MERCANTILE LAWS · PDF fileThe Indian Contract Act, 1872 : This is one of the oldest in the Indian law regime, passed by the ... 1.23 Distinction between Succession and Assignment

MERCANTILE LAWS

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PREFACE

Law in a broader sense includes rules, regulations, guidelines, principles which seek to regulate relationsof citizens with the State. There are also laws, which regulate business as they form an integral part of thesociety. 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 wasoriginally developed out of procedures and progress of trade and commerce in England. The MercantileLaws in India are mainly based upon the English laws. The subject, Mercantile Laws is vast and expansiveand a number of enactments were passed.

As a student aspiring to became a Chartered Accountant, he should have knowledge of those legalframeworks, which influences the business transactions. The syllabus has been segregated into three chapterscovering 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 nuancesof 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 thelegislature of pre-independence India and received its assent on 25th April, 1872. The statute containsessential principles for formation of contract. The Law of Contract does not involve or bind the stateor persons that are not parties to the contract. It is, therefore, said to be a part of “Private Law”. Itcontains 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 ofthe 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 IndianSale 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 hasseen several amendments and adaptation orders in due course. The latest one of such was theMultimodal Transportation of Goods Act, 1993.

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

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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 natureof contract, consideration, other essential elements of a valid contract, performance ofcontract 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 ofpartners – Registration and dissolution of a firm.

SYLLABUS

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CONTENTS

Chapter 1 - The Indian Contract Act, 1872

Introduction 1

Unit 1 : Nature of Contracts

1.1. What is Contract? 41.2. Essential Elements of a Valid Contract 51.3 Types of Contract 61.4. Proposal/Offer 81.5 Acceptance 101.6 Communication of Offer and Acceptance 111.7 Revocation of Offer and Acceptance 111.8 Summary 12

Unit 2 : Consideration

1.9 What is Consideration ? 141.10 Legal Requirements regarding Consideration 151.11 Suit by a Third Party on an Agreement 161.12 Validity of an Agreement without Consideration 161.13 Summary 17

Unit 3 : Other Essential Elements of a Valid Contract

1.14 Capacity to Contract 191.15 Free Consent 221.16 Elements Vitiating Free Consent 221.17 Lawful Object and the Consideration 261.18 Unlawful Object 271.19 Unlawful Consideration 271.20 Agreements Expressly Declared Void 311.21 Summary 33

Unit 4 : Performance of Contract

1.22 By whom Contract may be Performed ? 361.23 Distinction between Succession and Assignment 381.24 Effect of Refusal to Accept Offer of Performance 381.25 Effect of a Refusal of Party to Perform Promise 381.26 Liability of Joint Promisors 391.27 Rights of Joint Promisees 401.28 Time and Place for Performance of the Promise 401.29 Performance of Reciprocal Promises 401.30 Effect of Failure to Perform at a Time Fixed in a Contract in which Time is Essential 42

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CONTENTS

1.31 Impossibility of Performance 431.32 Appropriation of Payments 431.33 Contracts which need not be Performed 441.34 Restoration of Benefit under a Voidable Contract (Section 64) 451.35 Obligations of Person who has Received Advantage under Void Agreement 46

or One Becoming Void1.36 Discharge of a Contract 471.37 Summary 48

Unit 5 : Breach of Contract

1.38 Anticipatory Breach of Contract 501.39 Actual Breach of Contract 501.40 Liability for Damages 511.41 How to Calculate the Damage ? 511.42 Summary 52

Unit 6 : Contingent and Quasi-Contracts

1.43 What is a Contingent Contract ? 541.44 Essentials of a Contingent Contract 541.45 Rules Relating to Enforcement 551.46 What is a Quasi-Contract ? 551.47 Types of quasi-contracts 561.48 Wagering Agreement and Contingent Contract 571.49 Summary 571.50 Multiple Choice Questions 581.51 Answers 77

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

Chapter 2 - The Sale of Goods Act, 1930

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CONTENTS

Chapter 3 - The Indian Partnership Act, 1932

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

Introduction 119

Unit 1 : General Nature of a Partnership3.1 What is Partnership? 1223.2 Essential Elements of Partnership 1223.3 True Test of Partnership 1233.4 Partnership distinguished from other forms of Organisation 1243.5 Types of Partners 126

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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

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CHAPTER – 1TH

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CT, 1872

INTRODUCTIONThe term ‘contract’ means, in ordinary sense, anyagreement between any two persons. For businesspersons, making of contracts with others is a veryimportant process to put into effect their businessplans. Those who enter into contracts expect that thecommitments made shall be fulfilled. The law ofcontracts seeks to regulate the behaviour of personswho make contracts. It also determines thecircumstances under which a promise or anagreement shall be legally binding on the personmaking it. It also provides the remedies, which areavailable in a Court of Law against a person whofails to fulfil his contracts.

The law relating to contracts is contained in theIndian Contract Act, 1872. The Act came into forceon the first day of September 1872, and it applies tothe whole of India except the State of Jammu andKashmir. The Contract Act is not a complete andexhaustive law on all types of contracts. It lays downgeneral principles of contract law.

In this chapter we shall study the provisions of theAct 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

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CHAPTER – 1

THE INDIANCONTRACTACT, 1872

Unit 1

Natureof

Contracts

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THE INDIAN CONTRACT ACT, 1872

COMMON PROFICIENCY TEST4

Learning Objectives

� Understand meaning of the terms ‘agreement’ and ‘contract’ and note the distinctionbetween 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 andrevocation thereof.

THE LAW OF CONTRACT : GENERAL PRINCIPLES

As a result of increasing complexities of business environment, innumerable contracts are enteredinto by the parties in the usual course of carrying on their business. ‘Contract’ is the most usualmethod of defining the ‘give and take’ rights and duties in a business transaction. This branchof Private law is different from other branches of law in a very important respect. It does notprescribe so many rights and duties, which the law will protect or enforce; it contains a numberof 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 rulesthey desire to the subject matter of their agreements, and law takes cognizance of their decisionunless they are not legally prohibited.

All agreements are not studied under the Indian Contract Act, 1872, as some of those are notcontracts. Only those agreements, which are enforceable at law, are contracts. This unit refersto the essentials of a legally enforceable agreement or contract. It sets out rules for the offer andacceptance and revocation thereof. It states the circumstances when an agreement is voidableor 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 considerationfor 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 beaccepted. Proposal when accepted, becomes a promise”.

From the above, it is obvious that an agreement is a promise or a set of reciprocal promises, thata promise is the acceptance of a proposal. There must be an offer or a proposal which the otherperson accepts and when he accepts he knows that the acceptance will give rise to a bindingcontract. But as Section 2(h) requires an agreement to be worthy of being enforceable by lawbefore 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 ofour discussion in this Unit.

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MERCANTILE LAWS 5

1.2 ESSENTIAL ELEMENTS OF A VALID CONTRACTAccording to Section 10, “All agreements are contracts if they are made by the free consent of partiescompetent to contract, for a lawful consideration and with a lawful object, and are not hereby expresslydeclared to be void.” The following essential elements must co-exist in order to make a validcontract:

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 betweenthem through the form of offer an acceptance. They should have intention to impose duty onthe 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 essentialelement of a valid contract. Consideration is a technical word meaning thereby quid proquo i.e. something in return. It must result in benefit to one party and detriment to the otherparty 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 theconsideration for A’s promise to sell his books and A’s promise to sell the books is theconsideration 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-faciewill hold good; or at least we can say that there is an existence of contract, although somemore 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, andserious exercise of the reasoning faculty. If, therefore, either of the parties to an agreementis deprived of the use of his understanding or if he be deemed by law not to have attainedit, there can be no such agreement which shall bind him. Section 11 of the Indian ContractAct 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 canenter into a contract during his lucid intervals) and (c) a person disqualified from contractingby any law to which he is subject, e.g. an alien enemy, foreign sovereigns and accreditedrepresentatives of a foreign state, insolvents and convicts are not competent to contract.

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4. The consent of the parties must be genuine. The term ‘consent’ means parties to a contractmust agree upon the same thing in the same sense, i.e. there should be consensus-ad-idem. 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 optionof 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 agreementis one, which is without any legal effects. Illegal agreement is an agreement expressly orimpliedly prohibited by law.

Example: Agreements in restraint of trade, marriage, legal proceedings etc. are voidagreements. Those agreements prohibited by the Indian Penal Code e.g. Threats to commitmurder or publishing defamatory statements or agreements which are opposed to publicpolicy are illegal in nature.

1.3 TYPES OF CONTRACT1. 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 bylaw 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 agreementmade 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 optionof 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 ormisrepresentation would be voidable at the option of the person whose consent was causedby 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 lawbecomes void when it ceases to be enforceable and a voidable contract is an agreementwhich is enforceable by law at the option of one or more of the parties thereon, butnot at the option of other or others.

(b) Nature : A void contract is valid when it is made but subsequently becomesunenforceable on certain grounds such as supervening impossibility, subsequentillegality, repudiation of a voidable contract, a contingent contract depending uponhappening of an uncertain event, when occurrence of such event becomes impossible.

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MERCANTILE LAWS 7

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, undueinfluence, fraud, misrepresentation are voidable. But in case contract is caused bymistake 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 avoidable contract gets a right to rescind the contract. When such party rescind it, thecontract becomes void. In case aggrieved party does not rescind the contract within areasonable time, the contract remains valid.

3. Illegal contract : It is a contract which the law forbids to be made. The court will notenforce such a contract and also connected contracts. All illegal agreements are void but allvoid agreements or contracts are not necessarily illegal.

Examples : Contract to commit crime. Contract that is immoral or opposed to publicpolicy are illegal in nature.

Void and Illegal agreements : distinction.

According to Section 2 (g) of the Indian Contract Act, an agreement not enforceable bylaw is void. The Act has specified various factors due to which an agreement may beconsidered as void agreement. One of these factors is unlawfulness of object or considerationof the contract i.e., illegality of the contract which makes it void. Despite the similaritybetween an illegal and a void agreement that in either case the agreement is void andcannot 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 illegalbeing void due to some other factor e.g., an agreement the terms of which are notcertain is void but not illegal.

(b) Effect on collateral transaction : If an agreement is merely void and not illegal, thecollateral transactions to the agreement may be enforced for execution but collateraltransaction 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 voidagreement.

(d) Void-ab-initio : Illegal agreements are void from the very beginning, but sometimesvalid contracts may subsequently become void.

4. Unenforceable contract : Where a contract is good in substance but because of some technicaldefect i.e., absence in writing, barred by limitation etc. one or both the parties cannot sueupon it, it is described as an unenforceable contract.

Contracts may also be classified according to formation namely, Express Contracts andImplied Contracts.

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

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6. Implied Contract : By implied contract means implied by law (i.e.) the law implies a contractthough parties never intended. According to Section 9 insofar as such proposal or acceptanceis made otherwise than in words, the promise is said to be implied. For example, A deliversby mistake goods at B’s warehouse instead of at C’s place. Here there is an obligation onthe 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 ofthe parties. Examples obtaining cash through automatic teller machine, sale by fall ofhammer at an auction sale.

Besides contracts may be classified on the basis of performance. Such contracts may beexecuted, executory, unilateral and bilateral.

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

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

10. Unilateral Contract : A unilateral contract is a one-sided contract in which only one partyhas 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 partof 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 ofanother or others. As a matter of fact it is not a contract in the real sense, since it is notbased upon any agreement between the two parties. A recognisance is a writtenacknowledgement of a debt due to the State. It is usually met with the connection withcriminal 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 itsform alone. It is written and is signed, sealed and delivered by the parties. It is also called adeed or a speciality contract.

Now we shall discuss the term ‘offer’ and ‘acceptance’ referred to earlier, in detail.

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

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MERCANTILE LAWS 9

express his willingness ‘to do’ or ‘not to do’ something. But mere expression of willingness doesnot constitute an offer. For instance, where ‘A’ tells ‘B’ that he desires to marry by the end of2004, it does not constitute an offer of marriage by ‘A’ to ‘B’. Therefore, to constitute a validoffer 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; nonethelessboth 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 acceptand do the desired act. Section 8 of the Indian Contract Act points out that performanceof 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 andsuch offer can be accepted only by that specified person.

(c) Cross Offfers : When two parties exchange identical offers in ignorance at the time of eachother’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 tomodifications and variations in the terms of original offer, he is said to have made a counteroffer. Counter-offer amounts to rejection of the original offer.

(e) Standing, Open or Continuing offer : An offer is allowed to remain open for acceptance overa period of time is known as a standing, open or continuing offer. Tender for supply ofgoods 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 besuch 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 orindefinite, its acceptance cannot create any contractual relationship. Thus, where A offersto sell B a 100 quintals of oil, there is nothing whatever to show what kind of oil wasintended. The offer is not capable of being accepted for want of certainty. But if theagreement contains reference for ascertaining a vague term, the agreement is not void onthe ground of its being vague. If in the above example, A is a dealer in coconut oil only, itshall constitute a valid offer since the nature of A’s trade affords an indication as to whichoil 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 theperson to whom it is made. Unless an offer is communicated, there can be no acceptance

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COMMON PROFICIENCY TEST1 0

by it. An acceptance of an offer, in ignorance of the offer, is not acceptance and does notcreate 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 toacceptance. Thus a man cannot say that if acceptance is not communicated by a certaintime 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 invitationto an offer is only a circulation of an offer, it is an attempt to induce offers and precedes adefinite offer. Acceptance of an invitation to an offer does not result contract and only an offeremerges 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 tobe 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 tooffer’, the test would be intention with which such statement is made. Does the person whomake the statement intend to be bound by it as soon as it is accepted by the other or he intendsto do some further act, before he becomes bound by it? In the former case, it amounts to anoffer 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 proposalis 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 validwhen 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 enquiriesfrom B, “will you purchase my dog for Rs. 100” ? and B replies, “I shall purchase your dogfor Rs. 100 provided you purchase my cat for Rs. 60”. B in such a case would not be saidto 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 proposerbefore a contract can be deemed to have come into existence. A counter proposal is theoffer 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 becommunicated to the person who made the offer. An offer made by the intended offereewithout the knowledge that an offer has been made to him cannot be deemed as anacceptance thereto.

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

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MERCANTILE LAWS 1 1

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

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 inwriting or by word of mouth or by performance of some act. Therefore, when, a personperforms the act intended by the proposer as the consideration for the promise offered byhim, the performance of the act constitutes acceptance. For example, when a tradesmanreceives an order from a customer and executes the order by sending the goods, thecustomer’s order for goods constitutes the offer, which has been accepted by the tradesmansubsequently by sending the goods. It is a case of acceptance by conduct.

1.6 COMMUNICATION OF OFFER AND ACCEPTANCEWhen the contracting parties are face to face, there is no problem of communication, becausethere is instantaneous communication of offer and acceptance. In such a case the question ofrevocation 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 theyutilise the services of the post office or telephone. In such cases it is very much relevant for usto 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 theknowledge of the person to whom it is made (Sect. 4). An offer may be communicated either bywords 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 containingthe proposal reaches the persons to whom it is made. For example, A makes proposal to B tosell his house for Rs. two lakhs. The letter is posted on 10th March. This letter reaches B on 12thMarch. 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 willbe complete as against the proposer when the letter of acceptance is posted and as against theacceptor when the letter reaches the proposer.

1.7 REVOCATION OF OFFER AND ACCEPTANCEUnder 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 theperson 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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Let us consider the illustration. If you (proposer) revoke your proposal by a telegram, therevocation 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 thetelegram. As regards the revocation of acceptance, I revoke my acceptance by a telegram myrevocation 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 itsacceptance is complete as against the proposer. An acceptance may be revoked at any timebefore 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 lawrelating to the revocation of acceptance is different. In India, acceptance by a letter can berevoked by a telegram, if it reaches earlier than, or at the same time as the letter, but in Englandacceptance once posted cannot be revoked subsequently even by a telegram, even if it reachesearlier than the letter.

1.8 SUMMARYContract : A Contract is an agreement enforceable by law [Section 2(h)]. An agreement isenforceable by law, if it is made by the free consent of the parties who are competent to contractand the agreement is made with a lawful object and is for a lawful consideration, and is nothereby expressly declared to be void. [Section 10]. All contracts are agreements but all agreementsare not contracts. Agreements lacking any of the above said characteristics are not contracts. Acontract that ceases to be enforceable by law is called ‘void contract’, [Section 2(j)] but anagreement which is enforceable by law at the option of one party thereto, but not at the optionof 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 theoffer is properly accepted by the offeree. Offer may be expressly made or may even be impliedin conduct of the offeror, but it must be capable of creating legal relations and must intend tocreate legal relations. The terms of offer must be certain or at least be capable of being madecertain.

Acceptance of offer must be absolute and unqualified and must be according to the prescribedor usual mode. If the offer has been made to a specific person, it must be accepted by thatperson 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 thecourse of transmission to him and as against the acceptor, when it comes to the knowledgeof the offeror.

(c) Communication of revocation of an offer or acceptance is complete : As against the personmaking it, when it is put into a course of transmission so as to be out of power of theperson making it and as against the person to whom it is made, when it comes to hisknowledge.

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CHAPTER – 1

Unit 2

Consideration

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Learning objectives

� Understand the concept of consideration, its importance for a contract and its doubleaspect.

� Clearly understand how consideration may move from a third party and how this makesthe contract valid.

� Learn about the peculiar circumstances when a contract is valid even withoutconsideration.

� 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 beenforceable. 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. Inthis Unit we shall examine the terms of the Indian definition and try to understand the conceptof 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 thepromisor. 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, lossor responsibility given, suffered or undertaken by the other (i.e., the promisee)” at the requestof 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 orpromises to do or abstain from doing something, such an act or abstinence or promise is calledconsideration for the promise”.

(1) That is to say, consideration is the doing or not doing of something which the promisordesires 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 isdoes B offer any consideration as against A’s promise to carry his goods ? The answer must bein the affirmative, because the detriment or the disadvantage which B suffers in parting withthe goods so that goods may be carried by A is sufficient consideration as against A’ promise tocarry. 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 saidto 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 thedesire of a third party is not a consideration.

(ii) Consideration from promisee or any other person : In India, consideration may proceed fromthe promisee or any other person who is not a party to the contract. The definition ofconsideration as given in Section 2(d) makes that proposition clear. According to thedefinition, when at the desire of the promisor, the promisee or any other person doessomething such an act is consideration. In other words, there can be a stranger to aconsideration but not stranger to a contract.

(iii) Executed and executory consideration : A consideration which consists in the performance ofan act is said to be executed : When it consist in a promise, it is said to be executory. Thepromise by one party may be the consideration for an act by some other party, and viceversa. For example, A pays Rs. 5,000 to B and B promises to deliver to him a certainquantity of wheat within a month. In this case A pays the amount, whereas B merelymakes a promise. Therefore, the consideration paid by A is executed, whereas theconsideration promised by B is executory.

(iv) Past Consideration : The words “has done or abstained from doing” [as contained in Section2(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 thatconsideration is given and accepted in exchange for the promise. The consideration, ifpast, may be the motive but cannot be the real consideration of a subsequent promise. Butin the event of the services being rendered in the past at the request or the desire of thepromisor the subsequent promise is regarded as an admission that the past considerationwas not gratuitous.

(v) Adequacy of consideration: Consideration need not be any particular value. It need not beapproximately equal value with the promise for which it is exchanged but it must besomething 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 towhich the consent of the promisor is freely given is not void merely because the considerationis inadequate.

(vi) Performance of what one is legally bound to perform : The performance of an act by a personwho is legally bound to perform the same cannot be consideration for a contract. Hence, apromise to pay money to a witness is void, for it is without consideration. Hence such acontract is void for want of consideration. Similarly, an agreement by a client to pay to hiscounsel after the latter has been engaged, a certain sum over and above the fee, in theevent 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 promiseprovided 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 AGREEMENTThough under the Indian Contract Act the consideration for an agreement may proceedfrom a third party, the third party cannot sue on agreement. Only a person who is party toa 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 nota 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 enforcethe agreement.

(3) In the case of certain marriage contracts, a female member can enforce a provision formarriage 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 toN, and M informs N that he is holding the money for him, but afterwards M refuses to paythe 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 noticethat the owner of land is bound by certain duties affecting land, the covenant affectingthe land may be enforced by the successor of the seller.

1.12 VALIDITY OF AN AGREEMENT WITHOUT CONSIDERATIONThe general rule is that an agreement made without consideration is void (Section 25). In everyvalid contract consideration is very important. A contract may only be enforceable when anadequate consideration is there. However, the Indian Contract Act contains certain exceptionsto this rule. In the following cases, the agreement though made without consideration, will bevalid and enforceable.

1. Natural Love and Affection : A written and registered agreement based on natural loveand affection between the parties standing in near relation (e.g., husband and wife) toeach 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 enforceableunder 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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MERCANTILE LAWS 1 7

(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 personmaking it or by his authorised agent, is made to pay a debt barred by limitation it is validwithout consideration [Section 25(3)].

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

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

1.13 SUMMARYThe students may note that :

(a) Consideration is a price for the promise of the other party and it may either be in the formof ‘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 exceptionalcases 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 tothe contract.

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CHAPTER – 1

Unit 3

OtherEssentialElementsof a ValidContract


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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 samething in the same sense.

� Try to grasp the characteristics of different elements vitiating free consent and particularlydistinguish 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 itsacceptance 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 inlaw.

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 agreedabout the subject matter of the contract at the same time and in the same sense, as evidencedby offer and acceptance (Section 13). It has also been observed that the agreement must importan intention to create legal relationship between the parties, and that agreements relating tosocial matters are not enforceable by law.

1.14 CAPACITY TO CONTRACTWho is competent to contract? Every person who (a) has attained the age of majority, (b) is ofsound 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 (ActIX of 1875). Every person domiciled in India attains majority on the completion of 18years of age.

(b) Sound mind : A person is said to be of sound mind for the purposes of making a contractif, at the time when he makes it, he is capable of understanding it and of forming a rationaljudgement as to its effect upon his interests.

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A person who is usually of unsound mind, but occasionally of sound mind, may make a contractwhen he is of sound mind.

A person who is usually of sound mind, but occasionally of unsound mind, may not make acontract 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 whenused 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 saysthat only a person who is a major is competent to contract. The main reason forholding a minor’s agreement void is that where an agreement by a minor involves apromise on his part or his promise is a necessary part of the agreement it is voidbecause 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, nothingin 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 besued upon by him, because he though incompetent to contract, may yet accept abenefit.

A minor cannot become partner in a partnership firm. However, he may with theconsent of all the partners, be admitted to the benefits of partnership (Section 30 ofthe Indian Partnership Act).

3. Minor can always plead minority : A minor’s contract being void, any moneyadvanced to a minor on a promissory note or otherwise, cannot be recovered. Evenwhen a minor procures a loan by falsely representing that he is full age, it will notstop him from pleading his minority in a suit to recover the amount and the suit willbe dismissed.

But where a minor had fraudulently mortgaged and sold certain properties, the Courtheld that on the cancellation of the agreement at the instance of the minor the lenderand purchaser must be compensated.

4. Ratification on attaining majority is not allowed : As a minor’s agreement is void hecannot validate it by ratification on attaining majority. For instance, a minor borrows moneyand executes a promissory note. On attaining majority, he executes a fresh promissorynote in substitution of the one executed as a minor. The second promissory note is alsovoid being without consideration. But a person who supplies necessaries of life to a minoror to one whom the minor is legally bound to support, according to his situation in life, isentitled to be reimbursed from the property of the minor not on the basis of any contractbut on the basis of an obligation resembling a contract (Section 68).But a minor’s propertyin 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’sbehalf. Where the guardian makes a contract for the minor, which is within hiscompetence and which is for the benefit of the minor, there will be valid contractwhich the minor can enforce. For instance a guardian can make an enforceable contractof marriage for a minor.

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MERCANTILE LAWS 2 1

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 purchaseof immovable Property. But a contract entered into by a certified guardian (appointedby the Court) of a minor, with the sanction of the court for the sale of the minor’sproperty, may be enforced by either party to the contract.

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

(b) Contract by a person of unsound mind : A person of unsound mind too is, under theIndian Contract Act, incapable of entering into a contact. Although a contract by a personwho is not of sound mind is void, such a person can enter into a valid contract during aninterval of lucidity. The test of unsoundness of mind is whether or not the person is capableof understanding the business and of forming a rational judgement as to its effect uponhis interest. Idiots, lunatics and drunken persons are examples of those having an unsoundmind.

The presence of absence of the capacity mentioned in this Section at the time of makingthe contract is in all cases a question of fact. Where a person is usually of sound mind, theburden of proving that he was of unsound mind at the time of execution of a documentlies 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 contractduring such intervals.

The liability for necessaries of life supplied to persons of unsound mind is the same as forminors (Section 68).

(c) Contract by disqualified persons : Besides minors and persons of unsound mind, thereare also other persons who are disqualified from contracting, partially or wholly, so thatthe 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 theproperty.

An alien enemy, during war, cannot enter into a contract with an Indian subject. Hecannot sue in Indian Courts without a licence from the Central Government either, thisdisability being a matter of public policy. Similarly, a statutory corporation cannot enterinto a contract which is ultra vires its memorandum. Likewise, municipal bodies aredisqualified from entering into contracts which are not within their statutory powers.

Sovereign States, Ambassadors and Diplomatic Couriers enjoy certain special privilegeswith 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.

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1.15 FREE CONSENTAccording to Section 13, “two or more persons are said to have consented when they agree upon thesame thing in the same sense (Consensus-ad-idem). Consequently, when parties to a contractmake some fundamental error as to the nature of the transaction, or as to the person dealt withor as to the subject-matter of the agreement, it cannot be said that they have agreed upon thesame thing in the same sense. And if they do not agree in the same sense, there cannot beconsent. A contract cannot arise in the absence of consent.

If two persons enter into an apparent contract concerning a particular person or ship, and itturns out that each of them, misled by similarity of name, had a different person or ship in hismind, 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 transactionor as to the subject-matter of any agreement may prevent the formation of any contract on theground of absence of consent.

As has been said already, one of the essential elements of a contract is consent and there cannotbe a contract without consent. Consent may be free or not free. Only free consent is necessaryfor 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 thesefactors, it is said to have been freely given. When consent is not free due to mistake, the agreementis void but in all other cases, the contract is voidable at the option of the party whose consentwas obtained by coercion, etc.

1.16 ELEMENTS VITIATING FREE CONSENTWe shall now explain these elements one by one.

(a) Coercion : Section (15) : “Coercion” is the committing, or threatening to commit, any actforbidden by the Indian Penal Code (45 of 1860), or the unlawful detaining, or threatening todetain any property, to the prejudice of any person whatever, with the intention of causing anyperson to enter into an agreement. For example, X says to Y: “I shall kill your son, or I shallnot return the documents of title relating to your wife’s property, unless you agree to sellyour house to me for Rs. 5,000". Y says, “All right, I shall sell my house to you forRs. 5,000 : do not kill my son or do not detain my wife’s documents of title”. X has employedcoercion; he cannot therefore enforce the contract. But Y can enforce the contract if hefinds the contract to his benefit. An agreement induced by coercion is voidable and notvoid. That means it can be enforced by the party coerced, but not by the party usingcoercion.

Where husband obtained a release deed from his wife and son under a threat of committingsuicide, the transaction was set aside on the ground of coercion, suicide being forbiddenby the Indian Penal Code.

A person to whom money has been paid or anything delivered under coercion, mustrepay or return it. (Section 71).

(b) Undue influence (Section 16) : A contract is said to be induced by “undue influence” wherethe relations subsisting between the parties are such that one of the parties is in a position to

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MERCANTILE LAWS 2 3

dominate the will of the other and uses that position to obtain an unfair advantage of the other. Aperson is deemed to be in a position to dominate the will of the other, when he holds authority realor 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 theson. 2. Again by reason of fiduciary relationship, a solicitor can dominate the will of hisclient and 3. A trustee can dominate the will of the beneficiary. 4. Similarly, a personwhose 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 patientenfeebled 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 apparentauthority over the other, or stands in a fiduciary position to the other. That means oneparty 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 actscommitted by a party to a contract, or with his connivance or by his agent with intent to deceiveanother 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 committedby a party which does not lead the other party to enter into a contract is not covered bythis section.

Mere silence amounting to fraud? Mere silence as to facts likely to affect the willingness of aperson to enter into a contract is no fraud; but where it is the duty of a person to speak, orhis silence is equivalent to speech, silence amounts to fraud. [Read the illustrations underthe 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 theduty of the person keeping silence to speak. Duty to speak arises when one contractingparty reposes trust and confidence in the other or where one party has to dependupon 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. Mis-representation may be either innocent or without reasonable ground. Misrepresentation is

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misstatement of facts by one, which misleads the other who, consequently, can avoid thecontract. For example, A makes a positive statement to B that C will be made the directorof a company. A makes the statement on information derived, not directly from C butfrom M. B applies for shares on the faith of the statement which turns out to be false. Thestatement amounts to misrepresentation, because the information received second-handdid 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 compelledto make the contract against its will.

(b) It involves committing or threatening No such illegal act is committed or ato commit an act forbidden by Indian threat is given.Penal Code or detaining or threateningto detain property unlawfully.

(c) It is not necessary that there must be Some sort of relationship between thesome sort of relationship between the parties is absolutely necessary.parties.

(d) Coercion need not proceed from the Undue influence is always exercisedpromisor 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 byof the party whose consent has been undue influence, the contract is eitherobtained 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 directis rescinded by the aggrieved party, as the aggrieved party to return theper Section 64, any benefit received has benefit in whole or in part or not toto be restored back to the other party. give any such directions.

Distinction between fraud and misrepresentation : The principal difference betweenfraud and misrepresentation is that in the case of fraud the person making representationdoes 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 fraudnot only affords a ground for avoiding the contract, it also enabled the party defrauded tobring an action in tort for damages whereas misrepresentation merely affords a ground foravoiding the contract and not for bringing an action in tort. When recession is claimed, itis only necessary to prove that there was misrepresentation then however honestly it may

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MERCANTILE LAWS 2 5

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 actionfor deceit, there must be proof of fraud; and fraud is proved only when it is shown that afalse 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 theplaintiff had that means of discovering the truth by exercising ordinary diligence, can begood defence against the repudiation of the contract, whereas such a defence cannot be setup in the case of fraud other than fraudulent silence [Exception to Section 19].

Misrepresentation as to law : Misrepresentation as to fact renders a contract, voidablemisrepresentation as to law does not, ordinary, make the contract voidable. But a deliberatemisrepresentation in matter of law is certainly a cause for avoiding a contract.

Consequences of coercion, fraud, misrepresentation etc. (Section 19) : It has alreadybeen 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 contractis 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 sameposition in which he would have been, if the representation made had been true. Forinstance, A fraudulently informs B that A’s estate is free from encumbrance. B thereuponagrees to buy the estate. The estate is, however, subject to mortgage. B may either avoidthe 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 cannotavoid a contract on the ground that his consent was caused by misrepresentation or silenceamounting to fraud. For example, A by a misrepresentation leads B to believe erroneouslythat 750 tons of sugar is produced per annum at the factory of A. B examines the accountsof 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 thecircumstance, 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 isnot, in fact, misled by such fraud or misrepresentation, the contract cannot be avoided bythe latter. (Explanation to Section 19). Thus when a seller of specific goods deliberatelyconceals a fault in order that the buyer may not discover it even if he inspects the goodsbut 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 thepurchase 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 groundthe student can sue the teacher?

Yes, A can sue his teacher on the ground of undue influence under the provisions of IndianContract Act, 1872. A contract brought as a result of coercion, undue influence, fraud ormisrepresentation 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 toa matter of act essential to the agreement the agreement is altogether void. The Court will

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enforce a voidable contract if not avoided, but will not recognise an agreement that isvoid. For instance, A agrees to sell to B a specific cargo of goods supposed to be on its wayfrom England to Bombay. It turns out that before the day of the bargain, the ship conveyingthe cargo had been cast away and the goods lost. Neither of the parties was aware ofthese facts. The agreement was void. Both the parties must be under mistake. A unilateralmistake, that is to say, mistake of one party, does not render the agreement void (Section22). A agrees to purchase from B 18 carat gold thinking to be pure gold; B has not beeninstrumental 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 particulardebt 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, thoughdepending on rules of law. Thus, a man’s promise to buy property which, unknown to himalready 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 dependson whether a reasonable man would regard the fact as an essential in the circumstances. Amere wrong opinion as to the value is not an essential fact. For instance, A and B both believethat a particular kind of rice is being sold in the market at Rs. 1,780 per quintal and A sells riceof that kind to B at Rs. 1,780 per quintal. But, in fact, the market price was Rs. 1,900. Thecontract 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, fraudand misrepresentation, on the one hand, and the effect of mistake, on the other, on anagreement.)

1.17 LAWFUL OBJECT AND THE CONSIDERATIONWe shall now discuss the next two ingredients of a valid contract, viz., lawful object andlawful consideration. There are certain provisions of law which are general in character areapplicable to the community as a whole. Subject thereto, an individual generally has theright to adjust his rights and obligations as he may wish. But this contractual freedom or theright of individuals to make by an agreement what in effect is law between themselves, is notabsolute. In other words there is a limitation on the contractual freedom of an individual. Thenecessity for it will be clear from the following illustration: Suppose, A agrees to pay Rs. 100to B on B’s stealing C’s purse. In this case, the Court obviously cannot compel A to pay B, if Bhas stolen the purse because it will be encouraging theft which is hit by the Indian PenalCode.

Object means purpose or design. The term ‘consideration’ is defined in Section 2(d) and thevarious forms it may take have been considered earlier in this Study Module. Where A agreesto sell goods to B, and B, who is insolvent assigns the benefit of the contract for Rs. 100 with aview to defrauding his creditors, the consideration for the assignment; viz., the sum of Rs. 100is lawful but the object viz., defrauding the creditors, is unlawful as it is intended to defeat theprovisions of the insolvency law.

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1.18 UNLAWFUL OBJECTThe limits to contractual freedom are set out in Section 23 of the Act. An agreement, theobject or consideration of which is unlawful is void. “Consideration or object is unlawful if it isforbidden 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 publicpolicy.”

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 beacquired by fraud. The agreement is void, as its object, viz., acquisition of gains by fraud isunlawful.

(2) A promises to B to abandon a prosecution which he had instituted against B for robberyand B promises in lieu thereof to restore the value of the property robbed. The agreementis void as its object, namely, the stifling of prosecution, is unlawful.

1.19 UNLAWFUL CONSIDERATIONThe 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, topay Rs. 1,000 to A. The agreement is void, as the consideration thereof is unlawful. Here A’spromise to procure for B an employment in the public services is the consideration for B’spromise 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 arediscussed below :

(i) Forbidden by law : Acts forbidden by law are those which are punishable under anystatute as well as those prohibited by regulations or orders made in exercise of the authorityconferred by the legislature. Let us consider an example. A licence to cut grass is given toX by the Forest Department under the Forest Act. One of the terms of licence is that thelicencee should not assign his interest under the licence without the permission of theForest Officer, and a fine is prescribed for a breach of this condition. But the observance ofthe conditions of the licence is not obligatory under the Forest Act. If A in breach of thecondition, 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 beenimposed 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 ruleof 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 pleadlimitation, as the object is to defeat the provisions of the Limitation Act. The Hindu Law isdefeated by an agreement to give as son in adoption in consideration of annual allowanceto the natural parents.

(iii) Defeat of any rule for the time being in force in India : Example - A Receiver being anofficer of the Court, the Court has also the jurisdiction to determine his remuneration, and

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the parties cannot by any of theirs add to or derogate from the functions of the Courtwithout its authority. A promise, therefore, to pay the salary of a receiver without the leaveof the Court, even if unconditional, being in contravention of law, is not binding on thepromisor. 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 whereofis unlawful on the ground of fraud (1) A, an agent for a zamindar agrees for moneywithout the knowledge of his principal, to obtain for B a lease of land belonging to hisprincipal. 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 atender in the name of one of them only, though they were both partners in the transactionis void, as the object is fraudulent.

(v) Injury to the person or property of another : The general term “injury” means criminalor wrongful harm. In the following examples, the object or consideration is unlawful as itinvolves 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 objectis to cause injury to the property of another. It is also void as the object of the agreementis forbidden by the law relating to copyright.

(2) A promises to repay his debt by doing manual labour daily for a special period andagrees to pay interest at an exorbitant rate in case of default. Here A’s promise torepay by manual labour is the consideration for the loan, and this consideration isillegal as it imposes what, in substance, amounts to slavery on the part of A. In otherwords, as the consideration involves injury to the person of A, the consideration isillegal. Here the object too is illegal, as it seeks to impose slavery which is opposed topublic policy. Hence the agreement is void.

(vi) Immoral : The following are the illustrations of agreements where the object orconsideration is unlawful, being immoral.

(1) A landlord cannot recover the rent of a house knowingly let to prostitute who carrieson her vocation there. Here, the object being immoral, the agreement to pay rent isvoid.

(2) Where P had advanced money to D, a married woman to enable her to obtain adivorce from her husband and D had agreed to marry him as soon as she couldobtain the divorce, it was held that P was not entitled to recover the amount, sincethe agreement had for its object the divorce of D from her husband and the promiseof marriage given under these circumstances was against good morals.

(vii) Agreement opposed to public policy : The expression ‘public policy’ can be interpretedeither in a wide or in a narrow sense. The freedom to contract may become illusory, unlessthe scope of ‘public policy’ is restricted. In the name of public policy, freedom of contractis restricted by law only for the good for the community. In law, public policy coverscertain 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 tocreate monopolies and agreements not to bid at an auction are also opposed to publicpolicy. An attempt to enlarge the scope of the doctrine is bound to result in the curtailmentof individual freedom of contract. Public policy, on this account, has been described as anunruly horse which, if not properly bridled, may carry its rider, he knows not where. Itbeing an untrustworthy guide for regulating the relations between parties it should not beinvoked except within the prescribed limits described below.

(a) Trading with enemy : Any trade with person owing allegiance to a Government at warwith India without the licence of the Government of India is void, as the object isopposed to public policy. Here the agreement to trade offends against the public policyby 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 anabuse of justice; therefore, such an agreement is void. The principle is that one shouldnot 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 ofcompoundable offences and an agreement to drop proceeding relating to such offenceswith or without the permission of the Court, as the case may be, in consideration theaccused promising to do something for the complainant, is not opposed to publicpolicy. Thus, where A agrees to sell certain land to B in consideration of B abstainingfrom taking criminal proceeding against A with respect to an offence which iscompoundable, the agreement is not opposed to public policy. But, it is otherwise, ifthe offence is uncompounable.

(c) Champerty and maintenance : Maintenance is the promotion of litigation in which onehad no interest and champerty is bargain whereby one party agrees to assist theother in recovering property, with a view to sharing the profits of litigation. Agreementstending to champerty and maintenance are void in England but in India they are notnecessarily void. Thus, in India, an agreement to share the subject of litigation, ifrecovered in consideration of the party’s supplying the funds in good faith to carry iton, is not itself, opposed to public policy. But where such advances are made by wayof gambling in litigation, the agreement to share the subject of litigation is certainlyopposed to public policy and therefore void.

(d) Interference with the course of justice : An agreement whose object is to induce anyjudicial officer of the State to act partially or corruptly is void, as it is opposed topublic policy; so also is an agreement by A to reward B, who is an intended witness ina suit against A in consideration of B’s absenting himself from the trial. For the samereasons, an agreement which contemplates the use of under-hand means to influencelegislation is void. Similarly, an agreement to induce any executive officer of the Stateto act partially or corruptly is void.

(e) Marriage brokerage contracts : An agreement to negotiate marriage for reward, whichis 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 opposedto public policy and therefore void.

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(f) Interest against obligation : The following are examples of agreement that are void asthey tend to create an interest against obligation. The object of such agreements isopposed 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 publicpolicy, as it interferes with the appointment of a person best qualified for the serviceof the public. Public policy requires that there should be no money consideration forthe appointment to an office in which the public is interested. The following are theexamples of agreements that are void; since they are tantamount to sale of publicoffices.

(1) An agreement to pay money to a public servant in order to induce him to retirefrom his office so that another person may secure the appointment is void.

(2) An agreement to procure a public recognition like Padma Vibhushan for rewardis void.

(h) Agreement for the creation of monopolies : Agreements having for their object theestablishment of monopolies are opposed to public policy and therefore void. It is alsohit by the MRTP Act.

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

(j) Agreement in restraint of trade (Section 27) : An agreement by which any person isrestrained from exercising a lawful profession, trade or business of any kind, is to thatextent void. But this rule is subject to the following exceptions, namely, where a personsells the goodwill of a business and agrees with the buyer to refrain from carrying ona similar business, within specified local limits, so long as the buyer or his successor ininterest carries on a like business therein, such an agreement is valid (goodwill is theadvantage enjoyed by a business on account of public patronage and encouragementfrom habitual customers). The local limits within which the seller of the goodwillagrees not to carry on similar business must be reasonable. Under Section 36 of theIndian Partnership Act, if an outgoing partner makes an agreement with the continuingpartners that he will not carry on any business similar to that of the firm within aspecified period or within specified local limits, such an agreement, though in restraintof trade, will be valid, if the restrictions imposed are reasonable. Similarly, underSection 11 of that Act an agreement between partners not to carry on competingbusiness during the continuance of partnership is valid.

But an agreement of service by which an employee binds himself, during the term ofhis agreement, not to compete with his employer is not in restraint of trade. Forexample, B, a physician and surgeon, employs A as an assistant for a term of threeyears 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 startsindependent practice during this period.

Similarly, an agreement by a manufacturer to sell during a certain period his entireproduction to a wholesale merchant is not in restraint of trade. Likewise an agreementamong the sellers of a particular commodity not to sell the commodity for less than afixed price is not an agreement in restraint of trade.

(k) Agreement in restraint of legal proceedings (Section 28) : An agreement in restraint oflegal proceeding is the one by which any party thereto is restricted absolutely fromenforcing his rights under a contract through a Court or which abridges the usualperiod for starting legal proceedings. A contract of this nature is void. Such anagreement also is void under Section 23 of the Court Act, because its object is todefeat 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 awardedin such arbitration shall be recoverable is a valid contract.

(ii) Similarly, a contract by which the parties agree to refer to arbitration any questionbetween 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 VOIDCertain agreements have been expressly declared void by the Contract Act. These are void abinitio and do not give rise to any legal consequences. We have already discussed some of thesecontracts such as agreements by incompetent parties (Section 11); agreements with an unlawfulobject 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 expresslydeclared to be void.

(a) Consideration Unlawful in Part : By virtue of Section 24, “if any part of a singleconsideration for one or more objects, or any one or any part of any one of severalconsiderations 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 nopromise for a lawful consideration if there is anything illegal in a consideration whichmust be taken as a whole. The general rule is that where the legal part of a contract can besevered 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 andan 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 promisebeing in part unlawful.

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(b) Agreement - the meaning of which is uncertain (Section 29) : An agreement, the meaningof which is not certain, is void, but where the meaning thereof is capable of being madecertain, 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 voidfor 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 involvingpayment of a sum of money upon the determination of an uncertain event. The essence ofa wager is that each side should stand to win or lose, depending on the way an uncertainevent takes place in reference to which the chance is taken and in the occurrence of whichneither of the parties has legitimate interest. For example, A agrees to pay Rs. 500 to B if itrains, and B promises to pay a like amount to A if it does not rain, the agreement will be byway of wager. But if one of the parties has control over the event, agreement is not awager.

Now, what is your view about a lottery authorised by the government? Is your agreement tobuy a Haryana State Lottery ticket valid? It has been held that such an agreement is one byway of wager and hence void under Section 30.

Speculative transactions : Though wagering transactions are void, speculative transactions aregenerally valid. It is, however, sometimes difficult to distinguish between a speculativetransaction and a wagering transaction. A speculative transaction essentially, must have twoelements, namely, (1) mutual intention of the contracting parties to acquire or deliver, as thecase 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 aspeculative transaction is stated below.

A buys from B 100 bales of jute at Rs. 150 per bale for forward delivery after six months. At thetime to delivery, the price of jute is Rs. 200. In these circumstances, at the end of six months Acan either demand delivery of 100 bales or collect the difference in price at Rs. 50 bale. On theother hand, if the price has gone down to say, Rs. 125 per bale, A will be able to settle thetransaction by paying B at Rs. 25 per bale. In the case, it will be observed, that the originalintention of the parties was to purchase and sell the bales of jute. Merely because subsequentlythey transact by payment or receipt of the difference in price, the original character of thetransaction is not thereby altered. If, however, the mutual intention was only to settle thetransaction by payment or receipt of the difference in price, the transaction would be wageringcontract which would be void.

Thus, gambling is prohibited by law, whereas speculation is generally not. Under Section 30 ofthe Act, a wagering contract is void, the reason being that such a contract is opposed to publicpolicy.

Wager and collateral transactions : Though a wagering contract is void, transactions incidentalto wagering transactions are not void. Thus, a broker in a wagering transaction can recoverhis brokerage. Similarly a principal can recover from his agent the prize money received byhim 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. Forexample, a contract by way of wager is void by statute and no action can be brought to recoverany money alleged to have been won upon a wager but it is not illegal. Therefore, a promisemade by the loser of a wager to pay the amount lost in consideration of the winner’s forbearanceto post him as defaulter, can be enforced as a fresh contract since it is separate and distinct fromthe original wagering contract, though collateral to it. But the position is different in respect oftransactions collateral to illegal contracts. They are so invalid, e.g., security given for the regularpayment of the rent of a house let out for purposes for gambling cannot be recovered; therecovery of security being tainted with illegality of the original transaction, cannot be enforced.

1.21 SUMMARYThe 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 necessariessupplied to him. He cannot be a partner but can be admitted to benefits of partnershipwith the consent of all partners. He can always plead minority and cannot be asked tocompensate 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 contracton attaining majority.

(b) Persons of unsound mind : Persons of unsound mind such as idiots, lunatics and drunkardscannot enter into a contract, but a lunatic can enter into a valid contract when he is in asound state of mind. The liability for necessities of life supplied to persons of unsoundmind 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 samesense (Section 13). Consent is free when it is not caused by mistake, misrepresentation, undueinfluence, fraud or coercion. When consent is caused by any of above said elements, the contractis 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 theIndian Penal Code or the unlawful detaining or threatening to detain, any property, to theprejudice 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 aggrievedparty.

(b) Undue influence : When one party to a contract is able to dominate the will of the otherand uses the position to obtain an unfair advantage, the contract is said to be induced byundue influence. (Section 16). Such contract is voidable, not void.

(c) Fraud : Fraud exists when a false representation has been made knowingly with an intentionto deceive the other party, or to induce him to enter a contract (Section 17). Contract in thecase is voidable.

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(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 thiscase.

(e) Mistake : When both the parties are at a mistake to a matter of fact to the agreement, theagreement is altogether void.

LAWFUL OBJECT AND CONSIDERATION

An agreement where the object or the consideration is unlawful, is void. Object or considerationis unlawful if it is forbidden by law, it would defeat the provisions of law; or is fraudulent, orinvolves injury to the person or property of another; or is immoral; or is opposed to publicpolicy.

Besides the above said agreements, certain agreements have been expressly declared to be voidby the Contract Act such as - wagering agreements, agreement with uncertain meaning,agreements where consideration is unlawful in part etc.

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COMMON PROFICIENCY TEST

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CHAPTER – 1

Unit 4

Performanceof

Contract


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Learning objectives

� 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 acceptperformance, by either of the parties.

� Rights of joint promisees, liabilities of joint promisors, and rules regardingappropriation of payments must be clearly understood.

PERFORMANCE OF CONTRACTS

A contract being an agreement enforceable by law, creates a legal obligation, which subsistsuntil discharge. Performance of the promise or promises remaining to be performed is theprincipal 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 non-performance.

The parties to a contract must either perform, or offer to perform, their respective promisesunless such performance is dispensed with or excused under the provisions of the Contract Actor of any other law. Promises bind the representatives of the promisor in case of death of suchpromisor 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 tohim, to perform his promise for himself or offer to perform his promise. Only after that he canask the other party to carry out his promise. This is the principle which is enshrined in Section37. Thus, it is the primary duty of each party to a contract to either perform or offer to performhis promise. He is absolved from such a responsibility only when under a provision of law or anact 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 thepromisor 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 ofthe parties that the promise should be performed by the promisor himself, such promisemust be performed by the promisor. This means contracts which involve the exercise ofpersonal skill or diligence, or which are founded on personal confidence between theparties must be performed by the promisor himself.

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

3. Representatives : A contract which involves the use of personal skill or is founded on personalconsideration comes to an end on the death of the promisor. As regards any other contractthe legal representatives of the deceased promisor are bound to perform it unless a contraryintention appears from the contract. (Section 37, para 2). But their liability under a contractis 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 thelatter 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, Aexpressed his inability to make payment. C, who is known to A, pays Rs, 6,000/- to B onbehalf of A. However, A was not aware of the payment. Now B is intending to sue A forthe 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 performanceof 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 ofdischarging the promisor, although the latter has neither authorised nor ratified the act ofthe third party. Therefore, in the present instance, B can sue only for the balance amounti.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 acontrary 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 thepromise jointly. (Section 42).

Examples :

1. A promises to B to pay Rs. 1,000 on delivery of certain goods. A may perform this promiseeither himself or causing someone else to pay the money to B. If A dies before the timeappointed for payment, his representative must pay the money or employ some otherperson to pay the money. If B dies before the time appointed for the delivery of goods, B’srepresentative shall be bound to deliver the goods to A and A is bound to pay Rs. 1,000 toB’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 paintthe picture on his behalf. If A dies before painting the picture, the contract cannot beenforced 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 inabilityto clear the dues. C, who is known to B, pays Rs. 2,000 to A on behalf of B. Before makingthis payment C did not tell B about it. Now A can sue B only for the balance and not thewhole amount.

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1.23 DISTINCTION BETWEEN SUCCESSION AND ASSIGNMENTYou should now note carefully the distinction between two legal concepts, viz., succession andassignment. When the benefits of a contract are succeeded to by process of law, then bothburden 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 andliabilities of his father owed during his life-time. But if the debts owed by his father exceed thevalue of the estate inherited by the son then he would not be called upon to pay the excess. Inother words, the liability of the son will be limited to the extent of the property inherited byhim; thus far and no further. In the matter of assignment, however the benefit of a contractcan only be assigned but not the liabilities thereunder. Why this is so ? This is because whenliability is assigned, a third party gets involved therein. Thus a debtor cannot relieve himself ofhis 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 assigneeto realise the debt from the debtor but where the benefit is coupled with a liability or when apersonal consideration has entered into the making of the contract then the benefit cannot beassigned.

1.24 EFFECT OF REFUSAL TO ACCEPT OFFER OF PERFORMANCEAccording to Section 38 of the Act, where a promisor has made an offer of performance to thepromisee, and the offer has not been accepted, then the promisor is not responsible for nonperformance; nor does he thereby lose his rights under the contract. Every such offer mustfulfil 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 towhom it is made, may have a reasonable opportunity of ascertaining that the person bywhom it is made is able and willing, there and then to do the whole of what he is bound byhis promise to do.

(iii) if the offer is an offer to deliver anything to the promisee, then the promisee must have areasonable opportunity of seeing that the thing offered is the thing which the promisor isbound by his promise to deliver.

An offer to one of several joint promisees has the same legal consequences as an offer to all ofthem.

1.25 EFFECT OF A REFUSAL OF PARTY TO PERFORM PROMISEPrimarily, it gives rise to certain rights to the other party. Let us now consider what those rightsare.

When a party to a contract has refused to perform or has disabled himself from performing hispromise in entirety, the promisor may put an end to the contract, unless he has signified bywords or conduct, his acquiescence in its continuance (Section 39). From language of Section39 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 conductthat he is interested in its continuance.

In case the promisee decides to continue the contract, he would not be entitled to put an end tothe contract on this ground immediately. In either case, the promisee would be able to claimdamages that he suffers as a result on the breach.

1.26 LIABILITY OF JOINT PROMISORSIf two or more persons have made a joint promise, ordinarily all of them during their life-timemust jointly fulfill the promise. After death of any one of them, his legal representative jointlywith the survivor or survivors should do so (Sec. 42). After the death of the last survivor thelegal representatives of all the original co-promisors must fulfil the promise. For example, X, Yand 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 debtand 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 iswhat Section 43 resolves. Accordingly,

(i) When two or more persons make a joint promise, the promisee may, in the absence ofexpress agreement to the contrary, compel any one or more of such joint promisors toperform the whole of the promise.

(ii) If one of the joint promisors is made to perform the whole contract, he can call for acontribution from others. For example, A, B and C jointly execute a promissory note forRs. 3,000 in favour of D. A is compelled to pay the whole amount. A, in such a case wouldbe able to realise Rs. 1,000 each from B and C. This rule may, however, be modified bymutual agreement between the joint promisors.

(iii) If any of the joint promisors makes a default in making his contribution the remainingjoint promisors must bear the loss arising from such a default in equal shares. In the aboveexample, where A, B and C jointly executed the promissory note for Rs. 3,000 and if Cwas unable to pay anything, then A would be able to realise from B by way of contributionRs. 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 jointcontract, both joint and several, in so far as the promisee may, in the absence of a contract tothe 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 statedbelow :

Where two or more persons have made a joint promise, a release of one of such joint promisorsby the promisee does not discharge the other joint promisor or joint promisors; neither does itfree the joint promisors so released from responsibility to the other joint promisor or promisors.

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1.27 RIGHTS OF JOINT PROMISEESThe 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 contraryintention appears from the contract, the right to claim performance rests, as between him andthem, with them during their joint lives, and after the death of any of them with therepresentatives of such deceased person jointly with the survivor or survivors, and after thedeath 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 jointlyrepay the sum with interest on a specified day but B dies. In such a case right to demandpayment shall rest with B’s legal representatives, jointly with C during C’s life-time, and afterthe death of C, with the legal representatives of B and C jointly.

1.28 TIME AND PLACE FOR PERFORMANCE OF THE PROMISEThe law on the subject is contained in Section 46 to 50 provisions whereof are summarisedbelow :

(i) If no time is specified in a contract for the performance of the promise, the promise mustbe performed within a reasonable time. The expression reasonable time is to be interpretedhaving 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, thepromisor may perform it at any time during the usual hours of business, on such day. Forexample, if the delivery of goods is offered say after sunset, the promisee may refuse toaccept 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 toask 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 beingmade by the promisee.

(iv) Where the promisor has not undertaken to perform the promise without an applicationby the promisee, and the promise is to be performed on a certain day it is the duty of thepromisee to apply for performance at a proper place and within the usual hours of business.

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

(i) General observations : A contract may consist of an act and a promise, or it may consist oftwo promises, one being the consideration for the other. Thus, when A sells 500 quintals ofrice to B who promises to pay the price after a month, the contract would consist of an actperformed by A and a promise made by B. On the other hand, if A promises to deliver 500

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

(ii) Simultaneous performance of reciprocal promises : Reciprocal promises may have to beperformed simultaneously, or one after the other. Where A promises to deliver rice and Bpromises 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. Suchpromises constitute concurrent conditions and the performance of one of the promises isconditional on the performance of the other. If one of the promises is not performed theother too need not be performed. If A, in the above-mentioned illustration, is unwilling todeliver the rice on payment, A will be guilty of breach of promise and the breach wouldrelieve B of the obligation to perform his promise and would enable B to treat the contractas at an end.

(iii) Performance of reciprocal promises where the order of performance is expressly fixed : When theorder of performance of the reciprocal promises is expressly fixed by the contract, theymust be performed in that order. For instance, A and B contract that A shall build a housefor B at a fixed price. A’s promise to build the house must be performed before B can becalled upon to perform his promise to pay for it. The promise being dependent on eachother, 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 : Theorder of performance may sometimes be indicated not expressly, but by the nature of thetransaction. For example, A and B contract that A shall make over his stock-in-trade to Bat a fixed price, and B promises to give security for the payment of the price. A’s promiseto make over his stock need not be performed, until the security is given by B, for thenature of the transaction required that A should have the security from B before he delivershis stock.

(v) Effect of one party preventing another from performing promise : When in a contract, consistingof reciprocal promises, one party prevents the other from performing his promise, thecontract becomes voidable at the option of the party so prevented. The latter becomesentitled to get compensation from the other party for any loss he sustains in consequenceof the non-performance of the contract. For instance, in a contract for the sale of standingtimber, 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 thebuyer may avoid the contract and claim compensation from the seller for any loss whichhe 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 areillegal : When persons reciprocally promise, first to do certain things which are legal andsecondly, under specified circumstances, to do certain other things which are illegal, the firstset 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 itas a gambling house, he will pay a further sum of Rs. 75,000. The first set of reciprocal promises,

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i.e. to sell the house and to pay Rs. 50,000 for it, constitutes a valid contract. But the object ofthe second, being unlawful, is void.

‘Alternative promise’ one branch being illegal : The law on this point is contained in Section 58which is reproduced below.

“In the case of the alternative promise, one branch of which is legal and the other illegal, thelegal branch alone can be enforced”.

1.30 EFFECT OF FAILURE TO PERFORM AT A TIME FIXED IN ACONTRACT 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, orcertain things at or before the specified time, and fails to do any such thing at or before thespecified time, the contract, or so much of it as has not been performed, becomes voidable atthe option of the promisee, if the intention of the parties was that time should be of essence ofthe contract.

If it was not the intention of the parties that time should be of essence of the contract, thecontract does not become voidable by the failure to do such thing at or before the specifiedtime; but the promisee is entitled to compensation from the promisor for any loss occasionedto him by such failure.

But ordinarily, from an examination of a contract, it is difficult to ascertain whether time isintended to be of essence by the parties at the time of its formation. In every case, the intentionis 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 asto time for payment of money, are essential conditions, since punctuality is of the utmostimportance in the business world. Thus, on a sale of goods that are notoriously subject to rapidfluctuation of market price, e.g. gold, silver, shares having a ready market the time of deliveryis of the essence of the contract. But in mortgage bond, the time fixed for the repayment of themortgage money can by no means be regarded as an essential condition; consequently, themortgaged property can be regained even after the due date. Similarly, in a contract to sellland any clause limiting the time of completion is not strictly enforced. But even in a contractfor 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 contractcannot be avoided on the ground that the time for performance has expired: the promisee isonly entitled to compensation from the promisor for any loss caused by the delay. But it mustbe remembered that even where time is not essential it must be performed within a reasonabletime; 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 maywaive his right to repudiate the contract, when the promisor fails to perform the promisewithin the stipulated time. In that case, he may accept performance at any time other thanthat 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 theperformance he has given a notice to the promisor of his intention to claim compensation.

1.31 IMPOSSIBILITY OF PERFORMANCESection 56 contemplates various circumstances under which agreement may be void, since it isimpossible 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 thecontract is made, becomes impossible, or, by reason of some event which the promisor couldnot 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 ofsomething which is obviously impossible in itself the agreement would be void. Impossiblein itself means impossible in the nature of things. The fact of impossibility may be and maynot be known to the parties.

(i) If known to the parties : It would be observed that an agreement constituted, quiteunkno 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 theIndian Ocean from Bombay to Aden within a week. In this case, there is no realagreement, since both the parties are quite certain in their mind that the act is impossibleof achievement. Therefore, the agreement, being impossible in itself, is void.

(ii) If unknown to the parties : Where both the promisor and the promisee are ignorantof the impossibility of performance, the contract is void.

(iii) If known to the promisor only : Where at the time of entering into a contract, thepromisor alone knows about the impossibility of performance, or even if he does notknow though he should have known it with reasonable diligence, the promisee isentitled to claim compensation for any loss he suffered on account of non-performance.

(2) Supervening impossibility: When performance of promise become impossible or illegalby occurrence of an unexpected event or a change of circumstances beyond thecontemplation 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 himeither with express intimation or under circumstances implying that the payment is to beapplied to the discharge of some particular debt, the payment, if accepted, must be appliedaccordingly”.

The Latin maxim is quicquid soivitur, sovitur secundum modum solventis. The meaning ofthe maxim is that whatever is paid, is paid according to the intention or manner of theparty paying. According to this maxim, where a debtor owes several distinct debts to acreditor and makes payment it has been held in Clayton’s case that the former enjoys the

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right of appropriation, and he may, at his pleasure, appropriate it to any debt; the creditorwill be bound by such an appropriation. If the debtor has not intimated at the time ofpayment 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 containedin Section 61, reproduced below :

“Where neither party makes any appropriation, the payment shall be applied in dischargeof the debts in order of time, whether they are or are not barred by the law in force for thetime being as to the limitation of suits. If the debts are of equal standing the payment shallbe applied in discharge of each proportionately.”

The aforesaid rule is to be applied when there is nothing to show the intention of the parties. Ifthe 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 onthe same date the debtor pays Rs. 600. Out of this sum, a sum of Rs. 250 should be applied indischarge of the first debt and the balance of Rs. 350 in discharge of the second debt.

1.33 CONTRACTS WHICH NEED NOT BE PERFORMEDUnder this heading, we shall discuss the principles of Novation, Rescission and Alteration andRemission. The law is contained in Section 62 to 67 of the Contract Act. Section 62 is reproducedbelow :

“If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, theoriginal contract need not be performed”.

(a) Effect of novation : The parties to a contract may substitute a new contract for the old. Ifthey do so, it will be a case of novation. On novation, the old contract is discharged andconsequently it need not be performed. Thus it is a case where there being a contract inexistence some new contract is substituted for it either between the same parties or betweendifferent parties the consideration mutually being the discharge of old contract. Novationcan 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 thesum due from A. A’s liability thereby shall come to an end, and the old contract betweenA 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 acontract 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 isneedless to point out that novation also involves rescission. Both in novation and inrescission, 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 casewhere the parties to a contract agree to alter it, the original contract is rescinded, with theresult that it need not be performed. In other words, a contract is also discharged byalteration. The terms of contract may be so altered by mutual agreement that the alterationmay have the effect of substituting a new contract for the old one. In other words, thedistinction between novation and alteration is very slender.

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Novation and alteration : The law pertaining to novation and alteration is contained inSection 62 to 67 of the Indian Contract Act. In both these cases the original contract neednot be performed. Still there is a difference between these two.

1. Novation means substitution of an existing contract with a new one. Novation may bemade by changing in the terms of the contract or there may be a change in thecontracting parties. But in case of alteration the terms of the contract may be alteredby mutual agreement by the contracting parties but the parties to the contract willremain the same.

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

(d) Promisee may waive or remit performance of promise : The law on the subject is containedin Section 63 reproduced below :

“Every promisee may dispense with or remit, wholly or in part, the performance of thepromise made to him, or may extend the time for such performance or may accept insteadof its any satisfaction which he thinks fit”. In other words, a contract may be dischargedby remission. Thus where A, a party to a contract, has done all that he was required to dounder the contract and the time for the other party, X, to perform his promise has not yetarrived, 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 withoutconsideration. But in the case of partial or complete remission, no consideration is required.The promisee can dispense with performance without consideration and without a newagreement.

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 thepromisee.

Similarly, a promisee can accept instead of the stipulated performance, any satisfactionwhich he thinks fit. For instance, A sells his horse to B who promises to pay Rs. 500 for thehorse. 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 neednot perform any promise therein contained in which he is the promisor. The party rescindinga voidable contract shall, if he has received any benefit thereunder from another party to suchcontract, 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 hehas received any benefit under the contract, he must restore such benefit to the person from

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whom he has received it. For example, an insurance company may rescind a policy on theground that material fact has not been disclosed. When it does so, the premium collected by itin respect of the policy reduced by the amount of expenses incurred by it in this connectionmust be repaid to the policy holder.

A voidable contract, when it is voidable at its inception as well as when it subsequently becomesvoidable, 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 anydamage which he has sustained through the non-performance of the contract. On the otherhand, if he has received any benefit under voidable contract, he must restore such benefit tothe person from whom it was received.

1.35 OBLIGATIONS OF PERSON WHO HAS RECEIVED ADVANTAGEUNDER 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 personwho received any advantage under such agreement or contract must restore it, makescompensation 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 acompensation, 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 thewhole 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 ofa proportionate amount of the rent. Held, the plaintiff was entitled to recover the rent for theunexpired term, of the contract.

The Act requires that a party must give back whatever he has received under the contract. Thebenefit to be restored under this section must be benefit received under the contract. A agreesto sell land to B for Rs. 40,000. B pays to A Rs. 4,000 as a deposit at the time of the contract, theamount to be forfeited to A if B does not complete the sale within a specified period. B fails tocomplete the sale within the specified period, nor is he ready and willing to complete the salewithin a reasonable time after the expiry of that period. A is entitled to rescind the contractand to retain the deposit. The deposit is not a benefit received under the contract, it is a securitythat the purchaser would fulfill his contract and is ancillary to the contract for the sale of theland.

Though generally the benefit received under an agreement which is subsequently found to bevoid, must be returned, such a course may not be necessary when the benefit has been receivedby the corporation. It is because contract with a corporation usually is required to be enteredinto a special form, in the absence of which the contract becomes void. The argument in supportof 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 optionof one of the parties can be rescinded; but rescission must be communicated to the other partyin 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.

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Effects of neglect of promisee (Section 67) : If any promisee neglects or refuses to afford the promisorfacilities for the performance of a promise, the promisor is excused from the performance of hispromise. In other words, the promisor cannot be held liable for the non-performance. Forexample, 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 inwhich his house requires repair. A is excused for the non-performance of the contract it iscaused by such neglect or refusal.

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

(i) Discharge by performance : It takes place when the parties to the contract fulfil theirobligations 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 whathe had agreed to do under the agreement. When the promisor offers to perform hisobligation, but the promisee refuses to accept the performance, it amounts to attemptedperformance or tender.

(ii) Discharge by mutual agreement : Section 62 of the Indian Contract Act provides if the partiesto a contract agree to substitute a new contract for it, or to refund or remit or alter it, theoriginal contract need not be performed. The principles of Novation, Rescission, Alterationand 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. Superveningimpossibility may take place owing to : (a) an unforeseen change in law, (b) the destructionof the subject-matter essential to that performance; (c) the non-existence or non-occurrenceof 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 asprescribed by the Limitation Act, 1963. If it is not peformed and if no action is taken by thepromising within the specified period of limitation, he is deprived of remedy at law. Forexample, if a creditor does not file a suit against the buyer for recovery of the price withinthree years, the debt becomes time–barred and hence irrecoverable.

(v) Discharge by operation of law : A contract may be discharged by operation of law whichincludes by death of the promisor, by insolvency etc.

(vi) Discharge by breach of contract : Breach of contract may be actual breach of contract oranticipatory breach of contract. If one party defaults in performing his part of the contracton the due date, he is said to have committed breach thereof. When on the other hand, aperson repudiates a contract before the stipulated time for its performance has arrived, heis deemed to have committed anticipatory breach. If one of the parties to a contract breaks

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the promise the party injured thereby, has not only a right of action for damages but he isalso 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 ormay accept any satisfaction he thinks fit. In the first case, the contract will be dischargedby 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 theperformance of the promise, the promisor is excused by such neglect or refusal(Section 67).

1.37 SUMMARY1. 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 athird party. (Sections 37, 40 and 41).

2. In case of joint promisors, all must perform, and after the death of any of them, the survivorsand 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 claimcontribution 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 atthe proper time and place, allowing the promisee a reasonable opportunity of inspectionof 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 non-performance and does not lose his rights under the contract; so also if the promisee fails toafford reasonable facilities. He may sue for specific performance or he may avoid thecontract 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 todispense with further performance and to render the party rescinding liable to restore anybenefit 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 validcontract 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 compensationfor breach of contract is estimated.

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COMMON PROFICIENCY TEST

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CHAPTER – 1

Unit 5

Breachof

Contract


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Learning objectives

� 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 CONTRACTIt is an important concept under the law of contractual relationship. When the promisor refusesaltogether to perform his promise and signifies his unwillingness even before the time forperformance has arrived, it is called Anticipatory Breach. A promisee, instead of putting anend to the contract forthwith may keep the contract alive upto the time when the contract is tobe 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. Xagrees 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 sellwheat; and the price of wheat on the date is Rs. 110/- per quintal. If Y repudiates the contractforthwith (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 thecontract price. If instead of taking the action forthwith, he keeps the contract alive till the 3rdMarch and in the mean time, the price increases to Rs. 125/- per quintal on the date. Y wouldbe able or recover damages @25/- per quintal. If, on the other hand, during the interveningperiod between 2nd February and 3rd March, private sale of wheat is prohibited by theGovernment, the contract would become void, and Y would not be able to recover any damageswhatever. Thus you observe that if the promisee keeps the contract alive, he does so not onlyfor his own benefit but also for the benefit of the promisor.

1.39 ACTUAL BREACH OF CONTRACTIn contrast to anticipatory breach, it is a case of refusal to perform the promise on the scheduleddate. The parties to a lawful contract are bound to perform their respective promises. Butwhen one of the parties breaks the contract by refusing to perform his promise, he is said tohave committed a breach. In that case, the other party to the contract obtains a right of actionagainst 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 bedetermined. On the breach of the contract, the party who suffers from such a breach is entitledto receive, from the party who has broken the contract, compensation for any loss or damagecaused to him by breach. Compensation can be claimed for any loss or damage which naturallyarises in the usual course of events. Compensation can also be claimed for any loss or damagewhich 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 sufferingfrom the breach is bound to take reasonable steps to minimise the loss. And no compensationis 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 naturallyand directly from the breach but also for special damages.

(b) Liability to pay vindictive or exemplary damages : These damages may be awardedonly in two cases, viz. (i) for breach of promise to marry; and (ii) wrongful dishonour by abanker of his customer’s cheque. In a breach of promise to marry, exemplary damagesmay be awarded to the other party taking into consideration the injury caused to his orher feelings. The amount of damages recoverable by the drawer of cheque from his bankerin case of wrongful dishonour of his cheque may be quite heavy, depending upon the lossof credit and reputation suffered on that account.

(c) Liability to pay nominal damages : Nominal damages are awarded where the plaintiffhas proved that there has been a breach of contract but he has not in fact suffered any realdamage. 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 amountmay be a rupee or even 10 paise.

(d) Damages for deterioration caused by delay : In the case of deterioration caused to goodsby 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 ofspecial 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 thecontract, 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 differencebetween 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 consequenceof 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 arealso available :

(i) Rescission of contract : When a contract is broken by one party, the other party may treatthe contract as rescinded. In such a case he is absolved of all his obligations under thecontract 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 isearned” or “according to the quantity of work done”. When a person has begun the workand before he could complete it, the other party terminates the contract or does somethingwhich make it impossible for the other party to complete the contract, he can claim for thework done under the contract. He may also recover the value of the work done where thefurther performance of the contract becomes impossible. The claim on quantum meruit

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must be brought by a party who is not at default. However, in certain cases, the party indefault may also sue for the work done if the contract is divisible. Following are the cases inwhich a claim on quantum meruit may arise :

(a) Where the work has been done and accepted under a contract which is subsequentlydiscovered to be void, in such a case, the person who has performed the part of thecontract is entitled to recover the amount for the work done and the party, who receivesand accepts the benefit under such contract, must make compensation to the otherparty.

(b) Where a person does some act or delivers something to another person with theintention 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, orenjoys their benefit.

(c) The compensation for the work done may be recovered on the basis of quantummeruit. Where the contract is divisible and a party performs part of the contract andrefuses to perform the remaining part, in such a case, the party in default may sue theother party who has enjoyed the benefits of the part performance.

(iii) Suit for specific performance : Where damages are not an adequate remedy in the caseof breach of contract, the court may in its discretion on a suit for specific performancedirect 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 promisednot to do.

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

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CHAPTER – 1

Unit 6

Contingentand

Quasi-Contracts


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Learning objectives

� 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 simplecontract.

� Be familiar with the rules relating to enforcement of these in order to gain an understandingof 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 therules regarding enforcement of this type of contracts. Again, the Contract Act recognises certaincases in which an obligation is created without a contract. Such obligations arise out of certainrelations 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 anobligation on one party and confers a right in favour of the other. We shall have a look on thesecases 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 contingentcontract.

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 orsubsequent.

(2) The event on which the performance is made to depend, is an event collateral to thecontract, 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 apromise. Thus (i) where A agrees to deliver 100 bags of wheat and B agrees to pay theprice only afterwards, the contract is a conditional contract and not contingent; becausethe event on which B’s obligation is made to depend is part of the promise itself and not acollateral event. (ii) Similarly, where A promises to pay B Rs. 1,00,000 if he marries C, it isnot a contingent contract.

(3) The contingent event should not be the mere will of the promisor. For instance, if A promisesto pay B Rs. 10,000, if he so chose, it is not a contingent contract. (In fact, it is not acontract at all). However, where the event is within the promisor’s will but not merely hiswill, it may be contingent contract. For example, if A promises to pay B Rs. 10,000 if A leftDelhi for Bombay on a particular day, it is a contingent contract, because going to Bombayis an event no doubt within A’s will, but is not merely his will.

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1.45 RULES RELATING TO ENFORCEMENTEnforcement of contracts contingent on an event ‘happening’ : Where a contingent contractis made to do or not to do anything if an uncertain future event happens, it cannot be enforcedby law unless and until that event has happened. If the event becomes impossible, such contractsbecome void. To illustrate this concept, let us take an example. X entered into a contract with Yto purchase Y’s buffalo, if X survives Z. In view of the said principle of law, the contract, in theinstant 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 contingentcontract is made to do or not to do anything if an uncertain future event does not happen it canbe enforced only when the happening of that event becomes impossible and not before. Forexample, P agreed to pay Q a sum of money, if a certain ship does not return. The ship wassunk. 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 thefuture conduct of a living person : Suppose, the future event on which a contract is contingentis the way in which a person will act at an unspecified time. In such a case, the event shall beconsidered to have become impossible when such person does anything which renders itimpossible that he should so act within any definite time or otherwise than under furthercontingencies. For instance, A agrees to pay B a sum of money if A marries C; C marries D. Themarriage, of A to C is now to be considered impossible, although it is possible that D may dieand that C may afterwards marry A.

Agreement contingent on impossible event (Section 36) : A contingent agreement to do ornot to do anything, if an impossible event happens, is void. The impossibility of the event maybe 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. Theagreement is void.

1.46 WHAT IS A QUASI-CONTRACT ?In the case of every contract, the promisor voluntarily undertakes an obligation in favour ofthe promisee. A similar obligation may be imposed by law upon a person for the benefit ofanother even in the absence of a contract. Such cases are known as quasi contracts. Theobligation created in either of the cases is identical. Quasi contracts are based on principles ofequity, 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 bythe law; and

(b) Secondly, it is a right which is available not against the entire world, but against a particularperson or persons only.

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1.47 TYPES OF QUASI-CONTRACTSUnder the provisions of the Indian Contract Act, the relationship of quasi contract is deemed tohave come to exist in five different circumstances which we shall presently dilate upon. Butyou will notice that in none of these cases there comes into existence any contract between theparties in the real sense. Due to peculiar circumstances in which they are placed, the law imposesin each of these cases of contractual liability.

(a) Claim for necessaries supplied to persons incapable of contracting (Section 68): Ifnecessaries are supplied to a person who is incapable of contracting, e.g. minor or a personof unsound mind, the supplier is entitled to claim their price from the property of such aperson.

Accordingly, if A supplies to B, a lunatic, necessaries suited to B’s status in life, A would beentitled to recover their price from B’s property. He would also be able to recover the pricefor necessaries supplied by him to his (B’s) wife or minor child since B is legally bound tosupport 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 articlesof luxury, can be recovered. To establish his claim, the supplier must prove not only thatthe goods were supplied to the person who was minor or a lunatic but also that they weresuitable 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 moneywhich another is obliged to pay, is entitled to be reimbursed by that other person providedthe 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 anobligation arises under the provision of Section 70 reproduced below:

“Where a person lawfully does anything for another person, or delivers anything to himnot intending to do so gratuitously and such other person enjoys the benefit thereof, thelatter is bound to make compensation to the former in respect of, or to restore, the thing sodone or delivered.”

It thus follows that for a suit to succeed, the plaintiff must prove: (i) that he had done theact or had delivered the thing lawfully; (ii) that he did not do so gratuitously; and (iii) thatthe other person enjoyed the benefit.

(d) Responsibility of a finder of goods: Such a responsibility arises under Section 71 whichis reproduced below:

“A person who finds goods belonging to another and takes them into his custody is subjectto the same responsibility as a bailee”.

He is, therefore, required to take proper care of things found, not to appropriate it to hisown use and, when the owner is traced, to restore it to the owner. Further, he must take asmuch care of the goods found as a man of ordinary prudence would, under similarcircumstances, take care of his own goods of the same bulk, quantity and value as those of

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the goods found. Let us exemplify this rule by means of an illustration. P, a customer in D’sshop, puts down a broach with her coat and forgets to pick it up. One of D’s assistantsfound it and it was placed in a drawer over the weekend. On Monday, it was discovered asmissing. D was liable to P in view of the absence of that ordinary care which in thecircumstances, a prudent man would have taken.

(e) Liability for money paid or thing delivered by mistake or under coercion: Such liabilityarises 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 undercoercion must repay or return it.”

In each of the above cases, contractual liability is the creation of law and does not dependupon any mutual agreement between the parties.

1.48 WAGERING AGREEMENT AND CONTINGENT CONTRACTThe 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 determinationor ascertainment of an uncertain event.

A contingent contract, on the other hand, is a contract to do or not to do something ifsome 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 acontingent contract the event is only collateral.

3. A wagering agreement is essentially of a contingent nature whereas a contingent contractmay 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 theagreement except the winning or losing of the amount of the wager. In other words, awagering agreement is a game of chance. This is not so in case of a contingent contract.

1.49 SUMMARYContingent Contracts are the contracts, which are conditional on some future event happeningor 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 eventhappens. The contract becomes void if the event becomes impossible, or the event does nothappen 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 ofthat event becomes impossible or it does not happen at the expiry of time fixed for non-happening of the event.

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(c) If the future event is the act of a living person, any conduct of that person which preventsthe 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 abinitio.

Quasi Contracts arise where obligations are created without a contract. The obligations whichthey give rise to are expressly enacted:

(a) If necessaries are supplied to a person who is incapable of contracting, the supplier isentitled 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, andwho 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 repayor make restoration.

1.50 MULTIPLE CHOICE QUESTIONS1. 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

2. An agreement enforceable by law is a

(a) Promise. (b) Contract. (c) Obligation. (d) Lawful Promise.

3. 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. An agreement which is enforceable by law at the option of one or more of the partiesthereon but not at the option of the other or others is a

(a) Valid Contract. (b) Void Contract.

(c) Voidable Contract. (d) Illegal Contract.

5. Which of the following is false? An offer to be valid must:

(a) Intend to create legal relations.

(b) Have certain & unambiguous terms.

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MERCANTILE LAWS 5 9

(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. (b) Voidable. (c) Valid. (d) Illegal.

7. 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. (b) Void. (c) Voidable. (d) None of these.

9. 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. (b) Contract. (c) Offer. (d) Acceptance.

11. 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. (d) Must be of some value.

13. 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. (b) Promisee. (c) Any other person. (d) Any of these.

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(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 (b) Present (c) Future (d) All of the above.

17. Consideration in simple term means:

(a) Anything in return. (b) Something in return.

(c) Everything in return. (d) Nothing in return.

18. 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.

19. Ordinarily, a minor’s agreement is

(a) Void ab initio (b) Voidable. (c) Valid. (d) Unlawful.

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

21. 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.


(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 whenhe is of a sound mind.

(d) A person who is usually of a sound mind cannot enter into contract when he is ofunsound mind.

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23. Consent is not said to be free when it is caused by

(a) Coercion. (b) Undue Influence. (c) Fraud. (d) All of these.

24. When the consent of a party is obtained by fraud, the contract is;

(a) Void. (b) Voidable. (c) Valid. (d) Illegal.

25. The threat to commit suicide amounts to

(a) Coercion. (b) Undue Influence.

(c) Misrepresentation. (d) Fraud.

26. Moral pressure is involved in the case of



27. A wrong representation when made without any intention to deceive the other partyamounts to




(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 (b) Void (c) Voidable (d) Any of these.

30. An agreement the object or consideration of which is unlawful, is

(a) Void. (b) Valid. (c) Voidable. (d) Contingent.

31. An agreement is void if it is opposed to public policy. Which of the following is notcovered 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.

32. 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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33. 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.

34. 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. When prior to the due date of performance, the promisor absolutely refuses to performthe contract, it is known as

(a) abandonment of contract. (b) remission of contract.

(c) actual breach of contract. (d) anticipatory breach of contract.

38. 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). (d) only option (a) is available.

39. In case of breach of contract, which of the following remedy is available to the aggrievedparty?

(a) Suit for rescission. (b) Suit for damages.

(c) Suit for specific performance. (d) All of these.

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40. Sometimes, a party is entitled to claim compensation in proportion to the work done byhim. It is possible by a suit for

(a) damages (b) injunction

(c) quantum meruit (d) none of these.

41. Generally, the following damages are not recoverable?

(a) Ordinary damages. (b) Special damages.

(c) Remote damages. (d) Nominal damages.

42. A contract dependent on the happening or non-happening of future uncertain event, isa

(a) Uncertain contract. (b) Contingent contract.

(c) Void contract. (d) Voidable contract.

43. A contingent contract is

(a) Void (b) Voidable (c) Valid (d) Illegal

44. A contingent contract dependent on the happening of future uncertain event can beenforced when the event

(a) happens (b) becomes impossible

(c) does not happen (d) either of these.

45. A agrees to pay Rs. One lakh to B if he brings on earth a star from sky. This is a contingentcontract and

(a) Illegal (b) Valid (c) Voidable (d) Void.

46. 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) (d) none of these.

47. 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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(c) Both the acceptor and offeree becomes bound by the contract.

(d) None of these.

49. A, by a letter dated 25th December, 1998, offers to sell his house to B for Rs. 10 lakhs. Theletter 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 iscomplete on

(a) 25th December, 1998 (b) 27th December, 1998

(c) 28th December, 1998 (d) 30th December, 1998

50. 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

51. As a general rule, an agreement made without consideration is

(a) void (b) voidable (c) valid (d) unlawful

52. A agrees to sell his car worth Rs. 100,000 to B for Rs. 20,000 only, and A’s consent wasobtained by coercion. Here, the agreement is

(a) void (b) valid (c) voidable (d) unlawful

53. An agreement made with free consent to which the consideration is lawful butinadequate, is

(a) void (b) valid (c) voidable (d) unlawful

54. Which of the following persons are not competent to contract?

(a) minors (b) persons of unsound mind

(c) persons disqualified by law (d) all of these.

55. For the purposes of entering into a contract, a minor is a person who has not completedthe age of

(a) 16 years (b) 18 years (c) 20 years (d) 21 years

56. A contract with the minor, which is beneficial for him, is

(a) void ab initio (b) voidable (c) valid (d) illegal

57. Which of the following persons do not fall under the category of persons of unsoundmind?

(a) idiot (b) lunatics (c) drunken persons (d) alien.

58. Which of the following elements does not affect the free consent of the parties

(a) coercion (b) fraud (c) incompetency (d) undue influence

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MERCANTILE LAWS 6 5

59. When the consent of a party is obtained by coercion undue influence, fraud ormisrepresentation, the contract is

(a) void (b) voidable (c) valid (d) illegal

60. A threatens to kill B if he does not agree to sell his scooter to him for Rs. 1000 only. HereB’s consent is obtained by

(a) undue influence (b) fraud

(c) coercion (d) none of these

61. When the consent to an agreement is obtained by coercion, the agreement is voidable atthe 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.

62. Where one party is in a position to dominate the will of another and uses his superiorposition to obtain the consent of a weaker party, the consent is said to be obtained by

(a) coercion (b) undue influence (c) fraud (d) misrepresentation.

63. 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 (b) void (c) voidable (d) illegal

65. Which of the following statements is false?

(a) A contract is not voidable if fraud or misrepresentation does not induce the otherparty to enter into a contract.

(b) A party cannot complain of fraudulent silence or misrepresentation if he had themeans of discovering the truth with ordinary means.

(c) In case of fraud or misrepresentation, aggrieved party can either rescind or affirm thecontract.

(d) A party who affirms the contract, can also change his option afterwards if he sodecides.

66. Where the consent of both the parties is given by mistake, the contract is

(a) void (b) valid (c) voidable (d) illegal

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


68. A contract made by mistake about the India Law, is


69. A contract made by mistake about some foreign law, is


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

(a) mistake of fact (b) mistake of Indian law

(c) fraud (d) misrepresentation

71. 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.

72. A agrees to pay Rs. 5 lakhs to B if he (B) procures an employment for A in Income TaxDepartment. This agreement is

(a) void (b) valid (c) voidable (d) contingent.

73. A agrees to pay Rs. 50,000 to B if he kills C. The agreement is

(a) void (b) valid (c) voidable (d) contingent.

74. An agreement in restraint of marriage, i.e., which prevents a person from marrying, is

(a) valid (b) voidable (c) void (d) contingent

75. An agreement in restraint of marriage is valid in case of following persons.

(a) Minors (b) Educated (c) Married (d) None of these.

76. An agreement, which prevents a person from carrying a lawful business, is

(a) Valid (b) Void (c) Voidable (d) Contingent

77. An agreement in restraint of legal proceedings is void. It does not cover an agreementwhich

(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 (b) valid (c) voidable (d) contingent

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MERCANTILE LAWS 6 7

79. An agreement to pay money or money’s worth on the happening or non-happening of aspecified uncertain event, is a

(a) wagering agreement (b) contingent contract

(c) quasi contract (d) uncertain agreement.

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

(a) Valid (b) Void (c) Voidable (d) Contingent

81. Where an agreement consists of two parts once legal and the other illegal, and the legalpart is separable from the illegal one, such legal part is


82. A contingent contract dependent on the non-happening of a future uncertain eventbecomes void when such event

(a) happens (b) does not become impossible

(c) does not happen (d) both (a) and (b)

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

(a) valid (b) void (c) voidable (d) illegal

84. A contingent contract dependent on the non-happening of specified uncertain eventwithin 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)

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87. A, B and C jointly promised to pay Rs. 60,000 to D. A was compelled by D to pay theentire 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 ifthe 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. Where the performance of a promise by one party depends on the prior performance ofpromise 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)

90. When after the formation of a valid contract, an event happens which makes theperformance of contract impossible, then the contract becomes:

(a) void (b) voidable (c) valid (d) illegal

91. 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 unusualcircumstances -

(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.

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MERCANTILE LAWS 6 9

(c) Remote or indirect damages are not recoverable.

(d) All of these.

94. When offer is made to a definite person, it is known as

(a) General Offer (b) Cross Offers

(c) Counter Offer (d) Special Offer

95. 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 andvariations he is said to have made a

(a) Standing, open or Continuing offer. (b) Counter Offer.

(c) Cross Offers (d) Special Offer

97. What is legal terminology for the doing or not doing of something which the promisordesires to be done or not done?

(a) Desires. (b) Wishes. (c) Consideration. (d) Promise.

98. 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. (d) Can’t be determined.

99. A and B both believe that a particular kind of rice is being sold in the market at Rs. 3,000per quintal and A sells rice of that kind to B at Rs.3,000 per quintal. But, in fact, themarket 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 ona similar business within specified local limits. This contract is


101. R, an optical surgeon, employs S as the assistant for a term of three years and S agreesnot to practice as a surgeon during this period. This contract is


102. Agreement-the meaning of which is uncertain is


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103. A agrees to pay Rs. 500 to B if it rains, and B promises to pay a like amount to A if it doesnot 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 notessential. What is the remedy of the promisee in the circumstances?

(a) Can rescind the contract. (b) To claim compensation.

(c) No remedy available. (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

106. Agreement-the meaning of which is uncertain is ________.


107. In case of illegal agreements, the collateral agreements are ________.

(a) Voidable (b) Void (c) Valid (d) Can’t be said.

108. ________ consideration is no consideration in England.

(a) Past. (b) Present (c) Future (d) Past and Present

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 (d) Promise

111. A minor is liable for the ________________ supplied to him.

(a) Necessaries. (b) Luxuries (c) Necessities (d) All the things.

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 agreesnot to practice as a surgeon during this period. This contract is ____________.


115. Implied contract, even if not in writing or express words, is perfectly ________if otherconditions are satisfied.

(a) Void (b) Valid (c) Voidable (d) Illegal.

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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 toPublic 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.

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 d. 1, 2, 3, 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 b. 2 & 3 c. 3 & 4 d. 1 & 4.

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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 thethird 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 arewilling 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 inthe 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 treatedas 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.

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MERCANTILE LAWS 7 3

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 businesswithin 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 sellyou 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.

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 d. 1 & 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 ismade of imitation pearls of no value. B knows that A is mistaken and takes no steps tocorrect the error. Now A wants to cancel the contract on the basis of fraud. Which of thefollowing statement is correct?

a. A can cancel the contract alleging fraud.

b. A cannot cancel the contract.

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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 completionof his research. He wanted to take good care of his friends and accordingly be arrangeda very lavish dinner in a star hotel. On the day, to his shock and surprise the friends couldnot turn up to the dinner, consequently all the dishes and money were wasted. He wasterribly disappointed. In the above situation which of the following remedies is/areavailable 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 orderto provide him some employment. On his failure to provide the job, G sued H for recoveryof 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 thetheatre two evenings a week for the next two months and the manager of the theatreagrees to pay him at the rate of Rs. 1000 for each performance. From the sixth eveningonwards, M absents himself from the theatre. In this context, which of the followingremedies 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 promissorynote. Rohit and Kiran are not traceable. Rahim wants to recover the entire amount fromRam. Ram objected this move by saying he is liable to pay 1/3 of the debt only. Which ofthe 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.

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MERCANTILE LAWS 7 5

135. At the time of marriage between A and B, A’s father promised to B’s parents that he willpay five thousand rupees per month to B after her marriage with his son. On his failureto pay the amount B wants to sue A’s father for the amount promised by him at the timeof 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 enforceableby law.

136. V purchased a used computer from P thinking it as a computer imported from USA, Pfailed 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 wouldbe held on December 23, 2003. a broker came from Hyderabad to attend the auction, butall the furniture was withdrawn. The broker from Hyderabad sued the auctioneer forloss 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 agreementto 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 apleasure trip to France. After Ankit attained majority, Praveen sues him for the conveyanceof the property or, in the alternative, for the refund of Rs. 10,00,000 and damages. Theagreement 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.

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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 ormore of the parties thereon but not at the option of theother or others.

(iv) Valid Contract (d) Enforceable at the option of both the parties.


(i) Executed Contract (a) Contract in which only one party has to perform hispromise.

(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 theparties.

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


(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 periodof time.

(iv) Continuing Offer (d) Offer made to a definite person.


(i) Coercion (a) Involves Moral Pressure.

(ii) Undue Influence (b) Person making false representation does not believe it to betrue.

(iii) Fraud (c) Involves Physical force.

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

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MERCANTILE LAWS 7 7

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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NOTES

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CHAPTER – 2TH

E S

ALE O

F G

OO

DS

AC

T, 1930

INTRODUCTIONThe Law relating to this statute was contained in theChapter VII of the Indian Contract Act, 1872.Subsequently, it was separated with the Indian Sale ofGoods Bill, which received its assent on 15th March1930. It came into force on the 1st of July, 1930 as theIndian 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 thecontract of sale of goods but it does not altogetherrender the general law of contract inapplicable. Theprovisions of the Contract Act, in so far as they are notinconsistent with the express provisions of Sale ofGoods 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 ofProperty Act and the Indian Contract Act, respectively.Secondly, the Act deals with ‘goods’ but not with allmovable property, e.g., actionable claims and money.Provisions relating to sale of immovable property andthe transfer of actionable claims are contained in theTransfer of Property Act, 1882.

In this chapter we shall study the provisions of theAct in the following order:

Unit 1. Formation of the Contract of Sale.

Unit 2. Conditions and Warranties.

Unit 3. Transfer of Ownership and Delivery ofGoods.

Unit 4. Unpaid Seller.

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CHAPTER – 2

Unit 1

Formationof the

Contractof Sale

THE SALEOF GOODSACT, 1930

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THE SALE OF GOODS ACT, 1930

8 2 COMMON PROFICIENCY TEST8 2

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 theparties to modify the provisions of the law by express stipulations. However, in some placesthis freedom is severely restricted or negativated.

2.1 DEFINITIONSSection 2 of the Sale of Goods Act, 1930, defines the terms which have been frequently used inthe 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 twoterms, ‘buyer’ and ‘seller’ are complementary and represent the two parties to a contractof sale of goods. Both the terms are, however, used in a sense wider than their commonmeaning. 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 andmoney; and includes stock and shares, growing crops, grass, and things attached toor forming part of the land, which are agreed to be severed before sale or under thecontract of sale; [Sub Section (7)]. This is a wider definition than contained in theEnglish law, which does not consider ‘stock’ and ‘shares’ as goods, though it includesa ship. ‘Actionable claims’ are claims, which can be enforced only by an action orsuit, 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 sellerafter making the contract of sale [Section 2 (6)]. Thus, under the Act, a contract ofsale of future goods, e.g., 1,000 quintals of potatoes to be grown on A’s field, is notillegal, though the actual sale of future goods is not possible. This is an example ofagreement to sell.

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MERCANTILE LAWS 8 3

(iv) Specific goods means goods identified and agreed upon at the time the contract of asale has been made. Specific goods may be distinguished from ‘generic’ or unascertained’goods defined only by description and not identified and agreed upon. Ascertainedgoods have been held to mean goods identified in accordance with the agreementafter 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 thebuyer would, under contract, be bound to take delivery of them, e.g., when A contractsto sell timber and makes bundles thereof, the goods will be in a deliverable state afterA 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 effectof putting the goods in the possession of the buyer, or any person authorised to hold themon 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 actualpossession 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 ofB, at A’s request.

(iii) Symbolic delivery: When there is a delivery of a thing in token of a transfer of somethingelse, i.e., delivery of goods in case of transit may be made by handing over documentsof title to goods, like bill of lading or railway receipt or delivery orders or the key of awarehouse containing the goods is handed over to buyer.

(d) “Document of title to goods” includes bill of lading, dock-warrant, warehouse keeper’scertificate, wharfingers’ certificate, railway receipt, multimodal transport document,warrant or order for the delivery of goods and any other document used in the ordinarycourse of business as proof of the possession or control of goods or authorising or purportingto authorise, either by endorsement or by delivery, the possessor of the document to transferor 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 isonly illustrative and not exhaustive. Any other document which has the abovecharacteristics also will fall under the same category. Though a bill of lading is a documentof title, a mate’s receipt is not; it is regarded at law as merely an acknowledgement for thereceipt of goods. A document amounts to a document of title only where it shows anunconditional 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 merelyshows that the person named in the share certificate is entitled to the share represented byit, but it does not allow that person to transfer the share mentioned therein by mereendorsement on the back of the certificate and the delivery of the certificate.

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(e) Mercantile Agent [Sub-section (9)]: It means an agent having in the customary course ofbusiness as such agent an authority either to sell goods or to consign goods for the purposeof sale or to buy goods or to raise money on the security of the goods. Examples of suchkind 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 bedistinguished from a ‘special property’. It is quite possible that the general property in athing may be in one person and a special property in the same thing may be in anothere.g., when an article is pledged. The general property in a thing may be transferred, subjectto the special property continuing to remain with another person i.e., the pledgee whohas 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 ordinarycourse of business, or cannot pay his debts as they become due, whether he has committedan act of insolvency or not; [Sub-section (8)].

2.2 CONTRACT OF SALEContract of Sale of Goods is a contract between buyer and seller intending to exchange propertyin goods for a price. Section 4 (1) of the Sale of Goods Act, 1930 defines the term ‘Contract ofSale’ as – a contract of sale of goods is a contract whereby the seller transfers or agrees totransfer 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 gaina mutual benefit called price.

2.3 ESSENTIALS OF CONTRACT OF SALEThe following elements must co-exist so as to constitute a contract of sale of goods under theSale 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 SELLIn the Sale of Goods, the property is transferred from seller to the buyer immediately. The termSale is defined in the Section 4(3) of the Sale of Goods Act, 1930 as – “where under a contractof sale the property in the goods is transferred from the seller to the buyer, the contract is calleda sale.”

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MERCANTILE LAWS 8 5

In an agreement to sell the ownership of the goods is not transferred immediately. It is intendingto transfer at a future date upon the completion of certain conditions thereon. The term isdefined in Section 4(3) of the Sale of Goods Act, 1930, which is as follows – where under acontract of sale the transfer of the property in the goods is to take place at a future time orsubject 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, dependson the fact whether it contemplates immediate transfer from the seller to the buyer or thetransfer is to take place at a future date.

2.5 DISTINCTION BETWEEN SALE AND AN AGREEMENT TOSELL

The differences between the two are as follows:

Sale

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

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

3. The seller can sue the buyer for the priceof the goods because of the passage ofthe property therein to the buyer.

4. A subsequent loss or destruction of thegoods is the liability of the buyer.

5. Breach on the part of the seller gives thebuyer double remedy; a suit fordamages against the seller and aproprietary remedy of recovering thegoods from third parties who boughtthem.

Agreement to sell

1. Since property in the goods does notpass to the buyer, the risk also does notpass to him.

2. It is an executory contract, i.e. contractfor which consideration is to be paid ata future date.

3. The aggrieved party can sue for damagesonly and not for the price, unless theprice was payable at a stated date.

4. Such loss or destruction is the liability ofthe seller.

5. The seller, being still the owner of thegoods, may dispose of them as he likes,and the buyer’s remedy would be to filea 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 arequite different.

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(ii) Sale and Bailment: A ‘bailment’ is the delivery of goods for some specific purpose under acontract on the condition that the same goods are to be returned to the bailor or are to bedisposed of according to the directions of the bailor.

The difference between bailment and sale may be clearly understood by studying thefollowing:

Sale

1. Property in the goods is transferred tothe buyer immediately at the time ofcontract.

2. The position of the buyer is that of theowner of the goods.

3. The buyer cannot terminate the contractand is bound to pay the price of thegoods.

4. The seller takes the risk of any lossresulting from the insolvency of thebuyer.

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

6. Tax is levied at the time of the contract.

Hire-Purchase

1. The goods passes to the hirer uponpayment of the last instalment.

2. The position of the hirer is that of a baileetill he pays the last instalment.

3. The hirer may, if he so likes, terminatethe contract by returning the goods toits owner without any liability to pay theremaining instalments.

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

5. The hirer cannot pass any title even to abona fide purchaser.

6. Tax is not leviable until it eventuallyripens into a sale.

The main points of distinction between the ‘sale’ and ‘hire-purchase’ are as follows:

Sale

1. The property in goods is transferredfrom the seller to the buyer.

2. The return of goods in contract of saleis not possible.

3. The consideration is the price in termsof money.

Bailment

1. There is only transfer of possession ofgoods from the bailor to the bailee forany of the reasons like safe custody,carriage, etc.

2. The bailee must return the goods to thebailor on the accomplishment of thepurpose for which the bailment wasmade.

3. The consideration may be gratuitous ornon-gratuitous.

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MERCANTILE LAWS 8 7

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

2.7 FORMALITIES OF CONTRACT OF SALEExcept where specifically required by any law, no particular form is necessary to constitute avalid contract. The agreement may be express or may be implied from the conduct of theparties. Section 5 of the Sale of Goods Act, 1930, lays down the rule as to how a contract of salemay 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 bemade 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 SALEThe subject matter of contract of sale is always the goods. This is enshrined in the Sale of GoodsAct, 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 orfuture goods.

(2) Like an ordinary contract, a contract of sale of goods can also be made with regard tothe goods, the acquisition of which by seller depends upon a contingency, which mayor may not happen. Thus, a contract for sale of certain cloth to be manufactured by acertain 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, thecontract 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 knowledgeof the seller have been destroyed or so damaged as not to answer to the description inthe contract, and then the contract is void ab initio. The Section is founded on the rulethat where both the parties to a contract are under a mistake as to a matter of factessential to a contract, the contract is void.

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(ii) Goods perishing after the contract is made: Where there is an agreement to sell specificgoods and the goods, subsequently without any fault of the seller or the buyer perishor suffer such damages as not to answer to the description in the agreement beforethe risk passes to the buyer, the agreement becomes void (Section 8). It may be notedthat this would apply only if the risk had not passed to the buyer. Generally speakingrisk passes with property i.e., when the property in the goods sold has passed to thebuyer 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 Section9, the price may be (1) fixed by the contract, or (2) agreed to be fixed in a manner provided bythe 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 areasonable 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 agreementto sell goods on the terms that price has to be fixed by the third party and he either does not orcannot make such valuation, the agreement will be void. In case the third party is preventedby the default of either party from fixing the price, the party at fault will be liable to thedamages to the other party who is not at fault. However, a buyer who has received andappropriated 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 ofcontract, stipulation as regard this, is not deemed to be of the essence of a contract of sale. Butdelivery of goods must be made without delay. Whether or not such a stipulation is of theessence 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 specificmanner. Stipulations as to time of delivery are usually the essence of the contract.

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

8 8 COMMON PROFICIENCY TEST


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CHAPTER – 2

Unit 2

Conditions&

Warranties


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Learning Objectives

� To understand and identify conditions and warranties,

� To know the implied conditions and warranties,

� To understand doctrine of ‘caveat emptor’.

2.12 CONDITIONS AND WARRANTIESA stipulation in a contract of sale with reference to goods, which are the subject thereof, maybe a condition or a warranty. A condition is a stipulation essential to the main purpose of thecontract, the breach of which gives right to repudiate the contract and to claim damages. Onthe other hand warranty is a stipulation collateral to the main purpose of the contract, thebreach of which gives rise to a claim for damages but not to a right to reject the goods and treatthe contract as repudiated (Section 12(3) of the Sale of Goods Act, 1930).

Differences:

The following are important differences between conditions and warranties.

Condition

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

(2) The aggrieved party can repudiate thecontract or claim damages or both inthe case of breach of condition.

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

Warranty

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

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

(3) A breach of warranty cannot be treatedas 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 hisown benefit, waive a stipulation; or

(ii) where the buyer elects to treat the breach of the condition as one of a warranty. That is tosay, 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 orany 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 ofimpossibility or otherwise.

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MERCANTILE LAWS 9 1

2.14 EXPRESS AND IMPLIED CONDITIONS AND WARRANTIES‘Conditions’ and ‘warranties’ may be either express or implied. They are “express” when theterms of the contract expressly state them. They are implied when, not being expressly providedfor. Express conditions are those, which are agreed upon between the parties at the time ofcontract 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 animplied condition may be negated or waived by an express agreement. Following conditionsare implied in a contract of sale of goods unless the circumstances of the contract show adifferent intention.

(i) Condition as to title [Section 14(a)]. In every contract of sale, unless there is an agreement tothe 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 haveright to sell the goods at the time when the property is to pass. In simple words, thecondition implied is that the seller has the right to sell the goods at the time when theproperty is to pass. If the seller’s title turns out to be defective, the buyer must return thegoods 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 isbased on the principle that “if you contract to sell peas, you cannot compel the buyer totake beans.” The buyer is not bound to accept and pay for the goods which are not inaccordance 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 wouldnot be apparent on reasonable examination of the sample. This condition is applicableonly with regard to defects, which could not be discovered by an ordinary examinationof 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 aswell as by description the implied condition is that the bulk of the goods supplied mustcorrespond both with the sample and the description. In case the goods correspond withthe sample but do not tally with description or vice versa, the buyer can repudiate thecontract.

(v) Condition as to quality or fitness [Section 16]: Ordinarily, there is no implied condition as tothe quality or fitness of the goods sold for any particular purpose. However, the conditionas to the reasonable fitness of goods for a particular purpose may be implied if the buyerhad made known to the seller the purpose of his purchase and relied upon the skill andjudgement of the seller to select the best goods and the seller has ordinarily been dealing inthose goods. Even this implied condition will not apply if the goods have been sold undera trademark or a patent name.

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(vi) Conditions as to wholesomeness: In the case of eatables and provisions, in addition to theimplied condition as to merchantability, there is another implied condition that the goodsshall be wholesome.

2.15 IMPLIED WARRANTIESThe examination of Section 14 and 16 of the Sale of Goods Act, 1930, disclosed the followingimplied warranties:

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

2. Warranty as to non-existence of encumbrances: An implied warranty that the goods shall befree from any charge or encumbrance in favour of any third party not declared or knownto 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 ofthe seller that in case the goods are inherently dangerous or they are likely to be dangerousto the buyer and the buyer is ignorant of the danger, the seller must warn the buyer of theprobable 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 toquality 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 purposeof goods supplied, the rule is ‘let the buyer beware’ i.e., the seller is under no duty to revealunflattering truths about the goods sold, but this rule has certain exceptions.

2.16 CAVEAT EMPTORIn case of sale of goods, the doctrine ‘Caveat Emptor’ means ‘let the buyer beware’. Whensellers display their goods in the open market, it is for the buyers to make a proper selection orchoice of the goods. If the goods turn out to be defective he cannot hold the seller liable. Theseller is in no way responsible for the bad selection of the buyer. The seller is not bound todisclose the defects in the goods which he is selling. It is the duty of the buyer to satisfy himselfbefore 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 ownskill 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 theprovisions of this Act or of any other law for the time being in force, there is no implied warrantyor condition as to the quality or fitness for any particular purpose of goods supplied under acontract of sale”.

Exceptions: The doctrine of Caveat Emptor is, however, subject to the following exceptions;

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

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MERCANTILE LAWS 9 3

are of a description which is in the course of seller’s business to supply, it is the duty of theseller 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 noimplied 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 shallcorrespond with the description. [Section 15].

4. Where the goods are bought by description from a seller who deals in goods of thatdescription 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 goodsthis rule shall apply if the defects were such which ought to have been revealed by ordinaryexamination [Section 16(2)].

5. Where the goods are bought by sample, this rule of Caveat Emptor does not apply if thebulk 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 isnot 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 beannexed by the usage of trade and if the seller deviates from that, this rule of CaveatEmptor is not applicable.

8. Where the seller sells the goods by making some misrepresentation or fraud and the buyerrelies on it or when the seller actively conceals some defect in the goods so that the samecould not be discovered by the buyer on a reasonable examination, then the rule of CaveatEmptor will not apply. In such a case the buyer has a right to avoid the contract and claimdamages.

2.17 SUMMARYWhile entering into a contract of sale, certain stipulations are put by both the parties i.e. thebuyer 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 purposeof the contract is a ‘condition’ whereas collateral stipulations are called warranties. Breach ofa ‘condition’ and that of a ‘warranty’ have different consequences. Every contract of saleshave 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 purposeof goods supplied, the rule is ‘let the buyer beware’ i.e., the seller is under no duty to revealunflattering truths about the goods sold, but this rule has certain exceptions.

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CHAPTER – 2

Unit 3

Transfer ofOwnership

&Delivery of

Goods


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Learning Objectives

� Understand how and at what point of time the ownership in goods which are thesubject 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 ofproperty 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 hasnot 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 decidelegal 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 ofseller, 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 areascertained.

(2) Where there is a contract of sale of specific or ascertained goods, property passes to thebuyer at the time when parties intend to pass it. For the purpose of ascertaining intentionof the parties regard shall be had to the terms of contract, conduct of parties, andcircumstances of the case. Where the intention of the parties cannot be ascertained, rulescontained in Sections 20 to 24 shall apply.

For specific goods: Where there is an unconditional contract for the sale of specific goods in adeliverable state, property in the goods passes to the buyer when the contract is made (Section20). Deliverable state means such a state that the buyer would under the contract be bound totake delivery of the goods. If the goods are not in a deliverable state, property does not passuntil such a thing is done to put the goods in a deliverable state. This ‘something’ may meanpacking the goods, testing, polishing, filling in casks etc. It should be noted that the propertyshall not pass when the goods are made in deliverable state but shall pass only when the buyerhas notice of it (Section 21). But where they are in deliverable state, but the seller is bound toweigh, measure, test or do some other act or thing for the purpose of ascertaining the price, theproperty does not pass until such act or thing is done. When the seller has done his part theproperty 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. Theascertainment of goods and their unconditional appropriation to the contract are the two pre-conditions for transfer of property from seller to buyer in case of unascertained goods. A selleris deemed to have unconditionally appropriated, where he delivers the goods to the buyer orto a carrier or other bailee for the purpose of transmission to the buyer (Section 23).

MERCANTILE LAWS 9 5

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Appropriation of goods: Appropriation of goods involves selection of goods with the intention ofusing them in performance of the contract and with the mutual consent of the seller and thebuyer.

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 onapproval or on sale or return or other similar terms the property passes to the buyer, (i) whenhe signifies his approval or acceptance to the seller, (ii) when he does any other act adoptingthe transaction, and (iii) if he does not signify his approval or acceptance to the seller butretains 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” onthe terms that the goods were to remain the property of the seller till they are paid for, theproperty therein does not pass to the buyer until the terms are complied with, i.e., cash is paidfor.

A buyer under a contract on the basis of ‘sale or return’ is deemed to have exercised his optionwhen he does any act exercising domination over the goods showing an unequivocal intentionto buy, e.g., if he pledges the goods with a third party. Failure or inability to return the goods tothe 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 subsequentlyappropriated to the contract, the seller may, by the terms of the contract or appropriation, asthe case may be, reserve the right to dispose of the goods, until certain conditions have beenfulfilled. In such a case in spite of the fact that the goods have already been delivered to thebuyer or to a carrier or other bailee for the purpose of transmitting the same to the buyer, theproperty therein will not pass to the buyer till the condition imposed, if any, by the seller hasbeen fulfilled.

If the goods are shipped or delivered to a railway administration for carriage and by the bill oflading or railway receipt, as the case may be, the goods are deliverable to the order of the selleror his agent, then the seller will be prima facie deemed to have reserved to the right of disposal.

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MERCANTILE LAWS 9 7

Where the seller draws a bill on the buyer for the price and sends to him the bill of exchangetogether with the bill of lading or (as the case may be) the railway receipt to secure acceptanceor payment thereof, the buyer must return the bill of lading, if he does not accept or pay thebill. And if he wrongfully retains the bill of lading or the railway receipt, the property in thegoods does not pass to him.

It should be noted that Section 25 deals with “conditional appropriation” as distinguishedfrom ‘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 theproperty therein is transferred to the buyer, but when the property therein is transferred to thebuyer, 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.’ Itprovides that where delivery of the goods has been delayed through the fault of either buyer orseller, the goods are at the risk of the party in fault as regards any loss which might not haveoccurred but for such fault.

Thus in ordinary circumstances, risk is borne by the buyer only when the property in the goodspasses over to him. However, the parties may by special agreement stipulate that ‘risk’ willpass sometime after or before the ‘property’ has passed.

Risk passes with property: The owner of goods must bear the loss or damage of goods unlessotherwise is agreed to. Under Section 26 of the Sale of Goods Act, unless otherwise agreed, thegoods remain at the seller’s risk until property therein has passed to the buyer. After that eventthey 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, damagedor deteriorated) passes with ownership. The parties may, however, agree to the contrary. Forinstance, the parties may agree that risk will pass sometime after or before the property haspassed.

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 aperson may sell goods of which he is not the owner, then the question arises as to what is theposition of the buyer who has bought the goods by paying price. The general rule regardingthe transfer of title is that the seller cannot transfer to the buyer of goods a better title than hehimself has. If the seller is not the owner of goods, then the buyer also will not become theowner i.e. the title of the buyer shall be the same as that of the seller. This rule is expressed inthe Latin maxim “Nemo dat quod non habet” which means that no one can give what he has

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not got. For example, if A sells some stolen goods to B, who buys them in good faith, B will getno 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 providedto this rule.

Exceptions: In the following cases, a non-owner can convey better title to the bona fide purchaserof goods for value.

(1) Sale by a Mercantile Agent: A sale made by a mercantile agent of the goods for document oftitle 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 betransferred to any person who buys them from such a joint owner in good faith and doesnot 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 tothe goods sold to him by a seller who had obtained possession of the goods under a contractvoidable on the ground of coercion, fraud, misrepresentation or undue influence providedthat 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 hassold 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 goodfaith and without notice of the previous sale, he would have good title to them, althoughthe property in the goods had passed to the first buyer earlier. A pledge or other dispositionof the goods or documents of title by the seller in possession are equally valid [(Section30(1)].

(5) Sale by buyer obtaining possession before the property in the goods has vested in him: Where abuyer with the consent of the seller obtains possession of the goods before the property inthem has passed to him, he may sell, pledge or otherwise dispose of the goods to a thirdperson, and if such person obtains delivery of the goods in good faith and without noticeof the lien or other right of the original seller in respect of the goods, he would get a goodtitle to them [(Section 30(2)].

(6) Effect of Estoppel: Where the owner is estopped by the conduct from denying the seller’sauthority to sell, the transferee will get a good title as against the true owner. But before agood title by estoppel can be made, it must be shown that the true owner had activelysuffered or held out the other person in question as the true owner or as a person authorizedto sell the goods.

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MERCANTILE LAWS 9 9

(7) Sale by an unpaid seller: Where an unpaid seller who had exercised his right of lien orstoppage in transit resells the goods, the buyer acquires a good title to the goods as againstthe 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 suchgoods as delivery of the whole. But such part delivery, with the intention of severing itfrom the whole will not operate as a delivery of the remainder, it will be construed as partdelivery only (Section 34).

(ii) Buyer to apply for delivery: The seller of the goods is not obliged to deliver them until thebuyer 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 theplace where they were at the time of sale, and the goods agreed to be sold are required tobe delivered at the spot at which they were lying at the time the agreement to sale enteredinto 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 possessionof a third person, there is no delivery unless and until such third person acknowledges tothe buyer that he holds the goods on his behalf. The issue or transfer of any document oftitle to goods operates as delivery, symbolic in character, even if the goods are in the custodyof a third person without such attornment [Section 36(3)].

(vi) Time for tender of delivery: Demand or tender of delivery may be treated as ineffectualunless made at a reasonable hour. What is reasonable hour is a question of fact [Section36(4)].

(vii) Expenses for delivery: The expenses of and incidental to putting the goods into a deliverablestate 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 mayeither accept the same and pay for it at the contract rate or reject it [Section 37(1)]. In caseof excess delivery the buyer may accept or reject the delivery, if he accepts the whole of thegoods, he shall pay for them at the contract rate [Section 37(2)]. In case the seller makes adelivery of the goods contracted mixed with goods of a different description, the buyermay accept the relevant goods and reject the rest or reject the whole [Section 37(3)]. Mixingof goods with inferior quality does not amount to a mixing of goods of different description.

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(ix) Instalment deliveries: Unless otherwise agreed, the buyer is not bound to accept deliveryin installments. The rights and liabilities in cases of delivery by instalments and paymentsthere 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 carrierfor transmission to the buyer, is prima facie deemed to be delivery to the buyer [Section39(1)].

(xi) Deterioration during transit: Where goods are delivered at a distant place, the liabilityfor deterioration necessarily incidental to the course of transit will fall on the buyer, thoughthe 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 notpreviously examined them, he is entitled to a reasonable opportunity of examining themin order to ascertain whether they are in conformity with the contract. Unless otherwiseagreed, the seller is bound, on request, to afford the buyer a reasonable opportunity ofexamining the goods (Section 41).

2.23 ACCEPTANCE OF DELIVERY OF GOODSAcceptance 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 thathe has rejected them (Section 42).

Ordinarily, a seller cannot compel the buyer to return the rejected goods; but the seller is entitledto a notice of the rejection. Where the seller is ready and willing to deliver the goods andrequests the buyer to take delivery, and the buyer does not take delivery within a reasonabletime, 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 SUMMARYThe students must note that property in the goods or beneficial right in the goods passes to thebuyer 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 theseller’s risk unless the property therein is transferred to the buyer, but after transfer of propertytherein 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 nobetter 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 insome constructive form and which is again subject to various rules which help in decidingwhen the delivery becomes effective.


1 0 0 COMMON PROFICIENCY TEST1 0 0

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CHAPTER – 2

Unit 4

UnpaidSeller


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Learning Objectives

� 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 SELLERAccording 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 rightof action for the price.

(b) A bill of exchange or other negotiable instrument was given as payment, but the same hasbeen 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 conferredupon an ‘unpaid seller’ in above said circumstances. For instance, an agent of the seller, towhom 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 SELLERAn unpaid seller has been expressly given the rights against the goods as well as the buyerpersonally which are discussed as under.

(a) A rights of an unpaid seller against the goods: The unpaid seller has the following rightsagainst 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 heis in possession, until the payment or tender of the price of such goods. The right oflien 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) When he delivers the goods to a carrier or other bailee for the purpose oftransmission to the buyer without reserving the right of disposal of the goods.

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MERCANTILE LAWS 1 0 3

(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 partiesto believe that the lien does not exist.

(2) Right of stoppage in transit: When the unpaid seller has parted with the goods to acarrier and the buyer has become insolvent, he can exercise this right of asking thecarrier 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 conditionsare 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 underthe following conditions:

(i) When the goods are of a perishable nature. In such a case the buyer need not beinformed of the intention of re-sale.

(ii) When he gives notice to the buyer of his intention to re-sell the goods and thebuyer 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 rightsagainst the goods as well as against the buyer personally. The rights of the seller againstthe buyer personally are called rights in personam and are in addition to his rights againstthe 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 topay for the goods, the seller may sue him for the price of the goods [Section55(1)].

(b) Where property has not passed under the contract of sale and the price is payableon a certain day irrespective of delivery and the buyer wrongfully neglects orrefuses to pay such price, the seller may sue him for the price although theproperty in the goods has not passed and the goods have not been appropriatedto the contract [Section 55(2)].

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

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

4. Suit for interest [Section 61(2)(d)]: Where there is specific agreement between theseller and the buyer as to interest on the price of the goods from the date on whichpayment 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 pricewhen 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 ina suit by him at such rate as it thinks fit on the amount of the price from the date of thetender 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 OFSTOPPAGE IN TRANSIT

(i) The essence of a right of lien is to retain possession whereas the right of stoppage in transitis right to regain possession.

(ii) Seller should be in possession of goods under lien while in stoppage in transit (i) sellershould 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 casewith right of stoppage in transit.

(iv) Right of stoppage in transit begins when the right of lien ends. Thus the end of the right oflien 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 orother disposition of the goods by the buyer.

For example, an oil merchant A sold 100 tins of oil to B without appropriating any particularoil to the contract. B sold 60 tins out of it to C and gave delivery order addressed to A. C lodgedthe delivery order with A requesting him to “await” his orders. Meanwhile B became insolventand 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 madeby the buyer [Sub-Section (1)].

(b) when a document of title of goods has been transferred to the buyer and the buyer transfersthe 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 goodsto 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 measureof 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 lossnaturally 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 thedifference in price. If he does not purchase such similar goods but has during thecontract period settled contracts for the same kind of goods with other persons, therates at which those contracts were settled might afford a basis for ascertaining thedamages. Where, on breach of contract, the goods are irreplaceable in the market, theproper measure of damages is the profits which the buyer would have made if thecontract had been carried out.

(2) Suit for specific performance [Section 58]: Where property has passed to the buyer, healso can exercise another right, viz., a right to sue for specific performance and itslimits regulated by the Specific Relief Act. In such cases the court may, in its discretiongrant a decree ordering the seller to deliver those specific or ascertained goods whichformed the subject-matter of the contract.

(3) Suit for damages for Breach of warranty [Section 59]: Where there is a breach of warrantyby the seller or where the buyer elects or is compelled to treat any breach of conditionon the part of the seller as a breach of warranty, the buyer is entitled to reject thegoods but the buyer may:

(a) set up against the seller the breach of warranty in diminution or extinction of theprice; or

(b) sue the seller for the breach of warranty.

The measure of damage for breach of warranty is the estimated loss or damage arisingdirectly or naturally from the breach, which is prima facie the difference between thevalue of the goods at the time of the delivery and the value they would have had, ifthe goods had answered to the warranty.

(4) Suit for recovery of price: Under Section 61, the buyer has a right to recover the moneypaid 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 pricefor 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 haswrongfully 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 contract on a certain day irrespective of delivery and the buyer wrongfully neglects orrefuses to pay such price, the seller may sue him for the price even if the property in thegoods has not passed and the goods have not been appropriated to the contract (Section55).

(ii) Damages for non-acceptance: Where the buyer wrongfully neglects or refuses to accept andpay for the goods, then the seller may sue him for damages for non-acceptance (Section56).

2.30 AUCTION SALEAn ‘Auction Sale’ is a mode of selling property by inviting bids publicly and the property issold to the highest bidder. An auctioneer is an agent governed by the Law of Agency. When hesells, he is only the agent of the seller. He may, however, sell his own property as the principaland 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 aseparate contract of sale;

(b) The sale is complete when the auctioneer announces its completion by the fall of hammeror in any other customary manner and until such announcement is made, any biddermay retract from his bid;

(c) Right to bid may be reserved expressly by or on behalf of the seller and where such a rightis expressly reserved, but not otherwise, the seller or any one person on his behalf may bidat the auction;

(d) Where the sale if not notified to be subject to the right of the seller to bid, it shall not belawful for the seller to bid himself or to employ any person to bid at such sale, or for theauctioneer knowingly to take any bid from the seller or any person representing him. Anysale 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 theoption of the buyer.

2.31 SUMMARYA seller is called an ‘unpaid seller’ when either he has not been paid the whole price or thebuyer has failed to meet at maturity the bill of exchange or any other negotiable instrumentwhich was accepted by the seller as conditional payment. In such a circumstance the buyermay exercise lien on goods if he is in possession of them. If goods are in transit to the buyer, hemay 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 goodsafter giving a notice to the buyer of his intent to re-sell. The new buyer shall have a good titleon goods as against the original buyer even if the notice of re-sale has not been given by theseller to the original buyer.

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If the seller neglects to deliver the goods the buyer may sue him for damages, or he may sue theseller 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 asexercise 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 QUESTIONS1. 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 ofrescission 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 sale of Goods Act, 1930 deals with the(a) movable goods only.(b) immovable goods only.(c) both movable and immovable goods.(d) all goods except ornaments.

7. Under Sale of Goods Act, 1930 the terms “Goods” means every kind of movable propertyand 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.

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10. 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. (b) executed Contract.(c) both of the above. (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. (b) let the buyer beware.(c) let the creditor 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 doctrine of Caveat Emptor does not apply, when(a) the goods are bought by sample.(b) the goods are bought by sample as well as description.(c) the goods are purchased under its brand name.(d) all of the above.

24. Where there is an unconditional contract for the sale of specific goods in a deliverablestate-(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 andwith 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 becomeinsolvent he can exercise(a) right of lien. (b) right of stoppage in transit.(c) right of resale. (d) none of the above.

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30. 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.

31. Which of the following right can be exercised by an unpaid seller against the buyer, whois 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 (b) payment of price(c) fall of hammer (d) none of the above.

34. If a seller handed over the keys of a warehouse containing the goods to the buyer resultsin(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 newcar, 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. (b) seller has reserved such right.(c) seller gives notice. (d) all of these.

40. Legally, a contract of sale includes(a) sale. (b) agreement to sell. (c) barter. (d) both (a) and (b)

41. 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.

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42. A contact for the sale of goods which provide that the property would pass to the buyeron 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 hadsome manufacturing defect and it did not work after a few days in spite of repairs. In thiscase, 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.

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52. 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 thesale 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 owncanvas & 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 applicableonly where the buyer tells his purpose to the seller and relies upon seller’s skill andjudgement 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 (b) custody of goods(c) ownership 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 ofmaking 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 whenthe 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.

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63. Which of the following modes of delivery of goods is considered effective for a validcontract 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 transmissionto 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 knocksdown 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 ofrescission 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. (b) executed Contract.(c) both of the above. (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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75. 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, which of the following is/are the impliedwarranty (ies) ?1. Warranty of quiet possession 2. Warranty of freedom from encumbrances3. Warranty of title 4. Warranty as to wholesomeness.

(a) 1&2 (b) 1&3 (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 mediator2. Movable goods for a price3. Transfer of general property4. Exchanging of goods without money

(a) 1&2 (b) 2&3 (c) 2&4 (d) 3&4

78. The term ‘goods’ for the purpose of Sale of Goods Act, does not include1. Money2. Actionable claims3. Stocks & Shares4. Growing crops, grass

(a) 1&2 (b) 1&3 (c) 2&4 (d) 3&4

79. A buyer may make some payment in advance to the seller as a guarantee for performanceof contract. This money is known as1. Earnest money2. Security deposit3. Fixed deposit4. Deposit

(a) 1&2 (b) 1&3 (c) 2&4 (d) 3&4

80. Which of the following is a document of title to goods1. Bill of Lading2. Railway Receipt3. Dock Warrant4. Performa invoice

(a) 2, 3 (b) All the above (c) 1, 2, 3 (d) 2, 3, 4

81. A seller is unpaid when1. Whole of the price have not been tendered2. A negotiable instrument given has been dishonoured3. A bill of exchange given was dishonoured4. 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

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82. Which of the following is the Right of Unpaid Seller1. Right to re-sale2. Right to stop the goods in transit3. Right of lien4. 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 wasnot 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 purchasedthe refrigerator from C in good faith, on knowing the facts B wants to recover the refrigeratorfrom 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. Laterthe merchant supplied timber which was identified as ordinary class of timber anddemanded 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 behalfof ‘B’ and was authorized to collect the goods. ‘A’ later sold the goods to ‘D’. Is the salevalid?(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 concluded sale, if the goods are destroyed, the loss is to be borne by(a) The seller (b) The buyer(c) Both seller and buyer in agreed proportions(d) The party who is in possession of goods.

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88. R, a grain merchant, displays wheat of different varieties. A after satisfying himself of thequality buys the wheat in the belief that the wheat is of earlier harvest. In fact the wheat isof recent harvest. A wants to return the wheat and refuses to pay the price. Which of thefollowing 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 (a) Right of Lien(ii) Right to withhold (b) Constructive Delivery(iii) Delivery of goods (c) Wharf finger(iv) Deliver to a caretaker (d) Auction Sale

91. Match the following:(i) Sale (a) Ownership is transferred at some future

date(ii) Agreement to sell (b) A stipulation which is essential(iii) Condition (c) Stipulation which is collateral.(iv) Warranty (d) Ownership is transferred immediately

92. Match the following:(i) Right to Sell (a) Condition as to description(ii) Goods must be properly packed (b) Condition as to sample(iii) Goods must be the same as wanted (c) Condition as to wholesomeness

by the seller(iv) Buyer having right / opportunity (d) Condition as to title

to compare

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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

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CHAPTER – 3TH

E I

ND

IAN

PA

RTN

ER

SH

IPA

CT,

1932INTRODUCTION

You might be aware that one of the forms in whichbusiness can be carried on is partnership, where twoor more persons join together to form the partnershipand run the business. In order to govern and guidepartnership, the Indian Partnership Act, 1932, wasenacted. In human relations often misunderstandingscrop up; if any misunderstanding crops up in apartnership amongst its partners, the continuity ofthe partnership may become doubtful. Since, publicat large would be dealing with the partnership ascustomers, suppliers, creditors, lenders, employees orany other capacity, it is also very important for themto know the legal consequences of their transactionsand other actions in relation with the partnershipwhere no one partner is the owner of the businessand, therefore, exclusively responsible.

The law relating to partnership in India which iscontained in Indian Partnership Act (IX of 1932) isconcerned partly with the rights and duties ofpartners between themselves and partly with the legalrelations between partners and third persons, whichflow or are incidental to the formation of apartnership. (Thus the act not only determines therights and duties of a partner in relation to thepartnership business as also against other partners;it clearly establishes the position of a partner as wellas partnership firm vis-a-vis third parties, in legal andcontractual relationships arising out of and in thecourse of business of the firm). It may be describedas a branch of law relating to principal and agentsince every partner is in contemplation of law thegeneral and accredited agent of the partnership.

In this Chapter, we shall deal with the provisions ofthe 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

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CHAPTER – 3

Unit 1

General Natureof a

Partnership

THE INDIANPARTNERSHIP

ACT, 1932

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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 businesscarried on by all or any one of them acting for all (Section 4). It, therefore, follows that apartnership 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 PARTNERSHIPWe shall now consider the afore stated essential elements one by one.

Agreement : You have just observed that partnership must be the result of an agreementbetween two or more persons. You should note that it can arise only from a contract and notfrom status. That is why, a partnership is distinguishable from a Hindu Undivided Familycarrying on a family business. The reason is that as a result of the peculiarities of the MitaksharaSchool of Hindu Law applicable to joint families, a male child of a Hindu acquires an interestin a family business even in the absence of an agreement in that behalf, whereas partnership isa creation only of mutual agreement. Thus the nature of the partnership is voluntary andcontractual.

An agreement from which relationship of Partnership arises may be express. It may also beimplied 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, theremust exist a business. For the purpose, the term ‘business’ includes every trade, occupationand profession. The existence of business is essential. The motive of the business is the “acquisitionof gains” which leads to the formation of partnership. Therefore there can be no partnershipwhere 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 befloated in partnership [A joint stock company may, however, be floated for non-economicpurposes]. Secondly, there must be an agreement to share profits. For example X and Y buycertain bales of cotton which they agree to sell on their joint account and to share the profits

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equally. In these circumstances, X and Y are partners in respect of such cotton. But an agreementto share losses is not an essential element. However, in the event of losses, unless agreedotherwise, 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 thebusiness must be carried on by all the partners or by anyone or more of the partners acting forall. This is the cardinal principle of the partnership Law. An act of one partner in the course of thebusiness of the firm is in fact an act of all partners. Each partner carrying on the business is theprincipal as well as the agent for all the other partners. You should, therefore, note that thetrue test of partnership is mutual agency rather than sharing of profits. If the element of mutualagency is absent then there will be no partnership. Sharing of profits is only Prima facie evidencewhich can be rebutted by a stronger evidence. Thus, this prima facie evidence can be rebuttedby proving that there is no mutual agency.

3.3 TRUE TEST OF PARTNERSHIPYou must have understood that sharing of profit is an essential element to constitute apartnership. 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 orcommon interest in the property would not by itself make such persons partners. Although theright 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 ordoes 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 thebusiness is being carried on by all or any of them acting for all, there will be no difficulty in thelight 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 issuch as does not specifically speak of partnership. In such a case for testing the existence orotherwise of partnership relation, Section 6 has to be referred. According to Section 6, regardmust 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 allrelevant 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 relationshipbetween 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 theearning of profits or varying with the profits earned by business, would not by itself make hima partner with the persons carrying on the business, particularly, when such share of paymentis 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 goodwillor share thereof.

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Existence of Mutual Agency which is the cardinal principle of partnership law, is very muchhelpful in reaching a conclusion in this regard. Each partner carrying on the business is theprincipal as well as an agent of other partners. So, the act of one partner done on behalf offirm, binds all the partners. If the element of mutual agency relationship exists between theparties constituting a group formed with a view to earn profits by running a business, apartnership may deemed to be existed.

Distinction between partnership and firm : Persons who have entered into partnership withone another are called individual “Partners” and “collectively” and the name under whichthe business is carried on is called the “firm name”. Partnership is merely an abstract legalrelation between the partners. A firm is a concrete thing signifying the collective entity for allthe partners. Partnership is thus that invisibility which binds the partners together and firm isthe visible form of those partners who are thus bound together.

3.4 PARTNERSHIP DISTINGUISHED FROM OTHER FORMS OFORGANISATION

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 thepersonalities of its constituent members. On the other hand, a registered company is ajudicial 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, butin 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 partnersaccording to the terms of the partnership deed. But in the case of a company, there is nosuch 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 whendividends are declared.

(4) Extent of liability : In a partnership, the liability of the partners is unlimited. This meansthat each partner is liable for debts of a firm incurred in the course of the business of thefirm and these debts can be recovered from his private property, if the joint estate isinsufficient to meet them wholly. On the other hand, the liability of a shareholder is limitedto the amount, if any, unpaid on his shares, in the case of company limited by shares; butin the case of a guarantee company, the liability is limited to the amount for which he hasagreed to be liable. However, there may be companies where the liability of members isunlimited.

(5) Property : The firm’s property is that which is the “joint estate” of all the partners asdistinguished from the ‘separate’ estate of any of them and it does not belong to a bodydistinct 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 caseof a company, its property is separate from that of its members who can receive it backonly in the form of dividends or refund of capital.

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(6) Transfer of shares : A share in a partnership cannot be transferred without the consent of allthe partners; but in a company, a shareholder may transfer his shares, subject to theprovisions contained in its Articles. In the case of public limited companies whose sharesare 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 areentitled to participate in the management. But members of a company are not entitled totake part in the management unless they are appointed as directors, in which case theymay participate. Members, however, enjoy the right of attending general meeting andvoting there at to decide certain questions such as election of directors, appointment ofauditors, etc.

(8) Number of membership : In the case of firms carrying on business other than banking, thenumber must not exceed 20 and in the case of banks such number must not exceed 10. Aprivate company may have as many as 50 members but not less than two and a publiccompany 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 promotingsome beneficial purposes such as improvement of health or providing recreation for themembers, etc. On the other hand, partnership is also an association of persons but formedwith 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 toa creditor of the club, except when he is responsible for the contract which gave rise to theliability.

(2) A member of a club has no interest in the property of the club, as a partner has in theproperty of the firm. Also, the change in the membership of a club does not affect itsexistence.

3.4.3 PARTNERSHIP VS. HINDU UNDIVIDED FAMILY

(1) Creation : The relation of partnership is created necessarily by an agreement, whereas theright in the joint family is created by status. The creation of a right by status means itscreation by birth in the family.

(2) Death : Death of a partner ordinarily leads to the dissolution of partnership. But the deathof a member in the Hindu undivided family does not give rise to dissolution of the familybusiness.

(3) Management : The right of management of joint family business generally vests in theKarta, the governing male member of the family. But in the case of a partnership, all thepartners 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 authorityto contract for the family business. In partnership, every partner can, by his act, bind thefirm.

(5) Liability : In a partnership, the liability of a partner is unlimited; but in a Hindu undividedfamily, only the liability of the Karta is unlimited, and the other copartners are liable only

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to the extent of their share in the profits of the family business, unless they take part in theact performed or transactions entered into by the Karta.

(6) Calling for accounts : On the separation of the joint family, a member is not entitled to askfor account of the family business. But a partner can bring a suit against the firm foraccounts, provided he also seeks the dissolution of the firm.

(7) Governing Law : A partnership is governed by the Partnership Act; a Joint Hindu familybusiness is governed by the Hindu Law.

(8) Minor’s capacity : In a partnership, a minor cannot become a partner, though he can beadmitted to the benefits of partnership, only with the consent of all the partners. In Hinduundivided family business, a minor becomes a member of the ancestral business by theincidence of birth. He does not have to wait for attaining majority.

(9) Continuity : A Joint Hindu Family has the continuity till it is divided. The status of JointHindu Family is not thereby affected by the death of a member, but a firm subject to acontract 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 ariseeither 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 haveto 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 aco-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-ownershipmay be dissolved at the will of co-owners; also a co-owner may transfer his interest orrights 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 personswho have entered into a business for gains, with the intention to share the profits of sucha business; but partnerships does not exist between members of a charitable society orreligious 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 thatof partnership.

3.5 TYPES OF PARTNERSActive Partner means a person (i) who has become a partner by agreement and (ii) who activelyparticipates in the conduct of the partnership. While a partner who does not take an activepart in the conduct of the business of the firm is called a sleeping(dormant) partner. A personwho 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 partnershipby estoppel. Where a man holds himself out as a partner, or allows others to do it, he is then

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stopped from denying the character he has assumed and upon the faith of which creditorsmay be presumed to have acted. When a person (i) represents himself, or (ii) knowingly permitshimself, to be represented as a partner in a firm (when in fact he is not) he is liable, like apartner in the firm to anyone who on the faith of such representation has given credit to thefirm.

A person may himself, by his words or conduct have induced others to believe that he is apartner or he may have allowed others to represent him as a partner. The result in both thecases is identical.

Example: X and Y are partners in a partnership firm. X introduced A, a manger, as his partnerto Z. A remained silent. Z, a trader believing A as partner supplied 100 T.V sets to the firm oncredit. After expiry of credit period, Z did not get amount of T.V sets sold to the partnershipfirm. Z filed a suit against X and A for the recovery of price. Considering the provisions of theIndian 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 thereonthat 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 fromthe 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 betweena partner in a firm and a stranger, the latter is vested with interest jointly with that partner sofar 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 canclaim the agreed share from the actual partner, but he can have no right against the main firmto take part in or to interfere with its business or to examine its account.

3.6 MINOR’S POSITION IN PARTNERSHIPWe shall now discuss a topic, viz., minor’s position in relation to partnership. You will recallthat a minor cannot be bound by a contract because a minor’s contract is void and not merelyvoidable. Therefore, a minor cannot become a partner in a firm because partnership is foundedon a contract. Though a minor cannot be a partner in a firm, he can nonetheless be admitted tothe benefits of partnership under Section 30 of the Act. In other words, he can be validly givena share in the partnership profits. When this has been done and it can be done with the consentof all the partners then the rights and liabilities of such a partner will be governed under Section30 as follows :

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(1) Rights : (i) A minor partner has a right to his agreed share of the profits of the firm. (ii) Hecan have access to, inspect and copy the accounts of the firm. (iii) He can sue the partnersfor accounts or for payment of his share but only when severing his connection with thefirm, and not otherwise. (iv) On attaining majority he may within 6 months elect to becomea partner or not to become a partner. If he elects to become a partner, then he is entitled tothe share to which he was entitled as a minor. If he does not, then his share is not liable forany 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 personallyliable for any such act. (ii) Within 6 months of his attaining majority or on his obtainingknowledge that he had been admitted to the benefits of partnership, whichever date islater, he may give public notice that he has elected not to become partner and such noticeshall determine his position as regards the firm. If he fails to give such notice he shallbecome a partner in the firm on the expiry of the said six months. If the minor becomes apartner of his own willingness or by his failure to give the public notice within specifiedtime, the position will be as follows :

(i) He becomes personally liable to third parties for all acts of the firm done since he wasadmitted to the benefits of partnership.

(ii) His share in the property and the profits of the firm remains the same to which hewas entitled as a minor.

Where the minor decides to sever his connection with the firm his rights and liabilities will beas follows.

(i) His rights and liabilities continue to be those of a minor up to the date of giving publicnotice.

(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 benoted that such minor shall give notice to the Registrar that he has or has not become apartner.

3.7 SUMMARYIt is not quite easy to define the term ‘Partnership’. The definition given by Section 4 of the Actbrings out very clearly the fundamental principle that each partner, when carrying on thebusiness of the firm, is an agent as well as principal, and is probably the most business likedefinition of the term. The definition contains three elements which must be present before agroup 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 anyof them, acting for all. These three elements may appear to overlap, but they are neverthelessdistinct.

The element of agreement in partnership distinguishes it from various other relations whicharise by operation of law and not from agreement, such as, joint-owners, Hindu UndividedFamily, etc.



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CHAPTER – 3

Unit 2

Relationsof

Partners


ACT, 1932

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Learning Objectives

� Be familiar with the legal provisions regulating relation of partners’ interest as well asrelations 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 andits effect on the rights and duties of the partners.

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

3.8 MUTUAL RIGHTS AND DUTIES OF PARTNERSThese are governed by the contract existing between them which may be express or implied bythe course of dealing. The contract may be varied by the consent of all the partners; which maybe 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 thefirm while he is a partner (Section 11). Subject to a contract between the partners the mutualrights and liabilities are as follows :

Rights : (1) Right to take part in the conduct of the Business : Every partner has the right totake part in the business of the firm. This is because partnership business is a business of thepartners and their management powers are generally coextensive. Now suppose thismanagement power of the particular partner is interfered with and he has been wrongfullyprecluded from participating therein. Can the Court interfere in these circumstances? Theanswer is in the affirmative. The Court can, and will, by injunction, restrain other partnersfrom doing so. You should also note in this connection that a partner who has been wrongfullydeprived of the right of participation in the management has also other remedies, e.g., a suitfor 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 thecontrary 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 ofthe partnership will remain with one or more of the partners to the exclusion of others. In sucha case, the Court will normally be unwilling to interpose with the management with suchpartner or partners, unless it is clearly made out that something was done illegally or in breachof the trust reposed in such partners.

(2) Right to be consulted : Where any difference arises between the partners with regard tothe business of the firm, it shall be determined by the views of the majority of them, and everypartner shall have the right to express his opinion before the matter is decided. But no changein 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 partnerswill prevail. Of course, the majority must act in good faith and every partner must be consultedas far as practicable.

You should note that the aforesaid majority rule will not apply where there is a change in thenature of the firm itself. In such a case, the unanimous consent of the partners is needed.

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(3) Right of access to books : Every partner whether active or sleeping is entitled to haveaccess 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 tohis share in the profits of the firm for taking part in the business of the firm. But this rule canalways be varied by an express agreement, or by a course of dealings, in which event thepartner will be entitled to remuneration. Thus a partner can claim remuneration even in theabsence of a contract, when such remuneration is payable under the continued usage of thefirm. In other words, where it is customary to pay remuneration to a partner for conductingthe business of the firm he can claim it even in the absence of a contract for the payment of thesame.

It is not uncommon for partners, in actual practice, to agree that a managing partner willreceive over and above his share, salary or commission for the trouble that he will take whileconducting the business of the firm.

(5) Right to share Profits : Partners are entitled to share equally in the profits earned and socontribute equally to the losses sustained by the firm [Section 13 (b)]. The amount of a partner’sshare must be ascertained by enquiring whether there is any agreement in that behalf betweenthe partners. If there is no agreement then you should make a presumption of equality and theburden 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 profitsand 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 tohim 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 anagreement or usage to that effect. The principle underlying this provision of law is that regardsthe 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 broughtby him in the partnership business: (i) an express agreement to that effect, or practice of theparticular partnership or (ii) any trade custom to that effect; or (iii) a statutory provision whichentitles him to such interest.

(7) Interest on advances : Suppose a partner makes an advance to the firm in addition to theamount of capital to be contributed by him. In such a case, the partner is entitled to claiminterest thereon @6% per annum [Section 13 (d) ]. While interest on capital account ceases torun on dissolution, the interest on advances keep running even often dissolution and up to thedate of payment.

From the discussion so far, you will notice that the Partnership Act makes a distinction betweenthe capital contribution of a partner and the advance made by him to the firm. The advancesare regarded as loans which should bear interest while capital bears interest only when there isan agreement to this effect.

(8) Right to be indemnified : Every partner has the right to be indemnified by the firm inrespect of payments made and liabilities incurred by him in the ordinary and proper conduct

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of the business of the firm as well as in the performance of an act in an emergency for protectingthe firm from any loss, if the payments, liability and act are such as a prudent man wouldmake, 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 theintroduction 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 beforehe became a partner [Section 31].

(10) Right to retire : Every partner has the right to retire with the consent of all the otherpartners and in the case of a partnership being at will, by giving notice to that effect to all theother partners [Section 32 (1)].

(11) Right not to be expelled : Every partner has the right not to be expelled from the firm byany majority of the partners (Section 33).

(12) Right of outgoing partner to carry on competing business : An outgoing partner maycarry on business competing with that of the firm and he may advertise such business, butwithout using the firm name or representing himself as carrying on the business of the firm orsoliciting the custom of persons who were dealing with the firm before he ceased to be apartner [Section 36 (1)].

(13) Right of outgoing partner to share subsequent profits : Where any partner has died orceased to be a partner, and the surviving or continuing partners carry on the business of thefirm with the property of the firm without any final settlement of accounts as between themand the outgoing partner or his estate, the outgoing partner or his estate has at his or hisrepresentative’s option, the right to such share of the profit made since he ceased to be apartner 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 theconsent of all partners (Section 40). But where the partnership is at will the firm may be dissolvedby 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 legalrepresentative 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 hisfraud 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 thefirm’s business [Section 12 (b)]. A partner is not, however, normally entitled to remunerationfor participating in the conduct of the business [Section 13 (a)]. He is also bound to let hispartners have the advantage of his knowledge and skill.

(4) All the partners are liable to contribute equally to the loss sustained by the firm.

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(5) A partner must indemnify the firm for any loss caused to it by willful neglect in the conductof 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 useof the property or business connection of the firm or firm’s name then he is bound toaccount 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 [Section16 (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’, ‘partnershipassets’, ‘joint stock’, ‘common stock’ or ‘joint estate’, denotes all property, rights and intereststo which the firm, that is, all partners collectively, may be entitled. The property which isdeemed as belonging to the firm, in the absence of any agreement between the partners showingcontrary intention, is comprised of the following items :

(i) all property, rights and interests which partners may have brought into the common stockas their contribution to the common business;

(ii) all the property, rights and interest acquired or purchased by or for the firm, or for thepurposes 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 thefirm ultimately depends on the real intention or agreement of the partners. Thus, the mere factthat the property of a partner is being used for the purposes of the firm shall not by itself makeit partnership property, unless it is intended to be treated as such. Partners may, by an agreementat any time, convert the property of any partner or partners (and such conversion, if made ingood faith, would be effectual between the partners and against the creditors of the firm) orthe separate property of any partner into a partnership property.

Goodwill : Section 14 specifically lays down that the goodwill of a business is subject to acontract between the partners, to be regarded as ‘property’ of the ‘firm’. But this Section doesnot 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 profitsexpected in future over and above the normal level of profits earned by undertaking belongingto the same class of business.

When a partnership firm is dissolved every partner has a right, in the absence of any agreementto 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 otherproperties of the firm. Any partner may upon the sale of the goodwill of a firm, make anagreement with the buyer that such partner will not carry on any business similar to that ofthe firm within a specified period or within specified local limits and notwithstanding any

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thing contained in Section 27 of the Indian Contract Act, 1872 such agreement shall be valid ifthe 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 useof the property or business connection of the firm or firm name, he must account for that profitand pay it to the firm. For example, A, B, C & D established partnership business for refiningsugar. A, who was himself a wholesale grocer, was entrusted with the work of selection andpurchase of sugar. As wholesale grocer, A was well aware of the variations in the sugar marketand had the suitable sense of propriety as regards purchases of sugar. He had already in stocksugar purchased at a low price which he sold to the firm when it was in need of some withoutinforming the partners that the sugar sold had belonged to him. It was held that A was boundto account to the firm for the profit so made him. This rule, is however, subject to a contractbetween partners.

Where a partner carries on a competing business, he must account for and pay to the firm allprofits made by him in the business. For example, A, B, C and D started a business in partnershipfor importing salt from foreign ports and selling it at Chittagong. A struck certain transactionsin salt on his own account, which were found to be of the same nature as the business carriedon by the partnership. It was held that A was liable to account to the firm for profits of thebusiness so made by him. This rule is also subject to a contract between the partners.He isunder no obligation whatever to account for the profits of a non competing business, eventhough 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 thepartners are not to carry any business other than that of the firm during the continuance ofpartnership [Section 11(2)]. A breach of such a provision may entitle the other partner to recoverdamages from the defaulting partner, but it will not give rise to any occasion for accounting tohis copartners for the profits earned unless the business is shown to be in rivalry with thebusiness of the firm.

3.11 RIGHTS AND DUTIES OF PARTNERS AFTER A CHANGE INTHE CONSTITUTION OF THE FIRM (SECTION 17)

Before going into rights and duties, we should first know how a change may take place in theconstitution of the firm. It may occur in one of the four ways, namely, (i) where a new partneror 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 wasoriginally formed, (iv) where the partnership business is carried on after the expiry of the termfixed 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 mentionedabove, the mutual rights and duties of the partners in the reconstituted firm remain thesame 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 theexpiry of the term, the mutual rights and duties of the partners remain the same as theywere before the expiry, so far as they may be consistent with the incidents of partnershipat will. Some provisions have been held to be inconsistent with the incidents of partnershipat will, e.g., the provision in the deed that a partner desiring to retire shall give notice ofhis 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 outother ventures or undertakings, the mutual rights and duties of the partners in respect ofthe other adventures of the undertaking are the same as of those in respect of the originaladventures.

You should note that the above-mentioned rules are subject to contract between the partners.

3.12 RELATION OF PARTNERS TO THIRD PARTIES (SECTIONS18 TO 30)

Partners as agents of the firm : You may recall that a partnership is the relationship betweenthe partners who have agreed to share the profits of the business carried on by all or any ofthem acting for all (Section 4). This definition suggests that any one of the partners can be theagent of the others. Section 18 clarifies this position by providing that, subject to the provisionsof the Act, a partner is the agent of the firm for the purpose of the business of the firm. Thepartner indeed virtually embraces the character of both a principal and an agent. So for as heacts for himself and in his own interest in the common concern of the partnership, he mayproperly be deemed a principal : and so far as he acts for his partners, he may properly bedeemed an agent. The principal distinction between him, and a mere agent is that he has acommunity of interest with other partners in the whole property and business and liabilities ofpartnership, 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 isapplicable 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 FIRMAt the very outset, you should understand what is meant by “implied authority”. You havejust 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 privatearrangements between themselves), each partner is agent of every other in every matterconnected 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 Sectionsis that the act of a partner which is done on, in the usual way, business of the kind carried onby the firm binds the firm, provided that the act is done in the firm name, or any mannerexpressing or implying an intention to bind the firm. Such an authority of a partner to bind thefirm is called his implied authority.

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You should specially note the phrase “in the usual way”. It has been included to indicate thatif a usual act is done in an unusual way the outsider may well be put on an enquiry intounusual circumstances under which he is being called upon to give credit. It is not unreasonableto expect him to ask whether the partner has authority to act as he is doing. If the outsiderchooses to neglect what is unusual, he must not seek to charge persons other than the one withwhom 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 andapproved 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 mattersconnected with the partnership business and which are done in the usual way and are not intheir nature beyond the scope of partnership. You must remember that an implied authority ofa partner may differ in different kinds of business. For example, it may be usual for one partnerof firm of bankers to draw, accept or endorse a bill of exchange on behalf of the firm, but thesame may be unusual, for one of a firm of solicitors to do so, for it is no part of the ordinarybusiness 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 andpay debts on account of the partnership; he may draw, make, sign, endorse, transfer, negotiateand procure to be discounted, Promissory notes, bills of exchange, cheques and other negotiablepapers 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 doesnot empower him to:

(a) submit a dispute relating to the business of the firm to arbitration as it is not the ordinarybusiness 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’ IMPLIEDAUTHORITY (SECTION 20)

The partners may, by contract between them, either extend or restrict the implied authority ofany partner. In spite of any such restriction if a partner does, on firm’s behalf, any act which

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falls within his implied authority, the firm will be bound unless the person with whom he isdealing is aware of the restriction or does not know or believe the partner to be a partner. Thusa third party is not affected by a secret limitation of a partner’s implied authority unless he hadactual notice of it. For example, A, a partner, borrows from B Rs. 1,000 in the name of the firmbut in excess of his authority, and utilises the same in paying off the debts of the firm. Here, thefact that the firm has contracted debts suggests that it is a trading firm, and as such it is withinthe 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. Nowif B, the lender, is unaware of this restriction imposed on A, the firm will be liable to repay themoney to B. On the contrary B’s awareness as to this restriction will absolve the firm of itsliability to repay the amount to B.

You should further note that the above-mentioned extension or restriction is only possible withthe consent of all the partners. Any one partner, or even a majority of the partners, cannotrestrict 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 ofSection 20, the Act further recognises that each partner can bind the firm by all of his acts donein an emergency, with a view to protecting the firm from any loss, provided he has acted in thesame 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 makebinding admissions but only in relation to partnership transaction and in the ordinary courseof business; an admission or representation by a partner will not however, bind the firm if hisauthority on the point is limited and the other party knows of the restriction. The sectionspeaks of admissions and representations being evidenced against the firm. That is to say, theywill affect the firm when tendered by third parties; they may not have the same effect in caseof 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 theaffairs of the firm, operates as a notice to the firm except in the case of a fraud on the firmcommitted by or with the connivance of that partner. Thus, the notice to one is equivalent tothe notice to the rest of the partners of the firm, just as a notice to an agent is notice to hisprincipal. This notice must be actual and not constructive. It must be received by a workingpartner and not by a sleeping partner. It must further relate to the firm’s business. Only then itwould constitute a notice to the firm.

The only exception would lie in the case of fraud, whether active or tacit. For example, A, apartner who actively participates in the management of the business of the firm, bought for hisfirm, certain goods, while he knew of a particular defect in the goods. His knowledge as regardsthe defect, ordinarily, would be construed as the knowledge of the firm, though the otherpartners 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 theother partners would be entitled to reject the goods, upon detection by them of the defect.

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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 forthe acts of the firm done while he is a partner. The expression ‘act of firm’ connotes anyact or omission by all the partners or by any partner or agent of the firm, which gives riseto a right enforceable by or against the firm. Again in order to bring a case underSection 25, it is necessary that the act of the firm, in respect of which liability is bought tobe enforced against a party, must have been done while he was a partner. Thus, wherecertain persons were found to have been partners in a firm when the acts constituting aninfringement of a trade mark by the firm took place, it was held that they were liable fordamages arising out of the alleged infringement, it being immaterial that the damagesarose after the dissolution of the firm.

(ii) Liability for tort or wrongful act : The firm is liable to the same extent as the partner forany loss or injury caused to a third party by the wrongful acts of a partner, if they aredone 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 thecategories mentioned in Section 26, the fact that the method employed by the partner indoing it was unauthorised or wrongful would not affect the question. Furthermore, all thepartners in a firm are liable to a third party for loss or injury caused to him by the negligentact of a partner acting in the ordinary course of the business. For example, one of the twopartners in coal mine acted as a manager was guilty of personal negligence in omitting tohave the shaft of the mine properly fenced. As a result thereof, an injury was caused to aworkman. 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 personand misapplies it or (b) where a firm, in the course of its business, received money orproperty from a third person and the same is misapplied by a partner, while it is in thecustody 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 outclearly an important point of distinction between the two categories of cases of misapplicationof money by partners. Clause (a) covers the misapplication of money or property belonging toa third party made by the partner receiving the same. For this provision to be attracted, it is notnecessary that the money should have actually come into the custody of the firm. On the otherhand, the provision of clause (b) would be attracted when such money or property has comeinto the custody of the firm and it is misapplied by any of the partners. The firm would beliable in both the cases.

If receipt of money by one partner is not within the scope of his apparent authority, his receiptcannot be regarded as a receipt by the firm and the other partners will not be liable, unless themoney received comes into their possession or under their control.

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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 partnershiprelationship is based on mutual confidence, the assignee of a partner’s interest by sale, mortgageor otherwise cannot enjoy the same rights and privileges as the original partner. The SupremeCourt has held that the assignee will enjoy only the rights to receive the share of the profits ofthe 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 withthe conduct of the business, (b) to require accounts, or (c) to inspect books of the firm. Heis only entitled to receive the share of the profits of the transferring partner and he isbound to accept the profits as agreed to by the partners, i.e., he cannot challenge theaccounts.

(2) On the dissolution of the firm or on the retirement of the transferring partner, the transfereewill be entitled, against the remaining partners: (a) to receive the share of the assets of thefirm to which the transferring partner was entitled, and (b) for the purpose of ascertainingthe 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 apartner in a firm without the consent of all the partners. A partner cannot by transferring hisown interest, make anybody else a partner in his stead, unless the other partners agree toaccept that person as a partner. At the same time, a partner is not debarred from transferringhis interest. A partner’s interest in the partnership can be regarded as an existing interest andtangible property which can be assigned.

As a general rule, the partners are at liberty to determine their rights and obligation per se. (asbetween themselves) by means of a contract between them. It follows that an agreement betweenpartners which enables one either to introduce a new partner in the firm (over and above theexisting 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 tosubstitute another person in his stead, then he will not be liable for any acts of the firmsubsequent to a valid transfer of his share and serving notice of it on his copartners. Thiswould, in effect, by tantamount to his retirement from the firm and hence his rights and liabilitieswould be governed by Section 32 of the Act.

3.20 LEGAL CONSEQUENCES OF PARTNER COMING IN ANDGOING OUT (SECTIONS 31-38)

Introduction of new partner (Section 31) : As we have studied earlier, subject to a contractbetween partners and to the provisions regarding minors in a firm, no new partners can beintroduced into a firm without the consent of all the existing partners. The liabilities of the newpartner ordinarily commence from the date when he is admitted as a partner, unless he agreesto be liable for obligations incurred by the firm prior to the date. The new firm, including thenew 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.

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The creditor’s consent is necessary in every case to make the transaction operative. Novation isthe technical term in a contract for substituted liability, of course, not confined only to case ofpartnership. But a mere agreement amongst partners cannot operate as Novation. Thus anagreement between the partners and the incoming partner that he shall be liable for existingdebts 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 theother partners; (ii) by virtue of an express agreement between the partners; or (iii) in the case ofa 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 hisretirement until public notice of his retirement has been given either by himself or by otherpartners. But the retired partner will not be liable to any third party if the latter deals with thefirm 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 mayadvertise such business, but subject to contract to the contrary, he cannot use the name ofthe firm or represent himself as carrying on the business of the firm or solicit customers ofthe firm he has left [Section 36(1)]. Although this provision has imposed some restrictionson an outgoing partner, it effectively permits him to carry on a business competing withthat of the firm. However, the partner may agree with his partners that on his ceasing tobe so, he will not carry on a business similar to that of the firm within a specified period orwithin specified local limits. Such an agreement will not be in restraint of trade if therestraint is reasonable [Section 36(2)]. A similar rule applies to such an agreement of saleof 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 ofthe firm, including goodwill. It has been held that in the absence of evidence of anyuniform usage to the contrary, the assets (property) should be taken at their fair valueto the firm at the date of the account and not at their value as appearing in thepartnership.

(b) An outgoing partner, where the continuing partners carry on business of the firmwith the property of the firm without any final settlement of accounts with him, isentitled to claim from the firm such share of the profits made by the firm, since heceased 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 ofhis share in firm’s property (Section 37).

(c) However, if by a contract between the partners, an option has been given to thesurviving or continuing partners to purchase the interest of the outgoing partner andthe option is duly exercised, the outgoing partner or his estate will not be entitled toany further share of the profits. If on the other hand, any partner who assumes to actin exercise of the option, does not in all material respects comply with the termsthereof, 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 partnercontinues to be liable to third party for acts of the firm after his retirement until public notice ofhis retirement has been given either by himself or by any other partner. But the retired partnerwill not be liable to any third party if the latter deals with the firm without knowing that theformer was partner [Sections 32 (3) and (4)].

The liability of a retired partner to the third parties continues until a public notice of his retirementhas been given. As regards the liability for acts of the firm done before his retirement, theretiring partner remains liable for the same, unless there is an agreement made by him with thethird party concerned and the partners of the reconstituted firm. Such an agreement may beimplied by a course of dealings between the third party and the reconstituted firm after he hadknowledge of the retirement [Section 32 (2)].

Expulsion of a partner (Section 33) : A partner may not be expelled from a firm by a majorityof partners except in exercise, in good faith, of powers conferred by contract between thepartners. It is, thus, essential that: (i) the power of expulsion must have existed in a contractbetween 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 notdeemed 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 apartner 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 resultin dissolution of the firm. The invalid expulsion of a partner does not put an end to thepartnership 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 businesssuccessfully for the past several years. Spouses of A and B fought in ladies club on their personalissue and A’s wife was hurt badly. A got angry on the incident and he convinced C to expel Bfrom 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 apartner from the firm.

A partner may not be expelled from a firm by a majority of partners except in exercise, in goodfaith, of powers conferred by contract between the partners. It is, thus, essential that : (i) thepower of expulsion must have existed in a contract between the partners; (ii) the power hasbeen exercised by a majority of the partners; and (iii) it has been exercised in good faith. If allthese conditions are not present, the expulsion is not deemed to be in bonafide interest of thebusiness of the firm.

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The test of good faith as required under Section 33 (1), Indian Partnership Act, 1932 includesthree 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 PartnerB is not valid.

In this context, you should also remember that provisions of Sections 32 (2), (3) and (4) whichwe have just discussed, will be equally applicable to an expelled partner as if he was a retiredpartner.

Insolvency of a partner (Section 34) : When a partner in a firm is adjudicated an insolvent, heceases to be a partner on the date of the order of adjudication whether or not the firm isthereby dissolved. His estate (which thereupon vests in the official assignee) ceases to be liablefor any act of the firm done after the date of the order, and the firm also is not liable for any actof such a partner after such date (whether or not under a contract between the partners thefirm is dissolved by such adjudication).

You must also note that ordinarily but not invariably, the insolvency of a partner results indissolution of a firm; but the partners are competent to agree among themselves that theadjudication 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 deathof 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 rulein regard to the dissolution of the partnership, by death of partner is subject to a contractbetween the parties and the partners are competent to agree that the death of one will nothave the effect of dissolving the partnership as regards the surviving partners unless the firmconsists of only two partners. In order that the estate of the deceased partner may be absolvedfrom liability for the future obligations of the firm, it is not necessary to give any notice either tothe 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 firmordered goods in X’s lifetime; but the delivery of the goods was made after X’s death. In such acase, X’s estate would not be liable for the debt; a creditor can have only a personal decreeagainst the surviving partners and a decree against the partnership assets in the hands ofthose partners. A suit for goods sold and delivered would not lie against the representatives ofthe 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 theIndian Partnership Act provides that a continuing guarantee given to a firm or to third partyin respect of the transaction of a firm is, in the absence of an agreement to the contrary, revokedas to future transactions from the date of any change in the constitution of the firm. Youshould note that the above rule is subject to an agreement to the contrary. The agreement, ifany, to the contrary required to displace the effect of Section 38, must be clear.

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3.21 SUMMARYThe mutual rights and duties of partners are regulated by the contract between them. Suchcontract need not always be express, it may be implied from the course of dealing between thepartners. (Section 11). Section 12 gives rules regulating the conduct of the business by thepartners and Section 13 lay down rules of mutual rights and liabilities. Sections 14 to 17 alsocontain particular rules which become useful and important while determining the relationsof partners to one-another. What is essential to note, however, is that all these rules are subjectto contract between the parties.

As regards third parties, a partner is the agent of the firm for all purposes within the scope ofthe partnership concern. His rights, powers, duties and obligations are in many respects governedby the same rules and principles which apply to the agent. Generally, he may pledge or sell thepartnership property; he may buy goods on account of the firm; he may borrow money, contractdebt 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 negotiablepapers in the name and account of the firm. The implied authority of the partner to bind thefirm is restricted to acts usually done in the business of the kind carried on by the firm. He isalso empowered under the Act to do certain acts in an emergency so as to bind the firm. Thefirm, however, is bound only by those acts of a partner which were done by him in his capacityas a partner.

A partner may in some circumstances become liable on equitable grounds for obligationsincurred by a copartner in doing acts in excess of his authority, real or implied. He may alsobecome liable for an unauthorised acts of his copartner on the ground of estopple.

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CHAPTER – 3

Unit 3

Registrationand

Dissolutionof a Firm


ACT, 1932

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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 andthe 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 andthe effect of the dissolution upon rights and liabilities of various parties.

3.22 MODE OF EFFECTING REGISTRATIONThe registration of a firm may be effected at any time by sending by post or delivering to theRegistrar, of the area in which any place of business of the firm is situated or proposed to besituated, a statement in the prescribed form. It is not essential that the firm should be registeredfrom the very beginning. When the partners decide to get the firm registered, as per the provisionsof Section 58 of the Partnership Act, they have to file the statement in the prescribed form. Thestatement must be accompanied by the prescribed fee stating (i) the firm’s name, (ii) the principalplace of business, (iii) the names of its other places of business, (iv) the date of joining of eachpartner, (v) the names in full and the permanent addresses of the partners, and (vi) the durationof the firm. The aforesaid statement is to be signed by all the partners or by their agents speciallyauthorised 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 shallfile the statement.

Subsequent alterations as alterations in the name, place, constitution, etc., of the firm that mayoccur 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 filethe statement. Then he shall issue a certificate of Registration. However, registration is deemedto be complete as soon as an application in the prescribed form with the prescribed fee andnecessary details concerning the particular of the partnership is delivered to the Registrar. Therecording of an entry in the register of firms is a routine duty of Registrar.

3.23 CONSEQUENCES OF NON-REGISTRATIONUnder the English Law, the registration of firms is compulsory. Therefore, there is a penalty fornon-registration of firms. But the Indian Partnership Act does not make the registration offirms compulsory nor does it impose any penalty for non-registration. However, under Section69, non-registration of partnership gives rise to a number of disabilities which we shall presentlydiscuss. Although registration of firms is not compulsory, yet the consequences or disabilities ofnon-registration have a persuasive pressure for their registration. These disabilities briefly areas follows:


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(i) The firm or any other person on its behalf cannot bring an action against the third partyfor breach of contract entered into by the firm, unless the firm is registered and the personssuing 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 thepartner can claim any set off, if the suit be valued for more than Rs. 100 or pursue otherproceedings to enforce the rights arising from any contract.

(iii) A partner of an unregistered firm (or any other person on his behalf) is precluded frombringing legal action against the firm or any person alleged to be or to have been a partnerin the firm. But, such a person may sue for dissolution of the firm or for accounts andrealisation 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 InsolvencyAct, 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. In1972, B and C sue X in the name and on behalf of A & Co., without fresh registration. Now thefirst 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 carriedon after its dissolution by death of one of the partners), A suit can be filed by the remainingpartners in respect of any subsequent dealings or transactions without notifying to the Registrarof Firms, the changes in the constitution of the firm, it was decided that the remaining partnersshould sue in respect of such subsequent dealings or transactions even though the firm wasnot 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 requirementsof Section 69 (2) of the Act namely, (i) the suit must be instituted by or on behalf of the firmwhich had been registered; (ii) the person suing had been shown as partner in the register offirms. In view of this position of law, the suit is in the case by B and C against X in the nameand 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 anew 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 toRegistrar who shall make a record of the notice in the entry relating to the firm in the Registerof firms. Therefore, the firm cannot sue as D’s (new partner’s) name has not been entered inthe register of firms. It was pointed out that in the second requirement, the phrase “personsuing” means persons in the sense of individuals whose names appear in the register as partnersand 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 thepartners of the firm. But when only one of the partners retires or becomes incapacitated fromacting as a partner due to death, insolvency or insanity, the partnership, i.e., the relationship

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between such a partner and other is dissolved, but the rest may decide to continue. In suchcases, there is in practice, no dissolution of the firm. The particular partner goes out, but theremaining partners carry on the business of the firm. In the case of dissolution of the firm, onthe other hand, the whole firm is dissolved. The partnership terminates as between each andevery 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, suchas: (i) efflux of time; (ii) completion of the venture for which it was entered into; (iii) deathof a partner; (iv) insolvency of a partner. In case of death, it is to be noted that a contraryagreement may be made by the partners only if their number exceeds two. If there areonly two partners the only result of either’s death will necessarily be the dissolution of thefirm.

(e) by a partner giving notice of his intention to dissolve the firm, in case of partnership at willand the firm being dissolved as from the date mentioned in the notice, or if no date ismentioned, 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) permanentincapacity of a partner to perform his duties as such; (iii) misconduct of a partner affectingthe business; (iv) wilful or persistent breaches of agreement by a partner; (v) transfer orsale of the whole interest of a partner; (vi) improbability of the business being carried onsave at a loss; (vii) the Court being satisfied on other equitable grounds that the firmshould 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 ifdone before the dissolution, until public notice is given of the dissolution. For example, Xand 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 thedissolution. On December 20, X borrowed in the firm’s name a certain sum of money fromR, who was ignorant of the dissolution. In such a case, Y also would be liable for theamount. To this rule, there are some exceptions. Even where notice of dissolution has notbeen 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., apartner, 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 hisrepresentative shall have right, against the others (i) to have property of the firm applied

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in payment of the debts of the firm, and (ii) to have the surplus distributed amongst thepartners or their representatives according to their respective rights.

(c) Extent of continuing authority of the partners after dissolution : The authority of a partner tobind the firm and other mutual rights and obligations continue: (i) so far as may be necessaryto wind up the firm, (ii) to complete the unfinished transactions pending at the date ofdissolution and no other.

(d) Settlement of partnership accounts: (a) In settling the accounts of a firm after dissolution, thefollowing rules, laid down by Section 48 of the Indian Partnership Act, subject to anagreement by the partners, must be observed.

(i) Losses including deficiencies of capital are to be paid first out of profits then out ofcapital and lastly by the partners individually in the proportions in which they wereentitled to share profits. For example, X and Y were partners sharing profits andlosses equally and X died. On taking partnership accounts, it transpired that hecontributed Rs. 6,600 to the capital of the firm and Y only Rs. 400. The assets amountedto Rs. 2,000. The deficiency (Rs. 6,600 + Rs. 400 – Rs. 2,000 i.e. Rs. 5,000) would haveto be shared equally by Y and X’s estate. If in this case, the agreement was that ondissolution the surplus assets would be divided between the partners according totheir respective interests in the capital and on the dissolution of the firm a deficiencyof capital was found, then the assets would be divided between the partners inproportion to their capital with the result that X’s estate would be the main loser. Itmay be noted that prima facie, accounts between the partners shall be settled in themanner prescribed by partnership agreement. The above-mentioned rules apply subjectto 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 modein which losses will have to be borne eventually or the manner in which capital oradvances will have to be paid to any partner, such an intention must be given effectto. 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 updeficiencies 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 advancesas 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 whichthey were entitled to share profits.

The significance of the foregoing provisions is that if the assets of the firm are not sufficientto pay off the liabilities of the firm including the amount due to each partner on account ofcapital, each partner would individually be liable to contribute towards the losses, includingdeficiencies 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 inthe profits and losses of the firm. In a suit between them for dissolution and accounts, it isascertained 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 firmand advances made by the partners, as distinguished from their contributions to the capitalof the firm, are Rs. 7,000.

The deficiency of capital (which must be regarded as loss) being Rs. 9,000, each partnermust contribute to the assets an equal share of the deficiency, i.e. Rs. 3,000. After this isdone, the assets then available, Rs. 7,000 + Rs. 9,000 or Rs. 16,000 will be distributedamong the partners with the result that each will have suffered a loss of Rs. 3,000. Inactual practice, it will not be necessary for A and B to pay Rs. 3,000 each but the matterwill be settled on the basis of notional contributions so that C whose capital is Rs. 1,000only 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 ofthe firm, and if there is any surplus, then the share of each partner shall be applied to thepayment of his separate debts or paid to him; (ii) the separate property of any partnershall be applied first in the payment of his separate debts and surplus, if any, in the paymentof debts of the firm (Section 49).

In terms of Section 51, the partner paying a premium on entering into partnership for afixed period becomes entitled to the return of an appropriate portion of the premium. Weshall discuss the provisions of Section 51 later in detail.

(e) Personal profits earned after dissolution (Section 50) : Where a firm is dissolved by the deathof a partner and the surviving partners or the surviving partners along with therepresentatives of the deceased partner carry on business of the firm, any personal profitsby 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 anagreement to the contrary, each partner or his representative is entitled to restrain (byinjunction) other partners from carrying on a similar business in the name of the firm orfrom using the property of the firm for their own benefit till the affairs of the firm arecompletely wound up.

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

(i) by the death of one of the partners;

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(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 orany part thereof.

For example, X and Y become partners for 10 years; X pays Y a premium of Rs. 2,000. At theend of 8 years a quarrel arises between X and Y and a dissolution is declared. In such a case, Xwill 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 partnershipis dissolved:

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

(ii) Rescission of partnership for fraud act. (Section 52) : A partnership agreement is a contractbases on amount of confidence. In the case of fraud or misrepresentation practised by onepartner or the other, the party misled has the right to resign the partnership agreementand is entitled to; (i) a lien on the surplus, after payment of firm’s debts, for any sum paidby him for purchase of a share in the firm or for any capital contributed by him: (ii) to rankas 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 thedebts and liabilities of the firm.

Goodwill on dissolution (Section 55) : What the purchaser of goodwill acquires is (i) the right tocarry on the same business under the old name and (ii) to represent himself to the customers ofthe old firm as the successor in the business of the old firm. The partners selling the goodwill ofa firm can : (i) carry on a similar business; (ii) also compete with the business sold by them topurchaser and (iii) advertise their business in such manner as they deem fit, but, subject to anagreement to the contrary, they cannot use the firm name, represent themselves as carrying onthe 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 tobe given under this Act, it must be given by publication in the Official Gazette and in at leastone vernacular newspaper circulating in the district where the firm to which it relates, has itsplace or principal place of business.

In the case of registered firms, apart from the aforesaid notification, a notice is also required tobe served on the Registrar of Firms under Section 63 where the matters relate to (a) the retirementor 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 ofpartnership.

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3.27 SUMMARYRegistration of a firm is effected by the Registrar of Firms by recording in the Register of Firmsan entry of the statement relating to registration furnished to him. The Act does not makeregistration of the firm compulsory, yet the effect of the rules relating to the consequences ofnon-registration is such as practically necessitates the registration of the firm at one time orother. Certain disabilities have been imposed on partners of an unregistered firm seeking toenforce certain claims in the Civil Courts. A firm which is not registered is not able to enforceits claim against third parties in the Civil Courts; and any partner who is not registered is notable to enforce his claim either against third parties or against the fellow partners. Anunregistered partner may, however, sue for the dissolution of the firm or for accounts only ifthe firm is already dissolved.

Dissolution of a firm means the breaking up or extinction of the relationship which subsistedbetween all the partners of the firm under various circumstances contemplated by Act. Apartnership can be dissolved only in accordance with the manner prescribed under the Act.

3.28 MULTIPLE CHOICE QUESTIONS1. 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

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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.

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19. Which of the following is not the right of a partner i.e., which he cannot claim as amatter 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 theexpulsion 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 which of the following grounds, a partner may apply to the court for dissolution ofthe firm?(a) Insanity of a partner (b) Misconduct of a partner(c) Perpetual losses in business (d) All of the above.

29. Suppose you have entered into a partnership agreement with me and the partnership-deed 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.

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30. A partnership at will is one1. Duration not fixed2. Duration fixed3. Dissolved at any time4. Can be dissolved only on the happening of an event

(a) 1 & 2 (b) 2 & 3 (c) 3 & 4 (d) 1 & 3

31. The position of a minor in a partnership firm is to be determined taking into account1. The Indian Contract Act, 18722. The Indian Partnership Act, 19323. Minor’s agreement4. 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 partner1. He cannot become a full fledged partner in a new firm2. He can become a full fledged partner in an existing firm3. He has to bear all liabilities like other partners4. 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. Agreement2. Registration3. Test of Mutual Agency4. 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 followingterms, namely, Y is to pay X Rs. 100 per mile per annum, and X and Y are to share thecosts of repairing and replacement of the cars, and to divide equally between them theproceeds 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 himand sold, and that they shall share in the resulting profit or loss. The contract between Xand Y is that of(a) Partnership(b) Association of goldsmith(c) Contract for labour work(d) Contract of Sale

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37. X and Y agree to work together as carpenters but X shall receive all profit and shall paywages 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 (a) Partnership at Will

done within the scope(ii) No duration for partnership (b) Particular Partnership(iii) Duration for a period (c) Sub-Partner(iv) Share of profits by an outsider (d) Implied Authority

39. Match the following:(i) Partnership (a) Arises by operation of law(ii) Co-ownership (b) Comes into existence only after

registration.(iii) Hindu Undivided Family (c) Can arise by agreement or otherwise(iv) Company (d) Arise by way of an agreement only

40. Match the following:(i) Partnership business carried on by all (a) Evidence of Partnership

or by any one of them acting for all(ii) Sharing of Profits (b) Not necessary(iii) Registration of Firm (c) Does not arise form operation of law(iv) Contract of Partnership (d) Test of Partnership.

41. Match the following:(i) Full Fledged Partner (a) Does not disclose his name(ii) Sleeping Partner (b) Known to outside world(iii) Partner by holding out (c) Minor(iv) Partner to benefits of partnership (d) Active Partner


1. (d) 2. (c) 3. (d) 4. (d) 5. (d)6. (c) 7. (a) 8. (a) 9. (a) 10. (c)11. (a) 12. (a) 13. (b) 14. (b) 15. (c)16. (a) 17. (b) 18. (d) 19. (d) 20. (c)21. (d) 22. (b) 23. (d) 24. (a) 25. (d)26. (d) 27. (d) 28. (d) 29. (b) 30. (d)31. (a) 32. (b) 33. (c) 34. (a) 35. (a)36. (a) 37. (d)38. (i) (d) (ii) (a) (iii) (b) (iv) (c)39. (i) (d) (ii) (c) (iii) (a) (iv) (b)40. (i) (d) (ii) (a) (iii) (b) (iv) (c)41. (i) (d) (ii) (a) (iii) (b) (iv) (c)

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ADDITIONALQUESTION

BANK

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INDIAN CONTRACT ACT, 1872


a. An agreement enforceable by law is a contractb. An agreement is an accepted proposalc. An agreement can only consist of an offerd. An agreement can only consist of an acceptance

2. The Indian Contracts Act, 1872 applies to the ____________

a. Whole of India including Jammu b. Whole of India excluding Jammuc. Whole of India including Kashmir d. Whole of India excluding Kashmir

3. Which of the following are legal requirement of a valid offer?

a. It must be communicated to the other partyb. It must have clear and definite termsc. It must be made specific to a person and not public at larged. It must express offeror’s final willingness

4. Which of the following are legal requirement of a valid acceptance?a. It must be communicatedb. It must be presumed from silence if not communicated within specified timec. It must be absolute and unconditionald. 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 lawfulc. 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. Minorc. 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 considerationb. Agreement with inadequate consideration, if inadequacy is not supported by free

consent.c. Agreement the meaning of which is certaind. 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 contractb. It must be certainc. The performance of the contract must be conditionald. 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 partyb. Every contract is an agreement, but every agreement is not contractc. “Quantum meruit” means void from the beginningd. Social agreements are legally enforceable.


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ADDITIONAL QUESTION BANK


11. Match the following:(i) Agreement (a) Contract(ii) Agreement enforceable by law (b) Void ab initio(iii) Agreement not enforceable by law (c) Offer + Acceptance(iv) Illegal contract (d) Void contract

12. Match the following:(i) Voidable Contract (a) Obligation created by law(ii) Express Contract (b) Both parties due to perform their

obligation(iii) Quasi Contact (c) Terms are stated in writing(iv) Bilateral Contract (d) Enforceable by law at the will of one

party13. 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 event17. Match the following:

(i) Novation (a) When all or some of the terms of the contract arecancelled.

(ii) Rescission (b) When all or some of the terms of the contract are modifiedby 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 isposted 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 followingquestions.

18. When is the communication of the offer complete?a. 1st January b. 6th January

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c. 7th January d. 10th January19. When is the communication of the acceptance complete as against acceptor?

a. 6th January b. 10th Januaryc. 11th January d. 14th January

20. If X sends a telegram on 7th January revoking his offer, and his telegram reaches Y beforethe letter of the acceptance is posted. Is revocation of offer valid?a. It is valid b. It is invalidc. It is uncertain d. None of the above

21. If Y sends a telegram on 13th January revoking his acceptance, and his telegram reaches Xbefore the letter of the acceptance is received by Y. Is revocation of acceptance valid?a. It is valid b. It is invalidc. It is uncertain d. None of the aboveX agrees to sell to Y “one hundred tons of oil”. State the position of this agreement in thefollowing cases.

22. If X, who is a dealer in coconut oil only, decides to sell @ Rs. 10,000/ton.a. Valid contract b. Void contractc. Voidable contract d. Uncertain contract

23. If X is a dealer in coconut oil and price is not fixeda. Valid contract b. Void contractc. Voidable contract d. Uncertain contract

24. If X is a dealer in coconut oil and price is to be fixed by Za. Valid contract b. Void contractc. Voidable contract d. Uncertain contract

25. If X, who is a dealer in coconut oil agrees to sell at Rs. 10,000/ton or Rs. 11,000/tona. Valid contract b. Void contractc. Voidable contract d. Uncertain contract

26. If X is a dealer in coconut oil and mustard oila. Valid contract b. Void contractc. Voidable contract d. Uncertain contract

X of Mumbai agreed to sell 1000 bales of cotton @ Rs. 999/bale and to deliver within afortnight at buyers godown at Karachi. X failed to supply these goods. State the legalposition 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 mistakeb. Void on the ground of mutual mistakec. Void on the ground of supervening impossibilityd. Void on the ground of commercial impossibility

28. If X knew the goods were destroyed by fire at the time of agreementa. Void on the ground of X’s mistakeb. Voidablec. Void but X should compensate the buyer for any loss that it sustains through non-

performanced. Void on the ground of supervening impossibility

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29. If war is declared between India & Pakistana. Void on the ground of supervening impossibilityb. Void on the ground of non-performancec. Voidabled. 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/balebecause of unexpected increase in the cost of material and laboura. Void on the ground of supervening impossibilityb. Void on the ground of non-performancec. Void on the ground of third-party defaultd. Void on the ground of commercial impossibility

31. If these goods could not be delivered because of strike of transport operatorsa. Void on the ground of supervening impossibilityb. Void on the ground of non-performancec. Void on the ground of third-party defaultd. Void on the ground of commercial impossibility

Answers:1. a, b 2. b, d 3. a, b, d4. a, c, d 5. a, b, c 6. b, c, d7. a, c, d 8. a 9. a, c, d10. c, d. 11. i– c, ii – a, iii – d, iv – b 12. i– d, ii – c, iii – a, iv – b13. i– d, ii – c, iii – b, iv – a 14. i– c, ii – d, iii – a, iv – b15. i– c, ii – a, iii – d, iv – b 16. i– d, ii – a, iii – b, iv – c17. i– d, ii – a, iii – b, iv – c18. b 19. d 20. a21. a 22. a 23. a24. a 25. b 26. b27. b 28. c 29. a30. d 31. b

INDIAN PARTNERSHIP ACT, 1932

32. The essential elements of Partnership does not include:

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

33. The partnership relation does not exist whena. 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.

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35. The general rights of continuing partners includea. 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 thea. 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, whena. 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 witha. 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 thata. 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 (a) Lends his name to the firm, without any real interest.(ii) Sleeping Partner (b) Need not give public notice of his retirement.

(iii) Nominal Partner (c) Third -person with whom a partner agrees to share hisprofits.

(iv) Sub Partner (d) Takes active part in the conduct of business.43. Match the following:

(i) Right of partner (a) To open a bank account on behalf of firm in own name.(ii) Duty of partner (b) To carry on the business of the firm to the utmost advantage.

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(iii) Implied authority (c) Remuneration for taking part.of partner

(iv) Statutory restriction (d) Sell the goods of the firm.44. 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.

45. 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.

46. 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.

47. 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 personsP and Q jointly acquired a cyber café on 01.01.2007. Each of them contributed a half ofthe expenses incurred for the purchase of computers and furniture. They agreed to shareprofits equally.

48. 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. Yesb. 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. 01.03.2007c. 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 on01.03.2007. Will the firm succeed?a. No, because the sum does not exceeds Rs. 1,000.b. No, because the registration is still pending.

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c. No, as Mr.S has not acknowledged the debt.d. Yes.

52. 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 dissolvedAmar, Akbar and Anthony jointly started business of supplying cottons and agreed toshare profits equally through oral agreement on 01.03.2007. Amar and Akbar are activepartners, while Anthony is a sleeping partner.

53. 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.

54. If Akbar becomes insane, and Anthony files a suit. Can the court pass an order fordissolution?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.

55. If Amar becomes insane, and his friend files a suit. Can the court pass an order fordissolution?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.

56. If Anthony becomes insane, and Akbar files a suit. Can the court pass an order fordissolution?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. b, d 41. b, c, d 50. c33. a, b, c 42. i – d, ii – b, iii – a, iv – c 51. b34. a, b, d 43. i – c, ii – b, iii – d, iv – a 52. b35. b, c 44. i – c, ii – d, iii – a, iv – b 53. d36. a, d 45. i – a, ii – c, iii – d, iv – b 54. d37. a, d 46. i – b, ii – d, iii – c, iv – a 55. d38. a, c, d 47. i – b, ii – a, iii – d, iv – c 56. d39. a, b, c 48. c 57.40. b, d 49. b

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SALE OF GOODS ACT, 1930

58. Which of the following is the requirement of a valid contract for Sale?a. There must be two partiesb. The subject matter should be goodsc. There must be atleast two partiesd. 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 dateb. No delivery of goods and price to be paid at some future datec. Immediate delivery of goods and immediate payment of priced. 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 goodsc. Ascertained goods d. Contingent goods

61. Under the provision ‘goods perishing before the making of the contract’, contract of saleof goods is void ifa. The sale is of specific goodsb. Contract is of ‘agreement to sell’ and not actual salec. Goods perished before the contract is maded. 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 instalmentsb. He may purchase the goods without paying all the agreed instalmentsc. Return the goods at any time and stop further payment of instalmentsd. 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 purchasec. 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 goodsb. Actionable claims is a subject matter of contract of salec. A contract for the sale of future goods is always an agreement to selld. 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

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67. Match the column:(i) Condition as to title (a) Supply of good fit for the buyer.(ii) Condition as to description (b) Seller having right to sell the good.(iii) Condition as to quality (c) Goods having future viability.(iv) Condition as to merchantability (d) Goods corresponding to its description.

68. Match the column:(i) Condition as to sample (a) Goods sold must be fit for

consumption.(ii) Condition as to sample & description (b) Goods corresponding to the sample

seen.(iii) Condition as to description (c) Goods correspond to sample &

description(iv) Condition as to wholesomeness (d) Goods corresponding to its description.

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 goodsProblem: A agrees to sell 50 Refrigerators to B, at a price to be determined by C. 30 of 50Refrigerators are delivered to B.

73. B agreed to the above agreement, without asking the dealer whether the refrigerators arefit 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.

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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.

75. 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.

76. If 20 refrigerators are stolen at time of making contract, the abovesaid contract becomesa. Void, because the goods have perished.b. Void, because the contract was indivisible.c. Voidable at the option of Bd. Partly Void and partly voidable at the option of BProblem: A delivers bags of cements to B on ‘Sale on approval basis’ for 10 days. Thecement became stone due to heavy rainfall (without any fault of B) on the fifth day itself.

77. The loss is to be borne bya. 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.

78. 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.

79. 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.

80. If B neither returns nor rejects the bags till the tenth day and eventually the damageoccurs 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 65. i- d, ii – c, iii – a, iv – b 72. i – b, ii – d, iii – a, iv – c59. a, c 66. i – b, ii – d, iii – a, iv – c 73. a60. b, d 67. i – b, ii – d, iii – a, iv – c 74. d61. a, c 68. i – b, ii – c, iii – d, iv – a 75. c62. a, c 69. i – d, ii – c, iii – b, iv – a 76. d63. a, c, d 70. i – b, ii – d, iii – a, iv – c 77. a64. a, c 71. i – c, ii – d, iii – b, iv – a 78. b 79. a 80. d

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Documents

MERCANTILE LAWS · PDF fileThe Indian Contract Act, 1872 : This is one of the oldest in the Indian law regime, passed by the ... 1.23 Distinction between Succession and Assignment