KAMKUS COLLEGE OF LAW

B.A.LL.B. VTH SEMESTER

CONTRACT-II
(SPECIFIC CONTRACT AND LAW OF PARTNERSHIP)
Code (BL-5004)

UNIT- IST

LONG QUESTIONS WITH ANSWER

Q.1. Define the contract of guarantee? State the essential feature of a

contract of guarantee. Discuss the liabilities of a surety with the help of
decided cases?
ANS:- INTRODUCTION
A Contract to perform the promise, or discharge the liability, of a third person in case of
his default is called Contract of Guarantee. A contract of Guarantee is governed mainly
by the provisions of the Indian Contract Act, 1872.

DEFINITION OF CONTRACT OF GUARANTEE

Section 126 of the Indian Contract Act, 1872 defines a contract of guarantee as contract
of guarantee is a contract to perform the promise or discharge the liability, of a third
person in case of his default. The Section further provides that the person who gives the
guarantee is called the “surety”, the person in respect of whose default the guarantee is
given is called “principal debtor”, and the person to whom the guarantee is given is called
the “creditor”.

For example, A takes a loan from a bank. A promise to the bank to repay the loan. B also
makes a promises to the bank saying that if A does not repay the loan “then I will pay.”
In this case, A is the principal debtor, who undertakes to repay the loan; B is the surety,
whose liability is secondary because he promises to perform the same duty in case there
is default on the part of A. The bank in whose favour the promise has been made is the
creditor.

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ESSENTIALS FEATURES OF CONTRACT OF GUARANTEE

1. THE CONTRACT MAY BE EITHER ORAL OR IN WRITING

According to Section 126, a guarantee may be either oral or written. On this point,
the position in India is different from that in England. According to English law, for a
valid contract of guarantee, it is necessary that it should be in writing and signed by
the party to be charged therewith.

2. CONSENT OF THE SURETY SHOULD NOT HAVE BEEN OBTAINED BY

MISREPRESENTATION.
The creditor should not obtain guarantee by any misrepresentation of any material
facts concerning the transaction. If the guarantee has been obtained that way, the
guarantee is invalid. The position is explained by sections 142.

Guarantee obtained by misrepresentation invalids (Section-142) - Any guarantee

which has been obtained by means of misrepresentation made by the creditor, or with
his knowledge and assent, concerning a material part of the transaction, is invalid.

Consent of the surety should not have been obtained by misrepresentation or

concealment (Sec-143)- Any guarantee which the creditor has obtained by means of
keeping silence as to material circumstances is invalid.

EXAMPLES
 A engages B as clerk to collect money for him. B fails to account for some of his
receipts and A in consequences calls upon him to furnish security for his duly
accounting. C gives his guarantee for B’s duly accounting. A does not acquaint
C with B’s previous conduct. B afterwards makes default. The guarantee is
invalid.
 A guarantee to C payment for iron to be supplied by him to B to the amount of
2,000 tons. B and C have privately agreed that B should pay five rupees per ton
beyond the market price, such excess to be applied in liquidation of an old debt.
This agreement is concealed from A. A is not liable as a surety.”

3. TRIPARTITE AGREEMENT
A contract of guarantee is a tripartite agreement between the principal debtor,
creditor and surety. There are three contracts as under
 Contract between creditor and principal debtor
 Contract between surety and principal debtor
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  Contract between surety and the creditor

4. CONSENT OF THE PARTIES

There must be consent of all the three parties.

LIABILITY OF SURETY
According to Section 128, “The liability of the surety is coextensive with that of the
principal debtor, unless it is otherwise provided by the contract.” The provision that the
surety’s liability is coextensive with that of the principal debtor means that his liability is
exactly the same as that of the principal debtor. It means that on a default having been
made by the principal debtor, the creditor can recover from the surety all what he could
have recovered from the principal debtor. For instance, the principal debtor makes a
default in the payment of a debt of Rs. 10,000/-. The creditor may recover from the surety
the sum of Rs. 10,000/- plus interest becoming due thereon as well as the amount spent
by him in recovering that amount.

This may be further explained by the following example. A guaranteed to B the payment
of a bill of exchange by C, the acceptor. The bill is dishonored by C, the acceptor, is
liable not only for the amount of the bill but also for any interest and charges which may
have become due on it. If the principal debtor’s liability is reduced, e.g., after the creditor
has recovered a part of the sum due from him out of his property, the liability of the
surety is also reduced accordingly.

NATURE AND EXTENT

It has been held that if the principal debtor’s liability is scaled down in an amended
decree or otherwise extinguished in whole or in part by a statute, the liability of the surety
would also portent be reduced or extinguished. In this case, the liability of an
agriculturist, who was the principal debtor, was Act, 1957. It was held that the effect of
scaling down the principal debtor’s liability was that the surety’s liability had also been
reduced accordingly.

The surety’s liability was considered to be reduced for another reason also, and that was
that if the surety is made liable for the full amount, he in his turn will become entitled to
recover the same from the principal debtor, and this will eventually negative the benefit
conferred upon the agriculturist principal debtor under the statute. If the principal
debtor’s liability is affected by illegality, so is also that if the surety. Therefore, where the
liability of the principal is held to be not enforcement on the ground of the contract being
illegal, there is no question of surety being made liable. If the principal debtor happens to

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 be minor and the agreement made by him is void, the surety too cannot be made liable in
respect of the same because the liability of the surety is coextensive with that of the
principal debtor.

It has been held in an English case, that the guarantees of the loan or an overdraft to an
infant are void, because the loan to the infant itself is void.

CONCLUSION
Generally, a guarantee accommodates an obligation far-reaching with that of the
principal. At the end of the day, the guarantor can’t be at risk for much more than the
client. The document will be understood as a guarantee if, on its actual development, the
commitments of the surety are to “remained behind” the principal and just go to the fore
once a commitment has been broken as between the principal and the lender. The
commitment is an auxiliary one, reflexive in character.

Q.2. Define Bailment. What are the essential elements of bailment?

Differentiate between Bailment and pledge?

ANS:- INTRODUCTION
The team “Bailment” is derived from a French word “Ballior” which means “to give or
to deliver”. It has becomes as a technical term for the Law of Bailment in the Common
Law, where it means any kind of handing over of certain property, particularly good, for
a certain period. It involves a change of possession it means the delivery of the goods
which are to be returned or delivered according to the order of the giver.

DEFINITION
Section 148 defines “Bailment”, “Bailor” and “Bailee”,
Bailment”, “Bailor” and “Bailee” defined (Section-148) - A “bailment” is the delivery
of goods by one person to another for some purpose, upon a contract that they shall, when
the purpose is accomplished, be returned or otherwise disposed of according to the
directions of the person delivering them. The person delivering the goods is called the
“Bailor”, the person to whom they are delivered is called the “Bailee”.

EXAMPLE
Ram gives his Motor Car on hire to Ramesh for one day Ramesh prepares the ring. He
collects some charges from Ram. Ram is the bailor. Ramesh is Bailee. It is a contract of
bailment.

ESSENTIAL FEATURES OF A CONTRACT OF BAILMENT

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 1) Delivery of the goods by the bailor
2) Delivery should be upon Contract
3) Such delivery should have a specific purpose
4) Such delivery is temporary

1. DELIVERY OF POSSESSION
The first and most important essential characteristic feature of the bailment is the delivery
of possession of the property from one person to another. The delivery of the goods is
temporary and for some specific purpose only. After the purpose is over, the goods must
be returned to the bailor.

Blackstone explains “A bailment is a delivery of goods in trust upon a contract, express

or implied that the trust shall be faithfully executed on the part of the bailee.”

In Ultzen vs Nicols 1894, the plaintiff went to a restaurant for dining. When he entered
the room, the waiter took his coat and hung it on a hook behind him. When the plaintiff
arose to leave, the coat was gone. It was held that the waiter voluntarily took the
responsibility of keeping the coat while the customer was dining and was thus a bailee.

Contrasting this case with Kaliaperumal Pillai vs Visalakshmi AIR 1938, we can see the
meaning of delivery. In this case, a woman gave some gold to a jeweler to make jewelery.
Every evening she used to take the unfinished jewels, put it in a box, lock the box and
take the keys of the box with her while leaving the box at the goldsmith. One morning,
when the opened the box the gold was gone. It was held that, in the night, the possession

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 of the gold was not with the jeweler but with the plaintiff because she locked the box and
kept the keys with her.

2. DELIVERY SHOULD BE UPON CONTRACT

There must be a contract between the bailor and the bailee. The bailor delivers his goods
to the bailee for temporary possession for a specific purpose. After fulfilling such specific
purpose, the bailee returns the goods to bailor. Therefore, it requires an express or
implied contract.

In State of Gujarat vs Menon Mohammad AIR 1967, SC held that bailment can happen
even without an explicit contract. In this case, certain motor vehicles were seized by the
State under Sea Customs Act, which were then damaged. SC held that the govt. was
indeed the bailee and the State was responsible for proper careofthegoods.

3. DELIVERY SHOULD HAVE A SPECIFIC PURPOSE

The object of the bailment is ‘temporary custody of the property’ in the bailee’s hands.
The bailor hands over his goods to the bailee for a specific purpose and intention.

EXAMPLES
 We give cloth to a tailor for stitching our dresses. Tailor is a bailee, and we are
bailers. The purpose is to stitch the dresses.
 We give gold to goldsmith to get into ornaments. The purpose is to make the
ornaments.

4. DELIVERY IS FOR TEMPORARY

The goods handed over to a bailee are intended to keep them in his possession for a
limited time and for a specific purpose. After the prescribed time, or after fulfilling the
specific purpose, it is the duty of the bailee to return it. The delivery is only for
temporary.

DISTINCTION BETWEEN BAILMENT AND PLEDGE

BAILMENT PLEDGE
1. The law of bailment is explained in 1. The law of pledge is explained in
Secs.148 to 171 Secs. 172 to 181.
2. Object – There must be delivery of 2. Object – The goods are delivered to
goods upon a contract that they shall, Pawnee as security for payment of a
when the purpose is accomplished, be debt or performance of a promise, and
returned or otherwise disposed of be returned to Pawnee after payment

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 according to the directions of the person of debt.
delivering them.
3. There are several purpose utilized in 3. There is only purpose of pledge that
bailment. is to get a loan by pledging the goods.

4. The bailee has no right to sell the 4. The Pawnee has right to sell the
goods bailed. pledged goods if the pledger could not
redeem them within the time.
5. In bailment, if a thing is bailed for use 5. In Pledge, the Pawnee has no right to
of the bailee, the bailee can use the use the thing pledged.
thing for that purpose.
6. The bailee shall have to take 6. The Pawnee shall not use the goods
reasonable care. It is his duty. at all. If the contract between Pawnee
and Pawner allows, the Pawnee can
7. Examples – Tailors, motor car use it.
machines, T.V. Repairs, Setc may 7. The Creditors, banks, Pawnbrokers
become the bailees. etc. may become the Pawnees.
8. An every bailment, there may not be a 8. In every pledge, the essentials of
pledge. bailment are present

SHORT QUESTION WITH ANSWER

Q.3. Define pledge. What are its essential elements?

ANS:- INTRODUCTION
A pledge is only a special kind of bailment, and chief basis of distinction is the object of
the contract. Where the object of the delivery of goods is to provide a security for a loan
or for the fulfillment of an obligation that kind of bailment is called pledge.

DEFINITION OF PLEDGE
Under Indian Contract Act, 1872 the ‘Pledge’ has been defined in section 172 as-
According to Section-172
'The bailment of goods as security for payment of a debt or performance of a promise is
called 'pledge'. The bailor in this case is called the 'pawnor'. The bailee is called the
'pawnee'.

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ESSENTIAL FEATURES OF A VALID PLEDGE
The legal definition of pledge, discussed in the last article, reveals the essential features
of pledge which are as under

1. DELIVERY OF POSSESSION
It is an essential and important element of a valid pledge that the Possession of the goods
must be delivered by the pawnor to the Pawnee. It may be noted that only the possession
of the goods passes from one person to the other and not the ownership. The ownership
remains with the pawnor. If the possession is not delivered then there cannot be a valid
pledge.

The delivery of possession to the Pawnee may be of two kinds (a) actual delivery, (b)
constructive delivery. Actual delivery means the delivery of physical possession. And
constructive delivery means when there is no change of physical possession. The delivery
of keys of a go down where the goods are stored is the constructive delivery. Similarly,
the delivery of documents of titles which enables the Pawnee to obtain the possession is
the constructive delivery of goods.

2. DELIVERY SHOULD BE UPON A CONTRACT

It is another essential element of a valid pledge that the delivery of possession should be
made in pursuance of a contract of pledge. Thus, the delivery of goods should be made
with an intention to create a pledge. It is, however, not necessary that the delivery of the
goods and the advance of money (i.e., loan) should be simultaneous. Delivery may be
made before or in contemplation of advance. In such cases, a valid pledge results as soon
as the advance is made. The delivery may also be made after getting the advance. In such
cases, a valid pledge results as soon as the goods are delivered.

3. DELIVERY SHOULD BE FOR THE PURPOSE OF SECURITY

The goods should be delivered by one person to another by way of a security. The
pawnor should deliver the goods to the Pawnee as a security for the payment of a loan or
for the fulfillment of an obligation. It may be noted that this particular essential element
distinguishes the pledge from other similar, transactions. Thus, where the object of
delivery of goods is to provide a security for the payment of a loan, the transaction is a
pledge. And where the delivery is for some other purpose then it may be a bailment and
not a pledge.

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 4. DELIVERY SHOULD BE UPON A CONDITION TO RETURN
It is also an important element of a valid pledge. The goods should be delivered to the
Pawnee as a security for some loan or for the fulfillment of the promise. When such loan
is repaid or promise is fulfilled, the security should be returned to the pawner.

Q.4. Define indemnity. What are the rights of Indemnity holder?

ANS:- MEANING AND DEFINITION OF INDEMNITY

In the old English law, Indemnity was defined as a promise to save a person harmless
from the consequences of an act. Such a promise can be express or implied from the
circumstances of the case.

This view was illustrated in the case of Adamson vs Jarvis 1872. In this case, the
plaintiff, an auctioneer, sold certain goods upon the instructions of a person. It turned out
that the goods did not belong to the person and the true owner held the auctioneer liable
for the goods. The auctioneer, in turn, sued the defendant for indemnity for the loss
suffered by him by acting on his instructions. It was held that since the auctioneer acted
on the instructions of the defendant, he was entitled to assume that if, what he did was
wrongful, he would be indemnified by the defendant.

This gave a very broad scope to the meaning of Indemnity and it included promise of
indemnity due to loss caused by any cause whatsoever. Thus, any type of insurance
except life insurance was a contract of Indemnity.

However, Indian contract Act 1872 makes the scope narrower by defining the contract of
indemnity as follows:

According to Section 124 - A contract by which one party promises to save the other
from loss caused to him by the conduct of the promisor himself or by the conduct of any
other person is a "contract of Indemnity".

ILLUSTRATION
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.

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RIGHTS OF THE INDEMNITY HOLDER
Section 125 defines the rights of an indemnity holder. These are as follows -
The promisee in a contract of indemnity, acting within the scope of his authority, is
entitled to recover from the promisor –

1. RIGHT OF RECOVERING DAMAGES

All damages that he is compelled to pay in a suit in respect of any matter to which
the promise of indemnity applies.

2. RIGHT OF RECOVERING COSTS

All costs that he is compelled to pay in any such suit if, in bringing or defending it,
he did not contravene the orders of the promisor and has acted as it would have been
prudent for him to act in the absence of the contract of indemnity, or if the promisor
authorized him in bringing or defending the suit.

3. RIGHT OF RECOVERING SUMS

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

As per this section, the rights of the indemnity holder are not absolute or unfettered. He
must act within the authority given to him by the promisor and must not contravene the
orders of the promisor. Further, he must act with normal intelligence, caution, and care
with which he would act if there were no contract of indemnity.

At the same time, if he has followed all the conditions of the contract, he is entitled to the
benefits. This was held in the case of United Commercial Bank vs Bank of India AIR
1981. In this case, Supreme Court held that the courts should not grant injunctions
restraining the performance of contractual obligations arising out of a letter of credit or
bank guarantee if the terms of the conditions have been fulfilled. It held that such LoCs or
bank guarantees impose on the banker an absolute obligation to pay.

In the case of Mohit Kumar Saha vs New India Assurance Co AIR 1997, Calcutta HC
held that the indemnifier must pay the full amount of the value of the vehicle lost to theft
as given by the surveyor. Any settlement at lesser value is arbitrary and unfair and
violates art 14 of the constitution.

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Q.5. State the rights and duties of a bailee?

ANS:- RIGHTS OF A BAILEE

1. RIGHT TO NECESSARY EXPENSES (SECTION 158)
The bailee is entitled to lawful charges for providing his service. As per Section 158 says
that whereby conditions of the bailment, the goods are to be kept or to be carried or to
have work done upon them by the bailee for the bailor and the bailee is to receive no
remuneration, the bailor shall repay to the bailee the necessary expenses incurred by him
for the purpose of bailment. Thus, a bailee is entitled to recover the charges as agreed
upon, or if there is no such agreement, the bailee is entitled to all lawful expenses
according to this section.

In Surya Investment Co vs STC AIR 1987, STC hired a storage tank from the plaintiff.
On account of a dispute, STC appointed a special officer to take charge of the tank, who
delivered the contents as per directions of STC. Thus, the plaintiff lost his possession and
with it, his right of lien. SC held that the plaintiff is entitled to the charges even if he loses
his right of lien because the bailor has enjoyed bailee's services.

2. RIGHT TO COMPENSATION (SECTION 164)

As per section 164, the bailor is responsible to the bailee for any loss which the bailee
may sustain by reason that the bailor was not entitled to make the bailment, or to receive
back the goods, or to give directions respecting them. This means that if the bailor had no
right to bail the goods and if still bails them, he will be responsible for any loss that the
bailee may incur because of this.

3. RIGHT OF LIEN (SECTION 170-171)

In general, Lien means the right to keep the possession of the property of a person until
that person clear the debts. In case of bailment, the bailee has the right to keep the
possession of the property of the bailor until the bailor pays lawful charges to the bailee.
Thus, right of Lien is probably the most important of rights of a bailee because it gives
the bailee the power to get paid for his services.

4. RIGHT TO SUE (SECTION 180-181)

Section 180 enables a bailee to sue any person who has wrongfully deprived him of the
use or possession of the goods bailed or has done them any injury. The bailee's rights and
remedies against the wrong doer are same as those of the owner. An action may be
brought either by the bailor or the bailee.

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Thus, in Umarani Sen vs Sudhir Kumar AIR 1984, a firm which had consigned the
goods, of which it was a bailee, with a carrier, was allowed to sue the carrier for loss of
the goods.

DUTIES/RESPONSIBILITIES OF A BAILEE
1. DUTY TO TAKE REASONABLE CARE
In English law the duties of a gratuitous and non-gratuitous bailee are different. However,
in Indian law, Section 151 treats all kinds of bailees the same with respect to the duty. It
says that in all cases of bailment, the bailee is bound to take as much care of the goods
bailed to him as a man of ordinary prudence would, under similar circumstances take, of
his own goods of the same bulk, quality, and value as the goods bailed. The bailee must
treat the goods as his own in terms of care. However, this does not mean that if the bailor
is generally careless about his own goods, he can be careless about the bailed goods as
well. He must take care of the goods as any person of ordinary prudence would of his
things.

In Blount vs War Office 1953, a house belonging to the plaintiff was requisitioned by the
War Office. He was allowed to keep his certain articles in a room of the house, which he
locked. The troops who occupied the house were not well controlled and broke into the
room causing damage and theft of the articles. It was held that War office did not take
care of the house as an owner would and held the War Office liable for the loss.

2. DUTY NOT TO MAKE UNAUTHORIZED USE (SECTION 154)

Section 154 says that if the bailee makes any use of the goods bailed which is not
according to the conditions of the bailment; he is liable to make compensation to the
bailor for any damage arising to the goods from or during such use of them.

ILLUSTRATION - A lends horse to B for his own riding only. B allows C, a member of
his family, to ride the horse. C rides with care but the horse is injured. B is liable to
compensate A for the injury to the horse.

A hires a horse in Calcutta from B expressly to march to Benares. A rides with care but
marches to Cuttack instead. The horse accidentally falls and is injured. A is liable to
make compensation to B.

Thus, we can see that bailee is supposed to use the goods only as per the purpose of the
bailment. If the bailee makes any unauthorized use of the goods, he will be held
absolutely liable for any damages.

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3. DUTY NOT TO MIX (SECTION 155-157)
The bailee should maintain the separate identity of the bailor's goods. He should not mix
his goods with bailor's good without bailor's consent. If he does so, and if the goods are
separable, he is responsible for separating them and if they are not separable, he will be
liable to compensate the bailor for his loss. For example, A bails 100 bales of cotton
with a particular mark to B. B, without A's consent, mixes them with his own. A is
entitled to have his 100 bales returned and B is bound to bear all expenses for separation.
But if A bails a barrel of Cape flour worth Rs 45 to B and B mixes it with country flour
worth Rs 25, B is liable to A for the loss of his flour.

4. DUTY TO RETURN (SECTION 160)

Section 160 - It is the duty of the bailee to return or deliver according to the bailor's
directions, the goods bailed, without demand, as soon as the time for which they were
bailed has expired or the purpose for which they were bailed has been accomplished.
If the bailee keeps the goods after the expiry of the time for which they were bailed or
after the purpose for which they were bailed has been accomplished, it will be at bailee's
risk and he will be responsible for any loss or damage to the goods arising howsoever.

In Shaw & Co vs Symmons & Sons 1971, the plaintiff gave certain books to the
defendant to be bound. The defendant bound them but did not return them within
reasonable time. Subsequently, the books were burnt in an accidental file. The defendants
were held liable for the loss of books.

5. DUTY TO RETURN INCREASE (SECTION 163)

As per Section 163, in absence of any contract to the contrary, the bailee is bound to
deliver to the bailor, or according to his directions, any increase of profit which may have
accrued from the goods bailed.

Illustration - A leaves a cow in the custody of B to be taken care of. The cow has a calf.
B is bound to deliver the calf as well as the cow to B.

6. DUTY NOT TO SET UP JUS TERTII (SECTION 166)

As per Section 166 if the bailor has no title and the bailee, in good faith returns the goods
back to the bailor or as per the directions of the bailor, he is not responsible to the owner
in respect of such delivery. Thus, once the bailee takes the goods from the bailor, he
agrees that the goods belong to the bailor and he must return them only to the bailor. He
cannot deny redelivery to the bailor on the ground that the bailor is not the owner.

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 If there is true owner of the goods, he can apply to the court to stop the delivery of the
goods from the bailee to the bailor. This right is given to the true owner in section 167.

Q.6. State the circumstances in which surety is discharged from his liability?

ANS:-DISCHARGE OF SURETY FROM LIABILITY

When the liability of surety, which he had undertaken under a contract of guarantee, is
extinguished or comes to an end, he is said to be discharged from liability. The modes of
discharge of a surety, as recognized by the Indian Contract Act, are as under:

1. BY REVOCATION

 BY NOTICE (SECTION 130)

According to Section 130:“A continuing guarantee may at any time be revoked by the
surety, as to future transactions, by notice to the creditor.” This Section permits
revocation of guarantee by the surety:
 When it is a continuing guarantee, and
 As regards future transactions, only.
This can be done by a notice by the surety to the creditor in that regard. Once notice
revoking guarantee is issued, the liability of the surety would fasten only up to that date
and not thereafter.

The following illustrations make it clear that when the surety gives a notice of revocation,
his liability continues to exist for the transactions already made, but is revoked as regards
future transactions, i.e., the transactions made subsequent to the notice.

A, in consideration of B’s discounting at A’s request, bill of exchange for C guarantees to

B, for twelve months, the due payment of all such bills to the extent of 5,000 rupees . be
discounted bill for C to the extent of 2000 Rupees. Afterwards, at the end of three
months, A revokes the guarantee. This revocation discharges C from all liability to B for
any subsequent discount. But A is liable to B for the 2,000 rupees, on default of C. (Sita
Ram Gupta v/s Punjab National Bank)

 BY SURETY’S DEATH (SECTION 131)

According to Section 131 “The death of a surety operates, in the absence of any contract
to the contrary, as a revocation of a continuing guarantee, so far as regards future
transactions.”
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  BY NOVATION ( SECTION 133)
A contract of guarantee is said to be discharged by novation when a fresh contract is
entered into either between the same parties or between others parties, the consideration
being the mutual discharge of the old contract. The original contract of gurantee comes to
an endand the surety under original contract is discharged.

2. BY CONDUCT OF CREDITOR

 BY VARIANCE IN THE TERMS OF CONTRACT (SECTION 133)

When the surety has undertaken liability on certain terms, it is expected that they will
remain unchanged during the whole period of guarantee. If there is any variance in the
terms of the contract between the principal debtor and the creditor, without the consent of
the surety, the surety gets discharged as regards transactions subsequent to such a change.
The reason for such a discharge is that the surety agreed to be liable for a contract which
is no more there, and he is not liable on the altered contract because it is different from
the contract made by him. Section 133, which makes a provision in this regard, is as
follows:“Any variance, made without the surety’s consent, in the terms of the contract
between the principal debtor and the creditor discharges the surety as to transactions
subsequent to the variance.”

Section 133 has been explained with the help of the following illustrations:
A, becomes surety to C for B’s conduct as a manager in C’s bank. Afterwards, 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 loses on overdrafts, B allows a customer to overdraft and the
bank loses a sum of money. A is discharged from his surety ship by the variance made
without his consent, and is not liable to make good this loss.

 BY RELEASE OR DISCHARGE OF THE PRINCIPAL DEBTOR (SECTION

134)
The provision concerning the discharge of the surety on the release or discharge of the
principal debtor as contained in Section 134 and its Illustrations, is as under:

Discharge of surety by release or discharge of principal debtor (Section-134).- The

surety is discharged by any contract between the creditor and the principal debtor, by
which the principal debtor is released, or by any act or omission of the creditor, the legal
consequence of which is the discharge of the principal debtor.

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 EXAMPLE
A Contract with B for a fixed price to build a house for B within a stipulated time, B
supplying the necessary timber. C guarantees A’s performance of the contract. B omits to
supply the timber, C is discharged from his surety ship.”

 BY ARRANGEMENT
Section 135 mentions further circumstances when a contract between the creditor and the
principal debtor can result in the discharge of the surety. The Section is as under:

Discharge of surety when creditor compounds with, gives time to, or agrees not to
sue, principal debtor (Section-135) – A contract between the creditor and the principal
debtor by which the creditor makes a composition with, or promises to give time to, or
not to sue, the principal debtor, discharges the surety, unless the surety assents to such
contract.”

According to this Section, a contract between the creditor and the principal debtor
discharges the surety in the following three circumstances:-
 When the creditor makes composition with the principal debtor,
 When the creditor promises to give time to the principal debtor, and
 When the creditor promises not to sue the principal debtor.

Creditor’s forbearance to sue does not discharge surety(Section-137)- Mere

forbearance on the part of the creditor to sue the principal debtor, or to enforce any other
remedy against him does not, in the absence of any provision in the guarantee to the
contrary, discharge the surety.

ILLUSTRATION
B owes C a debt guaranteed by A. The debt becomes payable. C does not sue B for a year
after the debt has become payable. A is not discharged from his surety ship.”

 BY CREDITOR’S ACT OR OMISSION IMPAIRING SURETY’S EVENTUAL

REMEDY (SECTION 139)
Section 139 incorporates the rule that when the act or omission on the part of the creditor
is inconsistent with the interest of the surety, and the same results in impairing surety’s
eventual remedy against the principal debtor, the surety is discharged thereby. Section
139 is as follows:

16
Section 139 provides for Discharge of surety by creditor’s act or omission impairing
surety’s eventual remedy. If the creditor does any act which is inconsistent with the right
of the surety, or omits to do an act which his duty to the surety requires him to do, and the
eventual remedy of the surety himself against the principal debtor is thereby impaired, the
surety is discharged.”

 BY LOSS OF THE SECURITY BY THE CREDITOR (SECTION 141)

According to Section 141, the surety is entitled to all the securities which the creditor
has against the principal debtor at the time when the contract of surety ship is entered
into. If the creditor loses, or, without the consent of the surety, parts with such security,
the surety is discharged to the extent of the value of the security. For instance, the seller
of the goods allows the buyer to take away the goods without insisting for the payment of
the price for the same the surety who guarantees the payment of the price by the buyer, is
discharged from his liability.

3. BY INVALIDATION OF CONTRACT

 GUARANTEE OBTAIN BY MISREPRESENTATION SEC(142)

Any guarantee which has been obtained by means of misrepresentation made by the
creditor, or with his knowledge and assent, concerning a material part of the transaction,
is invalid.

 GUARANTEE OBTAINED BY CONCEALMENT INVALID SEC (143)

Any guarantee which the creditor has obtained by means of keeping silence as to material
circumstances is invalid.

ILLUSTRATIONS
A engages B as clerk to collect money for him. B fails to account for some of his receipts,
and A in consequence calls upon him to furnish security for his duly accounting. C gives
his guarantee for B' s duly accounting. A does not acquaint C with B’s previous conduct.
B afterwards makes default. The guarantee is invalid.

 FAILURE OF CO-SURETY TO JOIN SURETY SEC(144)

Guarantee on contract that creditor shall not act on it until co- surety joins.- Where a
person gives a guarantee upon a contract that the creditor shall not act upon it until
another person has joined in it as co- surety, the guarantee is not valid if that other person
does not join.

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VERY SHORT QUESTIONS WITH ANSWER

Q.7. What are the essential elements of a contract of Indemnity?

ANS:- The essential elements of a contract of indemnity are:
 There must be a loss.
 The loss must be caused either by the promisor or by any other person.
 Indemnifier is liable only for the loss.

Q.8. What is the difference between particular lien and general lien?
ANS:- PARTICULAR LIEN
This means that the lien holder has a right to keep possession of only that particular
property for which the charges are owed. For example, A gives a horse and a bicycle to
B. A agrees to pay B charges for training the horse and no charges for keeping the
bicycle. Now, if A fails to pay charges for the horse, B is entitled to keep possession only
of the horse and not of the bicycle. He must return the bicycle. Section 170 gives this
right to the bailee. It says that where the bailee has, in accordance with the purpose of the
bailment, rendered any service involving the exercise of labor or skill in respect of the
goods bailed, he has, in absense of a contract to the contrary, a right to retain such goods
until he receives due remuneration for the services he has rendered in respect of them.

Illustrations - A delivers a rough diamond to B to be cut and polished, which is

accordingly done. B is entitled to keep the diamond until charges for his services are
paid.

A gives cloth to B, a tailor, to make into a cloth. B promises to deliver the coat as soon as
it is done and also to give 3 months credit for the price. B is not entitled to keep the coat
until he is paid.

GENERAL LIEN
As opposed to Particular Lien, General Lien gives a right to the bailee to keep the
possession of any goods for any amount due in respect of any goods. Section 171 says
that, bankers, factors, wharfingers, attorneys of a High Court, and policy brokers may, in
the absence of a contract to the contrary, retain as a security for a general balance of
account, any goods bailed to them; but no other persons have a right to retain, as a
security for such balance, goods bailed to them, unless there is an express contract to that
effect.

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 Thus, this right is only available to bankers, factors, wharfingers, attorneys of high court,
and policy brokers. However, this right can be given to the bailee by making an express
contract between the bailor and the bailee.

Q.9. State the rights of a surety against the principal debtor, creditor and
co-sureties?
ANS:- RIGHTS OF SURETY
Against principal debtor
(a) Right of subrogation
After paying the guaranteed debt, the surety steps into the shoes of the creditor and
acquires all the rights which the latter had against the principal debtor (i.e., he gets
subrogated to all the rights and remedies available to the creditor) (Sec. 140). If the
creditor has the right to stop goods in transit or has a lien, the surety, on payment of
all he is liable for, will be entitled to exercise these rights.

(b) Right of indemnity

The surety is entitled to be indemnified by the principal debtor for all payments
rightfully made by him (Sec. 145).

Right against the creditor

(a) Right to securities Sec(141)
The surety can, after paying the guaranteed debt, compel the creditor to assign to him
all the securities taken by the creditor either before or at the time of the contract of
guarantee, whether the surety was aware of them or not.

(b) Claim to any set off

The surety on being called upon to pay can claim any set-off to which the principal
debtor is entitled from the creditor.

Right against co-sureties

Right to ask for Contribution
Surety can ask his co-sureties to contribute the amount when principal debtor comes
across default. If they have given guarantee for equal amounts, they have to contribute
equally. In case where guarantee is given for in equal amounts, the mode of contribution
differs from England law to Indian law. As per England law contribution is to be made in
the ratio of guarantee amounts. But as per Indian law the deficit amount is to be
distributed to all sureties equally and every surety will contribute share of deficit or
guarantee amount whichever is less.
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Q.10. What do you mean by continuing guarantee?

ANS:- CONTINUING GUARANTEE

As per section 129, a guarantee which extends to a series of transactions is called a continuing
guarantee.

Illustrations –
• A, in consideration that B will employ C for the collection of rents of B's zamindari,
promises B to be responsible to the amount of 5000/- for due collection and payment by C of
those rents. This is a continuing guarantee.
• A guarantees payment to B, a tea-dealer, for any tea that C may buy from him from time
to time to the amount of Rs 100. Afterwards, B supplies C tea for the amount of 200/- and C
fails to pay. A's guarantee is a continuing guarantee and so A is liable for Rs 100.
• A guarantees payment to B for 5 sacks of rice to be delivered by B to C over the period of
one month. B delivers 5 sacks to C and C pays for it. Later on B delivers 4 more sacks but C
fails to pay. A's guarantee is not a continuing guarantee and so he is not liable to pay for the 4
sacks.

Thus, it can be seen that a continuing guarantee is given to allow multiple transactions without
having to create a new guarantee for each transaction. In the case of Nottingham Hide Co vs
Bottrill 1873, it was held that the facts, circumstances, and intention of each case has to be
looked into for determining if it is a case of continuing guarantee or not.

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 UNIT- IIND

LONG QUESTION WITH ANSWER

Q.1. Define Agency. What are the essential elements of Agency? Discuss the
different modes by which the agency can be terminated?

ANS: INTRODUCTION
The law of agency governs situations where one person (agent) is appointed to act as the
representative of another (principal) in the context of contractual negotiations.
Generally, this system will be adopted for a number of reasons, for example it may not be
practical for one person to personally enter into all the contracts he/she would wish.
Moreover, where a company enters into contractual negotiations, it is important that
someone be appointed as an agent to act on behalf of that entity.

DEFINITION OF AGENCY

An agency is a business which provides a service on behalf of other businesses.

Section 182 of the Indian Contract Act defines an agent as person employed to do any act for
another or to represent another in dealings with third persons. The person for whom such act is
done, or who is so represented is called the “principal”.

ESSENTIALS OF A CONTRACT OF AGENCY

These are the following essentials of a Contract of Agency-

1. THERE SHOULD BE AN AGREEMENT BETWEEN THE PRINCIPAL AND

THE AGENT
It is an essential element of a valid agency. According to this element, the agency
must be created by an agreement between the principal and the agent. Thus, there
must be an agreement by which a person is appointed as an agent by the other. The
agreement may be express (i.e., by words of mouth or of the case.

2. THE AGENT MUST ACT IN THE REPRESENTATIVE CAPACITY

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 It is the most important essential element of a valid agency. The agent must act in the
representative capacity, i.e., he must represent his relationship of his principal with
the third persons. Thus the true nature of the relationship should be seen if the agent
acts in representative capacity and had the power to bind his principal with the third
persons, the relationship is that of ‘agency’.

3. THE PRINCIPAL MUST BE COMPETENT TO CONTRACT (SEC 183)

It is another important essential element of a valid agency. The principal must be
competent to enter into a valid contract, i.e., he must be of sound mind, and have
attained the age of majority (i.e., he should have completed 18 years of age). Thus, a
minor or a person of unsound mind (i.e., insane person) cannot appoint an agent to
act on his behalf [Section 183]. An appointment of an agent, made by an incompetent
person is void. It may be noted that an agent acting on behalf of an incompetent
principal will be personally liable, for his acts, to third persons with whom be
contracts.

4. THE AGENT NEED NOT BE COMPETENT TO CONTRACT (SEC: - 184)

Generally, an agent incurs no personal liability while contracting on behalf of his
principal. Therefore, it is not necessary that he should be competent to contract. Thus
any person may become an agent and he need not be competent to contract [Section
184]. Even a minor can be appointed as agent, and the principal shall be bound by the
acts of such an agent. It may, however, be noted that such an incompetent agent shall
not be liable to the principal. Thus, the principal cannot recover any compensation
from an incompetent agent for losses caused by misconduct or unauthorized acts of
such agent. It is, therefore, in the interest of the principal to appoint a competent
person as his agent.

5. THE CONSIDERATION IS NOT NECESSARY (SEC: - 185)

An agency is valid even without consideration. Thus, no consideration is required for
the creation of a valid agency relationship [Section 185]. Generally, an agent is
remunerated by way of commission for the services rendered by him. However, no
consideration is necessary for the validity of the appointment of the agent.

TERMINATION OF CONTRACT OF AGENCY

Termination of agency may take place in two ways either by the operation of law or by
the act of parties.
 Termination of agency by the operation of law
 Termination of agency by the act of Parties.

TERMINATION OF AGENCY BY THE OPERATION OF LAW

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The following are the situations where the agency is terminated by the operation of law-
1. Expiry of time: At times contract of agency may get formed for a particular period.
In such a case after expiry of that agreed period, termination of agency takes place.

2. Fulfillment of object: At times the contract of agency may be found for a particular
objective or to do a particular venture. In such a case termination of agency takes
place after completion of that venture.

3. Death or lunacy of either party (sec:-209) whenever principal or agent come across
death or lunacy, agency contract gets terminated.

4. Insolvency of Principal: Principal should have capacity to contract. When principal

becomes insolvent, He foregoes capacity to contract and termination of agency takes
place. But the act is silent with regard to insolvency of agent. As minor also can act
as agent, it can be conformed that insolvent person may act as agent.

5. Destruction of subject matter: When subject matter of contract gets destructed,

agency contract comes to an end.

6. Principal – Alien Enemy: When principal is alien and war breaks out between the
countries, then principal becomes alien enemy and agency contract gets terminated.

7. Liquidation of company: On account of legal entity company may act either as

principal or agent. Whatever the status may be, if company enters into liquidation,
termination of agency takes place.

8. Termination of Sub-agency (sec:-210) When ever man agency gets terminated on

account of any reason, sub-agency also goes off.

TERMINATION OF AGENCY BY THE ACT OF PARTIES

The following are the situations where the agency is terminated by the act of parties.
1. Termination of agency by the Principal: Principal can terminate the contract of
agency by giving notice to agent. By doing so if agent comes across any suffering.
Principal has to compensate the agent.

2. Termination of agency by the Agent: Agent also can terminate the agency contract
by giving notice to principal but by doing so if principal comes across any suffering,
agent has to compensate.

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 3. Termination of agency by both the parties to the contract: By means of mutual
understanding between principal and agent, the contract of agency may come to an
end.
Q. 2. Who is an Agent? What are the different kinds of agent?
ANS:- AGENT
An agent is any person who has been legally empowered to act on behalf of another
person. Agents are employed to represent their client in negotiations or dealings with
third parties.

Agent is one who agrees and is authorized to act on behalf of another, a principal, to
legally bind an individual in particular business transactions with third parties pursuant to
an agency relationship.

Agent is a person who is authorized to act for another (the agent's principal) through
employment, by contract or apparent authority. The importance is that the agent can bind
the principal by contract or create liability if he/she causes injury while in the scope of
the agency. Who is in agent and what is his/her authority or often difficult and crucial
factual issues.

An agent is a person who acts in the name of and on behalf of another, having been given
and assumed some degree of authority to do so. Most organized human activity—and
virtually all commercial activity—is carried on through agency. No corporation would be
possible, even in theory, without such a concept. We might say “General Motors is
building cars in China,” for example, but we can’t shake hands with General Motors.
“The General,” as people say, exists and works through agents. Likewise, partnerships
and other business organizations rely extensively on agents to conduct their business.
Indeed, it is not an exaggeration to say that agency is the cornerstone of enterprise
organization. In a partnership each partner is a general agent, while under corporation law
the officers and all employees are agents of the corporation.

The existence of agents does not, however, require a whole new law of torts or contracts.
A tort is no less harmful when committed by an agent; a contract is no less binding when
negotiated by an agent. What does need to be taken into account, though, is the manner in
which an agent acts on behalf of his principal and toward a third party.

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KINDS OF AGENT
The term agent applies to anyone who by authority performs an act for another, and
includes a great many classes of persons to whom distinctive names are given. There may
be various types of agents whose powers and duties are settled by usage and custom of
trade recognized by the courts of law. The important one are classified as under:

1. EXPRESS OR IMPLIED AGENTS

An express agent is one who is appointed verbally or by writing. An implied agent is
one whose appointment is to be inferred from the conduct of the parties.

2. GENERAL, SPECIAL OR UNIVERSAL AGENTS

A general agent is one who is employed to transact generally all the business of the
principal in regard to which he is employed. A special agent has only authority to do
some particular act or represent his principal in some particular transaction. A
universal agent is one who is authorized to transact all the business of his principal of
every kind and to do all the acts which the principal can lawfully do and can delegate.

3. AGENT OR SUB-AGENT
An agent derives his authority directly from the principal. A sub-agent derives his
authority from the agent who has been appointed to do the act. One broad
classification of agents is mercantile or commercial agents and non-mercantile or
non-commercial agents.

4. NON-MERCANTILE AGENTS
Non-mercantile agents include counsel, solicitor, guardian, promoters, wife, receiver,
insurance agent etc.

5. MERCANTILE AGENTS
The following are some of the important mercantile agents-

A. FACTOR
A factor is a mercantile agent to whom possession of goods is given for sale.
Generally speaking, he is a person to whom goods are consigned for sale by a
merchant residing abroad, or at a distance from the point of sale. He usually sells
the goods in his own name. He has ostensible authority to dispose of the goods or
to do such things as are usual in the conduct of his business. He cannot barter or
pledge the goods. He has a general lien for the balance of account as between
himself and the principal.
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B. AUCTIONEER
An auctioneer is an agent who is appointed to sell goods at a public auction for
remuneration. He may or may not be entrusted with the possession or control of
the goods which he sells. He may be agent both for the seller and buyer. The
auctioneer can sue for the purchase price in his own name. An auctioneer has
implied authority to sell the goods without any restriction. Hence a sale by him in
violation of the instruction is binding on the owner. If the owner directs the
auctioneer not to sell below a reserve price and the auctioneer sells it below that
price, the sale is even then binding on the owner except in cases where the buyer
knew that there was limitation on the auctioneer’s authority.

C. BROKER:
A broker is a mercantile agent who is employed to make contracts for the
purchase and sale of goods for a commission called brokerage. A broker unlike a
factor is not entrusted with the possession of the goods. Even the documents of
title are not made over to him. His business is to find purchasers for those who
wish to sell, and sellers for those who wish to buy. His duty is to bring parties
together to bargain for them in various matters. He makes contracts in the name of
his principal and not in his own name. He is a mere negotiator or in senses a
middleman.

D. COMMISSION AGENT
A commission agent is a mercantile agent who in consideration of a certain
commission engages to purchase or sell goods for his principal. He buys and sells
goods in the market on the best terms and in his own name. His only interest in
the transaction is his commission. All profits and losses accrue to the principal. A
commission agent may or may not be in actual possession of the goods. His
position is very similar to that of the broker.

E. DEL CREDERE AGENT

A Del credere agent is an agent who is in consideration of a extra remuneration
guarantees to his principal the performance of the contract by the other party. This
Del Credere commission is a higher reward than is usually given in the form of
commission. He occupies the position of a guarantor as well as of an agent. But
his liability is secondary and arises only on the insolvency or failure of the other
party. A Del Credere agent is appointed generally when the principal deals with
persons about whom he knows nothing. A Del Credere agent is the person who is
not dropped out after establishing the link between principal and third person.

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 F. BANKER
The relation between a banker and a customer is either that of debtor and creditor
or of an agent and principal. When the banker advances money to this customer as
a loan, banker is the creditor and customer the debtor. But the banker acts as agent
of his customer when he buys or sells securities, collects cheques, dividends, bills,
etc. on behalf of his customer.

G. GENERAL AGENT AND PARTICULAR AGENT

A general agent is one who represents the principal in all matters concerning a
particular business. A particular agent is one who is appointed for a specific
purpose e.g. to sell a particular article. Factors and commission agents are usually
general agents. When general agents are appointed it is usual to execute a general
power of attorney by which the agent is given authority to do certain things. A
particular agent may be appointed by executing a special power of attorney by
which the agent is authorized to do a specific thing. A power of attorney must be
written and stamped. A man dealing with a particular agent is bound to find out
the limits of the authority of the act and act accordingly.

SHORT QUESTION WITH ANSWER

Q.1. Discuss the rights and duties of an agent.

Ans:- RIGHTS OF AN AGENT
1. He is entitled to remuneration and other expenses properly incurred by him in the
agency. But if he is guilty of misconduct, he is not entitled to receive the
remuneration. Illustration: A employs B to recover Rs. 1000 from C. Through B’s
misconduct, the money is not recovered. B is entitled to no remuneration for his
services and must make good the loss.
2. He is entitled to retain the goods, papers and other property, movable on immovable,
of the principal for his claims.
3. The agent has a right to be indemnified by the principal for all lawful acts.
Illustration: B at Singapore under instructions from A of Calcutta, contracts with C to
deliver goods. A does not send the goods to B and C sues B breach of contract. B
informs A of the suit and A authorizes him to defend the suit. B defends and is
compelled to pay damages etc. A is liable to B for such damages etc.
4. The agent is entitled to be indemnified for the injury caused to him by the principal’s
neglect or want of skill. Illustration: A employs B as a brick-layer in building in a
27
 house and puts a scaffolding himself unskillfully and B is in consequence, hurt. A
must compensate B.
5. When an agent acts in good faith, the employer must indemnify him for the
consequence of that act, through it causes an injury to the rights of third parties.
Illustration: B, at the request of A, sells goods in the possession of A, but which A
had no right to dispose of B does not know this and hands over the sale proceeds to
A. afterwards C the true owner sues A and recovers the value of goods and costs. A
must indemnify B for what he has paid and for B’s own expenses.

DUTIES OF AN AGENT
1. He should act according to the directions of the principal and in default, indemnify
the principal for the loss, if any
2. In the absence of instructions, he must act according to the trade custom. Illustration:
A, an agent engaged in carrying on for B, a business, in which it is the custom, to
invest from time to time, at interest the monies which may be in hand, omits to make
such investment. A, must make good to B the interest usually obtained by such
investment.
3. In case of difficulty, he must be diligent in communicating with the principal and
obtaining his instruction.
4. He must conduct the business of agency with as much skill as is generally possessed
by persons engaged in similar business, unless the principal has notice of want of
skill. Illustration: A, having authority to sell on credit, sells goods to B without
enquiring about his solvency, B at the time of sale, is bankrupt. A must make good
the loss.
5. He must render proper accounts on demand.
6. He must not delegate his authority without the consent of the principal.
7. He must deliver all monies including secret commission, to the principal. He can
deduct his remuneration and other lawful expenses spent by him.
8. He should not set up his own title or title of third parties to the goods of the principal
in hi hands.
9. If, by the nature of profession, an agent is purported to have special skill, he must
exercise that degree of skill ordinarily expected from the members of the profession.
Illustration: A solicitor, who started the proceedings under a wrong section or field a
suit in a court having no jurisdiction, is liable.
10. He should not disclose confidential information.
11. His interest should not conflict with his duty.

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Q.2. Discuss different modes for the creation of principal and agent
relationship?

ANS:- CREATION OF AGENCY

An agency may be created in the following ways:

1. BY EXPRESS AUTHORITY
The authority of any agency may be expressed in words spoken or written. For
example, a contract of agency can be written by means of power of attorney.

2. BY IMPLIED AUTHORITY
The authority of an agent can be interred from the circumstances of the case.
Illustration: A living in Bombay, owns a shop in Madras and he occasionally visits it.
B is managing the shop and is in the habit of ordering goods from C in the name of A
for the purpose of the shop and of paying to them out of A’s funds with A’s
knowledge. B has an implied authority from A to order goods from C in the name of
A for the purpose of the shop.

3. BY NECESSITY
Sometimes, exigencies of circumstances require a man to act for another as an agent,
though not appointed as such. Illustration: A horse was sent by rail. The owner had
not taken delivery of the same at the destination. So, the station master had to feed it.
It was held that the station master had become an agent by necessity and was
therefore entitled to recover the charges incurred by him.

4. BY HOLDING OUT
Where a master usually sends his servant to pledge his credit for certain mangdfgfd
he is bound by the acts of the servant for similar purposes though done without his
consent.

5. BY ESTOPPEL
When one man by words or conduct causes another to believe that some other person
is his agent and that another person had acted on that belief, he would be stopped
from denying the authority of that another person to act on his behalf. Illustration: a
tells B in the presence and within the hearing of P that he (A) is P’s agent and P does
not contradict this statement B, on the faith of this statement, subsequently enters
into a contract with A, taking him to be P’s agent. P is bound by that contract.

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 6. BY RATIFICATION OR EXPOST EACTO AGENCY
Section 196 of the Indian Contract Act lays down that where acts are done by one
person on behalf of another, but without his knowledge of authority, he may elect to
ratify or to disown such acts. If he ratifies them the same effects will follow as if they
had been performed by his authority. Thus ratification relates back to the date of the
original contract and binds the principal as if he has expressly authorized it.

VERY SHORT QUESTIONS WITH ANSWER

Q.1. Explain Agent and Principal?

Ans: AGENT
An ‘AGENT’ is a person employed to do any act for another or to represent another in
dealings with third persons. The function of an agent is to bring his principal Into
contractual relations with third persons.

PRINCIPAL
A person for whom the above act is done or who is so represented is called the
‘PRINCIPAL’.

Q.2. Agency of Necessity?

Ans: Agency by necessity is an agency created by an emergency arising from a situation making
it necessary or proper for the agent to act without receiving the sanction or authorization
of the principal, in order to prevent harm to the principal. It arises when a duty is imposed
on a person to act on behalf of another apart from contract and to prevent irreparable
injury. Such an agency relationship is recognized by the courts.

Q.3. Is consideration necessary for the formation of a Contract of Agency?

Ans:- Sec 185 lays down that No consideration is required for creating an agency .Thus the
contract of agency constitutes an exception to the rule contained in sec 25 of Indian
Contract Act that no consideration – no contract. It means there can be a gratuitous
contract of agency.

30
Q.4. When is an agent personally bound by contracts entered into by him on
behalf of his principal?
ANS:- An agent is personally liable to the third party in the following cases:
1. He agrees to be personally liable to the third parties.
2. He acts for a principal who resides abroad.
3. When he signs a negotiable instrument in his own name without disclosing that he is
merely an agent.
4. Where a principal cannot be sued e.g. a minor
5. When he contracts as an agent without authority
6. Where he commits any kind of tort.

UNIT- IIIRD

LONG QUESTION WITH ANSWER

Q.1. What is meant by unpaid seller’s right of lien? When this right can be
exercised and when it comes to end?

Ans: Unpaid Seller

An unpaid seller has been defined by Section 38 of the Sales of Goods Act. It provides:
Section 38. (i) The seller of goods is deemed to an “unpaid seller” within the meaning of this
Act—
(a) When the whole of the price has not been paid or tendered;
(b) When a bill of exchange or other negotiable instrument has been received as conditional
payment, and the condition on which it was received has not been fulfilled by reason of the
dishonor of the instrument or otherwise.
(2) In this Part of this Act the term ” seller ” includes any person who is in the position of a
seller, as for instance, an agent of the seller to whom the bill of lading has been indorsed, or a
consignor or agent who has himself paid, or is directly responsible for, the price.
From the above, it can be deduced that an unpaid seller is a person who has not being paid, either
by cash or other negotiable instruments. For negotiable instruments, the mere fact that they
haven’t been tendered by the seller doesn’t mean that he is an unpaid seller. He becomes an
unpaid seller when after tendering them, they are rejected.
The term “seller” was also defined; it doesn’t only refer to the seller in his person but includes
the seller’s agents.

Rights of an Unpaid Seller

31
The Act further provides for means of redress in the situation of an unpaid seller. The means
are– a right of lien on the goods, the right to stop the goods in transit if it is discovered that the
buyer is insolvent and a right to resell the goods. This is encapsulated in the provisions of S.39 of
the Act which provides:
Section 39.—(i) Subject to the provisions of this Act, and of any statute in that behalf,
notwithstanding that the property in the goods may have passed to the buyer, the unpaid seller
of goods, as such, has by implication of law—
(a) A lien on the goods or right to retain them for the price while he is in possession of them;
(b) In case of the insolvency of the buyer, a right of stopping the goods in transitu after he has
parted with the possession of them;
(c) A right of re-sale as limited by this Act.
(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 rights of
lien and stoppage in transit where the property has passed to the buyer.

Unpaid Seller’s Right of Lien

A right of lien is simply the right of a seller to withhold the delivery of goods to the seller till he
has been paid. The act provides for situations in which an unpaid seller would be able to exercise
his right of lien: where the goods are not sold on credit, if they were sold on credit; the term of
the credit has expired, where the buyer becomes bankrupt.
The act also provides that the seller can exercise this right notwithstanding that he is an agent,
bailee or custodial for the buyer.
All these are encapsulated in Section 41 which reads:
Section 41.—(1) Subject to the provisions of this Act, the seller of goods who is in possession of
them is entitled to retain possession of them until payment or tender of the price in the following
cases, namely; —
(a) Where the goods have been sold without any stipulation as to credit;
(b) Where the goods have been sold on credit, but the term of credit has expired;
(c) Where the buyer becomes insolvent.
(2) The seller may exercise his right of lien notwithstanding that he is in possession of the goods
as agent or bailee or custodial for the buyer.
However, in a situation in which the seller makes part delivery of the goods, he may exercise his
right of lien on the remaining part unless there is an agreement in which he waives this right.
This is provided in Section 42 of the Sales of Goods Act which states:
Section 42. Where an unpaid seller has made part delivery of the goods, he may exercise his
right of lien or retention on the remainder, unless such part delivery has been made under such
circumstances as to show an agreement to waive the lien or right of retention.
By the provision of Section 43 of the sales of Goods Act, the following are situations in which
the seller loses his right of lien:
Section 43.—(1) The unpaid seller of goods loses his lien or right of retention thereon
(a) When he delivers the goods to a carrier or other bailee or custodial for the purpose of
transmission to the buyer without reserving the right of disposal of the goods;
(b) When the buyer or his agent lawfully obtains possession of the goods;
(c) By waiver thereof.
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(2) The unpaid seller of goods, having a lien or right of retention thereon, does not lose his lien
or right of retention by reason only that he has obtained judgment or decree for the price of the
goods.

The Black's Law Dictionary defines lien as "a legal right or interest that a creditor has in another
property, lasting usually until a debt or duty that it secures is satisfied". Vendor's Lien has also
been defined under the Black's Law Dictionary as a lien held by a seller of goods, who retains
possession of the goods until the buyer has paid in full.
The term lien implies that the property in the goods has vested in the buyer, because no man can
have a lien on his own goods. A lien necessarily presupposes that the property in the goods has
passed, as the seller cannot be said to possess a right of lien on his own property, which is in the
nature of a right of distress over the property of another.
It is settled law that the question of lien in respect of the goods, it is apparent that an unpaid
seller has a lien on the goods for the price "while he is in possession of them". Therefore, if the
unpaid seller does not have possession of the goods, he cannot have lien on such goods. This
view has also been upheld by the
Hon'ble High Court of Delhi in the judgment titled as "Pawan Hans Helicopters Ltd. vs. Aes
Aerospace Ltd.".7
In addition to an unpaid seller losing the possession of the goods, the Act also provides for the
following specific situations, in which an unpaid seller loses its right of lien, i.e. when:
a. The unpaid seller 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;
b. The buyer or his agent lawfully obtains possession of the goods;
c. The unpaid seller has waived its right of lien over the goods.8
However, in the presence of a contractual stipulation, an unpaid seller's lien, recognized in terms
of Section 46 and 47 of the Act, may not stand terminated upon delivery of the goods to the
carrier.
The Hon'ble Supreme Court of India has in the judgment titled as "Suchetan Exports Pvt. Ltd. vs.
Gupta Coal Ltd. and Ors."9 held that wherein the contract for sale provided that the seller would
retain its lien over the goods and title would pass to the buyer on payment of the full price of the
goods, then the unpaid seller of the goods is entitled to exercise lien over the goods,
notwithstanding that the possession of the goods may not be with the unpaid seller.10
Unpaid seller who pas possession of the goods in which the property has passed to the buyer, can
exercise the right of lien only in the following cases:
a. where the goods have been sold without any stipulation of credit;
b. where the goods have been sold on credit but the term of credit has expired;
c. where the buyer becomes insolvent.
Further, unpaid seller loses his right of lien as per Section 49 of the Act.
However, in case the parties enter into a contractual stipulation to retain the right of lien and
transfer of title upon payment, then notwithstanding that the possession of the goods may have
transferred to the buyer, the unpaid seller would have the right of exercising lien over the goods.

Q.2. “Doctrine of Caveat Emptor has lost much of its significance in modern
times” Discuss?
33
Ans: The modern trend to protect consumer’s right has minimized the importance of rule of
caveat emptor because the rule was originated at a time when the goods were mostly sold in
market overtly and the buyer, therefore, had every opportunity to inspect as to the quality of the
goods. At present time most of articles are packed and sealed by producer but still the buyer can
examine the packed goods, their descriptions shown on the cover, expire date, brand, logo etc.

Caveat Emptor is not allowed in most cases in India, especially consumer cases. The maxim that
now applies is Caveat Venditor - seller beware.

Caveat Emptor was a Common Law rule, which we replaced in our country in 1986, with the
Consumer Protection Law.
Now every seller of goods or services have to ensure that what they sell is of a reasonable and
"merchantable" quality. If a special purpose is mentioned at the time of buying by the buyer, the
seller must sell only something that suits such purpose. Failing this, the seller must compensate
the buyer.

Now Caveat Emptor is just an old saying, like a proverb, without any legal basis.

Hence, buy in peace, and sell only if you are sure about what you are selling, or risk getting sued.
If you promise something during the sale, you will be held to your promise. If there is a fault
with what you are selling, you will need to establish later that you made a clear and unequivocal
disclosure.

Doctrine of Caveat Emptor

The doctrine of Caveat Emptor is an integral part of the Sale of Goods Act. It translates to a
Latin phrase “let the buyer beware”. This means it lays the responsibility of their choice on the
buyer themselves. It is specifically defined in Section 16 of the act “there is no implied warranty
or condition as to the quality or the fitness for any particular purpose of goods supplied under
such a contract of sale”.
A seller makes his goods available in the open market. The buyer previews all his options and
then accordingly makes his choice. Now let’s assume that the product turns out to be defective or
of inferior quality. This doctrine says that the seller will not be responsible for this. The buyer
himself is responsible for the choice he made.
So the doctrine attempts to make the buyer more conscious of his choices. It is the duty of the
buyer to check the quality and the usefulness of the product he is purchasing. If the product turns
out to be defective or does not live up to its potential the seller will not be responsible for this.
Let us see an example. A bought a horse from B. A wanted to enter the horse in a race. Turns out
the horse was not capable of running a race on account of being lame. But A did not inform B of
his intentions. So B will not be responsible for the defects of the horse. The Doctrine of Caveat
Emptor will apply.
However, the buyer can shift the responsibility to the seller if the three following conditions are
fulfilled.
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• If the buyer shares with the seller his purpose for the purchase
• The buyer relies on the knowledge and/or technical expertise of the seller
• And the seller sells such goods

Exceptions to the Doctrine of Caveat Emptor

The doctrine of caveat emptor has certain specific exceptions. Let us take a brief look at these
exceptions:
1] Fitness of Product for the Buyer’s Purpose: When the buyer informs the seller of his purpose
of buying the goods, it is implied that he is relying on the seller’s judgment. It is the duty of the
seller then to ensure the goods match their desired usage.
For example A goes to B to buy a bicycle. He informs B he wants to use the cycle for mountain
trekking. If B sells him an ordinary bicycle that is incapable of fulfilling A’s purpose the seller
will be responsible. Another example is the case study of Priest v. Last.
2] Goods Purchased under Brand Name: When the buyer buys a product under a trade name or a
branded product the seller cannot be held responsible for the usefulness or quality of the product.
So there is no implied condition that the goods will be fit for the purpose the buyer intended.
3] Goods sold by Description: When the buyer buys the goods based only on the description
there will be an exception. If the goods do not match the description then in such a case the seller
will be responsible for the goods.
4] Goods of Merchantable Quality: The section 16 (2) deals with the exception of merchantable
quality. The sections state that the seller who is selling goods by description has a duty of
providing goods of merchantable quality, i.e. capable of passing the market standards.
So if the goods are not of marketable quality then the buyer will not be the one who is
responsible. It will be the seller’s responsibility. However if the buyer has had reasonable chance
to examine the product, then this exception will not apply.
5] Sale by Sample: If the buyer buys his goods after examining a sample then the rule of
Doctrine of Caveat Emptor will not apply. If the rest of the goods do not resemble the sample,
the buyer cannot be held responsible. In this case, the seller will be the one responsible. For
example, A places
an order for 50 toy cars with B. He checks one sample where the car is red. The rest of the cars
turn out orange. Here the doctrine will not apply and B will be responsible.
6] Sale by Description and Sample: If the sale is done via sample as well as a description of the
product, the buyer will not be responsible if the goods do not resemble the sample and/or the
description. Then the responsibility will fall squarely on the seller.
7] Usage of Trade: There is an implied condition or warranty about the quality or the fitness of
goods/products. But if a seller deviated from this then the rules of caveat emptor cease to apply.
For example, A bought goods from B in an auction of the contents of a ship. But B did not
inform A the contents were sea damaged, and so the rules of the doctrine will not apply here.
8] Fraud or Misrepresentation by the Seller: This is another important exception. If the seller
obtains the consent of the buyer by fraud then caveat emptor will not apply. Also if the seller
conceals any material defects of the goods which are later discovered on closer examination then
again the buyer will not be responsible. In both cases, the seller will be the guilty party.

35
Q.3. Can a minor be admitted in Partnership firm? If yes, explain his rights and
duties?

Ans: Minors Admitted to Benefits of Partnership

In the Contract Act, minors cannot be a party to a contract. A contract involving a minor is
void-ab-initio. However, the Partnership Act has its own sets of legal rules regarding minors. So
let us study about minor partner and the benefits they gain from a partnership.
Minors Admitted to Benefits of Partnership
Section 30 of the Indian Partnership Act 1932 contains legal provisions about a minor in a
partnership. The Indian Contract Act 1872 clearly states that no person less than the age of 18,
i.e. a minor can be a party to a contract. And a partnership is a contract between the partners.
Hence a minor cannot be a partner in a partnership firm.
However, according to the Partnership Act, a minor may be admitted to the benefits of a
partnership. So while the minor will not be a partner he will enjoy all the benefits of a
partnership. To admit all the minor to the benefits of the partnership all of the partners of the
firm must be in agreement.

Rights of a Minor Partner

Once the minor is given the benefits in a partnership there are certain rights that he enjoys. Let us
take a look at the rights of a minor partner.
i. A minor partner will obviously have the right to his share of the profits of the firm. But
the minor partner is not liable for any losses beyond his interests in the firm. So a minor partner’s
personal assets cannot be liquidated to pay the firms liabilities.
ii. He can also like any other partner inspect the books of accounts of the firm. He can
demand a copy of the books as well.
iii. If necessary he can sue any or all of the other partners for his share of the profits or
benefits.
iv. A minor partner on attaining majority has the right to become a partner of the firm. He
has six months from attaining majority to decide if he will execute this right. Whether he decides
to become a partner or not he must give public notice about the same.
Liabilities of a Minor Partner
i. A minor cannot be held personally liable for the losses of the firm. And if the firm
declares insolvency the minor’s share is kept with the Official Receiver
ii. After turning 18 the minor partner can choose to become a partner of the firm. But he
may choose to not become a partner. In this case, the minor partner has to give a public notice
about this decision. And the notice has to be given within 6 months of gaining majority. If such a
notice is not given even after 6 months then the minor partner will become liable for all acts done
by the other partners till the date of such notice.
iii. Should the minor partner choose to become a partner he will be liable to all the third
parties for the acts done by any and all partners since he was admitted to the benefits of the
partnership.
iv. If he becomes a full-time partner he will be treated as a normal partner and have all the
liabilities of one. His share in the profits and property of the firm will remain the same as it was
when he was a minor partner.
36
Q.4. Define contract of indemnity and explain its essentials fully. Distinguish
between a contract of indemnity and contract of guarantee?
Ans: The term 'indemnity' simply means to make good the loss or to compensate the party who
has suffered some loss. The term 'contract of indemnity' is defined in Section 124 of the Indian
Contract Act as follows, "A contract by which one party promises to save the other from loss
caused to him by the conduct of the promisor himself or by the conduct of any other person, is
called a contract of indemnity." The person who promises to compensate for the loss is called the
"indemnifier" and the person to whom this promise is made or whose loss is to be made good is
known as "indemnity-holder" or "indemnified".

For 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 money. This is a contract of indemnity, here A
is the indemnifier and B is the indemnified. The above definition restricts the scope of contracts
of indemnity as it covers only the losses caused by the conduct of the promisor himself or by the
conduct of any other person. If a strict view is taken of this definition, it will exclude the losses
caused by accidents. In that case insurance contracts should not fall within the purview of
contracts of indemnity. But the fact is that all contracts of insurance (except life insurance) are
also contracts of indemnity. The intention of law makers had never been to exclude insurance
contracts from the purview of contracts of indemnity. That is why we follow the English
definition which states "a promise to save another harmless from loss caused as a result of a
transaction entered into at the instance of the promisor".

This definition includes a promise to make good the loss arising from any cause whatsoever e.g.
fire, perils of sea, accidents etc. When a person expressly promises to compensate the other from
loss, it is termed as express indemnity. The contract of indemnity is said to be implied when it is
to be inferred from the conduct of the parties or from the circumstances of the case. Even Section
69 of the Contract Act (discussed in Unit 8) implies a duty to indemnity in case a person who is '
interested in the payment of money which another is bound by law to pay, has paid the amount.
Similarly, in an auction sale there is an implied contract of indemnity between the auctioneer and
the person who asks him to sell goods.

For example, A, an auctioneer, sold certain goods on the instructions of B. Later on, it is
discovered that the goods belonged to C and not B. So, C recovered damages from A for selling
the goods belonging to him. Here A is entitled to recover the compensation from B. In this case
there was an implied promise to compensate the auctioneer for any loss which he may suffer on
account of the defective title of B. As you know that contract of indemnity is a special type of
contract, therefore, to enforce such contracts it is necessary that all the essentials of a valid
contract must be present. In case any one of the essential is missing, the contract cannot be
enforced. Thus if the object or consideration of an indemnity agreement is unlawful, it cannot be
enforced.
37
For example, A asks B to beat C, promising to indemnify him against the consequences this
cannot be enforced. Suppose B beats C and is fined Ks. 500, B cannot claim this amount from A,
because the object of the agreement is unlawful.

Distinction between Contract of Indemnity and Contract Of Guarantee

Following are the main points of difference between a contract of indemnity and a contract of
guarantee.
i) In a contract of indemnity there are only two parties i.e., indemnifier and the indemnified
while in a contract of guarantee there are three parties principal debtor, creditor and the surety.
ii) In a contract of indemnity there is only one, contract, whereas in a contract of guarantee ,
there are three contracts.
iii) In a contract of indemnity the indemnifier undertakes to save the indemnified from any loss
caused to him by the conduct of indemnifier himself or the conduct of any other person, while in
a contract of guarantee, the surety undertakes for the payment of debts of principal debtor, if the
principal debtor fails to pay it.
iv) In a contract of indemnity, the liability of indemnifier is primary and independent, while in a
contract of guarantee the liability of surety is secondary i.e., it arises only on the default of
principal debtor. The primary liability is that of the principal debtor.
v) In a contract of indemnity, indemnifier's liability arises only on the happening of a
contingency, while in a contract of guarantee there is an existing duty or debt, the performance of
which is guaranteed by the surety.
vi) In a contract of indemnity, indemnifier acts independently without any request of the debtor
or the third party, while in a contract of guarantee the surety guarantees at the request of
principal debtor. vii) In a contract of guarantee, if the principal debtor fails to pay and the surety
discharge his debt, the surety can proceed against the principal debtor in his own right, while in a
contract of indemnity, the indemnifier cannot sue the third party in his own name unless there is
an assignment in indemnifier's favour. If there is no such assignment, the indemnifier must bring
the suit in the name of indemnified.

SHORT QUESTION WITH ANSWER

Q.5. Who is an agent? What are the kinds of agents and explain their powers
and duties?

Ans: Section 184 of the Act provides that as between the principal an the third persons any
person; may become an agent, but no person who is not of the age of majority and of sound mind
can become an agent, so as to be responsible to his principal according to the provisions in that
behalf herein contained. From this section it becomes clear that "as between the principal and
third persons, any person may become an agent".

38
Now the question arises, can a minor or a person of unsound mind also become an agent? The
answer is yes. In view of the language used by this section even a minor or person of unsound
mind is not debarred from being appointed as an agent. But as a rule of caution, they should not
be appointed as agent because if the principal appoints them, he undertakes a great risk. Because
whatever such incompetent person does shall be binding on the principal, but the principal shall
not be able to proceed against the agent for his misconduct or negligence. Thus, any person can
be appointed as an agent. For example, where A, a principal, entrusts to B, a minor a diamond
ring worth Rs. 11,000 and instructs him not to sell the same for credit or for any amount less than
Rs. 9,000. If B sells the same to C on credit for Rs. 5,000, this transaction will certainly be
binding as between A and C but A will have no right to claim damages as against B for his
misconduct, since B happens to be a minor, But, if B were an adult, he would be liable to A for
damages sustained due to his misconduct.

Agents can be classified in various ways:

i. Special Agents: Agent appointed for a particular task only. The agency in such cases
lasts for a specific period of for a particular type of job or work. For example… a property dealer
appointed as an agent for a sale of a property is authorize his rights in regards to that property
only and that too till its sale or revocation of agency by the principal.
General Agents: As the name suggests, the agent has a general authority in such a case. To
elaborate, we could say a general agent is one who has authority to do all the acts (usually related
to business or Trade) in the interest of his principal. A general agent has a implied authority to
bind his principal by doing various acts necessary for carrying on the business of his principal.
ii.Universal Agents: Universal agent is practically a general agent with very extensive rights. We
can say that a universal agent is a substitute of principal for all those transactions where in
principal cannot participate. We rarely find universal agents in business world today, however in
personal life, a wife, son or a very close friend or relative could become a universal agent. For
example: when a person leaves his country for a long time, he may appoint his son as his
universal agent to act on his behalf in his absence.
Co-Agents: This happens when a principal appoints two or more person as agents jointly. Their
authority is joint when nothing is mentioned. It implies that all co-agents concur in the exercise
of their authority unless their authority is fixed or unless circumstances reveal any intention to
the contrary. But when their authority is several, any other of the co-agents can act without the
concurrence of the other.
Sub-Agents: In the language of law, a sub-agent would be “a person employed and acting under
the control of the original agent in the business of the agency “. In simple words, sub-agent is
an agent of the original agent. As far as third party is concerned, principal can be held liable for
the acts of sub-agent in certain cases like fraud etc. however in general, agent is responsible to
the principal for the acts of sub-agent.
Substituted Agents: Substituted agent is almost same as a co-agent or sub-agent. Sections 194
and 195 deals with substituted agents. It states “when an agent holding on express or implied
authority to name another person to act for and on behalf of his principal in his business, such
agent is know as substituted agent. There are certain differences between the two, which could
be better understood by the way of following illustration: Mr. RR authorizes Mr. YY, who is a
39
businessman in Pune, to recover the money due to RR from ABC Company. YY, in turn,
instructs NN, a solicitor, to take necessary legal actions and recover the dues. Here, NN is not a
sub-agent but a solicitor for R.

Factor: As per the section 2 of sale of goods act, there is an agent known as Mercantile Agent.
As the name suggest he is the one who works for the business (merchandize) of the principal. A
Factor is one type of a mercantile agent who sells goods on behalf of his principal. He has wide
authority and discretionary powers to sell goods upon such terms and conditions as he thinks
proper. He in broader terms relieves his principal from the burden of his work. If a factor does
any act which is beyond his authority, but which is within the scope of his apparent authority,
then his principal is bound by such act.

Broker: A broker is a special type of mercantile agent who acts as a middleman between the
buyer and the seller. We can say that he is employed to bring about contractual relationship
between the principal and the third party. He usually gets commission for the work performed.
His function ends when he brings the two parties together. He is never in possession of the
subject, therefore cannot exercise the right of lien.
Auctioneer: Auction is usually a public sale of goods made in the highest of several bidders. An
auctioneer is a mercantile agent who is appointed to sell goods on behalf of principal,
compensated in terms of commission.

Commission Agents: A commission agent is generally, appointed for selling or buying goods on
behalf of his principal. Such types of agents belongs to a somewhat indefinite class of agents.
He/She tries to secure buyer for a seller of a goods and sellers for a buyer of goods and receives a
commission in return for his work on the actual sales price.
Del Credere Agents: A Del Credere agent is a mercantile agent who is employed to sell goods
on behalf of his principal. He undertakes to guarantee the payment of dues in consideration for
an extra commission. We can say that besides being a mercantile agent a del credere agent finds
himself into the shoes of a guarantor as well.
Forwarding Agents: Forwarding agents render services of collecting goods from their principals
and forwarding the same to shipping companies. As foreign trade procedures are more complex
that the procedures of home trade, the service of forwarding agents hence helps the producers
and exporters to a great extent.
Clearing Agents: As forwarding agents help the exporters of goods, clearing agents help the
importers of goods. They complete various complicated customs and exchange formalities on
behalf of the importers who appoint them.
Indenting Agents: An indenting agent is a commission agent who procures a sale or purchase on
behalf of his principal with a merchant abroad for a commission at the rate mentioned in the
indent. He is an important mercantile agent who facilitates the distribution of goods at
international level.

Following are the statutory duties of the agent:

1) Duty to Act According to the Instructions or Custom of Trade: Section 211 lays down that it is
the duty of an agent to conduct the business of the agency strictly according to the directions
40
given by the principal. For example, if an agent is asked by his principal to insure the goods, the
agent failed to do so and the goods are destroyed by the fire. The agent is liable to compensate
the principal for the loss. However, when the principal has not given any directions, in that case
the agent should conduct the business according to the custom of the trade. For example, B, a
broker in whose business it is not the custom to sell goods on credit, sells goods of his principal
on credit. Before making the payment, the buyer becomes, insolvent. The broker, B is liable to
pay for the loss. When the agent acts otherwise, if any loss incurred, the agent must make it good
to the principal, and if any profit accrues, the agent must account for it. For example, A, the
principal, instructed his agent B to put certain goods in a particular warehouse. Ignoring A's
directions, B puts the goods in another equally safe warehouse. The goods were destroyed by fire
without any negligence on the part of B. Here the agent was held liable to make good his
principal's loss.

2) Duty to Act with Reasonable Care and Skill: It is the duty of an agent to conduct the
business of the agency with reasonable care and skill. The degree of care and skill required from
the agent depends upon the nature of business and air draft, placed in a letter sent by register post
to A. B has done his duty as a man of ordinary prudence would have done in his own case.
However, if instead of sending the draft by registered post, B sends the draft by ordinary post, B
would be responsible for acting negligently. The agent is required to act with reasonable
diligence, to use skill as he possess and to compensate the principal in respect of the direct
consequence of agent’s own neglect, want of skill or misconduct. For example, A, an insurance
broker, was employed by B to effect an insurance on a ship. A insured the ship but failed to see
that 'usual clauses' are inserted in the policy. The ship was lost in storm. Due to omission of the
'usual clauses' in the policy, nothing could be recovered from the insurance company. A is liable
to make good the loss suffered by B. It follows from the above that the agent is not liable to
compensate the principal in respect of loss or damage which are indirect or remotely caused by
such neglect, want of skill, or misconduct.

3) Duty to Render Accounts: An agent is bound to render proper accounts to his principal on
demand and to pay overall sums received on principal's behalf subject to any lawful deduction
for remuneration or expenses properly incurred by him.
4) Duty to Communicate with the Principal: Section 214 enjoins an agent, in case of
difficulty, to use all reasonable diligence in communicating with his principal, and in seeking to
obtain his instructions.
5) Not to deal on His Own Account: An agent is not to deal on his own account in the business
of Agency, as no agent permitted to put himself in the position where his interest conflicts with
his duty. If an agent desires to deal on his own account in the business of agency, he must make a
full and frank disclosure of all the material circumstances, which have come to his knowledge on
the subject, to the principal and obtain his consent (Lever Bros. v. Bell). If, however, he fails to
obtain such consent, and carries on the said business on his own account, or after giving the
consent, the principal finds that either any material facts has been dishonestly concealed from
him by the agent to his interests, the principal has two options. He may
(i) Repudiate the transactions entered into by agent and disclaim all losses, or

41
 (ii) Claim from the agent benefit resulting from the transaction. For example, A directs B
to sell his estate. B, on looking over the estate before selling it, finds a mine on the estate
which is unknown to A. B informs A that he wishes to buy the estate for himself, but
conceals the discovery of the mine. A on discovering that B knew of the mine at the time
he bought the estate, may either repudiate. or adopt the sale at his option, Take another
example. A directs R, his agent, to buy a certain house for him. B tells A that the house
cannot be bought and buys the house for himself. A may, on discovering that B has
bought the house, compel him to sell it to A at the price he (B) gave for it.
6) Not to Use Information Obtained in the Course of the Agency against the Principal:
Where an agent has obtained information during the course of the agency, it is the duty of the
agent not to use the same prejudicially to the interests of the principal. Where an agent does
make use of such information, the principal may restrain him from doing so by an injunction.
7) Not to Set Up Adverse Title: Where an agent has obtained goods or property from the
principal as an agent, it is his duty not to set up his own title or the title of a third person. In other
words, the agent should not dispute the ownership of the principal.
8) Not to Make Secret Profits: As you know that the relationship of principal and agent is
based on mutual confidence, it is the agent's duty not to make any secret profits in the business of
agency. For example, A appointed B, an auctioneer to sell certain goods belonging to him. B sold
the goods to C, and received some secret commission from C in addition to the commission from
A. It was held that B was bound to hand over the secret commission to A.
9) Duty to Exercise His Authority Personally: Section 190 of the Act requires an agent to
perform acts personally which he has expressly or impliedly undertaken to perform personally.
In other words, an agent must not delegate the authority given to him. However, under certain
circumstances, this authority can be delegated
10) Duty on the Death or Insanity of the Principal: Section 209 requires that when an agency
is terminated by the principal dying or becoming of unsound mind. The agent is bound to take,
on behalf of the representatives of his late principal, all reasonable steps for the protection and
preservation of the interests entrusted to him. Rights and Duties of Principal towards Agent As
should be clear to you from what you have studied so Ear that the rights of the principal are the
duties of the agent and duties of the agent are the rights of the principal.

Q. 6. Discuss the essentials of a sale. Distinguish between sale by description and

sale by sample?
Define sale. What are the essentials of sale? Distinguish between sale and
agreement to sell?
Ans:Contract of Sale of goods
Contract of sale of goods is a contract, whereby, the seller transfers or agrees to transfer the
property in goods to the buyer for a price. There can be a contract of sale between one
part-owner and another.
Contract of sale of goods is a contract, whereby, the seller transfers or agrees to transfer the
property in goods to the buyer for a price. There can be a contract of sale between one
part-owner and another.

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In other words, under a contract of sale, a seller (or vendor) in the capacity of the owner, or
part-owner of the goods, transfers or agrees to transfer the ownership in goods to the buyer (or
purchaser) for an agreed upon value in money (or money equivalent), called the price, paid or the
promise to pay same.
A contract of sale may be absolute or conditional depending upon the desire of contracting
parties

Essentials elements of a Contract of Sale

The following six features are essential elements of any contract of sale of goods.
 Goods
 Price
 Two parties
 Transfer of ownership
 All Essentials of a Valid Contract of Sale
 Includes both a ‘sale‘ and ‘an agreement to sell‘
1. Two Parties: A contract of sale of goods is bilateral in nature wherein property in the goods
has to pass from one party to another. One cannot buy one’s own goods.
For example, A is the owner of a grocery shop. If he supplies the goods (from the stock meant
for sale) to his family, it does not amount to a sale and there is no contract of sale. This is so
because the seller and buyer must be two different parties, as one person cannot be both a seller
as well as a buyer. However, there shall be a contract of sale between part owners.
Suppose A and B jointly own a television set, A may transfer his ownership in the television set
to B, thereby making B the sole owner of the goods. In the same way, a partner may buy goods
from the firm in which he is a partner, and vice-versa.
However, there is an exception against the general rule that no person can buy his own goods.
Where a pawnee sells the goods pledged with him/her on non-payment of his/her money, the
pawnor may buy them in execution of a decree.
2. Goods: The subject matter of a contract of sale must be goods. Every kind of movable
property except actionable claims and money is regarded as ‘goods’. Contracts relating to
services are not considered as contract of sale. Immovable property is governed by a separate
statute, ‘Transfer of Property Act’.
3. Transfer of ownership: Transfer of property in goods is also integral to a contract of sale. The
term ‘property in goods’ means the ownership of the goods. In every contract of sale, there
should be an agreement between the buyer and the seller for transfer of ownership. Here property
means the general property in goods, and not merely a special property.
Thus, it is the general property, which is transferred under a contract of sale as distinguished
from special property, which is transferred in case of pledge of goods, i.e., possession of goods is
transferred to the pledgee or pawnee while the ownership rights remain with the pledger. Thus,
in a contract of sale there must be an absolute transfer of the ownership. It must be noted that the
physical delivery of goods is not essential for transferring the ownership.
4. Price: The buyer must pay some price for goods. The term ‘price’ is ‘the money consideration
for a sale of goods’. Accordingly, consideration in a contract of sale has necessarily to be in
money. Where goods are offered as consideration for goods, it will not amount to sale, but it will
be called barter or exchange, which was prevalent in ancient times.
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Similarly, if a person offers the goods to somebody else without consideration, it amounts to a
gift or charity and not sale. In explicit terms, goods must be sold for a definite amount of money,
called the price. However, the consideration can be partly in money and partly in valued up
goods. Furthermore, payment is not necessary at the time of making the contract of sale.
5. All essentials of a Valid contract: A contract of sale is a special type of contract, therefore, to
be valid, it must have all the essential elements of a valid contract, viz., free consent,
consideration, competency of contracting parties, lawful object, legal formalities to be
completed, etc. A contract of sale will be invalid if important elements are missing. For instance,
if A agreed to sell his car to B because B forced him to do so by means of undue influence, this
contract of sale is not valid since there is no free consent on the part of the transferor.
6. Includes both a ‘Sale’ and ‘An Agreement to Sell’: The ‘contract of sale’ is a generic term
and includes both sale and an agreement to sell. The sale is an executed or absolute contract
whereas ‘an agreement to sell’ is an executory contract and implies a conditional sale.
A contract of sale can be made merely by an offer, to buy or sell goods for a price, followed by
acceptance of such an offer. Interestingly, neither the payment of price nor the delivery of goods
is essential at the time of making the contract of sale unless otherwise agreed.
Subject to the provisions of the law for time being in force, a contract of sale may be made either
orally or in writing, or partly orally and partly in writing, or may even be implied from the
conduct of the parties.
Sale by sample
Sale by sample is a sale in which the buyer purchases goods under an agreed condition that
goods sold are as good as one shown to the buyer as a sample. Sample is a part of transaction
constituting express guarantee that whole goods conform to the sample. Sale by sample is a
contract based on understanding between the parties. Goods not exhibited must conform to the
standard exhibited by the sample. The sample is a fair representation of the quality of the bulk,
and the seller is bound by the warranty. This is also known as sample sale.

Differences between Sale and Agreement to Sell

The following are the major differences between sale and agreement to sell:
1. When the vendor sells goods to the customer for a price, and the transfer of goods from
the vendor to the customer takes place at the same time, then it is known as Sale. When the seller
agrees to sell the goods to the buyer at a future specified date or after the necessary conditions
are fulfilled then it is known as Agreement to sell.
2. The nature of sale is absolute while an agreement to sell is conditional.
3. A contract of sale is an example of Executed Contract whereas the Agreement to Sell is
an example of Executory Contract.
4. Risk and rewards are transferred with the transfer of goods to the buyer in Sale. On the
other hand, risk and rewards are not transferred as the goods are still in possession of the seller.
5. If the goods are lost or damaged subsequently, then in the case of sale it is the liability of
the buyer, but if we talk about an agreement to sell, it is the liability of the seller.
6. Tax is imposed at the time of sale, not at the time of agreement to sell.
7. In the case of a sale, the right to sell the goods is in the hands of the buyer. Conversely, in
agreement to sell, the seller has the right to sell the goods.
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Q.7. What conditions and warranties are implied in a contract of sale of goods?
Under what circumstances breach of condition is treated as a breach of
warranty?

Ans:Condition
‘A condition is a stipulation essential to the main purpose of the contract, the breach of which
gives rise to a right to treat the contract as repudiated’ .
A condition is referred to as, an essential element attached to the subject matter of an agreement
which is mentioned by the buyer to the seller and is either expressed or implied while entering
into the contract.

The buyer can refuse to accept the goods delivered by the seller, in case of non-compliance with
the condition mentioned by the seller in the contract. The condition may be expres or implied.

If while entering into a contract, the buyer mentions (in words or writing) that the goods are to be
delivered to him before a given date, the date is taken as a condition to the contract since the
buyer expressed it. Whereas, if a buyer contracts to buy a red-coloured saree for her ‘wedding’
which is to be held on a date mentioned to the seller, then the time is the implied condition for
the contract. Even if the buyer doesn’t mention the date of delivery (but has mentioned the date
of the wedding or occasion), it is implied on the part of the seller that the garment is to be
delivered before the mentioned date of the wedding. In this case, the seller is bound to deliver the
garment before the date of the wedding as the delivery of the garment after the said date of the
wedding is of no use to the buyer and the buyer can refuse to accept the same since the condition
to the contract is not fulfilled.
Warranty
‘A warranty is a stipulation collateral to the main purpose of the contract, the breach of which
gives rise to a claim for damages but not to a right to reject the goods and treat the contract as
repudiated’9.
A warranty is referred to as extra information given with respect to the desired good or its
condition. The warranty is of secondary importance to the contract for its fulfilment.
Non-compliance of the seller to the warranty of the contract does not render the contract
repudiated and hence, the buyer cannot refuse to buy the good but can only claim compensation
from the buyer.
Implied Conditions and Warranties under the Sale of Goods Act
Section 14-17 of the Sale of Goods Act, 1930 deal with the implied conditions and warranties
attached to the subject matter for the sale of a good which may or may not be mentioned in the
contract.
Implied Condition
Condition as to Title [Section 14(a)]

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Section 14(a) of the Sale of Goods Act 1930 explains the implied condition as to title as ‘in the
case of a sale, he has a right to sell the goods and that, in the case of an agreement to sell, he will
have a right to sell the goods at the time when the property is to pass’.
This means that the seller has the right to sell a good only if he is the true owner and holds the
title of the goods or is an agent of the title holder. When a good is sold the implied condition for
the good is its title, i.e. the ownership of the good. If the seller does not own the title of the said
good himself and sells it to the buyer, it is a breach of condition. In such a situation the buyer can
return the goods to the seller and claim his money back or refuse to accept the good before
delivery or whenever he learns about the false title of the seller.
CASE LAW: Rowland v Divall, – The plaintiff had purchased a car from the defendant and
was compelled to return it to the true owner after having used it for a while. The plaintiff then
sued the defendant for the purchase money, since the defendant didn’t receive the consideration
as per the condition of the title of ownership.
Sale by Description (Section 15)
Section 15 of the Sale of Goods Act, 1930 explains that when a buyer intends to buy goods by
description, the goods must correspond with the description given by the buyer at the time of
formation of the contract, failure in which the buyer can refuse to accept the goods.
Sale by Sample (Section 17)
When the goods are to be supplied on the basis of a sample provided to the seller by the buyer
while the formation of a contract the following conditions are implied:
• Bulk supplied should correspond with the sample in quality
• Buyer shall have a reasonable opportunity to compare the goods with the sample
• The good shall be free from any apparent defect on reasonable examination by the buyer.
Sale by sample as well as Description (Section 15)
When the sale of goods is by a sample as well as a description the bulk of the goods should
correspond with both, i.e. description and sample provided to the seller in the contract and not
only sample or description.
Condition as to Quality or Fitness (Section 16)
The doctrine of Caveat Emptor is applicable in the case of sale/purchase of goods, which means
‘Buyer Beware’. The maxim means that the buyer must take care of the quality and fitness of the
goods he intends to buy and cannot blame the seller for his wrong choice. However, section 16
of the Sale of Goods Act 1930 provides a few conditions which are considered as an implied
condition in terms of quality and fitness of the good:
• When the buyer specifies the purpose for the purchase of the good to the seller, he relied
on the sound judgment and expertise of the seller for the purchase there is an implied condition
that the goods shall comply with the description of the purpose of purchase.
• When the goods are bought on a description from a person who sells goods of that
description (even if he doesn’t manufacture the good), there is an implied condition that the
goods shall correspond with the description. However, in case of an easily observable defect that
is missed by the buyer while examining the good is not considered as an implied condition.
Implied Warranty
Enjoy Possession of the Goods [Section 14(b)]
Section 14(b) of the Act mentions ‘an implied warranty that the buyer shall have and enjoy quiet
possession of the goods’ which means a buyer is entitled to the quiet possession of the goods
46
purchased as an implied warranty which means the buyer after receiving the title of ownership
from the true owner should not be disturbed either by the seller or any other person claiming
superior title of the goods. In such a case, the buyer is entitled to claim compensation and
damages from the seller as a breach of implied warranty.
Goods are free from any charge or encumbrance in favour of any third party [Section 14(c)]
Any charge or encumbrance pending in favour of the third party which was not declared to the
buyer while entering into a contract shall be considered as a breach of warranty, and the buyer is
be entitled to compensation and claim damages from the seller for the same.

When a Condition can be treated as a “Warranty”

The ways when a Condition can be treated as a “Warranty” are listed below:
1. Voluntary waiver of a condition: The buyer may elect to treat a breach of condition as a
breach of warranty, i.e., instead of repudiating the contract he may accept performance and sue
for damages, if he has suffered any.—Sec. 13(1).
Where a contract of sale is subject to a condition to be fulfilled by the seller, the buyer may
waive the condition.
2. Compulsory waiver of a condition: Where a contract of sale is not severable and the buyer has
accepted the goods or a part thereof, he cannot repudiate the contract but can only sue for
damages. In such a case, the breach of condition can only be treated as a breach of warranty,
unless there is a contract to the contrary.—Sec. 13(2).If a buyer prevents the fulfilment of a
condition contained in the contract, the condition becomes invalid.
Example:
Certain goods were promised to be delivered on 1st June, time being made the essence of the
contract. The goods were delivered on the 2nd June. The buyer may accept the goods.

VERY SHORT QUESTIN WITH ANSWER

Q.8. Discuss the different modes by which the agency can be terminated.

Ans:Termination of Agency (Section 201)

An agency is terminated by the principal revoking his authority, or by the agent renouncing the
business of the agency; or by the business of the agency being completed; or by either the
principal or agent dying or becoming of unsound mind; or by the principal being adjudicated an
insolvent under the provisions of any Act for the time being in force for the relief of insolvent
debtors.
Different ways by which an agency can be terminated:-
1) An agency created for a specific purpose as well as an agency created by a power of
attorney is terminated once the particular purpose for which it was created was accomplished.
After the termination of the agency, the agent is free of any fiduciary duty to the principal arising
from the agency relationship.
2) The parties can terminate the agency by mutual agreement. An agency relationship
requires the mutual assent of the parties and both the parties have the power to withdraw their
assent. An agency may not be terminated by the act of one of the parties and should be done
47
mutually. The mutual abandonment of an agency is a question of fact since it is a matter of
intention of both the parties. The court will ascertain such intent from the surrounding facts and
circumstances of the transaction as well as implied from the conduct of the parties[viii].
3) An agency contract may be canceled on the basis of an express stipulation in the contract.
In such a case, the parties will have a right of cancellation at the will of either party or upon the
happening of a contingency or the nonperformance of some expressed condition. The principal
cannot cancel such an agreement at will so long as the agent fulfills his/her part of the agreement.
However, the principal can cancel the agency contract for any justifiable cause.
4) An agency may be revoked at the will of the principal when an agency is not coupled
with an interest, and no third party’s rights are involved. The party terminating the agency must
show good cause. Thus, when A enters into a contract whereby B is to provide A for a stated
period of time with goods or services, which both parties realize are for use in a particular
enterprise owned by A, in the absence of a specific clause so providing, A cannot escape his
obligations under that contract by voluntarily selling his interest in the enterprise before the
expiration of the expressed contract term.
Therefore, if the right to cancel an agency contract is dependent upon some contingency, the
cancellation must be justified by establishing the happening of such contingency. An agency
cannot be terminated at will during certain specific instances. For example, in the matter of
distributorship or sales agency contracts of indefinite duration, an at-will termination is not
feasible.
In such a case, the distributor might have made a substantial investment in establishing or
furthering the distributorship. Hence, the agreement may be terminated only after a reasonable
time has lapsed and reasonable notice of termination is given. An agency contract to be
performed to the principal’s satisfaction can generally be canceled at will by the principal.
Similarly, a power of attorney constituting a mere agency may be revoked at any time, with or
without cause.
5) A principal may unilaterally cancel an agency without incurring liability for breach of
contract under the following instances: misconduct or habitual intoxication of the agent which
interferes with his/her employment, the refusal of the agent to obey reasonable instructions or to
permit the principal to make a proper audit of his/her accounts, serious neglect or breach of duty
by the agent, dishonesty or untrustworthiness of the agent, the agent’s failure to pay an
indebtedness owing to the principal, disloyalty of the agent like using the agency to make secret
profits.
6) Ordinarily, an agent may renounce the agency relationship by expressly notifying the
principal, either orally or in writing. An agent’s cessation of all relations with the principal and
abandonment by the agent may be treated as a renunciation. However, mere violation of
instructions by the agent will not amount to renunciation.
Although the agency can be terminated at will, the law stipulates that notice must be given to the
party affected by the termination. However, express notice to the agent that the agency has been
revoked, or to the principal that the agency is renounced, is not always necessary if the affected
party actually knows, or has reason to know the facts resulting in such revocation or
renunciation. The principal shall provide sufficient notice to third parties as to the revocation of
the agent’s authority.

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Otherwise, the acts of an agent after his/ her authority has been revoked may bind a principal as
against third persons who rely upon the agency’s continued existence. This may often happen to
transactions initiated by the agent before the revocation of authority, and the rule is applied in
favor of persons who have continued to deal with insurance agents, purchasing agents, and the
like.
There is no need to provide any formal written notice to third persons of the ending of an agency
relationship. Actual notice of termination is sufficient in the case of third parties and such notice
may be shown by a written or oral communication from the principal or the agent, or it may be
inferred from the circumstances. For instance, a third party is deemed to have actual notice if
he/she has knowledge of the fact that the principal has appointed another agent for the same
purpose.
The character of the notice also differs with respect to third parties. Thus, actual notice must be
brought home to former customers who have dealt with the agency more directly, while notice
by publication will be sufficient as to other persons. In addition, an agency may be terminated by
operation of law. The death of the principal operates as an immediate and absolute revocation of
the agent’s authority unless the agency is one coupled with an interest.
The rule is the same even if the agency is created with more than one principal. Where the power
or authority is created by two or more principals jointly and one of them dies, the agency will be
terminated unless it is coupled with an interest. However, an agency may be made irrevocable by
statute, notwithstanding the death of the principal.
7) Regarding the termination of the agency upon the death of the principal, two views are
prevailing. According to one view, unless the agency is one coupled with an interest, it will
terminate on the death of the principal, notwithstanding the fact that the agent and third person
are ignorant of the fact. Another view is that if the third person dealing with the agent acts in
good faith and in ignorance of the principal’s death, the revocation of the agency on the death of
the principal takes effect only from the time that the agent receives notice of such death.
In such a case, “the principal’s estate may be bound where the act to be done is not required to be
done in the name of the principal.” Similarly, the death of the agent will revoke an agency not
coupled with an interest and this is the rule when there are two or more agents. However, in the
case where a sub-agent is appointed by the agent, the authority of a subagent is terminated by the
death of the agent, unless the agent appointed the subagent at the principal’s request. In that
event, the subagent derives his/her authority form the principal and not from the agent.
8) The loss of capacity of a party resulting from temporary or permanent mental
incompetency may result in the termination or suspension of the agency relationship. Thus, the
termination of the agent’s authority due to the loss of capacity of the principal may not affect the
rights of third persons if such third persons do not have notice of such fact. Also, if the agent’s
authority is coupled with an interest, it is not suspended by the principal’s insanity.
Similarly, the bankruptcy of the principal is a valid reason for the termination of agency and the
agent is divested of any authority to deal with any assets or rights of property of which the
principal was divested by reason of the bankruptcy, irrespective of whether the agent receives
notice of the bankruptcy. A power of attorney may be terminated by the bankruptcy of the
principal. The mere insolvency of the principal will not automatically terminate the agent’s
authority.

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9) A change in the value of the subject matter or a change in business conditions may
terminate or suspend the agent’s authority if the agent should reasonably infer that the principal
would not consent if aware of such facts. Similarly, a change in the legal identity of, or merger
by, the principal is a valid ground for termination of an agency contract. The loss or destruction
of the subject matter of the agency or the termination of the principal’s interest is yet another
ground for terminating the agent’s authority.
The agent’s authority ceases when the agent has notice of the fact. However, destruction of
subject matter will not always result in the termination of the agency, especially when the subject
matter can be replaced without substantial detriment to either party.

Q.9. The liability of surety is co-extensive with that and principal debtor. Explain
the statement?

Ans: Nature of Surety’s Liability

Where the parties do not specifically agree as to the extent of the liability or the surety does not
put up any limit on his ability at the time of entering into the contract, the liability of the surety
will be co-extensive with that of the principal debtor. In other words, whatever amount of money
a creditor can legally realize from the principal debtor including interest, cost of litigation,
damages etc., the same amount he can recover from the surety.

Example: A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is
dishonored by C. A will be liable not only for the amount of the bill also for any interest and
charges which have become due on it.

The liability of the surety arises immediately on the default of the principal debtor but the
creditor is not bound to give any notice of the default of the principal debtor to the surety or it
exhaust all the remedies open to him as against the debtor before proceeding against the surety.
Besides that, creditor is free to release the debt when it becomes due to either from the debtor or
the surety. It is not necessary for him to proceed against the debtor first. He may sue the surety
without suing the principal debtor. It is surety’s duty to see that the principal debtor pays or
performs his obligation.
Rights of the Security
Rights of the surety can be classified under three heads:
(i) Against the principal debtor.
(ii) Against the creditor.
(iii) Against the co-sureties.
1. Rights of the surety against the principal debtor
(a) Rights to be subrogated: When the principal debtor had committed the default and the surety
pays the debt to the creditor, surety will stand in the shoes of the creditor and will be invested
with all the rights which the creditor had against the debtor (Sec. 140).
(b) Right to claim indemnity: In every contract of guarantee, there is an implied promise by the
principal debtor to indemnify the surety and the surety is to recover from the principal debtor

50
whatever sum he has rightfully paid under the guarantee but no sums which he has paid
wrongfully, e.g., cost of fruitless litigation (Sec. 145).
Examples: (i) B is indebted to C, and A is surety for the debt. C demands payments from A, and
on his refusal sues him for the amount. A defends the suit, having reasonable grounds for doing
so, but is compelled to pay the amount of the debt with costs. He can recover from B the amount
paid by him for costs, as well as the principal debt.
(ii) A guarantees to C, to the extent of 2000 rupees, payment for rice to be supplied by C to B.
C supplies rice to a less amount than 2000 rupees, but obtains from A payment of the sum of
2,000 rupees in respect of the rice supplied. A cannot recover from B more than the price of the
rice actually supplied.
2. Rights of the surety against the creditor
A surety is entitled to the benefit of every security which the creditor has against the debtor at the
time when the contract of suretyship is entered into, whether the surety knows of the existence of
such security or not and if the creditor loses or without the consent of the surety parts with such
security, the surety is discharged to the extent of the value of the security (Sec. 141). But a
surety, however, cannot claim the benefit of the securities only on the payment of a part of the
debt.
3. Right against co-sureties
When two or more persons stand as sureties for the same debt or obligation they are termed as
co-sureties. The position of co-sureties is as follows.
Co-sureties liable to contribute equally (Sec. 146): Where two or more persons are co-sureties
for the same debt or duty, either jointly or severally, and whether under the same or different
contract, and whether with or without the knowledge of each other, the co-sureties in the absence
of any contract to the contrary, are liable, as between themselves, to pay each an equal share of
the whole debt, or of that part of it which remains unpaid by the principal debtor.
Example: A, B and C are sureties to D for the sum of 3,000 rupees lent to E.E makes default in
payment. A, B and C are liable, as between themselves, to pay 1,000 rupees each.

Liability of co-sureties bound in different sums (Sec. 147)

Co-sureties who are bound in different sums are liable to pay equally as far as the limits to their
respective obligations permit.
Example: (i) A, B and C, as sureties for D, enter into three several bonds, each in a different
penalty, namely, A in the penalty of 10,000 rupees, B in that of 20,000 rupees, C in that of
40,000 rupees, conditioned for D’s duly accounting to E. D makes default to the extent of 30,000
rupees. A, B and care each liable to pay 10,000 rupees.
(ii) A, B and C, as sureties for D, enter into three several bonds, each in a different penalty,
namely, A in the penalty of 10,000 rupees, B in that 20,000 rupees and C in that of 40,000
rupees, conditioned for D’s duly accounting to E, D makes default to the extent of 40,000 rupees.
A is liable to pay 10,000 rupees, and B and C 15,000 rupees each.

Discharge of surety
Surety will be discharged from his liability in the following cases:
1. By notice or death (Secs. 130 & 131): A contract of continuing guarantee may be terminated
at any time by notice to the creditor. The death of the surety brings an end to continuing
51
guarantee. No notice of death need to given to the creditor. The surety will not be responsible for
acts done after his death.
2. Variations in terms of the original contract between the principal debtor and the
creditor (Sec. 133): If the contract between the creditor and the principal debtor is materially
altered without the consent of the surety, the surety is discharged as to transactions subsequent
for the alteration.
Example (i) : A becomes surety to C for B’s conduct as a manager in C’s bank. Afterwards, 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 overdraw, and the bank
loses a sum of money. A is discharged from his suretyship by the variance made without the
consent, and is not liable to make good this loss.
(ii) C contracts to lend B Rs. 5,000 on first March. A guarantees repayment. C pays the amount
to B on first January. A is discharged from the liability, as the contract has been varied in as
much as C might sue B for the money before the 1st March.
3. By release or discharge of the principal debtor (Sec. 134). The surety is discharged by any
contract between in creditor and the principal debtor, by which the principal debtor is released or
by any act or omission of the creditor, the legal consequence of which is the discharge of a surety
on one agreement will not release the other surety bound for the same debtor by a separate
agreement from his engagement, unless the effect of such release is to adversely affect the others
right to contribution.
Example (i) : A gives a guarantee to C for goods to be supplied by C to B. C supplies goods to B,
and afterwards B becomes embarrassed and contracts with his creditors (including C) to assign to
them his property in consideration of their releasing him from their demands. Here B is released
from his debt by the contract with C, and A is discharged from his suretyship.
(ii) A contracts with B fro to grow crop of indigo on his (A’s) land and to deliver it to B at a
fixed rate. C guarantees A’s performance of his contract. B diverts a stream of water which is
necessary for irrigation of A’s land and thereby prevents him from raising the indigo. C is no
longer liable on his guarantee.
Compounding by creditor with the principal debtor (Sec. 135). A contract between the creditor
and the principal debtor by which the creditor makes a composition with, or promise to give time
to, or not sue to the principal debtor discharges the surety unless the surety assents to such
contract.
But where a contract to give time to the principal debtor is made by the creditor with a third
person, and not with the principal debtor, the surety is not discharged (Sec. 136).
Example: C, the holder of an overdue bill of exchange drawn by as surety for & and accepted by
B, contracts with A to give time to B, is not discharged.
Similarly, mere forbearance on the part of the creditor to sue the principal debtor within the
limitation period or to enforce any other remedy against him does not in the absence of any
provision in the guarantee to the contrary discharge the surety (Sec. 137).
Example: B, owes to C a debt guaranteed by A. The debt becomes payable. C does not sue
B for a year after the debt has become payable. A is not discharged from the suretyship.
Where there are co-sureties a release by the creditor of one of them does not discharge the other;
neither does it free the surety so released from his responsibility to other sureties (Sec. 138).

52
5. Creditor’s act or omission impairing surety’s eventual remedy (Sec. 139). If the creditor
does any act which is inconsistent with the rights of the surety, or omits to do any act which his
duty to the surety requires him to do, any the eventual remedy of the surety himself against the
principal debtor is thereby impaired, the security is discharged.
Example: (i) B contracts to build a ship for C for a given sum to be paid by installment as the
work reaches certain stages. A becomes surety to C for B’s performance of the contract. C
without the knowledge of A, prepays to B the last two installment. A is discharged by his
prepayment.
(ii) A puts M as apprentice to B, and gives a guarantee to B for M’s fidelity. B promises on his
part that he will, at least once a month, see M to make up the cash. B omits to see M as promised,
and M embezzles. A is not liable to B on his guarantee.
6. Loss of security (Sec. 141). If the creditor losses on, without the consent of the surety,
parts with any security given to him at the time of the contract of guarantee, the surety is
discharged from liability to the extent of the value of security.
Example: C advances to B, his tenant Rs. 2,000 on the guarantee of A. C has also further a
security of Rs. 2,000 by a mortgage of B’s furniture. C cancels the mortgage. B becomes
insolvent, and C sues A on his guarantee. A is discharged from his liability to the amount of the
value of the furniture.
7. By invalidation of the contract of guarantee (Secs. 142, 143 and 144). A contract of
guarantee becomes invalid if guarantee was obtained by fraud or concealment etc. about material
facts as discussed before. Surety in such a case will be discharged from his liability.

Q. 10. Discuss the doctrine of holding out. What are the exceptions? Explain.

Ans: Doctrine of Holding Out

Incorporating the Doctrine of Holding out S. 28 (1) says that anyone who by words spoken or
written or by conduct represents himself, or knowingly permits, himself to be represented, to be a
partner in a firm, liable as a partner in that firm, to anyone who has on the faith of any such
representation given credit to the firm, whether the person representing himself or represented to
be a partner does or does not know that the representation has reached the person so giving
credit.
(2) Where after a partner’s death the business is continued in the old firm name, the continued
use of that name or of the deceased partner’s name as a part thereof shall not of itself make his
legal representative or his estate, liable for any act of the firm done after his death.

Essentials of the Doctrine of Holding Out

The two essentials of this doctrine are as under:

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I. Representation: It may be noted that the person sought to be charged with the liability for
holding out must have represented himself to be a partner in the firm. Representation may be
made either by words, written or spoken, or by conduct. An express representation takes place
when a person allows his name to be used in the affairs of the firm. For Example–In the name,
title or signboard of the firm.
In Porter V.v. Incell, 1905, the defendant had given loan to a person establishing a cattle farm.
The defendant took such deep interest in the business that he used his personal influence to
obtain lease of premises for the farm and was constantly present there receiving parties and their
demands; The plaintiffs supplied building material to the firm under the impression that the
defendant was a partner.
He was held liable as a partner by holding out by way of his conduct and not by his words. The
liability for holding out may also arise where a person “knowingly permits” or “suffers” himself
to be represented as a partner. For Example- Where A introduced B to C as his partner, when in
fact he was not so and B silently stood by, he was held liable by holding out: Marlyn Vs. Gray
(1863).
2. Knowledge of Representation: The person seeking to hold another liable by holding out or
estoppel must show that he had knowledge of the representation and acted on it.

In case the plaintiff has acted on the faith of the representation, liability is incurred to him and it
is immaterial that the defendant did not know that his representation had reached the plaintiff.
But if the plaintiff has not heard of the representation, or having heard, did not believe it, or
knew the real truth or would have given credit to the firm in any case, no liability by holding out
arises, because he has not been misled by the representation.

Application of the Doctrine to Retirement Cases

When a partner retires and no public notice of retirement is given, the retired partner remains
liable by holding out to those customers of the firm who have given credit without knowledge of
the retirement. The customer can sue either the old firm or the new firm as constituted after
retirement. But he cannot sue both. In Scarf Vs. Jardine (1882), a firm consisted of two partners
Scarfand Rodgers. Scarf retired and Beach joined the firm in his place. The business was carried
on under the same name and no notice of the change was given to the customers of the firm.
Jardine was an old supplied to the firm. Goods were ordered of him and he supplied them
knowing nothing of the change. The firm failed to pay. When he brought his action for the price,
he came to know of the change and preferred to sue the new firm. The firm went bankrupt. He
then sued the retired partner. It was held that he had lost his right to proceed against the retired
partner.

Cases Where Doctrine of Holding Out Not Apply

Doctrine of holding out on retirement without giving public notice does not apply under the
following cases-
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(a) Deceased Partner –Since it was held in Venkatasubbamma Vs. subba Rao, A.I.R. 1964 AR
462, that death is a notice by itself hence the estate of a deceased partner is not liable for any act
of the firm done after his death even if the business is continued by the surviving partners in the
same style and place and even if his name appears in the name and affairs of the firm.
(b) Insolvent Partner – It may be noted that a person ceases to be a partner from the date of his
insolvency and his estate is no more liable for any act of the firm done after his insolvency
whether notice has been given or not.
(c) Dormant Partner-A dormant or sleeping partner means a partner who has never taken part in
the conduct of business as partner. So long as he remains a partner his liability for the acts of the
firm is the same as that of any acting, apparent or ostensible partner. But when he retires, public
notice is not necessary to terminate his liability. It must, however, be noted that where his
presence in the firm was known to some customers, notice of his retirement must be given at
least to them.

UNIT - IVTH

LONG QUESTION WITH ANSWER

Q.1. Discuss implied authority of partner as agent of the firm. What are the
restrictions on the implied authority of partner?

Ans: Implied authority, also known as “usual authority,” is the authority of an agent acting on
behalf of another person or entity. The person acting with implied authority does what is
reasonably necessary in order to effectively perform his duties. The acts undertaken surrounding
the use of implied authority depend on the circumstances and the case. To explore this concept,
consider the following implied authority definition.

Definition of Implied Authority

Authority that is not specifically expressed or defined in writing, but which an employee or agent
assumes to possess in order to conduct business on behalf of an agency.
Implied vs. Actual Authority

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Actual authority, also referred to as “express authority,” pertains to specific powers to given to
an agent in an oral or written contract. This differs from implied authority in that implied
authority is has been assumed because of the circumstance.

For example, when an employee or agent wears a uniform, name tag, or has a business card
bearing the trademark or logo of a company, that individual carries implied authority. This is
because consumers are likely to assume the individual has authorization to act on behalf of the
company. The same would be true of an employee sent by a company or agency to make repairs,
even if the employee wore no uniform or name tag. Because implied authority is often incidental,
it is impossible to define every single aspect of the agent’s authority in a written contract.

Example of Implied Authority

When John visits a local bar, the server tells him he will receive a free drink if he orders an
entrée. By making this offer, the server has made an oral contract with John on behalf of the bar.
John assumes that the server has the authority to offer a free drink since he is an employee of the
business and acting on behalf of the owner.

Liability in Actual and Implied Authority

When an agent acts on actual authority, the scope of which is outlined in a written document,
both the agent and agency may be held liable the results of such actions. When an agent acts on
implied authority, however, the scope cannot be specifically determined, and so liability
becomes a fuzzy issue. The employer or agency may claim the agent acted outside his authority,
leaving the agent holding the bag.
Termination of Implied Authority
At any given time, an agency can take implied authority away from an employee. This can be
done in several ways including:
1. Amending a contract or agreement taking away authority
2. Ending the agent’s employment
3. Discharging the agent of any obligations

Implied Authority of a Partner

Each partner in a business has the implied authority to act in the name of the company. Such acts
are binding on the other partners, so long as they fall within the ordinary course of the
company’s normal business. Such acts of implied authority may include:
1. Buying or selling goods on behalf of the company
2. Accepting payments on debts owed to the firm
3. Accepting, making, or issuing bills on the firm’s behalf
4. Taking on a new lease on the firm’s behalf
On the other hand, implied authority does not authorize a partner to:
1. Submit a company dispute to arbitration
2. Relinquish any claim made by the firm
3. Withdraw or proceed in a legal suit
4. Admit liability in a legal suit against the firm
5. Purchase property on the firm’s behalf
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 6. Enter a new partnership on the firm’s behalf

Apparent Authority
Apparent authority arises when someone logically concludes an individual has the authority to
act on behalf of another person or entity to do business or enter into contracts. Typically, this
belief stems from the person’s actions leading to the belief that they have been given authority to
act. Not all acts performed under apparent authority are legally binding.

Example of Apparent Authority

Bob works as a cashier at a stationery shop. Though Bob does not order products or price them,
he gives a price quote to a customer who calls requesting customized stationery. While Bob does
not have the actual authority to give customers price quotes, his position providing customer
service gives him the apparent authority to do so. Even though the company did not authorize
Bob to give price quotes to customers, the costumer would be entitled to the price Bob quoted,
since the customer reasonably assumed that Bob had the authority to make such an offer. The
company must uphold the oral agreement made between Bob and the customer.

Q.2. Discuss Bailee’s right of lien with the help of decided cases. What is the
difference between particular lien and general lien?

Ans: Bailee’s Right of Lien

The ‘common Law principle is that if a man has an article delivered to him, on the improvement
of which he has to bestow trouble and expenses, he has a right to detain it, until his demand is
paid.

Lien in its primary sense is a right in one man to retain that which is rightfully and continuously
in his possession belonging to another until the present and accrued claims of the person in
possession are satisfied. In this primary sense is given by law and not by contract. The
possession of the goods by the person claiming the right of lien is anterior to its exercise. If the
said person is not in possession then the exercise of the right is not possible. The lien never arises
unless the bailee has a right to continuing possession of the goods, so that if the bailor has the
right to remove the goods from time-to-time, there is no lien, in the absence of an express
agreement that the goods shall remain ‘in pawn’ despite temporary removal by the bailor.

Extent of the Right of Lien

The extent of bailee’s lien is in respect of services involving the exercise of labour or skill
rendered by him in respect of the goods bailed. The services rendered for the purpose of lien
must be limited to the labour or skill expended by the bailor over the goods bailed; the lien has
nothing to do with any other kind of service. Such labour and skill must have been spent, and
thirdly, the lien applies only to such goods over which the bailee has bestowed his labour and
expenses, and not to other goods. Nor does any lien attach to goods bailed to a person for the
57
purpose of his working with it, and not upon it. Mere making arrangement for storage of goods
in a godown for payment would not attract his provisions since no improvement in the goods
takes place, nor is any labour or skill exercised in respect of such goods.
Loss of Right of Lien
A bailee’s right of lien is lost with the loss possession. It is lost if he surrenders possessions of
the goods, even though he subsequently regains possession. Thus, in EC Eduljee v. Café John
Bros, E sold a second hand refrigerator to P, and agreed to put it in order for further sum. P took
delivery. Later, E agreed to make further repairs as an act of grace, and was given possession. E
claimed a lien, as the original fixed for repairs had not been fully paid. It was held that the lien
was lost by the original delivery to P.
The lien is also lost if the bailee has sold the goods. The bailee’s assertion of right to retain the
chattel otherwise than by way of lie may operate as a waiver of the lien; or by an act or
agreement of the bailee amounting to waiver.
Right to recover expenses Survives lien: Even though the right of lien is lost on loosing
possession of goods, the bailee, nevertheless, retains the right to recover the expenses incurred
by him for the preservation of the goods form deterioration no provided for in the contract of
bailment.

Definition of General Lien

General Lien means the right of an individual to retain or detain as security any movable
property, which belongs to someone else, against a general balance of the account, until the
liability of the holder is discharged. It is described under section 171 of the Indian Contract Act,
1872.
A person can waive the right of lien through a contract. It is commonly available to bankers,
factors, wharfingers, high-court attorneys, etc. who keep the goods bailed to them, during the
course of their profession and does not require any contract to that effect. Unless there is an
express contract in this regard, no other person can retain the property of another as the security
of the balance due to them.
In general lien, the property on which lien is exercised can only be retained, but cannot be sold
for any payment lawfully due to him.
Definition of Particular Lien
As per section 170 of the Indian Contract Ac, 1872, the particular lien is defined as a right of a
person to retain particular goods bailed to him/her as security, for non-payment of dues.
In conformity to the objective of bailment, when bailee has employed skill or labor and improved
the goods bailed to him/her. He/she is entitled to consideration for his service, and if bailor
denies paying the amount, then he/she can retain the goods, against remuneration.

Difference between General Lien and Particular Lien

The points given below describe the difference between general lien and particular lien in detail:
1. General Lien can be described as the right granted to a person to retain the possession of
goods belonging to another person against the general balance of the account. On the contrary,
the particular lien can be understood as the right of an individual to keep specific goods bailed,
until the dues relating to those goods are discharged.

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2. A general lien is available for any goods, in respect of which the claims are not satisfied.
Conversely, the particular lien is available only against the goods in respect of which bailee has
expensed skill and labor.
3. General Lien is not automatic but is recognized through an agreement, whereas particular
lien is automatic.
4. The holder of goods has no right to sell the goods to discharge the amount unpaid, in the
case of general lien. On the other hand, in the case of particular lien the bailee cannot sell the
goods to realize his/her debts, however, in special conditions, the right is conferred.
5. General Lien is most commonly exercised by bankers, wharfingers, factors, policy
brokers, attorneys, etc. As against this, the particular lien is employed by a bailee, unpaid seller,
finder of goods, pledgee, partner, agent, etc.

Q.3. ‘Risk passes with the property’. Discuss the statement with its
exceptions?
Ans: The general rule prevalent in India is that the risk of damage or loss of movable property
lies with the owner of the good. The Latin term ‘res perit domino’ expresses that the thing is lost
to the owner of the property. This principle is applicable in the case of sale of movable property.
The movable property includes every kind of movable property, including stocks and shares,
growing crops, grass, and things attached to or forming part of the land that is agreed to be
severed before sale or under the contract of sale. It does not apply to actionable claims and
money. The barter or exchange of goods is not covered under this Act as it is governed by the
general provisions of the Indian Contract Act, 1872.
Owner’s Risk (Section26)
Section 26 of the Sale of Goods Act, 1930 states the goods are the owner’s risk if the property in
them has not been transferred to the buyer. But if the property has been transferred to the buyer
then the goods are buyer’s risk. This provision is applicable if no specific provision has been
signed by the parties to the contract in their contract regarding this. This rule is applicable
irrespective of the fact that delivery has been made or not.
It means that the risk is associated with ownership and not with mere possession of the property.
To decide whether the risk has been passed or not, we first need to find whether the property in
goods i.e. the ownership has passed or not.
The passing of risk means the transfer of the liability for damage or loss of the property from the
seller of the immovable property to the buyer. The risk in the property prima facie passes with
the property, but if the parties to the contract agree to pass the risk on the property at some other
level of transaction, then that is also possible, depending upon the terms of their contract. It is
also possible that that the title, risk, and possession of the property pass independent of each
other from the seller to the buyer in a sale’s transaction.

Exceptions

There are two exceptions to the general law that the risk passes with the transfer of property in
the goods. These are:
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If the delivery has been delayed due to the fault of either party, then the liability of damage will
lie on the party at fault. If the seller has failed to deliver the goods as agreed by the parties and
the goods are damaged or lost due to that, then the seller will bear the cost. If the buyer has failed
to take delivery of goods despite many reminders by the seller, then the buyer will bear the cost.

In Demby Hamilton & Co. Ltd. v. Barden, the sellers agreed to supply 30 tons of apple juice by
samples. The seller crushed 30 tons of apples at once to ensure that they are according to the
samples and filled them in the casks. After some installments had been delivered, the buyer
refused to take further deliveries. The apple juice became putrid. It was held that the property in
the goods was still with the sellers, but the loss had to be borne by the buyer.[2]

Irrespective of the fact that the property in the goods has been transferred or not, the possessor of
the good has same rights and duties as bailee of the goods. If the damage to the property occurs
due to the negligence of the possessor of the goods, as a bailee, he will be liable to bear the
damage or loss of the goods.

It can be easier to understand it with the help of the following illustration;

“X, a seller of the goods, enters into a contract of sale of goods with Y, the buyer, who visits X’s
office to check the goods. Both the parties to the contract agree that transfer of ownership will
take place with the execution of the contract, restricting X’s right to sell those goods to someone
else. They both agree X will bring the goods in the deliverable state in 2 days and after two days,
Y’s agent will collect the goods from X. Both the parties agree that X will take care of Y’s goods
for 5 days after the contract has been executed (if not collected) and not beyond the period of 5
days. Hence, the agent of Y must turn up within the stipulated time for collection of the goods.
The contract regarding payment was that Y’s bank would transfer the amount to X’s account
within 3 days of execution of the contract.”

This type of contract is perfectly valid for the Sale of Goods Act, 1930. In this type of contract,
each transaction takes place according to the will of the parties. In this case, the property in the
goods or ownership is transferred at the same time when the contract is concluded, while the
possession of the goods passes at a later stage. If the contract had been silent about the transfer of
risk, then it would have passed with the conclusion of the contract. But in the instant case, it has
been decided by the parties that the risk will transfer after five days of execution of contract if
not collected by the parties.

Now, as per the contract signed between the parties, if the goods are lost or damaged within
those five days after the conclusion of the contract, then the seller will bear the cost. But if the
goods are damaged after five days and the buyer did not collect the goods, then the buyer will
bear the loss. Also, if the goods were lost after the 5th day (if not collected) but due to the

60
negligence of the seller, then the seller will bear the cost of damage or loss. In case the buyer’s
agent collects those goods before five days, then the risk will transfer with it.

Thus Res Perit Domino is applicable, and the loss of the good(s) falls upon its owner.

SHORT QUESTION WITH ANSWER

Q.1. Bailment and Agency

Ans:

No. Bailment Agency

Meaning:The term bailment is derived Meaning :When a person appoints another to
1 from the French word ‘Bailor’, which act on his behalf with a third party, it is called
means ‘to deliver’. ‘Agency’.

Definition : Voluntarily Change of Definition: ‘Agency’ is the legal relationship

possession from one person to another is between an agent and Principal; to bring the
2 called contract of bailment. principal into legal relationship with the third
party.
Example: X’ delivers a cloth to ‘Y’, a Example :‘X’ appoints ‘Y’ to purchase some
Tailor for making a shirt. The contract property on his behalf. Here ‘X’ is Principal
3 between ‘X’ and ‘Y’ is bailment. ‘X’ is a and ‘Y’ is Agent.
Bailor and ‘Y’ is a Bailee.
4 In bailment, the Bailee does not The agent represents his principal, and
represent the Bailor. He does not derive derives certain power from his principal.
any authority from the Bailor.
5 In Bailment, A Bailee cannot sell the In Agency,an agent can sell the property.
property under bailment
6 A Bailee cannot transfer the ownership An agent can transfer the ownership of the
of the property. property.
7 A Bailee must have possession of the An agent may or may not have possession of
property the property.

Q.2. Explain Pledge?

Ans: Pledge is a kind of bailment. Pledge is also known as Pawn.It is defined under section 172
of the Indian Contract Act, 1892. By pledge, we mean bailment of goods as a security for the
repayment of debt or loan advanced or performance of an obligation or promise. The person who
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pledges the goods as security is known as Pledger or Pawnor and the person in whose favour the
goods are pledged is known as Pledgee or Pawnee.

Essentials of Pledge

Since Pledge is a special kind of bailment, therefore all the essentials of bailment are also the
essentials of the pledge. Apart from that, the other essentials of the pledge are:

• There shall be a bailment for security against payment or performance of the promise,

• The subject matter of pledge is goods,

• Goods pledged for shall be in existence,

• There shall be the delivery of goods from pledger to pledgee,

• There is no transfer of ownership in case of the pledge.

Exception: In exception circumstances pledgee has the right to sell the movable goods or
property that are been pledged.

Q.3. Fraud and misrepresentation?

Ans: ‘Fraud‘ means a willful misrepresentation of a material fact while ‘Misrepresentation‘

means a bonafide representation which is false. The former is an untrue statement given by one
party that indues other party to enter to the contract, whereas the latter is the statement of fact,
made by one party, believing that it is true, then this is innocent misrepresentation.

The major difference between fraud and misrepresentation are as under:

1. Fraud is a deliberate misstatement of a material fact. Misrepresentation is a bonafide

representation of misstatement believing it to be true which turns out to be untrue.

2. Fraud is done to deceive the other party, but Misrepresentation is not done to deceive the
other party.

3. Fraud is defined in Section 17 and misrepresentation is defined in Section 18 of the

Indian Contract Act, 1872.

4. In fraud, the party making representation knows the truth however in misrepresentation,
the party making representation does not know the truth.

5. In fraud, the aggrieved party can claim damages for any loss sustained. On the other
hand, in misrepresentation, the aggrieved party cannot claim damages for any loss sustained.
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Very short question with answer

Q.1. Discuss Unpaid seller?

Ans: A seller is a person who sells or agrees to sell goods and deemed to be an unpaid seller
within the meaning of this Act.

i. When the whole of the price has not been paid or tendered:

ii. When a bill of exchange or other negotiable instrument has been received as conditional
payment, and the condition on which it was received has not been fulfilled by reason of dishonor
of the instrument or otherwise. Sec.45.

So an unpaid seller means the person who has sold the goods for a price and the payment of price
has not been made to him or the instrument which was given to him has been dishonored in its
maturity. Such seller is known as an unpaid seller.

Q.2.Partnership is created by contract and not by status?

Ans: Partnership is the form of business organization, where two or more persons can join
together or jointly carrying on some business. It is an improvement over the 'sole-trade business',
where one single individual with his own resources, skill and effort carries on his own business.

In a partnership, a number of persons could pool their resources and efforts and could start a
much larger business. In case of loss also, the burden gets divided amongst various partners in a
partnership.

According to Section 4 of the Indian Partnership Act, " The relation of partnership arises from
contract and not from status; and , particular, the members of a Hindu undivided family carrying
on a family business as such, or a Burmese Buddhist husband and wife carrying on business as
such, are not partners in such business."

Partnership is the result of agreement. Agreement here means a contract. It arises from an
agreement between two or more people. It cannot arise from status. The presence of agreement is
a must. It indicates the voluntary contractual relationship of partnership.

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Q.3. Bailment and Pledge?

Ans: The following are the major differences between Bailment and Pledge
1. A Bailment is a contract in which goods are transferred from one party to another party
for a short period for a specific objective. The Pledge is a kind of Bailment in which
goods are pledged as security against payment of debt.

2. A Bailment is defined under section 148 while Pledge is defined under section 172 of the
Indian Contract Act, 1872.

3. In bailment, the consideration may or may not be present, but in the case of a pledge, the
consideration is always present.

4. The objective of bailment is safe custody or repairing of goods delivered. On the other
hand, the sole purpose of delivering the goods is to act as security against the debt.

5. The receiver has no right to sell the goods in case of bailment whereas if Pawnor does not
redeem the goods within the reasonable time, the Pawnee can sell the goods after giving
notice to him.

6. In bailment, the goods are used by the bailee only for the said purpose. Conversely, in
pledge, Pawnee has no right to use the goods.

Q.4. Provisions relating to unpaid sellers lien?

Ans:An unpaid seller of the goods, who is in possession of them, is entitled to retain possession,
i.e. exercise a right of lien over the goods, in the following cases:

a. Where the goods have been sold without any stipulation of credit;

b. Where the goods have been sold on credit but the term of credit has expired;

c. Where the buyer becomes insolvent.5

Further, an unpaid seller is also entitled to exercise its right of lien if he is in the possession of
the goods as an agent of the buyer or the bailee for the buyer.6

The Black's Law Dictionary defines lien as "a legal right or interest that a creditor has in
another's property, lasting usually until a debt or duty that it secures is satisfied". Vendor's Lien
has also been defined under the Black's Law Dictionary as a lien held by a seller of goods, who
retains possession of the goods until the buyer has paid in full.

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The term lien implies that the property in the goods has vested in the buyer, because no man can
have a lien on his own goods. A lien necessarily presupposes that the property in the goods has
passed, as the seller cannot be said to possess a right of lien on his own property, which is in the
nature of a right of distress over the property of another.

It is settled law that the question of lien in respect of the goods, it is apparent that an unpaid
seller has a lien on the goods for the price "while he is in possession of them". Therefore, if the
unpaid seller does not have possession of the goods, he cannot have lien on such goods. This
view has also been upheld by the Hon'ble High Court of Delhi in the judgment titled as "Pawan
Hans Helicopters Ltd. vs. Aes Aerospace Ltd.".7

In addition to an unpaid seller losing the possession of the goods, the Act also provides for the
following specific situations, in which an unpaid seller loses its right of lien, i.e. when:

a. The unpaid seller 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;

b. The buyer or his agent lawfully obtains possession of the goods;

c. The unpaid seller has waived its right of lien over the goods.8

However, in the presence of a contractual stipulation, an unpaid seller's lien, recognized in terms
of Section 46 and 47 of the Act, may not stand terminated upon delivery of the goods to the
carrier.

The Hon'ble Supreme Court of India has in the judgment titled as "Suchetan Exports Pvt. Ltd. vs.
Gupta Coal Ltd. and Ors."9 held that wherein the contract for sale provided that the seller would
retain its lien over the goods and title would pass to the buyer on payment of the full price of the
goods, then the unpaid seller of the goods is entitled to exercise lien over the goods,
notwithstanding that the possession of the goods may not be with the unpaid seller.10

Unpaid seller who pas possession of the goods in which the property has passed to the buyer, can
exercise the right of lien only in the following cases:

a. where the goods have been sold without any stipulation of credit;

b. where the goods have been sold on credit but the term of credit has expired;

c. where the buyer becomes insolvent.

Further, unpaid seller loses his right of lien as per Section 49 of the Act.

However, in case the parties enter into a contractual stipulation to retain the right of lien and
transfer of title upon payment, then notwithstanding that the possession of the goods may have
transferred to the buyer, the unpaid seller would have the right of exercising lien over the goods.

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 UNIT- VTH

LONG QUESTION WITH ANSWER

Q.1. mutual relationship between partners

In this article, we will look at the various rules that govern the relation of partners in a firm to a
third party. Sections 18 to 22 of the Indian Partnership Act, 1932, offer details of different
scenarios under which partners can have different relations with a third party.

The Partnership Act contains various provisions regulating the relationship between partners.
The partners are bound to carry on the business of the firm to the greatest common advantage, to
be just and faithful to each other and to render true account and true information of all things
affecting the firm to any partner or his legal representative. Every partner has a right to take part
in the conduct of the business. Every partner is bound to attend diligently to his duties in the
conduct of the business. Any differences arising as to ordinary matters connected with the
business may be decided by majority of the partners and every partner shall have the right to
express his opinion before the matter is decided. No change can be made in the nature of the
business without the consent of all the partners. Every partner has a right to have access to and to
inspect and copy any of the books of the firm.

S.9. General duties of partners.- Partners are bound to carry on the business of the firm to the
greatest common advantage, to be just and faithful to each other, and to render true accounts and
full information of all things affecting the firm to any partner or his legal representative. The first
portion of this section is more didactic than legal. But it is the basis of claims arising from unfair
dealings between partners which are not provided for otherwise. This section is of vital
importance and subsequent sections dealing with relation of partners to one another are no more
than amplifications and illustrations of principles contained in s 9. Its opening general words
come from a time-honoured clause, which used to be common form in English partnership
articles, but do not appear any more in the corresponding s 28 of the English Act. Presumably,
the reason for dropping them was that, considered as a legislative command, they have no
definite operative effect. It would have done no harm to keep them, and it is certainly better to do
so in India; they place, in conspicuous view, the general tradition of good faith and honour on
which the whole law of partnership and the whole duty of partners are founded.

Partnership is based upon mutual confidence and trust. It is, therefore, necessary that no partner
should gain any personal advantage at the cost of others. One of the duties mentioned in S 9 is
that partners must carry on the business to the greatest common advantage. This provision is to
be read with S 16 (a) of the Act according to which if a partner derives any profit for himself
from any transaction of the firm, or from the use of the property or business connection of the
firm or the firm name, he shall account for that profit and pay it to the firm.

66
a firm which had been established for refining sugar consisted of four partners. One of the
partners, who was considered to be expert in the job, was authorised to purchase sugar for the
firm for refining. Instead of purchasing sugar from the market, he supplied his own sugar which
he had purchased earlier at much lower price and thus made considerable profit. He did not
disclose this fact to other partners that he was making profit in this particular transaction. It was
held that the firm was entitled to recover the profit thus made by this partner. In Gardener v
McCutcheon , a number of persons were the joint owners of a ship which was to be employed for
their common benefit. One of them, who was the master of the ship, traded on his own account
and made considerable profit. It was held that the defendant was not entitled to use the
partnership property for his private benefit and, therefore, he was bound to account for the profit
to the other co-partners. Another duty mentioned in this section is that the partners must be just
and faithful to each other. As already noted, there is mutual agency between partners and every
partner is the agent of all others and he can bind them to an unlimited extent. Every partner is,
therefore, expected to be just and faithful to his co-partners. Thus s 33 provides that even if the
contract between the partners authorised the expulsion of a partner, the fellow partners must
exercise this power in good faith. Rendering true accounts is another duty which is imposed by s
9. Every partner is, therefore, bound to keep and render true and complete accounts of all the
partnership moneys with him. He also must make these accounts available to the other partners
because every partner has a right to have access to and to inspect and copy any of the books,
including the account books of the firm. The partnership funds in the hands of a partner must be
spent by him properly for the purpose of the firm‟s business and the partner concerned should
keep proper vouchers in respect of the expenses. He should not mix up his money with that of
the firm nor should he wrongly spend or misappropriate the firm‟s money, otherwise he will be
accountable for the same towards the firm. Every partner is an agent of the firm. According to
the law of agency, information to the agent is deemed to be information to the principal. S 9,
therefore, makes it incumbent on every partner to pass on full information of all things affecting
the firm to his other fellow partners. Concealment of the facts by a partner renders him liable to
others. The duties cast on the partners under s 9 is not „subject to contract between the partners‟.
Therefore, it is absolute in its contents.

S.10. Duty to indemnify for loss caused by fraud. - Every partner shall indemnify the firm for
any loss caused to it by his fraud in the conduct of the business of the firm. The firm is liable not
only for the contract made by one of them on behalf of other but also for wrongful act or
omission of a partner acting in the ordinary course of business of the firm. If a partner commits a
fraud against a third party while acting in the ordinary course of business of the firm, the third
party can make the firm liable for the same. S 10 entitles the firm to recover indemnity from the
partner guilty of fraud because of which the firm had to suffer the loss. Unlike the provisions of
S 12 to 17, the duty mentioned in this section is not subject to the contract between the partners.
It is, therefore, not possible for a partner to negative his liability towards the firm for loss caused
to the firm due to his fraud. This section in absolute terms provides that every partner shall
indemnify the firm for any loss caused to the firm by his fraud in the conduct of the business of
the firm and leaves no scope for the guilty partner to contract himself out of such liability.

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 R. 12 (d). S.11. Determination of rights and duties of partners by contract between the
partners. –

S. (1) Subject to the provisions of this Act, the mutual rights and duties of the partners of
a firm may be determined by contract between the partners, and such contract may be
express or may be implied by a course of dealing. Such contract may be varied by
consent of all the partners, and such consent may be express or may be implied by a
course of dealing.

(2) Agreement in restraint of trade. – Notwithstanding anything contained in section 27 of the

Indian Contract Act, 1872, such contracts may provide that a partner shall not carry on any
business other than that of the firm while he is a partner.

(3) S 11 (1) provides that, subject to the provisions of the Act, the mutual rights and duties of the
partners of a firm may be determined by contract between the partners and such contract may be
express or may be implied by a course of dealing. It further provides that the mutual rights and
duties which may have been agreed upon between the partners may be subsequently varied by
the consent of all the partners and such consent may be expressed or may be implied by a course
of dealing. This section incorporates the general principle that the mutual rights and duties of the
partners may be determined by a contract between themselves. They may themselves decide that
how much investment or labour is to be put by whom, or whether a partner will be entitled to any
remuneration, apart from sharing the profits, or what will be the profit sharing ratio, etc.

Sub-section (2) clearly provides that, notwithstanding anything contained in s 27 of the Indian
Contract Act, the contract between the partners may provide that a partner shall not carry on any
business other than that of a firm while he is a partner. Although according to s 27 of the Indian
Contract Act, agreement in restraint of trade is void, but such an agreement entered into between
the partners as stated above will be valid. The right of the partners to make any contract to
regulate their mutual rights and duties is subject to the provisions of the Partnership Act. Certain
duties of the partners are incorporated in Ss 9 and 10, which have to be adhered to by all the
partners and they are not subject to contract between the partners. Thus, the disabilities suffered
by the partners of and unregistered firm, as envisaged by s 69, are binding on every partnership
and the partners cannot agree contrary to those provisions. Similarly, the provision contained in s
41 regarding compulsory dissolution of a firm on the happening of certain events is binding on
every firm. In the same way, the right of the partners to file a suit for dissolution of a firm under
s 44 is not subject to contract between the partners. S 11, which permits partners to make any
contract for regulating their mutual relations, is subject to the provisions of the Act and S 44 is
one such provision. Therefore, a partner can always invoke the jurisdiction of the court under S
44 for the dissolution of the firm. As has been noted above, S 9 & 10 contain certain duties by
which all the partners are bound and the duties cannot be negatived by a contract between the
partners. S 12 to 17 contain various other mutual rights and duties of the partners. Each one of
those sections has been made „subject to contract between the partners‟. It means that the rights
and duties.
68
5 Exceptions to s 27, Indian Contract Act are also contained in ss 36 (2), 54 & 55 (3) of the
Indian Partnership Act. incorporated in ss 12 to 17 are to be applied to the partners, if they have
not made any contract to the contrary. For instance, if the partners have agreed to the proportion
in which they will be sharing profits and losses, then their agreement will prevail, but if the
partners have not agreed to anything on this point, then according to s 13 (b) the partners are
entitled to share equally in the profits earned, and shall contribute equally to the losses sustained
by the firm.

Rights of the Partners

As already noted, the various rights and duties of the partners contained in s 12 to 17 are subject
to contract between the partners‟. Therefore, unless it has been agreed otherwise, the following
rights as contained in the above mentioned provisions are there:

1. Right to take part in the conduct of the business [S. 12 (a)]

According to s 12 (a), every partner has a right to take part in the conduct of the business. Since
the business of partnership belongs to all the partners, every partner is entitled to take part in the
conduct of the business. The partners are free to provide in their agreement that only some of
them will take part in the conduct of the business and certain other partners will not. If such a
right is wrongfully denied to a partner, he can seek the enforcement of the right through a court
of law. If the right to manage the business has been conferred on only some of the partners, they
alone will be entitled to this right.

2. Right to be consulted and express opinion [S. 12 (c)]

S 12 (c) contains the following provision with regard to the right of a partner to express opinion
in the partnership matters: (c) any difference arising as to ordinary matters connected with the
business may be decided by a majority of the partners, and every partner shall have the right to
express his opinion before the matter is decided, but no change may be made in the nature of the
business without the consent of all the partners; The difference of opinion between the partners
may be either (i) as to ordinary matters connected with the business, or (ii) matters of
fundamental importance concerning the nature of the business. When the difference of opinion
pertains to an ordinary or routine matter connected with the business, the same may be resolved
by a decision of the majority of partners. But before the matter is decided every partner must be
provided with an opportunity to express his opinion. In this connection Lord Eldon observed, “I
call that the act of all, which is the act of the majority, provided all are consulted, and the
majority are acting bona fide, meeting not for the purpose of negativing, what anyone have to
offer, but for the purpose of negativing, what, when they met together, they may, after due
consideration, think proper to negative: For a majority of partners to say, „We do not care what
one partner may say, we, being the majority, will do what we please, is, I apprehended, what this
Court will not allow.‟ The power of the majority has to be exercised in good faith. If, for

69
instance, the majority of the partners decide to expel a partner without sufficient cause, the
expulsion would be set aside.”

When the matter is not an ordinary or a routine matter but is of fundamental importance
concerning the nature of the business, consent of all partners is needed. For instance, admission
of a new partner to the firm is a change in the nature of the business. This provision being subject
to contract between the partners, they may decide that in all matters it is the decision of the
majority which will prevail.

3. Right to have access to books of the firm [S 12 (d)]

Every partner has a right to have access to and to inspect and copy any of the books of the firm.
This right is available to both active and dormant partners. This right is not only in respect of
books of accounts but in respect of any book of the firm. A partner could exercise this right
either personally or by engaging an agent for the purpose.

4. Right to share profits [S 13 (b)]

Every partner has a right to share the profits. Generally, the partners provide in their agreement
as to what will be the proportion in which they will share the profits. For example, in a firm of
three partners, it may be agreed that the profit sharing proportion will be 2/4: 1/4: 1/4. According
to s 13 (b), in the absence of any such agreement, the partners are to share the profits equally and
also to contribute equally to the losses sustained by the firm and not in the proportion in which
various partners contribute capital. Since every partner is entitled to share the profits, no other
remuneration, as a general rule, is to be paid to a partner for the management of the firm‟s
business. The rule contained in this regard in s 13 (a) is that a partner is not entitled to receive
remuneration for taking part in the conduct of the business, unless otherwise agreed. Thus, it is
only if the partners so agree, a partner may be entitled to additional salary, commission, etc. for
the efforts made by him in running the business of the firm.

5. Right to interest on capital and advances [S 13 (c) & (d)]

Generally, no interest on capital subscribed by the partners is to be given because the partners
share the profits of the business of the firm. In case the partners agree that interest on capital is to
be given, according to s 13 (c), such interest shall be payable only out of profits. Sometimes over
and above the capital subscribed by the partners, the firm may need extra money. In case a
partner makes any payment or advance beyond the amount of capital he has agreed to subscribe,
he is entitled to interest thereon at the rate of six percent per annum, according to s 13 (d).

6. Right to indemnity [S 13 (e)]

A partner while acting on behalf of the firm may make certain payments and also incur some
liabilities. According to s 13 (e), he is entitled to claim indemnity for the same. The indemnity
can be claimed for the acts done by a partner in the ordinary and proper conduct of the business
and also for doing some act in an emergency for the purpose of protecting the firm from the loss.
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Duties of the Partners

Besides the duties explained earlier under ss 9 and 10, the partners have the following duties
under the subsequent provisions which are subject to contract between the partners. As already
noted the duties mentioned in ss 9 and 10 are not subject to contract between the partners.

1. Duty to be diligent [Ss 12 (b) and 13 (f)]

According to s 12 (b), every partner is bound to attend diligently to his duties in the conduct of
the business of the firm. If a partner is negligent in the performance of his duties, this may cause
loss not to that partner alone but to the whole firm. It has, therefore, been provided in s 13 (f) that
if the firm suffers any loss by the wilful neglect of a partner, he shall indemnify the firm for the
same. The expression „wilful neglect‟ means an act done intentionally and deliberately rather
than by inadvertence or an accident. An act done in good faith and bona fide cannot be termed a
wilful neglect. In Cragg v Ford, a partner who was made in charge for winding up the business of
the firm made some delay in disposing of some bales of cotton, ignoring the suggestion of a
fellow partner. The prices of cotton fell considerably and loss was caused due to the delayed sale.
It was held that the defendant was not liable for the loss as there was no wilful neglect on the part
of the partner concerned because he was acting bona fide and did not anticipate the sudden fall in
the prices. The partners are, however, free to make a contract that they will not be liable for the
wilful neglect because this provision is subject to contract between the partners.

2. Duty to properly use the firm’s property [Ss 14 and 15]

According to s 15, the property of the firm is to be used by the partners exclusively for the
purposes of the firm‟s business rather than the private and personal use of a partner. Although
every partner has an interest in the property but no one can deal with any specific item of
property as his own. In Addanki Narayanappa v Bhaskara Krishnappa, the Supreme Court
explained the nature of the rights of the partners in the following words: whatever may be the
character of a property which is brought in by the partners when the partnership is formed or
which may be acquired in the course of the business of the partnership, it becomes the property
of the firm and what a partner is entitled to is his share of profits, if any, accruing to the
partnership from the realisation of this property, and upon dissolution of the partnership to a
share in the money representing the value of the property. No doubt, since a firm has no legal
existence, the partnership property will vest in all the partners and in that sense every partner has
an interest in the property of the partnership. During the subsistence of the partnership, however,
no partner can deal with any portion of the property as his own. Nor can he assign his interest in
a specific item of the partnership property to anyone. His right is to obtain such profits, if any, as
fall to his share from time to time and upon the dissolution of the firm to a share in the assets of
the firm which remain after satisfying the liabilities.”

The property of the firm has got to be used exclusively for the purpose of the business of the
firm. If any partner derives any profit or personal advantage by the use of the property of the
71
firm, he has to account for that profit and pay the same to the firm. This rule is subject to contract
between the partners. Property of the firm S 14 defines the property of the firm as under:

The property of the firm. - Subject to contract between the partners, the property of the firm
includes all property and rights and interest in property and rights and interest in property
originally brought into the stock of the firm, or acquired by purchase or otherwise, by or for the
firm, or for the purpose and in the course of the business of the firm, and includes also the
goodwill of the business. Unless the contrary intention appears, property and rights and interest
in property acquired with money belonging to the firm are deemed to have been acquired for the
firm. According to the above mentioned provision, the property of the firm not only includes
what is originally brought into the stock of the firm but also whatever is subsequently acquired,
by purchase or otherwise. Partners may bring in immovable property also into the common stock
and that becomes the property of the firm. When a partner brings in his personal asset into
partnership firm as his contribution to the capital, an asset which originally was subject to his
entire ownership, becomes now subject to the rights of other partners in it. What was his
exclusive right in the asset becomes reduced to the shared right in it with other partners of the
firm. Property of the firm also includes goodwill. Goodwill is an advantage acquired in the
course of business. It is an advantage which a business acquires by its reputation. A newly
established business may not be able to attract many customers but when this business gets
established and earns goodwill, it may be able to attract more customers giving it an obvious
advantage of making more profits. Goodwill is composed of a variety of elements. It is a
composite thing referable in part to its locality, in part to the way in which it is conducted and the
personality of those who conduct it, and in part to the likelihood of competition, etc.

3. Duty not to earn personal profits or to compete S 16

The partnership business belongs to all the partners jointly. It is, therefore, expected of every
partner that he will act to the greatest common advantage rather than acting for personal profit at
the cost of other partners. He should also not engage in a competing business. S 16 contains the
following provision as regards such duty. S 16. Personal profits earned by partners.- Subject to
contract between the partners) If a partner derives any profit for himself from any transaction of
the firm, or from the use of the property or business connection of the firm or the firm name, he
shall account for that profit and pay it to the firm;

b) If a partner carries on any business of the same nature as and competing with that of the firm,
he shall account for and pay to the firm all profits made by him in that business. A partner is the
agent of the firm for the purpose of the business of the firm. According to the rules of the law of
agency, no agent can deal on his own account in the business of agency

Q.2. Explain authority of partners?

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Subject to the provisions of section 22, the act of a partner which is done to carry on, in the usual
way, business of the kind carried on by the firm, binds the firm. The authority of a partner to
bind the firm conferred by this section is called his implied authority.

Partners? authority is very similar indeed to agents? authority, being that each partner has either:

. Actual/ express authority

· Implied authority

· Ostensible/ apparent authority.

A partner described as managing partner (or similar) has implied authority to bind the firm
without limits. If a third party makes a deal with a partner on behalf of the partnership, they are
entitled to believe that this partner had the right to bind the partnership in that contract.

Express authority

when the principal/agency relationship is established, the agent is instructed as to what particular
tasks are required to be performed and is informed of the precise powers given in order to fulfil
those tasks. If the agent subsequently contracts outside of the ambit of their express authority
then they will be liable to the principal and to the third party for breach of warrant of authority.

For example an partner in the partnership may be given the express power by the other partners
to enter into a specific contract . In such circumstances all the partners would be bound by the
subsequent contract, if the partner breach this authority then still all partners are liable in
unlimited partnership.

Implied authority

This refers to the way in which the scope of express authority may be increased. Third parties are
entitled to assume that agents holding a particular position have all the powers that are usually
provided to such an agent. Without actual knowledge to the contrary they may safely assume that
the agent has the usual authority that goes with their position.

In Watteau v Fenwick (1893) the new owners of a hotel continued to employ the previous owner
as its manager. They expressly forbade him to buy certain articles including cigars. The manager,
however, bought cigars from a third party who later sued the owners for payment as the
manager?s principal. It was held that the purchase of cigars was within the usual authority of a
manager of such an establishment and that for a limitation on such usual authority to be effective
it must be communicated to any third party.

Ostensible/apparent authority

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This type of authority, which is an aspect of agency by estoppel, can arise in two distinct ways,
both of which are similar to creation of agency by estoppels:

Direct Representation :Where a person makes a direct representation that a particular person has
the authority to act as their agent without actually appointing them as their agent. In such a case
the person making the representation is bound by the actions of the ostensible/apparent agent.
The principal is also liable for the actions of the agent where they are aware that the agent claims
to be their agent and yet does nothing to correct that impression.

In Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd (1964), although a particular
director had never been appointed as managing director, he acted as such with the clear
knowledge of the other directors and entered into a contract with the plaintiffs on behalf of the
company. When the plaintiffs sought to recover fees due to them under that contract it was held
that the company was liable: a properly appointed managing director would have been able to
enter into such a contract and the third party was entitled to rely on the representation of the
other directors that the person in question had been properly appointed to that position.

Established Pattern of Dealings

Where a principal has previously represented to a third party that an agent has the authority to act
on their behalf. Even if the principal has subsequently revoked the agents authority they may still
be liable for the actions of the former agent unless they have informed third parties who had
previously dealt with the agent about the new situation (Willis Faber & Co Ltd v Joyce (1911)).

If an agent contracts with a third party on behalf of a principal, the agent impliedly guarantees
that the principal exists and has contractual capacity. The agent also implies that he or she has
the authority to make contracts on behalf of that principal. If any of these implied warranties
prove to be untrue then the third party may sue the agent in quasi-contract for breach of warrant
of authority. Such an action may arise even though the agent was genuinely unaware of any lack
of authority (Yonge v Toynbee (1910))

Q.3. Discuss minor as partners?

Indian Partnership Act, 1932 defines persons as a partner who have agreed to share profits of the
business carried on by all are any of them acting for all.

A minor is a person who have attained the age of majority according to the Indian Majority Act,
1875. It is stated that a person who is domiciled in India will attain majority at the age of
eighteen in the Indian Majority Act. The Indian Partnership Act governs the admittance of a
minor into the partnership in Section 30. This section deals with the rights and liabilities of a
minor who is admitted and the partnership. A deeper reading of the provision, specifically
74
section 30(1) makes it very clear that a minor cannot be admitted in the partnership as a
full-fledged partner, but with the consent of the other partners, a minor can be admitted in the
partnership to the benefits of the partnership.

It is an established principle that a minor is incompetent to enter in a contract, and therefore,

a contract of partnership cannot be entered with a minor. The same was also assented by the
apex court of the country in the Dwarkadas Case and the Hardutt Ray Case.

Minors Admitted Only For Benefits

The general principle has been laid down by Section 11 of The Indian Contract Act, 1872,
where it is discussed that who is competent to a contract and thereby stating that a minor
does not have the ability to contract.The same was supported in the Andhra Pradesh High
judgement of Addepally Nageshwar Rao. The Indian Partnership Act was drafted by a
special committee. Before the enactment of The Indian Partnership Act the provision in
partnership was governed by The Indian Contract Act and therefore the special committee
thought that there was no requirement to deviate from the principle of incapability of a minor
to enter into a contract of partnership as provided by Section 11 of The Indian Contract Act.

Following this the special committee did not allow the minors to become a partner in a
partnership, although they allowed a minor to be admitted to the benefits of a partnership
with the consent of all the existing partners in the partnership. The same kind of principle is
also pronounced in judicial pronouncements like the S. C. Mandal case. It was observed that
under Section 4 of The Indian Partnership Act, a firm means a group of people who has
entered into a contract of partnership among themselves and reading it with Section 11 of the
Indian Contract Act, it can be interpreted that a minor cannot be a part of a partnership
contract. It was held that a minor can only be in the partnership only for the benefits of the
partnership. It also stated that there should partnership between two major partners before a
minor can be admitted to its benefits.

The high court of Allahabad even declared a partnership deed to be void where the rights and
liabilities of a partnership firm was divided between the minor and majors in the partnership.
The court held that in the present situation not only the benefits of the partnership but also
the liabilities of the partnership are being put on the minor which is contradictory to the
Indian Partnership Act. Although the various judgements in the same line was there but still
there was a huge confusion regarding the question as to can a minor become a full-fledged
partner in the partnership firm as there were some contrary judgement to this effect also.
Finally, the Supreme Court in the landmark judgement of Commissioner of Income Tax vs
D. Khaitan and Co.]took a legal stand that in a situation where a minor is made a full-fledged
partner in the firm in that case the partnership cannot be registered by the Income Tax
Department.
75
 In case the partnership has to be registered by the Income Tax Department then a totally new
contract has to be formulated where the minor is to be admitted only to the benefits of the
firm, and the old contract will be invalid with the new contract coming in force. It was also
stated that the new contract has to specifically mention that the minor has been admitted in
the partnership only for benefits and no the minor is not liable for any losses.

Even in the judgement of Banka Mal Lajja Ram & Co. vs. Commissioner of Income Tax,
Delhi, it was held that even if all the other partners of the partnership consent in making the
minor a full-fledged partner still that can be brought into effect. In the Guwahati High Court
judgement of Commissioner of Income Tax vs. Kedarmall Keshardeo the court held that a
contract deed is valid when a guardian enters into a partnership on behalf of the minor but
again no liability should be imposed on the minor, even the income of a minor from the firm
should not be considered for the purpose of income tax. The courts even came to the view
that when a guardian is contracting for a minor then the damages must be calculated in the
basis of what damage the guardian has suffered and not the minor.[19] It is also established
by the courts that if a minor is contracting through a guardian then the benefits that are being
conferred that has to be accepted by the guardian, but the minor may do away with the
agreement id it is not entered for his benefits.

Rights And Liability of A Minor

Section 30(2) of the Indian Partnership Act states that a minor is entitled to share of profits and
the property of the firm which may have decided at the time the minor was admitted to the
benefits of the partnership. Under this provision, a minor has the right to inspect the accounts of
the partnership but to that fact does not have any right to inspect other documents of the
partnership. Even in Section 30(3) of the Indian Partnership Act a minor can only be liable to the
extent of his share in the partnership and can't be liable personally to the partnership for the
losses of the firm. Even the same notion was taken in a Calcutta High Court judgement where it
was stated that the creditors can only recover the amount from a minor to the extent of his share
in the firm, but they can't sue the minor personally, this benefit is not enjoyed by the major
member in the firm. The Supreme Court went a step ahead when it adjudged that a minor can't be
declared insolvent even if the major partners of the firm are declared insolvent.[25] The apex
court also came out with the same view as to when can a minor sue the other full-fledged partner
in the partnership.

Section 30(4) of The Indian Partnership Act states that a minor can sue the other partners of the
firm for his benefits in the firm but the same right is not available to the full-fledged partners of
the firm. The provision also states that in the case the minor severs all ties with the firm then
valuation of his share is to be done according to Section 48 of The Indian Partnership Act as far
as possible.

Position of Minor Attaining Majority

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According to section 30(5) of The Indian Partnership Act, a minor has two option after attaining
majority, either he can sever the connection with the firm or become a full-fledged partner in the
firm. The minor has to make dis decision within six months of his attaining majority.

The minor has to furnish a public notice specified under Section 72 on The Indian
Partnership Act. if he chooses to become a full-fledged partner. The minor continues to enjoy
the rights as a minor till he makes his final decision as to he will join the partnership as a
full-fledged partner or sever the connection from the partnership. Section 7(a) of The Indian
Partnership Act also states that after a minor partner has been admitted in the partnership as a
full-fledged partner then he will be liable not only for the future liabilities of the firm but also
the past liability from the date of his admission in the partnership. Section 7(b) states that a
the share of the minor after he attains majority will be the same which was given to him
when he was a minor as because when a minor chooses to become a full-fledged member of
the partnership, there is no break in the partnership and it continues as it is just that the
liabilities of being a full-fledged partner are now upon him.

Section 8 of The Indian Partnership Act states that if the minor declines to continue as a
full-fledged member of the partnership he will be liable for all the liabilities of the partnership till
he furnishes the public notice as per Section 72 of The Indian Partnership Act. After serving the
ties with the partnership, the minor may file a suit as to recover the benefits he was entitled to.

Conclusion

From the above discussion, we can say that a partnership firm cannot be formed with a minor as
the only other member. The relationship of the partnership arises from a contract. According to
Section 11 of The Indian Contract Act[32], a minor is not competent to a contract. Even in the
Dwarkadas Khetan case the Supreme Court of the country declares that a minor cannot be a
full-fledged partner in the firm. The apex court in Shah Mohandas Case stated that a minor may
be admitted in the firm only for its benefits.

SHORT QUESTION WITH ANSWER

Q.1. Effect of non-registration of Partnership Firm?

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

1] No suit in a civil court by the firm or other co-partners against any third party

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If the firm registration is not done, then the firm or any other person on its behalf cannot file a
suit against a third party for breach of contract which the firm has entered into. Further, the
person filing the suit on behalf of the firm should be in the register of the firm as a partner.

2] No relief to partners for set-o¬ff of claim

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

3] An aggrieved partner cannot bring legal action against other partner or the firm

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

4] A third party can sue the firm

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

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

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

2. Partners’ right to sue the firm for dissolution or settlement of accounts (in case of
dissolution)

3. The power of the Official Assignees, Receiver of Court to release the property of the
insolvent partner and bring an action

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

Q.2. Distinguish between partnership and company?

Ans: Key Differences Between Partnership Firm and Company

1. A partnership is an agreement between two or more persons who come together to carry
out a business and share profit & losses mutually. A company is an incorporated

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 association, also called an artificial person having a separate identity, common seal and
perpetual succession.

2. The registration of the partnership firm is not compulsory whereas to form a company; it
needs to be registered.

3. For the creation of a partnership, there must be at least two partners. For the formation of
a company, there must be at least two members in case of private companies and 7 in
regard to public companies.

4. The limit for the maximum number of partners in a partnership firm is 100. On the other
hand, the maximum number of partners in case of a public company is unlimited and in
the case of a private company that limit is 200.

5. The next major difference between them is, there is no minimum capital requirement for
starting a partnership firm. Conversely, the minimum capital requirement for a public
company is 5 lakhs and for a private company, it is 1 lakh.

6. In the event of dissolution of the partnership firm, there are no legal formalities. In
opposition to this, a company has many legal formalities for winding up.

7. A partnership firm can be dissolved by any one of the partners. In contrast to this, the
company cannot be wound up, by any one of the members.

8. A partnership firm is not bound to use the word limited or private limited at the end of its
name while a company has to add the word ‘limited’ if it is a public company and
‘private limited’ if it is a private company.

9. The liability of the partners is unlimited whereas the liability of the company is limited to
the extent of shares held by every member or guarantee given by them.
As a company is an artificial person so that it can enter into contracts in its own name, the
members are not held liable for the acts of the company. But in the case of a partnership firm, a
partner can enter into a contract in their own name with the mutual consent of the other partners,
and they can also be sued for the acts done by the firm.

Q. 3. explain dissolution of partnership?

A partnership is a kind of business where a formal agreement between two or more people is
made and agreed to be the co-owners, distribute responsibilities for running an organization and
share the income or losses that the business generates. In India, all the aspects and functions of
the partnership are administered under ‘The Indian Partnership Act 1932’. This specific law
explains that partnership is an association between two or more individuals or parties who have
accepted to share the profits generated from the business under the supervision of all the
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members or behalf of other members. In this agreement, all the rights and responsibilities of each
partner who has set up the business. The partnership agreement features the names of both the
parties or partners, the purpose for which the partnership is founded, place of business, each
partners investment amount, and sharing of profits between the partners.

However, this partnership can be dissolved only when some predefined provisions according to
the Partnership Act of 1932 are matched such as:

 Dissolution by Agreement

 Dissolution by Notice

 Dissolution by the Court

 Compulsory Dissolution

 Conditional Dissolution

What is the dissolution of Partnership?

The dissolution of a partnership means termination or end of every contractual tie between
partners. This indicates that the operation of a partnered company is suspended and the assets are
issued to fund a different set of liabilities. But, there is a distinction between these two concepts
(dissolution of partnership and partnership firm). Dissolution of partnerships means the end of
the partnership business, whereas, dissolution of partnership firm indicates the termination of the
partnership among the partners and the firm. Suppose, if a current partner expires, retires, and is
unable to settle the debt then rest of the partners can buy the share percentage of the departing
partner and resume the operation of the firm under the same title.

When Partnership is Dissolved?

The partnership is dissolved when a new partner is added or when a current partner leaves or
retires from the partnership, dissolution of a partnership is said to come into the picture.
Regardless of the change in the partners’ composition, the remaining partners determine to
continue the business concern. To put in other words, since there is a change in the partners, the
partnership that prevailed among the partners prior to the change, is said to be dissolved.
However, the point worth noting here is that the new enterprise takes the liabilities and assets of
the old enterprise. Dissolution of partnership does not add to any discontinuation in the business
concern. This, a few times, is known as a technical dissolution.

The partnership may dissolve in any of the below-mentioned ways :

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 Change in current profit sharing ratio (PSR) among partners

 Admission of a partner

 Death of a partner

 Retirement of a partner

 Completion of the deal, if a partnership is established for that The bankruptcy of a partner

 Expiry of the partnership period, if a partnership is for a particular time frame

How a partnership is dissolved?

Generally, a partnership terminates or dissolved when a partner discontinues participating in the

business operation. The dissolution can happen in three different ways.

By an act of the partners- When a partner agrees to dissolves partnership at a particular time.
For instance, partners can come to an agreement that a partnership should continue for a span of
five years. The partners can dissolve the agreement at the end of the 5 years. Sometimes, it can
be mentioned that a partner can be suspended under a specific condition. If a partner breaks a
rule then this can dissolve the partnership.

By operation of law- A Partnership is a consequence of an agreement which is governed by the

law. Therefore, any hindrance to the agreement or operating unlawful business can cancel the
partnership contract For instance, you cannot make a valid partnership for selling illegal things.

By a court decree- A partner can demand partnership dissolution, and the law will allow the
dissolution only under this conditions: a partner’s incapability to work; breach of the agreement
by a partner; when a partner is mentally unstable; and the misbehaviour of a partner that impacts
the partnership.

Statement of Dissolution – This is done by filing the statement to the state’s secretary. The
form can be taken from the website of the secretary of state. The form must have the partnership
name, date and reason of dissolution.

Personal Notification- This can be done by giving personal notice to the partnership’s creditors.
Also, inform who is associated with the partnership by publishing the notification in a
newspaper.

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VERY SHORT QUESTION WITH ANSWER

Q.1. Explain stoppage in transit?

Ans:Right of Stoppage in Transit

This right is an extension to the right of lien. The right of stoppage in transit means that an
unpaid seller has the right to stop the goods while they are in transit, regain possession, and
retain them till he receives the full price. If an unpaid seller has parted with the possession of the
goods and the buyer becomes insolvent, then the seller can ask the carrier to return the goods
back. This is subject to the provisions of the Act.

Duration of Transit (Section 51)

Goods are in the course of transit from the time the seller delivers them to a carrier or a bailee for
transmission to the buyer until the buyer or his agent takes delivery of the said goods.

Some scenarios of the transit ending:

• The buyer or his agent obtain delivery before the goods reach the destination. In such
cases, the transit ends once the delivery is obtained.

• Once the goods reach the destination and the carrier of bailee informs the buyer or his
agent that he holds the goods, then the transit ends.

• If the buyer refuses the goods and even the seller refuses to take them back the transit is
not at an end.

• In some cases, goods are delivered to a ship chartered by the buyer. Depending on the
case, it is determined that if the master is functioning as an agent or carrier of the goods.

• If the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his
agent, the transit ends.

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• If a part-delivery of the goods has been made and the unpaid seller stops the remaining
goods in transit, then the transit ends for those goods. This is provided that there is no agreement
to give up the possession of all the goods.

Q. 2. What is mutual relations?

Relationship Of Partners To Each Other. Each partner has a right to share in the profits of the
partnership. Unless the partnership agreement states otherwise, partners share profits equally.
Moreover, partners must contribute equally to partnership losses unless a partnership agreement
provides for another arrangement every partners an agent of others partner of all business related
matters.

1. principle of mutual relation of partner-

the law of partnership each based principles that partners should have the freedom to arrange
their own affiresamount themself. the mutual relational amount the partner is a matter internal of
affires a firm.the act has given full freedom the partners to specified effective liability and rights
which can be very only with the consent of all others partners .

2. principle of absolute good faith

good faith is fundamental for efficient conduct of business every partners must be faithful and
senserioly the other partner carrier business on behalf of the firm in most beneficial manner to
the firm this principle can be excluded or modified even with the consent of all partners.

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