II SEMESTER;

COURSE-I; CONTRACT-II

Objectives:

In the society wherein all major ventures are getting corporative, a law student should acquaint himself
with the knowledge of special contracts apart from equipping himself with general principles of contract.
This law is contained in several legislations apart from the Indian Contract Act. This course equips the
students to better appreciate the legal services required in a corporate office so that he can enhance his
relevance as a lawyer in society.
Course contents:

UNIT-I
Contract of indemnity – Documents/Agreements of Indemnity – Definition, Nature and Scope – Rights of
indemnity holder – Commencement of the indemnifier’s liability – Contract of Guarantee – Definition,
Nature and Scope-Difference between contract of indemnity and Guarantee-Rights of surety-Discharge
of Surety-Extent of Surety’s liability – Co-surety.

UNIT-II

Contract of Bailment-Definition – Kinds – Duties of Bailer and Bailee –Rights of Finder of goods as
Bailee – Liability towards true owner – Rights to dispose off the goods.
Contract of pledge – Definition – Comparison with Bailment – Rights and duties of Pawnee.

UNIT-III
Agency – Definition – Creation of Agency – Kinds of Agents – Distinction between Agent and Servant –
Rights and Duties of Agent – Relation of Principal with third parties – Delegation – Duties and Rights of
Agent – Extent of Agents authority – Personal liability of Agent – Termination of Agency.

UNIT-IV

Indian Partnership Act – Definition – Nature, Mode of determining the existence of Partnership –
Relation of Partner to one another – Rights and duties of partner – Relation of partners with third parties
– Types of partners – Admission of partners – Retirement – Expulsion – Dissolution of Firm –
Registration of Firms.

UNIT-V

Sale of Goods Act – The Contract of sale – Conditions and Warranties – Passing of property – Transfer
of title – Performance of the Contract – Rights of Unpaid Seller against goods – Remedies for Breach of
Contract.
Q. Define a contract of Indemnity. What are the essential elements of a contract of Indemnity?
What are the rights of Indemnity holder?
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 curcumstances 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 autioneer 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 idemnified 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:

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.
This definition provides the following essential elements –
1. There must be a loss.
2. The loss must be caused either by the promisor or by any other person.
3. Indemnifier is liable only for the loss.

Thus, it is clear that this contract is contingent in nature and is enforceable only when the loss occurs.

Characteristics
Characteristics (or the requisites) of a Contract of indemnity are as follows :
l. A contract of guarantee must satisfy all the essential elements of a contract. For example, the object
must be lawful, there must be free consent etc.
2. The Contract may be express or implied. An express contract is by word or by writing. An implied
contract of indemnity comes from the circumstances of the` case or the relationship between the parties.
3. Section 69 implies a promise to indemnify

Definition not exhaustive

Section 124 of the Indian Contract Act does not give an exhaustive definition of contracts of indemnity.
This section Includes
(i) only express promises to indemnify and
(ii) only those cases where the loss arises from the conduct of the promisor or of any other person.
It does not include
(i) implied promises to indemnify and
(ii) cases where loss arises from accidents and events not depending on the conduct of any person.

it has been held in a number of cases in India that a duty to indemnify may arise by operation of law even
in the absence of express agreements. A promise to indemnify may be either express or implied from the
circumstances of the case. – The illustration given above is an example of an express promise to
indemnify. The following is an example of an implied promise to indemnify.
A broker forged the signature of the holder of a Government promissory note and endorsed it to the Bank
of India. The bank got the note renewed from the Government. The holder sued the Government and
recovered damages. The Government sued the bank for indemnity. The Privy Council decreed the suit,
quoting with approval the following observations of Lord Halsbury :
“It is a general principle of law that when an action is done by one person at the request of another which
act is not in itself manifestly tortious to the knowledge of the person doing it, and such act turns out to be
injurious to the rights of a third party, the person doing it is entitled to indemnity from him who requested
that it should be done.” Secretary of State etc. v. Bank of India. I

Under English law, contracts of indemnity cover a much wider field than that included in section 124 of
the Indian Contract Act. In England contracts of indemnity include promises, express and implied, to
indemnify a person from loss caused by events or accidents which may not depend upon the conduct of
any person. In a Bombay case it was held that, “Sections 124 and 125 of the Contract Act are not
exhaustive of the law of indemnity and the courts here would apply the same equitable principles that the
courts in England do.” Gajanan v. Moreslrar.

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 –
i. 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.
ii. 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.

iii. Right of recovering Sums -all sums which he may have paid under the terms of a compromize in any such
suite, if the compromize 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
compromize 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.
Commencement of liability
In general, as per the definition given in section 124, it looks like an idemnity holder cannot hold the indemnifier
liable untill he has suffered an actual loss. This is a great disadvantage to the indemnity holder in cases where the
loss is imminent and he is not in the position to bear the loss. In the case of Gajanan Moreshwar vs Moreshwar
Madan, AIR 1942, Bombay high court observed that the contract of indemnity held very little value if the
indemnity holder could not enforce his indemnity untill he actually paid the loss. If a suit was filed against him, he
had to wait till the judgement and pay the damages upfront before suing the indemnifier. He may not be able to pay
the judement and could not sue the indemnifier. Thus, it was held that if his liability has become absolute, he was
entitled to get the indemnifier to pay the amount.
Q. Define a contract of Guarantee. What are the essential elements of a contract of Guarantee?
What is a continuing Guarantee and what are its modes of revocation. What are the rights of
Surety? When is Surety discharged of Guarantee? What is the extent of Surety's liability?
Section 126 of Indian Contract Act 1872 defines a contract of guarantee as follows :
"A contract of guarantee is a contract to perform the promise, or to discharge the liabilities of a third person in
case of his default. The person who gives the guarantee is called 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 Creditor. A
Guarantee may be either oral or written."

For example, when A promises to a shopkeeper C that A will pay for the items being bought by B if B does not
pay, this is a contract of guarantee. In this case, if B fails to pay, C can sue A to recover the balance. The same
was held in the case of Birkmyr vs Darnell 1704, where the court held that when two persons come to a shop, one
person buys, and to give him credit, the other person promises, "If he does not pay, I will", this type of a collateral
undertaking to be liable for the default of another is called a contract of guarantee.

Classification
Contracts of guarantee may be of three types :
(1) for payment to the Creditor to the Principal Debtor by the Guarantor ;
(2) payment of price for goods sold, and
(3) fidelity guarantee
i.e. to discharge the liability of a person for good conduct of a service-holder.
A contract of guarantee may be for
(1) a future debt or obligation or for
(2) an existing debt.
A guarantee can also be
(1) a Simple Guarantee or
(2) a Continuing Guarantee

Essentials of a Valid Guarantee

1. A contract of guarantee must satisfy all the essential elements of a contract. (For example, the object
must be lawful ; there must be free consent etc.) But the following points are to be noted.
2. A contract of guarantee may be either oral or written. Sec 126.
3. In a contract of guarantee there are three parties i.e., the creditor, the principal . debtor and the surety.
All the parties must join the contract.
4. In a contract of guarantee, the primary liability is that of principal debtor. The liability of surety arises
only when there is a default of the principal debtor. Therefore, the liability of the surety is secondary.
5. in a contract of guarantee the principal debtor may be a minor. In this case the surety is liable to pay
even though the minor may not be. The contract will be enforced as between the surety and the creditor.
6. Consideration : In a contract of guarantee, the consideration received by the principal debtor is taken
to be sufficient consideration for the surety. “Anything done, or any promise made, for the benefit of the
principal debtor may be sufficient consideration to the surety for giving guarantee.”-Sec.127. Examples :

A contract of guarantee has the following essential elements –

1. Existance of Creditor, Surety, and Principal Debtor - The economic function of a guarantee is to enable a
credit-less person to get a loan or employment or something else. Thus, there must exist a principal debtor for a
recoverable debt for which the surety is liable in case of the default of the principal debtor.

In the case of Swan vs Bank of Scotland 1836, it was held that a contract of guarantee is a tripartite agreement
between the creditor, the principal debtor, and the surety.
2. Distinct promise of surety - There must be a distinct promise by the surety to be answerable for the liability of
the Principal Debtor.
3. Liability must be legally enforceable - Only if the liability of the principal debtor is legally enforceable, the
surety can be made liable. For example, a surety cannot be made liable for a debt barred by statute of limitation.

4. Consideration - As with any valid contract, the contract of guarantee also must have a consideration. The
consideration in such contract is nothing but any thing done or the promise to do something for the benefit of the
principal debor. Section 127 clarifies this as follows :
"Any thing done or any promise made for the benefit of the principal debtor may be sufficient consideration to the
surety for giving the guarantee."
Illustrations:
1. A agrees to sell to B certain goods if C guarantees the payment of the price of the goods. C promises to
guarantee the payment in consideration of A's promise to deliver goods to B. This is a sufficient consideration for
C's promise.
2. A sells and delivers goods to B. C, afterwards, requests A to forbear to sue B for an year and promises that if A
does so, he will guarantee the payment if B does not pay. A forbears to sue B for one year. This is sufficient
consideration for C's guarantee.
3. A sells and delivers goods to B. Later on, C, without any consideration, promises to pay A if B fails to pay. The
agreement is void for lack of consideration.
However, there is no uniformity on the issue of past consideration. In the case of Allahabad Bank vs S M
Engineering Industries 1992 Cal HC, the bank was not allowed to sue the surety in absence of any advance
payment made after the date of guarantee. But in the case of Union Bank of India vs A P Bhonsle 1991 Mah HC,
past debts were also held to be recoverable under the wide language of this section. In general, if the principal
debtor is benefitted as a result of the guarantee, it is sufficient consideration for the sustenance of the guarantee.

5. It should be without mispresentation or concealment - Section 142 specifies that a guarantee obtained by
misrepresenting facts that are material to the agreement is invalid, and section 143 specifies that a guarantee
obtained by concealing a material fact is invalid as well.
Illustrations –
1. A appoints B for collecting bills. B fails to account for some of the bills. A asks B to get a guarantor for
further employment. C guarantees B's conduct but C is not made aware of B previous mis-accounting by A. B,
afterwards, defaults. C cannot be held liable.
2. A promises to sell Iron to B if C guarantees payment. C guarantees payment however, C is not made aware of
the fact that A and B had contracted that B will pay 5 Rs higher that the market prices. B defaults. C cannot be held
liable.
In the case of London General Omnibus vs Holloway 1912, a person was invited to guarantee an employee, who
was previously dismissed for dishonesty by the same employer. This fact was not told to the surety. Later on, the
employee embezzled funds but the surety was not held liable.

Contracts of Guarantee which are invalid

A contract of guarantee is invalid in the following cases :
1.misrepresentation : Any guarantee which has been obtained by means of misrepresentation mode by
the creditor, or with his knowledge and assent, concerning a material part of the transaction, is invalid.-
Sec. 142.
2. Concealment : Any guarantee which ,the creditor has obtained by means of keeping silence as to
material circumstances is invalid. Sec. 143. Examples :
(a) D engages B as clerk to collect money for him. B fails to account for some of his receipts, and D in
consequence calls upon him to furnish security for his duly accounting. C gives his guarantee for B’s
duly accounting. D does not acquaint C with B’s previous conduct. B afterwards makes default. The
guarantee is invalid.
(b) G guarantees to C payment for iron to be supplied by him to B to the amount of 2000 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 G. G is not liable as a surety.
3.w’hen Co-surely does not join : 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.-Sec. 144.
4. Lack of essential elements : A contract of guarantee is invalid if it lacks one or more of the essential
elements of a contract (e.g., if there is want of free consent or if the object is illegal).

Continuing Guarantee
As per section 129, a guarantee which extends to a series of transactions is called a continuing guarantee.
Illustrations –
1. 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.

2. 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.
3. 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.
Revocation of Continuing Guarantee
1. As per section 130, a continuing guarantee can be revoked at any time by the surety by notice to the creditor.
Once the guarantee is revoked, the surety is not liable for any future transaction however he is liable for all the
transactions that happened before the notice was given.
Illustrations –
1. A promises to pay B for all groceries bought by C for a period of 12 months if C fails to pay. In the next three
months, C buys 2000/- worth of groceries. After 3 months, A revokes the guarantee by giving a notice to B. C
further purchases 1000 Rs of groceries. C fails to pay. A is not liable for 1000/- rs of purchase that was made after
the notice but he is liable for 2000/- of purchase made before the notice.
This illustration is based on the old English case of Oxford vs Davies.
In the case of Lloyd's vs Harper 1880, it was held that employment of a servant is one transaction. The guarantee
for a servant is thus not a continuing guarantee and cannot be revoked as long as the servant is in the same
employment. However, in the case of Wingfield vs De St Cron 1919, it was held that a person who guarateed the
rent payment for his servant but revoked it after the servant left his employment was not liable for the rents after
revocation.
2. A guarantees to B, to the amount of 10000 Rs, that C shall pay for the bills that B may draw upon him. B draws
upon C and C accepts the bill. Now, A revokes the guarantee. C fails to pay the bill upon its maturity. A is liable
for the amount upto 10000Rs.
2. As per section 131, the death of the surety acts as a revocation of a continuing guarantee with regards to future
transactions, if there is no contract to the contrary.
It is important to note that there must not be any contract that keeps the guarantee alive even after the death. In the
case of Durga Priya vs Durga Pada AIR 1928, Cal HC held that in each case the contract of guarantee between
the parties must be looked into to determine whether the contract has been revoked due to the death of the surety or
not. If there is a provision that says death does not cause the revocation then the constract of guarantee must be
held to continue even after the death of the surety.

Rights of the Surety

A contract of guarantee being a contract, all rights that are available to the parties of a contract are available to a
surety as well. The following are the rights specific to a contract of guarantee that are available to the surety.

Rights against principal debtor

1. Right of Subrogation
As per section 140, where a guaranteed debt has become due or default of the principal debtor to perform a duty
has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights
which the creditor had against the princpal debtor. This means that the surety steps into the shoes of the creditor.
Whatever rights the creditor had, are now available to the surety after paying the debt.

In the case of Lampleigh Iron Ore Co Ltd, Re 1927, the court has laid down that the surety will be entitled, to
every remedy which the creditor has against the principal debtor; to enforce every security and all means of
payment; to stand in place of the creditor to have the securities transfered in his name, though there was no
stipulation for that; and to avail himself of all those securities against the debtor. This right of surety stands not
merely upon contract but also upon natural justice.
In the case of Kadamba Sugar Industries Pvt Ltd vs Devru Ganapathi AIR 1993, Kar HC held that surety is
entitled to the benefits of the securities even if he is not aware of theire existence.
In the case of Mamata Ghose vs United Industrial Bank AIR 1987, Cal HC held that under the right of
subrogation, the surety may get certain rights even before payment. In this case, the principal debtor was disposing
off his personal properties one after another lest the surety, after paying the debt, seize them. The surety sought for
temporary injunction, which was granted.
2. Right to Indemnity
As per section 145, in every contract of guarantee there is an implied promise by the principal debtor to indemnify
the surety; and the surety is entitled to recover from the the principal debtor whatever sum he has rightfully paid
under the guarantee but no sums which he has paid wrong fully.
Illustrations -
B is indebted to C and A is surety for the debt. Upon default, C sues A. A defends the suit on reasonable grounds
but is compelled to pay the amount. A is entitled to recover from B the cost as well as the principal debt.

In the same case above, if A did not have reasonable grounds for defence, A would still be entitled to recover
principal debt from B but not any other costs.
A guarantees to C, to the extent of 2000 Rs, payment of rice to be supplied by C to B. C supplies rice to a less
amount than 2000/- but obtains from A a payment of 2000/- for the rice. A cannot recover from B more than the
price of the rice actually suppied.
This right enables the surety to recover from the principal debtor any amount that he has paid rightfully. The
concept of rightfully is illustrated in the case of Chekkara Ponnamma vs A S Thammayya AIR 1983. In this
case, the principal debtor died after hire-purchasing four motor vehicles. The surety was sued and he paid over.
The surety then sued the legal representatives of the principal debtor. The court required the surety to show how
much amount was realized by selling the vehicles, which he could not show. Thus, it was held that the payment
made by the surety was not proper.
Rights against creditor
1. Right to securities
As per section 141, a surety is entitled to the benefit of every security which the creditor has against the principal
debtor at the time when the contract of suretyship is entered into whether the surety knows about the existance of
such securty 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.
Illustrations -
C advances to B, his tenant, 2000/- on the guarantee of A. C also has a further security for 2000/- by a mortgage
of B's furniture. C cancels the mortgage. B becomes insolvent and C sues A on his guarantee. A is discharged of
his liability to the amount of the value of the furniture.
C, a creditor, whose advance to B is secured by a decree, also receives a guaratee from A. C afterwards takes B's
goods in execution under the decree and then without the knowledge of A, withdraws the execution. A is
discharged.

A as surety for B makes a bond jointly with B to C to secure a loan from C to B. Afterwards, C obtains from B a
further security for the same debt. Subsequently, C gives up the further security. A is not discharged.

This section recognizes and incorporates the general rule of equity as expounded in the case of Craythorne vs
Swinburne 1807 that the surety is entitled to every remedy which the creditor has agains the principal debtor
including enforcement of every security.
The expression "security" in section 141 means all rights which the creditor had against property at the date of the
contract. This was held by the SC in the case of State of MP vs Kaluram AIR 1967. In this case, the state had
sold a lot of felled trees for a fixed price in four equal installments, the payment of which was guaranteed by the
defendent. The contract further provided that if a default was made in the payment of an installment, the State
would get the right to prevent further removal of timber and the sell the timber for the the realization of the price.
The buyer defaulted but the State still did not stop him from removing further timber. The surety was then sued for
the loss but he was not held liable.
It is important to note that the right to securities arises only after the creditor is paid in full. If the surety has
guaranteed only part of the debt, he cannot claim a propertional part of the securities after paying part of the debt.
This was held in the case of Goverdhan Das vs Bank of Bengal 1891.

2. Right of set off

If the creditor sues the surety, the surety may have the benefit of the set off, if any, that the principal debtor had
against the creditor. He is entitled to use the defences that the principal debtor has against the creditor. For
example, if the creditor owes the principal debtor something, for which the principal debtor could have counter
claimed, then the surety can also put up that counter claim.

Rights against co-sureties

1. Effect of releasing a surety
As per section 138, Where there are co-sureties, a release by the creditor of one of them does not discharge the
others; neither does it free the surety so released from his responsibilty to the other surities.
A creditor can release a co-surety at his will. However, as held in the case of Sri Chand vs Jagdish Prashad
1966, the released co-surety is still liable to the others for contribution upon default.

2. Right to contribution
As per section 146, where two or more persons are co-surities for the same debt jointly or severally, with or
without the knowledge of each other, under same or different contractx, in the absernce of any contract to the
contrary, they are liable to pay an equal share of the debt or any part of it that is unpaid by the principal debtor.

Illustrations -
A, B, and C are surities to D for a sum of 3000Rs lent to E. E fails to pay. A, B, and C are liable to pay 1000Rs
each.

A, B, and C are surities to D for a sum of 1000Rs lent to E and there is a contract among A B and C that A and
B will be liable for a quarter and C will be liable for half the amount upon E's default. E fails to pay. A and B are
liable for 250Rs each and C is liable for 500Rs.
As per section 147, co-sureties who are bound in different sums are liable to pay equally as fas as the limits of
their respective obligations permit.
Illustrations -
A, B and C as surities to D, enter into three several bonds, each in different penalty, namely A for 10000Rs, B
for 20000 Rs, and C for 30000Rs with E. D makes a default on 30000Rs. All of them are liable for 10000Rs each.

A, B and C as surities to D, enter into three several bonds, each in different penalty, namely A for 10000Rs, B
for 20000 Rs, and C for 40000Rs with E. D makes a default on 40000Rs. A is liable for 10000Rs while B and C
are liable for 15000Rs each.
A, B and C as surities to D, enter into three several bonds, each in different penalty, namely A for 10000Rs, B for
20000 Rs, and C for 40000Rs with E. D makes a default on 70000Rs. A, B and C are liable for the full amount of
their bonds.

THE RIGHTS OF THE SURETY

A surety has the following rights :
Against the Principal Debtor
1. Right of Subrogation : Upon payment of performance of all that he is liable for, he is invested with all
the rights which the creditor had against the principal debtor.-Sec. 140.
2. Right to Indemnity : in every contract of guarantee there is implied promise by the principal debtor to
indemnify the surety; and the surety is entitled to recover from the principal
debtor whatever sum he has rightfully paid under the guarantee, but no sums which he has paid
wrongfully.-Sec. 145.
Examples :
(a) B is indebted to C and A is surety for the debt. C demands payment 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.
(b) C lends 8 a sum of money and A. at the request of B accepts at bill of exchange drawn by B upon A to
secure the amount. C, the holder of the bill, demands payment of it from .a. and on .4′s refusal him upon
the bill. .a not having reasonable grounds to pay, sues defends the suit, and has to pay the amount of the
for so doing, costs. He can recover from B the amount of the bill, but bill and sum paid for costs, as there
was no real ground for defending the action.
(c)A surety settled with the creditor by paying a sum smaller than the amount guaranteed. Held, he can
recover only what he paid. Reed v. Norris.
against
the Creditor
A surety is entitled to the benefit If every Right of Security: which the creditor has against the principal
debtor at security
when the contract of suretyship is entered into. Whether the time knows of the existence of security or
not is immaterial -Sec. 141.
“The expression `security’ in Section 141 is not used in any sense ; it includes all rights which the
creditor had technical s
of the principal debtor at the date of against the property contract.” State of M P. v. Kalurum
examples :
(a) advances to B his tenant, 2000 rupees on the guarantee of A.C has also a further security for the 2000
rupees by a mortgage of B’s furniture. B cancels the mortgage. 8 becomes insolvent, and of B to the (‘
sues .4 on his guarantee. A is discharged from liability to the amount of the value of the furniture.
(b)C a creditor whose advance to B is secured by a decree, receives also a guarantee for that advance from A .C afterwards
takes B’s goods in execution under the decree, and then without the knowledge of A, withdraws the
execution. A is discharged
(c)A is Sure for B, makes a bond jointly with B to C. to secure a from C to B. Afterwards, C obtains from
B a further security loan the same debt. Subsequently, C gives up the further security. A it is not
discharged
Against the Co-surety-See Below.
CONTRIBUTION BETWEEN CO-SURETIES
Definition
Where several persons guarantee a debt or duty, they are called co-sureties.
Co-sureties liable to contribute equally
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 contracts, 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.-
Sec. 146.
examples :
(a) 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 1000 rupees each.
(b) .4, B and C are sureties to D for sum of 1000 rupees lent to F_ and there is a contract between .4. B
and (‘ that .q is to be responsible to the extent of one-quarter, B to the extent of one-quarter, and C to the
extent of one-half. E makes default in payment. As between the sureties .4 is liable to pay 250 rupees, B
250 rupees and C 500 rupees. .
Liability of Co-sureties bound in different sums
Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their
respective obligations permit.-Sec. 147.
examples :
(a) .A, B and C as sureties for D, enter into three several bonds, each in a different penalty, namely .9 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. .4. B and C are each liable to pay
10,000 rupees.
(b)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 the 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 40,000 rupees. A is liable to pay 10,000 rupees,
and B and C 15,000 rupees.
release of one co-surety – See para 7, p. 156.

WHEN IS A SURETY DISCHARGED FROM LIABILITY ?

The liability of a surety under a contract of guarantee comes to an end under any one of the following
circumstances :
1. Notice of revocation
In the case of a continuing guarantee, a notice by the surety to the creditor stating that he will not be
responsible, will revoke his liability as regards all future transactions. He will remain liable for all
transactions entered into prior to the date of the notice.-Sec. 130.
2. Death of surety
In the case of a continuing, guarantee the death of a surety discharges him from all liabilities as regards
transactions after his death unless there is a contract to the contrary .sec 131
3.variation of contract
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.Sec. 133.
examples :
(a) .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, the B’s salary shall be raised and that he shall become liable for one-fourth of the
losses on overdraft. B allows a customer to overdraw, and the bank loses a sum of money. :I is
discharged from his suretyship by the variance made without his consent, and is not liable to make good
this loss.
(b) C agrees to appoint B as his clerk to sell goods at a yearly salary, upon ,4′s becoming surety to C for
B’s accounting for moneys received by him as such clerk. Afterwards. without A’s knowledge or
consent, C and B agree that B should be paid by a commission on the goods sold by him and not by a
fixed salary a is not liable for subsequent misconduct of B.
(c) A gives to C a continuing guarantee to the extent of 3,000 rupees for any oil supplied by C to B on
credit. Afterwards B becomes embarrassed, and without the knowledge of A. B and C contract that C.’
shall continue to supply B with oil for ready money and that the payments shall be applied to the then
existing debts between B and C. .4 is not liable on his guarantee for any goods supplied after this new
arrangement.
(d)C contracts to lend B 5,000 rupees on the 1 st March. A guarantees repayment. C pays the 5,000 rupees
to B on the 1st January. A is discharged from his liability, as the contract has been varied inasmuch as C
might sue B for the money before the 1st March.
4. Release or discharge of principal debtor
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.-Sec. 134.
Effect of Debt Relief Acts :
The Madras High Court held that if the liability of the principal debtor is reduced under the provisions of
an Act for debt relief, the surety is liable only for the reduced amount. Subramania Chettiar v. M. P.
Naravarrswami Gounder.
The Nagpur and the Kerala High Courts have held similar decisions.
Examples :
(a) G gives a guarantee to C for goods to be supplied by C to B. C supplies goods to 8 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 G is discharged from his suretyship.
(b) A contracts with B to grow a crop of sugarcane on .4′s land and to deliver it to B at fixed rate, and C
guarantees A’s performance of this contract. B diverts a stream of water which is necessary for irrigation
of A’s land and thereby prevent him from raisin; the crops. C is no longer liable on his guarantee.
(c) D contracts with B for a fixed price to build a house for B within a stipulated time. B supplying the
necessary timber. C guarantees D’s performance of the contract. B omits to supply the timber. C is
discharged from hit suretyship.
5. Arrangement with principal debtor
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.-Sec. 135.
With a third person
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 D as surety for B, and accepted by B, contracts
with M to give time to B. D is not discharged.
6. Creditor’s forbearance to sue does not discharge surety
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.–Sec. 137.
Examples :
(i) B owes to C a debt guaranteed by G. The debt becomes payable. C does not sue B for a year after the
debt has become payable. G is not discharged from his suretyship.
(ii) Failure to sue the principal debtor until recovery is barred by Statute of Limitation does not operate as
a discharge of the surety. mohant Singh v. Ba yi
7. Release of one co-surety
Where there are co-sureties, a release by the creditor of one of them does not discharge the others ;
neither does it free the surety so released from his responsibility to the other sureties. Sec. 138.
8. Act or omission impairing surety’s eventual remedy
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 and the eventual remedy of the surety himself against the
principal debtor is thereby impaired, the surety is discharged.-Sec. 139.
Examples :
(a) B contracts to build a ship for C for a given sum, to be paid by installments as the work reaches
certain stages. S becomes surety to C for B’s due performance of the contract. C, without the knowledge
of S prepays to B the last two installments. S is discharged by the prepayment.
(b) C lends money to 8 on the security of a joint and several promissory note made in C’s favour by B
and by S as surety for B, together with a bill of sale of B’s furniture, which gives power to C to sell the
furniture, and apply the proceeds in discharge of the note. Subsequently, C sells the furniture, but, owing
to his misconduct and willful negligence, only a small price is realized. S is discharged from liability on
the note.
(c) S 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 make up the cash. 8 omits to see this done as promised, and M
embezzles. S is not liable to B on his guarantee.
9. Loss of security
If the creditor loses or parts with any security given to him by the principal debtor at the time the contract
to guarantee was entered into, the surety is discharged to the extent of the value of the security, unless the
surety consented to the release of such security.-Sec. 141.
10. Miscellaneous
A contract of guarantee is invalid if it is obtained by means of misrepresentation (Sec. 142), silence as to
material circumstances (Sec. 143), or if a co-surety fail; to join according to the terms of the contract
(Sec. 144). See-pp. 150-151.

Discharge of Surety
A surety is said to be discharged from liability when his liability comes to an end. Indian Contract Act 1872
specifies the following conditions in which a surety is discharged of his liability –

1. Section 130 - By a notice of revocation - discussed above.

2. Section 131 - By death of surety - discussed above.
3. Section 133 - By variance in terms of contract - A variance made without the consent of the surety in terms of
the contract between the principal debtor and the creditor, discharges the surety as to the transactions after the
variance.

Illustrations -
A becomes a surety to C for B's conduct as manager in C's bank. Afterwards, B and C contract without A's
consent that B's salary shall be raised and that B shall be liable for 1/4th of the losses on overdrafts. B allows a
customer to overdraft and the bank loses money. A is not liable for the loss.

A guarantees C against the misconduct of B in an office to which B is appointed by C. The conditions of

employment are defined in an act of legislature. In a subsequent act, the nature of the office is materially altered. B
misconducts. A discharged by the change from the future liablity of his guarantee even though B's misconduct is
on duty that is not affected by the act.

B appoints C as a salesperson on a fixed yearly salary upon A's guarantee on due account of sales by C. Later on,
without A's consent, B and C contract that C will be paid on commission basis. A is not liable for C's misconduct
after the change.

C promises to lends 5000Rs to B on 1st March. A guarantee the repayment. C gives the money to B on 1st January.
A is discharged of his liability because of the variance in as much as C may decide to sue B before 1st march.

4. Section 134 - By discharge of principal debtor - The surety is discharged by any contract between the creditor
and the principal debtor by which the principal debtor is discharged; or by any action of the creditor the legal
consequence of which is the discharge of the principal debtor.

Illustrations
A gives a guarantee to C for goods to be delivered to B. Later on, B contracts with C to assign his property to C
in lieu of the debt. B is discharged of his liability and A is discharged of his liability.

A contracts with B to grow indigo on A's land and deliver it to B at a fixed price. C guarantees A's performance.
B diverts a stream of water that is necessary for A to grow indigo. This action of B causes A to be discharged of
the liability. Consequenty C is discharged of his suretyship as well.
A contracts with B to build a house for B. B is to supply timber. C guarantees A's performance. B fails to supply
timber. C is discharged of his liability.

If the principal debtor is released by a compromise with the creditor, the surety is discharged but if the principal
debtor is discharged by the operation of insolvancy laws, the surety is not discharged. This was held in the case of
Maharashtra SEB vs Official Liquidator 1982.

5. Section 135 - By composition, extension of time, or promise not to sue - A contract between the principal debtor
and the creditor by which the creditor makes a composition with, or promises to give time to, or promises to not
sue the principal debtor, discharges the surety unless the surety assents to such a contract.

It should be noted that as per section 136, if a contract is made by the creditor with a third person to give more
time to the principal debtor, the surety is not discharged. However, in the case of Wandoor Jupitor Chits vs K P
Mathew AIR 1980, it was held that the surety was not discharged when the period of limitation got extended due
to acknowledgement of debt by the principal debtor.
Further, as per section 137, mere forbearance to sue or to not make use of any remedy that is available to the
creditor against the principal debtor, does not automatically discharge the surety.
Illustration –
B owes C a debt guarateed by A. The debt becomes payable. However, C does not sue B for an year. This does not
discharge A from his suretyship.

It must be noted that forbearing to sue until the expiry of the period of limitation has the legal consequence of
discharge of the principal debtor and thus as per section 134, will cause the surety to be discharged as well. If
section 134 stood alone, this inference was correct. However, section 137 explicitly says that mere forbearance to
sue does not discharge the surety. This contradiction was removed in the case of Mahanth Singh vs U B Yi by
Privy Council. It held that failure to sue the principal debtor until recovery is banned by period of limitation does
not discharge the surety.

6. Section 139 - By imparing surety's remedy - If the creditor does any act that is inconsistent with the rights of
the surety or omits to do an act which his duty to surety requires him to do, and the eventual remedy of the surety
himself against the principal debtor is thereby impaired, the surety is dischared.

Illustrations -
C contracts with B to build a ship the payment of which is to be made in installments at various stages of
completion. A guarantee's C's performance. B prepays last two installments. A is discharged of his liability.

A appoints M as an apprentice upon getting a guarantee of M's fidelity by B. A also promises that he will at least
once a month see M make up the cash. A fails to do this. M embezzeles. B is discharged of his suretyship.

A lends money to B with C as surety. A also gets as a security the mortgate to B's furniture. B defaults and A
sells his furniture. However, due to A's carelessness very small amount is received by sale of the furniture. C is
discharged of the liability.

State of MP vs Kaluram - Discussed above.

In the case of State Bank of Saurashtra vs Chitranjan Ranganath Raja 1980, the bank failed to properly take
care of the contents of a godown pledged to it against a loan and the contents were lost. The court held that the
surety was not liable for the amount of the goods lost.

Creditor's duty is not only to take care of the security well but also to realize it proper value. Also, before
disposing of the security, the surety must be informed on the account of natural justice so that he can have the
option to take over the security by paying off the debt. In the case of Hiranyaprava vs Orissa State Financial
Corp AIR 1995, it was held that if such a notice of disposing off of the security is not given, the surety cannot be
held liable for the shortfall.

However, when the goods are merely hypothecated and are in the custody of the debtor, and if their loss is not
because of the creditor, the suerty is not discharged of his liability.

Extent of Surety's Liability

As per section 128, the liability of a surety is co-extensive with that of the principal debtor, unless it is otherwise
provided in the contract.

Illustration - A guaratees the payment of a bill by B to C. The bill becomes due and B fails to pay. A is liable to C
not only for the amount of the bill but also for the interest.
This basically means that although the liability of the surety is co-extensive with that of the principal debtor, he
may place a limit on it in the contract. Co-extensive implies the maximum extent possible. He is liable for the
whole of the amount of the debt or the promises. However, when part of a debt was recovered by disposing off
certain goods, the liability of the surety is also reduced by the same amount. This was held in the case of
Harigopal Agarwal vs State Bank of India AIR 1956.
The surety can also place conditions on his guarantee. Section 144 says that where a person gives guarantee upon a
contract that the creditor shall not act upon it untill another person has joined it as co-surety, the guarantee is not
valid if the co-surety does not join. In the case of National Provincial Bank of England vs Brakenbury 1906, the
defendant signed a guarantee which was supposed to be signed by three other co-surities. One of them did not sign
and so the defendant was not held liable.

Similarly, a surety may specify in the contract that his liability cannot exceed a certain amount.

However, where the liability is unconditional, the court cannot introduce any conditions. Thus, in the case of Bank
of Bihar Ltd. vs Damodar Prasad AIR 1969, SC overruled trial court's and high court's order that the creditor
must first exhaust all remedies against the principal debtor before suing the surety.

Q. Differentiate between a contract of Indemnity and a contract of Guarantee.

Contract of Indemnity (Section 124) Contract of Guarantee (Section 126)
It is a bi partite agreement between the indemnifier and indemnity- It is a tripartite agreement between the Creditor, Principal Debtor, and
holder. Surety.
Liability of the indemnifier is contingent upon the loss. Liability of the surety is not contingent upon any loss.
Liability of the surety is co-extensive with that of the principal debtor
although it remains in suspended animation until the principal debtor
Liability of the indemnifier is primary to the contract.
defaults. Thus, it is secondary to the contract and consequenty if the
principal debtor is not liable, the surety will also not be liable.
The undertaking in a guarantee is collateral to the original contract
The undertaking in indemnity is original.
between the creditor and the principal debtor.
There are three contracts in a contract of guaratee - an original contract
There is only one contract in a contract of indemnity - between the between Creditor and Principal Debtor, a contract of guarantee
indemnifier and the indemnity holder. between creditor and surety, and an implied contract of indemnity
between the surety and the principal debtor.
The reason for a contract of indemnity is to make good on a loss if The reason for a contract of guarantee is to enable a third person get
there is any. credit.
Once the indemnifier fulfills his liability, he does not get any right Once the guarantor fulfills his liabilty by paying any debt to the
over any third party. He can only sue the indemnity-holder in his creditor, he steps into the shoes of the creditor and gets all the rights
own name. that the creditor had over the principal debtor.

DIFFERENCES BETWEEN INDEMNITY AND GUARANTEE

1. In a contract of indemnity, there are ‘two parties : the indemnifier and the indemnity-holder. In a contract of guarantee there
are three parties : the creditor, the principal debtor, and t surety.

2. In a contract of indemnity it is necessary to have only one contract, i.e., between the indemnity-holder and the indemnifier ;
in a contract of guarantee it is necessary to have three contracts, between the parties, i.e., between the creditors, the principal
debtors and the surety.

3.in a contract of indemnity, the liability of the indemnifier is primary ; in a contract of guarantee, the liability of the surety is
secondary i.e., the surety is liable only if the principal debtor fails to perform his obligations.
4. in a contract of guarantee there is an existing debt or duty, the performance of which is guaranteed by the surety. In a
contract f indemnity, the liability of the indemnifier arises only on the happening of a contingency.

5. In a contract of indemnity the indemnifier can sue only the indemnity older for his loss, because there is no contract
between the indemnified and other parties unless there is an assignment on his favour ; in a contract of guarantee the surety
can proceed against principal debtor.

6. in a contract of guarantee the surety, after he discharges the debt owing to the creditor, can proceed against the principal
debtor; in a contract of indemnity the loss falls on the indemnifier except in certain special cases.

Q. Define Bailment. What are the rights, duties, and liabilities of a bailee? When is he not
responsible for loss, destruction, or deterioration of the things bailed? What are the various kinds
of lien held by the bailee. Explain the rights of finder of goods.

Bailment is a kind of activity in which the property of one person temporarily goes into the possession of
another. The ownership of the property remains with the giver, while only the possession goes to another.
Several situations in day to day life such as giving a vehicle for repair, or parking a scooter in a parking
lot, giving a cloth to a tailor for stitching, are examples of bailment. Section 148 of Indian Contract Act
1872, defines bailment as follows –

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 and the person to whom they are delivered is called the bailee.
Explanation - If a person is already in possession of the goods of another contracts to hold them as a
baliee, he thereby becomes the bailee and the bailor becomes the bailor of such goods although they may
not have been delivered by way of bailment.

According to this definition the following are the essential elements of bailment –

1. Delivery of goods
The possession of goods must transfer from one person to another. Delivery is not same as custody. For
example, a servant holding his master's umbrella is not a bailee but only a custodian. The goods must be
handed over to the bailee for whatever is the purpose of the bailment.

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. Therefore, he was liable to return it.

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 of the gold was not with the jeweler but with the plaintiff because she
locked the box and kept the keys with her.
As the explanation to section 148 says, even if a person already has the possession of goods that he does
not own, he can become a bailee by entering into a contract with the bailor. In such a case, the actual act
of delivery is not done but is considered to be valid for bailment.

Types of Delivery - As per section 149, the delivery to the bailee may be made by doing anything which
has the effect of putting the goods in the possession of the intended bailee or of any person authorized to
hold them on his behalf. This means that the delivery can be made to either the bailee or to any other
person whom the baliee authorizes. This person can be the bailor himself. This gives us two types of
delivery - Actual and Constructive. In actual delivery, the physical possession of the goods is handed
over to the bailee while in constructive delivery the possession of the goods remains with the bailor upon
authorization of the bailee. In other words, the bailee authorizes the person to keep possession of the
goods.
In Bank of Chittor vs Narsimbulu AIR 1966, a person pledged cinema projector with the bank but the
bank allowed him to keep the projector so as to keep the cinema hall running. AP HC held that this was
constructive delivery because something was done that changed the legal possession of the projector.
Even though the physical possession was with the person, the legal possession was with the bank.

2. Delivery upon contract

For a valid bailment, the delivery must be done upon a contract that the goods will be returned when the
purpose is accomplished. If the goods are given without any contract, there is no bailment. In Ram
Gulam vs Govt. of UP AIR 1950, plaintiffs ornaments were seized by police on the suspicion that they
were stolen. The ornaments were later on stolen from the custody or police and the plaintiff sued the
govt. for returning the ornaments. It was held that the goods were not given to the police under any
contract and thus there was no bailment.

However, this decision was criticized and finally, 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 care of the goods.

3. Conditional Delivery
The delivery of goods is not permanent. The possession is given to the bailee only on the condition that
he will either return the goods or dispose them according to the wishes of the bailer after the purpose for
which the goods were given. For example, when the stitching is complete, the tailor is supposed to return
the garment to the bailor. If the bailee is not bound to return the goods to the bailor, then the relationship
between them is not of bailment. This is a key feature of bailment that distinguishes it from other type of
relations such as agency. J Shetty of SC in U Co. Bank vs Hem Chandra Sarkar 1990, observed that
the distinguishing feature between a bailment and an agency is that the bailee does not represent the
bailor. He merely exercises some rights of the bailor over the bailed property. The bailee cannot bind the
bailor by his acts. Thus, a banker who was holding the goods on behalf of its account holder for the
purpose of delivering them to his customers against payment, was only a bailee and not an agent.

Duties of a Bailor
A bailor may give his property to the bailee either without any consideration or reward or for a
consideration or reward. In the former case, he is called a gratuitous bailor, while in the latter, a bailor for
reward. The duties in both the cases are slightly different. Section 150 specifies the duties for both kinds
of bailor. It says that the bailor is bound to disclose any faults in the goods bailed that the bailor is aware
of, and which materially interfere with the use of them or which expose the bailee to extraordinary risk.
This means that if there is a fault with the goods which may cause harm to the bailee, the bailor must tell
it to the bailee. For example, if a person bails his scooter to his friend and if the person knows that the
brakes are loose, then he must tell this to the friend. Otherwise, the bailor will be responsible for damages
arising directly out of the faults to the bailee. But the bailor is not bound to tell the bailee about the fault
if the bailor himself does not know about it.

Section 150 imposes a bigger responsibility to the non-gratuitous bailor since he is making a profit out of
the bailment. A non gratuitous bailor is responsible for any damage that happens to the bailee directly
because of the fault of the goods irrespective of whether the bailor knew about it or not.
In Hyman and Wife vs Nye & Sons 1881, the plaintiff hired a carriage from the defendant. During the
journey, a bolt in the under part of carriage broke, causing an accident in which the plaintiff was injured.
The defendants were held liable even though they did not know about the condition of the bolt.

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.

Bailee, when not liable for loss etc. for thing bailed –
As per section 152, in absence of a special contract, the bailee is not responsible for loss, destruction, or
deterioration of the thing bailed, if he has taken the amount of care as described in section 151. This
means that if the bailee has taken as much care of the goods as any owner of ordinary prudence would
take of his goods, then the bailee will not be liable for the loss, destruction, or deterioration of the goods.
No fixed rule regarding how much care is sufficient can be laid down and the nature, quality, and bulk of
goods will be taken into consideration to find out if proper care was taken or not. In Gopal Singh vs
Punjab National Bank, AIR 1976, Delhi HC held that on the account of partition of the country, when a
bank had to flee along with mass exodus from Pakistan to India, the bank was not liable for the goods
bailed to it in Pakistan.

If the bailee has taken sufficient care in the security of the goods, then he will not be liable if they are
stolen. However, negligence in security, for example leaving a bicycle unlocked on the street, would
cause the bailee to be liable. In Join & Son vs Comeron 1922, the plaintiff stayed in a hotel and kept his
belonging in his room, which were stolen. The hotel was held liable because they did not take care of its
security as an owner would.
If loss is caused due to the servant of the bailee, the bailee would be liable if the servant's act is within the
scope of his employment.

Special Contract
The extent of this responsibility can be changed by a contract between the bailor and the bailee.
However, it is still debatable whether the responsibility can be reduce or it can be increased by a contract.
Section 152 opens with, "In absence of special contract", which is interpreted by Punjab and Haryana
HC, as the bailee can escape his responsibility by way of a contract with the bailor. However, in another
case Gujarat HC held that the bank was liable for loss of bales of cotton kept in its custody irrespective of
the clause that absolved the bank of all liability. This seems to be fair because no one can get a license to
be negligent and a minimum standard of care is expected from everybody.

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.

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.

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.

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 where by
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.

Lien is of two kinds - Particular and General.

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

Conditions for Particular Lien -

1. Exercise of labor or skill - This right is subject to the condition that the bailee has exercised labor
or skill in respect of the goods. Further, it has been frequently pointed out that the labor or skill
must be such as improves the goods. This, in Hutton vs Car Maintenance Co 1915, it was held
that a job master has no lien for feeding and keeping the horse in his stable but a horse trainer
does get a lien upon the horse.
2. Labor or skill exercised must be for the purpose of the bailment - Any services rendered that are
beyond the purpose of the bailment do not give a right of lien. For example, A bails his car to B to
repair Engine. But B repairs tires instead. B will not get the right of lien.
3. Labor or skill exercised must be in respect of the goods - As mentioned before, the bailee gets a
right of lien only upon the goods upon which the service was performed.

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.
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.

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.

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.
Rights of finder of goods
If a person finds something, he does not automatically become the owner of that thing. He, in fact,
becomes a special kind of a baliee in the sense that he has to keep the thing until the owner is found. He
should take care of the thing just like a bailee. Section 168 and 169 describe the rights of such finder of
goods.

Section 168 - The finder of goods has no right to sue the owner for compensation for trouble and
expense voluntarily incurred by him to preserve the goods and to find out the owner; but he may retain
the goods against the owner until he receives such compensation; and where the owner has offered a
specific reward for the return of goods lost, the finder may sue for such reward, and may retain the goods
until he receives it.

Thus, if the finder has incurred expenses in finding the owner and/or in maintaining the goods
voluntarily, he can retain the possession of the goods until the owner pays the expense to him, though the
finder cannot sue the owner for the expense. His only remedy is to keep the goods. Further, if the owner
has promised a reward for the return of the goods, the finder is entitled to the rewards, and he can even
sue the owner for the reward. He can retain the goods as well until the reward is received.

As per Section 169, the finder of the goods can even sell the goods if they are of common objects of sale,
in the following conditions -

1. the finder of goods was not able to find the owner after good faith efforts.
2. the owner is found but the owner refuses to pay lawful expenses and
1. either the goods are in danger of perishing or of losing greater part of the value
2. or the lawful charges of the finder amount to two third of the value of the goods.

What is pledge? What are the essentials of pledge? Can a pledge be made by a person who is not
the owner of goods? What is the difference between bailment and pledge? Explain Pawner's right
to redeem.

Pledge is a special kind of bailment in which a person transfers the possession of his property to another
for securing the loan taken from the other. It only differs from bailment in the matter of purpose. When
the purpose of the bailment is to secure a loan or a promise, it is called a pledge. Section 172 of Indian
Contract Act 1872 defines Pledge as follows –

Section 172 - The bailment of goods as a security for the payment of a debt or performance of a promise
is called Pledge. The bailor in this case is called a Pawnor and the bailee is called Pawnee.

J Shelat in Lallan Prasad vs Rahmat Ali AIR 1967 observed that Pawn or pledge is a bailment of
personal property as a security for some debt or engagement.
The following are essential ingredients of a pledge –

1. Delivery of possession - As in bailment, the delivery of possession is essential in a pledge. Thus, in

Revenue Authority vs Sudarsanam Pictures, AIR 1968, a film producer borrowed a sum of money
from a financier and agreed to deliver the final prints of the film when ready. This was held not to be a
pledge because there was no delivery of possession at the time of the agreement.
It is possible to do delivery by atonement in which case a third person who has the possession of the
property agrees to hold it on behalf of the pledgee upon direction of the pledger.

Hypothecation - It is also possible to let the pawner keep the physical goods even though the legal
possession is transfered to the pawner. Thus, in Bank of Chittor vs Narsimbulu AIR 1966, a cinema
hall equipment was pledged to the bank but the bank allowed the hall owner to keep the equipment to
show the movies. The hall owner then sold the equipment to another party. It was held that the sale was
subject to the pledge.

In Bank of India vs Binod Steel AIR 1977, MP HC held that in such cases where goods are
hypothecated, other creditors cannot claim right on them until the claim of the pledgee is satisfied.

2. In return of a loan or a promise - The delivery must be in return of a loan or of acceptance of a

promise to perform something. Thus, if A gives his bicycle to B in friendship, it is not a pledge but a
simple bailment. However, if A gives his bicycle to B as a security for a debt of 100Rs it will be a pledge.

3. In pursuance of a contract - The delivery must be done under a contract though it is not necessary
that the delivery and the payment of loan be at the same time. Delivery can be made even after the loan is
received.

Rights of a Pawnee

1. Right of retainer (Section 173- 174) - As per section 173, the pawnee may retain the goods pledged,
not only for a payment of a debt or the performance of the promise, but also for the interest of the debt,
and all necessary expenses incurred by him in respect of the possession or for the preservation of the
goods pledged. Further, as per section 174, in absence of any contract to the contrary, the pawner shall
not retain the goods pledged for debt or promise other than the debt or promise for which they have been
pledged. However, such contract shall be presumed in absence of any contract to the contrary with
respect to any subsequent advances made by the pawnee.

This means that if A pledges his gold watch with B for 1000 Rs and later on he promises to teach B's son
for a month and takes for 500Rs for this promise , and if he does not teach B's son, B cannot retain A's
gold watch after A pays 1000Rs. Thus, the right of retainer is a sort of particular lien. The difference
was pointed out in Bank of Bihar vs State of Bihar 1972 by SC. It observed that a pawnee obtains a
special interest in the pledged goods in the sense that he can transfer or pledge that special interest to
somebody else. The lien only gives the right to detain the goods but not transfer. Thus, a pledgee get the
first right to claim the goods before any other creditor can get them. The pledgee's loan is secured by the
goods.

2. Right to extra ordinary expenses (Section 175) - As per section 175, the pawnee is entitled to
receive from the pawner extra ordinary expenses incurred by him for the preservation of the goods
pledged. For such expenses, however, he does not have right to detain the goods. Section 175 says that
the pawnee is entitled to receive from the pawner extraordinary expenses incurred by him for the
preservation of the goods pledged.

3. Right of sale (Section 176) - As per section 176 (Pawnee's right where pawnor makes default) - If the
pawnor makes default in payment of the debt or performance at the stipulated time, of the promise, in
respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt
or the promise and retain the goods pledged as a collateral security; or he may sell the thing pledged, on
giving the pawnor reasonable notice of the sale.

This right secures the debt for the pawnee up to the value of the goods pledged because it allows the
pawnee to either sue the pawnor for recovering the debt or perform the promise or sell the goods pledged.
If the value received after selling the goods, the pawner is still liable for the difference and if the value of
the sale is more than the amount of debt, the pawnee is supposed to give the difference to the pawnor.
However, if the pawnee has sold the goods, he cannot sue for the debt.
In Lallan Prasad vs Rahmat Ali AIR 1967the defendant borrowed 20000Rs from the plaintiff on a
promissory note and gave him aeroscrapes worth about 35000Rs, as a security for the loan. The plaintiff
sued for repayment of the loan but was unable to produce the security, having sold it. SC rejected his
action. It held that pledgee cannot maintain a suit for recovery of debt as well as retain the pledged
property.

The pawner is required to give a reasonable notice to the pawnee about the sale. The notice is not a mere
notice but reasonable notice. In Prabhat Bank vs Babu Ram AIR 1966, the terms of an agreement of a
loan enabled the bank to sell the securities upon default without notice. The pawnor defaulted in
payment. The bank sent a reminder upon which the pawnor asked for more time. The bank sold the
securities. SC held that this was bad in law. The bank is required to give a clear and specific notice of the
impending sale. Pawner's request for more time cannot be interpreted as a notice of sale.

When the goods are lost due to pawnee's negligence, the liability of the pawnor is reduced to the extent of
value of the goods.

Pawnor's Right to Redeem (Section 177)

Section 177 provides a very important right to the pawnor. It allows the pawnor to redeem his property
even if he has defaulted. It says that if a time is stipulated for the payment of a debt or performance of the
promise for which the pledge is made, and the pawnor make default in payment of the debt or
performance of the promise at the stipulated time, he may redeem the goods pledged at any subsequent
time before the actual sale of them; but he must, in that case, pay, in addition, any expense which have
arisen from his default.

J Shelat in Lallan Prasad vs Rahmat Ali AIR 1967, observed that the pawnor has as absolute right to
redeem his property upon satisfaction or the debt or the promise. This right is not extinguished by the
expiry of the stipulated time for repayment of debt or performance of the promise but only by the actual
sale of the goods. If the pawnor redeems his goods after the expiry of the stipulated time, he is bound to
pay the expenses as have arisen on account of his default.

The pawnor also has a right to take back any increase in the property. In M R Dhawan vs Madan
Mohan AIR 1969, certain shares of a company were pledged. During the period of the pledge, the
company issued bonus and rights shares. Delhi HC held that the pawnor was entitled to those at the time
of redemption.

Pledge made by non-owner of the goods

Ordinarily goods may be pledged by the owner or by any person with the consent of the owner. A pledge
made by any other person is not valid. Thus, in Biddomoy Dabee vs Sittaram, it was held that a pledge
made by the servant who was holding the goods of his master was not valid. Similarly, in Purushottam
Das vs Union of India AIR 1967, a railway company delivered goods on a forged railway receipt. The
goods were then pledged with the defendants. In a suit by the railways to recover the goods it was held
that the pledge was invalid.

This is important to protect the interests of the owners. However, in many situations it is equally
important to allow trade and commerces and so there are some situations where a person having the
possession of the goods by owner's consent, is entitled to pledge those goods even without owner's
consent for the pledge. These situations are discussed below –

1. Pledge by Mercantile agent (Section 178)

When a mercantile agent is in possession of the goods with consent of the owner, any pledge made by
him in ordinary course of business will be valid, provided that the pawnee acts in good faith and that he
has no notice of the fact that the pawnor is not authorized to pawn the goods.

The essential conditions of this rule are - he must be a mercantile agent, he must have possession of the
goods by consent of the owner, and it must be done in ordinary course of business. Further, the pawnee
should act in good faith and he must not have notice that the pawnor has no authority to pledge.

2. Pledge by a person in possession under voidable contract (Section 178 A)

When the goods are obtained by a person under a contract that is voidable under section 19 or 19 A, he
can pledge the goods if the contract is not avoided at the time of the pledge. Thus, in Phillips vs Brooks
Ltd 1919, a fraudulent person pretending to be a man of credit induced the plaintiff to give him a
valuable ring in return for his cheque which proved worthless. Before the fraud could be discovered, he
pledged the ring with the defendants. The pledge was held to be valid.

3. Pledge by person with limited interest (Section 179)

Section 179 says that where a person pledges goods in which he has only a limited interest, the pledge is
valid to the extent of that interest. Thus, when a car worth 100,000Rs is owned jointly by A and B both
having 50% interest in the car, and if A pledges the car for 60000Rs, the value of the pledge that the
pledgee can receive upon default is only 50% of the value received by sale.

Thus, if a pledgee further pledges the goods, his interest is only the amount for which the first pledger
pledged the goods. For example, if A pledged his car worth 100000Rs for 20000Rs to B. B's interest in
the car is only 20000 Rs. He can further pledge it but if he pledges it for more than 20000Rs, A will be
liable only for 20000Rs.

In Jaswantrai Manilal Akhney vs State of Bombay 1956, a cooperative bank had an overdraft account
with the Exchange Bank, which was secured by the deposit of certain securities. After many dealing and
adjustments the last position of the account was that the overdraft limit was set at Rs 66150 and the
securities under the pledge of the bank were worth Rs 75000. The cooperative bank did not make use of
this overdraft for a long time and when it attempted to use it, the Exchange Bank was itself in financial
crisis and had pledged the securities first with Canara Bank and then after having redeemed them,
pledged them again with a private financier. The SC held that the pledge was invalid.

Difference between Bailment and Pledge –

Pledge is a special kind of Bailment. Thus, all Pledges are Bailments but the reverse is not true.

Bailment Pledge
A pledge is bailment done for a specific type of
Bailment can be for many reasons ranging for
purpose, which is to secure a loan or performance
reward to gratuitous.
of a promise.
A pawnee has a right to sell the goods in case of
The bailee does not get a right to sell the goods.
default.
A pawnee gets a right of retainer and a special
The bailee only get a right of lien over the goods. interest in the goods, which is more that just the
lien.
The bailee can use the goods bailed. The pawnee has no right to use the goods.
The bailee is not responsible for the loss,
The pawnee is absolutely liable for the upkeep of
destruction, or deterioration if he uses the goods
the goods.
with reasonable care.
Q. Define Partnership. Is sharing of profit conclusive proof of partnership? Explain - "partners are
agents of each other". What are the mutual rights and liabilities of the partners? What is implied
authority of a partner? Can it be restricted? Can a partner retire? What are its consequences? Can
a partner be expelled? If so, when? Can minor be admitted to the benefits of partnership? If yes,
what are the rights and liabilities of such a minor after attaining majority?

Is the registration of a partnership firm compulsory? What are the consequences of non-
registration? Can a partner of an unregistered firm bring a suit against a third party to release the
property of the dissolved firm? What is the procedure for registration? Explain various modes of
dissolution of the Firm. What are the liabilities of the partners after dissolution?

In common parlance, partnership is a business owned and managed by two or more people. To form a
partnership, each partner normally contributes money, valuable property or labor in exchange for a
partnership share, which reflects the amount contributed. Section 4 of Indian Partnership Act 1932
defines Partnership as follows –

Section 4 - Partnership is the relationship between persons who have agreed to share the profits of a
business carried on by all or any of them acting for all. Persons who have entered into partnership with
one another are individually called partners and collectively called a firm and the name under which their
business is carried on is called firm name.

Examples -

1. A and B buy 100 bales of cotton to sell later on profit which they agree to share equally. A and B
are partners in respect of such cotton.
2. A and B buy 100 bales of cotton together for personal use. There is no partnership between A and
B.
3. A, a goldsmith, agrees with B to buy and provide gold to B to work on an ornament and to sell
and that they shall share the profit. A and B are partners.
4. A and B are carpenters working together. They agree that A will keep all the profits and will pay
B a wage. They are not partners.
5. A and B jointly own a ship. This circumstance does not make them partners.

Section 5 of IPA 1932 says that the relation of partnership arises from contract and not from status. Thus,
if there is no specific contract, there can be no partnership. As per Section 6, to determine whether a
partnership exists between a group of persons, we have to look at the real relation between them as
shown by all relevant facts taken together. It further says that sharing of profits or of gross returns arising
from a property owned jointly by them does not by itself makes them partners.

Based on these definitions, in Helper Girdharbhai vs Saiyed M Kadri and others AIR 1987, J
Sabyasachi of SC identified that the following elements must be there in order to establish a partnership -
there must be an agreement entered into by all the parties concerned, the agreement must be to share
profits of the business, and the business must be carried on by all or any of the person concerned for all.
These three aspects can be discussed under four heads -
1. Agreement - There has to be an agreement between two or more people to enter into partnership.
The agreement is the source of the partnership. It is not necessary that the agreement be formal or
written. An agreement can be express or implied. Further, such agreement must follow all the
requirements of a valid contract given by Indian Contract Act 1872. This includes the parties must
be competent to contract and the object of the agreement should be legal.
2. Business - They must intend to start or do a business. A business is a very wide term and includes
any trade, occupation, or profession. Business may not be of long duration or permanent and even
a single activity may be considered a business. Thus, if two persons are not partners, they can
engage is a transaction with an intention to share profits and can become partners in respect of
that transaction. For example, if two advocates are appointed to jointly plead a case and if they
agree to divide the profits, they are partners in respect to that case. Section 8 also mentions that a
person may become partner with another in particular adventures of undertaking.
It is however necessary that a business exists. If a business is simply contemplated and has not
been started, the partnership is not considered to be in existence. In Ram Priya Saran vs
Ghanshyam Das AIR 1981 All, two persons agreed that after their tender is passed they will
construct the dam in partnership. In order to deposit earnest money, the plaintiff gave 2000 Rs.
The tender was not accepted. It was held that since a business was only contemplated and not
started, there was no partnership and so the plaintiff was entitled to get 2000 Rs from the
defendant.
However, in Khan vs Miah 2000 WLR, two persons obtained loan from the bank to start a
restaurant. They also entered into a contract to purchase equipement and laundary for the
restaurant. But their relationship terminated before the opening of the restaurant. It was held that
there is no rule of law that parties to a joint venture do not become partners untill they actually
embark on the activity in question. It is necessary to identify the venture in order to decide
whether the parties have actually embarked upon it but it is not necessary to attach any name to it.
Many business require a lot of investment and activities before the actual trading begins. This
does not mean that the business has not started until the trading begins. It was held that in this
case the activity of the business had begun and so the partnership was in existence.
3. Sharing of profits - Normally, an activity is done in partnership with a goal to make profits.
Thus, for a valid partnership to exist, the partners must agree to share the profits according to their
investment. Here, profits include losses as well.
4. Mutual Agency - The firm must be managed by the partners and thus when any partner acts, he
acts on behalf of the firm and thus on behalf of other partners. Therefore, a partner is considered
an agent of others. In absence of such mutual right of agency, a partnership cannot exist. This
was held in Cox vs Hickman 1860. In this case, two person carried on business in partnership.
Due to financial crisis they obtained loans. Having unable to repay the loans they executed a trust
deed of properties in favor of the creditors. Some of the creditors were made trustees of the
business. This included Cox and Wheatcroft. They were empowered to enter into contracts and
execute instruments to carry on business and to divide the profits among the creditors. After the
recovery of debts, the property was to be restored to the two original partners. Cox never acted as
trustee and retired, while Wheatcroft acted as a trustee for some time and retired. Other trustee
then became indebted to Hickman and executed a bill of exchange, which was not accepted and
paid. Hickman sued the trustees for recovery of the money for materials supplied. The trustees
could be held liable if they were partners. However, it was held that they were not partners. They
observed that in partnership every partner is an agent of another and in this case this element was
absent.
As we can see, a partnership requires all the above ingredients to have legal validity, and so a mere
sharing of profits is not a conclusive proof of a partnership. It must have the other three elements also. As
mentioned in Section 6, merely sharing of profits arising out of a jointly owned property does not
necessarily create a partnership. For example, if two persons own a house and give it on rent, the sharing
of the rent does not create a partnership. Similarly, a payment to a person contingent upon profits also
does not necessarily create a partnership until the element of mutual agency is not present. This is the
case when profits is shared with the lender of money for business. In case of Mollow March Co vs The
Court of Wards 1872, a Hindu Raja loaned some money to Watson & Co. In return, he was to get a %
of profit and was to exercise control on some aspects of the business. He was not empowered to direct the
transactions of the company. It was held that although sharing of profits is a very strong test, yet whether
a relation of partnership exists depends on the real intention and conduct of the parties.

Duty/Liabilities of the partners

1. General Duties - According to section 9, every partner is liable to carry on the business in the
best interest of the firm, to be just and faithful to each other, and to render true accounts and full
information affecting the firm to any partner or his legal representative. During the course of
business no partner can do any act which may be against his duty to work to greatest common
advantage.
In Bentlay vs Craven 1853, it was held that if a partner was authorized to purchase goods for the
firm and if he supplies the goods from his own stock and makes a profit, he is liable to give the
profit to the firm. This matter is further clarified in section 16 which says that 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, he shall pay that profit to the firm.
Further, if a partner carries on any business of the same nature as and competing with that of the
firm, he shall pay all such profit to the firm. Subject to contract means, partners can choose to
modify this rule while entering into partnership. For example, the partnership contract may
specify that a partner may be allowed to use firm's property for personal use.
2. Duty to indemnify for loss caused by fraud - According to section 10, every partner shall
indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm.
For example, a firm of A and B enter into a contract with the government. Later on, due to B's
conduct, the govt. cancels the contract and gives it to B. Here, the contract obtained by B in his
own name will be for the benefit of the partnership. Further, if the second contract is of the lesser
value, B is personally liable to the firm for the difference.
3. Duties imposed by contract - As per Section11 any special rights and duties may be given or
imposed by the contract between the partners.
4. Duty relating to the conduct of business - According to section 12, every partner is bound to
attend to his duties diligently. Thus, if a partner is assigned some task, he must do it to the best of
his abilities. Further, if any difference arises in respect of ordinary business matter, it may be
decided by majority. However, no change in the nature of business can be made without the
consent of all the partners.
In Suresh Kumar vs Amrit Kumar AIR 1982, Delhi HC held that majority cannot trample on
the opinion of minority in the key matters of the partnership. Thus, majority cannot replace the
managing director of the firm because it is a key business decision. It can be done only with the
consent of all the partners.
5. Duty to contribute equally to the losses - According to section 13(b), partners shall contribute
equally to the losses sustained by the firm.
 6. Duty to indemnify for loss caused by his willful neglect - According to section 13 (f), if a
partner neglects the business activity willfully, he must compensate the firm for the loss caused. It
has been long held that if a partner during the course of business commits breach of duty, or
fraud, or culpable negligence and causes harm to the firm, even if he is not liable in law, he must
be held liable to indemnify the firm in equity. This does not mean that a partner, when acting in
good faith, makes an error in judgment and causes loss to the firm, is liable. However, this is
subject to the contract among the partners. This means that the contract may specify that a partner
is a sleeping partner and may excuse him from doing any work.
7. Duty in respect of application of property of the firm - According to section 15, the property
of the firm shall be held and used exclusively for the purposes of the business. If a partner uses it
for personal benefits, he shall account for and pay such profits to the firm.
8. Duty in respect of personal profits - According to section 16(a), if a partner derives any profit
for himself from any transaction of the firm or from any property or business connection of the
firm, he shall account for that profit and pay it to the firm, subject to the contract.
9. Duty not to compete with the firm - According to section 16(b), if a partner engages in a
business in competition of the firm, he should pay the profits to the firm. But if a partner does a
private act, which is not in the scope of the business of the firm, he is not liable to the firm for the
profits.

Rights of the partners

The partners of the firm have following rights –
Rights given by contract - As per Section11 any special rights, such as right to remunerationmay be
given by the contract between the partners.

1. Right to take part in the conduct of business - As per section 12(a), subject to the contract
between them, a partner has a right to take part in the conduct of business. Only way to restrain a
partner from getting involved in the business is to specify it in the contract of partnership. Even
courts cannot, through an injunction, restrain a partner.
2. Right to have access to and inspect and copy books of the firm - As per section 12, every
partner has a right to inspect the books and make a copy if he wants.
3. Right to share in profit - As per section 13, subject to contract, a partner is entitled to an equal
share of the profit.
4. Right to receive interest on the capital subscribed - As per section 13, subject to contract,
where a partner is entitled to interest on the capital subscribed by him, such interest shall be
payable only out of profits. Further, if a partner pays any money to the firm, beyond the amount
of capital, he is entitled to 6% interest.
5. Right to indemnity in respect of payments made and liabilities incurred - According to
section 13, the firm shall indemnify a partner in respect of payments made and liabilities incurred
by him in the ordinary and proper conduct of business or in doing such act, in an emergency, for
the purposes of protecting firm from loss as would be done by a person of ordinary prudence in
his own case under similar circumstance.

Implied authority of a partner

As held in Cox vs Hickman 1860, if two or more agree to carry on a business, each of them is a principal
and each is an agent for the other. Further, each is bound by the other's contract in carrying on the trade
as much as a single principal would be bound by the act of an agent. This principle has been incorporated
in section 18 of IPA 1932. It says that a partner is the agent of the firm for the purposes of the firm. Its
complimentary principle is incorporated in section 25 which says that every partner is liable jointly with
all other partners and also severally for all acts of the firm done while he is a partner.

This brings us to the implied authority of the partners. Since, a partner is an agent of the firm, his act
binds every other partner and the firm. For example, if a partner A gives a check in the firm's name to a
creditor and if the check is unpaid, partner B is equally liable even though B's signature does not appear
on the check. This authority to bind the firm is called "implied authority". It has been incorporated in
section 19 of IPA 1932, which says that the act of the partner which is done to carry on, in the usual way,
business of the kind carried on by the firm, binds the firm.

The following essential conditions are required for the exercise of Implied Authority to bind the firm -

1. Usual way - The act must be done to carry on the business in the usual way. Any drastic action,
which is out of ordinary, requires the consent of all the partners. For example, if a firm deals in
coal, a partner has the implied authority to enter into a contract to buy and sell coal, but not gold.
The implied authority of partners is limited to only those acts which are done in usual way and
related to the business of the kind carried on by the firm.
2. Mode of doing act to bind firm - Section 22 specifies that in order to bind the firm, the act must
be done in firm's name or in any manner expressing or implying the intention to bind the firm. For
example, if a partner A obtains a loan in his name without mentioning anything about the firm, it
will not bind the firm. It must be clear from the action that it is intended as being done by the
firm.
In Devji vs Magan Lal AIR 1965, a partner had taken a sublease in his own name instead of the
firm's name. Further, there did not seem to be any intention to bind the firm. SC held that the firm
was not bound by the lease as the parties did not intend to bind the firm by this transaction.

Power of implied authority also has the following restrictions -

There are two kinds of restrictions - Statutory restrictions, as imposed by section 19 (2) and Restrictions
imposed by partnership deed and those imposed by the agreement between the partners. Statutory
restrictions are binding upon all the partners whether they know them or not, while the second type of
restrictions are applicable only when the partners have knowledge about them.

Statutory restrictions - In the absence of any usage or custom of trade to the contrary, a partner is not
allowed to -

1. Refer a dispute to arbitration.

2. open a banking account on behalf of the firm in his own name.
3. compromise or relinquish any claim or portion of the claim by the firm.
4. withdraw a suit or proceeding filed on behalf of the firm.
5. admit any liability in a suit or proceeding against the firm.
6. acquire immovable property on behalf of the firm.
7. transfer immovable property belonging to the firm.
8. enter into partnership on behalf of the firm.
Contractual Restrictions - As per section 20, Partners may, by contract, put additional restrictions or
give additional powers to the partners. However, any act which falls under the implied authority but is
restricted by the contract, will bind the firm unless certain conditions are satisfied. A firm can avoid its
liability in such case, if the person dealing with the partner knows the restriction or the person dealing
with the partner does not know or does not believe that the partner is a partner in the firm.

In Sanganer Dal & Flour Mill vs F C I AIR 1982, a partner of the firm, who had the implied authority
to enter the contract with FCI to purchase goods, entered in to a contract with FCI to purchase Dal. The
contract had an arbitration clause. In this case, the question was whether the partner had the power to
enter into such a contract? It was held by SC that the partner was within his implied authority to enter
into a contract to purchase goods from the corporation because it was normal for their business and the
contract was done in the usual way. Thus, the contract was valid even if it contained an arbitration
clause.

Admission of Partners (Section 23)

Since a partner is an agent of the firm and can bind the firm by his acts, an admission or representation by
him concerning the affairs of the firm, is evidence against the firm. This is incorporated in section 23,
which says that an admission or representation made by a partner concerning the affairs of the firm is
evidence against the firm if it is made in ordinary course of business.
The key factor in this is that the admission or representation must be made in ordinary course of business.
This will also not include the representation by which a partner increases his scope of authority. For
example, if a partner executes a bill of exchange for payment of his personal debts and on inquiry he
makes a false statement that the other partners have authorized him, the said bill of exchange will not
bind the firm.

Incoming partners
The mutual relations of the partners is based on the principle that they have to be just and fair to each
other and are bound to carry on the business of the firm to the greatest common advantage. Thus, it is
important for each partner to have trust in each other. Therefore, section 31 lays down a general principle
that a partner cannot be introduced into a firm without the consent of all the existing partners. However,
the existing partners may, by contract, authorize a partner to introduce a new partner. A contract may also
be made that upon death of a partner, a new partner may be nominated in his place. If there are only two
partners and one of them dies, there is no question of nominating a new partner because the partnership
ends as soon as the partner dies.
Also, a new partner is not liable for any act of the firm done before he became a partner.

Outgoing partners
In many situations, a partner may have to leave the partnership. A partner may leave in the following
ways -
With the consent of all other partners - According to section 32(1) (a), a partner may retire with he
consent of all the other partners.

1. With an express agreement by partners - Section 32 (1)(b) provides that a partner may retire
with an express agreement by partners. This means that if there is a provision in the contract deed
of partnership that allows a partner to retire, a partner can retire using that agreement.
In Vishnu Chandra vs Chandrika Prasad Agarwal AIR 1983, the question before SC was
whether a partner was entitled to retire on the basis of partnership deed. The deed provided that a
 partner may retire by giving one month notice and that a partner cannot retire within one year of
commencement of business and if he does so, his capital will not be returned. SC held that it is
consistent with the provisions of section 31(1)(b) and the partner can retire according to the deed.
2. By giving notice to all other partners in case of partnership at will - According to section
32(1)(c), a partner may retire where the partnership is at will, by giving notice in writing to all the
other partners of his intention to retire.
3. By Expulsion (Can a partner be removed? How?) - According to section 33 (1) a partner may
not be expelled by any majority of the partners, save in exercise of good faith of powers conferred
by contract between the partners. Thus, to expel a partner by majority of the partners, the
following two conditions must be satisfied -
1. Such a power must be conferred by contract between the partners. This means, the
contract of partnership must clearly give this power to the partners otherwise, a partner
cannot be expelled.
2. The power to expel a partner conferred under the contract must be exercised in good faith.
Thus, if majority of the partners try to expel a partner with evil intention and without any
reasonable cause, it is not possible.

In Carmichael vs Evans 1904, a partner was caught traveling without ticket and was convicted
on this charge. He was expelled by the majority of the partners. It was held that the expulsion was
justified.
In Blisset vs Daniel 1953, a partner was expelled by the majority of the partners because he
opposed the appointment of the son of a partner on the post of manager. It was held that the
expulsion was invalid.

4. On insolvency of a partner - According to section 34(1), where a partner in a firm is adjudicated

an insolvent he ceases to be a partner on the date on which the order of adjudication is made,
whether or not firm is thereby dissolved.
5. By Death - Upon death of a partner, his association with the firm ends and he ceases to be a
partner. His estate will not be liable for the acts of the firm after his death. According to section
42(c), subject to the contract between the partners, a firm is dissolved by the death of a partner.
This means that partners may by contract that by death of a partner the firm will not be dissolved
but if there is no such contract, the firm will be dissolved.

Liability of a retired partner

The liability of a retired partner may be of two types - For acts done before retirement and for acts done
after retirement.

1. Acts before retirement - The general rule is that a partner is liable for all acts done before
retirement even after he is retired. However, a retiring partner may be discharged of his liabilities
for act before retirement by an agreement between the retiring partner and the remaining partners.
The agreement should specify that all such liabilities will be borne by the remaining partners. A
notice to this effect must also be given to the creditors.
2. Acts after retirement - The general principle is that a retired partner is not liable for the acts of
the firm done after his retirement. However, he must give a public notice of his retirement to
escape liabilities.
Partnership with a minor
By virtue of section 10 and 11 of Indian Contract Act 1872, a minor is not considered capable of giving
consent and thus any contract with a minor is void ab initio. Therefore, a contract of partnership with a
minor is also void. In other words, a partnership cannot be done with a minor and a minor cannot become
a partner of a firm. However, a minor can be admitted to the benefits of the partnership as per section 30
(1), by the consent of all the partners. In Venkatarama Iyer vs Balayya AIR 1936, it was held that
there must be some positive act of the partners so that the court may infer that the minors have been
admitted to the benefits of the partnership. Merely assuming that the minors were admitted would be an
error in law and is not sufficient.
Further, in Addl Commr. of Income Tax vs Uttam Kumar Pramod Kumar 1975, a partnership deed
was not signed by minor or anybody on his behalf. It was held that to admit the minor to the benefits of
partnership it is necessary to have an agreement between the partners and the minor. Since the property
and money of the minor can be used for the firm, an agreement is necessary between the partners and
someone on behalf of the minor.

Rights and Liabilities of a minor

He has the following rights -

1. to such share of the property and of the profits of the the firm as may be agreed upon.
2. to access, copy, and inspect the records of the firm.
3. his share is liable for the acts of the firm but he is not personally liable for them.
4. may sue the partners for his share of profits of the firms when severing his connection with the
firm.
5. As per Section 30(5), he has a right of election to become or not to become the partner of the firm
after becoming a major. Upon attaining the age of majority, the minor can, within six months ,
give public notice that he has elected to become or not to become a partner of the firm. If he fails
to give such notice, he will be become partner of the firm at the expiry of six months.

Illustration - In Shivganda R Patil vs Chandrakanth Neelkanth Sadalge AIR 1965, C a minor

was admitted to the benefits of the partnership between A and B. The partnership became
indebted and was dissolved while C was still a minor. Upon majority, C did not exercise the
option of election. Later on, the creditor started insolvency proceedings against the partners and
impleaded C as well in the proceedings. It was held that a minor cannot be impleaded in
insolvency proceedings against the firm on the ground that he had become a major after
dissolution of the firm. At the time of his majority the firm had ceased to exist and thus there was
no question of electing to become or not to become a partner.

Registration of a firm
Chapter 7 of IPA 1932 deals with the registration of firms. Under this act, registration of firms is not
compulsory. There is no penalty for not registering. However, the effects of non-registration are so severe
that usually firms opt to register.
Consequences of not registering

1. Suits between partners and Firm - A per Section 69 (1) unless a firm is registered and the party
is shown as a partner, no suit can be filed by or on behalf of any partner against the firm. In
 Loonkaran Sethia vs Mr Ivan E John AIR 1977, the firm was not registered and the plaintiff
filed the suit to enforce an agreement entered into by a partner of the firm. The suit was filed on
behalf of the firm and was for its benefit. SC observed that a partner of an unregistered firm
cannot bring a suit to enforce a right arising out of a contract falling within the ambit of section
69. It held that the suit was unmaintainable.
2. Suit between firm and third parties - Until the firm is registered, no suit can be filed by the firm
against third parties. In Ram Adhar vs Rama Kirat Tiwary AIR 1981, the plaintiff sold bricks
to the defendant. The defendant did not pay the price to the partnership firm and so the firm filed
the suit. It was held that since the firm was not registered the suit was unmaintainable.
3. Bar to claim set off and other proceedings - According to section 69(3), suit cannot be filed for
claim of set off or other proceedings to enforce a right arising from a contract.

Exception
According to section 69(3)(a), the provisions of section 61(1) and (2) shall not affect the enforcement of
any right to sue for the dissolution of the firm, or for accounts of the dissolved firm or any right or power
to realize the property of dissolved firm. Thus, a partner of a dissolved firm can sue a third party for
releasing the property of the firm.

Procedure for registration

As per section 58, registration of a firm can be done any time by sending a statement in prescribed form
by post or delivering to the registrar of the area in which any place of business of the firm is situated or
proposed to be situated. The form should also be accompanied with the prescribed fee. The form must
contain -

1. the firm name

2. place or principal place of the business of the firm.
3. the names of any places where the firm carries on business.
4. the date when each partner joined the firm.
5. the names in full and permanent address of the partners.
6. the duration of the firm.

The statement must be signed by all of the partners or by their agents specially authorized in this behalf.
Each person signing the statement shall also verify it in the manner prescribed. There is a restriction on
the name of the firm that it cannot contain certain words such as Crown, Emperor, Empress, King etc.
that give an impression that the firm is associated with the govt

When the registrar is satisfied that the provisions of section 58 have been fulfilled, he shall record an
entry in the Register of Firms and shall file the statement

Dissolution of the firm

As per section 39, the dissolution of the partnership between all the partners of a firm is called the
dissolution of the firm. The firm is dissolved when all the partners stop carrying on the partnership
business. It is possible that some partners may decide to disassociate from the firm while others carry on
the business. In this case the partnership is not dissolved.

After dissolution of the firm, the partnership between the partners does not completely end. It continues
for the purpose of realization of assets or properties of the firm. Also, after the dissolution, the right and
power of the partners of the firm to bind the firm exists as is necessary to wind up the operation and for
the acts that started before the dissolution but have not yet ended.

Modes of dissolution

1. Dissolution by agreement - According to section 40, a firm may be dissolved either with the
consent of all the partners or in accordance with a contract between the partners.
2. Compulsory Dissolution - According to section 41, a firm will be compulsorily dissolved if
1. all the partners or all but one of the partners become insolvent - This happens because if a
partner becomes insolvent, he becomes incompetent to contract and so he ceases to be a
partner as per section 34(1). Thus, if all or all but one partners become insolvent the firm
will compulsorily dissolved because for a partnership, at least two partners are required.
2. If the business of the firm becomes unlawful - It is possible that due to legislation, the
business may become unlawful. For example, liquor sales may become unlawful in a
particular state. In such a case, a partnership that sells liquor will be dissolved.
3. Dissolution upon contingencies - According to section 42, subject to the contract, a firm is
dissolved on the happening of following contingencies -
 1. By Expiry of fixed term - A firm is dissolved, if it is constituted for a fixed term, which
that term expires.
2. On completion of adventures or undertakings - In many cases, a partnership is started
with a specific goal to accomplish or for a particular task. Upon completion of such task,
the partnership gets dissolved.
3. By the death of a partner - Subject to the contract between the partners,a partnership
gets dissolved if a partner dies.
4. By the adjudication of a partner as an insolvent - If a partner becomes insolvent and if
there is no provision in the contract to keep the partnership alive in such case between the
solvent partners, the partnership is dissolved.
4. Dissolution by notice of partnership at will - According to section 43, a partnership at will can
be dissolved any time by any partner by giving a notice of such intention to other partners.
5. Dissolution by court - According to section 44, the court may dissolve a partnership if -
1. a partner becomes of unsound mind - In such a case, the next friend of the person with
unsound mind may request the court to dissolve the firm.
2. a partner becomes permanently incapable - At the suit of a partner, the court may
dissolve the firm on the ground that a partner other than the one suing has become
permanently incapable of performing the duties of partnership.
3. a partner is guilty of conduct likely to affect prejudicially the carrying on of business
- At the suit of a partner the court may dissolve a firm on the ground that a partner other
than the one suing, is guilty of conduct which is likely to affect the business prejudicially.
For example, in partnership of doctors, if one doctor is guilty of immorality towards some
patients, it is possible for the court to dissolve the partnership upon suit of other partners.
In Carmichael vs Evans 1856, a partner was convicted of traveling without ticket and the
court dissolved the firm on this ground.
4. willful or persistent breach of agreements relating to the business or management of
the affairs of the firm - If a partner willfully or persistently commits breach of the
agreements related to the firm, or the conduct of its business, or conducts such that it is not
reasonably practical for other partners to carry on the business, the court may dissolve the
firm upon suit by other partners.
5. transfer of the whole interest in the firm by a partner to a third party - At the suit of a
partner the court may dissolve a firm on the ground that a partner other than the one suing,
has in any way transferred the whole of his interest in the firm to a third party.
6. perpetual loss - At the suit of a partner, the court may dissolve the firm on the ground
that the business of a firm cannot be carried on without incurring loss. It is indeed
impractical to run a business that is continuously going in the loss. Thus, if a partner of
such a business desires, he can request the court to dissolve the firm.
7. Just and Equitable cause - As per section 44(g), the court may dissolve the firm on any
just and equitable ground upon request by a partner. This gives very wide powers to the
court because the court has to decide whether there is a just and equitable ground for
dissolving a firm.

Consequences of Dissolution

1. Liabilities of the partners for acts done after dissolution - As per section 45, until public notice
is given of the dissolution, partners remain liable for their acts as they were before dissolution. It
 is therefore essential to give notice of dissolution if the partners want to escape liability for the
acts of the firm.
2. Right of partners to have business wound up after dissolutions - Upon dissolution of the firm,
every partner is entitled, as against other partners, to have the property of the firm applied in
payments of debts and other liabilities of the firm and to have the surplus distributed to the
partners as per the contract.
3. Continuing authority of partners for purpose of winding - Each partner continues to enjoy
implied authority but for the acts done in the process of winding up of the business.
4. Settlement of accounts - Upon dissolution, the accounts of the firm will be settled as per the
agreement of the partners.
5. Payment of debts - where there are any joint debts, the property of the firm will be first applied
to clear those debts and then it will be applied to any separate debts due to a partner.
6. Restrain the use of name of the firm - Every partner has a right to restrain another from using
the name of the firm, subject to any contract between them. However, if the goodwill of the firm
is sold, the buyer may use the name of the firm for his business.
7. Restrain in trade - Subject to contract, the partners of the firm may be restrained from doing the
same business as the firm after the dissolution as long as the conditions of the restrain do not
violate section 27 of ICA 1872.

COMPARISONS

PARTNERSHIP CO-OWNERSHIP

# It arises by contract. The interests of partners is # Co-ownership means joint ownership.# It may arise out
determined by contract.# It always implies a business. of status or contract for example birth, marriage or
adoption.
# It involves the sharing of profits and losses.
# It may exist without any business.
# Each partner is an agent of the other partners.
# It dies not always involve a sharing of profits and
# A partner cannot transfer his interest without the losses as it can exist without any business.
consent of all other partners.
# A co-owner is not the agent of the others co-
# A partner can claim a share in the surplus assets owners.
of the firm, but not a share in the properties of the
firm in species. # A co-owner may transfer his interest to a third
party without the consent of other co-owners,
# A partnership is dissolved by death or insanity of
a partner. # A co-owner can claim division of the joint
property in specie.
# A partner’s liability is not limited to the extent of
his interests in the assets of the firm. # Co-ownership is not dissolved by death or insanity
# There is a restriction on the number of partners in of one of the co-owners.
a firm.
# A co-owner’s liability is limited to the extent of
# The concept of Mutual Agency bears great his share.
importance here. Even the doctrine of holding out
and estoppel are applicable more strictly. # There is no restriction on number of co-owners.

# The concept of mutual agency does not apply here.

CLUB

# A club is the association of a peculiar nature.# Its objective is the promotion of some beneficial or social object.

# In St JAMES CLUB 1862 case, a member of a club is not liable to a creditor of the club, except to the
extent to which he took part in the contract concerned that gave rise to the liability.

# A member of the club is not the agent of the other members.

# The death or resignation of a member of a member does not affect its existence
PARTNERSHIP COMPANY

# Partnership has been given a legal status.# In INDIA # In SALOMAN V SALOMAN & CO LTD, it was decided
COTTON V RAGHUNATH, it was decided that a that a company is a separate legal entity distinct from all
partnership firm has no existence apart from its its members.# A member of a company is not an agent of
members. other members.

# Mutual agency is the essence of partnership. # Liability of a member or a shareholder is limited

to the extent of the amount remaining unpaid on
# The liability of the members is unlimited and shares held by him or the amount of guarantee as
includes his personal assets too. mentioned in the Memorandum of Association of
the Company.
# The transfer of interest by one partner cannot take
place without the consent of all other partners. # A shareholder, subject to restrictions contained in
the Articles, can freely transfer his share.
# Unless there is a contract to the contrary death,
retirement or insolvency of a partner results in the # A company enjoys a perpetual succession.
dissolution of the firm.
# The minimum membership is 2 in case of private
# There needs to be a minimum membership of 2. companies and 7 in case of public companies.

# Audit is not compulsory # There is no limit for maximum membership in

case of a public company and a private company
cannot have more 50 members.

# For companies, there is an obligatory audit of the

accounts.
PARTNERSHIP JOINT HINDU FAMILY BUSINESS

# Section 5 of the IPA says that Partnership is created by # The act does not prohibit the members of the joint
status. In particular, the members of a Hindu undivided Hindu family to enter into partnership amongst
family carrying on a family business as such or a themselves.# It exists because of the status.
Burmese Buddhist husband and wife carrying business
as such are not partners in such business.# The # One becomes a member by birth.
relationship of partnership arises from contract.
# A family always arises by the operation of law and
# It can arise by an agreement. not contract.

# New members can be entered into by the consent # The family members are not mutual agents.
of all the members.
# Females cannot be members.
# Females can be members too.
# Minors are members from the date of their birth.
# A partner cannot be a minor except in case of
benefits of an already existing partnership. # Death leaves the business unaffected.

# Death of a partner dissolves the firm unless # The karta has the authority to contract and bind the
agreed otherwise. family; the other coparceners cannot do so.

# Mutual agency is important. Here, every partner # Only karta is liable unlimitedly; other members
is an agent of the rest of the partners and his acts are liable only to the extent of share in profits of the
bind the firm. family business unless they took part in the act or
transaction done by the karta.
# The remedy for a partner is a suit for dissolution
and accounts. # The remedy for a co-parcener is a suit for
partition.

We will discuss Partners, Firm and Firm Name in more detail in Part Two

Chapter 29. Agency Formation and Termination

Chapter Objectives
Define an agency.
Identify and define a principal-independent contractor relationship.
Describe when a principal is liable for actions of independent contractors.
Describe how express and implied agencies are created.
Define an apparent agency.
Describe how an agency is terminated by the acts of the parties.
Describe how an agency is terminated by operation of law.
Identify who should be notified when an agency is terminated.
Identify a wrongful termination of an agency contract.
Define an irrevocable agency.

Definition of agency
Principal—the party who employs another person to act on his or her behalf Agent—the party who
agrees to act on behalf of another Agency—the principal/agent relationship

Any person with the capacity to contract can appoint an agent to act or his or her behalf. An agency
relationship can only be created to accomplish a lawful purpose.

Kinds of employment relationships

Employer/employee—a relationship that results when an employer hires an employee to perform some
form of physical service.
Principal/agent—an employer hires an employee and gives that employee authority to act and enter into
contracts on his or her behalf.
Principal/independent contractor—a relationship that results when a person or business that is not an
employee is employed by a principal to perform a certain task on his or her behalf. Critical factors in
determining independent contractor status include:

 Whether the worker is engaged in a distinct occupation or an independently established business.

 The length of time the agent has been employed by the principal.
 The amount of time the agent works for the principal.
 Whether the principal supplies the tools and equipment used in the work.
 The method of payment, whether by time or by the job.
 The degree of skill necessary to complete the task.
 Whether the worker hires employees to assist him or her.
 Whether the employer has the right to control the manner and means of accomplishing the desired
result.

When is a principal liable for actions of independent contractors?

The crucial factor in determining whether a person is an employee or an independent contractor is the
degree of control that the principal has over that person. If the principal has substantial control, there is an
employer/employee relationship, and the principal can be held liable for actions of the independent
contractor.

Types of agency

 Express agency-an agency that occurs when a principal and an agent expressly agree to enter into
an agency agreement with each other.
 Implied agency-an agency that occurs when a principal and an agent do not expressly create an
agency, but it is inferred from the conduct of the parties.
 Apparent agency-an agency that arises when a principal creates the appearance of an agency that
in actuality does not exist; the principal's actions, not the agent's, create the agency.
 Agency by ratification-an agency that occurs when a person misrepresents him or herself as
another's agent when in fact he or she is not and the purported principal ratifies the agency.

Termination of agency by acts of the parties

An agency may be terminated by the following acts of the parties:

 Mutual agreement
 Lapse of time
 Purpose achieved
 Occurrence of a specified event

Termination of agency by operation of law

An agency is terminated by operation of law if there is:

 Death of the principal or agent

 Insanity of the principal or agent
 Bankruptcy of the principal
 Impossibility of performance
 Change in circumstances
 War between the principal's and agent's countries

Notification when an agency is terminated

If an agency is terminated by agreement of the parties, the principal is under a duty to give certain third
parties notification of the termination.

Wrongful termination of an agency contract

Wrongful termination is the termination of an agency in violation of the terms of the agency contract. The
nonbreaching party may recover damages from the breaching party.

Irrevocable agency
An agency coupled with an interest is a special type of agency relationship that is created for the agent's
benefit. It is irrevocable by the principal. This type of agency is commonly used in security agreements to
secure loans.
Terms

 agency by ratification—An agency that occurs when (1) a person misrepresents him- or herself as
another's agent when in fact he or she is not and (2) the purported principal ratifies the
unauthorized act.
 agency—The principal-agent relationship: the fiduciary relationship "which results from the
manifestation of consent by one person to another that the other shall act in his behalf and subject
to his control, and consent by the other so to act."
 agency law—The large body of common law that governs agency; a mixture of contract law and
tort law.
 agent—The party who agrees to act on behalf of another.
 apparent agency—Agency that arises when a principal creates the appearance of an agency that in
actuality does not exist.
 employer-employee relationship—A relationship that results when an employer hires an
employee to perform some form of physical service.
 employment relationships—(1) Employer-employee, (2) principal-agent, and (3) principal-
independent contractor.
 exclusive agency contract—A contract a principal and agent enter into that says the principal
cannot employ any agent other than the exclusive agent.
 express agency—An agency that occurs when a principal and an agent expressly agree to enter
into an agency agreement with each other.
 implied agency—An agency that occurs when a principal and an agent do not expressly create an
agency, but it is inferred from the conduct of the parties.
 independent contractor—"A person who contracts with another to do something for him who is
not controlled by the other nor subject to the other's right to control with respect to his physical
conduct in the performance of the undertaking." [Restatement (Second) of Agency].
 independent contractor—A person or business who is not an employee who is employed by a
principal to perform a certain task on his behalf.
 power of attorney—An express agency agreement that is often used to give an agent the power to
sign legal documents on behalf of the principal.
 principal-agent relationship—An employer hires an employee and gives that employee authority
to act and enter into contracts on his or her behalf.
 principal—The party who employs another person to act on his or her behalf.
 termination by acts of the parties—An agency may be terminated by the following acts of the
parties: (1) mutual agreement, (2) lapse of time, (3) purpose achieved, and (4) occurrence of a
specified event.
 termination by operation of law—An agency is terminated by operation of law, including: (1)
death of the principal or agent, (2) insanity of the principal or agent, (3) bankruptcy of the
principal, (4) impossibility of performance, (5) changed circumstances, and (6) war between the
principal's and agent's countries.
 wrongful termination—The termination of an agency contract in violation of the terms of the
agency contract. The nonbreaching party may recover damages from the breaching party.