Class –.LL.B. I I SEM.

Subject –
Contract Law - II

CONTRACT LAW
- II

UNIT I:
INDEMNITY
 The Concept
 Need for indemnity to facilitate
commercial transactions
 Method of creating indemnity
obligations
 Definition of indemnity
 Nature and extent of liability of the
indemnifier
 Commencement of liability of the
indemnifier
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 Situations of various types of

indemnity creations
 Documents agreements of
indemnity
 Nature of indemnity clauses
 Indemnity in case of International
transactions
 Indemnity by Governments during
interstate transactions
GUARANTEE
 The concepts
 Definition of guarantee: as
distinguished from indemnity
 Basic essentials for a valid
guarantee contract
 The place of consideration and the
criteria for ascertaining the
existence of consideration in
guarantee contracts
 Position of minor and validity of
guarantee when minor is the
Class –.LL.B. I I SEM. Subject –
Contract Law - II

INDEMNITY
INTRODUCTION
 In common parlance indemnity is often used as a synonym for compensation or
reparation.
 As a legal concept, it has a more specific meaning. A contract of indemnity is a
contract that keeps a person who has engaged into or is about to enter into a contract
or incur any other liability, insured against loss, regardless of third-party default or
not.
 Indemnity is insurance that protects you from potential losses. The word indemnity
comes from the Latin word indemnis, which means ‘unharmed’ or ‘loss-free.’ In its
broadest definition, it refers to reimbursing a person for any losses he or she has
suffered. The need to pay occurs for a variety of reasons, including an agreement,
duties originating from the parties’ relationships, or statutory requirements.
 An indemnity agreement should also have the basic elements of a contract, such as
free assent, lawfulness, and so on. As a result of indemnification, the promisor is
obligated to protect the promisee from any misfortune caused by the promisor’s own
actions or the actions of a third party. Due to the rule that one person cannot complete
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all exchanges on their own, he should have the opportunity to work with his business
where he is addressed by someone else when managing a third individual.
 In English law, indemnification refers to a commitment to protect a person from the
consequences of their actions, which might be explicit or implicit. Indemnity is not
restricted to contract cases. Between a principal and an agent, an employer and an
employee, and so forth, an indemnification right may exist.
 Example: A contracts to indemnify B against the consequences of any proceedings
which C may take against B in respect of a certain sum of Rs 200. This is a contract of
indemnity.
BASIC DEFINITIONS
Indemnity
A contract of indemnity is defined by Section 124 of the Indian Contract Act as “a contract
by which one party promises to rescue the other from loss caused to him by the promisor’s
behaviour, or by the action of any other person.” The indemnifier is the person who provides
the indemnity, while the indemnity-holder or indemnified is the person who receives the
indemnification.
Indemnifier and Indemnify-Holder
Class –.LL.B. I I SEM. Subject –
Contract Law - II
The person who promises to make good the loss is called the 'indemnifier'. The person
whose loss is to be made good is called 'indemnity-holder'. The rights and duties of both
the Indemnifier and Indemnify-Holder are mentioned under Sections 124 and 125 of the
Indian Contract Act, 1872.
Example: A promises to deliver certain goods to B for Rs. 2,000 every month. C comes in
and promises to indemnify B’s losses if A fails to so deliver the goods. This is how B and C
will enter into contractual obligations of indemnity.
Here, C is the Indemnifier and B is the Indemnity Holder.
NATURE OF CONTRACT OF INDEMNITY
A contract of indemnification can be express or implicit, depending on the circumstances,
though implied indemnity does not appear to be covered under Section 124 of the Indian
Contract Act.
A broker in possession of a government promissory note forged an endorsement on it and
gave it to a bank. The bank applied for and received a fresh promissory note from the Public
Debt Office in good faith. Meanwhile, the genuine owner filed a conversion lawsuit against
the Secretary of State, who then sued the bank on the basis of an implied indemnification. It
was decided that: “ When a person performs an act at the request of another, and the conduct
is not inherently tortious to the knowledge of the person performing it, and the act injures the
rights of a third person, the person performing the act is entitled to an indemnification from
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the person who requested that it be done”. [Bank of India v. Secretary of State (1938) 40
BOMLR 868].
KEY FUNDAMNETALS OF CONTRACT OF INDEMNITY
1. It is a promise to compensate for or security against damage, loss or injury.
2. In wider sense it includes all contracts of insurance, guarantee. It is not a collateral but
an independent contract.
3. It is a tool for allocating risks contingent liability.
4. Indemnity clauses, amongst other things, must be clear, specific, where possible
stipulate the circumstances under which the indemnity will arise, be considered in
light of any exclusion of liability clauses found elsewhere in the agreement and state
what damages will be payable in the event of the clause being successfully invoked.
ENFORCEMENT OF CONTRACT OF INDEMNITY
1. A contract of indemnity can be enforced according to its terms.
2. Claim of Indemnity holder can include: damages, legal costs of adjudication, amount
paid under the terms of compromise
3. The measure of damages is the extent to which the promisee has been indemnified.
4. Indemnifier should ideally be informed of the legal proceedings or should be joined as
third party
5. There is no onus to show breach or actual loss.
Class –.LL.B. I I SEM. Subject –
Contract Law - II
ESSENTIALS OF CONTRACT OF INDEMNITY
1. There should be a loss then only the contract will be enforceable.
2. As stated in the definition of contract of indemnity, the loss must be caused either by
the indemnifier or any other third party.
3. There must be two parties: indemnifier and indemnity- holder.
4. It should contain the essentials of a valid contract. There should be free consent and
lawful objective.
5. It is a contingent contract as the indemnifier will be liable to pay for the loss if the
loss occurs.
6. Indemnifier is liable to pay for the loss as mentioned in terms and conditions of the
agreement. The loss caused by an act of God, accident, etc. is not considered in this.
There should be human intervention.
RIGHTS OF INDEMNIFIER
Contract Act is silent about the rights of Indemnifier. In Jaswant Singh vs The State (1965),
it was held that the rights of indemnifier are the same as the rights of surety. After paying all
damages the indemnifier takes the position of indemnity holder and has right over the
property. He is required to indemnify promisee up to the amount of losses as mentioned in
terms and conditions of the contract. He takes the position of the creditor after settling all his
claims.
1. Right to sue the third party -> As soon as the indemnifier has indemnified the
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indemnity-holder against the damages and amount of the property, he is entitled to

have full rights over the property and has the right to sue the third party for that
property too. Before paying damages to the indemnity holder, he cannot sue the third
party.
For example- A has promised B to indemnify him in case he suffers damage to his car
because of C. Afterwards when B suffers the damage because of C and asks for
money from A, A indemnifies him and gets the right over the car. Now A has a right
to sue C and claim damage.
2. Compensate losses which are covered in the deed -> The indemnifier has a right to
pay for only those losses which are covered in the contract of indemnity. In
Ramaswami Vs Muthukrishna 1967 AIR 359 High Court ordered the indemnifier
to pay the plaintiffs only for a sum of Rs. 1236/- which was the actual loss suffered by
him. The further appeal filed in Supreme Court to recover more amount from the
defendant was dismissed.
3. Right under Doctrine of Subrogation -> According to surety’s subrogation rights,
after settling the claims of the former creditor, the surety steps into the shoes of the
creditor and in certain cases is entitled to receive the whole amount from the debtor.
Similarly, indemnifier also has rights in some cases to recover the money or
possession.
DUTIES OF INDEMNIFIER
Class –.LL.B. I I SEM. Subject –
Contract Law - II
The duties of indemnifier are the rights of indemnity-holder. Section 125, states the rights of
indemnifier when sued by the third party to recover the damages, cost and all the sums as
payable by him in any suit of any matter in which indemnifier promised him to indemnify
him and he acted same as he was expected to act in case of absence of a contract of
indemnity. The indemnifier has duties against indemnity holder to:
1. Indemnify promisee for all damages -> It is the duty of indemnifier to pay for all
damages which he has promised to indemnify in any suit in respect of any of the
matter. The promisee should prove that he was compelled by law to pay damages
(Duffield v. Scott (1913) ILR 35 All 168). There is no need to prove that the loss
incurred is direct or indirect in nature.
In Nallappa Reddi vs Vridhachala Reddi And Anr. (1914) ILR 37 Mad 270 the
court ordered that it’s the duty of the indemnifier to provide the damages to the
promisee. The duty arises as soon as the decree is passed against the promisee.
In Gokuldas vs. Gulabrao AIR 1926 Nag 108, the court said that the indemnifier
cannot request that he was not the party to the suit and has the liability to indemnify
the promisee.
In Toplis v. Grane (1839), the court observed that when the act is done with the
lawful objective by the promisee and the act violates the rights of any other person,
the indemnifier has to indemnify the plaintiff against the consequences of the act
thereof.
2. Indemnify promisee against all the costs -> It is the duty of the Indemnifier to pay
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all the costs which indemnity-holder is compelled to pay in a suit where he did not
have breached the orders of the promisor. The indemnity-holder is entitled to recover
reasonably incurred costs that arise while reducing or ascertaining or resisting the
claims. The promisee is entitled to receive all expenditure which he has incurred
during the case proceedings.
In Adamson V. Jarvis (1827) 4 BING.66:29 R.R 503, Jarvis gave his cattle to
Adamson for auction. Adamson didn’t know that Jarvis was not the real owner of
cattle. As soon as the owner came to know about the auction, he claimed his cattle and
Adamson had to pay the amount of money to the real owner. Adamson suffered
damage and sued Jarvis. Court-ordered latter to pay Adamson the amount of damage
he suffered and also the cost as he was unaware of the fact that Jarvis was not the real
owner of cattle and thought that Jarvis had an implied authority.
3. Indemnify for the amount payable by the promisee in case of compromise -> If
the promisee did not act contrary to the orders of the promisor and has paid all sums
under the terms of compromise in a suit, he is entitled to receive the money from the
indemnifier.
In Kali Charan vs Durga Kunwar And Ors. (1913) ILR 35 All 168, court ordered
to recover the amount paid as a compromise from the indemnified. In
Venkatarangayya Appa Rao Vs Varaprasada Rao Naidu (1920) ILR 43 Mad
898, court said that the indemnity holder is entitled to receive all of the sums in case
of compromise if certain conditions are being fulfilled that is the compromise should
Class –.LL.B. I I SEM. Subject –
Contract Law - II
have been done in a bona fide manner, there should be no collusion in the process of
settlement and it should not have been charged as an immoral bargain.
RIGHTS OF INDEMNITY HOLDER
When parties expressly make a contract of indemnity, they can determine their own terms
and conditions. However, sometimes they may not do so. In such a case, the indemnity holder
can enforce the following rights against the indemnifier:
1. The indemnifier will have to pay damages which the indemnity holder will claim in a
suit.
2. The indemnity holder can even compel the indemnifier to pay the costs he incurs in
litigating the suit.
3. If the parties agree to legally compromise the suit, the indemnifier has to pay the
compromise amount.
DUTIES OF INDEMNITY HOLDER
Rights always come hand-in-hand with duties. The indemnity holder has some implied duties,
for instance, to comply with the terms and conditions of the contract. It must be noted that
these duties of the indemnified are the ‘rights’ of indemnifier. Thus, unless otherwise
specified in the contract, the indemnifier will not be responsible for damage in the following
conditions:
1. Duty to act prudently -> The indemnity-holder must act reasonably. If the
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indemnity-holder acts negligently, the indemnifier shall not be liable to indemnify.

2. Duty not to act to cause harm or loss -> The indemnity-holder must not intend to
deceive or cause harm to the indemnifier, and thus, must act in good faith.
3. Duty to comply with the orders of Promisor -> If the indemnity-holder acts in
contravention of the orders of the Promisor, the indemnifier will not be responsible
for such losses which arise due to non-compliance of instructions.
CONCLUSION
It is reasonable to assume that the phrase indemnity has both broad and narrow applicability.
The English concept of indemnity is broad enough to cover a promise of indemnification
against loss occurring from any cause, while the Indian Contract Act’s definition is much
more limited. In some ways, Indian law on contractual indemnities has deviated from English
law and taken its own route. However, their commonalities vastly outnumber their
differences.

GUARANTEE
Contract of Guarantee means a contract to perform the promises made or discharge the
liabilities of the third person in case of his failure to discharge such liabilities.
Class –.LL.B. I I SEM. Subject –
Contract Law - II
SECTION 126 OF INDIAN CONTRACT ACT, 1872
“A contract of guarantee is a contract to perform the promise or discharge the liability of the
defaulting party in case he fails to fulfill his promise.”
PARTIES TO CONTRACT OF GUARANTEE
There are three parties to the contract of guarantee:

SURETY PRINCIPAL CREDITOR

Surety: A surety is a person giving a guarantee
DEBTORin a contract of guarantee. A person who
takes responsibility to pay a sum of money, perform any duty for another person in case that
person fails to perform such work.
Principal Debtor: A principal debtor is a person for whom the guarantee is given in a
contract of guarantee.
Creditor: The person to whom the guarantee is given is known as the creditor.
Example: Mr. X advances a loan of 25000 to Mr. Y and Mr. Z promise that in case Mr. Y
fails to repay the loan, then he will repay the same. In this case of a contract of guarantee, Mr.
X is a Creditor, Mr. Y is a principal debtor and Mr. Z is a Surety.
CASE LAW
In P.J. Rajappan v Associated Industries (1983) the guarantor, having not signed the
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contract of guarantee, wanted to wriggle out of the situation. He said that he did not stand as a
surety for the performance of the contract. Evidence showed the involvement of the guarantor
in the deal and had promised to sign the contract later. The Kerala High Court held that a
contract of guarantee is a tripartite agreement, involving the principal debtor, surety and the
creditor. In a case where there is evidence of the involvement of the guarantor, the mere
failure on his part in not signing the agreement is not sufficient to demolish otherwise
acceptable evidence of his involvement in the transaction leading to the conclusion that he
guaranteed the due performance of the contract by the principal debtor. When a court has to
decide whether a person has actually guaranteed the due performance of the contract by the
principal debtor all the circumstances concerning the transactions will have to be necessarily
considered.
ESSENTIALS OF CONTRACT OF GUARANTEE
1. Must be made with the agreement of all the three parties -> All the three parties to
the contract i.e. the principal debtor, the creditor, and the surety must agree to make
such a contract with the agreement of each other. Here it is important to note that the
surety takes his responsibility to be liable for the debt of the principal debtor only on
the request of the principal debtor. Hence communication either express or implied by
the principal debtor to the surety is necessary. The communication of the surety with
Class –.LL.B. I I SEM. Subject –
Contract Law - II
the creditor to enter into a contract of guarantee without the knowledge of the
principal debtor will not constitute a contract of guarantee.
Example: Sam lends money to Akash. Sam is the creditor and Akash is the principal
debtor. Sam approaches Raghav to act as the surety without any information to
Akash. Raghav agrees. This is not valid.
2. Consideration -> According to Section 127 of the act, anything is done or any
promise made for the benefit of the principal debtor is sufficient consideration to the
surety for giving the guarantee. The consideration must be a fresh consideration given
by the creditor and not a past consideration. It is not necessary that the guarantor must
receive any consideration and sometimes even tolerance on the part of the creditor in
case of default is also enough consideration.
In State Bank of India v Premco Saw Mill (1983), the State Bank gave notice to the
debtor-defendant and also threatened legal action against her, but her husband agreed
to become surety and undertook to pay the liability and also executed a promissory
note in favor of the State Bank and the Bank refrained from threatened action. It was
held that such patience and acceptance on the bank’s part constituted good
consideration for the surety.
3. Liability -> In a contract of guarantee, the liability of a surety is secondary. This
means that since the primary contract was between the creditor and principal debtor,
the liability to fulfill the terms of the contract lies primarily with the principal debtor.
It is only on the default of the principal debtor that the surety is liable to repay.
4. Presupposes the existence of a debt -> The main function of a contract of guarantee
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is to secure the payment of the debt taken by the principal debtor. If no such debt
exists then there is nothing left for the surety to secure. Hence in cases when the debt
is time-barred or void, no liability of the surety arises. The House of Lords in the
Scottish case of Swan vs. Bank of Scotland (1836) held that if there is no principal
debt, no valid guarantee can exist.
5. Must contain all the essentials of a valid contract -> Since a contract of guarantee
is a type of contract, all the essentials of a valid contract will apply in contracts of
guarantee as well. Thus, all the essential requirements of a valid contract such as free
consent, valid consideration offer, and acceptance, intention to create a legal
relationship etc. are required to be fulfilled.
6. No concealment of facts -> The creditor should disclose to the surety the facts that
are likely to affect the surety’s liability. The guarantee obtained by the concealment of
such facts is invalid. Thus, the guarantee is invalid if the creditor obtains it by the
concealment of material facts.
7. No Misrepresentation -> The guarantee should not be obtained by misrepresenting
the facts to the surety. Though the contract of guarantee is not a contract of Uberrima
fides i.e., of absolute good faith, and thus, does not require complete disclosure of all
the material facts by the principal debtor or creditor to the surety before he enters into
a contract. But the facts, that are likely to affect the extent of surety’s responsibility,
must be truly represented.
Class –.LL.B. I I SEM. Subject –
Contract Law - II
8. Writing not Necessary -> A contract of guarantee may either be oral or written. It
may be express or implied from the conduct of parties.
KINDS OF GURANATEE
Contracts of guarantees may be classified into the following types:
1. Unilateral Contract of Credit -> This is a type of contract of guarantee usually seen
in trade transactions. It commonly arises between the wholesale trader and a retail
trader. Also, it arises between a retail trader and the customer. In this type of
guarantee contract, the goods are delivered against no payment but with an agreement.
The agreement between parties is either written or oral. The agreement may or may
not have any securities against discharge of the payment on a later date.
2. Bank Guarantee -> This type of guarantee contract is common in the contracts of the
Government. Also, it is common in tender for contracts. This type of guarantee
contract is a commercial document. The bank guarantee is autonomous and is
independent of the contract that is underlying. It is a guarantee from a bank against
liabilities.
3. Letter of Credit -> A letter of credit is an instrument which is written by one person
to the other about giving of credit. The one who writes the letter, requests the other to
give credit to the bearer of the letter or in whose favor the letter is drawn. In the
international trade this practice is commonly seen. This can be general letter of credit
which is drawn against merchants in general or special letter of credit which is drawn
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against a specific person with all the information enclosed.

4. Absolute Performance Bonds -> Absolute means perfect and it also means
complete. In this type of guarantee contract, the surety pays the amount written in the
contract upon the failure to discharge the contract by the person against whom the
guarantee is given.
5. Retrospective Guarantee -> When the guarantee is given for an existing obligation
or debt, it is called retrospective guarantee.
6. Prospective Guarantee -> When the guarantee is given for a future obligation or
debt it is called prospective guarantee.
7. Specific Guarantee -> When a guarantee is given in respect of a single debt or
specific transaction and is to come to an end when the guaranteed debt is paid or the
promise is duly performed, it is called a specific or simple guarantee.
Example: S is a bookseller who supplies a set of books to P, under the contract that if
P does not pay for the books, his friend K would make the payment. This is a contract
of specific guarantee and K’s liability would come to an end, the moment the price of
the books is paid to S.
8. Continuing Guarantee -> A continuing guarantee is defined under Section 129 of
the Indian Contract Act, 1872. A continuing guarantee is a type of guarantee which
applies to a series of transactions. It applies to all the transactions entered into by the
principal debtor until it is revoked by the surety. Therefore Bankers always prefer to
Class –.LL.B. I I SEM. Subject –
Contract Law - II
have a continuing guarantee so that the guarantor’s liability is not limited to the
original advances and would also extend to all subsequent debts.
Example: On M’s recommendation S, a wealthy landlord employs P as his estate
manager. It was the duty of P to collect rent every month from the tenants of S and
remit the same to S before the 15th of each month. M, guarantee this arrangement and
promises to make good any default made by P. This is a contract of continuing
guarantee.
The most important feature of a continuing guarantee is that it applies to a series of
separable, distinct transactions. Therefore, when a guarantee is given for an entire
consideration, it cannot be termed as a continuing guarantee.
PERIOD OF LIMITATION
The period of limitation of enforcing a guarantee is 3 years from the date on which the letter
of guarantee was executed. In State Bank of India vs Nagesh Hariyappa Nayak And Ors.
III (2003) BC 201, against the advancement of a loan to a company, the guarantee deed was
executed by its directors and subsequently a letter acknowledging the load was issued by
same directors on behalf of the company. It was held that the letter did not have the effect of
extending the period of limitation. Recovery proceedings instituted after three years from the
date of the deed of guarantee were liable to be quashed.
RIGHTS OF SURETY
After making a payment and discharging the liability of the principal debtor, the surety gets
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various rights. These rights can be studied under three heads:

i. rights against the, principal debtors.
ii. rights against the creditor, and
iii. rights against the co-sureties.

I. Rights against Principal Debtor

1. The right of surety on payment of debt or the Right of subrogation
(Section 140) -> The right of subrogation means that since the surety had
given a guarantee to the creditor and the creditor after getting the payment is
out of the scene, the surety will now deal with the debtor as if he is a creditor.
Hence the surety has the right to recover the amount which he has paid to the
creditor which may include the principal amount, costs and the interest.
2. The right of Indemnity (Section 145) -> In every contract of guarantee, there
is an implied promise by the principal debtor to indemnify the surety, and the
surety is entitled to recover from the principal debtor whatever sum he has
rightfully paid under the guarantee. This is because the surety has suffered a
loss due to the non-fullfillment of promise by the principal debtor and
therefore the surety has a right to be compensated by the debtor.
Example: Luthra and co has taken a loan from Khaitan and co where
Amarchand acts as security on behalf of Luthra. Khaitan demands payment
Class –.LL.B. I I SEM. Subject –
Contract Law - II
from Amarchand and on his refusal sues him for the amount, Amarchand
defends the suit having reasonable grounds for doing so, but he is compelled
to pay the amount of the debt with costs. He can recover from Luthra the
amount paid by him for costs, as well as the principal debt.
II. Rights against the Creditor
1. Right to securities given by the principal debtor(section 141) -> On the
default of payment by the principal debtor, when the surety pays off the debt
of the principal debtor he becomes entitled to claim all the securities which
were given by the principal debtor to the creditor. The Surety has the right to
all securities whether received before or after the creation of the guarantee and
it is also immaterial whether the surety has knowledge of those securities or
not.
Example: On the guarantee of Priya, Anita lent rs 100000 to Sita. This debt is
also secured by security for the debt which is the lease of Sita’s house. Sita
defaults in paying the debt and Priya has to pay the debt. On paying off Sita’s
liabilities Priya is entitled to receive the lease deed in her favor.
2. Right to set off -> When the creditor sues the surety for the payment of
principal debtor’s liabilities, the surety can claim set off, or counterclaim if
any, which the principal debtor had against the creditor.
III. Rights against the Co-sureties
1. Release of one co-surety does not discharge others (Section 138) -> When
the repayment of debt of the principal debtor is guaranteed by more than one
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person they are called Co-sureties and they are liable to contribute as agreed
towards the payment of guaranteed debt. The release by the creditor of one of
the co-sureties does not discharge the others, nor does it free the released
surety from his responsibility to the other sureties. Thus when the payment of
a debt or performance of duty is guaranteed by co-sureties and the principal
debtor has defaulted in fulfilling his obligation and thus the creditor compels
only one or more of the co-sureties to perform the whole contract, the co-
surety sureties performing the contract are entitled to claim contribution from
the remaining co-sureties.
2. Co-sureties to contribute equally (Section 146) -> According to Section
146, in the absence of any contract to the contrary, the co-sureties are liable to
contribute equally. This principle will apply even when the liability of co-
sureties is joint or several, and whether under the same or different contracts,
and whether with or without the knowledge of each other.
Example: A, B, C, and D are co-sureties for a debt of Rs. 2,0000 lent by Z to
R. R defaults in repaying the loan. A, B, C, and D are liable to contribute Rs.
5000 each.
3. Liability of co-sureties bound in different sums (Section 147) -> When the
co-sureties have agreed to guarantee different sums, they have to contribute
equally subject to the maximum of the amount guaranteed by each one.
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Contract Law - II
Example: A, B and C, sureties for D, enter into three separate bonds, each in a
different penalty, A for Rs. 10,000, B for Rs. 20,000 and C for Rs. 40,000. D
makes default to the extent of Rs. 30,000. A B and C are liable to pay Rs.
10,000 each. Suppose this default was to the extent of Rs. 40,000. Then A
would be liable for Rs. 10,000 and B and C Rs. 15,000 each.
DISCHARGE OF SURETY FROM LIABILITY
Under any of the following circumstances a surety is discharged from his liability:
1. by the revocation of the contract of guarantee,
2. by the conduct of the creditor, or
3. by the invalidation of the contract of guarantee.

1. Revocation of Guarantee
So far as a guarantee given for an existing debt is concerned, it cannot be revoked, as once an
offer is accepted it becomes final. However, a continuing guarantee can be revoked for future
transactions. In that case, the surety shall be liable for those transactions which have already
taken place.
A contract of guarantee can be revoked in the following two ways:
i. By giving a notice (Section 130) -> Continuing guarantees can be revoked by giving
notice to the Creditor but this applies only to future transactions. Just by giving a
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notice the surety cannot waive off his responsibility and still remains liable for all the
transactions that have been placed before the notice was given by him. If the contract
of guarantee includes a clause that a notice of a certain period of time is required
before the contract can be revoked, then the surety must comply with the same as said
in Offord v Davies (1862).
Example: A guarantees to B to the extent of Rs. 10,000 that C shall pay for all the
goods bought by him during the next three months. B sells goods worth Rs. 6,000 to
C. A gives notice of revocation, C is liable for Rs. 6,000. If any goods are sold to C
after the notice of revocation, A shall not be, liable for that.
ii. By Death of Surety (Section 131) -> Unless there is a contract to the contrary, the
death of surety operates as a revocation of the continuing guarantee in respect to the
transactions taking place after the death of surety due to the absence of a contract.
However, his legal representatives will continue to be liable for transactions entered
into before his death. The estate of deceased surety is, however, liable for those
transactions which had already taken place during the lifetime of the deceased.
Surety’s estate will not be liable for the transactions taking after the death of surety
even if the creditor had no knowledge of surety’s death.
2. Conduct of the Creditor
i. Variance in terms of the contract (Section 133) -> When a contract of guarantee
has been materially altered through an agreement between the creditor and
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Contract Law - II
principal debtor, the surety is discharged from his liability. This is because a
surety is liable only for what he has undertaken in the guarantee and any alteration
made without the surety’s consent will discharge the surety as to transactions
subsequent to the variation.
Example: A becomes surety to C for B’s conduct as a manager in C’s bank.
Afterward, B and C contract, without A’ s consent, that B’ s salary shall be raised,
and that he shall become liable for one-fourth of the losses on overdrafts. B allows
a customer to over-draw, and the bank loses a sum of money. A is discharged
from his suretyship by the variance made without his consent and is not liable to
make good this loss.
ii. Release or discharge of the principal debtor (Section 134) -> A surety is
discharged if the creditor makes a contract with the principal debtor by which the
principal debtor is released, or by any act or omission of the creditor, which
results in the discharge of the principal debtor.
Example: A supplies goods to B on the guarantee of C. Afterwards B becomes
unable to pay and contracts with A to assign some property to A in consideration
of his releasing him from his demands on the goods supplied. Here, B is released
from his debt, and C is also discharged from his suretyship. But, where the
principal debtor is discharged of his debt by operation of law, say, on insolvency,
this will not operate as a discharge of the surety.
iii. Arrangement between principal debtor and creditor -> According to Section
135 when the creditor, without the consent of the surety, makes an arrangement
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with the principal debtor for composition, or promise to give him time to, or not to
sue him, the surety will be discharged.
However, when the contract to allow more time to the principal debtor is made
between the creditor and a third party, and not with the principal debtor, the surety
is not discharged (Section 136).
Example: C, the holder of an overdue bill of exchange drawn by A as surety for B,
and accepted by B, contracts with M to give time to B, A is not discharged.
iv. Loss of security (Section 141) -> If the creditor parts with or loses any security
given to him at the time of the guarantee, without the consent of the surety, the
surety is discharged from liability to the extent of the value of the security.
Example: A, as surety for B, makes a bond jointly with 3 to C to secure a loan
from C to B. Later on, C obtains from B further security for the same debt.
Subsequently, C gives up further security. A is not discharged.
3. By Invalidation of the Contract
A contract of guarantee, like any other contract, may be avoided if it becomes void or
voidable at the option of the surety. A surety may be discharged from liability in the
following cases:
i. Guarantee obtained by misrepresentation (Section 142) -> When a
misrepresentation is made by the creditor or with his knowledge or consent,
relating to a material fact in the contract of guarantee, the contract is invalid.
Class –.LL.B. I I SEM. Subject –
Contract Law - II
ii. Guarantee obtained by concealment (Section 143) -> When a guarantee is
obtained by the creditor by means of keeping silence regarding some material part
of circumstances relating to the contracts, the contract is invalid.
iii. Failure of co-surety to join a surety (Section 144) -> When a contract of
guarantee provides that a creditor shall not act on it until another person has joined
in it as a co-surety, the guarantee is not valid if that other person does not join.
EXTENT OF SURETY’s LIABILITY
In the absence of a contract to the contrary, the liability of a surety is co-extensive with that
of the liability of the principal debtor. It means that the surety is liable to the same extent to
which the principal debtor is liable.
Example: A guarantees to B the payment of a bill of exchange by C, the acceptor. On the due
date, the bill is dishonoured by C. A is liable, not only for the amount of the bill but also for
any interest and charges which may have become due on it.
CONCLUSION
The contract of guarantee is a specific contract for which the Indian Contract Act has laid
some rules. Every contract of guarantee has three parties and there exist two types of
guarantees i.e. specific guarantee and continuing guarantee. The type of Guarantee used
depends on the situation and the terms of the contract. The surety has some rights against the
other parties and liability of the surety is considered to be co-extensive with that of the
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principal debtor unless it is otherwise provided by the contract. In case the contracts are
entered into by misrepresentation made by the creditor regarding material circumstances or
by concealment of material facts by the creditor, the contract will be considered invalid.
DIFFERENCE BETWEEN CONTRACT OF INDEMNITY AND
GUARANTEE

BASIS FOR
INDEMNITY GUARANTEE
COMPARISON

Meaning A contract in which one party A contract in which a party promises

promises to another that he will to another party that he will perform
compensate him for any loss the contract or compensate the loss, in
suffered by him by the act of the case of the default of a their person, it
promisor or the third party. is the contract of guarantee.

Defined in Section 124 of Indian Contract Section 126 of Indian Contract Act,
Act, 1872 1872

Parties Two, i.e. indemnifier and Three, i.e. creditor, principal debtor
Class –.LL.B. I I SEM. Subject –
Contract Law - II
BASIS FOR
INDEMNITY GUARANTEE
COMPARISON

indemnified and surety

Number of One Three

Contracts

Degree of liability Primary Secondary

of the promisor

Purpose To compensate for the loss To give assurance to the promisee

Maturity of When the contingency occurs. Liability already exists.

Liability

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UNIT II:
BAILMENT
 Identification of bailment contracts
in day-to-day life
 Manner of creation of such
contracts
 Commercial utility of bailment
contracts
 Definition of bailment
 Kinds of bailees
 Duties of bailor and bailee towards
each other
 Rights of bailor and bailee
 Finder of goods as a bailee
 Liability towards the true owner
 LI. Obligation to keep the goods
safe
Class –.LL.B. I I SEM. Subject –
Contract Law - II

BAILMEN
INTRODUCTION
There are many cases of bailment in our day to day life. For example, in the case of laundry,
we give our clothes for getting washed. Once they are washed, they are to be returned back to
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us. We place the other person in temporary possession of our clothes for a specific purpose
and there is an express or implied understanding between the two to return the good once the
purpose has been fulfilled.
MEANING OF CONTRACT OF BAILMENT
The word Bailment has got its origin from a French word baillier which means - to deliver.
According to Section 14, a delivery of goods with a condition to return, when the purpose is
over or otherwise disposed-off according to the direction of the person delivering them, by
one person to another is called a Bailment.
The person who delivers the goods is called the bailor. The person who receives the goods
from the bailor is called the bailee.
Example: Contracts for the lease of a car, for sale of goods on consignment, and for the
transport of goods are examples of bailments.
ELEMENTS OF BAILMENT
1. There must exist an expressed or implied agreement between the bailee and bailor
2. It is necessary that the goods should be delivered to the bailee in case of bailment.
Furthermore, the possession of the goods must be voluntarily transferred and shall be
in accordance with the contract. Delivery may be of two types - Actual delivery and
constructive delivery.
Class –.LL.B. I I SEM. Subject –
Contract Law - II
Example:
i. A car delivered for repair to a workshop dealer is an actual delivery.
ii. The key of a car delivered to a workshop dealer for repair of the car is a
constructive delivery.
3. In a bailment the ownership remains with the bailor and is not transferred to the bailee
or anyone as because if the ownership is transferred then it is not a bailment contract.
It becomes a contract of sale.
4. Bailment is only for movable goods and not for immovable goods.
5. There should be a purpose for the delivery of goods like safe custody, use and
transportation of the goods, repair etc.
6. If the bailed goods are changed like a raw material is converted into a product still the
contract remains the same as a bailment.
7. The goods shall be returned to the bailor or disposed off according to his direction
Example: The amount deposited by a person in various bank accounts like saving, current
account etc. isn't treated as bailment because the bank is not bound to return the same
deposited coins or currency notes. This has been stated in the various decisions given by the
judges in different cases from time to time. But it will be treated as bailment if a person keeps
of his valuable items in the locker of the bank for safe custody.
KINDS OF BAILMENT
 On the basis of reward Renaissance Law College

1. Gratuitous bailment: The bailment of products without any charges or reward is

Gratuitous bailment. In this type,There is no requirement to pay any charges by the
bailee for the bailment.
2. Non gratuitous bailment: The bailment for some reward or charges is Non
gratuitous bailment. It is required to pay some charges to the bailor by the bailee.
 On the basis of benefit
1. Bailment Contract made for the exclusive benefits of the bailor;
2. Bailment made for the exclusive benefits of the bailee;
3. Bailment made for mutual benefits of both bailor and bailee.
DUTIES OF BAILOR
1. Duty to disclose all known defects (Section 150) -> It is the duty of the bailor to
disclose any known defects occurred in the goods. In case if there is failure of
disclosing the defects and there occurs some loss from the end of bailee, the
compensation will be beared by the bailor.
2. Duty to bear necessary and extraordinary expenses (Section 158) -> In case of
gratuitous baiment, the bailee must be repaid with all the expenses which he has
incurred already for bailment, by the bailor.
3. Duty to indemnify loss for premature termination of bailment (Section 159) ->
The bailor would be liable to indemnify the bailee for any loss incurred which the
Class –.LL.B. I I SEM. Subject –
Contract Law - II
bailee has paid to the original owner,if the title to deliever the goods does not falls
within the bailor's reach.
4. Duty to indemnify the bailee against the defective title of the bailor (Section 164)
- If any loss is occurred to the bailee by reason that the bailor was not entitled to make
the bailment, or to receive back the goods. In that case, bailor will be responsible for
the losses.
5. Duty to bear a loss (Section 162) -> If the bailee has taken all the necessary and
reasonable care to protect the bailed goods from occurance of any possible damage or
loss and still any loss or damage is occurred then it is the duty of bailor to bear the
damages or loss of the things bailed.
RIGHTS OF BAILOR
1. Right to claim damages in cases of negligence from the bailee (Section 152) -> It
is the right of the bailor to be compensated for the damages of the goods which are
bailed if the bailee has failed to take all the necessary due care to abstain that damage
or losss according to the direction.
2. Right of termination of the contract in case of unauthorized use of goods (Section
153) -> If there is an unauthorized use of goods by the bailee, the bailment contract
can be terminated before its completion.
3. Right of compensation in case of the unauthorized use of goods (Section 154) ->
If the use of goods is not done by the bailee as per the terms and conditions of the
bailment contract, the bailor has a right to claim compensation from bailee for any
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damages arising to the said goods.

4. Right to claim compensation in case of the unauthorized mixture of the goods
which cannot be separated (Section 157) -> If the bailee without the consent of the
bailor mixes goods of the bailor with his own goods and they cannot be separated, the
bailor has right to claim compensation from bailee for loss of the goods.
5. Right to claim separation of the goods in case of unauthorized mixture of goods
(Section 156) -> If bailee, without consent of the bailor mixes with his own goods the
goods of the bailor and goods can be separated, the bailor has right to claim his own
goods after separation.
6. Right to demand return of goods (Section160) -> The bailor has a right to demand
return of goods after the completion of purpose or after expiry of the period of
bailment.
7. Right to claim compensation in case of unauthorized retention of goods (Section
161) -> If the bailee does not either return or deliver the goods according to bailor's
directions, even after accomplishment of the purpose or after expiry of period of
bailment, the bailor has a right to claim compensation for any loss, destruction and
deterioration of goods from that time.
8. Duty to deliver any accretion to goods -> It is the duty of the bailee to deliver the
respective goods to the bailor and any natural increase or profit accruing from goods
bailed, unless there exists a contract to the contrary.
Class –.LL.B. I I SEM. Subject –
Contract Law - II
DUTIES OF BAILEE
1. Duty to take due care of the respective goods delivered to him (Section 151) -> In
all cases of bailment, it is necessary for the bailee to take the maximum amount of
care to the goods delivered to him.
2. Duty to not make unauthorized use of the respective goods entrusted to him -> In
ICA Section 154, the bailee must use the respective goods strictly under the terms of
the bailment. If he makes unauthorized use of the respective goods, he's at risk of
being liable to compensate the make for any damage arising to the respective goods
from or during such use of them. This liability is absolute.
3. Duty to not combine mix bailed along with his own the respective (Section 155 to
157) goods -> Duty of bailee that he shouldn't mix his own goods with those of the
it's also the bailor, without bailor's consent. If the respective goods area unit mixed
with the consent of the bailor, there's no breach of duty and therefore the bailor and
the bailee shall have an interest, in proportion to their respective shares, within the
mixture thus produced.
4. Duty to return the goods (Section 160) -> It is that the duty of the bailee to come, or
deliver, according to the bailor's directions the respective goods bailed, without
demand, as soon because the time for which they were bailed has expired, or the aim
that they were bailed has been accomplished.
5. Duty to deliver any accretion to goods -> It is the duty of the bailee to deliver the
respective goods to the bailor and any natural increase or profit accruing from goods
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bailed, unless there exists a contract to the contrary.

RIGHTS OF BAILEE
1. Right to claim the damages (ICA Section 150)
2. Right to claim reimbursement of expenses if any (ICA Section 158)
3. Right to get indemnified if termination of gratuitous bailment takes place (ICA
Section 159)
4. Right to give bailed goods to any of the bailors in case of joint bailment (ICA Section
165)
5. Right to recover damages for the losses in case bailor refuses to take the goods back
(ICA Section 164)
6. Right to deliver the goods to the bailor in case of the title of bailor is defective (ICA
Section 166)
7. Right to recover damages for the loss in case title of bailor is defective (ICA Section
164)
TERMINATION OF BAILMENT
1. After the fulfilment of the purpose
2. When use of goods become inconsistent
3. When the subject matter of bailment gets destroyed
4. Death of any party occurs
Class –.LL.B. I I SEM. Subject –
Contract Law - II
5. When bailor terminates the bailment contract
RELEVANT CASE LAWS
 Kavita Trehan V. Balsara Hygiene Product Ltd. ( AIR 1992 Delhi 103):
In this case it was decided that one of the very requirement of bailment is the delivery
of goods to the bailee, where there is no change of possession there is no bailment.
 Jagdish Chandra Trikha V. Punjab National Bank (AIR 1998 Delhi 266):
This case is related to parcel which was carrying some gold jewellery. The jewellery
was well scaled and packed. When the parcel reached the destination some part of the
jewellery was missing. In this the court held that the position of bank is of bailee.
 Annamalai Timber Trust Ltd. V. Thrippunithura Dewas (1954):
The court held that where there is no obligation to return identical subject matter is an
altered manner there is no bailment
 Haatmal Bhutaria V. Dominion of India (AIR 1961 Kolkata 54):
In this case it was decided that sec. 148 makes it clear that a seller can become a
bailee if he contracts to hold the goods as bailee in the absence of such contract he
cannot be awarded as bailee.
CONCLUSION
Contract of bailment involves the transfer of possession of the good from the bailor to the
bailee for the specific purpose and both, the bailor and the bailee, have been confronted with
some rights and duties which are necessary for them to follow whenever seem suitable. Also,
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for the contract of bailment to be valid, all the essential features need to be fulfilled.
Moreover, bailment of goods is different from the sale of goods as bailment is involved with
the transfer of possession while the sale is involved with the transfer of ownership.

PLEDGE
MEANING
Contract of pledge is a subset of a contract of bailment. Here, the goods bailed are kept as a
security for a debt or a performance of a promise. Pledge is defined in Section 172 of the
Indian Contract Act, 1872 as “The bailment of goods as security for payment of a debt or
performance of a promise is called ‘pledge’. The bailor is in this case called the ‘pawnor’.
The bailee is called ‘pawnee’.” It is covered under Chapter IX (Section 172- Section 181) of
the Indian Contract Act, 1872.
ESSENTIAL FEATURES OF CONTRACT OF PLEDGE
1. A valid contract -> Similar to the contract of bailment, all the basic essentials of a
valid contract should be present in a contract of pledge. Without these elements, the
contract will be void and won’t be enforceable in a court of law.
Class –.LL.B. I I SEM. Subject –
Contract Law - II
2. Delivery of possession -> It is necessary that the possession of goods be delivered
from the pawnor to the pawnee. As mentioned in the definition, pledge is a bailment
and this is an essential element of bailment. The delivery can be either actual or
constructive. However, there might be exceptions where the possession remains with
the pawnor.
3. Ownership cannot be transferred -> In the case of pledge, mere possession of the
goods is transferred to the pawnee. The pawnor of the goods is still the owner. The
pawnee has possession of the goods but has limited interest in the goods.
4. Security against debt -> The goods must be pledged as security against an
outstanding debt of the pawnor. This outstanding debt can also be a promise for
specific performance.
5. Return of goods on repayment -> Once the debtor the specific performance against
which goods are pledged as security is repaid or completed, the goods must be
returned to the pawnor in the manner specified by him.
DUTIES OF PAWNOR AND PAWNEE
Duties of Pawnor
1. To compensate expenses -> The pawnor has the responsibility to compensate the
pawnee for all the ordinary and extraordinary expenses made by the pawnee in order
to ensure the well-being of the pledged goods.
2. To repay the entire amount due along with interest -> The pawnor has to repay the
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amount which is due to the pawnee. This amount is the total of the principal amount
as well as any interest accrued on that amount during the course of the contract.
3. To disclose all the faults in the goods -> The pawnor before entering into a contract
has to disclose all the faults in the goods to the pawnee. If the pawnee incurs any loss
later due to those faults, the pawnor will be liable for those.

Duties of Pawnee
1. To take reasonable care of the goods -> It is the pawnee’s responsibility to take care
of the goods that are pledged. The care taken by the pawnee must be just, fair and
reasonable. It should be as the pawnee took care of his personal belongings. If due to
negligence of the pawnee, the goods are damaged, he will be liable to compensate the
pawnor.
Example: If ‘A’ pledges his watch with ‘B’ for a sum of Rs. 100. Then ‘B’ must take
reasonable care of A’s watch as if it is B’s own watch. The condition of the watch
should not deteriorate or be worse than at the time when it was pledged.
2. To use the goods only for authorised purpose -> The pawnee can use the goods
pledged if only it is authorised by the pawnor. If the goods are used for any purpose
that is not authorised, the pawnee will have to compensate the pawnor against the
same.
Class –.LL.B. I I SEM. Subject –
Contract Law - II
Example: ‘A’ pledges his car with ‘B’. ‘A’ authorises ‘B’ to use the car for his
personal use. ‘B’ allows his cousin ‘C’ to drive the car and the car then gets damaged.
‘B’ will have to compensate ‘A’ for the damages.
3. To return the goods -> As per the contract, once the amount against which the goods
are pledged is repaid, the goods must be returned to the pawnor. This return must be
as mentioned in the contract or as per the pawnor’s directions.
4. To return any profits which arose from the goods -> If at any time during the
contract, the pawnee earns profit from the pledged goods, the same shall be returned
to the pawnor during the termination of the contract.
Example: ‘X’ pledged his property with ‘Y’. The property was given on rent to ‘Z’.
The rent received on the property must be returned to ‘X’.
5. To keep the goods separate -> It is the pawnee’s duty to keep the pledged goods
separate from his own goods. If he mixes the pledged goods, all expenses to separate
them will be borne by the pawnee. If separating is not possible, the pawnee will be
liable for all the damages.
RIGHTS OF PAWNOR AND PAWNEE
Rights of Pawnor
1. To redeem the goods -> As per Section 177 of the Act, ”If a time is stipulated for the
payment of the debt, or performance of the promise, for which the pledge is made,
and the pawnor makes default in payment of the debt or performance of the promise
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at the stipulated time, he may redeem the goods pledged at any subsequent time
before the actual sale of them, but he must, in that case, pay, in addition, any expenses
which have arisen from his default.”
Example: ‘A’ gave his watch to ‘B’ as a security against INR 800 that is due. They
agreed that the amount should be repaid within 1 month. If ‘A’ fails to do so, he can
redeem his watch even after the expiry of the contract given that ‘B’ has not yet sold
the watch. However, if ‘B’ had to incur any expenses to safe keep that watch, the
same will have to be paid by ‘A’.
2. To get the goods back -> Once the pawnor pays back the amount due along with the
interest to the pawnee, he has the right to get the goods back. After clearing the entire
due against which the goods were held as security, the pawnee cannot retain the
pledged goods.
Rights of Pawnee
1. To retain the goods -> The pawnee has the right to retain the goods until the amount
owed by the pawnor is paid in full or the promise is completely performed. This
amount includes the expenses incurred by the pawnee as well as any interest accrued
on that amount. This is mentioned in Section 173 of the Act.
Example: ‘A’ pledged his house with a bank for a loan of INR 2,50,000. The interest
on the same was INR 10,000. The bank can retain the pledged house until ‘A’ repays
the entire amount along with the interest i.e. INR 2,60,000.
Class –.LL.B. I I SEM. Subject –
Contract Law - II
As per Section 174, “The pawnee shall not, in the absence of a contract to that effect,
retain the goods pledged for any debt or promise other than the debt or promise for
which they are pledged; but such contract, in the absence of anything to the contrary,
shall be presumed in regard to subsequent advances made by the pawnee.”
2. To get compensation for extraordinary expenses -> It is implied that the pawnor
will be liable to pay for all the necessary expenses needed for the safekeeping of the
goods. As per Section 175, if any extraordinary expenses arise, the pawnor will only
be liable for the same as well. However, the pawnee cannot retain the goods for non-
payment of such expenses.
3. To sell the goods -> As mentioned in Section 176, “If the pawnor makes default in
payment of the debt, or performance; at the stipulated time or the promise, in respect
of which the goods were pledged, the pawnee may bring a suit against the pawnor
upon the debt or promise, and retain the goods pledged as a collateral security; or he
may sell the thing pledged, on giving the pawnor reasonable notice of the sale.” It is
important to note that the pawnor must be given proper and enough notice before
selling the goods. It is further mentioned, “If the proceeds of such sale are less than
the amount due in respect of the debt or promise, the pawnor is still liable to pay the
balance. If the proceeds of the sale are greater than the amount so due, the pawnee
shall pay over the surplus to the pawnor.”
Example: ‘X’ pledged his watch with ‘Y’ as security against INR 10,000. ‘X’
defaulted the payment even after enough notices. ‘Y’ went to sell his watch. If the
watch is sold above INR 10,000, the surplus amount must be returned to ‘Y’.
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However, if the watch is sold for less, ‘X’ will still be liable for the difference.
RELEVANT CASE LAWS
 Lallan Prasad v. Rahmat Ali and Anr., 1996:
It was held by the Supreme Court that the pledged goods were delivered to the
plaintiff. This meant that this agreement did ripen into a contract of pledge. The Court
also stated that the plaintiff was not entitled to any compensation on his stance that
the goods were never pledged to him.
 The Morvi Mercantile Bank Ltd. And Anr. v. Union of India, 1965:
It was held by the Supreme Court that railway receipts can be valid as goods under a
contract of pledge. It was also held that the plaintiff was the pawnee of the goods and
not merely its documents of title. It was stated that since the pawnee in a contract of
pledge has the authority as the owner of the goods, the plaintiff will be allowed to sue
for the entire value of the goods and not just the amount he has advanced.
 K. M. Hidayathulla v. the Bank of India, 2001:
The Madras High Court was held that the bank had two remedies; either to file a suit
for recovering the debt or selling the goods after reasonable notices to the pawnor. It
was found that there was no connection between the two remedies. Merely because
the period for filing a suit had passed, it did not mean that the other alternatives could
not be used. It was held that if the pawnee resorted to any alternate course of sale, the
prescribed period should be extended for the same.
Class –.LL.B. I I SEM. Subject –
Contract Law - II
COMMERCIAL UTITLITY OF CONTRACT OF PLEDGE
Pledge by mercantile agent is defined under Section 178 of Indian Contract Act. Pledge by
a mercantile agent acting in ordinary course of business is valid. It reads, “Where a
mercantile agent is, with the consent of the owner, in possession of goods or the document of
title to goods, any pledge made by him, when acting in the ordinary course of business of a
mercantile agent, shall be as valid as if he were expressly authorized by the owner of the
goods to make the same; provided that the pawnee acts in good faith and has not at the time
of the pledge notice that the pawnor has not authority to pledge.”
Consent of owner is assumed to be present if the mercantile agent pledges the goods.
In the Section 178, the terms mercantile agent and documents of title shall bear the same
meaning as they do in Indian Sale of Goods Act, 1930 (3 of 1930).
A mercantile agent is one who can sell, consign or raise money out of the goods by keeping
them as security on behalf of owner.
DIFFERENCE BETWEEN CONTRACT OF BAILMENT AND PLEDGE
Contracts of bailment and pledge are special types of contracts that are regulated under the
Indian Contract Act, 1872.

Point of
Contract of Bailment Contract of Pledge
difference
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When certain goods are transferred

When certain goods are transferred from
from one party to another for a
one party to another as a security against
specific purpose, it is called a Meaning
a debt, it is called a contract of pledge.
contract of bailment.

It is covered under Sections 148-171 It is covered under Sections 172-179 of

Provisions
of the Indian Contract Act, 1872. the Indian Contract Act, 1872.

The sole purpose for bailing the

The sole purpose to enter into a contract
goods is for the safe custody of the
Purpose of pledge is for security against a debt.
goods or repairs, at most times.

The party which bails the goods is The party which pledges their goods is
known as the ‘bailor’ and the party known as the ‘pawnor’ or the ‘pledger’
with whom the goods are bailed is Parties and the party which receives the goods is
known as the ‘bailee’. known as the ‘pawnee’ or the ‘pledgee’.

The presence of consideration in a Consideration The presence of consideration in a

contract of bailment is mandatory. contract of pledge is mandatory.
Class –.LL.B. I I SEM. Subject –
Contract Law - II
The goods cannot be sold by the The goods may be sold by the pawnee or
Right to sell
bailee in such contracts. the pledgee.

The goods can be used by the bailee

The goods cannot be used by the pawnee
only for specific purposes known to
Right to use or the pledgee.
both the parties or not otherwise.

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UNIT III:
AGENCY
 Identification of different kinds
of agency transactions in day-
to-day life in the commercial
world
 Kinds of agents and agencies
 Distinction between agent and
servant
 Essentials of agency transaction
 Various methods of creation of
agency
 Delegation
 Duties and rights of agent
Class –.LL.B. I I SEM. Subject –
Contract Law - II

AGENCY
INTRODUCTION: WHAT IS AGENCY?
When one party delegates some authority to another party whereby the latter performs his
actions in a more or less independent fashion, on behalf of the first party, the relationship
between them is called an agency. Agency can be express or implied. Chapter X of the Indian
Contract Act, 1872 deals with the laws relating to Agency. It is important to know the law
relating to agency because nearly all business transactions worldwide are carried out through
agency. All corporations, big or small, carry their work out through agency. Therefore, laws
relating to the agency are an important area of Business Law. Relationships relating to
principal and agent involve three main parties: The Principal, the Agent, and a Third Party.
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WHO IS AN AGENT?
The Indian Contract Act, 1872 defines an ‘Agent’ in Section 182 as a person employed to
do any act for another or to represent another in dealing with third persons.

WHO IS A PRINCIPAL?
According to Section 182, “The person for whom such act is done, or who is so represented,
is called the ‘principal’”. Therefore, the person who has delegated his authority will be the
principal.
Examples:
 A, a businessman, delegates B to buy some goods on his behalf. Here, A is the
principal and B is the agent, and the person from whom the goods are bought is the
‘Third Person’.
 Joe appoints Mary to deal with his bank transactions. In this case, Joe is the Principal,
Mary is the Agent and the Bank is the Third Party.
 Lavanya lives in Mumbai, but owns a shop in Delhi. She appoints a person Susan to
take care of the dealings of the shop. In this case, Lavanya has delegated her authority
to Susan, and she becomes a Principal while Susan becomes an agent.
Class –.LL.B. I I SEM. Subject –
Contract Law - II
WHO CAN APPOINT AN AGENT?
According to Section 183, any person who has attained the age of majority and has a sound
mind can appoint an agent. In other words, any person capable of contracting can legally
appoint an agent. Minors and persons of unsound mind cannot appoint an agent.
WHO MAY BE AN AGENT?
In the same fashion, according to Section 184, the person who has attained the age of
majority and has a sound mind can become an agent. A sound mind and a mature age is a
necessity because an agent has to be answerable to the Principal.
CREATION OF AGENCY
An agency can be created by:
1. Direct (Express) appointment– The standard form of creating an agency is by direct
appointment. When a person, in writing or speech appoints another person as his
agent, an agency is created between the two.
2. Implication– When an agent is not directly appointed but his appointment can be
inferred from the circumstances, an agency by implication is created.
3. Necessity– In a situation of necessity, one person can act on behalf of another to save
the person from any loss or damage, without expressly being appointed as an agent.
This creates an agency out of necessity.
4. Estoppel– An agency can also be created by estoppel. In a situation where one person
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behaves in such a manner in front of a third person, as to make someone believe he is

an authorized agent on behalf of someone, an agency by estoppel is created.
5. Ratification– When an act of a person, who acted as another person’s agent (on his
behalf) without his knowledge is later ratified by that person, this creates an agency
by ratification between the two.
TYPES OF AGENTS
1. Special Agent- Agent appointed to do a singular specific act.
2. General Agent- Agent appointed to do all acts relating to a specific job.
3. Sub-Agent-An agent appointed by an agent.
4. Co-Agent- Agents together appointed to do an act jointly.
5. Factor- An agent who is remunerated by a commission (one who looks like the
apparent owner of the things concerned).
6. Broker- An agent whose job is to create a contractual relationship between two
parties.
7. Auctioneer- An agent who acts a seller for the Principal in an auction.
8. Commission Agent- An appointed to buy and sell goods (make the best purchase) for
his Principal
9. Del Credere- An agent who acts as a salesperson, broker and guarantor for the
Principal. He guarantees the credit extended to the buyer.
Class –.LL.B. I I SEM. Subject –
Contract Law - II
AUTHORITY OF AN AGENT
Authority of an agent can be either express or implied.
1. Express Authority -> According to Section 187, the authority is said to be express
when it is given by words spoken or written.
2. Implied Authority -> According to Section 187, authority is said to be implied when
it is to be inferred from the facts and circumstances of the case. In carrying out the
work of the Principal, the agent can take any legal action. That is, the agent can do
any lawful thing necessary to carry out the work of the Principal.
Implied authority is of four main types
i. Incidental Authority- doing something that is incidental to the due
performance of express authority
ii. Usual Authority- doing that which is usually done by persons occupying the
same position.
iii. Customary Authority- doing something according to the pre-established
customs of a place where the agent acts
iv. Circumstantial Authority- doing something according to the circumstances of
the case
Example:
 Ali owns a shop in Bihar but lives in Mumbai. His shop is managed by
a person named John. John takes care of the deals regarding the shop
and buys goods from a person named Ram, with Ali’s knowledge. In
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this case, John has implied authority from Ali to buy these goods.
 Soham employed Abhay, who is a shipbuilder to build ships for him.
In doing so, Abhay may legally buy all the material necessary to build
the ships.

CASE LAW
Chairman L.I.C v. Rajiv Kumar Bhaskar 2003 ACJ 86
In this case, as per the salary saving scheme of L.I.C, the employer was supposed to deduct
the premium from the employee’s salary and deposit it with L.I.C. Upon the death of the
employee, it was found by his heirs that the employer has defaulted in doing so, causing the
policy to lapse. A clause in the acceptance letter was referred to, in which the employer had
said that he would act as the agent of the employee and not as that of L.I.C. It was held that
the employer was acting as the agent of the company, thereby making the company (L.I.C)
responsible as a Principal due to the fault of the Agent (the employer).
3. Agency between husband and wife -> Generally, there exists no agency between a
husband and wife, except in cases where it has expressly or impliedly been sanctioned
Class –.LL.B. I I SEM. Subject –
Contract Law - II
that either of them would do certain acts or transactions as the agent of the other. That
is, a relationship of agency can come into existence between the two through contract,
appointment, or ratification. A husband is responsible for necessaries to his wife when
they are living apart due to the husband’s fault. This results in an agency of necessity
where the wife can use her husband’s credit for what is necessary for her to live. But
in cases where they are separated because of the wife’s own whims or faults, for no
just reason, the husband is not liable for the wife’s necessaries.
SUB-AGENT
Who is a Sub-Agent?
An agent may sometimes delegate the duty that has been delegated to him by the Principal to
somebody else. Ordinarily, an agent cannot delegate the duty he is supposed to perform
himself to another person (delegatus non potest delegare), except in particular circumstances
where he must, out of necessity, do so. Section 191 of the Indian Contract Act, 1872
defines a sub-agent to be a person employed by and acting under the control of the original
agent in the business of the agency.
Delegatus non potest delegare
An agent cannot in ordinary circumstances delegate the duty that was delegated to him. The
principle is based upon the idea that when a Principal appoints an agent, he does so by
placing his confidence and trust in the agent and might not have similar trust in the work of
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another person.
Difference between sub-agent and substituted agent
The difference between sub-agent and the substituted agent is very fundamental. When a
person, in the capacity of an agent, is asked to name someone for a certain task, the person
who is named does not become a sub-agent to the Principal, but a substituted agent.
Example: Sarah asks her solicitor to appoint an auctioneer to sell her antique merchandise.
Her solicitor appoints Naaz as an auctioneer. In this case, Naaz is not a sub-agent but is, in
fact, a substituted agent for this sale.
AGENCY BY RATIFICATION
A principal may subsequently ratify an act done by a person who acted on his behalf without
his permission or knowledge. If the act is ratified, a relationship of the agency will come into
existence and it will be as if he had previously authorized the person to act his agent.
Ratification may be express (by speech or writing) or implied (by act or conduct).
Example: Steve bought apples on behalf of Mark, without his permission or knowledge. Mark
later sold those apples to another person. This act of mark impliedly ratifies the purchase
made by Steve.
Ratification is not allowed in the following cases
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Contract Law - II
1. When the person’s knowledge of the facts of the case is defective. That is, he only
half knows things that he is ratifying to.
2. An act done on behalf of another person which would have the effect of injuring or
harming the person or violating any of his rights if the act was done with his
authority.
TERMINATION OF AGENCY
An agency can be terminated or is terminated in 5 different ways:
1. When the agent’s authority is revoked by the Principal
2. When the agent renounces the business of the agency
3. When the business of the agency is completed
4. When either of the parties dies or becomes mentally disabled
5. When the Principal is adjudicated an insolvent
REVOACTION OF AGENT’s AUTHORITY
There are certain rules regarding the revocation of an agent’s authority.
1. It can be revoked any time before the authority has been exercised.
2. If according to the terms of the contract between the two, the agency has to continue
up to a certain time, any prior revocation by the Principal shall be compensated for, to
the agent.
3. The termination does not take effect before it has been communicated to the agent.
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4. Termination of the authority of an agent terminates the authority of all the sub-agents
under him.
AGENT’s DUTIES TO PRINCIPAL
An agent has 6 duties towards his Principal:
1. He has to conduct the business of the Principal according to the directions of the
Principal.
2. An agent is bound to conduct the business he is supposed to conduct with as much
skill as a person on his position ordinarily holds.
3. An agent is supposed to show the relevant accounts to the Principal as and when the
Principal demands.
4. An agent has the duty to communicate any difficulty whatsoever he may come across
while doing the Principal’s business. He is supposed to perform due diligence in this
regard.
5. If any material fact has been concealed or the business is not carried out in the manner
that the Principal directed, the Principal can repudiate the contract between them.
6. If the agent carries out the business in the manner he wanted to perform it, rather than
on the directions of the Principal, the Principal may claim from the agent any benefit
he may have achieved through doing so.
Class –.LL.B. I I SEM. Subject –
Contract Law - II
Example: X directs his agent Y to buy a certain house for him. Y does not buy the house, and
tells X that it cannot be bought due to certain reasons, but ends up buying the house himself.
In this case, X has the right to claim the house from Y at the price which Y bought it for
himself.
PRINCIPAL’s DUTIES TO AGENT
The Principal has 4 duties towards the Agent:
1. The Principal is bound to indemnify the agent against any lawful acts done by him in
the exercise of his authority as an agent.
2. The Principal is bound to indemnify the agent against any act done by him in good
faith, even if it ended up violating the rights of third parties.
3. The Principal is not liable to the agent if the act that is delegated is criminal in nature.
The agent will also in no circumstances be indemnified against criminal acts.
4. The Principal must make compensation to his agent if he causes any injury to him
because of his own competence or lack of skill.
LIABILITY OF PRINCIPAL FOR AGENT’S FRAUD OR
MISREPRESENTATION
According to Section 238, the Principal is liable for any fraud or misrepresentation made by
his agent during the course of his business, as if the fraud or misrepresentation was done by
the Principal himself. Renaissance Law College

RIGHTS OF AN AGENT
An agent has the following 5 rights:
1. Right of retainer– An agent has the right to retain any remuneration or expenses
incurred by him while conducting the Principal’s business.
2. Right to remuneration– An agent, when he has wholly carried out the business of
the agency has the right to be remunerated of any expenses suffered by him while
conducting the business.
3. Right of Lien on Principal’s property- The agent has the right to hold (keep with
himself) any movable or immovable property of the Principal until his due
remuneration is paid to him by the Principal.
4. Right to be Indemnified– The agent has the right to be indemnified against all the
lawful acts done by him during the course of conducting the Principal’s business.
5. Right to Compensation– The Agent has the right to be compensated for any injury or
loss suffered by him due to the lack of skill and competency of the Principal.
CONCLUSION
Contracts establishing a relationship of the agency are very common in business law. These
can be express or implied. An agency is created when a person delegates his authority to
another person, that is, appoints them to do some specific job or a number of them in
Class –.LL.B. I I SEM. Subject –
Contract Law - II
specified areas of work. Establishment of a Principal-Agent relationship confers rights and
duties upon both the parties. There are various examples of such a relationship: Insurance
agency, advertising agency, travel agency, factors, brokers, del credere agents, etc.

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UNIT IV: LAW RELATING TO

PARTNERSHIP
 Definition and Nature of
Partnership/Firm/Duties
 Relationship between
partners’ mutual rights duties.
 Implied Authority of Partners,
Emergency.
 Liability of Partners
 Doctrine of Holding out.
Class –.LL.B. I I SEM. Subject –
Contract Law - II

PARTNERSHIP
INTRODUCTION
An Act was enacted in 1932 and it came into force on the 1st day of October 1932. The
present Act superseded the earlier law, which was contained in Chapter XI of the Indian
Contract Act, 1872.
This Act is not complete and has the intention to define and amend laws relating to
Partnership.
PARTNERSHIP – DEFINITION AND MEANING
Section 4 of the Indian Partnership Act 1932 defines a partnership as a relation between
two or more persons who agree to share the profits of a business run by them all or by one or
more persons acting for them all.
Partnership results from a contract and is governed by the Partnership Act 1932. The
partnership is also governed by the general provision of the Indian Contract Act on such
matters where the Partnership Act is silent. It is expressly mentioned that the provision of
India Contract Act which is not repealed will be applicable on Partnership until and unless
such provision is in contrary to any provision of Partnership Act, 1932. The rules of contract
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regarding the capacity to contract, offer, acceptance etc. will also be applicable to the
partnership. But the rules regarding the status of minor will be governed by the Partnership
Act, 1932 since Section 30 of the Act talks about the position of the minor.
NATURE OF BUSINESS
It is a business organization where two or more persons agreed to join together to carry out
the business for the purpose of earning the profits. It is an extension of a sole proprietorship.
It is better than sole proprietorship because in sole proprietorship the business is carried out
by the individual with limited capital and limited skill. Due to the limited resources of a
single individual carrying a sole proprietorship, a larger business requiring more resources
and investment than available to the sole proprietor cannot be thought of such business. On
the other hand in partnership, a number of partners join together with their capital to form an
agreement and carry out a business jointly.
ESSENTIAL REQUIREMENTS OF A PARTNERSHIP
1. There must exist an agreement between the partners.
2. The motive is to earn the profit and share between the partners.
3. The agreement must be to carry out the business jointly or by any of them acting on
the behalf of all.
Examples:
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Contract Law - II
 A and B buy 100 tons of oil which they agree to sell for their joint account. This
forms a partnership and A and B are considered as partners.
 A and B buy 100 tons of oil and agreed to share it among them. It does not form a
partnership as they had no intention to carry out business.

 NUMBER OF MEMBERS
Any two or more persons may form a partnership. There is no limit imposed on the minimum
and the maximum number of partners under the Partnership Act, 1932. According to
Companies Act 2013, the maximum number of 100 must not exceed in case of partnership
and minimum is 2 partners.
If in any case, it exceeds the maximum limit then it will amount to the illegal association
under Section 464 of Companies Act, 2013. According to Section 11 of Companies Act the
maximum number of partner in case of:
 Banking purpose-10 persons
 Other purposes- 20 persons

 AGREEMENT
The partnership is an agreement in which two or more person has decided to carry out
business and share the profit and losses equally. To create a legal relationship it is necessary
to form a partnership agreement. Renaissance Law College

The partnership agreement becomes the foundation or the basis on which it is based. It can be
either written or oral. The written agreement is known as a partnership deed. Partnership deed
mainly consists of the following details:
 Name and address of its firm and business
 Name and address of its partner
 Capital contributed by each partner
 Profit and loss sharing ratio
 Rate of interest on capital, loan, drawings etc
 Rights, duties and obligation of partners
 Settlement of accounts on the dissolution of the firm
 Salaries, commission payable to partners
 Rules to be followed in case of admission, retirement and death of a partner
 Mode of settlement on disputes among partner.
 Any other affecting the rights of the partners

 BUSINESS (SECTION 12)

The partnership must be created for the purpose of carrying the business which is legal in
nature. Co-ownership of property does not amount to the partnership.
 Class –.LL.B. I I SEM. Subject –
Contract Law - II
 MUTUAL AGENCY (SECTION 13)
The business is to be carried by all of them or by any one of them on behalf of all. It gives
two assumptions
Each partner is entitled to carry out the business. The mutual agency exists between the
partners. Each partner is a principal as well as an agent for the other partners. He is bound by
the acts of other partners as well as can bind others by his own act.
 SHARING OF PROFIT
The agreement is to share profit and losses among the partners. The sharing of profit and
losses can be according to the ratio of the capital contributed or equally.
It helps to distribute the burden among the partners in the case when the partnership suffers
losses.
LIABILITY OF PARTNERSHIP
All the partners are jointly liable for paying the debts of the firm. The liability is unlimited
which means that the partner’s private assets can be disposed of for the purpose of paying the
debts of the firm.
KINDS OF PARTNERSHIP
The various types of partnership are based on two different criteria.
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PARTNERSHIP

With regard to the On the basis of extent

duration of the term of of the business carried
the Partnership by a Partnership

Partnership at Will Particular

Partnership

Partnership for a
Fixed Period General
Partnership
Class –.LL.B. I I SEM. Subject –
Contract Law - II

On the basis of the extent of the business carried by a partnership –

1. Partnership at Will -> When no fixed period is prescribed for the expiration of
partnership then it is a partnership at will. According to Section 7 two conditions need
to be fulfilled:
 No agreement about the determination of the fixed period of partnership
 No clause with respect to the determination of partnership.
2. Partnership for a Fixed Period -> When the partners fixed the duration of the
partnership firm then after the expiration of the fixed period the partnership comes to
an end. When the partners decided to continue with the partnership even after the
expiry of the fixed period then it becomes a partnership at will.
On the basis of the extent of the business carried by a partnership -
1. Particular Partnership (Section 8) -> When the partnership is created for
completing any project or undertaking. When such an undertaking or project have
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been completed then partnership comes to an end. The partners have a choice to
continue with the firm.
2. General Partnership -> When the partnership is created for the purpose of carrying
out the business. There is no particular task that has to be completed. The task is
general in nature.
SCOPE OF PARTNERSHIP ACT (SECTION 5)
The partnership arises from the contract but not from the status. The intention of partners is a
question of the partnership. The partners may exercise any of its power at time but must not
exercise in the pursuance of illegal, fraudulent or misconduct.
If any of the partners have made the contract without the consent of all other partners then the
question as to the validity of such contract arises. If all the partners have accepted or ratified
the contract then no question as to the validity of such contract arise.
With the consent of all the partners, the partnership can become a member of another firm.
KINDS OF PARTNERS
The member of a partnership is called partners.it is not mandatory that all the partners are the
same or all the partners participate in the conduct of the business or share the profit or losses

PARTNERS
 Class –.LL.B. I I SEM. Subject –
Contract Law - II
equally. The partners are classified depending on the nature of work, the extent of liability,
etc. There are basically six types of partner:

Active/managing Nominal Minor

Partner Partner Partner

Sleeping/Dormant Partner in Partner by

Partner profit only estoppel

 Active/managing Partner: The partner who takes participation in the conduct of the
business daily. This partner is also called an ostensible partner.
 Sleeping/Dormant Partner: He does not participate in the conduct of the business
but he is bound by the conduct of all the partners.
 Nominal Partner: He is a partner to the firm only by his name. In reality, he has no
significant or real interest in the firm.
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 Partner in profit only: The partner who agrees to share the profit but does not suffer
losses. He is not liable for any liabilities in case of dealing with the third party.
 Minor Partner: A minor cannot be a partner according to the Indian Contract Act,
but he can be admitted to get the benefit of all the partners gives the consent. His will
share the profit equally but his liability will be limited in case of loss of the firm.
 Partner by estoppel: it means when the person is not a partner but he has represented
himself by conduct, or words to another person to be the partner then he cannot deny
afterwards. Even though he is not a partner but he becomes the partner by holding out
or by estoppel.

RELATION OF PARTNER WITH ONE ANOTHER

All the partners have a right to create their own terms and condition with regard to the affairs
of the business in the partnership deed. The Indian Partnership Act has prescribed the
provision to govern the relation of partners and this provision is applicable in case when there
is no deed. The various rights of the partners are explained below:
Right to determine the relationship by contract (Section 11)
Class –.LL.B. I I SEM. Subject –
Contract Law - II
The partnership deed determines the general administration of the partnership like what will
be the profit-sharing ratio, who will do what work etc. The partnership contains the rights and
duties of the partners.
Such a deed can be made either expressly or by necessary implication. For example, if one
partner looks into sales daily and other partners do not object to it, his conduct will be
presumed as the right of all the partners in the absence of written agreement. So it can be
concluded that all partners create a right for their own.
SECTION 27 OF THE INDIAN CONTRACT ACT, 1872
Agreement in restraint of trade is void
All the agreements which restrain the person from carrying any lawful profession, trade or
business are void.
But Section 11 of the Partnership Act states that the partners can restrain each other from
carrying a business other than the firm but such restraint must contain in the partnership deed.
RIGHTS OF THE PARTNERS
1. Right to participate in the conduct of business (Section 12(a)): Each partner has a
right to participate in the conduct of the business. A partner right to participate in
business is curtailed in a case where some of them only participate in the business
affairs of the firm. This right can be curtailed only when the partnership deed states
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so.
2. Rights to access and inspect books and accounts (Section 12(d)): This right is also
given to the active and dormant partner. Each partner has a right to access and inspect
the book of account of the firm. In case of death of a partner, his legal heir can inspect
the copies of accounts.
3. Right to be indemnified: The partners have a right to be indemnified for the decision
taken in the course of the business. But such a decision is to be taken in the case of
urgency and should be of such nature that the ordinarily prudent person would take.
4. Rights to express his opinion (Section 12(c)): Each partner has a right to express his
opinion with regard to the business affairs. They also have the right to participate in
the decision-making process.
5. Rights to get interested on capital or advances: Generally, partners are not entitled
to get any interest on the capital that they invest .but when they agree to give interest,
then such interest would be paid from the capital. They are also entitled to 6%interest
on the advances made towards the business of the firm.
6. Right to share profit and loss: The partners share the profit and losses equally in the
absence of any deed. But when there is a partnership deed prescribing the ratio of
profit and losses it will be shared in accordance with the partnership deed.
RELATIONS OF PARTNERS TO THIRD PARTIES
Section 18 to 22 of the Act talks about the relation of partners third parties
Class –.LL.B. I I SEM. Subject –
Contract Law - II
 Section 18 prescribes that the partners are an agent of the firm for the purpose of
conducting the affairs of the business. The partners act as the principal and agent as
well when he performs the act in his own interest he is the principal and when he does
in the interest of another partner then he is an agent. He is not an agent for the
dealings or the transactions between the partners themselves.
 Section 19 states that any act which is performed by the partners in the usual course
of its business binds the firm itself. The authority to bind the firm is implied authority
 Section 20 states that partners can make a contract to restrict or expand the implied
authority of a partner.
 Section 21 states that if any act is done by any partners in case of an emergency
which a prudent man would do, then such acts need to bind the firm.
 Section 22 specifies that if any act is done by any partner then it must be done in the
name of the firm or in such manner which binds the firm.
DUTIES OF PARTNERS
The rights and duties are correlated with each other. When the rights are given to the partners
then there must be some which the partners should perform the various duties of partners are
as follows:
1. Duty to act diligently (Section 12(b)): It is the duty of the partners to act with due
care and diligence because his actions will affect all other partners. If his wilful act
causes a loss or injury to other partners he is entitled to pay compensation to the
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affected partners.
2. Duty to indemnify fraud (Section 10): Whenever any fraud is committed by
partners then every partner is liable to indemnify the firm for losses because the firm
is liable for the wrongful acts of the partners. If the fraud causes the losses to other
partners he is entitled to indemnify for the loss caused.
3. Duty to use the firm property exclusively for the purpose of business (Section
15): The partners can use the firm property for the purpose of the business but not for
its personal purpose. The partner must use the property in a lawful manner. They must
not earn a person gains from such property.
4. Duty to hand over personal gains (Section 16): All the partners should act towards
achieving the common goal. They must not engage in other profession or engage in
any competitive business venture. If they earn any personal gains from the conduct of
business then they should hand over to all the partners.
5. General duties (Section 9): It is the duty of all partners to make all the efforts to
achieve a common goal, to render a true account and provides all the information
affecting a firm to partners, or his representative.
WHEN DO RIGHTS AND DUTIES CHANGE?
The existing relationship between the partners come to an end when there is a change in the
constitution of the firms. Such changes in the constitution of the firm may occur due to the
following reasons (Section 17).
Class –.LL.B. I I SEM. Subject –
Contract Law - II
 Expiration of term of the firm.
 Carrying out the additional business other than agreed upon.
 Changes in the composition of members due to admission, retirement or the death of a
partner.
The duties and rights of partners remain the same until there is any change in agreement but
such right and duties may vary or modified by creating a fresh agreement.
STATUS OF A MINOR
Section 30 states the legal provision related to the minor according to Section 18 of the
Indian Contract act 1872, no person below the age of 18 years can enter into the contract
which implies that no minor can enter into a contract. But, Section 30 states that the minor
cannot be a partner in a partnership firm but he can be admitted to benefit from the
partnership firm. The minor will be liable to get only the benefits from the partnership but is
not liable for any losses or liability. The minor can be admitted to the partnership only with
the consent of all the partners.
Rights of a Minor
Various rights are as follows:
1. Right to inspect the books of account
2. Rights to share the profits from the firm
3. Rights to sue any partner or all for his share of benefit or profit
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4. He has a limited liability which means his personal assets may not be disposed of to
pay the firm debts
5. A minor has a right to become a partner on attaining the age of 18 years.
Liabilities of a Minor
1. A minor has Limited liability. If minor is declared as insolvent his share will be kept
in the possession of official liquidator.
2. If after attaining the age of 18 years he decided to become the partner then he has to
give public notice within 6 months of attaining the majority. If notice not given then
minor will become liable for all the acts of others until the notice is given
3. When a minor partner becomes the major he will be liable for the acts of all partners
to the third parties.
4. If he decided to become a full-time partner then he will be considered as a normal
partner and will take part in the conduct of the business.
LIABILITIES OF A PARTNER
1. Liability of partners for the acts of the firm (Section 25): All the partners is jointly
and severally liable for the acts of the firms. He is liable only for those acts which are
done at the time he is a partner.
Class –.LL.B. I I SEM. Subject –
Contract Law - II
2. Liability of a firm for the wrongful act of partner (Section 26): When any
wrongful act or omission is done by any of its partners in the ordinary course of its
business or with the consent of others partners then the firm is liable to the same
extent as a partner.
3. Liability of a firm for the misapplications by partner (Section 27): When any
partner acting as an agent receives the money from the third party and misapplies it or
the firm receives the money and money are misappropriated by any of its partners
then the firm is liable to pay for the loss suffered.
HOW IS REGISTRATION OF A PARTNERSHIP FIRM DONE?
Section 58 explains the procedure of the registration of a partnership firm.
Making an application to Registrar:
Any of its partners can send an application along with the prescribed fee and copy of
partnership deed o the registrar of the area in which any place of business is proposed to be
situated or is situated. Such a statement shall be signed by all of its partners. Such a statement
should contain:
 Name of the firm
 Principal place of business
 Any other place where the business is carried on
 Duration of partnership firm Renaissance Law College

 Name and address of all partners of a firm

 The date on which each partner joined the firm
 Verification: Each partner who has signed the statements needs to be verified.
 The name of the firm shall not contain any name resembling the name of Crown,
Emperor, king, Royal, Emperors’, or any other words implying or expressing the
sanction of the government.
Section 59 states that when the Registrar is satisfied that the conditions of Section 58 are
complied with then he shall record an entry of the statement in a register called the Register
of Firms, and shall file the statement.
NON-REGISTRATION OF A PARTNERSHIP FIRM
In India, it is not compulsory to register the partnership and no penalty is being imposed for
non-registration but if we talk about English law it is compulsory to register partnership firm
and if it is not registered then the penalty is imposed. Non-registration leads to a certain
disability in accordance with Section 69 of the Act.
Effect of non-registration (Section 69)
 No suit can be initiated in civil court by the firm or other co-partners against the third
party
Class –.LL.B. I I SEM. Subject –
Contract Law - II
 In case of breach of contract by the third party; the suit cannot be brought in any civil
suit. The suit must be filed by the one whose name is registered as a partner in a
register of the firm.
 No partners can claim a relief of set-off.
 Any action which is brought out by the third party against the firm having a value of
Rs 100 cannot be set off by the firm or any of its partners.
 An aggrieved person cannot sue against firms or other partners
Generally, no action can be brought against the firm or the partners but there is an exception
to it. In a case when the firm is dissolved it can bring a suit for the realization of his share in
the firm’s property.
Non-registrations do not affect the following rights
 A third party can bring a suit against the firm
 Right of the partners or firm to claim a relief of set off the claim for the value which
does not exceed Rs 100
 Power of official liquidator, official assignees to release the property of insolvent
partners and brings a legal action
 Partner right to claim for the realization of his share in case of dissolution of the firm
ADMISSION OF A PARTNER
A new partner may be admitted into partnership firm only with the consent of all the partners.
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A new partner admitted will not be liable for any acts of other partners or firms before his
admission.
What are the rights and liabilities of a new partner?
The liabilities of new partner commences from the date when he is admitted as a partner in a
partnership firm.
After the admission of a new partner, the new firm is liable for the debts of the old firm and
the creditor has to discharge the old firm and accept a new firm as its debtor. It can be called
as a novation. It can be done only when the creditor gives the consent to it.
RETIREMENT OF A PARTNER (SECTION 32)
Section 32 of Act talks about the retirement of partners. When the partner withdraws from
the partnership by dissolving it then it is dissolution but not a retirement.
Any partner may retire:
 When there is a partnership at will, by serving a notice to all the existing partners
 When there is an express agreement among the partners
 When the consent of all the partners is given
Liabilities of retired partner
Class –.LL.B. I I SEM. Subject –
Contract Law - II
A retired partner continues to be liable for the acts of firms and other partners till he or any
other partners give public notice about his retirement. When the third party does not know
that he was a partner and deals with the firm; then in such case a retired partner is not liable.
If it is a partnership at will then there is no requirement to give public notice about his
retirement.
The outgoing partner may enter into an agreement to not carry similar business or activities
within a specified period of time.
EXPULSION OF A PARTNER
A partner can be expelled only when below three conditions are satisfied:
1. Expulsion of the partner is necessary for the interest of the partnership
2. Notice is served to the expelled partner
3. An opportunity of being heard is given to the expelled partner
If the above three conditions are not fulfilled then such expulsion will be considered as null
and void.
INSOLVENCY OF A PARTNER
When a partner is declared as insolvent by the court, it leads to the following consequences:
1. He ceases to be the partner of a partnership firm from the date of adjudication
2. His estate which is in possession of official liquidator ceases to be liable for any acts
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of the firm whether the partnership subsequently dissolves or not

3. Partnership ceases to be liable for any act of insolvency partner
LIABILITY OF ESTATE OF A DECEASED PERSON (SECTION 35)
Generally, the partnership comes to end on the death of a partner but if there is a contract
between partners to continue with the partnership on the death of a partner then surviving
partner continues with the business after clearing the deceased partner estate from any
liability for the future acts of the firms.
LIABILITY OF OUTGOING PARTNER (SECTION 36)
The outgoing partner is restricted to perform acts like:
 Using the name of the firm
 Representing himself as a partner
 Make the customer of the firm in which he was a partner as its own.
The outgoing partner may enter into an agreement not to carry similar business or activities
within a specified period of time. After the specified period, the outgoing partner is allowed
to carry on a similar business or advertise it.
Liabilities of Outgoing Partner to subsequent Profits (Section 37)
Class –.LL.B. I I SEM. Subject –
Contract Law - II
When the any of the partners ceases to be a partner or dies and remaining partner continues
with the business without settling the accounts then the outgoing partner is liable to get a
share from the profit earned by the firm since the date he ceases to be a partner.
The share may be attributable to the use of a share of his property or 6% interest per annum
on the amount of share in his property.
The surviving partner has the option to purchase the share of the deceased partner and if they
purchase it then the deceased partner has no right to get the profit derived from such property.
DISSOLUTION OF A PARTNERSHIP FIRM
Dissolution of partnership firm is a process in which relationship between partners of firm is
dissolved or terminated. If a relationship between all the partners of firm is dissolved then it
is known as dissolution of firm. In case of dissolution of partnership of firm, the firm ceases
to exist. This process includes the discarding and disposing of all the assets of firm or and
settlements of accounts, assets, and liabilities. The dissolution of partnership takes place in
any of the following ways:
1. Change in the existing profit sharing ratio.
2. Admission of a new partner
3. The retirement of an existing partner
4. Death of an existing partner
5. Insolvency of a partner as he becomes incompetent to contract. Thus, he can no longer
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be a partner in the firm.

6. On completion of a specific venture in case, the partnership was formed specifically
for that particular venture.
7. On expiry of the period for which the partnership was formed.
Section 39 of the Indian Partnership Act, 1932 states that the dissolution of partnership
firm among all the partners of the partnership firm is the Dissolution of the Partnership Firm.
The dissolution of partnership firm ceases the existence of the organization.
After this, the partnership firm cannot enter into any transaction with anybody. It can only
sell the assets to realize the amount, pay the liabilities of the firm and discharge the claims of
the partners.
However, the dissolution of a firm may be without or with the intervention of the court. It is
noteworthy here that the dissolution of partnership may not necessarily result in the
dissolution of the firm. But, dissolution of partnership firm always results in the dissolution
of the partnership.

Ways in which dissolution of a partnership firm takes place:

Class –.LL.B. I I SEM. Subject –
Contract Law - II
1. Dissolution by Agreement -> A firm may be dissolved if all the partners agree to the
dissolution. Also, if there exists a contract between the partners regarding the
dissolution, the dissolution may take place in accordance with it.
2. Compulsory Dissolution ->
In the following cases the dissolution of a firm takes place compulsorily:
 Insolvency of all the partners or all but one partner as this makes them
incompetent to enter into a contract.
 When the business of the firm becomes illegal due to some reason.
 When due to some event it becomes unlawful for the partnership firm to carry
its business. For example, a partnership firm has a partner who is of another
country and India declares war against that country, then he becomes an
enemy. Thus, the business becomes unlawful.

3. When certain contingencies happen ->

The dissolution of the firm takes place subject to a contract among the partners, if:
 The firm is formed for a fixed term, on the expiry of that term.
 The firm is formed to carry out specific venture, on the completion of that
venture.
 A partner dies.
 A partner becomes insolvent.
4. Dissolution by Notice -> When the partnership is at will, the dissolution of a firm
may take place if any one of the partners gives a notice in writing to the other partners
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stating his intention to dissolve the firm.

5. Dissolution by Court ->
When a partner files a suit in the court, the court may order the dissolution of the firm
on the basis of the following grounds:
 In the case where a partner becomes insane
 In the case where a partner becomes permanently incapable of performing his
duties.
 When a partner becomes guilty of misconduct and it affects the firm’s
business adversely.
 When a partner continuously commits a breach of the partnership agreement.
 In a case where a partner transfers the whole of his interest in the partnership
firm to a third party.
 In a case where the business cannot be carried on except at a loss
 When the court regards the dissolution of the firm to be just and equitable on
any ground.

LIABILITIES OF PARTNERS IN DIFFERENT SITUATIONS

Class –.LL.B. I I SEM. Subject –
Contract Law - II
Liabilities of partners after the dissolution of the partnership firm (Section 45)
The partners are liable for the acts of the firm to the third party until public notice is given. A
partner who is declared as insolvent, or who is retired, the estate of a person who dies, or who
was not known as a partner at the time of dealing with the third party will not be liable for the
act.
Wind up the Business Post-Dissolution (Section 46)
When the firm is dissolved every partner has a right to apply for the firm’s property in the
payment of debts and liabilities. If there is any surplus it needs to be distributed among the
partners.
The partners have mutual obligations and rights until the affairs of the firm is wound up.
Settlement of partnership account (Section 48)
When the partnership has dissolved the accounts of the partners needs to be settled under the
usual course of business. Various modes can be used for the settlement of accounts.
If there is a deficiency in capital or loss is incurred when it is paid out of profit. If profit is not
sufficient or no profit is earned then it is paid out by the capital and by the partners if
necessary. The partners contribute to the proportion of the profit sharing ratio.
The asset of the firm and the capital contributed by the partners to meet up the deficiency in
the capital is applied in the following order:
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Repayment to third parties

1. The amount which is due to him from the capital
2. The amount which is due to him on account of capital
3. And if any amount is left then it is distributed among all the partners in their profit
sharing ratio.
Paying Firm Debts and Separate Debts (Section 49)
In a case when there are joint debts from the firm and the separate debts from the partner then
joint debts from the firm is given priority and if any surplus is left then separate debts from
the partner is to be paid off.
The property of the individual partners is applied firstly for the payment of separate debts.
Personal Profit Earned After Dissolution of Firm (Section 50 and Section 53)
When the firm is dissolved by the death of the partner and business is carried out by the
existing partners or his legal heirs then they have to account for the personal benefit earned
before winding up the partnership.
Class –.LL.B. I I SEM. Subject –
Contract Law - II
Section 53 states that if there is no contract the partner can restrain other partners from
carrying similar activities, or using the firm’s name or firm’s property for their own benefit
until the winding up process is complete.
Return of Premium on the Premature Dissolution of the firm (Section 51)
When the firm is dissolved before the expiry of a fixed period, then a partner paying a
premium can receive a return of a reasonable part of the premium. Such rules are not
applicable in a case when the partnership is dissolved by:
Misconduct of partner paying a premium (Section 52)
Post an agreement in which there is no clause for return of premium.
Contract Rescinded for Fraud or Misrepresentation
When the partnership arising from the contract is rescinded due to fraud and
misrepresentation then the party who has rescinded the contract will be liable as:
After the debt of the firm is paid the lien on remaining assets. He will be treated as a creditor
for the payment of any debts made by him.
An indemnity from the partners guilty of misrepresentation or fraud against all debts of firms.
Sale of Goodwill After Dissolution of Firm (Section 55)
The goodwill is treated as an asset. The goodwill is included in the assets while settling the
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account after the dissolution of the firm. The goodwill may be sold separately or with other
assets. Once the firm is dissolved and goodwill is sold then any partners can carry on a
similar business or advertise a business competing with the buyers of the goodwill. The
partners are prohibited from doing the following acts:
 To use the name of the firm
 To represent himself as carrying the business
 To solicit the customers of the firm dealing before dissolution.
CONCLUSION
Partnership is a very common type of business which is prevailing in the country. It has many
advantages for the company. This Act is a complete Act as it covers all the aspect related to
the partnership.
 Class –.LL.B. I I SEM. Subject –
Contract Law - II

UNIT V: SALE OF GOODS

 Concept of sale as a contract
 Illustrative instances of sale of
goods and the nature of such
contracts
 Essentials of contract sale
 Essential conditions in every
contract of sale
 Implied terms in contract sale
 The rule of caveat emptor and the
exceptions thereto under the sale of
Goods Act
 Changing concepts of caveat emptor
 Effect and meaning of implied
warranties in the sale
 Transfer of title and passing of risk

SALE OF
GOODS Renaissance Law College

FORMATION OF CONTRACT OF SALE

Till 1930, the law relating to sale and purchase of goods were regulated by the Indian
Contract Act, 1872. In 1930, Sections 76 to 123 of the Indian contract act, 1872 were
repealed and separate act called “The Indian sale of goods act, 1930” was passed. It came
into force on 1st July 1930.
MEANING OF CONTRACT OF SALE
According to Section 4 of the Sale of Goods Act, 1930 - ‘Contract of sale of goods is a
contract whereby the seller transfer or agrees to transfer the property in goods to the buyer for
a price’.

Contract of
Sale

Sale Agreement to Sale

ownership in the goods is where the transfer of ownership in

transferred by the seller to goods is to take place, at a future
the buyer immediately at the time or subject to fulfillment of
time of contract. some condition.
Class –.LL.B. I I SEM. Subject –
Contract Law - II
ESSENTIALS OF A CONTRACT OF SALE
 Two parties Buyer and Seller
 Goods
 Transfer of property
 All Essential elements of a valid contract must be fulfilled
 Price
 Include both sale and agreement to sale
DIFFERENCE BETWEEN SALE AND AGREEMENT TO SALE

BASIS FOR
SALE AGREEMENT TO SELL
COMPARISON

Meaning When in a contract of sale, the When in a contract of sale the parties
exchange of goods for money to contract agree to exchange the
consideration takes place goods for a price at a future specified
immediately, it is known as date is known as an Agreement to
Sale. Sell.

Nature Absolute Conditional

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Type of Contract Executed Contract Executory Contract

Transfer of risk Yes No

Title In sale, the title of goods In an agreement to sell, the title of

transfers to the buyer with the goods remains with the seller as
transfer of goods. there is no transfer of goods.

Right to sell Buyer Seller

Consequences of Responsibility of buyer Responsibility of seller

subsequent loss or
damage to the goods

Tax VAT is charged at the time of No tax is levied.

sale.
Class –.LL.B. I I SEM. Subject –
Contract Law - II
BASIS FOR
SALE AGREEMENT TO SELL
COMPARISON

Suit for breach of The buyer can claim damages Here the buyer has the right to claim
contract by the seller from the seller and proprietary damages only.
remedy from the party to
whom the goods are sold.

Right of unpaid seller Right to sue for the price. Right to sue for damages.

GOODS
Definition - Section 2(7)
The subject matter of a contract of a sale must be goods. The term ‘goods’ means ‘every kind
of movable property other than actionable claims and money and includes stock and shares,
growing crops, and things attached to or forming part of the land which are agreed to be
served or under the contract of sale’.
Effects of Destruction of Goods Renaissance Law College

1. In case of Contract of Sale [Section 7]- The contract of sale is void if the following
three conditions are satisfied:
 There must be a contract of sale for specific goods.
 The goods must have become perished or so damaged as no longer to answer their
description in the contract, before making of the contract.
 The seller must not be aware about the destruction of goods.
Example: X sold to Y all 700 bags of cement lying in his Delhi’s godown. State the legal
position:
i. If unknown to X, all bags had been stolen before he contract was made.
ii. If unknown to X, all cement had become stone as a result of heavy rainfall.
iii. If unknown to X, 109 bags had been stolen at the time of making the contract.
Solution:
Case 1- The contract is void because the goods have perished before making of the contract.
Case 2-The contract is void because the goods became so damaged as no longer to answer to
their description.
Case 3- The contract has become void and Y cannot be compelled to accept 591 bags because
the contract was indivisible.
Class –.LL.B. I I SEM. Subject –
Contract Law - II
2. In case of an ‘Agreement to sell’ [Section 8]- An agreement to sell becomes void if
the following four conditions are satisfied:
 There must be an agreement to sell specific goods.
 The goods must have become perished or so damaged as no longer to answer their
description in the agreement.
 There must not be any fault of seller or buyer.
 The risk must not have passed to the buyer, i.e. the goods must have perished before
the agreement to sell becomes sale.
Example 1: X agrees to sell a particular horse to Y on the expiry of 8 days. The horse was
delivered on trial for 8 days. However, the horse died on the third day, without any fault of
either the buyer or the seller. This agreement becomes void and X could not recover the price
from Y.
Example 2: X agreed to sell to Y 10 tonnes of potatoes to be grown on his land. X sowed
sufficient land to grow more than 10 tonnes of potatoes. But without any fault on X’s part, a
disease attacked the crop and only about 8 tonnes of potato could be grown. It was held that
the agreement to sell has become void.
PRICE OF GOODS
Section 2(10) defines Price “as a money consideration for a sale of goods”.
 It forms an essential part of the contract.
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 It must be expressed it terms of money.

 It is not essential that the price should be fixed at the time of sale.
 It must, however be payable, though it may not have been fixed.
Modes of determining price- Section 9(1):
 It may be fixed by the contract, or
 It may be left to be fixed in an agreed manner, or
 It may be determined by the course of dealing between the parties.
 In the absence of this, the buyer must pay to seller a reasonable price. What is
reasonable price is a question of fact dependent on the circumstances of each
particular case [Sec.9(2)]
Agreement to sell at valuation:
 Where there is an agreement to sell goods on the terms that the price is to be fixed by
the valuation of a third party and such third party cannot or does not make such
valuation, the agreement is thereby avoided.
Provided that, if the goods or any part thereof have been delivered to, and appropriated by the
buyer, he shall pay a reasonable price therefore.
 Class –.LL.B. I I SEM. Subject –
Contract Law - II
 Where such third party is prevented from making the valuation by the fault of the
seller or buyer, the party not in fault may maintain a suit for damages against the party
in fault.
CONDITIONS AND WARRANTIES
Meaning of stipulation [Section 12(1)]-
The representation as to the fact which becomes a part of the contract. of sale is called
stipulation.
The stipulation may be a condition or warranty depending upon its importance in relation to
the contract.
Meaning of Condition [Section 12(2)]-
 The stipulation which is essential to the main purpose of a contract is known as
condition.
 The breach of condition gives the aggrieved party the right to terminate the contract.
Meaning of Warranty [Section 12(3)]-
 A warranty is a stipulation which is collateral to the main purpose of the contract, and
 The breach of which gives the aggrieved party a right to claim damages but not a right
to reject goods and to terminate the contract.
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When condition to be treated as warranty [Section13]-

 Where the buyer waives a condition;
 Where the buyer elects to treat breach of the condition as a breach of warranty;
 Where the contract is not severable and the buyer has accepted the goods or part
thereof.
Types of conditions and warranties:

Express Implied Implied

Conditions Conditions Warranties

The express conditions 1. Condition as to 1. Condition as to

and warranties are title[sec.14(a)] quite possession
those which the parties 2. Sale by [Section 14(b)].
agree expressly, i.e. description[sec.15] 2. Warranty
orally or in writing. 3. Sale by against
sample[sec.17] encumbrance
4. Condition as to [Section 14(c)]
quality or 3. Warranty to
fitness[sec.16(1)] disclose
5. Condition as to dangerous
merchantable nature of goods.
quality[sec.16(2)] 4. Warranty as to
6. Condition implied by quality or fitness
custom[sec.16(3)] by usage of
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Contract Law - II

TRANSFER OF OWNERSHIP
A contract of sale of goods involves transfer of ownership from the seller to the buyer.
Transfer of ownership or property in goods is in fact the object of making a contract of sale.
Significance of transfer of ownership-
The time of transfer of ownership of goods decides various rights and liabilities of the seller
and buyer. Thus it becomes very important to know the exact time of transfer of ownership of
goods from seller to the buyer for the following reasons:
 Who shall bear the risk
 Who can take action against third party
 Whether a seller can sue for price.
 In case of insolvency of a buyer whether the official receiver or assignee can take
possession of goods from seller
 In case of insolvency of a seller whether the official receiver or assignee can take the
possession of goods from buyer.
RULES RELATING TO PASSING OF PROPERTY FROM SELLER TO
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BUYER
Three categories-
1. Rules relating to the transfer of ownership of specific or ascertained goods-[ Sec
19 - 22] -> The ownership is transferred immediately at the time of making the
contract if all the following conditions are satisfied:
 The contract is for the specific goods.
 The goods are in deliverable state.
 The goods are not required to be weight or measured for determining price.
2. Rules relating to the transfer of ownership of unascertained goods or future
goods-[Sec 18 and 23] -> Unascertained goods means goods which have not been
identified and agreed upon at the time when contract of sale is made. The ownership
of unascertained goods is transferred to the buyer when the following condition are
satisfied:
 The goods must have been ascertained.
 The goods must have been unconditionally appropriated by the seller or the buyer.
 The contract to sell unascertained goods is not a complete sale. It is the agreement to
sell.
3. Rules relating to the transfer of ownership of goods sale on approval or on sale
or return’ basis—[Sec24] -> The term sale on approval basis may be defined as the
Class –.LL.B. I I SEM. Subject –
Contract Law - II
sale in which the buyer may return the goods within reasonable time. This is also
known as sale on return basis. It means the buyer has the option either to return or
retain the goods. Here, the property in goods does not pass from the seller to the
buyer.

TRANSFER OF TITLE BY NON – OWNERS

General rule- NEMO DAT NON HABET
 No one can give that which has not
 To protect property rights
Exceptions
 Transfer of title by Estoppel [Sec 27]
 Sale by mercantile agent [Sec 27]
 Sale by Joint owners.[ Sec 28]
 Sale by a person in possession under voidable contract.[Sec 29]
 Sale by a seller in possession after sale.[Sec 30 (1)]
 Sale by a buyer in possession before the transfer of ownership.[Sec 30 (2)]
 Sale by an unpaid seller [Sec 54]
DELIVERY Renaissance Law College

Meaning of delivery-Sec 2(2): Delivery means the voluntary transfer of possession from one
person to another.
Types of Delivery-
1. Actual delivery
2. Symbolic delivery
3. Constructive delivery
Rules as to Delivery –
a) Payment and delivery to be concurrent [Section 32]
b) Mode of delivery [Section 33]
c) Effect of part delivery [Section 34]
d) Buyer to apply for delivery [Section 35]
e) Place of delivery [Section 36(1)]
f) Time of delivery [Section 36(2)]
g) Delivery when the goods are in possession of a third party [Section 36(3)]
h) Demand of delivery to be treated as ineffectual [Section 36(4)]
i) Expenses of delivery [Section 36(5)]
j) Delivery of wrong quality [Section 37]
k) Delivery by instalments [Section 38]
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Contract Law - II
l) Delivery to carrier or wharfinger [Section 39]
UNPAID SELLER
Meaning of unpaid seller- Sec 45
The seller to whom the full price of the goods sold has not been paid the price is known as
unpaid seller. A seller of goods is deemed to be unpaid in the following cases:
1. The price must be due but not paid.
2. A negotiable instrument like cheque and bill of exchange was received but same has
been dishonoured.
3. The seller who has obtained a decree for the price of the goods will also be an unpaid
seller if the decree has not been satisfied.
4. The seller shall be called an unpaid seller even when only a small portion of the price
remains to be paid.
5. The seller must have an immediate right of action for the price.
RIGHTS OF AN UNPAID SELLER

RIGHTS OF AN
UNPAID SELLER

Against the Buyer

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Against Goods
personally

Where the Where the Suit for Suit for

ownership of ownership in Price Interest
goods has goods has not
passed to the passed to the
buyer buyer Suit for
Damages
Right of
Lien Withholding
delivery

Right of
stoppage Lien
in transit

Right to
Re-Sale
Class –.LL.B. I I SEM. Subject –
Contract Law - II

Stoppage
in transit

Resale

Rights of unpaid seller against the goods when ownership is transferred

1. Right of lien- Section 47-49
Lien means the right to retain the possession of goods until the full price is received. An
unpaid seller can exercise his right of line in the following cases:
• Where the goods have been sold on the cash basis
• Where the goods have been sold on credit basis and the term of credit has expired.
• Where the buyer has become insolvent even if the period of credit has not been
expired
Other rules to satisfy conditions for this right are:
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i. The unpaid seller must be in actual possession of goods sold.

ii. It can be exercised even if the documents of title have been delivered to the buyer.
iii. It can be exercised for the price and no for other expenses.
iv. If the seller delivers some goods, it can be exercised on the remaining.
The Unpaid seller loses his Right of Lien
• When he delivers the goods to a carrier or other bailee for the purpose of transmission
to the buyer without reserving the right of disposal of the goods.
• When the buyer or his agent lawfully obtains the possession of the goods.
• When the seller waives his Right of Lien.
• When the buyer disposes off the goods by sale with the consent of the seller
• When the price is paid by the buyer.
• When the goods are destroyed.
2. Right of stoppage of goods in transit [Sec 50-52]
The right of stoppage in transit means the right of stopping the goods while they are in transit,
to regain possession and to retain them till the full price is paid.
Unpaid seller can stop the goods in transit in the following cases:
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Contract Law - II
• While the buyer becomes insolvent
• While the goods are out of actual possession of seller, but have not reached buyers
possession, ie, goods are in transit with carrier.
• The unpaid seller can stop the goods in transit only for payment of the price of the
goods and not for any other charges.
The unpaid seller cannot stop goods in transit in the following cases:
• When the goods reach the destination.
• While the buyer or his agent takes possession of delivery even if it has not reached
destination.
• In case the carrier is agent of the buyer, the transit comes to an end the instance carrier
receives the goods and seller cannot stop the transition.
• Carriers wrongful refusal to deliver goods to the buyer.
3. Right of Re-sale
If a buyer fails to pay the price within a reasonable time, the unpaid seller has the right of re-
sell the goods –
• Where the goods are of perishable nature
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• Where the unpaid seller has exercised his right of lien or stoppage in transit and gives
a notice to buyer of his intention of re-sale the goods.
• Where the unpaid seller has expressly reserve a right of re-sale if the buyer commits a
default in making the payment.
Rights against the goods where the property in the goods has not passed to the buyer
[Sec 46(2)]
Where the property in goods has not passed to the buyer, the unpaid seller has, in addition to
his other remedies, a right of withholding delivery similar to and co-extensive with his right
of lien and stoppage in transit where the property has passed to the buyer.
Rights against the buyer personally
 He may sue for price. Section 55
 He may sue for the damages for the non- acceptance of goods-Section 56
 He may sue for the damages for the repudiation of the contact before the due date of
the delivery of the goods- Section 60
 He has the right of interest for the delayed payment
 He may sue the damages for the wrongful refusal to take the delivery.
DOCTRINE OF CAVEAT EMPTOR
Class –.LL.B. I I SEM. Subject –
Contract Law - II
 Caveat Emptor is a fundamental principle of the law of sale of goods.
 It means “Caution Buyer”, i.e. “Let the buyer beware”.
Exceptions to the doctrine of Caveat Emptor [Section 16]:
 In case of any misrepresentation by the seller.
 In case of concealment of latent defects by the sellers.
 In case of sale by description and sample [Section15].
 Conditions as to merchantability.
 Conditions as to quality of fitness for buyers’ purpose.
 Conditions of wholesomeness.

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Class –.LL.B. I I SEM. Subject –
Contract Law - II

AUCTION FOR SALE

Meaning:

Sale of auction is the public sale where the goods are generally sold to the highest bidder.

Rules of Auction Sale:

The law on auction sales is contained in Section 64 of the Sale of Goods Act. According to
it, in the case of a sale of auction the following rules apply:

 Where goods are put up for sale in lots, each lot is prima facie deemed to be the
subject of a separate contract of sale;
 The sale is complete when the auctioneer announces its completion by the fall of the
hammer or in other customary manner; and, until such announcement is made, any
bidder may retract his bid;
 A right to bid may be reserved expressly by or on behalf of the seller and, where such
right is expressly so re-served, but not otherwise, the seller or any one person on his
behalf may, subject to the provision here in after contained, bid at the auction;
 Where the sale is not notified to be subject to a right to bid on behalf of the seller, it
shall not be lawful for the seller to bid himself or to employ any person to bid at such
a sale, or for the auctioneer knowingly to take any bid from the seller or any such
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CONCLUSION

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