period for starting legal proceedings. A contract of this nature is void. Such an agreement also is void under Section 23 of the Court Act, because its object is to defeat the provision of the Indian Limitation Act. However, there are certain exceptions to the above rule : (i) A contract by which the parties agree that any dispute between them in respect of any subject shall be referred to arbitration and that only the amount awarded in such arbitration shall be recoverable is a valid contract. (ii) Similarly, a contract by which the parties agree to refer to arbitration any question between them which has already arisen or which may arise in future, is valid; but such a contract must be in writing.

1.20 AGREEMENTS EXPRESSLY DECLARED VOID Certain agreements have been expressly declared void by the Contract Act. These are void ab initio and do not give rise to any legal consequences. We have already discussed some of these contracts such as agreements by incompetent parties (Section 11); agreements with an unlawful object or consideration (Section 23); agreement made under a mutual mistake of fact (Section 20); agreements without consideration (Section 25); Agreements in restraint of marriage, trade, or legal proceedings etc. We shall now discuss some other cases of agreements expressly declared to be void. (a) Consideration Unlawful in Part : By virtue of Section 24, “if any part of a single consideration for one or more objects, or any one or any part of any one of several considerations for a single object, is unlawful, the agreement is void.” This section is an obvious consequence of the general principle of Section 23. There is no promise for a lawful consideration if there is anything illegal in a consideration which must be taken as a whole. The general rule is that where the legal part of a contract can be severed from the illegal part, the bad part may be rejected and the good one can be retained. But where the illegal part cannot be severed, the contract is altogether void.

Illustration : A promises to superintend, on behalf of Y, a legal manufacturer of indigo and an illegal traffic in other articles. B promises to pay A a salary of 2,000 rupees per month. The agreement is void, the object of A’s promise and the consideration for B’s promise being in part unlawful.

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THE INDIAN CONTRACT ACT, 1872 (b) Agreement - the meaning of which is uncertain (Section 29) : An agreement, the meaning of which is not certain, is void, but where the meaning thereof is capable of being made certain, the agreement is valid. For example, A agrees to sell B “a hundred tons of oil”. There is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty. But the agreement would be valid if A was dealer only in coconut oil; because in such a case its meaning would be capable of being made certain. (c) Wagering agreement: An agreement by way of a wager is void. It is an agreement involving payment of a sum of money upon the determination of an uncertain event. The essence of a wager is that each side should stand to win or lose, depending on the way an uncertain event takes place in reference to which the chance is taken and in the occurrence of which neither of the parties has legitimate interest. For example, A agrees to pay Rs. 500 to B if it rains, and B promises to pay a like amount to A if it does not rain, the agreement will be by way of wager. But if one of the parties has control over the event, agreement is not a wager. Now, what is your view about a lottery authorised by the government? Is your agreement to buy a Haryana State Lottery ticket valid? It has been held that such an agreement is one by way of wager and hence void under Section 30.

Speculative transactions : Though wagering transactions are void, speculative transactions are generally valid. It is, however, sometimes difficult to distinguish between a speculative transaction and a wagering transaction. A speculative transaction essentially, must have two elements, namely, (1) mutual intention of the contracting parties to acquire or deliver, as the case may be, the commodities; and (2) the undertaking or risk arising from movement in prices. A wager, on the other hand, postulates only the incurring of risk. The essential character of a speculative transaction is stated below. A buys from B 100 bales of jute at Rs. 150 per bale for forward delivery after six months. At the time to delivery, the price of jute is Rs. 200. In these circumstances, at the end of six months A can either demand delivery of 100 bales or collect the difference in price at Rs. 50 bale. On the other hand, if the price has gone down to say, Rs. 125 per bale, A will be able to settle the transaction by paying B at Rs. 25 per bale. In the case, it will be observed, that the original intention of the parties was to purchase and sell the bales of jute. Merely because subsequently they transact by payment or receipt of the difference in price, the original character of the transaction is not thereby altered. If, however, the mutual intention was only to settle the transaction by payment or receipt of the difference in price, the transaction would be wagering contract which would be void. Thus, gambling is prohibited by law, whereas speculation is generally not. Under Section 30 of the Act, a wagering contract is void, the reason being that such a contract is opposed to public policy.

Wager and collateral transactions : Though a wagering contract is void, transactions incidental to wagering transactions are not void. Thus, a broker in a wagering transaction can recover his brokerage. Similarly a principal can recover from his agent the prize money received by him on account of a wagering transaction.

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When a transaction is simply void but not illegal, the collateral transaction would be valid. For example, a contract by way of wager is void by statute and no action can be brought to recover any money alleged to have been won upon a wager but it is not illegal. Therefore, a promise made by the loser of a wager to pay the amount lost in consideration of the winner’s forbearance to post him as defaulter, can be enforced as a fresh contract since it is separate and distinct from the original wagering contract, though collateral to it. But the position is different in respect of transactions collateral to illegal contracts. They are so invalid, e.g., security given for the regular payment of the rent of a house let out for purposes for gambling cannot be recovered; the recovery of security being tainted with illegality of the original transaction, cannot be enforced.

1.21 SUMMARY The following persons are incompetent to contract: (a) minor, (b) Persons of unsound mind, (c) other disqualified persons. (a) Minor : Agreement with a minor is altogether void but his property is liable for necessaries supplied to him. He cannot be a partner but can be admitted to benefits of partnership with the consent of all partners. He can always plead minority and cannot be asked to compensate for any benefit received under a void agreement. Under certain circumstances, a guardian can enter into valid contract on behalf of minor. Minor cannot ratify a contract on attaining majority. (b) Persons of unsound mind : Persons of unsound mind such as idiots, lunatics and drunkards cannot enter into a contract, but a lunatic can enter into a valid contract when he is in a sound state of mind. The liability for necessities of life supplied to persons of unsound mind is the same as in case of minors. (Section 68) (c) Certain other persons are disqualified due to their status. FREE CONSENT Two or more persons are said to consent when they agree upon the same thing in the same sense (Section 13). Consent is free when it is not caused by mistake, misrepresentation, undue influence, fraud or coercion. When consent is caused by any of above said elements, the contract is voidable at the option of the party whose consent was so caused (Sections 19 and 19A). (a) Coercion : Coercion is the committing or threatening to commit any act, forbidden by the Indian Penal Code or the unlawful detaining or threatening to detain, any property, to the prejudice of any person with the intention of causing any person to enter into an agreement (Section 15). A contract induced by coercion is voidable at the option of the aggrieved party. (b) Undue influence : When one party to a contract is able to dominate the will of the other and uses the position to obtain an unfair advantage, the contract is said to be induced by undue influence. (Section 16). Such contract is voidable, not void. (c) Fraud : Fraud exists when a false representation has been made knowingly with an intention to deceive the other party, or to induce him to enter a contract (Section 17). Contract in the case is voidable.

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THE INDIAN CONTRACT ACT, 1872 (d) Misrepresentation : Means a misstatement of a material fact made believing it to be true, without an intent to deceive the other party (Section 18). Contract will be voidable in this case. (e) Mistake : When both the parties are at a mistake to a matter of fact to the agreement, the agreement is altogether void. LAWFUL OBJECT AND CONSIDERATION An agreement where the object or the consideration is unlawful, is void. Object or consideration is unlawful if it is forbidden by law, it would defeat the provisions of law; or is fraudulent, or involves injury to the person or property of another; or is immoral; or is opposed to public policy. Besides the above said agreements, certain agreements have been expressly declared to be void by the Contract Act such as - wagering agreements, agreement with uncertain meaning, agreements where consideration is unlawful in part etc.

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CHAPTER – 1


Unit 4 Performance of Contract


Understand how obligations under a contract must be carried out by the parties.

Be familiar with the various modes of performance.

Be clear about the consequence of refusal of performance or refusal to accept performance, by either of the parties.

Rights of joint promisees, liabilities of joint promisors, and rules regarding appropriation of payments must be clearly understood.

PERFORMANCE OF CONTRACTS A contract being an agreement enforceable by law, creates a legal obligation, which subsists until discharge. Performance of the promise or promises remaining to be performed is the principal and most usual mode of discharge. This unit explains: who must perform his obligation, what should be the mode of performance, and what shall be the consequences of nonperformance. The parties to a contract must either perform, or offer to perform, their respective promises unless such performance is dispensed with or excused under the provisions of the Contract Act or of any other law. Promises bind the representatives of the promisor in case of death of such promisor before performance, unless a contrary intention appears from the contract (Section 37). Thus, you should note that it is necessary for a party who wants to enforce the promise made to him, to perform his promise for himself or offer to perform his promise. Only after that he can ask the other party to carry out his promise. This is the principle which is enshrined in Section 37. Thus, it is the primary duty of each party to a contract to either perform or offer to perform his promise. He is absolved from such a responsibility only when under a provision of law or an act of the other party to the contract, the performance can be dispensed with or excused.

1.22 BY WHOM CONTRACT MAY BE PERFORMED ? The promise under a contract may be performed, as the circumstances may permit, by the promisor himself, or by his agent or his legal representative. 1.

Promisor himself : If there is something in the contract to show that it was the intention of the parties that the promise should be performed by the promisor himself, such promise must be performed by the promisor. This means contracts which involve the exercise of personal skill or diligence, or which are founded on personal confidence between the parties must be performed by the promisor himself.

2.

Agent : Where personal consideration is not the foundation of a contract, the promisor or his representative may employ a competent person to perform it.

3.

Representatives : A contract which involves the use of personal skill or is founded on personal consideration comes to an end on the death of the promisor. As regards any other contract the legal representatives of the deceased promisor are bound to perform it unless a contrary intention appears from the contract. (Section 37, para 2). But their liability under a contract is limited to the value of the property they inherit from the deceased.

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4.

Third persons : When a promisee accepts performance of the promise from a third person, he cannot afterwards enforce it against the promisor. That is, performance by a stranger, accepted by the promisee, produces the result of discharging the promisor, although the latter has neither authorised not ratified the act of the third party. Example : A received certain goods from B promising to pay Rs. 10,000/-. Later on, A expressed his inability to make payment. C, who is known to A, pays Rs, 6,000/- to B on behalf of A. However, A was not aware of the payment. Now B is intending to sue A for the amount of Rs. 10,000/- whether he can do so? Advice. As per Section 41 of the Indian Contract Act, 1872, when a promisee accepts performance of the promise from a third person, he cannot afterwards enforce it against the promisor. That is, performance by a stranger, accepted by the promisee, produces the result of discharging the promisor, although the latter has neither authorised nor ratified the act of the third party. Therefore, in the present instance, B can sue only for the balance amount i.e., Rs. 4,000/- and not for the whole amount.

5.

Joint promisors : When two or more persons have made a joint promise, then unless a contrary intention appears from the contract, all such persons must jointly fulfil the promise. If any of them dies, his legal representatives must, jointly with the surviving promisors, fulfill the promise. If all of them die, the legal representatives of all of them must fulfil the promise jointly. (Section 42).

Examples : 1.

A promises to B to pay Rs. 1,000 on delivery of certain goods. A may perform this promise either himself or causing someone else to pay the money to B. If A dies before the time appointed for payment, his representative must pay the money or employ some other person to pay the money. If B dies before the time appointed for the delivery of goods, B’s representative shall be bound to deliver the goods to A and A is bound to pay Rs. 1,000 to B’s representative.

2.

A promises to paint a picture for B for a certain price. A is bound to perform the promise himself. He cannot appoint some other painter to paint the picture on his behalf. If A dies before painting the picture, the contract cannot be enforced either by A’s representative or by B.

3.

A delivered certain goods to B for a promise of Rs. 5,000. Later on B expresses his inability to clear the dues. C, who is known to B, pays Rs. 2,000 to A on behalf of B. Before making this payment C did not tell B about it. Now A can sue B only for the balance and not the whole amount.

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1.23 DISTINCTION BETWEEN SUCCESSION AND ASSIGNMENT You should now note carefully the distinction between two legal concepts, viz., succession and assignment. When the benefits of a contract are succeeded to by process of law, then both burden and benefits attaching to the contract, may sometimes devolve on the legal heir. Suppose, a son succeeds to the estate of his father after his death, he will be liable to pay the debts and liabilities of his father owed during his life-time. But if the debts owed by his father exceed the value of the estate inherited by the son then he would not be called upon to pay the excess. In other words, the liability of the son will be limited to the extent of the property inherited by him; thus far and no further. In the matter of assignment, however the benefit of a contract can only be assigned but not the liabilities thereunder. Why this is so ? This is because when liability is assigned, a third party gets involved therein. Thus a debtor cannot relieve himself of his liability to creditor by assigning to someone else his obligation to repay the debt. On the other hand, if a creditor assigns the benefit of a promise, he thereby entitles the assignee to realise the debt from the debtor but where the benefit is coupled with a liability or when a personal consideration has entered into the making of the contract then the benefit cannot be assigned.

1.24 EFFECT OF REFUSAL TO ACCEPT OFFER OF PERFORMANCE According to Section 38 of the Act, where a promisor has made an offer of performance to the promisee, and the offer has not been accepted, then the promisor is not responsible for non performance; nor does he thereby lose his rights under the contract. Every such offer must fulfil certain conditions which are as follows, namely : (i)

it must be unconditional;

(ii) it must be made at a proper time and place under such circumstances that the persons to whom it is made, may have a reasonable opportunity of ascertaining that the person by whom it is made is able and willing, there and then to do the whole of what he is bound by his promise to do. (iii) if the offer is an offer to deliver anything to the promisee, then the promisee must have a reasonable opportunity of seeing that the thing offered is the thing which the promisor is bound by his promise to deliver. An offer to one of several joint promisees has the same legal consequences as an offer to all of them.

1.25 EFFECT OF A REFUSAL OF PARTY TO PERFORM PROMISE Primarily, it gives rise to certain rights to the other party. Let us now consider what those rights are. When a party to a contract has refused to perform or has disabled himself from performing his promise in entirety, the promisor may put an end to the contract, unless he has signified by words or conduct, his acquiescence in its continuance (Section 39). From language of Section 39 it is clear that in the case under consideration, the following two rights accrue to the

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aggrieved party, namely, (a) to terminate the contract; (b) to indicate by words or by conduct that he is interested in its continuance. In case the promisee decides to continue the contract, he would not be entitled to put an end to the contract on this ground immediately. In either case, the promisee would be able to claim damages that he suffers as a result on the breach.

1.26 LIABILITY OF JOINT PROMISORS If two or more persons have made a joint promise, ordinarily all of them during their life-time must jointly fulfill the promise. After death of any one of them, his legal representative jointly with the survivor or survivors should do so (Sec. 42). After the death of the last survivor the legal representatives of all the original co-promisors must fulfil the promise. For example, X, Y and Z who had jointly borrowed money must, during their life-time jointly repay the debt. Upon the death of X his representative, say, S along with Y and Z should jointly repay the debt and so on. This rule is applicable only if the contract reveals no contrary intention. We have seen that Section 42 deals with voluntary discharge of obligations by joint promisors. But if they do not discharge their obligation on their own volition, what will happen? This is what Section 43 resolves. Accordingly, (i)

When two or more persons make a joint promise, the promisee may, in the absence of express agreement to the contrary, compel any one or more of such joint promisors to perform the whole of the promise.

(ii) If one of the joint promisors is made to perform the whole contract, he can call for a contribution from others. For example, A, B and C jointly execute a promissory note for Rs. 3,000 in favour of D. A is compelled to pay the whole amount. A, in such a case would be able to realise Rs. 1,000 each from B and C. This rule may, however, be modified by mutual agreement between the joint promisors. (iii) If any of the joint promisors makes a default in making his contribution the remaining joint promisors must bear the loss arising from such a default in equal shares. In the above example, where A, B and C jointly executed the promissory note for Rs. 3,000 and if C was unable to pay anything, then A would be able to realise from B by way of contribution Rs. 1,500 instead of Rs. 1,000. We thus observe that the effect of Section 43 is to make the liability in the event of a joint contract, both joint and several, in so far as the promisee may, in the absence of a contract to the contrary, compel anyone or more of the joint promisors to perform the whole of the promise. The effect of release of one of the joint promisors is dealt with in Section 44 which is stated below : Where two or more persons have made a joint promise, a release of one of such joint promisors by the promisee does not discharge the other joint promisor or joint promisors; neither does it free the joint promisors so released from responsibility to the other joint promisor or promisors.

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1.27 RIGHTS OF JOINT PROMISEES The law is contained in Section 45 which is reproduced below : “When a person has made a promise to two or more persons jointly, then unless a contrary intention appears from the contract, the right to claim performance rests, as between him and them, with them during their joint lives, and after the death of any of them with the representatives of such deceased person jointly with the survivor or survivors, and after the death of the last survivor, with the representatives of all jointly”. For example, A, in consideration of Rs. 5,000 lent to him by B and C, promises B and C jointly repay the sum with interest on a specified day but B dies. In such a case right to demand payment shall rest with B’s legal representatives, jointly with C during C’s life-time, and after the death of C, with the legal representatives of B and C jointly.

1.28 TIME AND PLACE FOR PERFORMANCE OF THE PROMISE The law on the subject is contained in Section 46 to 50 provisions whereof are summarised below : (i)

If no time is specified in a contract for the performance of the promise, the promise must be performed within a reasonable time. The expression reasonable time is to be interpreted having regard to the facts and circumstances of a particular case.

(ii) If a promise is to be performed on a specified date but the hour is not mentioned, the promisor may perform it at any time during the usual hours of business, on such day. For example, if the delivery of goods is offered say after sunset, the promisee may refuse to accept delivery, for the usual business hours are, between 10 a.m. and 5 p.m. Moreover, the delivery must be made at the usual place of business. (iii) When no place is fixed for the performance of a promise, it is the duty of the promisor to ask the promisee to fix a reasonable place for the performance of the promise. The foregoing rules regarding the time and place for the performance of promise apply, only when the promisor undertakes to perform the promise without an application being made by the promisee. (iv) Where the promisor has not undertaken to perform the promise without an application by the promisee, and the promise is to be performed on a certain day it is the duty of the promisee to apply for performance at a proper place and within the usual hours of business.

1.29 PERFORMANCE OF RECIPROCAL PROMISES The law on the subject is contained in Sections 51 to 54. The provisions thereof are summarised below :

(i)

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General observations : A contract may consist of an act and a promise, or it may consist of two promises, one being the consideration for the other. Thus, when A sells 500 quintals of rice to B who promises to pay the price after a month, the contract would consist of an act performed by A and a promise made by B. On the other hand, if A promises to deliver 500 COMMON PROFICIENCY TEST

quintals of rice and B promises to pay the price on delivery, the contract would consist of two promises, one made by A to B and the other given by B to A. Such promises are called reciprocal promises. Here, the promise of A is the consideration for the promise of B and vice versa.

(ii) Simultaneous performance of reciprocal promises : Reciprocal promises may have to be performed simultaneously, or one after the other. Where A promises to deliver rice and B promises to pay the price on delivery, both the promises are to be performed simultaneously, and both A and B must be ready and willing to perform their respective promises. Such promises constitute concurrent conditions and the performance of one of the promises is conditional on the performance of the other. If one of the promises is not performed the other too need not be performed. If A, in the above-mentioned illustration, is unwilling to deliver the rice on payment, A will be guilty of breach of promise and the breach would relieve B of the obligation to perform his promise and would enable B to treat the contract as at an end. (iii) Performance of reciprocal promises where the order of performance is expressly fixed : When the order of performance of the reciprocal promises is expressly fixed by the contract, they must be performed in that order. For instance, A and B contract that A shall build a house for B at a fixed price. A’s promise to build the house must be performed before B can be called upon to perform his promise to pay for it. The promise being dependent on each other, any breach thereof by A would relieve B of the obligation to keep up his own promises, and would enable B to avoid the contract. (iv) Performance of reciprocal promises when the order of performance is fixed by implication : The order of performance may sometimes be indicated not expressly, but by the nature of the transaction. For example, A and B contract that A shall make over his stock-in-trade to B at a fixed price, and B promises to give security for the payment of the price. A’s promise to make over his stock need not be performed, until the security is given by B, for the nature of the transaction required that A should have the security from B before he delivers his stock. (v) Effect of one party preventing another from performing promise : When in a contract, consisting of reciprocal promises, one party prevents the other from performing his promise, the contract becomes voidable at the option of the party so prevented. The latter becomes entitled to get compensation from the other party for any loss he sustains in consequence of the non-performance of the contract. For instance, in a contract for the sale of standing timber, the seller is to cut and cord it, whereupon buyer is to take it away and pay for it. The seller cords only a part of the timber and neglects to cord the rest. In that event the buyer may avoid the contract and claim compensation from the seller for any loss which he may have sustained for the non-performance of the contract. Reciprocal promise to do certain things that are legal, and also some other things that are illegal : When persons reciprocally promise, first to do certain things which are legal and secondly, under specified circumstances, to do certain other things which are illegal, the first set of promises is a contract, but the second is a void agreement. For example, A and B agree that A will sell a house to B for Rs. 50,000 and also that if B uses it as a gambling house, he will pay a further sum of Rs. 75,000. The first set of reciprocal promises, MERCANTILE

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THE INDIAN CONTRACT ACT, 1872 i.e. to sell the house and to pay Rs. 50,000 for it, constitutes a valid contract. But the object of the second, being unlawful, is void.

‘Alternative promise’ one branch being illegal : The law on this point is contained in Section 58 which is reproduced below. “In the case of the alternative promise, one branch of which is legal and the other illegal, the legal branch alone can be enforced”.

1.30 EFFECT OF FAILURE TO PERFORM AT A TIME FIXED IN A CONTRACT IN WHICH TIME IS ESSENTIAL The law on the subject is contained in Section 55 which is reproduced below : When a party to a contract promises to do certain thing at or before the specified time, or certain things at or before the specified time, and fails to do any such thing at or before the specified time, the contract, or so much of it as has not been performed, becomes voidable at the option of the promisee, if the intention of the parties was that time should be of essence of the contract. If it was not the intention of the parties that time should be of essence of the contract, the contract does not become voidable by the failure to do such thing at or before the specified time; but the promisee is entitled to compensation from the promisor for any loss occasioned to him by such failure. But ordinarily, from an examination of a contract, it is difficult to ascertain whether time is intended to be of essence by the parties at the time of its formation. In every case, the intention is to be gathered from the terms of the contract. In a mercantile contract, the general rule in this regard is that stipulations as to time, except as to time for payment of money, are essential conditions, since punctuality is of the utmost importance in the business world. Thus, on a sale of goods that are notoriously subject to rapid fluctuation of market price, e.g. gold, silver, shares having a ready market the time of delivery is of the essence of the contract. But in mortgage bond, the time fixed for the repayment of the mortgage money can by no means be regarded as an essential condition; consequently, the mortgaged property can be regained even after the due date. Similarly, in a contract to sell land any clause limiting the time of completion is not strictly enforced. But even in a contract for the sale of land, time can be made the essence of the contract by express words.

Contract cannot be avoided where time is not essential : Where time is not essential, the contract cannot be avoided on the ground that the time for performance has expired: the promisee is only entitled to compensation from the promisor for any loss caused by the delay. But it must be remembered that even where time is not essential it must be performed within a reasonable time; otherwise it becomes voidable at the option of the promisee. Effect of acceptance of performance out of time : Even where time is essential the promisee may waive his right to repudiate the contract, when the promisor fails to perform the promise within the stipulated time. In that case, he may accept performance at any time other than that agreed. In such an event, he cannot claim compensation for any loss occasioned by the

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non-performance of the promise at the time agreed, unless at the time of acceptance of the performance he has given a notice to the promisor of his intention to claim compensation.

1.31 IMPOSSIBILITY OF PERFORMANCE Section 56 contemplates various circumstances under which agreement may be void, since it is impossible to carry it out. The Section is reproduced below : “An agreement to do an act impossible in itself is void. A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.” (1) Impossibility existing at the time of contract : When the parties agree upon doing of something which is obviously impossible in itself the agreement would be void. Impossible in itself means impossible in the nature of things. The fact of impossibility may be and may not be known to the parties. (i)

If known to the parties : It would be observed that an agreement constituted, quite unkno wn to the parties, may be impossible of being performed and hence void. For example, B promises to pay a sum of Rs. 5,000 if he is able to swim across the Indian Ocean from Bombay to Aden within a week. In this case, there is no real agreement, since both the parties are quite certain in their mind that the act is impossible of achievement. Therefore, the agreement, being impossible in itself, is void.

(ii) If unknown to the parties : Where both the promisor and the promisee are ignorant of the impossibility of performance, the contract is void. (iii) If known to the promisor only : Where at the time of entering into a contract, the promisor alone knows about the impossibility of performance, or even if he does not know though he should have known it with reasonable diligence, the promisee is entitled to claim compensation for any loss he suffered on account of non-performance. (2) Supervening impossibility: When performance of promise become impossible or illegal by occurrence of an unexpected event or a change of circumstances beyond the contemplation of parties, the contract becomes void e.g. change in law etc.

1.32 APPROPRIATION OF PAYMENTS (i)

Application of Payment where debt to be discharged is indicated: The law on the subject is contained in Section 59 reproduced below : “Where a debtor, owing several distinct debts to one person, makes a payment to him either with express intimation or under circumstances implying that the payment is to be applied to the discharge of some particular debt, the payment, if accepted, must be applied accordingly”. The Latin maxim is quicquid soivitur, sovitur secundum modum solventis. The meaning of the maxim is that whatever is paid, is paid according to the intention or manner of the party paying. According to this maxim, where a debtor owes several distinct debts to a creditor and makes payment it has been held in Clayton’s case that the former enjoys the

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THE INDIAN CONTRACT ACT, 1872 right of appropriation, and he may, at his pleasure, appropriate it to any debt; the creditor will be bound by such an appropriation. If the debtor has not intimated at the time of payment creditor is entitled to appropriate it to the debt first in time.

(ii) Application of payment where neither party appropriates : The law on the subject is contained in Section 61, reproduced below : “Where neither party makes any appropriation, the payment shall be applied in discharge of the debts in order of time, whether they are or are not barred by the law in force for the time being as to the limitation of suits. If the debts are of equal standing the payment shall be applied in discharge of each proportionately.” The aforesaid rule is to be applied when there is nothing to show the intention of the parties. If the debts are of the same date the payment shall be applied in discharge of each proportionately. For example, there are two debts one of Rs. 500 and the other of Rs. 700 that were incurred on the same date the debtor pays Rs. 600. Out of this sum, a sum of Rs. 250 should be applied in discharge of the first debt and the balance of Rs. 350 in discharge of the second debt.

1.33 CONTRACTS WHICH NEED NOT BE PERFORMED Under this heading, we shall discuss the principles of Novation, Rescission and Alteration and Remission. The law is contained in Section 62 to 67 of the Contract Act. Section 62 is reproduced below : “If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed”. (a) Effect of novation : The parties to a contract may substitute a new contract for the old. If they do so, it will be a case of novation. On novation, the old contract is discharged and consequently it need not be performed. Thus it is a case where there being a contract in existence some new contract is substituted for it either between the same parties or between different parties the consideration mutually being the discharge of old contract. Novation can take place only by mutual agreement between the parties. For example, A owes B Rs. 100. A, B and C agree that C will pay B and he will accept Rs. 100 from C in lieu of the sum due from A. A’s liability thereby shall come to an end, and the old contract between A and B will be substituted by the new contract between B and C. (b) Effect of rescission : A contract is also discharged by rescission. When the parties to a contract agree to rescind it, the contract need not be performed. In the case of rescission, only the old contract is cancelled and no new contract comes to exist in its place. It is needless to point out that novation also involves rescission. Both in novation and in rescission, the contract is discharged by mutual agreement. (c) Effect of alteration of contract : As in the case of novation and rescission so also in a case where the parties to a contract agree to alter it, the original contract is rescinded, with the result that it need not be performed. In other words, a contract is also discharged by alteration. The terms of contract may be so altered by mutual agreement that the alteration may have the effect of substituting a new contract for the old one. In other words, the distinction between novation and alteration is very slender.

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Novation and alteration : The law pertaining to novation and alteration is contained in Section 62 to 67 of the Indian Contract Act. In both these cases the original contract need not be performed. Still there is a difference between these two. 1.

Novation means substitution of an existing contract with a new one. Novation may be made by changing in the terms of the contract or there may be a change in the contracting parties. But in case of alteration the terms of the contract may be altered by mutual agreement by the contracting parties but the parties to the contract will remain the same.

2.

In case of novation there is altogether a substitution of new contract in place of the old contract. But in case of alteration it is not essential to substitute a new contract in place of the old contract. In alteration may be a change in some of the terms and conditions of the original agreement.

(d) Promisee may waive or remit performance of promise : The law on the subject is contained in Section 63 reproduced below : “Every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance or may accept instead of its any satisfaction which he thinks fit”. In other words, a contract may be discharged by remission. Thus where A, a party to a contract, has done all that he was required to do under the contract and the time for the other party, X, to perform his promise has not yet arrived, a bare waiver of his claim by A would be an effectual discharge to X. It should be noted that novation, rescission or alteration cannot take place without consideration. But in the case of partial or complete remission, no consideration is required. The promisee can dispense with performance without consideration and without a new agreement. The promisee under the Act can also extend the time for the performance of the promise. Time can be extended only for the benefit of the promisor and not for the benefit of the promisee. Similarly, a promisee can accept instead of the stipulated performance, any satisfaction which he thinks fit. For instance, A sells his horse to B who promises to pay Rs. 500 for the horse. A may accept, instead of Rs. 500 a necklace as the price of the horse.

1.34 RESTORATION OF BENEFIT UNDER A VOIDABLE CONTRACT (SECTION 64) The law on the subject is reproduced below : “When a person at whose option a contract is voidable rescinds it, the other party thereto need not perform any promise therein contained in which he is the promisor. The party rescinding a voidable contract shall, if he has received any benefit thereunder from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received”. Such a contract can be terminated at the option of the party who is empowered to do so. If he has received any benefit under the contract, he must restore such benefit to the person from MERCANTILE

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THE INDIAN CONTRACT ACT, 1872 whom he has received it. For example, an insurance company may rescind a policy on the ground that material fact has not been disclosed. When it does so, the premium collected by it in respect of the policy reduced by the amount of expenses incurred by it in this connection must be repaid to the policy holder. A voidable contract, when it is voidable at its inception as well as when it subsequently becomes voidable, comes to an end as soon as it is avoided by the party at whose option it is voidable. On the contract being avoided, the injured party is entitled to recover compensation for any damage which he has sustained through the non-performance of the contract. On the other hand, if he has received any benefit under voidable contract, he must restore such benefit to the person from whom it was received.

1.35

OBLIGATIONS OF PERSON WHO HAS RECEIVED ADVANTAGE UNDER VOID AGREEMENT OR ONE BECOMING VOID

The law on the subject is contained in Section 65 which is stated below : When an agreement is discovered to be void or when a contract becomes void, any person who received any advantage under such agreement or contract must restore it, makes compensation for it to the person from whom he received it. From the language of the Section, it is clear that in such a case either the advantage received must be restored back or a compensation, sufficient to put the position prior to contract, should be paid. In a case, the plaintiff hired a godown from the defendant for twelve months and paid the whole of the rent in advance. After about seven months the godown was destroyed by fire, without any fault or negligence on the part of the plaintiff and the plaintiff claimed a refund of a proportionate amount of the rent. Held, the plaintiff was entitled to recover the rent for the unexpired term, of the contract. The Act requires that a party must give back whatever he has received under the contract. The benefit to be restored under this section must be benefit received under the contract. A agrees to sell land to B for Rs. 40,000. B pays to A Rs. 4,000 as a deposit at the time of the contract, the amount to be forfeited to A if B does not complete the sale within a specified period. B fails to complete the sale within the specified period, nor is he ready and willing to complete the sale within a reasonable time after the expiry of that period. A is entitled to rescind the contract and to retain the deposit. The deposit is not a benefit received under the contract, it is a security that the purchaser would fulfill his contract and is ancillary to the contract for the sale of the land. Though generally the benefit received under an agreement which is subsequently found to be void, must be returned, such a course may not be necessary when the benefit has been received by the corporation. It is because contract with a corporation usually is required to be entered into a special form, in the absence of which the contract becomes void. The argument in support of this view is that the agreement in this case becomes void due to the negligence of the promisor.

Communication of rescission (Section 66) : You have noticed that a contract voidable at the option of one of the parties can be rescinded; but rescission must be communicated to the other party in the same manner as a proposal is communicated under Section 4 of the Contract Act. Similarly, a rescission may be revoked in the same manner as a proposal is revoked. 46


Effects of neglect of promisee (Section 67) : If any promisee neglects or refuses to afford the promisor facilities for the performance of a promise, the promisor is excused from the performance of his promise. In other words, the promisor cannot be held liable for the non-performance. For example, if an apprentice refuses to learn, the teacher cannot be held liable for not teaching. A contracts with B to repair B’s house. B neglects or refuses to appoint out to A the places in which his house requires repair. A is excused for the non-performance of the contract it is caused by such neglect or refusal.

1.36 DISCHARGE OF A CONTRACT A contract may be discharged either by an Act of the parties or by an operation of law in the different base set out below :

(i)

Discharge by performance : It takes place when the parties to the contract fulfil their obligations arising under the contract within the time and in the manner prescribed. Discharge by performance may be (1) actual performance or (2) attempted performance. Actual performance is said to have taken place, when each of the parties has done what he had agreed to do under the agreement. When the promisor offers to perform his obligation, but the promisee refuses to accept the performance, it amounts to attempted performance or tender.

(ii) Discharge by mutual agreement : Section 62 of the Indian Contract Act provides if the parties to a contract agree to substitute a new contract for it, or to refund or remit or alter it, the original contract need not be performed. The principles of Novation, Rescission, Alteration and Remission are already discussed in para 4.12. (iii) Discharge by impossibility of performance : The impossibility may exist from the very start. In that case, it would be impossibility ab initio. Alternatively, it may supervene. Supervening impossibility may take place owing to : (a) an unforeseen change in law, (b) the destruction of the subject-matter essential to that performance; (c) the non-existence or non-occurrence of particular state of things, which was naturally contemplated for performing the contract, as a result of some personal incapacity like dangerous malady; (e) the declaration of a war (Section 56). (iv) Discharge by lapse of time : A contract should be performed within a specified period as prescribed by the Limitation Act, 1963. If it is not peformed and if no action is taken by the promising within the specified period of limitation, he is deprived of remedy at law. For example, if a creditor does not file a suit against the buyer for recovery of the price within three years, the debt becomes time–barred and hence irrecoverable. (v) Discharge by operation of law : A contract may be discharged by operation of law which includes by death of the promisor, by insolvency etc. (vi) Discharge by breach of contract : Breach of contract may be actual breach of contract or anticipatory breach of contract. If one party defaults in performing his part of the contract on the due date, he is said to have committed breach thereof. When on the other hand, a person repudiates a contract before the stipulated time for its performance has arrived, he is deemed to have committed anticipatory breach. If one of the parties to a contract breaks MERCANTILE

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THE INDIAN CONTRACT ACT, 1872 the promise the party injured thereby, has not only a right of action for damages but he is also discharged from performing his part of the contract (Section 64) (vii) A promise may dispense with or remit the performance of the promise made to him or may accept any satisfaction he thinks fit. In the first case, the contract will be discharged by remission and in the second by accord and satisfaction (Section 63). (viii) When a promise neglects or refuses to afford the promisor reasonable facilities for the performance of the promise, the promisor is excused by such neglect or refusal (Section 67).

1.37 SUMMARY 1.

The promisor or his representation must perform unless the nature of contract shows that it may be performed by a third person, but the promisee may accept performance by a third party. (Sections 37, 40 and 41).

2.

In case of joint promisors, all must perform, and after the death of any of them, the survivors and the representatives of the deceased must perform. But their liability is joint and several. If the promisee requires any one of them perform the whole promise, he can claim contribution from others. (Sections 42, 43 and 44).

3.

Joint promisees have only a joint right to claim performance (Section 45).

4.

The promisor must offer to perform and such offer must be unconditional, and be made at the proper time and place, allowing the promisee a reasonable opportunity of inspection of the things to be delivered (Sections 38, 46, 47, 48, 49 and 50).

5.

If the performance consists of payment of money and there are several debts to be paid, the payment shall be appropriated as per provisions of Sections 59, 60 and 61.

6.

If an offer of performance is not accepted, the promisor is not responsible for nonperformance and does not lose his rights under the contract; so also if the promisee fails to afford reasonable facilities. He may sue for specific performance or he may avoid the contract and claim compensation (Sections 38, 39, 53 and 67).

7.

Rescission is communicated and revoked in the same way as a promise. The effect is to dispense with further performance and to render the party rescinding liable to restore any benefit he may have received. (Sections 64 and 66)

8.

Parties may agree to cancel the contract or to alter it or to substitute a new contract for it. (Section 62).

We have so far seen how a contract is made, the essential elements that go to make a valid contract and also how a contract is to be performed and how a contract may be put an end to. We shall now discuss about the breach of contract and also the mode in which compensation for breach of contract is estimated.

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CHAPTER – 1


Unit 5 Breach of Contract


Understand the concept of breach of contract and various modes thereof.

Be clear about how the damages are to be measured.

Note the circumstances when vindictive damages are awarded.

1.38 ANTICIPATORY BREACH OF CONTRACT It is an important concept under the law of contractual relationship. When the promisor refuses altogether to perform his promise and signifies his unwillingness even before the time for performance has arrived, it is called Anticipatory Breach. A promisee, instead of putting an end to the contract forthwith may keep the contract alive upto the time when the contract is to be executed. But the amount of damages in one case may be different from that in the other. We shall now explain this difference in the amount of damages by means of an illustration. X agrees to sell to Y a certain quantity of say, wheat at Rs. 100/- per quintal to be delivered, say, on the 3rd March. On the 2nd February, X gives notice expressing his unwillingness to sell wheat; and the price of wheat on the date is Rs. 110/- per quintal. If Y repudiates the contract forthwith (which he is entitled to do at his option), he would be able to recover damages @ Rs. 10/- per quintal, being the difference between market price on the 2nd February and the contract price. If instead of taking the action forthwith, he keeps the contract alive till the 3rd March and in the mean time, the price increases to Rs. 125/- per quintal on the date. Y would be able or recover damages @25/- per quintal. If, on the other hand, during the intervening period between 2nd February and 3rd March, private sale of wheat is prohibited by the Government, the contract would become void, and Y would not be able to recover any damages whatever. Thus you observe that if the promisee keeps the contract alive, he does so not only for his own benefit but also for the benefit of the promisor.

1.39 ACTUAL BREACH OF CONTRACT In contrast to anticipatory breach, it is a case of refusal to perform the promise on the scheduled date. The parties to a lawful contract are bound to perform their respective promises. But when one of the parties breaks the contract by refusing to perform his promise, he is said to have committed a breach. In that case, the other party to the contract obtains a right of action against the one who has refused to perform his promise. The Act, in Section 73, has laid down the rules as to how the amount of compensation is to be determined. On the breach of the contract, the party who suffers from such a breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him by breach. Compensation can be claimed for any loss or damage which naturally arises in the usual course of events. Compensation can also be claimed for any loss or damage which the party knew when they entered into the contract, as likely to result from the breach. That is to say, special damage can be claimed only on a previous notice. But the party suffering from the breach is bound to take reasonable steps to minimise the loss. And no compensation is payable for any remote or indirect loss.

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1.40 LIABILITY FOR DAMAGES (a) Liability for special damages : Where a party to a contract receives a notice of special circumstances affecting the contract, he will be liable not only for damages arising naturally and directly from the breach but also for special damages. (b) Liability to pay vindictive or exemplary damages : These damages may be awarded only in two cases, viz. (i) for breach of promise to marry; and (ii) wrongful dishonour by a banker of his customer’s cheque. In a breach of promise to marry, exemplary damages may be awarded to the other party taking into consideration the injury caused to his or her feelings. The amount of damages recoverable by the drawer of cheque from his banker in case of wrongful dishonour of his cheque may be quite heavy, depending upon the loss of credit and reputation suffered on that account. (c) Liability to pay nominal damages : Nominal damages are awarded where the plaintiff has proved that there has been a breach of contract but he has not in fact suffered any real damage. Now you may ask why such damages are at all awarded. The answer is simple. It is awarded just to establish the right to decree for the breach of contract. The amount may be a rupee or even 10 paise. (d) Damages for deterioration caused by delay : In the case of deterioration caused to goods by delay, damages can be recovered from carrier even without notice. The word ‘deterioration’ not only implies physical damages to the goods but it may also mean loss of special opportunity for sale.

1.41 HOW TO CALCULATE THE DAMAGE ? Under a contract for the sale of goods, the measure of damages, when the buyer breaks the contract, is the difference between the contract price and the market price at the date of breach. If the contract is broken by the seller, the buyer is entitled to recover from the seller the difference between the market price and the contract price at the date of breach.

Duty to mitigate the loss. You will perhaps recollect that the party who suffers in consequence of the breach of contract must take all reasonable steps to mitigate the loss from such a breach; he cannot claim as damages any loss which he has suffered due to his own negligence. Besides claiming damages as a remedy for the breach of contract, the following remedies are also available : (i)

Rescission of contract : When a contract is broken by one party, the other party may treat the contract as rescinded. In such a case he is absolved of all his obligations under the contract and is entitled to compensation for any damages that he might have suffered.

(ii) Suit upon Quantum Meruit : The phrase ‘quantum meruit’ literally means “as much as is earned” or “according to the quantity of work done”. When a person has begun the work and before he could complete it, the other party terminates the contract or does something which make it impossible for the other party to complete the contract, he can claim for the work done under the contract. He may also recover the value of the work done where the further performance of the contract becomes impossible. The claim on quantum meruit

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THE INDIAN CONTRACT ACT, 1872 must be brought by a party who is not at default. However, in certain cases, the party in default may also sue for the work done if the contract is divisible. Following are the cases in which a claim on quantum meruit may arise : (a) Where the work has been done and accepted under a contract which is subsequently discovered to be void, in such a case, the person who has performed the part of the contract is entitled to recover the amount for the work done and the party, who receives and accepts the benefit under such contract, must make compensation to the other party. (b) Where a person does some act or delivers something to another person with the intention of receiving payments for the same (i.e. non-gratuitous act), in such a case, the other person is bound to make payment if he accepts such services or goods, or enjoys their benefit. (c) The compensation for the work done may be recovered on the basis of quantum meruit. Where the contract is divisible and a party performs part of the contract and refuses to perform the remaining part, in such a case, the party in default may sue the other party who has enjoyed the benefits of the part performance. (iii) Suit for specific performance : Where damages are not an adequate remedy in the case of breach of contract, the court may in its discretion on a suit for specific performance direct party in breach, to carry out his promise according to the terms of the contract. (iv) Suit for injunction : Where a party to a contract is negativating the terms of a contract, the court may by issuing an ‘injunction order’ restrain him from doing what he promised not to do.

1.42 SUMMARY In case of breach of contract by one party the other party need not perform his part of the contract and is entitled to compensation for the loss occurred to him. Damages for breach of contract must be such loss or damage as naturally arises, in the usual course of things or which had been reasonably supposed to have been in contemplation of the parties when they made the contract, as the probable result of the breach. Any other damages are said to be remote or indirect damages, hence, cannot be claimed.

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CHAPTER – 1


Unit 6 Contingent and Quasi-Contracts


Have clarity about the basic characteristics of ‘Contingent contract’ and ‘quasi-contract’ so that you are able to distinguish between a contract of any of these types and a simple contract.

Be familiar with the rules relating to enforcement of these in order to gain an understanding of rights and obligations of the parties to the contract.

In this unit we shall briefly examine what is called a ‘contingent contract’, its essentials and the rules regarding enforcement of this type of contracts. Again, the Contract Act recognises certain cases in which an obligation is created without a contract. Such obligations arise out of certain relations which cannot be called as contracts in the strict sense. There is no offer, no acceptance, no consensus ad idem and in fact neither agreement nor promise and yet the law imposes an obligation on one party and confers a right in favour of the other. We shall have a look on these cases of ‘Quasi-contracts’.

1.43 WHAT IS A CONTINGENT CONTRACT ? According to Section 31 of the Act, contingent contract is a contract to do or not to do something, if some event collateral to such contract, does or does not happen. Contracts of insurance are of this class. Example : A contracts to pay B Rs. 1,00,000 if B’s house is destroyed by fire. This is a contingent contract.

1.44 ESSENTIALS OF A CONTINGENT CONTRACT (1) The performance of a contingent contract is made dependent upon the happening or non-happening of some event. A contract may be subject to a condition precedent or subsequent. (2) The event on which the performance is made to depend, is an event collateral to the contract, i.e., it does not form part of the reciprocal promises which constitute the contract. Thus the event should neither be a performance promised, nor the consideration for a promise. Thus (i) where A agrees to deliver 100 bags of wheat and B agrees to pay the price only afterwards, the contract is a conditional contract and not contingent; because the event on which B’s obligation is made to depend is part of the promise itself and not a collateral event. (ii) Similarly, where A promises to pay B Rs. 1,00,000 if he marries C, it is not a contingent contract. (3) The contingent event should not be the mere will of the promisor. For instance, if A promises to pay B Rs. 10,000, if he so chose, it is not a contingent contract. (In fact, it is not a contract at all). However, where the event is within the promisor’s will but not merely his will, it may be contingent contract. For example, if A promises to pay B Rs. 10,000 if A left Delhi for Bombay on a particular day, it is a contingent contract, because going to Bombay is an event no doubt within A’s will, but is not merely his will.

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1.45 RULES RELATING TO ENFORCEMENT Enforcement of contracts contingent on an event ‘happening’ : Where a contingent contract is made to do or not to do anything if an uncertain future event happens, it cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void. To illustrate this concept, let us take an example. X entered into a contract with Y to purchase Y’s buffalo, if X survives Z. In view of the said principle of law, the contract, in the instant case, could not be enforced by law unless and until Z died during the life-time of X. Enforcement of contracts contingent on an event ‘not-happening’ : Where a contingent contract is made to do or not to do anything if an uncertain future event does not happen it can be enforced only when the happening of that event becomes impossible and not before. For example, P agreed to pay Q a sum of money, if a certain ship does not return. The ship was sunk. The contract could be enforced as the ship would never return in the circumstances. When shall an event on which contract is contingent be deemed impossible, if it is the future conduct of a living person : Suppose, the future event on which a contract is contingent is the way in which a person will act at an unspecified time. In such a case, the event shall be considered to have become impossible when such person does anything which renders it impossible that he should so act within any definite time or otherwise than under further contingencies. For instance, A agrees to pay B a sum of money if A marries C; C marries D. The marriage, of A to C is now to be considered impossible, although it is possible that D may die and that C may afterwards marry A. Agreement contingent on impossible event (Section 36) : A contingent agreement to do or not to do anything, if an impossible event happens, is void. The impossibility of the event may be or may not be known to the parties to the agreement at the time when they entered into it. For example X agrees to pay Y 1,000 rupees if two straight lines should enclose a space. The agreement is void.

1.46 WHAT IS A QUASI-CONTRACT ? In the case of every contract, the promisor voluntarily undertakes an obligation in favour of the promisee. A similar obligation may be imposed by law upon a person for the benefit of another even in the absence of a contract. Such cases are known as quasi contracts. The obligation created in either of the cases is identical. Quasi contracts are based on principles of equity, justice and good conscience. The salient features, of quasi contractual right, are as follows: (a) Firstly, it does not arise from any agreement of the parties concerned, but is imposed by the law; and (b) Secondly, it is a right which is available not against the entire world, but against a particular person or persons only.

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1.47 TYPES OF QUASI-CONTRACTS Under the provisions of the Indian Contract Act, the relationship of quasi contract is deemed to have come to exist in five different circumstances which we shall presently dilate upon. But you will notice that in none of these cases there comes into existence any contract between the parties in the real sense. Due to peculiar circumstances in which they are placed, the law imposes in each of these cases of contractual liability. (a) Claim for necessaries supplied to persons incapable of contracting (Section 68): If necessaries are supplied to a person who is incapable of contracting, e.g. minor or a person of unsound mind, the supplier is entitled to claim their price from the property of such a person. Accordingly, if A supplies to B, a lunatic, necessaries suited to B’s status in life, A would be entitled to recover their price from B’s property. He would also be able to recover the price for necessaries supplied by him to his (B’s) wife or minor child since B is legally bound to support them. However, if B has no property, nothing would be realisable. You should, however, note that in such circumstances, the price only of necessaries and not of articles of luxury, can be recovered. To establish his claim, the supplier must prove not only that the goods were supplied to the person who was minor or a lunatic but also that they were suitable to his actual requirements at the time of the sale and delivery. Similarly, if money has been advanced in like circumstances for the purchase of necessaries, its reimbursement can be claimed. (b) Right to recover money paid for another person : A person who has paid a sum of money which another is obliged to pay, is entitled to be reimbursed by that other person provided the payment has been made by him to protect his own interest. (c) Obligation of a person enjoying benefits of non-gratuitous act (Section 70): Such an obligation arises under the provision of Section 70 reproduced below: “Where a person lawfully does anything for another person, or delivers anything to him not intending to do so gratuitously and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered.” It thus follows that for a suit to succeed, the plaintiff must prove: (i) that he had done the act or had delivered the thing lawfully; (ii) that he did not do so gratuitously; and (iii) that the other person enjoyed the benefit. (d) Responsibility of a finder of goods: Such a responsibility arises under Section 71 which is reproduced below: “A person who finds goods belonging to another and takes them into his custody is subject to the same responsibility as a bailee”. He is, therefore, required to take proper care of things found, not to appropriate it to his own use and, when the owner is traced, to restore it to the owner. Further, he must take as much care of the goods found as a man of ordinary prudence would, under similar circumstances, take care of his own goods of the same bulk, quantity and value as those of 56


the goods found. Let us exemplify this rule by means of an illustration. P, a customer in D’s shop, puts down a broach with her coat and forgets to pick it up. One of D’s assistants found it and it was placed in a drawer over the weekend. On Monday, it was discovered as missing. D was liable to P in view of the absence of that ordinary care which in the circumstances, a prudent man would have taken. (e) Liability for money paid or thing delivered by mistake or under coercion: Such liability arises under Section 72 of the Contract Act which is reproduced below: “A person to whom money has been paid, or anything delivered, by mistake or under coercion must repay or return it.” In each of the above cases, contractual liability is the creation of law and does not depend upon any mutual agreement between the parties.

1.48 WAGERING AGREEMENT AND CONTINGENT CONTRACT The points of distinction between the two may be noted as follows : 1.

A wagering agreement is a promise to give money or money’s worth upon the determination or ascertainment of an uncertain event. A contingent contract, on the other hand, is a contract to do or not to do something if some event, collateral to such contract does or does not happen.

2.

In a wagering agreement the uncertain event is the sole determining factor, while in a contingent contract the event is only collateral.

3.

A wagering agreement is essentially of a contingent nature whereas a contingent contract may not be of a wagering nature.

4.

A wagering agreement is void whereas a contingent contract is valid.

5.

In a wagering agreement, the parties have no other interest in the subject matter of the agreement except the winning or losing of the amount of the wager. In other words, a wagering agreement is a game of chance. This is not so in case of a contingent contract.

1.49 SUMMARY Contingent Contracts are the contracts, which are conditional on some future event happening or not happening and are enforceable when the future event or loss occurs. (Section 31) Rules for enforcement (a) If it is contingent on the happening of a future event, it is enforceable when the event happens. The contract becomes void if the event becomes impossible, or the event does not happen till the expiry of time fixed for happening of the event. (b) If it is contingent on a future event not happening. It can be enforced when happening of that event becomes impossible or it does not happen at the expiry of time fixed for nonhappening of the event.

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THE INDIAN CONTRACT ACT, 1872 (c) If the future event is the act of a living person, any conduct of that person which prevents the event happening within a definite time renders the event impossible. (d) If the future event is impossible at the time of the contract is made, the contract is void ab initio. Quasi Contracts arise where obligations are created without a contract. The obligations which they give rise to are expressly enacted: (a) If necessaries are supplied to a person who is incapable of contracting, the supplier is entitled to claim their price from the property of such a person. (b) A person who is interested in the payment of money which another is bound to pay, and who therefore pays it, is entitled to be reimbursed by the other. (c) A person who enjoys the benefit of a non-gratuitous act is bound to make compensation. (d) A person who finds lost property may retain it subject to the responsibility of a bailee. (e) If money is paid or goods delivered by mistake or under coercion, the recipient must repay or make restoration.

1.50 1.

2.

MULTIPLE CHOICE QUESTIONS

The law of contract in India is contained in (a) Indian Contract Act, 1862

(b) Indian Contract Act, 1962

(c) Indian Contract Act, 1872

(d) Indian Contract Act, 1972

An agreement enforceable by law is a (a) Promise.

3.

(b) Contract.

(c) Obligation.

(d)

Lawful Promise.

A void agreement is one which is (a) Valid but not enforceable (b) Enforceable at the option of both the parties. (c) Enforceable at the option of one party (d) Not enforceable in a court of law.

4.

5.

An agreement which is enforceable by law at the option of one or more of the parties thereon but not at the option of the other or others is a (a) Valid Contract.

(b) Void Contract.

(c) Voidable Contract.

(d) Illegal Contract.

Which of the following is false? An offer to be valid must: (a) Intend to create legal relations. (b) Have certain & unambiguous terms.

58


(c) Contain a term the non-compliance of which would amount to acceptance. (d) Be communicated to the person to whom it is made. 6.

When the consent of a party is not free, the contract is (a) Void.

7.

(b) Voidable.

(c) Valid.

(d)

Illegal.

Which of the following is false? An acceptance: (a) Must be communicated.

(b) Must be absolute and unconditional.

(c) Must be accepted by a person having authority to accept. (d) May be presumed from silence of offeree. 8.

In case of illegal agreements, the collateral agreements are: (a) Valid.

9.

(b) Void.

(c) Voidable.

(d)

None of these.

An offer may lapse by: (a) Revocation.

(b) Counter Offer.

(c) Rejection of Offer by Offeree.

(d) All of these. 10.

A proposal when accepted becomes a (a) Promise.

11.

(b) Contract.

(c) Offer.

(d)

Acceptance.

Which of the following statement is true? (a) Consideration must result in a benefit to both parties. (b) Past consideration is no consideration in India. (c) Consideration must be adequate. (d) Consideration must be something, which a promisor is not already bound to do.

12.

Which of the following statement is false? Consideration: (a) Must move at the desire of the promisor. (b) May move from any person. (c) Must be illusory.

13.

(d) Must be of some value.

Which of the following statement is false? (a) Generally a stranger to a contract cannot sue. (b) A verbal promise to pay a time barred debt is valid. (c) Completed gifts need no consideration. (d) No consideration is necessary to create an agency.

14.

Consideration must move at the desire of (a) Promisor.

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(b) Promisee.

(c) Any other person. (d)

Any of these.

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Which of the following statement is true? (a) There can be a stranger to a contract. (b) There can be a stranger to a consideration. (c) There can be a stranger to a contract & consideration. (d) None of the above.

16.

Consideration may be (a) Past

17.

18.

19.

(b) Present

(d)

All of the above.

Consideration in simple term means: (a) Anything in return.

(b) Something in return.

(c) Everything in return.

(d) Nothing in return.

Which of the following is not an exception to the rule – No consideration, No contract (a) Compensation for involuntary services.

(b) Love & Affection.

(c) Contract of Agency.

(d) Gift.

Ordinarily, a minor’s agreement is (a) Void ab initio (b) Voidable.

20.

(c) Future

(c) Valid.

(d)

Unlawful.

A minor’s liability for ‘necessaries’ supplied to him; (a) Arises after he attains majority age. (b) Is against only minor’s property. (c) Does not arise at all.

21.

(d) Arises if minor gives a promise for it.

Which of the following statements is not true about minor’s position in a firm? (a) He cannot become a partner in an existing firm. (b) He can become a partner in an existing firm. (c) He can be admitted only to the benefits of any existing firm. (d) He can become partner on becoming a major.

22.

Which of the following statement is true? (a) A contract with a minor is voidable at the option of the minor. (b) An agreement with a minor can be ratified after he attains majority. (c) A person who is usually of an unsound mind cannot enter into contract even when he is of a sound mind. (d) A person who is usually of a sound mind cannot enter into contract when he is of unsound mind.

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23.

Consent is not said to be free when it is caused by (a) Coercion.

24.

26.

27.

28.

(c) Fraud.

(d)

All of these.

When the consent of a party is obtained by fraud, the contract is; (a) Void.

25.

(b) Undue Influence. (b) Voidable.

(c) Valid.

(d)

Illegal.

The threat to commit suicide amounts to (a) Coercion.

(b) Undue Influence.

(c) Misrepresentation.

(d) Fraud.

Moral pressure is involved in the case of (a) Coercion.



(d) Fraud.

A wrong representation when made without any intention to deceive the other party amounts to (a) Coercion.



(d) Fraud.

Which of the following statement is true? (a) A threat to commit suicide does not amount to coercion. (b) Undue influence involves use of physical pressure. (c) Ignorance of law is no excuse. (d) Silence always amounts to fraud.

29.

In case of illegal agreements, the collateral agreements are: (a) Valid

30.

32.

(c) Voidable

(d)

Any of these.

An agreement the object or consideration of which is unlawful, is (a) Void.

31.

(b) Void (b) Valid.

(c) Voidable.

(d)

Contingent.

An agreement is void if it is opposed to public policy. Which of the following is not covered by heads of public policy? (a) Trading with an enemy.

(b) Trafficking in public offices.

(c) Marriage brokerage contracts.

(d) Contracts to do impossible acts.

On the valid performance of the contractual obligations by the parties, the contract (a) is discharged.

(b) becomes enforceable.

(c) becomes void.

(d) none of these.

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34.

Which of the following persons can perform the contract? (a) Promisor alone.

(b) Legal representatives of promisor.

(c) Agent of the promisor.

(d) All of these.

A, B and C jointly promised to pay Rs. 60,000 to D. Before performance of the contract, C dies. Here, the contract (a) becomes void on C’s death. (b) should be performed by A and B along with C’s legal representatives. (c) should be performed by A and B alone. (d) should be renewed between A, B and D.

35.

A contract is discharged by novation which means the (a) cancellation of the existing contract. (b) change in one or more terms of the contract. (c) substitution of existing contract for a new one. (d) none of these.

36.

A contract is discharged by rescisson which means the (a) change in one or more terms of the contract. (b) acceptance of lesser performance. (c) abandonment of rights by a party. (d) cancellation of the existing contract.

37.

38.

When prior to the due date of performance, the promisor absolutely refuses to perform the contract, it is known as (a) abandonment of contract.

(b) remission of contract.

(c) actual breach of contract.

(d) anticipatory breach of contract.

In case of anticipatory breach, the aggrieved party may treat the contract (a) as discharged and bring an immediate action for damages. (b) as operative and wait till the time for performance arrives. (c) exercise option either (a) or (b).

39.

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(d) only option (a) is available.

In case of breach of contract, which of the following remedy is available to the aggrieved party? (a) Suit for rescission.

(b) Suit for damages.

(c) Suit for specific performance.

(d) All of these.


40.

41.

42.

43.

Sometimes, a party is entitled to claim compensation in proportion to the work done by him. It is possible by a suit for (a) damages

(b) injunction

(c) quantum meruit

(d) none of these.

Generally, the following damages are not recoverable? (a) Ordinary damages.

(b) Special damages.

(c) Remote damages.

(d) Nominal damages.

A contract dependent on the happening or non-happening of future uncertain event, is a (a) Uncertain contract.

(b) Contingent contract.

(c) Void contract.

(d) Voidable contract.

A contingent contract is (a) Void

44.

45.

(c) Valid

(d)

Illegal

A contingent contract dependent on the happening of future uncertain event can be enforced when the event (a) happens

(b) becomes impossible

(c) does not happen

(d) either of these.

A agrees to pay Rs. One lakh to B if he brings on earth a star from sky. This is a contingent contract and (a) Illegal

46.

(b) Voidable

(b) Valid

(c) Voidable

(d)

Void.

Which of the following statements is true (a) an agreement enforceable by law is a contract (b) an agreement is an accepted proposal (c) both (a) and (b)

47.

(d) none of these.

A voidable contract is one which (a) can be enforced at the option of aggrieved party (b) can be enforced at the option of both the parties (c) cannot be enforced in a court of law (d) courts prohibit.

48.

On the acceptance of an offer by a offeree, (a) Only the acceptor becomes bound by accepting the offer. (b) Only the offeror becomes bound as his terms are accepted.

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THE INDIAN CONTRACT ACT, 1872 (c) Both the acceptor and offeree becomes bound by the contract. (d) None of these. 49.

50.

51.

A, by a letter dated 25th December, 1998, offers to sell his house to B for Rs. 10 lakhs. The letter reaches B on 27th December, 1998, who posts his acceptance on 28th December, 1998 which reaches A on 30th December, 1998. Here, the communication of offer is complete on (a) 25th December, 1998

(b) 27th December, 1998

(c) 28th December, 1998

(d) 30th December, 1998

In the above question, the communication of acceptance is complete against A on 28th December, 1998, and against B on (a) 25th December, 1998

(b) 27th December, 1998

(c) 28th December, 1998

(d) 30th December, 1998

As a general rule, an agreement made without consideration is (a) void

52.

55.

(b) valid

(b) valid

unlawful

(c) voidable

(d)

unlawful

(c) persons disqualified by law

(d) all of these.

For the purposes of entering into a contract, a minor is a person who has not completed the age of (b) 18 years

(c) 20 years

(d)

21 years

(d)

illegal

A contract with the minor, which is beneficial for him, is (c) valid

Which of the following persons do not fall under the category of persons of unsound mind? (b) lunatics

(c) drunken persons (d)

alien.

Which of the following elements does not affect the free consent of the parties (a) coercion

64

(d)

(b) persons of unsound mind

(a) idiot 58.

(c) voidable

(a) minors

(a) void ab initio (b) voidable 57.

unlawful

Which of the following persons are not competent to contract?

(a) 16 years 56.

(d)

An agreement made with free consent to which the consideration is lawful but inadequate, is (a) void

54.

(c) valid

A agrees to sell his car worth Rs. 100,000 to B for Rs. 20,000 only, and A’s consent was obtained by coercion. Here, the agreement is (a) void

53.

(b) voidable

(b) fraud

(c) incompetency

(d)

undue influence


59.

When the consent of a party is obtained by coercion undue influence, fraud or misrepresentation, the contract is (a) void

60.

61.

62.

(c) valid

(d)

illegal

A threatens to kill B if he does not agree to sell his scooter to him for Rs. 1000 only. Here B’s consent is obtained by (a) undue influence

(b) fraud

(c) coercion

(d) none of these

When the consent to an agreement is obtained by coercion, the agreement is voidable at the option of (a) either party to the agreement

(b) a party whose consent was so obtained

(c) a party who obtained the consent

(d) none of these.

Where one party is in a position to dominate the will of another and uses his superior position to obtain the consent of a weaker party, the consent is said to be obtained by (a) coercion

63.

(b) voidable

(b) undue influence (c) fraud

(d)

misrepresentation.

Which of the following acts does not fall under the categories of fraud? (a) Intentional false statement of facts (b) Active concealment of facts (c) Innocent false statement (d) Promise made without intention to perform.

64.

Where the consent of a party is obtained by misrepresentation, the contract is (a) valid

65.

(b) void

(c) voidable

(d)

illegal

Which of the following statements is false? (a) A contract is not voidable if fraud or misrepresentation does not induce the other party to enter into a contract. (b) A party cannot complain of fraudulent silence or misrepresentation if he had the means of discovering the truth with ordinary means. (c) In case of fraud or misrepresentation, aggrieved party can either rescind or affirm the contract. (d) A party who affirms the contract, can also change his option afterwards if he so decides.

66.

Where the consent of both the parties is given by mistake, the contract is (a) void

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(b) valid

(c) voidable

(d)

illegal

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As per section 20, the contract is void on account of bilateral mistake of fact. But as per Section 22, if there is mistake of only one party, then the contract is (a) void

68.

71.

72.

illegal

(b) valid

(c) voidable

(d)

illegal

(d) misrepresentation

The consideration or object of an agreement is considered unlawful, if it is (a) forbidden by law

(b) fraudulent

(c) immoral

(d) all of these.

A agrees to pay Rs. 5 lakhs to B if he (B) procures an employment for A in Income Tax Department. This agreement is (b) valid

(c) voidable

(d)

contingent.

(d)

contingent.

A agrees to pay Rs. 50,000 to B if he kills C. The agreement is (b) valid

(c) voidable

An agreement in restraint of marriage, i.e., which prevents a person from marrying, is (b) voidable

(c) void

(d)

contingent

An agreement in restraint of marriage is valid in case of following persons. (b) Educated

(c) Married

(d)

None of these.

An agreement, which prevents a person from carrying a lawful business, is (a) Valid

77.

(d)

(c) fraud

(a) Minors 76.

(c) voidable

(b) mistake of Indian law

(a) valid 75.

(b) valid

(a) mistake of fact

(a) void 74.

illegal

A mistake as to a law not in force in India has the same effect as:

(a) void 73.

(d)

A contract made by mistake about some foreign law, is (a) void

70.

(c) voidable

A contract made by mistake about the India Law, is (a) void

69.

(b) valid

(b) Void

(c) Voidable

(d)

Contingent

An agreement in restraint of legal proceedings is void. It does not cover an agreement which (a) Restricts absolutely the parties from enforcing their legal rights (b) Cuts short the period of limitation (c) Discharges a party from liability or extinguishes the rights of a party (d) Provides for a reference to arbitration instead of court of law.

78.

A agrees to sell his car to B at a price which B may be able to pay. This agreement is (a) void

66

(b) valid

(c) voidable

(d)

contingent


79.

80.

An agreement to pay money or money’s worth on the happening or non-happening of a specified uncertain event, is a (a) wagering agreement

(b) contingent contract

(c) quasi contract

(d) uncertain agreement.

An agreement to do an illegal act e.g., to share the earnings of a smuggling business, is (a) Valid

81.

83.

(d)

Contingent

(b) valid

(c) voidable

(d)

illegal

A contingent contract dependent on the non-happening of a future uncertain event becomes void when such event (a) happens

(b) does not become impossible

(c) does not happen

(d) both (a) and (b)

A agrees to pay Rs. 1,000 to B if a certain ship returns within a year. However, the ship sinks within the year. In this case, the contract becomes (a) valid

84.

(c) Voidable

Where an agreement consists of two parts once legal and the other illegal, and the legal part is separable from the illegal one, such legal part is (a) void

82.

(b) Void

(b) void

(c) voidable

(d)

illegal

A contingent contract dependent on the non-happening of specified uncertain event within fixed time can be enforced if the event (a) does not happen within fixed time (b) becomes impossible before the expiry of fixed time (c) happens within the fixed time (d) both (a) and (b)

85.

The basis of ‘quasi contractual relations’ is the (a) existence of a valid contract between the parties (b) prevention of unjust enrichment at the expense of others (c) Provisions contained in Section 10 of the Contract Act (d) Existence of a voidable contract between the parties.

86.

Sometimes, a person finds certain goods belonging to some other persons. In such a case, the finder (a) becomes the owner of the goods and can use them (b) is under a duty to trace the true owner and return the goods (c) can sell the perishable goods if true owner cannot be found (d) both (b) and (c)

MERCANTILE

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A, B and C jointly promised to pay Rs. 60,000 to D. A was compelled by D to pay the entire amount of Rs. 60,000. Here (a) A can file a suit against D for recovery of amount exceeding his share. (b) A is entitled to recover Rs. 20,000 each from B and C (c) On payment by A, the contract is discharged and B and C are also not liable to A. (d) D is not justified here, and is liable to refund the entire amount to A.

88.

In commercial transactions, time is considered to be of the essence of the contract, and if the party fails to perform the contract within specified time, the contract becomes: (a) voidable at the option of the other party (b) void and cannot be enforced (c) illegal for non-compliance of legal terms (d) enforceable in higher court only.

89.

90.

Where the performance of a promise by one party depends on the prior performance of promise by the other party, such reciprocal promises fall under the category of (a) Mutual and concurrent

(b) Conditional and dependent

(c) Mutual and independent

(d) Both (a) and (b)

When after the formation of a valid contract, an event happens which makes the performance of contract impossible, then the contract becomes: (a) void

91.

(b) voidable

(c) valid

(d)

illegal

A party entitled to rescind the contract, loses the remedy where (a) he has ratified the contract (b) third party has acquired right in good faith (c) contract is not separable and rescission is sought of a part only (d) all of these.

92.

The special damages, i.e., the damages which arise due to so e special or unusual circumstances (a) Are not recoverable altogether (b) Are illegal being punitive in nature (c) Cannot be claimed as a matter of right (d) Can be claimed as a matter of right.

93.

Which of the following statements is correct? (a) Ordinary damages are recoverable. (b) Special damage are recoverable only if the parties knew about them.

68


(c) Remote or indirect damages are not recoverable. (d) All of these. 94.

95.

When offer is made to a definite person, it is known as (a) General Offer

(b) Cross Offers

(c) Counter Offer

(d) Special Offer

Standing Offer means (a) Offer allowed to remain open for acceptance over a period of time. (b) Offer made to the public in general. (c) When the offeree offers to qualified acceptance of the offer. (d) Offer made to a definite person.

96.

When the offeree offers to qualified acceptance of the offer subject to modifications and variations he is said to have made a (a) Standing, open or Continuing offer. (b) Counter Offer. (c) Cross Offers

97.

What is legal terminology for the doing or not doing of something which the promisor desires to be done or not done? (a) Desires.

98.

(d) Special Offer

(b) Wishes.

(c) Consideration.

(d)

Promise.

Can a person who is usually of unsound, but occasionally of sound mind, make a contract? (a) Yes, he can always make a contract. (b) Yes, but only when he is of sound mind. (c) No, he cannot make a contract.

99.

(d) Can’t be determined.

A and B both believe that a particular kind of rice is being sold in the market at Rs. 3,000 per quintal and A sells rice of that kind to B at Rs.3,000 per quintal. But, in fact, the market price was Rs. 4,000. The contract is (a) Valid.

(b) Void.

(c) Voidable.

(d)

Illegal.

100. A sells the goodwill of his business to B and agrees with him to refrain from carrying on a similar business within specified local limits. This contract is (a) Valid.

(b) Void.

(c) Voidable.

(d)

Illegal.

101. R, an optical surgeon, employs S as the assistant for a term of three years and S agrees not to practice as a surgeon during this period. This contract is (a) Valid.

(b) Void.

(c) Voidable.

(d)

Illegal.

(d)

Illegal.

102. Agreement-the meaning of which is uncertain is (a) Valid.

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LAWS

(b) Void.

(c) Voidable.

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THE INDIAN CONTRACT ACT, 1872 103. A agrees to pay Rs. 500 to B if it rains, and B promises to pay a like amount to A if it does not rain, this agreement is called (a) Quasi Contract

(b) Contingent Contract.

(c) Wagering Agreement.

(d) Voidable Contract.

104. Suppose the time fixed for performance of the contract has expired but the time is not essential. What is the remedy of the promisee in the circumstances? (a) Can rescind the contract. (c) No remedy available.

(b) To claim compensation. (d) Can’t be determined.

105. A ___________ agreement is one, which is enforceable at the option of one party. (a) Voidable

(b) Void

(c) Valid

(d)

Illegal

(d)

Illegal.

106. Agreement-the meaning of which is uncertain is ________. (a) Valid.

(b) Void.

(c) Voidable.

107. In case of illegal agreements, the collateral agreements are ________. (a) Voidable

(b) Void

(c) Valid

(d)

Can’t be said.

(d)

Past and Present

(d)

Promise

(d)

All the things.

108. ________ consideration is no consideration in England. (a) Past.

(b) Present

(c) Future

109. Consideration must move at the desire of the___________. (a) Promisor.

(b) Promisee.

(c) Any person

(d) Promisee or promissory or any other person 110. There can be a stranger to a _____________. (a) Contract

(b) Consideration

(c) Agreement

111. A minor is liable for the ________________ supplied to him. (a) Necessaries.

(b) Luxuries

(c) Necessities

112. When the consent of a party is obtained by fraud, the contract is ____________. (a) Valid

(b) Void

(c) Illegal

(d)

Voidable

113. An agreement the object or consideration of which is unlawful, is ____________. (a) Valid

(b) Void

(c) Voidable

(d)

Can’t be said.

114. R, an optical surgeon, employs S as the assistant for a term of three years and S agrees not to practice as a surgeon during this period. This contract is ____________. (a) Valid.

(b) Void.

(c) Voidable.

(d)

Illegal.

115. Implied contract, even if not in writing or express words, is perfectly ________if other conditions are satisfied. (a) Void 70

(b) Valid

(c) Voidable

(d) Illegal. COMMON PROFICIENCY TEST

116. Threat to commit suicide amounts to 1. Coercion 2. Offence under the Indian Penal Code 3. Undue Influence 4. Fraud a. 1 & 2

b.

2&3

c.

3&4

d.

1&4

117. Which of the following are covered under the heads Agreements Opposed to Public Policy? (1) Trading with enemy (2) Trafficking in Public Offices (3) Marriage Brokerage Contracts (4) Contracts to do impossible acts a. 1, 2, 3

b.

2, 3, 4

c.

1, 2, 4

d.

1, 2, 3, 4.

118. The consideration of an agreement is considered unlawful, if it is (1) forbidden by law (2) fraudulent (3) immoral (4) Very expensive. a. 1, 2, 3

b.

2, 3, 4

c.

1, 2, 4

d.

1, 2, 3, 4.

d.

1, 2, 3, 4.

119. Contract caused by which of the following is voidable: (1) Fraud (2) Mis-representation (3) Coercion (4) Bilateral Mistake. a. 1, 2, 3

b.

2, 3, 4

c.

1, 2, 4

120. Who among the following is not disqualified by law to enter in to contract? 1. A major person. 2. A lunatic. 3. Insolvent person. 4. Diplomatic staff of foreign states. a. 1 & 2

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b.

2&3

c.

3&4

d.

1 & 4.

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THE INDIAN CONTRACT ACT, 1872 121. Which of the following is true with respect to minor entering a contract? 1. An agreement with or by a minor is void ab initio. 2. A minor can be a beneficiary of a contract. 3. The contracts involving a minor as a beneficiary may be enforced at the option of the third party. 4. A minor can ratify a contract on attaining majority. a. 1 & 2

b.

2&3

c.

3&4

d.

1 & 4.

122. Which of the following is/are not competent to enter into a contract? 1. A person of the age of majority. 2. A minor. 3. A person who is not capable of understanding the contract at the time of its making. 4. A lunatic during lucid intervals (period of soundness). a. 1 & 2

b.

2&3

c.

3&4

d.

1 & 4.

123. Which of the following statements is true? 1. Even if a proposal is not accepted properly it becomes a valid contract. 2. The agreements which are against the public policy can be enforced if the parties are willing to contract. 3. For breach of contract a party can claim compensation for loss or damage. 4. Two are more persons are said to consent when they agree upon the same thing in the same sense. a. 1 & 2

b.

2&3

c.

3&4

d.

1 & 4.

124. Which of the following is/are false? 1. Consideration must be real. 2. Consideration can be inadequate. 3. A promise to do something which one is already bound to do by law, will be treated as good consideration. 4. Consideration must be adequate. a. 1 & 2

b.

2&3

c.

3&4

d.

1 & 4.

125. Which of the following is/are the essential elements of a valid offer? 1. Offeror must have an intention to be bound by his offer. 2. Offer must be made to a specific person/party and not to public at large. 3. Must be definite. 4. Offer can be vague. 72


a. 1 & 3

b.

2&3

c.

3&4

d.

1 & 4.

126. Which of the following agreements is/are void? 1. Agreement in restraint of legal proceedings. 2. Agreement to stifle prosecution. 3. Agreement by an outgoing partner with his partners not to carry on any business within a specified period or within specified local limits. 4. Contingent Contracts. a. 1 & 2

b.

2&3

c.

3&4

d.

1 & 4.

127. Which of the following offers do not constitute a valid offer? 1. An auctioneer displays a T.V. set before a gathering in an auction sale. 2. Ram who is in possession of three cars purchased in different years says ‘I will sell you a car’. 3. A says to B, “Will you purchase my motor cycle for Rs. 20,000”? 4. Ram communicates to Shyam that he will sell his car for Rs. 1,50,000. a. 1 & 2

b.

2&3

c.

3&4

d.

1 & 4.

d.

1 & 4.

128. Which of the following agreements are void? 1. Agreements made under the unilateral mistake of fact. 2. Agreements made under the bilateral mistake of fact. 3. Agreements the consideration of which is unlawful. 4. Contingent agreement. a. 1 & 2

b.

2&3

c.

3&4

129. Which of the following is a requirement for misrepresentation to exist? 1. Misrepresentation should relate to a material fact. 2. The person making a misrepresentation should believe it to be true.. 3. It must be made with an intention to deceive the other party. 4. The person making a misrepresentation should not believe it to be true. a. 1 & 2

b.

2&3

c.

3&4

d.

1 & 4.

130. A contracts with B to buy a necklace, believing it is made of pearls whereas in fact it is made of imitation pearls of no value. B knows that A is mistaken and takes no steps to correct the error. Now A wants to cancel the contract on the basis of fraud. Which of the following statement is correct? a. A can cancel the contract alleging fraud. b. A cannot cancel the contract. MERCANTILE

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THE INDIAN CONTRACT ACT, 1872 c. A can cancel the contract alleging undue influence. d. A can claim damages. 131. Mr. J invited all his close friends for a dinner on the occasion of the successful completion of his research. He wanted to take good care of his friends and accordingly be arranged a very lavish dinner in a star hotel. On the day, to his shock and surprise the friends could not turn up to the dinner, consequently all the dishes and money were wasted. He was terribly disappointed. In the above situation which of the following remedies is/are available to Mr. J for the loss caused to him? a. Mr. J can file a suit against his friends for not attending to the dinner. b. Mr. J cannot have any remedy. c. Mr. J can recover the expenses incurred for the arrangements from his friends. d. Mr. J can file a suit for the special damages. 132. G paid Rs. 1,00,000 to H to influence the head of the Government Organisation in order to provide him some employment. On his failure to provide the job, G sued H for recovery of the amount. Which of the following is correct? a. The contract is valid and G can recover the amount from H. b. The contract is void as it is opposed to public policy and G cannot recover. c. G can recover the amount with interest. d. G can recover the amount of Rs. 1,00,000 and damages. 133. M a popular singer, enters into a contract with the manager of a theatre, to sing at the theatre two evenings a week for the next two months and the manager of the theatre agrees to pay him at the rate of Rs. 1000 for each performance. From the sixth evening onwards, M absents himself from the theatre. In this context, which of the following remedies is/are available to the manager of the theatre against M? a. He is at liberty to put an end to the contract. b. He cannot put an end to the contract. c. He is entitled to compensation for the damages sustained by him through M on his failure to sing from the sixth evening onwards. d. Both (a) and (c) above. 134. Ram, Rohit and Kiran jointly borrowed Rs. 2,00,000 from Rahim by executing a promissory note. Rohit and Kiran are not traceable. Rahim wants to recover the entire amount from Ram. Ram objected this move by saying he is liable to pay 1/3 of the debt only. Which of the following statement(s) is correct? a. Rahim can recover the entire amount from Ram. b. Rahim can only recover 1/3 of Rs. 2,00,000 from Ram. c. Rahim cannot recover any amount from Ram. d. The promissory note is not executable against Ram as Rohit and Kiran are not traceable. 74


135. At the time of marriage between A and B, A’s father promised to B’s parents that he will pay five thousand rupees per month to B after her marriage with his son. On his failure to pay the amount B wants to sue A’s father for the amount promised by him at the time of her marriage with A. Which of the following statement(s) is correct? a. B cannot sue A’s father as the contract is void for lack of consideration. b. B cannot sue A’s father under the doctrine of privity of contracts. c. B can sue A’s father for breach of contract. d. B cannot sue A’s father as the contracts made at the time of marriage are not enforceable by law. 136. V purchased a used computer from P thinking it as a computer imported from USA, P failed to disclose the fact to V. On knowing the fact V wants to repudiate the contract. Which of the following statement(s) is correct? a. V can repudiate the contract on the ground of fraud. b. V can repudiate the contract on the ground of misrepresentation. c. V cannot repudiate the contract. d. V can repudiate the contract on the ground of mistake. 137. An auctioneer in Mumbai advertised in a newspaper that a sale of office furniture would be held on December 23, 2003. a broker came from Hyderabad to attend the auction, but all the furniture was withdrawn. The broker from Hyderabad sued the auctioneer for loss of his time and expenses. Which of the following statement(s) is correct? a. The broker can get damages from the auctioneer for loss of his time and expenses. b. The broker will not get damages from the auctioneer for loss of his time and expenses. c. An invitation to make offer is a valid offer. d. A declaration of intention by a person will give right of action to another. 138. Ankit, aged 17 years, falsely representing himself to be of 22 years, enters into an agreement to sell his property to Praveen and receives from Praveen a sum of Rs. 10,00,000 in advance. Out of this sum, Ankit buys an imported car worth Rs. 5,50,000 and spends the rest on a pleasure trip to France. After Ankit attained majority, Praveen sues him for the conveyance of the property or, in the alternative, for the refund of Rs. 10,00,000 and damages. The agreement between Ankit and Praveen is: a. Void ab initio as it is a contract with a minor. b. Voidable at the option of Praveen. c. Would be valid if Ankit ratifies the agreement on attainting the age of majority. d. Valid as Ankit has sold his own property for personal use.

MERCANTILE

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THE INDIAN CONTRACT ACT, 1872 139. Match the following: (i)

Void Contract

(a) In case of this collateral agreements are void.

(ii)

Voidable Contract

(b) Not enforceable in a court of law.

(iii) Illegal Contract

(c) An agreement enforceable by law at the option of one or more of the parties thereon but not at the option of the other or others.

(iv) Valid Contract

(d) Enforceable at the option of both the parties.

140. Match the following: (i)

Executed Contract

(a) Contract in which only one party has to perform his promise.

(ii)

Executory Contract

(b) Consideration for the promise in a contract is already given.

(iii) Unilateral Contract

(c) Promise in a contract is outstanding on part of both the parties.

(iv) Bilateral Contract

(d) Reciprocal promises are to be performed in future.

141. Match the following: (i)

General Offer

(a) Exchanging identical offers by two parties in ignorance.

(ii)

Special Offer

(b) Offer made to the public in general.

(iii) Cross Offers

(c) Offer allowed to remain open for acceptance over a period of time.

(iv) Continuing Offer

(d) Offer made to a definite person.

142. Match the following:

76

(i)

Coercion

(a) Involves Moral Pressure.

(ii)

Undue Influence

(b) Person making false representation does not believe it to be true.

(iii) Fraud

(c) Involves Physical force.

(iv) Misrepresentation

(d) The person making false representation believes it to be true.


1.51 ANSWERS TO MULTIPLE CHOICE QUESTIONS 1.

(c)

2.

(b)

3.

(d)

4.

(c)

5.

(c)

6.

(b)

7.

(d)

8.

(b)

9.

(d)

10.

(a)

11.

(d)

12.

(c)

13.

(b)

14.

(a)

15.

(b)

16.

(d)

17.

(b)

18.

(a)

19.

(a)

20.

(b)

21.

(b)

22.

(d)

23.

(d)

24.

(b)

25.

(a)

26.

(b)

27.

(c)

28.

(c)

29.

(b)

30.

(a)

31.

(d)

32.

(a)

33.

(d)

34.

(b)

35.

(c)

36.

(d)

37.

(d)

38.

(c)

39.

(d)

40.

(c)

41.

(c)

42.

(b)

43.

(c)

44.

(a)

45.

(d)

46.

(c)

47.

(a)

48.

(c)

49.

(b)

50.

(d)

51.

(a)

52.

(c)

53.

(b)

54.

(d)

55.

(b)

56.

(c)

57.

(d)

58.

(c)

59.

(b)

60.

(c)

61.

(b)

62.

(b)

63.

(c)

64.

(c)

65.

(d)

66.

(a)

67.

(b)

68.

(b)

69.

(a)

70.

(a)

71.

(d)

72.

(a)

73.

(a)

74.

(c)

75.

(a)

76.

(b)

77.

(d)

78.

(a)

79.

(a)

80.

(b)

81.

(b)

82.

(d)

83.

(b)

84.

(d)

85.

(b)

86.

(d)

87.

(b)

88.

(a)

89.

(b)

90.

(a)

91.

(d)

92.

(c)

93.

(d)

94.

(d)

95.

(a)

96.

(b)

97.

(c)

98.

(b)

99.

(a)

100.

(a)

101.

(a)

102.

(b)

103.

(c)

104.

(b)

105.

(a)

106.

(b)

107.

(b)

108.

(a)

109.

(a)

110.

(b)

111.

(a)

112.

(d)

113.

(b)

114.

(a)

115.

(b)

116.

(a)

117.

(a)

118.

(a)

119.

(a)

120.

(d)

121.

(a)

122.

(b)

123.

(c)

124.

(c)

125.

(a)

126.

(a)

127.

(a)

128

(b)

129.

(a)

130.

(b)

131.

(b)

132.

(b)

133.

(d)

134.

(a)

135.

(c)

136.

(c)

137.

(b)

138.

(a)

139.

(i) (b)

(ii) (c) (iii) (a)

(iv) (d)

140.

(i) (b)

(ii) (d) (iii) (a)

(iv) (c)

141.

(i) (b)

(ii) (d) (iii) (a)

(iv) (c)

142.

(i) (c)

(ii) (a) (iii) (b)

(iv) (d)

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LAWS

77

NOTES

THE SALE OF GOODS ACT, 1930

CHAPTER – 2 INTRODUCTION The Law relating to this statute was contained in the Chapter VII of the Indian Contract Act, 1872. Subsequently, it was separated with the Indian Sale of Goods Bill, which received its assent on 15th March 1930. It came into force on the 1st of July, 1930 as the Indian Sale of Goods Act, 1930. In due course, the word “Indian” was omitted by the Indian Sale of Goods (Amendment) Act, 1963 (33 of 1965) and it became “The Sale of Goods Act, 1930”. This Act lays down special provisions governing the contract of sale of goods but it does not altogether render the general law of contract inapplicable. The provisions of the Contract Act, in so far as they are not inconsistent with the express provisions of Sale of Goods Act, shall apply to contracts for the sale of goods, e.g., provisions regarding the capacity of parties, legality of contract, etc. The Sale of Goods Act, 1930, deals with the ‘sale’ but not with ‘mortgage’ or ‘pledge’, which comes within the purview of the Transfer of Property Act and the Indian Contract Act, respectively. Secondly, the Act deals with ‘goods’ but not with all movable property, e.g., actionable claims and money. Provisions relating to sale of immovable property and the transfer of actionable claims are contained in the Transfer of Property Act, 1882. In this chapter we shall study the provisions of the Act in the following order: Unit 1. Formation of the Contract of Sale. Unit 2. Conditions and Warranties. Unit 3. Transfer of Ownership and Delivery of Goods. Unit 4. Unpaid Seller.

CHAPTER – 2


Unit 1 Formation of the Contract of Sale

THE SALE OF GOODS ACT, 1930 Learning Objectives

Definitions of certain terms,

Meaning of contract of sale,

Distinctions of sale from other similar contracts,

Formalities of contract of sale,

Subject matter of contract of sale,

Ascertainment of price for the contract of sale,

Stipulation as to time.

Sale of goods is one of the specific form of contracts recognised and regulated by law in India. Sale is a typical bargain between the buyer and seller. The Sale of Goods Act, 1930, leaves the parties to modify the provisions of the law by express stipulations. However, in some places this freedom is severely restricted or negativated.

2.1

DEFINITIONS

Section 2 of the Sale of Goods Act, 1930, defines the terms which have been frequently used in the Act, which are as follows – (a) Buyer and Seller: ‘Buyer’ means a person who buys or agrees to buy goods [Sub Section (1)]; ‘seller’ means a person who sells or agrees to sell goods [Sub Section (13)]. The two terms, ‘buyer’ and ‘seller’ are complementary and represent the two parties to a contract of sale of goods. Both the terms are, however, used in a sense wider than their common meaning. Not only the person who buys but also the one who agrees to buy is a buyer. Similarly, a ‘seller’ means not only a person who sells but also a person who agrees to sell. (b) Goods and other related terms : (i)

“Goods” means every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land, which are agreed to be severed before sale or under the contract of sale; [Sub Section (7)]. This is a wider definition than contained in the English law, which does not consider ‘stock’ and ‘shares’ as goods, though it includes a ship. ‘Actionable claims’ are claims, which can be enforced only by an action or suit, e.g., debt. A debt is not a movable property or goods.

(ii) Existing goods are such goods as are in existence at the time of the contract of sale, i.e., those owned or possessed by the seller (Section 6). (iii) Future goods means goods to be manufactured or produced or acquired by the seller after making the contract of sale [Section 2 (6)]. Thus, under the Act, a contract of sale of future goods, e.g., 1,000 quintals of potatoes to be grown on A’s field, is not illegal, though the actual sale of future goods is not possible. This is an example of agreement to sell.

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(iv) Specific goods means goods identified and agreed upon at the time the contract of a sale has been made. Specific goods may be distinguished from ‘generic’ or unascertained’ goods defined only by description and not identified and agreed upon. Ascertained goods have been held to mean goods identified in accordance with the agreement after the contract of sale has been made. (v) Goods are said to be in a deliverable state when they are in such a condition that the buyer would, under contract, be bound to take delivery of them, e.g., when A contracts to sell timber and makes bundles thereof, the goods will be in a deliverable state after A has put the goods in such a condition. (c) Delivery - its forms and derivatives: Delivery means voluntary transfer of possession by one person to another [(Section 2(2)]. As a general rule, delivery of goods may be made by doing anything, which has the effect of putting the goods in the possession of the buyer, or any person authorised to hold them on his behalf. Delivery may be of three kinds, which may be enumerated as follows: (i)

Actual delivery: It is actual when the goods are physically delivered to the buyer.

(ii) Constructive delivery: When it is affected without any change in the custody or actual possession of the thing as in the case of delivery by attornment (acknowledgement) e.g., where a warehouseman holding the goods of A agrees to hold them on behalf of B, at A’s request. (iii) Symbolic delivery: When there is a delivery of a thing in token of a transfer of something else, i.e., delivery of goods in case of transit may be made by handing over documents of title to goods, like bill of lading or railway receipt or delivery orders or the key of a warehouse containing the goods is handed over to buyer. (d) “Document of title to goods” includes bill of lading, dock-warrant, warehouse keeper’s certificate, wharfingers’ certificate, railway receipt, multimodal transport document, warrant or order for the delivery of goods and any other document used in the ordinary course of business as proof of the possession or control of goods or authorising or purporting to authorise, either by endorsement or by delivery, the possessor of the document to transfer or receive goods thereby represented by it. Examples of such documents are bill of lading, dock warrant, warehouse keeper’s certificate, wharfinger’s certificate, railway receipt, warrant, an order of delivery of goods. The list is only illustrative and not exhaustive. Any other document which has the above characteristics also will fall under the same category. Though a bill of lading is a document of title, a mate’s receipt is not; it is regarded at law as merely an acknowledgement for the receipt of goods. A document amounts to a document of title only where it shows an unconditional undertaking to deliver the goods to the holder of the document. However, there is a difference between a ‘document showing title’ and ‘document of title’. A share certificate is a ‘document’ showing title but not a document of title. It merely shows that the person named in the share certificate is entitled to the share represented by it, but it does not allow that person to transfer the share mentioned therein by mere endorsement on the back of the certificate and the delivery of the certificate. MERCANTILE

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THE SALE OF GOODS ACT, 1930 (e) Mercantile Agent [Sub-section (9)]: It means an agent having in the customary course of business as such agent an authority either to sell goods or to consign goods for the purpose of sale or to buy goods or to raise money on the security of the goods. Examples of such kind of agents are auctioneers, factors, brokers, etc. (f)

Property [Sub-section (11)]: It means the general property (right of owner-ship-in goods) and not merely a special property. Note that the ‘general property’ in goods is to be distinguished from a ‘special property’. It is quite possible that the general property in a thing may be in one person and a special property in the same thing may be in another e.g., when an article is pledged. The general property in a thing may be transferred, subject to the special property continuing to remain with another person i.e., the pledgee who has a right to retain the goods pledged till payment of the stipulated dues.

(g) Insolvent:- A person is said to be insolvent when he ceased to pay his debts in the ordinary course of business, or cannot pay his debts as they become due, whether he has committed an act of insolvency or not; [Sub-section (8)].

2.2

CONTRACT OF SALE

Contract of Sale of Goods is a contract between buyer and seller intending to exchange property in goods for a price. Section 4 (1) of the Sale of Goods Act, 1930 defines the term ‘Contract of Sale’ as – a contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. The definition as above reveals important elements of transfer of ownership for a price. Here, there are two parties to a contract who are willing to exchange their goods or services to gain a mutual benefit called price.

2.3

ESSENTIALS OF CONTRACT OF SALE

The following elements must co-exist so as to constitute a contract of sale of goods under the Sale of Goods Act, 1930. (i)

There must be at least two parties.

(ii) The subject matter of the contract must necessarily be goods. (iii) A price in money (not in kind) should be paid or promised. (iv) A transfer of property in goods from seller to the buyer must take place. (v) A contract of sale must be absolute or conditional [Section 4(2)]. (vi) All other essential elements of a valid contract must be present in the contract of sale.

2.4

SALE AND AN AGREEMENT TO SELL

In the Sale of Goods, the property is transferred from seller to the buyer immediately. The term Sale is defined in the Section 4(3) of the Sale of Goods Act, 1930 as – “where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale.”

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In an agreement to sell the ownership of the goods is not transferred immediately. It is intending to transfer at a future date upon the completion of certain conditions thereon. The term is defined in Section 4(3) of the Sale of Goods Act, 1930, which is as follows – where under a contract of sale the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell. Thus, whether a contract of sale of goods is an absolute sale or an agreement to sell, depends on the fact whether it contemplates immediate transfer from the seller to the buyer or the transfer is to take place at a future date.

2.5 DISTINCTION BETWEEN SALE AND AN AGREEMENT TO SELL The differences between the two are as follows: Agreement to sell

Sale 1.

The property in the goods passes to the buyer and along therewith the risk.

1.

Since property in the goods does not pass to the buyer, the risk also does not pass to him.

2.

It is an executed contract. i.e. contract for which consideration has been paid.

2.

It is an executory contract, i.e. contract for which consideration is to be paid at a future date.

3.

The seller can sue the buyer for the price of the goods because of the passage of the property therein to the buyer.

3.

The aggrieved party can sue for damages only and not for the price, unless the price was payable at a stated date.

4.

A subsequent loss or destruction of the goods is the liability of the buyer.

4.

Such loss or destruction is the liability of the seller.

5.

Breach on the part of the seller gives the buyer double remedy; a suit for damages against the seller and a proprietary remedy of recovering the goods from third parties who bought them.

5.

The seller, being still the owner of the goods, may dispose of them as he likes, and the buyer’s remedy would be to file a suit for damages only.

2.6 SALE DISTINGUISHED FROM OTHER SIMILAR CONTRACTS (i)

Sale and Hire Purchase: Contracts of sale resemble contracts of hire purchase very closely, and indeed the real object of a contract of hire purchase is the sale of the goods ultimately. Nonetheless a sale has to be distinguished from a hire purchase as their legal incidents are quite different.

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THE SALE OF GOODS ACT, 1930 The main points of distinction between the ‘sale’ and ‘hire-purchase’ are as follows: Hire-Purchase

Sale 1.

Property in the goods is transferred to the buyer immediately at the time of contract.

1.

The goods passes to the hirer upon payment of the last instalment.

2.

The position of the buyer is that of the owner of the goods.

2.

The position of the hirer is that of a bailee till he pays the last instalment.

3.

The buyer cannot terminate the contract and is bound to pay the price of the goods.

3.

The hirer may, if he so likes, terminate the contract by returning the goods to its owner without any liability to pay the remaining instalments.

4.

The seller takes the risk of any loss resulting from the insolvency of the buyer.

4.

The owner takes no such risk, for if the hirer fails to pay an instalment the owner has right to take back the goods.

5.

The buyer can pass a good title to a bonafide purchaser from him.

5.

The hirer cannot pass any title even to a bona fide purchaser.

6.

Tax is levied at the time of the contract.

6.

Tax is not leviable until it eventually ripens into a sale.

(ii) Sale and Bailment: A ‘bailment’ is the delivery of goods for some specific purpose under a contract on the condition that the same goods are to be returned to the bailor or are to be disposed of according to the directions of the bailor. The difference between bailment and sale may be clearly understood by studying the following: Bailment

Sale 1.

The property in goods is transferred from the seller to the buyer.

1.

There is only transfer of possession of goods from the bailor to the bailee for any of the reasons like safe custody, carriage, etc.

2.

The return of goods in contract of sale is not possible.

2.

The bailee must return the goods to the bailor on the accomplishment of the purpose for which the bailment was made.

3.

The consideration is the price in terms of money.

3.

The consideration may be gratuitous or non-gratuitous.

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(iii) Sale and contract for work and labour: A contract of sale of goods is one in which some goods are sold or are to be sold for a price. But where no goods are sold, and there is only the doing or rendering of some work of labour, then the contract is only of work and labour and not of sale of goods, e.g., where gold is supplied to a goldsmith for preparing an ornament or when an artist is asked to paint a picture, even when he himself arranges for all colours etc.

2.7

FORMALITIES OF CONTRACT OF SALE

Except where specifically required by any law, no particular form is necessary to constitute a valid contract. The agreement may be express or may be implied from the conduct of the parties. Section 5 of the Sale of Goods Act, 1930, lays down the rule as to how a contract of sale may be made and has nothing to do with the transfer or passing of the property in the goods. A contract of sale may be made in any of the following modes: (i)

There may be immediate delivery of the goods; or

(ii) There may be immediate payment of price, but it may be agreed that the delivery is to be made at some future date; or (iii) There may be immediate delivery of the goods and an immediate payment of price; or (iv) It may be agreed that the delivery or payment or both are to be made in installments; or (v) It may be agreed that the delivery or payment or both are to be made at some future date.

2.8

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. (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 specific 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.

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THE SALE OF GOODS ACT, 1930 (ii) Goods perishing after the contract is made: Where there is an agreement to sell specific 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 speaking 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.

2.9

ASCERTAINMENT OF PRICE (SECTIONS 9 & 10)

‘Price’ means the monetary consideration for sale of goods [Section 2 (10)]. By virtue of Section 9, the price may be (1) fixed by the contract, or (2) agreed to be fixed in a manner provided by the contract, e.g., by a valuer, or (3) determined by the course of dealings between the parties. When it cannot be fixed in any of the above ways, the buyer is bound to pay to the seller a reasonable price. What is a reasonable price is a question of fact in each case (Section 9). Section 10 provides for the determination of price by a third party. Where there is an agreement to sell goods on the terms that price has to be fixed by the third party and he either does not or cannot make such valuation, the agreement will be void. In case the third party is prevented by the default of either party from fixing the price, the party at fault will be liable to the damages to the other party who is not at fault. However, a buyer who has received and appropriated the goods must pay a reasonable price for them in any eventuality.

2.10 STIPULATION AS TO TIME (SECTION 11) As regard time for the payment of price, unless a different intention appears from the terms of contract, stipulation as regard this, is not deemed to be of the essence of a contract of sale. But delivery of goods must be made without delay. Whether or not such a stipulation is of the essence of a contract depends on the terms agreed upon. Price for goods may be fixed by the contract or may be agreed to be fixed later on in a specific manner. Stipulations as to time of delivery are usually the essence of the contract.

2.11 SUMMARY In nutshell, contract of sale of goods is a contract where the seller transfers or agrees to transfer the property in the goods to the buyer for a price. Where, however, the transfer of property in goods is to take place at a future date or subject to some conditions to be fulfilled, the contract is called ‘agreement to sell’. The subject matter of such contract must always be goods. Price for goods may be fixed by the contract or may be agreed to be fixed later on in a specific manner. Stipulations as to time of delivery are usually of the essence of the contract.

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CHAPTER – 2


Unit 2 Conditions & Warranties


To understand and identify conditions and warranties,

To know the implied conditions and warranties,

To understand doctrine of ‘caveat emptor’.

2.12 CONDITIONS AND WARRANTIES A stipulation in a contract of sale with reference to goods, which are the subject thereof, may be a condition or a warranty. A condition is a stipulation essential to the main purpose of the contract, the breach of which gives right to repudiate the contract and to claim damages. On the other hand 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 (Section 12(3) of the Sale of Goods Act, 1930). Differences: The following are important differences between conditions and warranties. Condition

Warranty

(1) A condition is essential to the main purpose of the contract.

(1) It is only collateral to the main purpose of the contract.

(2) The aggrieved party can repudiate the contract or claim damages or both in the case of breach of condition.

(2) The aggrieved party can claim only damages in case of breach of warranty.

(3) A breach of condition may be treated as a breach of warranty.

(3) A breach of warranty cannot be treated as a breach of condition.

2.13 WHEN A CONDITION MAY BE TREATED AS WARRANTY? In the following cases, a contract is not avoided even on account of a breach of a condition. (i)

Where the buyer altogether waives the performance of the condition a party may for his own benefit, waive a stipulation; or

(ii) where the buyer elects to treat the breach of the condition as one of a warranty. That is to say, he may only claim damages instead of repudiating the contract; or (iii) where the contract is non-severable and the buyer has accepted either the whole goods or any part thereof. Acceptance means acceptance as envisaged in Section 72; (iv) where the fulfillment of any condition or warranty is excused by law by reason of impossibility or otherwise.

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2.14 EXPRESS AND IMPLIED CONDITIONS AND WARRANTIES ‘Conditions’ and ‘warranties’ may be either express or implied. They are “express” when the terms of the contract expressly state them. They are implied when, not being expressly provided for. Express conditions are those, which are agreed upon between the parties at the time of contract and are expressly provided in the contract. The implied conditions, on the other hand, are those, which are presumed by law to be present in the contract. It should be noted that an implied condition may be negated or waived by an express agreement. Following conditions are implied in a contract of sale of goods unless the circumstances of the contract show a different intention. (i)

Condition as to title [Section 14(a)]. In every contract of sale, unless there is an agreement to the contrary, the first implied condition on the part of the seller is that (a) in case of a sale, he has a right to sell the goods, and (b) in the case of an agreement to sell, he will have right to sell the goods at the time when the property is to pass. In simple words, the condition implied is that the seller has the right to sell the goods at the time when the property is to pass. If the seller’s title turns out to be defective, the buyer must return the goods to the true owner and recover the price from the seller.

(ii) Sale by description [Section 15]. Where there is a contract of sale of goods by description, there is an implied condition that the goods correspond with the description. This rule is based on the principle that “if you contract to sell peas, you cannot compel the buyer to take beans.” The buyer is not bound to accept and pay for the goods which are not in accordance with the description of goods. (iii) Sale by sample [Section 17]. In a contract of sale by sample, there is an implied condition (a) the bulk shall correspond with the sample in quality; (b) the buyer shall have a reasonable opportunity of comparing the bulk with the sample, and (c) the goods shall be free from any defect rendering them unmerchantable, which would not be apparent on reasonable examination of the sample. This condition is applicable only with regard to defects, which could not be discovered by an ordinary examination of the goods. But if the defects are latent, then the buyer can avoid the contract. (iv) Sale by sample as well as by description [Section 15]. Where the goods are sold by sample as well as by description the implied condition is that the bulk of the goods supplied must correspond both with the sample and the description. In case the goods correspond with the sample but do not tally with description or vice versa, the buyer can repudiate the contract. (v) Condition as to quality or fitness [Section 16]: Ordinarily, there is no implied condition as to the quality or fitness of the goods sold for any particular purpose. However, 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 the purpose of his purchase and relied upon the skill and judgement of the seller to select the best goods and the seller has ordinarily been dealing in those goods. Even this implied condition will not apply if the goods have been sold under a trademark or a patent name. MERCANTILE

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THE SALE OF GOODS ACT, 1930 (vi) Conditions as to wholesomeness: In the case of eatables and provisions, in addition to the implied condition as to merchantability, there is another implied condition that the goods shall be wholesome.

2.15 IMPLIED WARRANTIES The examination of Section 14 and 16 of the Sale of Goods Act, 1930, disclosed the following implied warranties: 1.

Warranty as to undisturbed possession: An implied warranty that the buyer shall have and enjoy quiet possession of the goods. That is to say, if the buyer having got possession of the goods, is later on disturbed in his possession, he is entitled to sue the seller for the breach of the warranty.

2.

Warranty as to non-existence of encumbrances: 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.

3.

Disclosure of dangerous nature of goods: There is another implied warranty on the part of the seller that in case the goods are inherently dangerous or they are likely to be dangerous to the buyer and the buyer is ignorant of the danger, the seller must warn the buyer of the probable danger. If there is breach of this warranty, the seller will be liable in damages.

4.

Warranty as to quality or fitness by usage of trade [Section 16(4)]: An implied warranty as to quality or fitness for a particular purpose may be annexed by the usage of trade.

Regarding implied condition or warranty as to the quality of fitness for any particular purpose of goods supplied, the rule is ‘let the buyer beware’ i.e., the seller is under no duty to reveal unflattering truths about the goods sold, but this rule has certain exceptions.

2.16 CAVEAT EMPTOR In case of sale of goods, the doctrine ‘Caveat Emptor’ means ‘let the buyer beware’. When sellers display their goods in the open market, it is for the buyers to make a proper selection or choice of the goods. If the goods turn out to be defective he cannot hold the seller liable. The seller is in no way responsible for the bad selection of the buyer. The seller is not bound to disclose the defects in the goods which he is selling. It is the duty of the buyer to satisfy himself before buying the goods that the goods will serve the purpose for which they are being bought. If the goods turn out to be defective or do not serve his purpose or if he depends on his own skill or judgement, the buyer cannot hold the seller responsible. The rule of Caveat Emptor is laid down in the Section 16, which states that, “subject to the provisions of this Act or of any other law for the time being in force, there is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale”. Exceptions: The doctrine of Caveat Emptor is, however, subject to the following exceptions; 1.

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Where the buyer makes known to the seller the particular purpose for which the goods are required, so as to show that he relies on the seller’s skill or judgement and the goods


are of a description which is in the course of seller’s business to supply, it is the duty of the seller to supply such goods as are reasonably fit for that purpose [Section 16(1)]. 2.

In case where the goods are purchased under its patent name or brand name, there is no implied condition that the goods shall be fit for any particular purpose [Section 16(1)].

3.

Where the goods are sold by description there is an implied condition that the goods shall correspond with the description. [Section 15].

4.

Where the goods are bought by description from a seller who deals in goods of that description there is an implied condition that the goods shall be of merchantable quality. The rule of Caveat Emptor is not applicable. But where the buyer has examined the goods this rule shall apply if the defects were such which ought to have been revealed by ordinary examination [Section 16(2)].

5.

Where the goods are bought by sample, this rule of Caveat Emptor does not apply if the bulk does not correspond with the sample [Section 17].

6.

Where the goods are bought by sample as well as description, the rule of Caveat Emptor is not applicable in case the goods do not correspond with both the sample and description [Section 15].

7.

An implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the usage of trade and if the seller deviates from that, this rule of Caveat Emptor is not applicable.

8.

Where the seller sells the goods by making some misrepresentation or fraud and the buyer relies on it or when the seller actively conceals some defect in the goods so that the same could not be discovered by the buyer on a reasonable examination, then the rule of Caveat Emptor will not apply. In such a case the buyer has a right to avoid the contract and claim damages.

2.17 SUMMARY While entering into a contract of sale, certain stipulations are put by both the parties i.e. the buyer and the seller such as time for payment of price, time for delivery, quality of goods, transfer of title, etc. These stipulations with reference to goods may be ‘conditions’ or ‘warranties’ depending upon the construction of the contract. A stipulation essential to the main purpose of the contract is a ‘condition’ whereas collateral stipulations are called warranties. Breach of a ‘condition’ and that of a ‘warranty’ have different consequences. Every contract of sales have certain conditions and warranties implied by law. Besides, the parties may provide for ‘conditions’ and ‘warranties’ by an express agreement. Regarding implied condition or warranty as to the quality of fitness for any particular purpose of goods supplied, the rule is ‘let the buyer beware’ i.e., the seller is under no duty to reveal unflattering truths about the goods sold, but this rule has certain exceptions.

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CHAPTER – 2

THE SALE OF GOODS ACT, 1930 Unit 3 Transfer of Ownership & Delivery of Goods

Learning Objectives

Understand how and at what point of time the ownership in goods which are the subject matter of a contract of sale passes to the buyer from the seller, Be clear about what is appropriation of goods and how it affects the passing of property in goods,

Distinguish between passing of property and passing of title,

Understand the rule of ‘nemo dat quod non habet’ (no one can give what he has not got) and exceptions thereof,

Be familiar with the rules relating to delivery of goods and acceptance of goods.

2.18 PASSING OF PROPERTY (SECTIONS 18 – 24) Passing or transfer of property constitutes the most important element and factor to decide legal rights and liabilities of sellers and buyers. Passing of property implies passing of ownership. If the property has passed to the buyer, the risk in the goods sold is that of buyer and not of seller, though the goods may still be in the seller’s possession. The primary rules relating to the passing of property in the sale of goods are: (1) No property in the goods is transferred to the buyer, unless and until the goods are ascertained. (2) Where there is a contract of sale of specific or ascertained goods, property passes to the buyer at the time when parties intend to pass it. For the purpose of ascertaining intention of the parties regard shall be had to the terms of contract, conduct of parties, and circumstances of the case. Where the intention of the parties cannot be ascertained, rules contained in Sections 20 to 24 shall apply.

For specific goods: Where there is an unconditional contract for the sale of specific goods in a deliverable state, property in the goods passes to the buyer when the contract is made (Section 20). Deliverable state means such a state that the buyer would under the contract be bound to take delivery of the goods. If the goods are not in a deliverable state, property does not pass until such a thing is done to put the goods in a deliverable state. This ‘something’ may mean packing the goods, testing, polishing, filling in casks etc. It should be noted that the property shall not pass when the goods are made in deliverable state but shall pass only when the buyer has notice of it (Section 21). But where they are in deliverable state, but the seller is bound to weigh, measure, test or do some other act or thing for the purpose of ascertaining the price, the property does not pass until such act or thing is done. When the seller has done his part the property passes even if the buyer has to do something for his own satisfaction. (Section 22). Unascertained goods: Until goods are ascertained, there is merely an agreement to sell. The ascertainment of goods and their unconditional appropriation to the contract are the two preconditions for transfer of property from seller to buyer in case of unascertained goods. A seller is deemed to have unconditionally appropriated, where he delivers the goods to the buyer or to a carrier or other bailee for the purpose of transmission to the buyer (Section 23).

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Appropriation of goods: Appropriation of goods involves selection of goods with the intention of using them in performance of the contract and with the mutual consent of the seller and the buyer. The essentials are: (a) The goods should conform to the description and quality stated in the contract. (b) The goods must be in a deliverable state. (c) The goods must be unconditionally (as distinguished from an intention to appropriate) appropriated to the contract either by delivery to the buyer or his agent or the carrier. (d) The appropriation must be made by: (i)

the seller with the assent of the buyer; or

(ii) the buyer with the assent of the seller. (e) The assents may be express or implied. (f)

The assent may be given either before or after appropriation.

Goods sent on approval or “on sale or return”: When the goods are delivered to the buyer on approval or on sale or return or other similar terms the property passes to the buyer, (i) when he signifies his approval or acceptance to the seller, (ii) when he does any other act adopting the transaction, and (iii) if he does not signify his approval or acceptance to the seller but retains goods beyond a reasonable time (Section 24). Sale for cash only or Return It may be noted that where the goods have been delivered by a person on “sale or return” on the terms that the goods were to remain the property of the seller till they are paid for, the property therein does not pass to the buyer until the terms are complied with, i.e., cash is paid for. A buyer under a contract on the basis of ‘sale or return’ is deemed to have exercised his option when he does any act exercising domination over the goods showing an unequivocal intention to buy, e.g., if he pledges the goods with a third party. Failure or inability to return the goods to the seller does not necessarily imply selection to buy.

2.19 RESERVATION OF RIGHT TO DISPOSAL (SECTION 25) Where there is contract of sale of specific goods or where the goods have been subsequently appropriated to the contract, the seller may, by the terms of the contract or appropriation, as the case may be, reserve the right to dispose of the goods, until certain conditions have been fulfilled. In such a case in spite of the fact that the goods have already been delivered to the buyer or to a carrier or other bailee for the purpose of transmitting the same to the buyer, the property therein will not pass to the buyer till the condition imposed, if any, by the seller has been fulfilled. If the goods are shipped or delivered to a railway administration for carriage and by the bill of lading or railway receipt, as the case may be, the goods are deliverable to the order of the seller or his agent, then the seller will be prima facie deemed to have reserved to the right of disposal. 96


Where the seller draws a bill on the buyer for the price and sends to him the bill of exchange together with the bill of lading or (as the case may be) the railway receipt to secure acceptance or payment thereof, the buyer must return the bill of lading, if he does not accept or pay the bill. And if he wrongfully retains the bill of lading or the railway receipt, the property in the goods does not pass to him. It should be noted that Section 25 deals with “conditional appropriation” as distinguished from ‘unconditional appropriation’ dealt with under Section 23(2).

2.20 PASSING OF RISK (SECTION 26) The general rule is, “unless otherwise agreed, the goods remain at the seller’s risk until the property therein is transferred to the buyer, but when the property therein is transferred to the buyer, the goods are at the buyer’s risk whether delivery has been made or not” (Section 26). However, Section 26 also lays down in exception to the rule that ‘risk follows ownership.’ It provides that where delivery of the goods has been delayed through the fault of either buyer or seller, the goods are at the risk of the party in fault as regards any loss which might not have occurred but for such fault. Thus in ordinary circumstances, risk is borne by the buyer only when the property in the goods passes over to him. However, the parties may by special agreement stipulate that ‘risk’ will pass sometime after or before the ‘property’ has passed. Risk passes with property: The owner of goods must bear the loss or damage of goods unless otherwise is agreed to. Under Section 26 of the Sale of Goods Act, unless otherwise agreed, the goods remain at the seller’s risk until property therein has passed to the buyer. After that event they are at the buyer’s risk, whether delivery has been made or not. The aforesaid rule is, however, subject to two qualifications: (i) If delivery has been delayed by the fault of the seller or the buyer, the goods shall at the risk of the party in default, as regards loss which might not have arisen but for the default. (ii) The duties and liabilities of the seller or the buyer as bailee of goods for the other party remain unaffected even when the risk has passed generally. As noted above, the risk (i.e., the liability to bear the loss in case property is destroyed, damaged or deteriorated) passes with ownership. The parties may, however, agree to the contrary. For instance, the parties may agree that risk will pass sometime after or before the property has passed.

2.21 TRANSFER OF TITLE (SECTIONS 27 – 30) In general the seller sells only such goods of which he is the absolute owner. But sometimes a person may sell goods of which he is not the owner, then the question arises as to what is the position of the buyer who has bought the goods by paying price. The general rule regarding the transfer of title is that the seller cannot transfer to the buyer of goods a better title than he himself has. If the seller is not the owner of goods, then the buyer also will not become the owner i.e. the title of the buyer shall be the same as that of the seller. This rule is expressed in the Latin maxim “Nemo dat quod non habet” which means that no one can give what he has MERCANTILE

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THE SALE OF GOODS ACT, 1930 not got. For example, if A sells some stolen goods to B, who buys them in good faith, B will get no title to that and the true owner has a right to get back his goods from B. If this rule is enforced rigidly then the innocent buyers may be put to loss in many cases. Therefore, to protect the interests of innocent buyers, a number of exceptions have been provided to this rule. Exceptions: In the following cases, a non-owner can convey better title to the bona fide purchaser of goods for value. (1) Sale by a Mercantile Agent: A sale made by a mercantile agent of the goods for document of title to goods would pass a good title to the buyer in the following circumstances; namely; (a) If he was in possession of the goods or documents with the consent of the owner; (b) If the sale was made by him when acting in the ordinary course of business as a mercantile agent; and (c) If the buyer had acted in good faith and has at the time of the contract of sale, no notice of the fact that the seller had no authority to sell (Proviso to Section 27). (2) Sale by one of the joint owners: If one of the several joint owners of goods has the sole possession of them with the permission of the others, the property in the goods may be transferred to any person who buys them from such a joint owner in good faith and does not at the time of the contract of sale have notice that the seller has no authority to sell (Section 28). (3) Sale by a person in possession under a voidable contract: A buyer would acquire a good title to the goods sold to him by a seller who had obtained possession of the goods under a contract voidable on the ground of coercion, fraud, misrepresentation or undue influence provided that the contract had not been rescinded until the time of the sale (Section 29). (4) Sale by one who has already sold the goods but continues in possession thereof: If a person has sold goods but continues to be in possession of them or of the documents of title to them, he may sell them to a third person, and if such person obtains the delivery thereof in good faith and without notice of the previous sale, he would have good title to them, although the property in the goods had passed to the first buyer earlier. A pledge or other disposition of the goods or documents of title by the seller in possession are equally valid [(Section 30(1)]. (5) Sale by buyer obtaining possession before the property in the goods has vested in him: Where a buyer with the consent of the seller obtains possession of the goods before the property in them has passed to him, he may sell, pledge or otherwise dispose of the goods to a third person, and if such person obtains delivery of the goods in good faith and without notice of the lien or other right of the original seller in respect of the goods, he would get a good title to them [(Section 30(2)]. (6) Effect of Estoppel: Where the owner is estopped by the conduct from denying the seller’s authority to sell, the transferee will get a good title as against the true owner. But before a good title by estoppel can be made, it must be shown that the true owner had actively suffered or held out the other person in question as the true owner or as a person authorized to sell the goods.

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(7) Sale by an unpaid seller: Where an unpaid seller who had exercised his right of lien or stoppage in transit resells the goods, the buyer acquires a good title to the goods as against the original buyer – Section 54(3). (8) Sale under the provisions of other Acts: (i) Sale by an official Receiver or liquidator of the Company will give the purchaser a valid title. (ii) Purchase of goods from a finder of goods will get a valid title under certain circumstances.

2.22 RULES REGARDING DELIVERY OF GOODS (SECTIONS 33 - 39) The Sale of Goods Act, 1930, prescribes the following rules of delivery of goods: (i) Effect of part delivery: A delivery of part of goods, taking place in the course of the delivery of the whole, has the same effect for the purpose of passing the property in such goods as delivery of the whole. But such part delivery, with the intention of severing it from the whole will not operate as a delivery of the remainder, it will be construed as part delivery only (Section 34). (ii) Buyer to apply for delivery: The seller of the goods is not obliged to deliver them until the buyer has applied for delivery, unless otherwise agreed (Section 35). (iii) Place of delivery: If there is no contract to the contrary, goods must be delivered at the place where they were at the time of sale, and the goods agreed to be sold are required to be delivered at the spot at which they were lying at the time the agreement to sale entered into or if not then in existence, at the place where they would be manufactured or produced [Section 36(1)]. (iv) Time of delivery: When the time of sending the goods has not been fixed by the parties, the seller must send them within a reasonable time [Section 36(2)]. (v) Goods in possession of a third party: Where the goods at the time of sale are in possession of a third person, there is no delivery unless and until such third person acknowledges to the buyer that he holds the goods on his behalf. The issue or transfer of any document of title to goods operates as delivery, symbolic in character, even if the goods are in the custody of a third person without such attornment [Section 36(3)]. (vi) Time for tender of delivery: Demand or tender of delivery may be treated as ineffectual unless made at a reasonable hour. What is reasonable hour is a question of fact [Section 36(4)]. (vii) Expenses for delivery: The expenses of and incidental to putting the goods into a deliverable state must be borne by the seller, in the absence of a contract to the contrary [Section 36(5)]. (viii)Delivery of wrong quantity: In case of tender of lesser quantity of goods, the buyer may either accept the same and pay for it at the contract rate or reject it [Section 37(1)]. In case of excess delivery the buyer may accept or reject the delivery, if he accepts the whole of the goods, he shall pay for them at the contract rate [Section 37(2)]. In case the seller makes a delivery of the goods contracted mixed with goods of a different description, the buyer may accept the relevant goods and reject the rest or reject the whole [Section 37(3)]. Mixing of goods with inferior quality does not amount to a mixing of goods of different description. MERCANTILE

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THE SALE OF GOODS ACT, 1930 (ix) Instalment deliveries: Unless otherwise agreed, the buyer is not bound to accept delivery in installments. The rights and liabilities in cases of delivery by instalments and payments there on may be determined by the parties of contract (Section 38). (x) Delivery of carrier: Subject to the terms of contract, the delivery of the goods to the carrier for transmission to the buyer, is prima facie deemed to be delivery to the buyer [Section 39(1)]. (xi) Deterioration during transit: Where goods are delivered at a distant place, the liability for deterioration necessarily incidental to the course of transit will fall on the buyer, though the seller agrees to deliver at his own risk (Section 40). (xii) Buyer’s right to examine the goods: Where goods are delivered to the buyer, who has not previously examined them, he is entitled to a reasonable opportunity of examining them in order to ascertain whether they are in conformity with the contract. Unless otherwise agreed, the seller is bound, on request, to afford the buyer a reasonable opportunity of examining the goods (Section 41).

2.23 ACCEPTANCE OF DELIVERY OF GOODS Acceptance is deemed to take place when the buyer (a) intimates to the seller that he had accepted the goods; or (b) does any act to the goods, which is inconsistent with the ownership of the seller; or (c) retains the goods after the lapse of a reasonable time, without intimating to the seller that he has rejected them (Section 42). Ordinarily, a seller cannot compel the buyer to return the rejected goods; but the seller is entitled to a notice of the rejection. Where the seller is ready and willing to deliver the goods and requests the buyer to take delivery, and the buyer does not take delivery within a reasonable time, he is liable to the seller for any loss occasioned by the neglect or refusal to take delivery, and also reasonable charge for the care and custody of the goods (Sections 43 and 44).

2.24 SUMMARY The students must note that property in the goods or beneficial right in the goods passes to the buyer at a point of time depending on ascertainment, appropriation and delivery of goods. Risk of loss of goods prima facie follows the passing of property in goods. Goods remain at the seller’s risk unless the property therein is transferred to the buyer, but after transfer of property therein to the buyer the goods are at the buyer’s risk whether delivery has been made or not. An important rule regarding passing of title in goods is that the purchaser does acquire no better title to the goods than what the seller had. This rule again is not applicable under certain circumstances. Delivery of goods denotes the voluntary transfer of possession, which may be actual or even in some constructive form and which is again subject to various rules which help in deciding when the delivery becomes effective.

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CHAPTER – 2


Unit 4 Unpaid Seller


Understand the concept of Unpaid Seller,

Know the rights of Unpaid Seller,

Analyze the effect of sub-sale or pledge by the buyer,

Distinguish the right of lien and right of stoppage in transit,

Know the rights of parties in case of breach of contract,

Understand the concept of sale by auction.

2.25 UNPAID SELLER According to Section 45(a) of the Sale of Goods Act, 1930, the seller of goods is deemed to be an ‘unpaid Seller’ when(a) the whole of the price has not been paid or tendered and the seller had an immediate right of action for the price. (b) A bill of exchange or other negotiable instrument was given as payment, but the same has been dishonoured, unless this payment was an absolute, and not a conditional payment. Any person who is in a position of a seller, is also a seller, and may exercise the rights conferred upon an ‘unpaid seller’ in above said circumstances. For instance, an agent of the seller, to whom bill of lading has been endorsed, is in the position of seller and may exercise rights of ‘unpaid seller’.

2.26 RIGHTS OF AN UNPAID SELLER An unpaid seller has been expressly given the rights against the goods as well as the buyer personally which are discussed as under. (a) A rights of an unpaid seller against the goods: The unpaid seller has the following rights against the goods whether the property in the goods has passed to the buyer or not. (1) Rights of lien (Section 47): He has a right of lien on the goods for the price while he is in possession, until the payment or tender of the price of such goods. The right of lien can be exercised by him in the following cases only: (a) where goods have been sold without any stipulation of credit; (b) where goods have been sold on credit but the term of credit has expired; or (c) where the buyer becomes insolvent. However, the unpaid seller loses his right of lien under the following circumstances: (i)

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When he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer without reserving the right of disposal of the goods.


(ii) Where the buyer or his agent lawfully obtains possession of the goods. (iii) Where seller has waived the right of lien. (iv) By Estoppel i.e., where the seller so conducts himself that he leads third parties to believe that the lien does not exist. (2) Right of stoppage in transit: When the unpaid seller has parted with the goods to a carrier and the buyer has become insolvent, he can exercise this right of asking the carrier to return the goods back, or not to deliver the goods to the buyer. However, the right of stoppage in transit is exercised only when the following conditions are fulfilled: (a) The seller must be unpaid. (b) He must have parted with the possession of goods. (c) The goods are in transit. (d) The buyer has become insolvent. (e) The right is subject to provisions of the Act. (3) Right of re-sale: The unpaid seller can exercise the right to re-sell the goods under the following conditions: (i)

When the goods are of a perishable nature. In such a case the buyer need not be informed of the intention of re-sale.

(ii) When he gives notice to the buyer of his intention to re-sell the goods and the buyer does not within a reasonable time pay or tender the price. (b) Rights of unpaid seller against the buyer: An unpaid seller can enforce certain rights against the goods as well as against the buyer personally. The rights of the seller against the buyer personally are called rights in personam and are in addition to his rights against the goods. The right in personam are as follows: 1.

Suit for price (Section 55) (a) Where property has passed to the buyer and he wrongfully neglects or refuses to pay for the goods, the seller may sue him for the price of the goods [Section 55(1)]. (b) Where property has not passed under the contract of sale and the price is payable on a certain day irrespective of delivery and the buyer wrongfully neglects or refuses to pay such price, the seller may sue him for the price although the property in the goods has not passed and the goods have not been appropriated to the contract [Section 55(2)].

2.

Suit for damages for non-acceptance (Section 56): Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may sue him for damages for non-acceptance. As regards measure of damages, Section 73 of the Indian Contract Act, 1872, applies.

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THE SALE OF GOODS ACT, 1930 3.

Repudiation of contract before due date (Section 60): Where the buyer repudiates the contract before the date of delivery, the seller may treat the contract as rescinded and sue damages for the breach. This is known as the ‘rule of anticipatory breach of contract’.

4.

Suit for interest [Section 61(2)(d)]: Where there is specific agreement between the seller and the buyer as to interest on the price of the goods from the date on which payment becomes due, the seller may recover interest from the buyer. If, however, there is no specific agreement to this effect, the seller may charge interest on the price when it becomes due from such day as he may notify to the buyer.

In the absence of a contract to the contrary, the Court may award interest to the seller in a suit by him at such rate as it thinks fit on the amount of the price from the date of the tender of the goods or from the date on which the price was payable [Section 61(2)(a)].

2.27 DISTINCTION BETWEEN RIGHT OF LIEN AND RIGHT OF STOPPAGE IN TRANSIT (i)

The essence of a right of lien is to retain possession whereas the right of stoppage in transit is right to regain possession.

(ii) Seller should be in possession of goods under lien while in stoppage in transit (i) seller should have parted with the possession (ii) possession should be with a carrier & (iii) buyer has not acquired the possession. (iii) Right of lien can be exercised even when the buyer is not insolvent but it is not the case with right of stoppage in transit. (iv) Right of stoppage in transit begins when the right of lien ends. Thus the end of the right of lien is the starting point of the right of stoppage in transit.

2.28 EFFECT OF SUB-SALE OR PLEDGE BY THE BUYER (SECTION 53) The unpaid seller’s right of lien or stoppage or transit is not effected by any further sale or other disposition of the goods by the buyer. For example, an oil merchant A sold 100 tins of oil to B without appropriating any particular oil to the contract. B sold 60 tins out of it to C and gave delivery order addressed to A. C lodged the delivery order with A requesting him to “await” his orders. Meanwhile B became insolvent and thus A became the unpaid seller. A claiming his right of lien refused to make delivery to C. It was held that A was entitled to do so. However, the unpaid seller’s above right is subjected to the following two exceptions: (a) when the seller has assented to the sale, mortgage or other disposition of the goods made by the buyer [Sub-Section (1)]. (b) when a document of title of goods has been transferred to the buyer and the buyer transfers the documents to a person who has bought goods in good faith and for value (price).

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2.29 RIGHTS OF PARTIES IN CASE OF BREACH OF CONTRACT (a) Buyer’s right against the seller in case of breach of contract (Sections 57-59) The law confers certain protective rights on the buyer of goods. They are as follows: (1) Suit for non-delivery: Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may sue the seller for damages for non-delivery [Section 57]. Where there is an available market for the goods in question, prima facie the measure of damages would be contract price minus market price at the date of the breach. If, however, there is no such market, the measure of damage would be the estimated loss naturally resulting from the breach. Thus, if the goods contracted for are not obtainable, then the purchaser may purchase similar goods and may claim from the seller the difference in price. If he does not purchase such similar goods but has during the contract period settled contracts for the same kind of goods with other persons, the rates at which those contracts were settled might afford a basis for ascertaining the damages. Where, on breach of contract, the goods are irreplaceable in the market, the proper measure of damages is the profits which the buyer would have made if the contract had been carried out. (2) Suit for specific performance [Section 58]: Where property has passed to the buyer, he also can exercise another right, viz., a right to sue for specific performance and its limits regulated by the Specific Relief Act. In such cases the court may, in its discretion grant a decree ordering the seller to deliver those specific or ascertained goods which formed the subject-matter of the contract. (3) Suit for damages for Breach of warranty [Section 59]: Where there is a breach of warranty by the seller or where the buyer elects or is compelled to treat any breach of condition on the part of the seller as a breach of warranty, the buyer is entitled to reject the goods but the buyer may: (a) set up against the seller the breach of warranty in diminution or extinction of the price; or (b) sue the seller for the breach of warranty. The measure of damage for breach of warranty is the estimated loss or damage arising directly or naturally from the breach, which is prima facie the difference between the value of the goods at the time of the delivery and the value they would have had, if the goods had answered to the warranty. (4) Suit for recovery of price: Under Section 61, the buyer has a right to recover the money paid to the seller where the consideration for payment of it has failed. For example, where the buyer is deprived to goods by their true owner, he may recover the price for breach of the condition as to title. (b) Seller’s right against the buyer in case of breach of contract (Sections 55 and 56) (i)

Suit for the price: Where the property in the goods has passed to the buyer or he has wrongfully neglected or refused to pay for the goods according to the terms of the contract, the sellers may sue him for the price of goods. Further, where the price is payable under

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THE SALE OF GOODS ACT, 1930 the contract on a certain day irrespective of delivery and the buyer wrongfully neglects or refuses to pay such price, the seller may sue him for the price even if the property in the goods has not passed and the goods have not been appropriated to the contract (Section 55). (ii) Damages for non-acceptance: Where the buyer wrongfully neglects or refuses to accept and pay for the goods, then the seller may sue him for damages for non-acceptance (Section 56).

2.30 AUCTION SALE An ‘Auction Sale’ is a mode of selling property by inviting bids publicly and the property is sold to the highest bidder. An auctioneer is an agent governed by the Law of Agency. When he sells, he is only the agent of the seller. He may, however, sell his own property as the principal and need not disclose the fact that he is so selling. Under Section 64 of the Sale of Goods Act, 1930, in the case of an auction: (a) Where goods are put for sale in lot, each lot is prima facie deemed to be subject matter of a separate contract of sale; (b) The sale is complete when the auctioneer announces its completion by the fall of hammer or in any other customary manner and until such announcement is made, any bidder may retract from his bid; (c) Right to bid may be reserved expressly by or on behalf of the seller and where such a right is expressly reserved, but not otherwise, the seller or any one person on his behalf may bid at the auction; (d) Where the sale if not notified to be subject to the right of the seller to bid, it shall not be lawful for the seller to bid himself or to employ any person to bid at such sale, or for the auctioneer knowingly to take any bid from the seller or any person representing him. Any sale contravening this rule may be treated as fraudulent by the buyer; (e) The sale may be notified to be subject to a reserve or upset price; and (f) If the seller makes use of pretended bidding to raise the price, the sale is voidable at the option of the buyer.

2.31 SUMMARY A seller is called an ‘unpaid seller’ when either he has not been paid the whole price or the buyer has failed to meet at maturity the bill of exchange or any other negotiable instrument which was accepted by the seller as conditional payment. In such a circumstance the buyer may exercise lien on goods if he is in possession of them. If goods are in transit to the buyer, he may stop the goods in transit and obtain the possession of the goods. When the unpaid seller has exercised right of lien or stoppage in transit, he may sell the goods after giving a notice to the buyer of his intent to re-sell. The new buyer shall have a good title on goods as against the original buyer even if the notice of re-sale has not been given by the seller to the original buyer. 106


If the seller neglects to deliver the goods the buyer may sue him for damages, or he may sue the seller for specific performance if the property in goods had not been transferred to the buyer. Where the buyer neglects to pay the price, the seller may sue him for the price as well as exercise lien on goods. Where the buyer wrongfully neglects to accept and pay for the goods, the seller may sue him for damages for non-acceptance.

2.32 MULTIPLE CHOICE QUESTIONS 1.

A contract for the sale of goods where property would pass to the buyer on payment of total price would be (a) sale (b) agreement to sell (c) hire-purchase contract (d) sale on approval.

2.

The term “goods” under Sale of Goods Act, 1930 does not include (a) goodwill. (b) actionable claims. (c) stocks and shares. (d) harvested crops.

3.

A contract for the sale of “future goods” is (a) sale (b) agreement to sell. (c) void. (d) hire-purchase contract.

4.

A stipulation in a contract of sale of goods whose violation by seller gives a right of rescission to buyer, is called: (a) guarantee. (b) warranty. (c) condition. (d) term.

5.

The unpaid seller has right of stoppage of goods in transit only where the buyer (a) becomes insolvent. (b) refuses to pay price. (c) acts fraudulently. (d) all of these.

6.

The (a) (b) (c) (d)

7.

Under Sale of Goods Act, 1930 the terms “Goods” means every kind of movable property and it includes (a) stock and share (b) growing crops, grass (c) both (a) and (b) (d) none of the above

8.

A stipulation which is collateral to the main purpose of the contract, and if proves false, gives the buyer only a right to claim damages, is known as (a) conditions. (b) guarantee. (c) warranty. (d) none of these.

9.

Which of the following is not an implied condition in a contract of sale? (a) condition as to title. (b) condition as to description. (c) condition as to free from encumbrance. (d) condition as to sample.

sale of Goods Act, 1930 deals with the movable goods only. immovable goods only. both movable and immovable goods. all goods except ornaments.

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The Sale of Goods Act, 1930 deals with (a) sale (b) mortgage. (c) pledge.

(d) all of the above.

11.

Which one of the following is true? (a) the provisions of Sale of Goods were originally with the Indian Contract Act, 1872. (b) the Sale of Goods Act, 1930 deals with mortgage. (c) the Sale of Goods Act restricts the parties to modify the provisions of law. (d) none of the above.

12.

The conditions and warranties may be in the form of (a) express. (b) implied. (c) either (a) or (b).

(d) none of the above.

13.

Goods which are in existence at the time of the Contract of Sale is known as (a) present Goods. (b) existing Goods. (c) specific Goods. (d) none of the above.

14.

Which of the following is not a form of delivery? (a) constructive delivery. (b) structured delivery. (c) actual delivery. (d) symbolic delivery.

15.

Which one of the following is/are document of title to goods? (a) railway receipt. (b) wharfinger’s certificate. (c) warehouse keeper’s certificate. (d) all of the above

16.

Which one of the following is not true? (a) document showing title is different from document of title. (b) bill of lading is a document of title to goods. (c) specific goods can be identified and agreed upon at the time of the contract of Sale. (d) none of the above.

17.

Mercantile Agent is having an authority to (a) sell or consign goods. (b) raise money on the security of goods. (c) sell or buy goods. (d) any of the above.

18.

Contract of Sale is (a) executory Contract. (c) both of the above.

(b) executed Contract. (d) none of the above.

19.

In which form of the contract, the property in the goods passes to the buyer immediately? (a) agreement to sell. (b) hire purchase. (c) sale (d) installment to sell.

20.

Which one of the following is not an implied warranty? (a) warranty as to undisturbed possession. (b) warranty as to existence of encumbrance. (c) disclosure of dangerous nature of goods. (d) warranty as to quality or fitness by usage of trade.

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21.

Doctrine of Caveat Emptor means (a) let the seller beware. (c) let the creditor beware.

(b) let the buyer beware. (d) none of the above.

22.

Under the doctrine of Caveat Emptor the seller is (a) responsible for the bad selection of goods by the buyer. (b) not responsible for the bad selection of goods by the buyer. (c) both (a) and (b). (d) none of the above.

23.

The (a) (b) (c) (d)

24.

Where there is an unconditional contract for the sale of specific goods in a deliverable state(a) property in the goods passes to the buyer when the contract is made. (b) property in the goods does not pass to the buyer when the contract is made. (c) property in the goods remains with the seller when the contract is made. (d) none of the above.

25.

Selection of goods with the intention of using them in performance of the contract and with the mutual consent of the seller and the buyer is known as (a) distribution (b) appropriation. (c) amortization. (d) storage.

26.

Acceptance of delivery of goods is deemed to take place when the buyer (a) intimates to the seller that he had accepted the goods. (b) does any act to the goods, which is inconsistent with the ownership of the seller. (c) retains the goods after the lapse of a reasonable time, without intimating to the seller that he was rejected them. (d) any of the above.

27.

An unpaid seller is having rights against (a) goods only. (b) the buyer only. (c) both goods and buyer. (d) none of the above.

28.

Under which of the circumstances unpaid seller loses his right of lien (a) by estoppel (b) where seller waived the right of lien. (c) where the buyer or his agent lawfully obtains possession of the goods. (d) any of the above.

29.

When the unpaid seller has parted with the goods to a carrier and the buyer has become insolvent he can exercise (a) right of lien. (b) right of stoppage in transit. (c) right of resale. (d) none of the above.

doctrine of Caveat Emptor does not apply, when the goods are bought by sample. the goods are bought by sample as well as description. the goods are purchased under its brand name. all of the above.

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The essence of a right of lien is to (a) deliver the goods. (c) regain the possession.

(b) retain the possession. (d) none of the above.

31.

Which of the following right can be exercised by an unpaid seller against the buyer, who is not insolvent (a) right of lien. (b) right of stoppage in transit. (c) both (a) and (b). (d) none of the above.

32.

Which of the following is a buyer right against the seller in case of breach of contract? (a) suit for non-delivery. (b) suit for specific performance. (c) suit for damages for breach of warranty. (d) all of the above.

33.

An auction sale is complete on the (a) delivery of goods (c) fall of hammer

(b) payment of price (d) none of the above.

34.

If a seller handed over the keys of a warehouse containing the goods to the buyer results in (a) constructive delivery (b) actual delivery (c) symbolic delivery (d) none of the above

35.

If A agrees to deliver 100 kg of sugar to B in exchange of 15 mts of cloth, then it is (a) Contract of sale. (b) Agreement to sell. (c) Sale on Approval. (d) Barter.

36.

In a hire-purchase agreement, the hirer (a) has an option to buy the goods. (b) must buy the goods. (c) must return the goods. (d) is not given the possession of goods.

37.

A agrees to deliver his old car valued at Rs. 80,000 to B, a car dealer, in exchange for a new car, and agrees to pay the difference in cash it is (a) Contract of sale. (b) Agreement to sell. (c) Exchange. (d) Barter.

38.

If the buyer rejects the whole quantity of goods due to short delivery or excess delivery, the contract is treated as (a) subsisting (b) cancelled (c) void. (d) invalid.

39.

Seller has right of resale where (a) goods are perishable. (c) seller gives notice.

(b) seller has reserved such right. (d) all of these.

Legally, a contract of sale includes (a) sale. (b) agreement to sell.

(c) barter.

40. 41.

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(d) both (a) and (b)

In case of goods sold by sample, the goods should correspond with the sample other wise (a) buyer can reject the goods. (b) buyer cannot reject the goods. (c) contract is automatically terminated. (d) seller is liable to punishment.


42.

A contact for the sale of goods which provide that the property would pass to the buyer on full payment of price and execution of sale deed, is known as (a) sale (b) agreement to Sell (c) hire-purchase Agreement (d) sale of approval

43.

M, a shopkeeper, sold a Television set to N, who purchased it in good faith. The set had some manufacturing defect and it did not work after a few days in spite of repairs. In this case, the television was not merchantable as it was not fit for ordinary purpose (a) the buyer has no right to reject the television. (b) the buyer has the right to reject the television and to have refund of the price. (c) both of the above. (d) none of the above [(a) & (b)]

44.

The Sale of Goods Act, 1930 came into force on (a) 15th March, 1930. (b) 1st July, 1930. (c) 30th July, 1930. (d) 30th June, 1930.

45.

The person who buys or agrees to buy goods is known as (a) consumer. (b) buyer. (c) both (a) and (b)

(d) none of the above.

46.

Voluntary transfer of possession by one person to another is popularly known as (a) transfer. (b) possession. (c) delivery. (d) none of the above.

47.

Under which circumstances, the right of stoppage can be exercised by the unpaid seller (a) the buyer has become insolvent (b) the goods are in transit (c) the seller must be unpaid (d) all of the above.

48.

Under which circumstances the unpaid seller can exercise right of re-sale (a) when the goods are of perishable nature. (b) when he gives notice to the buyer. (c) when he gives notice to the buyer of his intention to re-sale and the buyer does not within a reasonable time pay the price. (d) both (a) and (c)

49.

Where the seller wrongfully neglects to deliver the goods to the buyer, then the buyer (a) cannot sue the seller for damages for non-delivery. (b) may sue the seller for damages for non-delivery. (c) either (a) or (b) (d) none of the above

50.

Where the buyer is deprived to goods by their true owner, then the buyer (a) may recover the price for breach of the condition as to title. (b) can not recover the price for breach of the condition as to title. (c) either (a) or (b) (d) none of the above.

51.

Where the buyer wrongfully neglects or refuses to accept and pay for the goods, then (a) the seller may sue buyer for damages for non-acceptance. (b) the seller cannot sue buyer for damages for non-acceptance. (c) the seller can sue buyers’ banker for damages. (d) none of the above.

MERCANTILE

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111


In an auction sale, the property shall be sold to the (a) Lowest bidder. (b) Highest bidder. (c) All bidders (d) None of the above.

53.

In an auction sale, if the seller makes use of pretended bidding to raise the price, then the sale is (a) valid (b) void (c) voidable (d) illegal

54.

If X commissioned Y, an artist, to paint a portrait of A for 200 dollars & Y uses his own canvas & paint then it is (a) Contract of sale. (b) Contract of work & materials. (c) Sale on approval. (d) Hire-Purchase agreement.

55.

The implied condition that goods shall be fit to buyer’s specific purpose, is applicable only where the buyer tells his purpose to the seller and relies upon seller’s skill and judgement as (a) It is the requirement of law. (b) It is buyer’s duty to select goods, which serve his purpose. (c) Seller can be silent (d) All of the above.

56.

In case, a condition is changed to the status of a warranty, then the buyer (a) loses the right to reject goods (b) retains right to claim damages only (c) both (a) and (b) are true (d) both (a) and (b) are false.

57.

The property in the goods means the (a) Possession of goods (c) ownership of goods

(b) custody of goods (d) both (a) and (b)

58.

The goods are at the risk of a party who has the (a) Ownership of goods (b) Possession of goods (c) Custody of goods (d) both (b) and (c)

59.

In case of unconditional contract of sale, the property passes to the buyer at the time of making the contract. For this rule to apply, the goods must be (a) specific (b) in a deliverable state (c) physically transferred to buyer (d) both (a) and (b)

60.

In case of sale of standing trees, the property passes to the buyer when trees are (a) felled and ascertained (b) not felled but earmarked (c) counted and ascertained (d) both (b) and (c)

61.

In case of sale of unascertained goods, the ownership is transferred to the buyer when the goods are (a) ascertained (b) appropriated to the contract (c) weighed and measured (d) both (a) and (b)

62.

In case of sale on approval, the ownership is transferred to the buyer when he (a) accepts the goods (b) adopts the transaction (c) fails to return goods (d) in all the above cases.

112


63.

Which of the following modes of delivery of goods is considered effective for a valid contract of sale? (a) Actual delivery (b) symbolic delivery (c) Constructive delivery (d) all of these.

64.

Where the goods are delivered to a carrier or wharfinger for the purpose of transmission to the buyer, the delivery is (a) invalid and ineffective (b) valid and effective (c) conditional (d) none of these.

65.

In which of the following cases, the unpaid seller loses his right of lien? (a) delivery of goods to buyer (b) delivery of goods to carrier (c) tender of price by buyer (d) all of these.

66.

The bidder at an auction sale can withdraw his bid (a) any time during auction (b) before fall of hammer (c) before payment of price (d) none of these.

67.

Where in an auction sale, the seller appoints more than one bidder, the sale is (a) void (b) illegal (c) conditional (d) voidable

68.

Where in an auction sale notified with reserve price, the auctioneer mistakenly knocks down the goods for less than the reserve price, then the auctioneer is (a) bound by auction (b) not bound by auction (c) liable for damages (d) both (a) and (c)

69.

A contract for the sale of “future goods” is _______________ (a) Sale (b) agreement to sell. (c) void (d) hire-purchase contract

70.

A stipulation in a contract of sale of goods whose violation by seller gives a right of rescission to buyer, is called _____________ (a) guarantee. (b) warranty. (c) condition. (d) term.

71.

Goods which are in existence at the time of the Contract of Sale is known as __________ (a) present Goods. (b) existing Goods. (c) specific Goods. (d) none of the above.

72.

Contract of Sale is _______________ (a) executory Contract. (c) both of the above.

(b) executed Contract. (d) none of the above

73.

Doctrine of Caveat Emptor means _________ (a) let the seller beware. (b) let the buyer beware. (c) let the creditor beware. (d) none of the above.

74.

The essence of a right of lien is to __________ (a) deliver the goods. (b) retain the possession. (c) regain the possession. (d) none of the above

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The Sale of Goods Act, 1930 came into force on ______________ (a) 15th March, 1930. (b) 1st July, 1930. (c) 30th July, 1930. (d) 30th June, 1930.

76.

Under the Sale of Goods Act, 1930, warranty (ies) ? 1. Warranty of quiet possession 3. Warranty of title (a) 1&2 (b) 1&3

which of the following is/are the implied 2. Warranty of freedom from encumbrances 4. Warranty as to wholesomeness. (c) 2&4 (d) 3&4

77.

Which of the following is/are necessary constituent(s) of a contract of sale? 1. Three distinct parties – seller, buyer and a mediator 2. Movable goods for a price 3. Transfer of general property 4. Exchanging of goods without money (a) 1&2 (b) 2&3 (c) 2&4 (d) 3&4

78.

The 1. 2. 3. 4.

79.

A buyer may make some payment in advance to the seller as a guarantee for performance of contract. This money is known as 1. Earnest money 2. Security deposit 3. Fixed deposit 4. Deposit (a) 1&2 (b) 1&3 (c) 2&4 (d) 3&4

80.

Which of the following is a document of title to goods 1. Bill of Lading 2. Railway Receipt 3. Dock Warrant 4. Performa invoice (a) 2, 3 (b) All the above (c) 1, 2, 3

(d)

2, 3, 4

A seller is unpaid when 1. Whole of the price have not been tendered 2. A negotiable instrument given has been dishonoured 3. A bill of exchange given was dishonoured 4. A part of the price has only been paid (a) 1, 2, 3 (b) 2, 3, 4 (c) 1, 2, 3, 4

(d)

1, 3, 4

81.

114

term ‘goods’ for the purpose of Sale of Goods Act, does not include Money Actionable claims Stocks & Shares Growing crops, grass (a) 1&2 (b) 1&3 (c) 2&4 (d) 3&4


82.

Which of the following is the Right of Unpaid Seller 1. Right to re-sale 2. Right to stop the goods in transit 3. Right of lien 4. Right to demand back the goods (a) 2, 3, 4 (b) 1, 2, 3 (c) 1, 3, 4

(d)

1, 2, 3, 4

83.

A sold a tin of disinfectant powder to K without warning knowing fully that if the tin was not opened with care, it will likely to cause injury. K was injured while opening the tin. Which of the following statement(s) is/are correct? (a) A is not liable to K under the Doctrine of caveat emptor. (b) A is liable for the damages. (c) A has no duty to disclose the facts to K. (d) The buyer has the responsibility to enquire about all the things before purchasing the goods.

84.

A purchased a refrigerator on hire purchase from B and pledged with C. D purchased the refrigerator from C in good faith, on knowing the facts B wants to recover the refrigerator from D. Which of the following statement(s) is/are correct? (a) B can recover the refrigerator from D. (b) B can recover the refrigerator from A only. (c) B cannot recover the refrigerator from D. (d) D will get good title for the refrigerator as he bought it in good faith.

85.

A timber merchant agreed to supply best teak at a certain agreed price to a builder. Later the merchant supplied timber which was identified as ordinary class of timber and demanded the payment from the builder. Which of the following statements is/are true? (a) Builder can reject the goods and can claim damages. (b) Builder has to accept the goods. (c) Builder has to pay the price by taking delivery of teak wood. (d) Timber merchant cannot plead the doctrine of caveat emptor.

86.

‘A’ acquired certain goods from ‘C’ by falsely representing that he was acting on behalf of ‘B’ and was authorized to collect the goods. ‘A’ later sold the goods to ‘D’. Is the sale valid? (a) The sale is valid as ‘D’ is not supposed to inquire the status of ‘A’ as a seller. (b) The sale is valid because ‘D’ has purchased the goods in good faith. (c) The sale is valid as ‘A’ has acquired the goods by way of fraud. (d) The sale is not valid because it a sale by non-owner and therefore, ‘D’, the buyer, will not acquire any good title of the goods.

87.

In a (a) (c) (d)

concluded sale, if the goods are destroyed, the loss is to be borne by The seller (b) The buyer Both seller and buyer in agreed proportions The party who is in possession of goods.

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R, a grain merchant, displays wheat of different varieties. A after satisfying himself of the quality buys the wheat in the belief that the wheat is of earlier harvest. In fact the wheat is of recent harvest. A wants to return the wheat and refuses to pay the price. Which of the following is/are true? (a) A can return the wheat. (b) A can refuse to pay the price. (c) A cannot return the wheat. (d) R cannot sue A to recover the money.

89.

Match the following: (i) Goods were there at the time of sale (a) Unascertained goods (ii) Goods were not specifically identified (b) Future goods (iii) Good not in existence at the time (c) Contingent Goods of contract of sale (iv) Goods depend upon certain events (d) Existing Goods which may or may not happen

90.

Match the following: (i) Goods sold on the fall of hammer (ii) Right to withhold (iii) Delivery of goods (iv) Deliver to a caretaker

91.

Match the following: (i) Sale (ii) Agreement to sell (iii) Condition (iv) Warranty

92.

116

Match the following: (i) Right to Sell (ii) Goods must be properly packed (iii) Goods must be the same as wanted by the seller (iv) Buyer having right / opportunity to compare

(a) Right of Lien (b) Constructive Delivery (c) Wharf finger (d) Auction Sale (a) Ownership is transferred at some future date (b) A stipulation which is essential (c) Stipulation which is collateral. (d) Ownership is transferred immediately (a) Condition as to description (b) Condition as to sample (c) Condition as to wholesomeness (d) Condition as to title


2.33 ANSWERS TO MULTIPLE CHOICE QUESTIONS 1.

(b)

2.

(b)

3.

(b)

4.

(c)

5.

(a)

6.

(a)

7.

(c)

8.

(c)

9.

(c)

10.

(a)

11.

(a)

12.

(c)

13.

(b)

14.

(b)

15.

(d)

16.

(d)

17.

(d)

18.

(c)

19.

(c)

20.

(b)

21.

(b)

22.

(b)

23.

(d)

24.

(a)

25.

(b)

26.

(d)

27.

(c)

28.

(d)

29.

(b)

30.

(b)

31.

(a)

32.

(d)

33.

(c)

34.

(c)

35.

(d)

36.

(a)

37.

(a)

38.

(a)

39.

(d)

40.

(d)

41.

(a)

42.

(b)

43.

(b)

44.

(b)

45.

(b)

46.

(c)

47.

(d)

48.

(d)

49.

(b)

50.

(a)

51.

(a)

52.

(b)

53.

(c)

54.

(b)

55.

(a)

56.

(c)

57.

(c)

58.

(a)

59.

(d)

60.

(a)

61.

(d)

62.

(d)

63.

(d)

64.

(b)

65.

(d)

66.

(b)

67.

(d)

68.

(b)

69.

(b)

70.

(c)

71.

(b)

72.

(c)

73.

(b)

74.

(b)

75.

(b)

76.

(a)

77.

(b)

78.

(a)

79.

(a)

80.

(c)

81.

(c)

82.

(b)

83.

(b)

84.

(a)

85.

(a)

86.

(d)

87.

(b)

88.

(c)

89.

(i) (d)

(ii) (a) (iii) (b)

(iv) (c)

90.

(i) (d)

(ii) (a) (iii) (b)

(iv) (c)

91.

(i) (d)

(ii) (a) (iii) (b)

(iv) (c)

92.

(i) (d)

(ii) (c) (iii) (a)

(iv) (b)

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NOTES

THE INDIAN PARTNERSHIP ACT, 1932

CHAPTER – 3 INTRODUCTION You might be aware that one of the forms in which business can be carried on is partnership, where two or more persons join together to form the partnership and run the business. In order to govern and guide partnership, the Indian Partnership Act, 1932, was enacted. In human relations often misunderstandings crop up; if any misunderstanding crops up in a partnership amongst its partners, the continuity of the partnership may become doubtful. Since, public at large would be dealing with the partnership as customers, suppliers, creditors, lenders, employees or any other capacity, it is also very important for them to know the legal consequences of their transactions and other actions in relation with the partnership where no one partner is the owner of the business and, therefore, exclusively responsible. The law relating to partnership in India which is contained in Indian Partnership Act (IX of 1932) is concerned partly with the rights and duties of partners between themselves and partly with the legal relations between partners and third persons, which flow or are incidental to the formation of a partnership. (Thus the act not only determines the rights and duties of a partner in relation to the partnership business as also against other partners; it clearly establishes the position of a partner as well as partnership firm vis-a-vis third parties, in legal and contractual relationships arising out of and in the course of business of the firm). It may be described as a branch of law relating to principal and agent since every partner is in contemplation of law the general and accredited agent of the partnership. In this Chapter, we shall deal with the provisions of the Act in the following order : Unit 1 - General Nature of a Partnership Unit 2 - Relations of Partners Unit 3 - Registration and Dissolution of a Firm

CHAPTER – 3


Unit 1 General Nature of a Partnership

THE INDIAN PARTNERSHIP ACT, 1932 Learning Objectives

Understand the concept of partnerships and be clear about its essentials.

Try to understand the ‘principal - agent relationship’ among the partners.

Note the points of difference between partnership and other various forms of organisation.

Be aware of the position of a minor in a partnership.

3.1

WHAT IS PARTNERSHIP?

Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all (Section 4). It, therefore, follows that a partnership consists of three essential elements : (i)

It must be a result of an agreement between two or more persons.

(ii) The agreement must be to share the profits of the business. (iii) The business must be carried on by all or any of them acting for all. All these essentials must coexist before a partnership can come into existence.

3.2

ESSENTIAL ELEMENTS OF PARTNERSHIP

We shall now consider the afore stated essential elements one by one. Agreement : You have just observed that partnership must be the result of an agreement between two or more persons. You should note that it can arise only from a contract and not from status. That is why, a partnership is distinguishable from a Hindu Undivided Family carrying on a family business. The reason is that as a result of the peculiarities of the Mitakshara School of Hindu Law applicable to joint families, a male child of a Hindu acquires an interest in a family business even in the absence of an agreement in that behalf, whereas partnership is a creation only of mutual agreement. Thus the nature of the partnership is voluntary and contractual. An agreement from which relationship of Partnership arises may be express. It may also be implied from the act done by partners and from a consistent course of conduct being followed, showing mutual understanding between them. It may be oral or in writing. Sharing profit of business : In this context, we will consider two propositions. First, there must exist a business. For the purpose, the term ‘business’ includes every trade, occupation and profession. The existence of business is essential. The motive of the business is the “acquisition of gains” which leads to the formation of partnership. Therefore there can be no partnership where there is no intention to carry on the business and to share the profit thereof. For example, co-owners who share amongst themselves the rent derived from a piece of land are not partners, because there does not exist any business. Similarly, no charitable institution or club may be floated in partnership [A joint stock company may, however, be floated for non-economic purposes]. Secondly, there must be an agreement to share profits. For example X and Y buy certain bales of cotton which they agree to sell on their joint account and to share the profits 122


equally. In these circumstances, X and Y are partners in respect of such cotton. But an agreement to share losses is not an essential element. However, in the event of losses, unless agreed otherwise, these must be borne in the profit-sharing ratio. Business carried on by all or any of them acting for all : The third requirement is that the business must be carried on by all the partners or by anyone or more of the partners acting for all. This is the cardinal principle of the partnership Law. An act of one partner in the course of the business of the firm is in fact an act of all partners. Each partner carrying on the business is the principal as well as the agent for all the other partners. You should, therefore, note that the true test of partnership is mutual agency rather than sharing of profits. If the element of mutual agency is absent then there will be no partnership. Sharing of profits is only Prima facie evidence which can be rebutted by a stronger evidence. Thus, this prima facie evidence can be rebutted by proving that there is no mutual agency.

3.3

TRUE TEST OF PARTNERSHIP

You must have understood that sharing of profit is an essential element to constitute a partnership. But, it is only a prima facie evidence and not conclusive evidence, in that regard. The sharing of profits or of gross returns accruing from property by persons holding joint or common interest in the property would not by itself make such persons partners. Although the right to participate in profits is a strong test of partnership, and there may be cases where, upon a simple participation in profits, there is a partnership, yet whether the relation does or does not exist must depend upon the whole contract between the parties. Where there is an express agreement between partners to share the profit of a business and the business is being carried on by all or any of them acting for all, there will be no difficulty in the light of provisions of Section 4, in determining the existence or otherwise of partnership. But the task becomes difficult when either there is no specific agreement or the agreement is such as does not specifically speak of partnership. In such a case for testing the existence or otherwise of partnership relation, Section 6 has to be referred. According to Section 6, regard must be had to the real relation between the parties as shown by all relevant facts taken together. The rule is easily stated and it is clear but its application is difficult. Cumulative effect of all relevant facts such as written or verbal agreement, real intention and conduct of the parties, other surrounding circumstances etc., are to be considered while determining the relationship between the parties and ascertaining the existence of partnership. The receipt by a person of a share of the profits of a business or a payment contingent upon the earning of profits or varying with the profits earned by business, would not by itself make him a partner with the persons carrying on the business, particularly, when such share of payment is received by the following persons : (i)

a lender of money to persons engaged or about to the engaged in any business, or

(ii) a servant (e.g., manager of a firm) or agent as his remuneration, or (iii) widow or child of a deceased partner or (iv) A previous owner of part of the business as the consideration for the sale of the goodwill or share thereof. MERCANTILE

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THE INDIAN PARTNERSHIP ACT, 1932 Existence of Mutual Agency which is the cardinal principle of partnership law, is very much helpful in reaching a conclusion in this regard. Each partner carrying on the business is the principal as well as an agent of other partners. So, the act of one partner done on behalf of firm, binds all the partners. If the element of mutual agency relationship exists between the parties constituting a group formed with a view to earn profits by running a business, a partnership may deemed to be existed. Distinction between partnership and firm : Persons who have entered into partnership with one another are called individual “Partners” and “collectively” and the name under which the business is carried on is called the “firm name”. Partnership is merely an abstract legal relation between the partners. A firm is a concrete thing signifying the collective entity for all the partners. Partnership is thus that invisibility which binds the partners together and firm is the visible form of those partners who are thus bound together.

3.4

PARTNERSHIP DISTINGUISHED FROM OTHER FORMS OF ORGANISATION

3.4.1 PARTNERSHIP VS. JOINT STOCK COMPANY (1) Personality : A firm is not legal entity i.e., it has no legal personality distinct from the personalities of its constituent members. On the other hand, a registered company is a judicial person distinct from its members. (2) Agency : In a firm, every partner is an agent of the other partners, as well as of the firm, but in the case of a company a member is not an agent of the other members or of the company, his actions do not bind either. (3) Distribution of profits : The profits of the firm must be distributed among the partners according to the terms of the partnership deed. But in the case of a company, there is no such compulsion to distribute its profits among its members. Some portion of the profits, but generally not the entire profit, become distributable among the shareholders only when dividends are declared. (4) Extent of liability : In a partnership, the liability of the partners is unlimited. This means that each partner is liable for debts of a firm incurred in the course of the business of the firm and these debts can be recovered from his private property, if the joint estate is insufficient to meet them wholly. On the other hand, the liability of a shareholder is limited to the amount, if any, unpaid on his shares, in the case of company limited by shares; but in the case of a guarantee company, the liability is limited to the amount for which he has agreed to be liable. However, there may be companies where the liability of members is unlimited. (5) Property : The firm’s property is that which is the “joint estate” of all the partners as distinguished from the ‘separate’ estate of any of them and it does not belong to a body distinct in law from its members. That is why, in the event of insolvency, the joint estate, after meeting the liability in respect of joint debts devolves on the partners. But in the case of a company, its property is separate from that of its members who can receive it back only in the form of dividends or refund of capital.

124


(6) Transfer of shares : A share in a partnership cannot be transferred without the consent of all the partners; but in a company, a shareholder may transfer his shares, subject to the provisions contained in its Articles. In the case of public limited companies whose shares are quoted on the stock exchange, the transfer is usually unrestricted. (7) Management : In the absence of an express agreement to the contrary, all the partners are entitled to participate in the management. But members of a company are not entitled to take part in the management unless they are appointed as directors, in which case they may participate. Members, however, enjoy the right of attending general meeting and voting there at to decide certain questions such as election of directors, appointment of auditors, etc. (8) Number of membership : In the case of firms carrying on business other than banking, the number must not exceed 20 and in the case of banks such number must not exceed 10. A private company may have as many as 50 members but not less than two and a public company may have any number of members but not less than seven. 3.4.2 PARTNERSHIP VS. CLUB A club is an association of persons formed with the object not of earning profit, but of promoting some beneficial purposes such as improvement of health or providing recreation for the members, etc. On the other hand, partnership is also an association of persons but formed with the object of earning profit. (1) Unlike a partner, a member of a club is not the agent of other members nor is he liable to a creditor of the club, except when he is responsible for the contract which gave rise to the liability. (2) A member of a club has no interest in the property of the club, as a partner has in the property of the firm. Also, the change in the membership of a club does not affect its existence. 3.4.3 PARTNERSHIP VS. HINDU UNDIVIDED FAMILY (1) Creation : The relation of partnership is created necessarily by an agreement, whereas the right in the joint family is created by status. The creation of a right by status means its creation by birth in the family. (2) Death : Death of a partner ordinarily leads to the dissolution of partnership. But the death of a member in the Hindu undivided family does not give rise to dissolution of the family business. (3) Management : The right of management of joint family business generally vests in the Karta, the governing male member of the family. But in the case of a partnership, all the partners are equally entitled to take part in the partnership business. (4) Authority to bind the firm : In the joint family, the Karta or the manager, has the authority to contract for the family business. In partnership, every partner can, by his act, bind the firm. (5) Liability : In a partnership, the liability of a partner is unlimited; but in a Hindu undivided family, only the liability of the Karta is unlimited, and the other copartners are liable only MERCANTILE

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(6)

(7) (8)

(9)

to the extent of their share in the profits of the family business, unless they take part in the act performed or transactions entered into by the Karta. Calling for accounts : On the separation of the joint family, a member is not entitled to ask for account of the family business. But a partner can bring a suit against the firm for accounts, provided he also seeks the dissolution of the firm. Governing Law : A partnership is governed by the Partnership Act; a Joint Hindu family business is governed by the Hindu Law. Minor’s capacity : In a partnership, a minor cannot become a partner, though he can be admitted to the benefits of partnership, only with the consent of all the partners. In Hindu undivided family business, a minor becomes a member of the ancestral business by the incidence of birth. He does not have to wait for attaining majority. Continuity : A Joint Hindu Family has the continuity till it is divided. The status of Joint Hindu Family is not thereby affected by the death of a member, but a firm subject to a contract between the partners gets dissolved by death or insolvency of a partner.

3.4.4 PARTNERSHIP VS. CO-OWNERSHIP (1) Partnership always arises out of a contract, express or implied co-ownership may arise either from agreement or by the operation of law, such as by inheritance. (2) In partnership, there is community of interest. It means that profits and losses must have to be shared but co-ownership does not necessarily involve sharing of profits and losses. (3) In the case of partnership, a partner is the agent of the other partners, but in the case of a co-ownership, a co-owner is not the agent of other co-owners. (4) A share in the partnership is transferred only by the consent of other partners. Co-ownership may be dissolved at the will of co-owners; also a co-owner may transfer his interest or rights in the property without the consent of other co-owners. 3.4.5 PARTNERSHIP VS. ASSOCIATION (1)

Partnership means and involves setting up relation of agency between two or more persons who have entered into a business for gains, with the intention to share the profits of such a business; but partnerships does not exist between members of a charitable society or religious association or an improvement scheme or building corporation, etc.

(2) Partnership does not exist between members of a mutual insurance society. (3) In a trade combine or protection association, the relation between the members is not that of partnership.

3.5

TYPES OF PARTNERS

Active Partner means a person (i) who has become a partner by agreement and (ii) who actively participates in the conduct of the partnership. While a partner who does not take an active part in the conduct of the business of the firm is called a sleeping(dormant) partner. A person who lends his name to the firm, without having any real interest in it is called a nominal partner. ‘Partner’ byholding out’ (Section 28) : Partnership by ‘holding out’ is also known as partnership by estoppel. Where a man holds himself out as a partner, or allows others to do it, he is then 126


stopped from denying the character he has assumed and upon the faith of which creditors may be presumed to have acted. When a person (i) represents himself, or (ii) knowingly permits himself, to be represented as a partner in a firm (when in fact he is not) he is liable, like a partner in the firm to anyone who on the faith of such representation has given credit to the firm. A person may himself, by his words or conduct have induced others to believe that he is a partner or he may have allowed others to represent him as a partner. The result in both the cases is identical. Example: X and Y are partners in a partnership firm. X introduced A, a manger, as his partner to Z. A remained silent. Z, a trader believing A as partner supplied 100 T.V sets to the firm on credit. After expiry of credit period, Z did not get amount of T.V sets sold to the partnership firm. Z filed a suit against X and A for the recovery of price. Considering the provisions of the Indian Partnership Act, 1932 state whether A is liable. Yes, A is also liable for the price because he becomes a partner by holding out (Section 28, Indian Partnership Act, 1932). It is only the person to whom the representation has been made and who has acted thereon that has right to enforce liability arising out of ‘holding out’. You must also note that for the purpose of fixing liability on a person who has, by representation, led another to act, it is not necessary to show that he was actuated by a fraudulent intention. The rule enunciated in Section 28 is also applicable to a former partner who has retired from the firm without giving proper public notice of his retirement. In such cases a person who, even subsequent to the retirement, give credit to the firm on the belief that he was a partner, will be entitled to hold him liable. Sub-partnership : A sub-partnership may arise when, consequent upon an agreement between a partner in a firm and a stranger, the latter is vested with interest jointly with that partner so far as his share in the firm is concerned. Such an agreement will not render the stranger a partner of the main firm. A sub-partner can claim the agreed share from the actual partner, but he can have no right against the main firm to take part in or to interfere with its business or to examine its account.

3.6

MINOR’S POSITION IN PARTNERSHIP

We shall now discuss a topic, viz., minor’s position in relation to partnership. You will recall that a minor cannot be bound by a contract because a minor’s contract is void and not merely voidable. Therefore, a minor cannot become a partner in a firm because partnership is founded on a contract. Though a minor cannot be a partner in a firm, he can nonetheless be admitted to the benefits of partnership under Section 30 of the Act. In other words, he can be validly given a share in the partnership profits. When this has been done and it can be done with the consent of all the partners then the rights and liabilities of such a partner will be governed under Section 30 as follows :

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THE INDIAN PARTNERSHIP ACT, 1932 (1) Rights : (i) A minor partner has a right to his agreed share of the profits of the firm. (ii) He can have access to, inspect and copy the accounts of the firm. (iii) He can sue the partners for accounts or for payment of his share but only when severing his connection with the firm, and not otherwise. (iv) On attaining majority he may within 6 months elect to become a partner or not to become a partner. If he elects to become a partner, then he is entitled to the share to which he was entitled as a minor. If he does not, then his share is not liable for any acts of the firm after the date of the public notice served to that effect. (2) Liabilities : (i) The minor’s share is liable for the acts of the firm, but he is not personally liable for any such act. (ii) Within 6 months of his attaining majority or on his obtaining knowledge that he had been admitted to the benefits of partnership, whichever date is later, he may give public notice that he has elected not to become partner and such notice shall determine his position as regards the firm. If he fails to give such notice he shall become a partner in the firm on the expiry of the said six months. If the minor becomes a partner of his own willingness or by his failure to give the public notice within specified time, the position will be as follows : (i)

He becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of partnership.

(ii) His share in the property and the profits of the firm remains the same to which he was entitled as a minor. Where the minor decides to sever his connection with the firm his rights and liabilities will be as follows. (i)

His rights and liabilities continue to be those of a minor up to the date of giving public notice.

(ii) His share shall not be liable for any acts of the firm done after the date of the notice. (iii) He shall be entitled to sue the partners for his share of the property and profits. It may be noted that such minor shall give notice to the Registrar that he has or has not become a partner.

3.7

SUMMARY

It is not quite easy to define the term ‘Partnership’. The definition given by Section 4 of the Act brings out very clearly the fundamental principle that each partner, when carrying on the business of the firm, is an agent as well as principal, and is probably the most business like definition of the term. The definition contains three elements which must be present before a group of persons can be held to be partners, namely; (a) agreement among all the partners; (b) agreement to share the profits of the business; (c) the business must be carried on by all or any of them, acting for all. These three elements may appear to overlap, but they are nevertheless distinct. The element of agreement in partnership distinguishes it from various other relations which arise by operation of law and not from agreement, such as, joint-owners, Hindu Undivided Family, etc.

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CHAPTER – 3


Unit 2 Relations of Partners

THE INDIAN PARTNERSHIP ACT, 1932 Learning Objectives

Be familiar with the legal provisions regulating relation of partners’ interest as well as relations with the third parties.

Note the scope of implied authority of a partner to bind the partnership by his acts.

Be aware of the various situations in which the constitution of a firm may change and its effect on the rights and duties of the partners.

Learn how the share in a partnership is transferred and what shall be the rights and obligations of such transferee.

3.8

MUTUAL RIGHTS AND DUTIES OF PARTNERS

These are governed by the contract existing between them which may be express or implied by the course of dealing. The contract may be varied by the consent of all the partners; which may be express or implied by the course of dealings. The contract may provide that a partner shall not carry on any business other than that of the firm while he is a partner (Section 11). Subject to a contract between the partners the mutual rights and liabilities are as follows : Rights : (1) Right to take part in the conduct of the Business : Every partner has the right to take part in the business of the firm. This is because partnership business is a business of the partners and their management powers are generally coextensive. Now suppose this management power of the particular partner is interfered with and he has been wrongfully precluded from participating therein. Can the Court interfere in these circumstances? The answer is in the affirmative. The Court can, and will, by injunction, restrain other partners from doing so. You should also note in this connection that a partner who has been wrongfully deprived of the right of participation in the management has also other remedies, e.g., a suit for dissolution, a suit for accounts without seeking dissolution, etc. The above mentioned provisions of law will be applicable only if there is no contract to the contrary between the partners. It is quite common to find a term in partnership agreements, which gives only limited power of management to a partner or a term that the management of the partnership will remain with one or more of the partners to the exclusion of others. In such a case, the Court will normally be unwilling to interpose with the management with such partner or partners, unless it is clearly made out that something was done illegally or in breach of the trust reposed in such partners. (2) Right to be consulted : Where any difference arises between the partners with regard to the business of the firm, it shall be determined by the views of the majority of them, and every partner shall have the right to express his opinion before the matter is decided. But no change in the nature of the business of the firm can be made without the consent of all the partners [Section 12 (c)]. This means that in routine matters, the opinion of the majority of the partners will prevail. Of course, the majority must act in good faith and every partner must be consulted as far as practicable. You should note that the aforesaid majority rule will not apply where there is a change in the nature of the firm itself. In such a case, the unanimous consent of the partners is needed. 130


(3) Right of access to books : Every partner whether active or sleeping is entitled to have access to any of the books of the firm and to inspect and take out of copy thereof [Section 12 (d) ]. The right must, however, be exercised Bona fide. (4) Right to remuneration : No partner is entitled to receive any remuneration in addition to his share in the profits of the firm for taking part in the business of the firm. But this rule can always be varied by an express agreement, or by a course of dealings, in which event the partner will be entitled to remuneration. Thus a partner can claim remuneration even in the absence of a contract, when such remuneration is payable under the continued usage of the firm. In other words, where it is customary to pay remuneration to a partner for conducting the business of the firm he can claim it even in the absence of a contract for the payment of the same. It is not uncommon for partners, in actual practice, to agree that a managing partner will receive over and above his share, salary or commission for the trouble that he will take while conducting the business of the firm. (5) Right to share Profits : Partners are entitled to share equally in the profits earned and so contribute equally to the losses sustained by the firm [Section 13 (b)]. The amount of a partner’s share must be ascertained by enquiring whether there is any agreement in that behalf between the partners. If there is no agreement then you should make a presumption of equality and the burden of proving that the shares are unequal, will lie on the party alleging the same. There is no connection between the proportion in which the partners shall share the profits and the proportion in which they have contributed towards the capital of the firm. (6) Interest on Capital : Suppose interest on capital subscribed by the partner is payable to him under the partnership deed. In such a case, the interest will be payable only out of profits. As a general rule, interest on capital subscribed by partners is not allowed unless there is an agreement or usage to that effect. The principle underlying this provision of law is that regards the capital brought by a partner in the business, he is not a creditor of the firm but an adventurer. The following elements must be before a partner can be entitled to interest on moneys brought by him in the partnership business: (i) an express agreement to that effect, or practice of the particular partnership or (ii) any trade custom to that effect; or (iii) a statutory provision which entitles him to such interest. (7) Interest on advances : Suppose a partner makes an advance to the firm in addition to the amount of capital to be contributed by him. In such a case, the partner is entitled to claim interest thereon @6% per annum [Section 13 (d) ]. While interest on capital account ceases to run on dissolution, the interest on advances keep running even often dissolution and up to the date of payment. From the discussion so far, you will notice that the Partnership Act makes a distinction between the capital contribution of a partner and the advance made by him to the firm. The advances are regarded as loans which should bear interest while capital bears interest only when there is an agreement to this effect. (8) Right to be indemnified : Every partner has the right to be indemnified by the firm in respect of payments made and liabilities incurred by him in the ordinary and proper conduct MERCANTILE

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THE INDIAN PARTNERSHIP ACT, 1932 of the business of the firm as well as in the performance of an act in an emergency for protecting the firm from any loss, if the payments, liability and act are such as a prudent man would make, incur or perform in his own case, under similar circumstance [Section 13 (e) ]. (9) Right to stop admission of a new partner : Every partner has the right to prevent the introduction of a new partner in the firm without the consent of all the existing partners. Where a partner is introduced into the firm, he is not liable for any act of the firm done before he became a partner [Section 31]. (10) Right to retire : Every partner has the right to retire with the consent of all the other partners and in the case of a partnership being at will, by giving notice to that effect to all the other partners [Section 32 (1)]. (11) Right not to be expelled : Every partner has the right not to be expelled from the firm by any majority of the partners (Section 33). (12) Right of outgoing partner to carry on competing business : An outgoing partner may carry on business competing with that of the firm and he may advertise such business, but without using the firm name or representing himself as carrying on the business of the firm or soliciting the custom of persons who were dealing with the firm before he ceased to be a partner [Section 36 (1)]. (13) Right of outgoing partner to share subsequent profits : Where any partner has died or ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with the property of the firm without any final settlement of accounts as between them and the outgoing partner or his estate, the outgoing partner or his estate has at his or his representative’s option, the right to such share of the profit made since he ceased to be a partner as may be attributable to the use of his share of the property of the firm or to interest @ 6% per annum on the amount of his share in the property of the firm [Section 37]. (14) Right to dissolve the firm : A partner has the right to dissolve the partnership with the consent of all partners (Section 40). But where the partnership is at will the firm may be dissolved by any partner giving notice in writing to all other partners of his intention to dissolve the firm (Section 40). DUTIES (1) Partners are bound to carry on the business of the firm (i) to the greatest common advantage, (ii) to be just and faithful to each other and (iii) to render to any partner or his legal representative a true account and full information of all things affecting the firm (Section 9). (2) Every partner is liable to indemnify the firm for any damage caused to it by reason of his fraud in the conduct of the business of the firm (Section 10). (3) Every partner is bound to attend diligently to his duties relating to the conduct of the firm’s business [Section 12 (b)]. A partner is not, however, normally entitled to remuneration for participating in the conduct of the business [Section 13 (a)]. He is also bound to let his partners have the advantage of his knowledge and skill. (4) All the partners are liable to contribute equally to the loss sustained by the firm. 132


(5) A partner must indemnify the firm for any loss caused to it by willful neglect in the conduct of the business of the firm [Section 13 (f)]. (6) If a partner derives any profit for himself from any transaction of the firm or from the use of the property or business connection of the firm or firm’s name then he is bound to account for that profit and refund it to the firm [Section 16 (a)]. (7) If a partner carries on business of the same nature as and competing with that of the firm, then he must account for and pay to firm all profits made by him in the business [Section 16 (b)]. The firm will not be liable for any loss. We shall discuss Sections 16 and 17 in more detail later on.

3.9

PARTNERSHIP PROPERTY (SECTION 14)

The expression ‘property of the firm’, also referred to as ‘partnership property’, ‘partnership assets’, ‘joint stock’, ‘common stock’ or ‘joint estate’, denotes all property, rights and interests to which the firm, that is, all partners collectively, may be entitled. The property which is deemed as belonging to the firm, in the absence of any agreement between the partners showing contrary intention, is comprised of the following items : (i)

all property, rights and interests which partners may have brought into the common stock as their contribution to the common business;

(ii) all the property, rights and interest acquired or purchased by or for the firm, or for the purposes and in the course of the business of the firm; and (iii) goodwill of the business. The determination of the question whether a particular property is or is not ‘property’ of the firm ultimately depends on the real intention or agreement of the partners. Thus, the mere fact that the property of a partner is being used for the purposes of the firm shall not by itself make it partnership property, unless it is intended to be treated as such. Partners may, by an agreement at any time, convert the property of any partner or partners (and such conversion, if made in good faith, would be effectual between the partners and against the creditors of the firm) or the separate property of any partner into a partnership property. Goodwill : Section 14 specifically lays down that the goodwill of a business is subject to a contract between the partners, to be regarded as ‘property’ of the ‘firm’. But this Section does not define the term. ‘Goodwill’ is a concept very easy to understand but difficult to define. Goodwill may be defined as the value of the reputation of a business house in respect of profits expected in future over and above the normal level of profits earned by undertaking belonging to the same class of business. When a partnership firm is dissolved every partner has a right, in the absence of any agreement to the contrary, to have the goodwill of business sold for the benefit of all the partners. A goodwill is a part of the property of the firm, it can be sold separately or along with the other properties of the firm. Any partner may upon the sale of the goodwill of a firm, make an agreement with the buyer that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits and notwithstanding any MERCANTILE

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THE INDIAN PARTNERSHIP ACT, 1932 thing contained in Section 27 of the Indian Contract Act, 1872 such agreement shall be valid if the restrictions imposed are reasonable.

3.10 PERSONAL PROFIT EARNED BY PARTNERS (SECTION 16) Where a partner derives any profit for himself from any transaction of the firm or from the use of the property or business connection of the firm or firm name, he must account for that profit and pay it to the firm. For example, A, B, C & D established partnership business for refining sugar. A, who was himself a wholesale grocer, was entrusted with the work of selection and purchase of sugar. As wholesale grocer, A was well aware of the variations in the sugar market and had the suitable sense of propriety as regards purchases of sugar. He had already in stock sugar purchased at a low price which he sold to the firm when it was in need of some without informing the partners that the sugar sold had belonged to him. It was held that A was bound to account to the firm for the profit so made him. This rule, is however, subject to a contract between partners. Where a partner carries on a competing business, he must account for and pay to the firm all profits made by him in the business. For example, A, B, C and D started a business in partnership for importing salt from foreign ports and selling it at Chittagong. A struck certain transactions in salt on his own account, which were found to be of the same nature as the business carried on by the partnership. It was held that A was liable to account to the firm for profits of the business so made by him. This rule is also subject to a contract between the partners.He is under no obligation whatever to account for the profits of a non competing business, even though his connection with the firm may enable him to push his private trade better. You should, however, note that a deed of partnership may contain a clause that some or all the partners are not to carry any business other than that of the firm during the continuance of partnership [Section 11(2)]. A breach of such a provision may entitle the other partner to recover damages from the defaulting partner, but it will not give rise to any occasion for accounting to his copartners for the profits earned unless the business is shown to be in rivalry with the business of the firm.

3.11 RIGHTS AND DUTIES OF PARTNERS AFTER A CHANGE IN THE CONSTITUTION OF THE FIRM (SECTION 17) Before going into rights and duties, we should first know how a change may take place in the constitution of the firm. It may occur in one of the four ways, namely, (i) where a new partner or partners come in, (ii) where some partner or partners go out, i.e., by death or retirement, (iii) where the partnership concerned carries on business other than the business for which it was originally formed, (iv) where the partnership business is carried on after the expiry of the term fixed for the purpose. Section 17 lays down the rule : (a) Where a change occurs in the constitution of the firm in any of the first three ways mentioned above, the mutual rights and duties of the partners in the reconstituted firm remain the same as they were before the change as may be.

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(b) where a firm constituted for a fixed term continues to carry on the business after the expiry of the term, the mutual rights and duties of the partners remain the same as they were before the expiry, so far as they may be consistent with the incidents of partnership at will. Some provisions have been held to be inconsistent with the incidents of partnership at will, e.g., the provision in the deed that a partner desiring to retire shall give notice of his intention of the same at a certain time before hand. (c) Where the firm constituted to carry out one or more ventures or undertakings, carries out other ventures or undertakings, the mutual rights and duties of the partners in respect of the other adventures of the undertaking are the same as of those in respect of the original adventures. You should note that the above-mentioned rules are subject to contract between the partners.

3.12 RELATION OF PARTNERS TO THIRD PARTIES (SECTIONS 18 TO 30) Partners as agents of the firm : You may recall that a partnership is the relationship between the partners who have agreed to share the profits of the business carried on by all or any of them acting for all (Section 4). This definition suggests that any one of the partners can be the agent of the others. Section 18 clarifies this position by providing that, subject to the provisions of the Act, a partner is the agent of the firm for the purpose of the business of the firm. The partner indeed virtually embraces the character of both a principal and an agent. So for as he acts for himself and in his own interest in the common concern of the partnership, he may properly be deemed a principal : and so far as he acts for his partners, he may properly be deemed an agent. The principal distinction between him, and a mere agent is that he has a community of interest with other partners in the whole property and business and liabilities of partnership, whereas an agent as such has no interest in either. The rule that a partner is the agent of the firm for the purpose of the business of the firm, cannot be applied to all transactions and dealings between the partners themselves. It is applicable only to the act done by partners for the purpose of the business of the firm.

3.13 IMPLIED AUTHORITY OF A PARTNER OF THE FIRM At the very outset, you should understand what is meant by “implied authority”. You have just read that every partner is an agent of the firm for the purpose of the business thereof. Consequently, as between the partners and the outside world (whatever may be their private arrangements between themselves), each partner is agent of every other in every matter connected with the partnership business; his acts bind the firm. Sections 19 (1) and 22 deal with the implied authority of a partner. The impact of these Sections is that the act of a partner which is done on, in the usual way, business of the kind carried on by the firm binds the firm, provided that the act is done in the firm name, or any manner expressing or implying an intention to bind the firm. Such an authority of a partner to bind the firm is called his implied authority.

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THE INDIAN PARTNERSHIP ACT, 1932 You should specially note the phrase “in the usual way”. It has been included to indicate that if a usual act is done in an unusual way the outsider may well be put on an enquiry into unusual circumstances under which he is being called upon to give credit. It is not unreasonable to expect him to ask whether the partner has authority to act as he is doing. If the outsider chooses to neglect what is unusual, he must not seek to charge persons other than the one with whom he is actually dealing. If the act is “outside the usual course of the business of the firm” it will not bind the firm even if it is prudent or has benefited the firm unless it is ratified and approved by all the partners. Power to do the usual does not include power to do the unusual. Thus, a partner has implied authority to bind the firm by all acts done by him in all matters connected with the partnership business and which are done in the usual way and are not in their nature beyond the scope of partnership. You must remember that an implied authority of a partner may differ in different kinds of business. For example, it may be usual for one partner of firm of bankers to draw, accept or endorse a bill of exchange on behalf of the firm, but the same may be unusual, for one of a firm of solicitors to do so, for it is no part of the ordinary business of a solicitor to draw, accept or endorse bills of exchange. If partnership be of a general commercial nature, he may pledge or sell the partnership property; he may buy goods on account of the partnership; he may borrow money, contract debts and pay debts on account of the partnership; he may draw, make, sign, endorse, transfer, negotiate and procure to be discounted, Promissory notes, bills of exchange, cheques and other negotiable papers in the name and on account of the partnership.

3.14 ACTS BEYOND IMPLIED AUTHORITY (SECTION 19) If there is no usage or custom of trade to the contrary, the implied authority of the partner does not empower him to: (a) submit a dispute relating to the business of the firm to arbitration as it is not the ordinary business of partnership firm to enter into a submission for arbitration : (b) open a bank account on behalf of the firm in his own name; (c) compromise or relinquish any claim or portion of a claim by the firm against a third party (i.e., an outsider). (d) withdraw a suit or proceedings filed on behalf of the firm; (e) admit any liability in a suit or proceedings against the firm; (f)

acquire immovable property on behalf of the firm;

(g) transfer immovable property belonging to the firm; and (h) enter into partnership on behalf of the firm.

3.15 EXTENSION AND RESTRICTION OF PARTNERS’ IMPLIED AUTHORITY (SECTION 20) The partners may, by contract between them, either extend or restrict the implied authority of any partner. In spite of any such restriction if a partner does, on firm’s behalf, any act which 136


falls within his implied authority, the firm will be bound unless the person with whom he is dealing is aware of the restriction or does not know or believe the partner to be a partner. Thus a third party is not affected by a secret limitation of a partner’s implied authority unless he had actual notice of it. For example, A, a partner, borrows from B Rs. 1,000 in the name of the firm but in excess of his authority, and utilises the same in paying off the debts of the firm. Here, the fact that the firm has contracted debts suggests that it is a trading firm, and as such it is within the implied authority of A to borrow money for the business of the firm. This implied authority, as you have noticed, may be restricted by an agreement between him and other partners. Now if B, the lender, is unaware of this restriction imposed on A, the firm will be liable to repay the money to B. On the contrary B’s awareness as to this restriction will absolve the firm of its liability to repay the amount to B. You should further note that the above-mentioned extension or restriction is only possible with the consent of all the partners. Any one partner, or even a majority of the partners, cannot restrict or extend the implied authority.

3.16 ACTS IN EMERGENCY (SECTION 21) Over and above the implied authority which every partner wields subject to the provision of Section 20, the Act further recognises that each partner can bind the firm by all of his acts done in an emergency, with a view to protecting the firm from any loss, provided he has acted in the same manner as a man of ordinary prudence would have acted in the like circumstances. Admission by partner - its effects (Section 23) : Partners, as agents of each other can make binding admissions but only in relation to partnership transaction and in the ordinary course of business; an admission or representation by a partner will not however, bind the firm if his authority on the point is limited and the other party knows of the restriction. The section speaks of admissions and representations being evidenced against the firm. That is to say, they will affect the firm when tendered by third parties; they may not have the same effect in case of disputes between the partners themselves.

3.17 NOTICE TO AN ACTING PARTNER - ITS EFFECT (SECTION 24) The notice to a partner, who habitually acts in business of the firm, on matters relating to the affairs of the firm, operates as a notice to the firm except in the case of a fraud on the firm committed by or with the connivance of that partner. Thus, the notice to one is equivalent to the notice to the rest of the partners of the firm, just as a notice to an agent is notice to his principal. This notice must be actual and not constructive. It must be received by a working partner and not by a sleeping partner. It must further relate to the firm’s business. Only then it would constitute a notice to the firm. The only exception would lie in the case of fraud, whether active or tacit. For example, A, a partner who actively participates in the management of the business of the firm, bought for his firm, certain goods, while he knew of a particular defect in the goods. His knowledge as regards the defect, ordinarily, would be construed as the knowledge of the firm, though the other partners in fact were not aware of the defect. But because A had, in league with his seller, conspired to conceal the defect from the other partners, the rule would be inoperative and the other partners would be entitled to reject the goods, upon detection by them of the defect. MERCANTILE

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3.18 LIABILITY TO THIRD PARTIES (SECTIONS 25 TO 27) The question of liability of partners to third parties may be considered under different heads. These are as follows: (i)

Contractual liability : Every partner is liable jointly with other partners also severally for the acts of the firm done while he is a partner. The expression ‘act of firm’ connotes any act or omission by all the partners or by any partner or agent of the firm, which gives rise to a right enforceable by or against the firm. Again in order to bring a case under Section 25, it is necessary that the act of the firm, in respect of which liability is bought to be enforced against a party, must have been done while he was a partner. Thus, where certain persons were found to have been partners in a firm when the acts constituting an infringement of a trade mark by the firm took place, it was held that they were liable for damages arising out of the alleged infringement, it being immaterial that the damages arose after the dissolution of the firm.

(ii) Liability for tort or wrongful act : The firm is liable to the same extent as the partner for any loss or injury caused to a third party by the wrongful acts of a partner, if they are done by the partner while acting (a) in the ordinary course of the business of the firm (b) with the authority of the partners. If the act in question can be regarded as authorised and as falling within either of the categories mentioned in Section 26, the fact that the method employed by the partner in doing it was unauthorised or wrongful would not affect the question. Furthermore, all the partners in a firm are liable to a third party for loss or injury caused to him by the negligent act of a partner acting in the ordinary course of the business. For example, one of the two partners in coal mine acted as a manager was guilty of personal negligence in omitting to have the shaft of the mine properly fenced. As a result thereof, an injury was caused to a workman. The other partner was held responsible for the same. (iii) Liability for misappropriation by a partner : Section 27 provides that (a) when a partner, acting within his apparent authority, receives money or other property from a third person and misapplies it or (b) where a firm, in the course of its business, received money or property from a third person and the same is misapplied by a partner, while it is in the custody of the firm, is liable to make good the loss. It may be observed that the workings of the two clauses of Section 27 are designed to bring out clearly an important point of distinction between the two categories of cases of misapplication of money by partners. Clause (a) covers the misapplication of money or property belonging to a third party made by the partner receiving the same. For this provision to be attracted, it is not necessary that the money should have actually come into the custody of the firm. On the other hand, the provision of clause (b) would be attracted when such money or property has come into the custody of the firm and it is misapplied by any of the partners. The firm would be liable in both the cases. If receipt of money by one partner is not within the scope of his apparent authority, his receipt cannot be regarded as a receipt by the firm and the other partners will not be liable, unless the money received comes into their possession or under their control. 138


3.19 RIGHTS OF TRANSFEREE OF A PARTNER’S SHARE (SECTION 29) A share in a partnership is transferable like any other property, but as the partnership relationship is based on mutual confidence, the assignee of a partner’s interest by sale, mortgage or otherwise cannot enjoy the same rights and privileges as the original partner. The Supreme Court has held that the assignee will enjoy only the rights to receive the share of the profits of the assignor and account of profits agreed to by other partners. The rights of such a transferee are as follows : (1) During the continuance of partnership, such transferee is not entitled (a) to interfere with the conduct of the business, (b) to require accounts, or (c) to inspect books of the firm. He is only entitled to receive the share of the profits of the transferring partner and he is bound to accept the profits as agreed to by the partners, i.e., he cannot challenge the accounts. (2) On the dissolution of the firm or on the retirement of the transferring partner, the transferee will be entitled, against the remaining partners: (a) to receive the share of the assets of the firm to which the transferring partner was entitled, and (b) for the purpose of ascertaining the share, he is entitled to an account as from the date of the dissolution. By virtue of Section 31, which we will discuss hereinafter, no person can be introduced as a partner in a firm without the consent of all the partners. A partner cannot by transferring his own interest, make anybody else a partner in his stead, unless the other partners agree to accept that person as a partner. At the same time, a partner is not debarred from transferring his interest. A partner’s interest in the partnership can be regarded as an existing interest and tangible property which can be assigned. As a general rule, the partners are at liberty to determine their rights and obligation per se. (as between themselves) by means of a contract between them. It follows that an agreement between partners which enables one either to introduce a new partner in the firm (over and above the existing partners) or to substitute another partner in his place by novation, transfer or otherwise, could bind all the partners. If a partner has an unconditional right to transfer his share so as to substitute another person in his stead, then he will not be liable for any acts of the firm subsequent to a valid transfer of his share and serving notice of it on his copartners. This would, in effect, by tantamount to his retirement from the firm and hence his rights and liabilities would be governed by Section 32 of the Act.

3.20 LEGAL CONSEQUENCES OF PARTNER COMING IN AND GOING OUT (SECTIONS 31-38) Introduction of new partner (Section 31) : As we have studied earlier, subject to a contract between partners and to the provisions regarding minors in a firm, no new partners can be introduced into a firm without the consent of all the existing partners. The liabilities of the new partner ordinarily commence from the date when he is admitted as a partner, unless he agrees to be liable for obligations incurred by the firm prior to the date. The new firm, including the new partner who joins it, may agree to assume liability for the existing debts of the old firm, and creditors may agree to accept the new firm as their debtor and discharge the old partners. MERCANTILE

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THE INDIAN PARTNERSHIP ACT, 1932 The creditor’s consent is necessary in every case to make the transaction operative. Novation is the technical term in a contract for substituted liability, of course, not confined only to case of partnership. But a mere agreement amongst partners cannot operate as Novation. Thus an agreement between the partners and the incoming partner that he shall be liable for existing debts will not ipso facto give creditors of the firm any right against him. Retirement of a partner (Section 32) : A partner may retire : (i) with the consent of all the other partners; (ii) by virtue of an express agreement between the partners; or (iii) in the case of a partnership at will, by giving notice in writing to all other partners of his intention to retire. Such a partner, however, continues to be liable to the third party for acts of the firm after his retirement until public notice of his retirement has been given either by himself or by other partners. But the retired partner will not be liable to any third party if the latter deals with the firm without knowing that the former was partner [Sub-Sections (3) and (4)]. Right of outgoing partners : (i)

An outgoing partner may carry on business competing with that of the firm and he may advertise such business, but subject to contract to the contrary, he cannot use the name of the firm or represent himself as carrying on the business of the firm or solicit customers of the firm he has left [Section 36(1)]. Although this provision has imposed some restrictions on an outgoing partner, it effectively permits him to carry on a business competing with that of the firm. However, the partner may agree with his partners that on his ceasing to be so, he will not carry on a business similar to that of the firm within a specified period or within specified local limits. Such an agreement will not be in restraint of trade if the restraint is reasonable [Section 36(2)]. A similar rule applies to such an agreement of sale of the firm’s goodwill [Section 53(3)].

(ii) (a) On the retirement of a partner, he has the right to receive his share of the property of the firm, including goodwill. It has been held that in the absence of evidence of any uniform usage to the contrary, the assets (property) should be taken at their fair value to the firm at the date of the account and not at their value as appearing in the partnership. (b) An outgoing partner, where the continuing partners carry on business of the firm with the property of the firm without any final settlement of accounts with him, is entitled to claim from the firm such share of the profits made by the firm, since he ceased to a partner, as attributable to the use of his share of the property of the firm. In the alternative, he can claim interest at the rate of 6% per annum on the amount of his share in firm’s property (Section 37). (c) However, if by a contract between the partners, an option has been given to the surviving or continuing partners to purchase the interest of the outgoing partner and the option is duly exercised, the outgoing partner or his estate will not be entitled to any further share of the profits. If on the other hand, any partner who assumes to act in exercise of the option, does not in all material respects comply with the terms thereof, then he would be liable to account under the provisions contained in Para (a) above (Proviso to Section 37).

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Liabilities of an outgoing partner : As we have already stated earlier, a retiring partner continues to be liable to third party for acts of the firm after his retirement until public notice of his retirement has been given either by himself or by any other partner. But the retired partner will not be liable to any third party if the latter deals with the firm without knowing that the former was partner [Sections 32 (3) and (4)]. The liability of a retired partner to the third parties continues until a public notice of his retirement has been given. As regards the liability for acts of the firm done before his retirement, the retiring partner remains liable for the same, unless there is an agreement made by him with the third party concerned and the partners of the reconstituted firm. Such an agreement may be implied by a course of dealings between the third party and the reconstituted firm after he had knowledge of the retirement [Section 32 (2)]. Expulsion of a partner (Section 33) : A partner may not be expelled from a firm by a majority of partners except in exercise, in good faith, of powers conferred by contract between the partners. It is, thus, essential that: (i) the power of expulsion must have existed in a contract between the partners; (ii) the power has been exercised by a majority of the partners; and (iii) it has been exercised in good faith. If all these conditions are not present, the expulsion is not deemed to be in bonafide interest of the business of the firm. The test of good faith as required under Section 33 (1) includes three things : (a) that the expulsion must be in the interest of the partnership. (b) that the partner to be expelled is served with a notice. (c) that he is given an opportunity of being heard. If a partner is otherwise expelled, the expulsion is null and void. The only remedy, when a partner misconduct in the business of the firm, is to seek judicial dissolution. You should also note that under the Act, the expulsion of partners does not necessarily result in dissolution of the firm. The invalid expulsion of a partner does not put an end to the partnership even if the partnership is at will and it will be deemed to continue as before. Example : A, B and C are partners in a Partnership firm. They were carrying their business successfully for the past several years. Spouses of A and B fought in ladies club on their personal issue and A’s wife was hurt badly. A got angry on the incident and he convinced C to expel B from their partnership firm. B was expelled from partnership without any notice from A and C. Considering the provisions of Indian Partnership Act, 1932 state whether they can expel a partner from the firm. A partner may not be expelled from a firm by a majority of partners except in exercise, in good faith, of powers conferred by contract between the partners. It is, thus, essential that : (i) the power of expulsion must have existed in a contract between the partners; (ii) the power has been exercised by a majority of the partners; and (iii) it has been exercised in good faith. If all these conditions are not present, the expulsion is not deemed to be in bonafide interest of the business of the firm.

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THE INDIAN PARTNERSHIP ACT, 1932 The test of good faith as required under Section 33 (1), Indian Partnership Act, 1932 includes three things : (a) that the expulsion must be in the interest of the partnership. (b) that the partner to be expelled is served with a notice. (c) that he is given an opportunity of being heard. If a partner is otherwise expelled, the expulsion is null and void. Therefore, expulsion of Partner B is not valid. In this context, you should also remember that provisions of Sections 32 (2), (3) and (4) which we have just discussed, will be equally applicable to an expelled partner as if he was a retired partner. Insolvency of a partner (Section 34) : When a partner in a firm is adjudicated an insolvent, he ceases to be a partner on the date of the order of adjudication whether or not the firm is thereby dissolved. His estate (which thereupon vests in the official assignee) ceases to be liable for any act of the firm done after the date of the order, and the firm also is not liable for any act of such a partner after such date (whether or not under a contract between the partners the firm is dissolved by such adjudication). You must also note that ordinarily but not invariably, the insolvency of a partner results in dissolution of a firm; but the partners are competent to agree among themselves that the adjudication of a partner as an insolvent will not give rise to dissolution of the firm. Death of a partner (Section 35) : Where under the contract a firm is not dissolved by the death of a partner, the estate of the deceased partner is not liable for act of the firm after his death. Ordinarily, the effect of the death of a partner is the dissolution of the partnership, but the rule in regard to the dissolution of the partnership, by death of partner is subject to a contract between the parties and the partners are competent to agree that the death of one will not have the effect of dissolving the partnership as regards the surviving partners unless the firm consists of only two partners. In order that the estate of the deceased partner may be absolved from liability for the future obligations of the firm, it is not necessary to give any notice either to the public or the persons having dealings with the firm. In relation to Section 35, let us consider a concrete case. X was a partner in a firm. The firm ordered goods in X’s lifetime; but the delivery of the goods was made after X’s death. In such a case, X’s estate would not be liable for the debt; a creditor can have only a personal decree against the surviving partners and a decree against the partnership assets in the hands of those partners. A suit for goods sold and delivered would not lie against the representatives of the deceased partner. This because there was no debt due in respect of the goods in X’s lifetime. Revocation of continuing guarantee by change in the firm (Section 38) : Section 38 of the Indian Partnership Act provides that a continuing guarantee given to a firm or to third party in respect of the transaction of a firm is, in the absence of an agreement to the contrary, revoked as to future transactions from the date of any change in the constitution of the firm. You should note that the above rule is subject to an agreement to the contrary. The agreement, if any, to the contrary required to displace the effect of Section 38, must be clear. 142


3.21 SUMMARY The mutual rights and duties of partners are regulated by the contract between them. Such contract need not always be express, it may be implied from the course of dealing between the partners. (Section 11). Section 12 gives rules regulating the conduct of the business by the partners and Section 13 lay down rules of mutual rights and liabilities. Sections 14 to 17 also contain particular rules which become useful and important while determining the relations of partners to one-another. What is essential to note, however, is that all these rules are subject to contract between the parties. As regards third parties, a partner is the agent of the firm for all purposes within the scope of the partnership concern. His rights, powers, duties and obligations are in many respects governed by the same rules and principles which apply to the agent. Generally, he may pledge or sell the partnership property; he may buy goods on account of the firm; he may borrow money, contract debt and pay debts on account of the firm; he may draw, make, sign, endorse, accept, transfer, negotiate and get discounted promissory notes, bills of exchange, cheques and other negotiable papers in the name and account of the firm. The implied authority of the partner to bind the firm is restricted to acts usually done in the business of the kind carried on by the firm. He is also empowered under the Act to do certain acts in an emergency so as to bind the firm. The firm, however, is bound only by those acts of a partner which were done by him in his capacity as a partner. A partner may in some circumstances become liable on equitable grounds for obligations incurred by a copartner in doing acts in excess of his authority, real or implied. He may also become liable for an unauthorised acts of his copartner on the ground of estopple.

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CHAPTER – 3


Unit 3 Registration and Dissolution of a Firm

Learning Objectives

Be aware of mode of getting a firm registered with the authorities.

Understand the effect of registration of a firm upon the rights of partners interse and the rights of the third parties.

Note the effect of non-registration on rights of partners and the third parties.

Learn the various circumstances when a firm is dissolved and the consequences and the effect of the dissolution upon rights and liabilities of various parties.

3.22 MODE OF EFFECTING REGISTRATION The registration of a firm may be effected at any time by sending by post or delivering to the Registrar, of the area in which any place of business of the firm is situated or proposed to be situated, a statement in the prescribed form. It is not essential that the firm should be registered from the very beginning. When the partners decide to get the firm registered, as per the provisions of Section 58 of the Partnership Act, they have to file the statement in the prescribed form. The statement must be accompanied by the prescribed fee stating (i) the firm’s name, (ii) the principal place of business, (iii) the names of its other places of business, (iv) the date of joining of each partner, (v) the names in full and the permanent addresses of the partners, and (vi) the duration of the firm. The aforesaid statement is to be signed by all the partners or by their agents specially authorised in this behalf. Each partner so signing it shall also verify it in the manner prescribed. When the Registrar is satisfied that the above mentioned provisions have been complied with, he shall record an entry of this statement in the register (called the Register of Firms) and shall file the statement. Subsequent alterations as alterations in the name, place, constitution, etc., of the firm that may occur during its continuance should also be registered. When the Registration is complete? When the Registrar is satisfied that the provisions of Section 58 have been duly complied with, he shall record an entry of the statement in a Register called the Register of Firms and shall file the statement. Then he shall issue a certificate of Registration. However, registration is deemed to be complete as soon as an application in the prescribed form with the prescribed fee and necessary details concerning the particular of the partnership is delivered to the Registrar. The recording of an entry in the register of firms is a routine duty of Registrar.

3.23 CONSEQUENCES OF NON-REGISTRATION Under the English Law, the registration of firms is compulsory. Therefore, there is a penalty for non-registration of firms. But the Indian Partnership Act does not make the registration of firms compulsory nor does it impose any penalty for non-registration. However, under Section 69, non-registration of partnership gives rise to a number of disabilities which we shall presently discuss. Although registration of firms is not compulsory, yet the consequences or disabilities of non-registration have a persuasive pressure for their registration. These disabilities briefly are as follows: MERCANTILE

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THE INDIAN PARTNERSHIP ACT, 1932 (i)

The firm or any other person on its behalf cannot bring an action against the third party for breach of contract entered into by the firm, unless the firm is registered and the persons suing are or have been shown in the register of firms as partners in the firm.

(ii) If an action is brought against the firm by a third party, then neither the firm nor the partner can claim any set off, if the suit be valued for more than Rs. 100 or pursue other proceedings to enforce the rights arising from any contract. (iii) A partner of an unregistered firm (or any other person on his behalf) is precluded from bringing legal action against the firm or any person alleged to be or to have been a partner in the firm. But, such a person may sue for dissolution of the firm or for accounts and realisation of his share in the firm’s property where the firm is dissolved. Non-registration of a firm does not affect the right of third parties against the firm or its partners, or the power of an Official Assigns, Receiver of Court under the Presidency-Towns Insolvency Act, 1909, or the Provincial Insolvency Act, 1920 to realise the property of an insolvent partner. Let us now examine the following cases : A & Co. is registered as a partnership firm in 1970 with A, B and C partners. In 1971, A dies. In 1972, B and C sue X in the name and on behalf of A & Co., without fresh registration. Now the first question for our consideration is whether the suit is maintainable. As regards the question whether in the case of a registered firm (whose business was carried on after its dissolution by death of one of the partners), A suit can be filed by the remaining partners in respect of any subsequent dealings or transactions without notifying to the Registrar of Firms, the changes in the constitution of the firm, it was decided that the remaining partners should sue in respect of such subsequent dealings or transactions even though the firm was not registered again after such dissolution and no notice of the partner was given to the Registrar. The test applied in the these cases was whether the plaintiff satisfied the only two requirements of Section 69 (2) of the Act namely, (i) the suit must be instituted by or on behalf of the firm which had been registered; (ii) the person suing had been shown as partner in the register of firms. In view of this position of law, the suit is in the case by B and C against X in the name and on behalf of A & Co. is maintainable. Now, in the above illustration, what difference would it make, if in 1972 B and C had taken a new partner, D, and then filed a suit against X without fresh registration? Where a new partner is introduced, the fact is to be notified, under Section 63 (1) of the Act to Registrar who shall make a record of the notice in the entry relating to the firm in the Register of firms. Therefore, the firm cannot sue as D’s (new partner’s) name has not been entered in the register of firms. It was pointed out that in the second requirement, the phrase “person suing” means persons in the sense of individuals whose names appear in the register as partners and who must be all partners in the firm at the date of the suit.

3.24 DISSOLUTION OF FIRM (SECTIONS 39-47) The Dissolution of firm means the discontinuation of the jural relation existing between all the partners of the firm. But when only one of the partners retires or becomes incapacitated from acting as a partner due to death, insolvency or insanity, the partnership, i.e., the relationship 146


between such a partner and other is dissolved, but the rest may decide to continue. In such cases, there is in practice, no dissolution of the firm. The particular partner goes out, but the remaining partners carry on the business of the firm. In the case of dissolution of the firm, on the other hand, the whole firm is dissolved. The partnership terminates as between each and every partner of the firm. Dissolution of a firm may take place (Sections 39-44) (a) as a result of any agreement between all the partners (i.e., dissolution by agreement); (b) by the adjudication of all the partners, or of all the partners but one, as insolvent (i.e., compulsory dissolution); (c) by the business of the firm becoming unlawful (i.e., compulsory dissolution); (d) subject to agreement between the parties, on the happening of certain contingencies, such as: (i) efflux of time; (ii) completion of the venture for which it was entered into; (iii) death of a partner; (iv) insolvency of a partner. In case of death, it is to be noted that a contrary agreement may be made by the partners only if their number exceeds two. If there are only two partners the only result of either’s death will necessarily be the dissolution of the firm. (e) by a partner giving notice of his intention to dissolve the firm, in case of partnership at will and the firm being dissolved as from the date mentioned in the notice, or if no date is mentioned, as from the date of the communication of the notice; and (f) by intervention of court in case of (i) a partner becoming of unsound mind; (ii) permanent incapacity of a partner to perform his duties as such; (iii) misconduct of a partner affecting the business; (iv) wilful or persistent breaches of agreement by a partner; (v) transfer or sale of the whole interest of a partner; (vi) improbability of the business being carried on save at a loss; (vii) the Court being satisfied on other equitable grounds that the firm should be dissolved.

3.25 CONSEQUENCES OF DISSOLUTION (SECTIONS 45-52) (a) Continuing liability until public notice : In spite of dissolution of the firm, partners continue to be liable for any act done by any of them, which would have been an act of the firm if done before the dissolution, until public notice is given of the dissolution. For example, X and Y who carried on business in partnership for several years, executed on December 1, a deed dissolving the partnership from the date, but failed to give a public notice of the dissolution. On December 20, X borrowed in the firm’s name a certain sum of money from R, who was ignorant of the dissolution. In such a case, Y also would be liable for the amount. To this rule, there are some exceptions. Even where notice of dissolution has not been given, there will be no liability for subsequent acts of other partners in the case of : (a) the estate of a deceased partner : (b) an insolvent partner, or (c) a dormant partner, i.e., a partner, who was not known as a partner to the person dealing with the firm. (b) Rights to enforce winding up : On a partnership being dissolved, any partner or his representative shall have right, against the others (i) to have property of the firm applied

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THE INDIAN PARTNERSHIP ACT, 1932 in payment of the debts of the firm, and (ii) to have the surplus distributed amongst the partners or their representatives according to their respective rights.

(c) Extent of continuing authority of the partners after dissolution : The authority of a partner to bind the firm and other mutual rights and obligations continue: (i) so far as may be necessary to wind up the firm, (ii) to complete the unfinished transactions pending at the date of dissolution and no other. (d) Settlement of partnership accounts: (a) In settling the accounts of a firm after dissolution, the following rules, laid down by Section 48 of the Indian Partnership Act, subject to an agreement by the partners, must be observed. (i)

Losses including deficiencies of capital are to be paid first out of profits then out of capital and lastly by the partners individually in the proportions in which they were entitled to share profits. For example, X and Y were partners sharing profits and losses equally and X died. On taking partnership accounts, it transpired that he contributed Rs. 6,600 to the capital of the firm and Y only Rs. 400. The assets amounted to Rs. 2,000. The deficiency (Rs. 6,600 + Rs. 400 – Rs. 2,000 i.e. Rs. 5,000) would have to be shared equally by Y and X’s estate. If in this case, the agreement was that on dissolution the surplus assets would be divided between the partners according to their respective interests in the capital and on the dissolution of the firm a deficiency of capital was found, then the assets would be divided between the partners in proportion to their capital with the result that X’s estate would be the main loser. It may be noted that prima facie, accounts between the partners shall be settled in the manner prescribed by partnership agreement. The above-mentioned rules apply subject to any agreement between partners. The rules laid down in Section 48, just specified, as to what will be the mode of settlement of accounts in the usual course of business. But if the partners, by their agreement, express any different intention as to the mode in which losses will have to be borne eventually or the manner in which capital or advances will have to be paid to any partner, such an intention must be given effect to. However, any such agreement cannot affect the rights of the creditors of the firm.

(ii) The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, must be applied in the following manner and order : (a) in paying the debts of the third parties; (b) in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital; (c) in paying to each partner rateably what is due to him on account of capital and; (d) in distributing the residue, if any, among partners in the proportions in which they were entitled to share profits. The significance of the foregoing provisions is that if the assets of the firm are not sufficient to pay off the liabilities of the firm including the amount due to each partner on account of capital, each partner would individually be liable to contribute towards the losses, including deficiencies of capital, in the proportion in which he is entitled to share profits.

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Suppose A, B and C were partners under the agreement that they were to share equally in the profits and losses of the firm. In a suit between them for dissolution and accounts, it is ascertained that contributions of A, B, and C to the capital of the firm, were Rs. 10,000, Rs. 5,000 and Rs. 1,000 respectively. The assets of the firm after paying debts of the firm and advances made by the partners, as distinguished from their contributions to the capital of the firm, are Rs. 7,000. The deficiency of capital (which must be regarded as loss) being Rs. 9,000, each partner must contribute to the assets an equal share of the deficiency, i.e. Rs. 3,000. After this is done, the assets then available, Rs. 7,000 + Rs. 9,000 or Rs. 16,000 will be distributed among the partners with the result that each will have suffered a loss of Rs. 3,000. In actual practice, it will not be necessary for A and B to pay Rs. 3,000 each but the matter will be settled on the basis of notional contributions so that C whose capital is Rs. 1,000 only will pay Rs. 2,000 out of Rs. 9,000 with the firm. A will take Rs. 7,000 and B Rs. 2,000. Assuming that A and B contribute to the capital deficiency Rs. 3,000 each and C cannot, A and B will share Rs. 13,000, i.e., Rs. 7,000 plus Rs. 6,000 in the proportion of Rs. 10,000 : 5,000. A will suffer a loss of Rs. 4,333 in all and B Rs. 3,667. Where there are joint debts due from the firm and also separate debts due from any partner: (i) the property of the firm shall be applied in the first instance in payment of the debts of the firm, and if there is any surplus, then the share of each partner shall be applied to the payment of his separate debts or paid to him; (ii) the separate property of any partner shall be applied first in the payment of his separate debts and surplus, if any, in the payment of debts of the firm (Section 49). In terms of Section 51, the partner paying a premium on entering into partnership for a fixed period becomes entitled to the return of an appropriate portion of the premium. We shall discuss the provisions of Section 51 later in detail.

(e) Personal profits earned after dissolution (Section 50) : Where a firm is dissolved by the death of a partner and the surviving partners or the surviving partners along with the representatives of the deceased partner carry on business of the firm, any personal profits by them, before the firm is fully wound up, must be accounted for by them to other partners. Thus a lease expiring on the death of a partner, which is renewed by the surviving partners, before final winding up, belongs to the partnership. This section has to be read with Section 53 which provides that in the absence of an agreement to the contrary, each partner or his representative is entitled to restrain (by injunction) other partners from carrying on a similar business in the name of the firm or from using the property of the firm for their own benefit till the affairs of the firm are completely wound up.

(i)

Return on premium of partnership’s premature dissolution : According to Section 51, in the case of dissolution of partnership earlier than the period fixed for it, the partner paying the premium is entitled to the return of the premium of such part thereof as may be reasonable, regard being had to the terms of agreement and to the length of time during which he was a partner, except when the partnership is dissolved: (i)

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THE INDIAN PARTNERSHIP ACT, 1932 (ii) mainly due to the misconduct of the partner paying the premium; (iii) pursuant to an agreement containing no provisions for the return of the premium or any part thereof. For example, X and Y become partners for 10 years; X pays Y a premium of Rs. 2,000. At the end of 8 years a quarrel arises between X and Y and a dissolution is declared. In such a case, X will be entitled to a return of such amount of the premium from Y as may be deemed reasonable. What is reasonable will depend upon the circumstances of each case. The partner paying the premium gets a proportionate part of the premium where the partnership is dissolved: (i)

Without the fault of either party; or (ii) owing to the fault of both; or (iii) on account of the fault of the partner receiving the premium; or (iv) due to the insolvency of the partner receiving the premium, where the partner paying the premium was unaware of the other’s embarrassing circumstances at the time of entering into the partnership.

(ii) Rescission of partnership for fraud act. (Section 52) : A partnership agreement is a contract bases on amount of confidence. In the case of fraud or misrepresentation practised by one partner or the other, the party misled has the right to resign the partnership agreement and is entitled to; (i) a lien on the surplus, after payment of firm’s debts, for any sum paid by him for purchase of a share in the firm or for any capital contributed by him: (ii) to rank as a credit of the firm in respect of any payment made by him towards firm’s debts; and (iii) to an indemnity from the partners guilty of fraud or misrepresentation against all the debts and liabilities of the firm.

Goodwill on dissolution (Section 55) : What the purchaser of goodwill acquires is (i) the right to carry on the same business under the old name and (ii) to represent himself to the customers of the old firm as the successor in the business of the old firm. The partners selling the goodwill of a firm can : (i) carry on a similar business; (ii) also compete with the business sold by them to purchaser and (iii) advertise their business in such manner as they deem fit, but, subject to an agreement to the contrary, they cannot use the firm name, represent themselves as carrying on the old business, and solicit the customers of the old firm.

3.26 MODE OF GIVING PUBLIC NOTICE (SECTION 72) In every case where the public notice of any matter in respect of partnership firm is required to be given under this Act, it must be given by publication in the Official Gazette and in at least one vernacular newspaper circulating in the district where the firm to which it relates, has its place or principal place of business. In the case of registered firms, apart from the aforesaid notification, a notice is also required to be served on the Registrar of Firms under Section 63 where the matters relate to (a) the retirement or expulsion of a partner, or (b) dissolution of the firm, or (c) the election, on attaining majority, to be or not to be a partner, by a person who as a minor, was admitted to the benefit of partnership.

150


3.27 SUMMARY Registration of a firm is effected by the Registrar of Firms by recording in the Register of Firms an entry of the statement relating to registration furnished to him. The Act does not make registration of the firm compulsory, yet the effect of the rules relating to the consequences of non-registration is such as practically necessitates the registration of the firm at one time or other. Certain disabilities have been imposed on partners of an unregistered firm seeking to enforce certain claims in the Civil Courts. A firm which is not registered is not able to enforce its claim against third parties in the Civil Courts; and any partner who is not registered is not able to enforce his claim either against third parties or against the fellow partners. An unregistered partner may, however, sue for the dissolution of the firm or for accounts only if the firm is already dissolved. Dissolution of a firm means the breaking up or extinction of the relationship which subsisted between all the partners of the firm under various circumstances contemplated by Act. A partnership can be dissolved only in accordance with the manner prescribed under the Act.

3.28

MULTIPLE CHOICE QUESTIONS

1.

The most important element in partnership is: (a) Business (b) Sharing of Profits (c) Agreement (d) Business to be carried on by all or any of them acting for all.

2.

The maximum number of partners is mentioned in (a) The Partnership Act (b) The General Clauses Act (c) The Companies Act (d) The Societies Registration Act

3.

A firm is the name of: (a) The Partners (b) The minors in the firm. (c) The business under which the firm carries on business (d) The collective name under which it caries on business.

4.

In the absence of agreement to the contrary all partners are: (a) Not entitled to share profits (b) Entitled to share in capital ratio. (c) Entitled to share in proportion to their ages. (d) Entitled to share profits equally.

5.

A minor is: (a) A partner of a firm (b) Representative of the firm (c) Entitled to carry on the business of the firm (d) Entitled to the benefits of the firm

6.

A partnership at will is one: (a) Which does not have any deed (b) Which does not have any partner (c) Which does not provide for how long the business will continue (d) Which cannot be dissolved.

7.

Active partner is one who: (a) Takes part in the business of the firm (b) Actively participates in co-curricular activities (c) Actively shares the profits (d) Makes a show of authority

MERCANTILE

LAWS

151

THE INDIAN PARTNERSHIP ACT, 1932 8.

Every partner has the right to: (a) Take part in the business of the firm (b) To share exclusive profits (c) To use the property of the firm for personal purposes (d) Pay taxes

9.

Each of the Partner is__________________ (a) Principals as well agents (b) Only Agents of the firm (c) Only Representatives of the firm (d) Only Co-partners of the firm

10.

A partner can retire on_____________ (a) Reaching the age of superannuation (b) On the balance in the capital account reaching a certain amount (c) In accordance with the Partnership Deed (d) On the condition of his nominee becoming a partner

11.

A partner can be expelled if _________________ (a) Such expulsion is in good faith (b) The majority of the partner agree on such expulsion (c) The expelled partner is given an opportunity to start a business competing with that of the firm (d) Compensation is paid

12.

Death of partner has the effect of____________ (a) Dissolving the firm (b) Result in continuance of the business of the firm (c) His heirs joining the firm (d) Computation of profits upto the date of death

13.

Registration of a firm is____________ (a) Compulsory (b) Optional

(c) Occasional

(d) None of the above

14.

An unregistered firm cannot claim____________ (a) Set on (b) Set off (c) Set on and set off (d) None of the above

15.

On dissolution the partners remain liable until (a) Accounts are settled (b) Partners dues are paid off (c) Public notice is given (d) The registrar strikes off the name

16.

Which of the following statements, about the registration of firm, is not true: (a) It must be done at the time of its formation. (b) It may be done at the time of formation. (c) It may be done before filing a suit against third party. (d) It may be done at any time after its formation.

17.

As per the accepted view, the registration of the firm is considered complete when. (a) Complete application for registration is filed with the Registrar. (b) Registrar files the statement and makes entries in the Register of Firms. (c) Registrar gives notice of registration to all partners. (d) Court records the statement and certifies the entries in Register of Firms.

18.

Which of the following is not disability of an unregistered firm? (a) It cannot file a suit against third parties (b) Its partners cannot file a suit against a firm. (c) It cannot claim a set-off exceeding Rs. 100. (d) It cannot be sued by a third party.

152


19.

Which of the following is not the right of a partner i.e., which he cannot claim as a matter of right? (a) Right to take part in business. (b) Right to have access to account books. (c) Right to share profits. (d) Right to receive remuneration.

20.

Which of the following acts are not included in the implied authority of a partner? (a) To buy or sell goods on accounts of partners. (b) To borrow money for the purposes of firm. (c) To enter into partnership on behalf of firm. (d) To engage a lawyer to defend actions against firm.

21.

After retirement from firm, which of the following partners is not liable by holding out, even if the public notice of retirement is not given? (a) Active partner (b) Sleeping partner (c) Representative of deceased partner (d) Both (b) and (c)

22.

Which of the following statements is not true about minor’s position as a partner? (a) He cannot become a full-fledged partner in a new firm (b) He can become a full-fledged partner in an existing firm (c) He can be admitted only to the benefits of any existing firm. (d) He can become partner on becoming a major.

23.

The reconstitution of the firm takes place in case (a) Admission of a partner (b) Retirement of a partner (c) Expulsion or death of a partner (d) All of the above.

24.

A new partner can be admitted in the firm with the consent of (a) All the partners (b) Simple majority of partners (c) Special majority of partners (d) New partner only.

25.

A partner may retire from an existing firm (a) with consent of all partners (b) as per express agreement (c) by written notice in partnership at will (d) all of the above.

26.

A partner may be expelled from the firm on the fulfillment of the condition that the expulsion power is exercised. (a) As given by express contract (b) By majority of partners (c) In absolute good faith (d) All of the above.

27.

A partnership firm is compulsorily dissolved where (a) All partners have become insolvent (b) Firm’s business has become unlawful (c) The fixed term has expired (d) In cases (a) and (b) only.

28.

On the (a) (c)

29.

Suppose you have entered into a partnership agreement with me and the partnershipdeed provides neither for the duration nor for the determination of our partnership. What is the technical expression for this kind of partnership? (a) Partnership for a fixed term. (b) Partnership at will (c) Particular Partnership. (d) Any of these.

which of the following grounds, a partner may apply to the court for dissolution of firm? Insanity of a partner (b) Misconduct of a partner Perpetual losses in business (d) All of the above.

MERCANTILE

LAWS

153

THE INDIAN PARTNERSHIP ACT, 1932 30.

A partnership at will is one 1. Duration not fixed 2. Duration fixed 3. Dissolved at any time 4. Can be dissolved only on the happening of an event (a) 1 & 2 (b) 2 & 3 (c) 3 & 4

(d)

1&3

31.

The 1. 2. 3. 4.

position of a minor in a partnership firm is to be determined taking into account The Indian Contract Act, 1872 The Indian Partnership Act, 1932 Minor’s agreement The Majority Act, 1875 (a) 1 & 2 (b) 2 & 3 (c) 3 & 4 (d) 1 & 4

32.

Which of the following statement is not true about minor’s position as a partner 1. He cannot become a full fledged partner in a new firm 2. He can become a full fledged partner in an existing firm 3. He has to bear all liabilities like other partners 4. He can become a partner on becoming a major (a) 1 & 2 (b) 2 & 3 (c) 3 & 4 (d) 1 & 4

33.

Which of the following is not an essential feature of partnership? 1. Agreement 2. Registration 3. Test of Mutual Agency 4. Separate Legal Entity (a) 1 & 2 (b) 2 & 3 (c) 2 & 4 (d)

1&4

34.

X agrees with Y to carry passengers by taxi from Delhi to Gurgaon on the following terms, namely, Y is to pay X Rs. 100 per mile per annum, and X and Y are to share the costs of repairing and replacement of the cars, and to divide equally between them the proceeds of fares received from passengers. Choose the correct alternative. (a) X and Y are partners (b) X and Y are cab owners (c) X and Y are co-owners (d) None of the above

35.

X and Y purchase 10,000 bags of cement, which they agree to sell for their joint account. The relation between X and Y is (a) X and Y are partners (b) X and Y are only joint owners (c) X and Y are co-ventures (d) None of the above

36.

X agrees with Y who is goldsmith to buy and furnish gold to Y, to be worked up by him and sold, and that they shall share in the resulting profit or loss. The contract between X and Y is that of (a) Partnership (b) Association of goldsmith (c) Contract for labour work (d) Contract of Sale

154


37.

X and Y agree to work together as carpenters but X shall receive all profit and shall pay wages to Y. The relation between X and Y is that (a) Partners (b) Carpenters (c) Labourers (d) Master-Servant

38.

Match the following: (i) Firm is bound by all acts of a partner done within the scope (ii) No duration for partnership (iii) Duration for a period (iv) Share of profits by an outsider

39.

Match the following: (i) Partnership (ii) Co-ownership

41.

(b) Particular Partnership (c) Sub-Partner (d) Implied Authority (a) Arises by operation of law (b) Comes into existence only after registration. (c) Can arise by agreement or otherwise (d) Arise by way of an agreement only

(iii) Hindu Undivided Family (iv) Company 40.

(a) Partnership at Will

Match the following: (i) Partnership business carried on by all or by any one of them acting for all (ii) Sharing of Profits (iii) Registration of Firm (iv) Contract of Partnership Match the following: (i) Full Fledged Partner (ii) Sleeping Partner (iii) Partner by holding out (iv) Partner to benefits of partnership

(a) Evidence of Partnership (b) Not necessary (c) Does not arise form operation of law (d) Test of Partnership. (a) Does not disclose his name (b) Known to outside world (c) Minor (d) Active Partner

3.29 ANSWERS TO MULTIPLE CHOICE QUESTIONS 1. 6. 11. 16. 21. 26. 31. 36. 38. 39. 40. 41.

(d) (c) (a) (a) (d) (d) (a) (a) (i) (d) (i) (d) (i) (d) (i) (d)

MERCANTILE

LAWS

2. 7. 12. 17. 22. 27. 32. 37. (ii) (a) (ii) (c) (ii) (a) (ii) (a)

(c) (a) (a) (b) (b) (d) (b) (d) (iii) (b) (iii) (a) (iii) (b) (iii) (b)

3. 8. 13. 18. 23. 28. 33. (iv) (iv) (iv) (iv)

(d) (a) (b) (d) (d) (d) (c)

4. 9. 14. 19. 24. 29. 34.

(d) (a) (b) (d) (a) (b) (a)

5. 10. 15. 20. 25. 30. 35.

(d) (c) (c) (c) (d) (d) (a)

(c) (b) (c) (c)

155

ADDITIONAL QUESTION BANK

INDIAN CONTRACT ACT, 1872

1.

Which of the following statement is true?

2.

a. b. c. d. The

3.

a. Whole of India including Jammu b. Whole of India excluding Jammu c. Whole of India including Kashmir d. Whole of India excluding Kashmir Which of the following are legal requirement of a valid offer?

An agreement enforceable by law is a contract An agreement is an accepted proposal An agreement can only consist of an offer An agreement can only consist of an acceptance Indian Contracts Act, 1872 applies to the ____________

a. It must be communicated to the other party b. It must have clear and definite terms c. It must be made specific to a person and not public at large d. It must express offeror’s final willingness 4. Which of the following are legal requirement of a valid acceptance? a. It must be communicated b. It must be presumed from silence if not communicated within specified time c. It must be absolute and unconditional d. It must be accepted by a person who has the authority to accept 5. Which of the following are legal requirement of a valid consideration? a. It must move at the desire of the promisor b. It must be lawful c. It must be real and not illusory d. It needs to be adequate 6. Which of the following persons are not competent to contract? a. Person of Indian origin b. Minor c. Person Disqualified by law d. Person of unsound mind 7. Which are the following elements that affect the consent of the party? a. Undue Influence b. Representation c. Fraud d. Coercion 8. Which of the following are void contracts? a. Agreement with unlawful consideration b. Agreement with inadequate consideration, if inadequacy is not supported by free consent. c. Agreement the meaning of which is certain d. Agreement in respect of legal proceedings 9. Which of the following are legal requirement of a valid contingent contract? a. It must be a valid contract b. It must be certain c. The performance of the contract must be conditional d. The event must be collateral to the contract 10. Which of the following statements are not correct? a. Right of one party is the obligation of another party b. Every contract is an agreement, but every agreement is not contract c. “Quantum meruit” means void from the beginning d. Social agreements are legally enforceable. MERCANTILE

LAWS

157

ADDITIONAL QUESTION BANK 11. Match the following: (i) Agreement (ii) Agreement enforceable by law (iii) Agreement not enforceable by law (iv) Illegal contract 12. Match the following: (i) Voidable Contract (ii) Express Contract (iii) Quasi Contact (iv) Bilateral Contract

(a) (b) (c) (d)

Contract Void ab initio Offer + Acceptance Void contract

(a) Obligation created by law (b) Both parties due to perform their obligation (c) Terms are stated in writing (d) Enforceable by law at the will of one party

13. Match the following: (i) Benefit to the promiser (a) Consent (ii) Competence of a party to enter the contract (b) Void (iii) An agreement with a minor (c) Capacity (iv) Act of assenting to an offer (d) Consideration 14. Match the following: (i) Both the parties of a contract make mistake (a) Invitation to an offer (ii) Withdrawal of contract (b) Contract (iii) An ad for season end sale is (c) Bilateral Mistakes (iv) Compensation for voluntary services (d) Revocation 15. Match the following: (i) Only one party due to perform (a) Partly Executed Contract (ii) Only one party has performed (b) Executory Contract (iii) Both party has performed (c) Unilateral Contract (iv) Both party has not performed (d) Executed Contract 16. Match the following: (i) Wagering agreement (a) Agreement the meaning of which is uncertain (ii) Uncertain agreement (b) Returning the benefit received under void contract (iii) Restitution (c) Contract dependent on something else (iv) Contingent contract (d) Agreement to pay money or moneys worth on the happening or non-happening of an uncertain event 17. Match the following: (i) Novation (a) When all or some of the terms of the contract are cancelled. (ii) Rescission (b) When all or some of the terms of the contract are modified by mutual consent of parties (iii) Alteration (c) Acceptance of a lesser fulfillment of the promise made (iv) Remission (d) New contract substituted for an existing one between same parties X of Agra sents a letter to Y of Delhi offering to sell his car for Rs. 2,00,000. This letter is posted on 1st January and reaches Y on 6th January. Y sends his acceptance by post on 10th January but X receives this letter of acceptance on 14th January. Answer each of the following questions. 18. When is the communication of the offer complete? a. 1st January b. 6th January 158


19.

20.

21.

22.

23.

24.

25.

26.

c. 7th January d. 10th January When is the communication of the acceptance complete as against acceptor? a. 6th January b. 10th January d. 14th January c. 11th January If X sends a telegram on 7th January revoking his offer, and his telegram reaches Y before the letter of the acceptance is posted. Is revocation of offer valid? a. It is valid b. It is invalid c. It is uncertain d. None of the above If Y sends a telegram on 13th January revoking his acceptance, and his telegram reaches X before the letter of the acceptance is received by Y. Is revocation of acceptance valid? a. It is valid b. It is invalid c. It is uncertain d. None of the above X agrees to sell to Y “one hundred tons of oil”. State the position of this agreement in the following cases. If X, who is a dealer in coconut oil only, decides to sell @ Rs. 10,000/ton. a. Valid contract b. Void contract c. Voidable contract d. Uncertain contract If X is a dealer in coconut oil and price is not fixed a. Valid contract b. Void contract c. Voidable contract d. Uncertain contract If X is a dealer in coconut oil and price is to be fixed by Z a. Valid contract b. Void contract c. Voidable contract d. Uncertain contract If X, who is a dealer in coconut oil agrees to sell at Rs. 10,000/ton or Rs. 11,000/ton a. Valid contract b. Void contract c. Voidable contract d. Uncertain contract If X is a dealer in coconut oil and mustard oil a. Valid contract b. Void contract c. Voidable contract d. Uncertain contract

X of Mumbai agreed to sell 1000 bales of cotton @ Rs. 999/bale and to deliver within a fortnight at buyers godown at Karachi. X failed to supply these goods. State the legal position in each case with explanation. 27. If unknown to both the parties, the goods were destroyed by party at the time of agreement. a. Void on the ground of X’s mistake b. Void on the ground of mutual mistake c. Void on the ground of supervening impossibility d. Void on the ground of commercial impossibility 28. If X a. b. c. d.

knew the goods were destroyed by fire at the time of agreement Void on the ground of X’s mistake Voidable Void but X should compensate the buyer for any loss that it sustains through nonperformance Void on the ground of supervening impossibility

MERCANTILE

LAWS

159

ADDITIONAL QUESTION BANK 29. If war is declared between India & Pakistan a. Void on the ground of supervening impossibility b. Void on the ground of non-performance c. Voidable d. Void on the ground of commercial impossibility 30. If these goods were to be manufactured by Z who is ready to supply @ Rs. 1,111/bale because of unexpected increase in the cost of material and labour a. Void on the ground of supervening impossibility b. Void on the ground of non-performance c. Void on the ground of third-party default d. Void on the ground of commercial impossibility 31. If these goods could not be delivered because of strike of transport operators a. Void on the ground of supervening impossibility b. Void on the ground of non-performance c. Void on the ground of third-party default d. Void on the ground of commercial impossibility Answers: 1. a, b 2. b, d 3. a, b, d 4. a, c, d 5. a, b, c 6. b, c, d 7. a, c, d 8. a 9. a, c, d 10. c, d. 11. i– c, ii – a, iii – d, iv – b 12. i– d, ii – c, iii – a, iv – b 13. i– d, ii – c, iii – b, iv – a 14. i– c, ii – d, iii – a, iv – b 15. i– c, ii – a, iii – d, iv – b 16. i– d, ii – a, iii – b, iv – c 17. i– d, ii – a, iii – b, iv – c 18. b 19. d 20. a 21. a 22. a 23. a 24. a 25. b 26. b 27. b 28. c 29. a 30. d 31. b INDIAN PARTNERSHIP ACT, 1932

32. The essential elements of Partnership does not include: a. b. c. d.

There must be an association of two or more persons. There must be an agreement to share profits and losses equally. There must be mutual agency among partners. The relationship must be registered.

33. The partnership relation does not exist when a. Joint owner of some property share profit or loss arising from the property. b. A person receives a share of profit as a part of his remuneration. c. Two friends A(age 19 years), B(17 years) decide to form a partnership. d. A and B agreed to sell clothes for their joint account and share the profits. 34. _____________ does not takes active part in conduct of the business. a. Minor partner. b. Sub partner. c. Ostensible partner. d. Partner by estoppel.

160


35. The general rights of continuing partners include a. Right to get remuneration. b. Right to be indemnified. c. Right to prevent the introduction of a new partner. d. Right to carry on competing business. 36. Doctrine of implied authority of a partner applies to the a. Act of settling accounts with the person dealing with the firm. b. Act of acquiring immovable property on behalf of the firm. c. Act of admitting a liability in suit against the firm. d. Act of engaging servants for the business of the firm. 37. The partnership firms becomes an illegal association, when a. The number of partners in a banking business exceeds 10. b. The number of partners in a non-banking business exceeds 10. c. The number of partners in a banking business exceeds 5. d. The number of partners in a non-banking business exceeds 20. 38. A partnership firm may not be registered with a. Registrar of Partners. b. Registrar of firms. c. Registrar of companies. d. District Court. 39. In case of a non-registered partnership firm…. a. A partner cannot file a suit against the firm. b. A partner cannot file a suit against any partner of the firm. c. The firm cannot file a suit against third parties. d. None of above. 40. The decision in Garner v/s Murray requires that a. All partners should bring in cash equal to their respective shares of the loss on realization. b. The solvent partners should bring in cash equal to their respective shares of the loss on realization. c. The solvent partners should bear the loss arising due to insolvency of a partner in their profit sharing ratio. d. The solvent partners should bear the loss arising due to insolvency of a partner in the ratio of their last agreed capitals. 41. The dissolution of a partnership firm takes place a. Only by an order of court. b. On the death of a partner. c. On the insolvency of a partner. d. By mutual agreement of all the partners. 42. Match the Following: (i) Actual Partner (ii) Sleeping Partner (iii) Nominal Partner (iv) Sub Partner 43. Match the following: (i) Right of partner (ii) Duty of partner MERCANTILE

LAWS

(a) Lends his name to the firm, without any real interest. (b) Need not give public notice of his retirement. (c) Third -person with whom a partner agrees to share his profits. (d) Takes active part in the conduct of business. (a) To open a bank account on behalf of firm in own name. (b) To carry on the business of the firm to the utmost advantage. 161


44.

45.

46.

47.

48.

(iii) Implied authority (c) Remuneration for taking part. of partner (iv) Statutory restriction (d) Sell the goods of the firm. Match the following: (i) Number of partners exceed 20 (a) Dissolution of firm. (ii) Retirement of a partner (b) Registration of firm. (iii) Insolvency of all partners (c) Illegal association. (iv) Suit by the partners against the firm (d) Reconstitution of firm. Match the following: (i) Mutual agency (a) Test of Partnership. (ii) Partnership with (b) Essential element of partnership. no fixed duration (iii) Partnership for a (c) Partnership at will. specific venture (iv) Two or more members (d) Particular partnership. Match the following: (i) Expulsion of partner (a) Right to carry on competing business. (ii) Death of a partner (b) By majority of partners. (iii) Insolvency of partner (c) Application of Garner v/s Murray. (iv) Retirement of partner (d) No public notice required. Match the following: (i) Partnership for a fixed duration of time (a) Contract (ii) Partnership is a special (b) Duration of Partnership (iii) Partnership is a legal relationship (c) Law of agency (iv) Law of partnership is an extension (d) Between two or more persons P and Q jointly acquired a cyber café on 01.01.2007. Each of them contributed a half of the expenses incurred for the purchase of computers and furniture. They agreed to share profits equally. The relationship of P and Q is that of: a. Co-owners. b. Co-venturers. c. Partners, because they agree to share profits. d. Not partners, because the firm is unregistered.

49. Can R (age 17 years) be admitted to their business? a. Yes b. Yes, if Z is admitted with the consent of P & Q, only to share the benefits. c. Yes, if the firm is registered. d. No 50. They further decided to register as a partnership firm on 01.03.2007. Will they be registered? If yes, with effect from which date? a. Yes, w.e.f. 01.01.2007 b. Yes, w.e.f. 01.03.2007 c. Yes, w.e.f. the date on which the Registrar makes entries in the register of firms. d. No. 51. Mr. S is indebted to the firm for a sum of Rs. 500 and the firm files a suit against him on 01.03.2007. Will the firm succeed? a. No, because the sum does not exceeds Rs. 1,000. b. No, because the registration is still pending. 162


52.

53.

54.

55.

56.

c. No, as Mr.S has not acknowledged the debt. d. Yes. On 31.12.2007, it was decided to discontinue the business, due to heavy losses. a. The firm will be dissolved on receipt of permission from Court. b. The firm will be dissolved by mutual consent of all. c. The firm cannot be dissolved before 01.01.2008. d. The firm will not be dissolved Amar, Akbar and Anthony jointly started business of supplying cottons and agreed to share profits equally through oral agreement on 01.03.2007. Amar and Akbar are active partners, while Anthony is a sleeping partner. Is the Partnership firm valid? a. No, as the agreement was not a written one. b. No, as Akbar is not participating. c. No, as the firm has not been registered. d. Yes, because they agree to share profits. If Akbar becomes insane, and Anthony files a suit. Can the court pass an order for dissolution? a. No, because the suit has not been filed by an active partner. b. No, because other partners can still continue. c. Yes, if Akbar agrees to it. d. Yes. If Amar becomes insane, and his friend files a suit. Can the court pass an order for dissolution? a. No, because suit has not been filled by a partner. b. No, because other partners are still working. c. Yes, if Amar agrees to it. d. Yes. If Anthony becomes insane, and Akbar files a suit. Can the court pass an order for dissolution? a. Yes. b. Yes, if Amar agrees to it. c. No, because other partners are still working. d. The court may not pass, because such a partner is not an active partner.

57. If Amar applies for insolvency on 01.06.2007 and is declared insolvent on 01.08.2007. a. The firm would not be dissolved. b. The firm would be dissolved on 01.06.2007. c. The firm would be dissolved on 01.08.2007, with effect from 01.08.2007. d. The firm would be dissolved with retrospective effect from 01.01.2007. Answers : 32. 33. 34. 35. 36. 37. 38. 39. 40.

b, d a, b, c a, b, d b, c a, d a, d a, c, d a, b, c b, d

MERCANTILE

LAWS

41. 42. 43. 44. 45. 46. 47. 48. 49.

b, c, d i – d, ii – b, iii – a, iv – c i – c, ii – b, iii – d, iv – a i – c, ii – d, iii – a, iv – b i – a, ii – c, iii – d, iv – b i – b, ii – d, iii – c, iv – a i – b, ii – a, iii – d, iv – c c b

50. 51. 52. 53. 54. 55. 56. 57.

c b b d d d d

163

ADDITIONAL QUESTION BANK SALE OF GOODS ACT, 1930

58. Which of the following is the requirement of a valid contract for Sale? a. There must be two parties b. The subject matter should be goods c. There must be atleast two parties d. Property in the goods may not be transferred 59. Which of the following is a mode of contract of sale? a. Immediate delivery of goods, but price to be paid at some future date b. No delivery of goods and price to be paid at some future date c. Immediate delivery of goods and immediate payment of price d. No price paid at all for the delivery of goods 60. Which of the following goods is not in existence at the time of contract of sale? a. Specific goods b. Future goods c. Ascertained goods d. Contingent goods 61. Under the provision ‘goods perishing before the making of the contract’, contract of sale of goods is void if a. The sale is of specific goods b. Contract is of ‘agreement to sell’ and not actual sale c. Goods perished before the contract is made d. Goods perished without the fault of the seller 62. The option available to the Hirer in case of Hire Purchase Agreement? a. He may purchase the goods after paying all the agreed instalments b. He may purchase the goods without paying all the agreed instalments c. Return the goods at any time and stop further payment of instalments d. Return the goods at any time and remain paying the instalments 63. Which of the following is not a typical sale? a. Barter b. Hire purchase c. Hypothecation of goods d. Bailment of goods 64. Which of the following statement is true? a. A contract of sale can be validly made for the sale of future goods b. Actionable claims is a subject matter of contract of sale c. A contract for the sale of future goods is always an agreement to sell d. In an agreement to sell, the ownership of the goods passes to the buyer immediately 65. Match the column (i) Specific goods (a) Acquisition of goods depend on uncertain event (ii) Future goods (b) Goods not identified and agreed by the party (iii) Contingent goods (c) Not existent at the time of contract (iv) Unascertained goods (d) Goods identified and agreed by the party 66. Match the column (i) Hire purchase (a) Goods delivered for certain purpose, after which to be returned. (ii) Barter (b) Goods delivered on hire basis (iii) Bailment (c) Goods delivered as security for repayment (iv) Pledge (d) Goods exchanged for goods 164


67. Match the column: (i) Condition as to title (ii) Condition as to description (iii) Condition as to quality (iv) Condition as to merchantability 68. Match the column: (i) Condition as to sample (ii) Condition as to sample & description (iii) Condition as to description

(a) (b) (c) (d)

Supply of good fit for the buyer. Seller having right to sell the good. Goods having future viability. Goods corresponding to its description.

(a) Goods sold must be fit for consumption. (b) Goods corresponding to the sample seen. (c) Goods correspond to sample & description (d) Goods corresponding to its description.

(iv) Condition as to wholesomeness 69. Match the column: (i) Express warranty (a) Warranties attached by usage of trade. (ii) Implied warranty (b) Goods free from any change in favour of others (iii) Warranty free from (c) Stipulation not included in the contract encumbrance (iv) Warranty by custom (d) Stipulation included in the contract 70. Match the column: (i) Condition (a) Seller excluding his liability. (ii) Warranty (b) Stipulation essential to main purpose of contract (iii) Express agreement (c) Parties not held liable for breach of contract (iv) Trade usage (d) Stipulation subsidiary to main purpose of contract

71. Match the column: (i) Title by estoppel (a) Goods sold if they are under the danger of perishing (ii) Sale by mercantile agent (b) Buyer buys the goods ‘in good faith’ (sec 28) (iii) Sale by joint owner (c) Title by prevention of claim or assertion of law (iv) Sale by finder of goods (d) Buyer gets valid title even if seller is not the owner 72. Match the column: (i) Right against goods (a) Right to retain possession of good until charges are paid (ii) Right against buyer (b) Seller having the possession of the sold goods (iii) Right of lien (c) Goods of perishable nature sold by an unpaid seller (iv) Right of resale (d) Suit for damages for non-accepting the goods Problem: A agrees to sell 50 Refrigerators to B, at a price to be determined by C. 30 of 50 Refrigerators are delivered to B. 73. B agreed to the above agreement, without asking the dealer whether the refrigerators are fit to make ice and paid the determined consideration. The refrigerators failed to make ice. a. A must refund the price, because refrigerators are meant to make ice. b. A will refund the price, only if buyer would have disclosed this particular purpose. c. A will refund the price at his option. d. A need not refund the price. 74. What would be the legal position if C denies to determine the price? a. C can be compelled to determine the price. b. The contract becomes voidable at the option of B. MERCANTILE

LAWS

165


75.

76.

77.

78.

79.

80.

c. The contract becomes void and B must return those 30 refrigerators. d. The contract becomes void and B must pay reasonable price for 30 refrigerators. What would be the legal position if B prevents C from determining the price? a. C can be compelled to determine the price. b. The contract becomes voidable at the option of A. c. The contract becomes void and B must pay reasonable price for 30 refrigerators. d. B has to return the refrigerators. If 20 refrigerators are stolen at time of making contract, the abovesaid contract becomes a. Void, because the goods have perished. b. Void, because the contract was indivisible. c. Voidable at the option of B d. Partly Void and partly voidable at the option of B Problem: A delivers bags of cements to B on ‘Sale on approval basis’ for 10 days. The cement became stone due to heavy rainfall (without any fault of B) on the fifth day itself. The loss is to be borne by a. A, because the ownership has not passed to B. b. A, if B refuses to bear the loss. c. B, if A refuses to bear the loss. d. B, because the ownership has passed to B. If the cement became stone, after being accepted by B, the loss is to be borne by: a. A, if B refuses to bear the loss. b. B, if A refuses to bear the loss. c. A, because the ownership has not passed to B. d. B, because the ownership has passed to B. If B retains the good and gives notice of rejection on the fourth day, the loss is to be borne by: a. A, because the ownership has not passed to B. b. B, because the bags were in custody of B, at the time of damage. c. B, because B has retained the bags for more than three days. d. B, because the ownership has passed to B. If B neither returns nor rejects the bags till the tenth day and eventually the damage occurs on the eleventh day. The loss shall be borne by: a. A, because the ownership has not passed to B. b. A, because ten days has elapsed. c. A, because the agreement has become void. d. B, because the ownership has passed to B.

Answers : 58. a, b 59. a, c 60. b, d 61. a, c 62. a, c 63. a, c, d 64. a, c

166

65. 66. 67. 68. 69. 70. 71.

i- d, ii – c, iii – a, iv – b i – b, ii – d, iii – a, iv – c i – b, ii – d, iii – a, iv – c i – b, ii – c, iii – d, iv – a i – d, ii – c, iii – b, iv – a i – b, ii – d, iii – a, iv – c i – c, ii – d, iii – b, iv – a

72. 73. 74. 75. 76. 77. 78.

i – b, ii – d, iii – a, iv – c a d c d a b 79. a 80. d
