CHAPTER - 1 INDIAN REGULATORY FRAMEWORK

Q1. What is Law?

Sol. Law is a set of obligations and duties imposed by the government for securing welfare
and providing justice to society. India’s legal framework reflects the social, political,
economic, and cultural aspects of our vast and diversified country.

Q2. What is the Process of Making a Law

Sol. When a law is proposed in parliament it is called a Bill. After discussion and debate, the law
is passed in Lok Sabha. Thereafter, it has to be passed in Rajya Sabha. It then has to obtain the
assent of the President of India.
Finally, the law will be notified by the Government in the publication called the Official
Gazette of India. The law will become applicable from the date mentioned in the notification
as the effective date. Once it is notified and effective, it is called an Act of Parliament.

Q3. Types of laws in the Indian Legal System

Sol. The laws in the Indian legal system could be broadly classified as follows:

Criminal Law
Criminal law is concerned with laws pertaining to violations of the rule of law or public
wrongs and punishment of the same. Criminal Law is governed under the Indian Penal Code,
1860, and the Code of Criminal Procedure, 1973 (CRPC). The Indian Penal Code, 1860,
defines the crime, its nature, and punishments whereas the Criminal Procedure Code,
1973, defines exhaustive procedure for executing the punishments of the crimes.
Murder, rape, theft, fraud, cheating and assault are some examples of criminal offences under
the law.

Civil Law
Matters of disputes between individuals or organisations are dealt with under Civil Law. Civil
courts enforce the violation of certain rights and obligations through the institution of a civil
suit. Civil law primarily focuses on dispute resolution rather than punishment. The act of
process and the administration of civil law are governed by the Code of Civil Procedure, 1908
(CPC). Civil law can be further classified into Law of Contract, Family Law, Property Law, and
Law of Tort.
Some examples of civil offences are breach of contract, non-delivery of goods, non-payment
of dues to lender or seller defamation, breach of contract, and disputes between landlord and
tenant.

Common Law
A judicial precedent or a case law is common law. A judgment delivered by the Supreme
Court will be binding upon the courts within the territory of India under Article 141 of the
Indian Constitution.

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 The doctrine of Stare Decisis is the principle supporting common law. It is a Latin phrase that
means “to stand by that which is decided.” The doctrine of Stare Decisis reinforces the
obligation of courts to follow the same principle or judgement established by previous
decisions while ruling a case where the facts are similar or “on all four legs” with the earlier
decision.

Principles of Natural Justice

Natural justice, often known as Jus Natural deals with certain fundamental principles of
justice going beyond written law. Nemo judex in causa sua (Literally meaning “No one should
be made a judge in his own cause, and it’s a Rule against Prejudice), audi alteram partem
(Literally meaning “hear the other party or give the other party a fair hearing), and reasoned
decision are the rules of Natural Justice. A judgement can override or alter a common law,
but it cannot override or change the statute.

Q4. Write a short note on The Ministry of Finance.

Sol. The Ministry of Finance (Vitta Mantralaya) is a Ministry within the Government of India
concerned with the economy of India, serving as the Treasury of India. In particular, it
concerns itself with taxation, financial legislation, financial institutions, capital markets,
centre and state finances, and the Union Budget.
As a Chartered Accountant, many of your day-to-day work life will be impacted by this
ministry and its proclamations. This Ministry is so important that many ministers have
preferred to hold the portfolio of Finance Minister also.
One of the important functions of the Finance Ministry is the presentation of the Union
Budget. This annual event is eagerly awaited by professionals and the common man as it
provides for the rates of taxes and budget allocations for the ensuing year.

Q5. Write a short Note on The Securities and Exchange Board of India (SEBI)
Sol. The Securities and Exchange Board of India (SEBI):
 is the regulatory body
 for securities and commodity market in India
 under the ownership of Ministry of Finance within the Government of India.
 It was established on 12 April, 1988 as an executive body and was given statutory
powers on 30 January, 1992 through the SEBI Act, 1992.

Q6. Write a detailed note on Reserve Bank of India (RBI)

Sol. Reserve Bank of India:
 is India’s Central Bank and regulatory body responsible for regulation of the Indian
banking system.
 It is under the ownership of Ministry of Finance, Government of India.
 It is responsible for the control, issue and maintaining supply of the Indian rupee.
 It also manages the country’s main payment systems and works to promote its economic
development.

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  Bharatiya Reserve Bank Note Mudran (BRBNM) is a specialised division of RBI through
which it prints and mints Indian currency notes (INR) in two of its currency printing presses
located in Nashik (Western India) and Dewas (Central India).
 RBI established the National Payments Corporation of India as one of its specialised division
to regulate the payment and settlement systems in India.
 Deposit Insurance and Credit Guarantee Corporation was established by RBI as one of its
specialized division for the purpose of providing insurance of deposits and guaranteeing of
credit facilities to all Indian banks.

Q7. Explain the Structure of the Indian Judicial System.

Sol.
(i) Supreme Court: The Supreme Court is the apex body of the judiciary. It was established
on 26th January, 1950. The Chief Justice of India is the highest authority appointed under
Article 126.
The principal bench of the Supreme Court consists of seven members including the Chief
Justice of India. Presently, the number has increased to 34 including the Chief Justice of
India due to the rise in the number of cases and workload. An individual can seek relief in
the Supreme Court by filing a writ petition under Article 32.

(ii) High Court: The highest court of appeal in each state and union territory is the High
Court. Article 214 of the Indian Constitution states that there must be a High Court in each
state.
The High Court has appellant, original jurisdiction, and Supervisory jurisdiction. However,
Article 227 of the Indian Constitution limits a High Court’s supervisory power. In India,
there are twenty-five High Courts, one for each state and union territory, and one for each
state and union territory.
Six states share a single High Court. An individual can seek remedies against violation of
fundamental rights in High Court by filing a writ under Article 226.

(iii) District Court: Below the High Courts are the District Courts. The Courts of District Judge
deal with Civil law matters i.e. contractual disputes and claims for damages etc., The Courts
of Sessions deals with Criminal matters.
Under pecuniary jurisdiction, a civil judge can try suits valuing not more than Rupees two
crore.
Jurisdiction means the power to control. Courts get territorial Jurisdiction based on the
areas covered by them. Cases are decided based on the local limits within which the parties
reside or the property under dispute is situated.

(iv) Metropolitan courts: Metropolitan courts are established in metropolitan cities in

consultation with the High Court where the population is ten lakh or more.
Chief Metropolitan Magistrate has powers as Chief Judicial Magistrate and Metropolitan
Magistrate has powers as the Court of a Magistrate of the first class.

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 CHAPTER 2 - THE INDIAN CONTRACT ACT, 1872

Q1. All contracts are agreements, but all agreements are not contracts”. Comment.
Sol. An agreement comes into existence when one party makes a proposal or offer to the other
party and that other party gives his acceptance to it.
A contract is an agreement enforceable by law. It means that to become a contract an
agreement must give rise to a legal obligation i.e. duty enforceable by law.
If an agreement is incapable of creating a duty enforceable by law, it is not a contract.
There can be agreements which are not enforceable by law, such as social, moral or religious
agreements.
The agreement is a wider term than the contract. All agreements need not necessarily become
contracts but all contracts shall always be agreements.

All agreements are not contracts: When there is an agreement between the parties and they
do not intend to create a legal relationship, it is not a contract.

All contracts are agreements: For a contract there must be two things

(a) an agreement and (b) enforceability by law.

Thus, existence of an agreement is a pre- requisite existence of a contract. Therefore, it
is true to say that all contracts are agreements.

Thus, we can say that there can be an agreement without it becoming a contract, but
we can’t have a contract without an agreement.

Q2. A sends an offer to B to sell his second- car for Rs. 1,40,000 with a condition that if B does
not reply within a week, he (A) shall treat the offer as accepted. Is A correct in his
proposition?

Sol. Provision

Acceptance to an offer cannot be implied merely from the silence of the offeree, even if it is
expressly stated in the offer itself. Unless the offeree has by his previous conduct indicated
that his silence amount to acceptance, it cannot be taken as valid acceptance.

Analysis and conclusion

So, in the given problem, if B remains silent, it does not amount to acceptance.

The acceptance must be made within the time limit prescribed by the offer. The acceptance
of an offer after the time prescribed by the offer or has elapsed will not avail to turn the offer
into a contract.

Q3. Explain the type of contracts in the following agreements under the Indian Contract
Act,1872:

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 (i) A coolie in uniform picks up the luggage of A to be carried out of the railway station
without being asked by A and A allows him to do so.
(ii) Obligation of finder of lost goods to return them to the true owner.
(iii) A contracts with B (owner of the factory) for the supply of 10 tons of sugar, but before
the supply is effected, the fire caught in the factory and everything was destroyed.
Sol. It is an implied contract and A must pay for the services of the coolie detailed by him.

(i) Implied Contracts: Implied contracts come into existence by implication. Most often the
implication is by law and or by action. Section 9 of the Act contemplates such implied
contracts when it lays down that in so far as such proposal or acceptance is made otherwise
than in words, the promise is said to be implied.
(ii) Obligation of finder of lost goods to return them to the true owner cannot be said to arise
out of a contract even in its remotest sense, as there is neither offer and acceptance nor
consent. These are said to be quasi-contracts.
Quasi-Contract: A quasi-contract is not an actual contract but it resembles a contract. It is
created by law under certain circumstances. The law creates and enforces legal rights and
obligations when no real contract exists. Such obligations are known as quasi-contracts. In
other words, it is a contract in which there is no intention on part of either party to make a
contract but law imposes a contract upon the parties.

(iii) The above contract is a void contract.

Void Contract: Section 2 (j) states as follows: “A contract which ceases to be enforceable by
law becomes void when it ceases to be enforceable”. Thus, a void contract is one which
cannot be enforced by a court of law.

Q4. Shambhu Dayal started “self service” system in his shop. Smt. Prakash entered the shop,
took a basket and after taking articles of her choice into the basket reached the cashier for
payments. The cashier refuses to accept the price. Can Shambhu Dayal be compelled to sell
the said articles to Smt. Prakash? Decide as per the provisions of the Indian Contract Act,
1872.

Sol. Provision
Invitation to offer: The offer should be distinguished from an invitation to offer. An offer is
the final expression of willingness by the offer or to be bound by his offer should the party
chooses to accept it. Where a party, without expressing his final willingness, proposes
certain terms on which he is willing to negotiate, he does not make an offer, but invites
only the other party to make an offer on those terms. This is the basic distinction between
offer and invitation to offer.

The display of articles with a price in it in a self- service shop is merely an invitation to
offer. It is in no sense an offer for sale, the acceptance of which constitutes a contract.

Analysis and conclusion

In this case, Smt. Prakash by selecting some articles and approaching the cashier for
payment simply made an offer to buy the articles selected by her. If the cashier does not
accept the price, the interested buyer cannot compel him to sell.
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Q5. State whether there is any contract in following cases:
(a) A engages B to do certain work and remuneration to be paid as fixed by C.
(b) A and B promise to pay for the studies of their maid’s son
(c) A takes a seat in public bus.
(d) A, a chartered accountant promises to help his friend to file his return.
Sol.
(a) It is a valid express contract
(b) It is not a contract as it is a social agreement
(c) It is an implied contract. A is bound to pay for the bus fare.
(d) It is a social agreement without any intention to create a legal relationship.
Q6. Miss Shakuntala puts an application to be a teacher in the school. She was appointed by the
trust of the school. Her friend who works in the same school informs her about her
appointment informally. But later due to some internal reasons her appointment was
cancelled. Can Miss Shakuntala claim for damages?

Sol. Provision

As per Section 4, communication of acceptance is complete as against proposer when it is

put in the course of transmission to him.

Analysis and conclusion

In the present case, school authorities have not put any offer letter in transmission. Her
information from a third person will not form part of contract. Therefore, Miss Shakuntala
cannot claim damages.

Q7. Define the term acceptance under the Indian Contract Act, 1872. Explain the legal rules
regarding a valid acceptance

Sol.
(a) Definition of Acceptance: In terms of Section 2(b) of the Indian Contract Act, 1872 the
term acceptance is defined as “When the person to whom the proposal is made signifies
his assent thereto, proposal is said to be accepted. The proposal, when accepted,
becomes a promise”.
Legal Rules regarding a valid acceptance

(1) Acceptance can be given only by the person to whom offer is made. In case of a specific
offer, it can be accepted only by the person to whom it is made. In case of a general offer,
it can be accepted by any person who has the knowledge of the offer.
(2) Acceptance must be absolute and unqualified: As per section 7 of the Act, acceptance
is valid only when it is absolute and unqualified and is also expressed in some usual and
reasonable manner unless the proposal prescribes the manner in which it must be
accepted. If the proposal prescribes the manner in which it must be accepted, then it
must be accepted accordingly.

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 (3) The acceptance must be communicated: To conclude a contract between the parties,
the acceptance must be communicated in some perceptible form. Further when a
proposal is accepted, the offeree must have the knowledge of the offer made to him. If
he does not have the knowledge, there can be no acceptance. The acceptance must relate
specifically to the offer made. Then only it can materialize into a contract.
(4) Acceptance must be in the prescribed mode: Where the mode of acceptance is
prescribed in the proposal, it must be accepted in that manner. But if the proposer does
not insist on the proposal being accepted in the manner prescribed after it has been
accepted otherwise, i.e., not in the prescribed manner, the proposer is presumed to have
consented to the acceptance.
(5) Time: Acceptance must be given within the specified time limit, if any, and if no time is
stipulated, acceptance must be given within the reasonable time and before the offer
lapses.
(6) Mere silence is not acceptance: The acceptance of an offer cannot be implied from the
silence of the offeree or his failure to answer, unless the offeree has in any previous
conduct indicated that his silence is the evidence of acceptance.
(7) Acceptance by conduct/ Implied Acceptance: Section 8 of the Act lays down that “the
performance of the conditions of a proposal, or the acceptance of any consideration for
a reciprocal promise which may be offered with a proposal, constitutes an acceptance of
the proposal. This section provides the acceptance of the proposal by conduct as against
other modes of acceptance i.e. verbal or written communication.
Therefore, when a person performs the act intended by the proposer as the
consideration for the promise offered by him, the performance of the act constitutes
acceptance.

Q 8. Define the term “Acceptance’. Discuss the legal provisions relating to communication of
acceptance.

Sol.
1. According to Section 2(b), the term ‘acceptance’ is defined as follows:
“When the person to whom the proposal is made signifies his assent thereto, the
proposal is said to be accepted. A proposal, when accepted, becomes a promise. “An
acceptance in order to be valid must be absolute, unqualified, accepted according to
the mode if any prescribed within the reasonable time and communicated to offer or.

Acceptance can also be made by way of conduct

The legal provisions relating to communication of acceptance are contained in

Section 4. The communication of an acceptance is complete:

(a) as against the proposer, when it is put in a course of transmission to him, so as to be

out of power of the acceptor;

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 (b) as against the acceptor, when it comes to the knowledge of the proposer.

Section 3 of the Act prescribes, in general terms, two modes of communication, namely:

(1) by any act or

(2) by omission intending thereby communicate to the other or which has the effect of
communicating it to the other.
The first method would include any conduct and words whether written or oral.

Written words would include letters, telegrams, advertisements, etc. Oral words would
include telephone messages.

Any conduct would include positive acts or signs so that the other person understands what
the person acting or making signs means to say or convey.

Omission would exclude silence but include such conduct or forbearance on one’s part that
the other person takes it as his willingness or assent.

These are not the only modes of communication of the intention of the parties. There are
other means as well, e.g., if you as the owner, deliver the goods to me as the buyer thereof at
a certain price, this transaction will be understood by everyone, as acceptance by act or
conduct, unless there is an indication to the contrary.

The phrase appearing in Section 3 “which has the effect of communicating it”, clearly refers
to an act or omission or conduct which may be indirect but which results in communicating
an acceptance or non-acceptance.

However, a mere mental but unilateral act of assent in one’s own mind does not tantamount
to communication, since it cannot have the effect of communicating it to the other.

Q9. Mr. B makes a proposal to Mr. S by post to sell his house for Rs. 10 lakhs and posted the letter
on 10th April 2020 and the letter reaches to Mr. S on 12th April 2020. He reads the letter on
13th April 2020.

Mr. S sends his letter of acceptance on 16th April 2020 and the letter reaches Mr. B on 20th
April 2020. On 17th April Mr. S changed his mind and sends a telegram withdrawing his
acceptance. Telegram reaches to Mr. B on 19th April 2020.

Examine with reference to the Indian Contract Act, 1872:

(i) On which date, the offer made by Mr. B will complete?

(ii) Discuss the validity of acceptance.
What would be validity of acceptance if letter of revocation and letter of acceptance reached
together?

Sol. (i) Provision

According to Section 4 of the Indian Contract Act, 1872, “the communication of offer is
complete when it comes to the knowledge of the person to whom it is made”.

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 When a proposal is made by post, its communication will be complete when the letter
containing the proposal reaches the person to whom it is made. Further, mere receiving of
the letter is not sufficient, he must receive or read the message contained in the letter.

Analysis and conclusion

In the given question, Mr. B makes a proposal by post to Mr. S to sell his house. The letter was
posted on 10th April 2020 and the letter reaches to Mr. S on 12th April 2020 but he reads the
letter on 13th April 2020.

Thus, the offer made by Mr. B will complete on the day when Mr. S reads the letter, i.e. 13th
April 2020.

(ii) Provision
When communication of acceptance is complete: Where a proposal is accepted by a letter sent
by the post, in terms of Section 4 of the Act, the communication of acceptance will be complete
as against the proposer when the letter of acceptance is posted and as against the acceptor
when the letter reaches the proposer. Revocation of Acceptance: The acceptor can revoke his
acceptance any time before the letter of acceptance reaches the offer or, if the revocation
telegram arrives before or at the same time with the letter of acceptance, the revocation is
absolute.

Analysis and conclusion

In the given question, when Mr. S accepts Mr. B’s proposal and sends his acceptance by post
on 16th April 2020, the communication of acceptance as against Mr. B is complete on 16th
April 2020, when the letter is posted. As against Mr. S acceptance will be complete, when the
letter reaches Mr. B i.e. 20th April 2020. Whereas, acceptor, will be bound by his acceptance
only when the letter of acceptance has reached the proposer.

The telegram for revocation of acceptance reached Mr. B on 19th April 2020 i.e. before the
letter of acceptance of offer (20th April 2020). Hence, the revocation is absolute. Therefore,
acceptance to an offer is invalid.

(iii) It will not make any difference even if the telegram of revocation and letter of acceptance
would have reached on the same day, i.e. the revocation then also would have been absolute.
As per law, acceptance can be revoked anytime before the communication of acceptance is
complete. Since revocation was made before the communication of acceptance was complete
and communication can be considered as complete only when the letter of acceptance reaches
the proposer i.e. Mr. B.
Q10. A shop-keeper displayed a pair of dress in the show-room and a price tag of Rs. 2,000 was
attached to the dress. Ms. Lovely looked to the tag and rushed to the cash counter. Then
she asked the shop-keeper to receive the payment and pack up the dress. The shop-keeper
refused to hand-over the dress to Ms. Lovely in consideration of the price stated in the
price tag attached to the Ms. Lovely seeks your advice whether she can sue the shop-keeper
for the above cause under the Indian Contract Act, 1872

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 Sol. Provision

The offer should be distinguished from an invitation to offer. An offer is definite and
capable of converting an intention in to a contract. Whereas an invitation to an offer is only
a circulation of an offer, it is an attempt to induce offers and precedes a definite offer.
Where a party, without expressing his final willingness, proposes certain terms on which
he is willing to negotiate, he does not make an offer, but invites only the other party to
make an offer on those terms. This is the basic distinction between offer and invitation to
offer.

The display of articles with a price in it in a self-service shop is merely an invitation to

offer. It is in no sense an offer for sale, the acceptance of which constitutes a contract.

Analysis and Conclusion

In this case, Ms. Lovely by selecting the dress and approaching the shopkeeper for
payment simply made an offer to buy the dress selected by her. If the shopkeeper does not
accept the price, the interested buyer cannot compel him to sell.

Q11. Explain the modes of revocation of an offer as per the Indian Contract Act, 1872.

Sol. Modes of revocation of Offer

(i) By notice of revocation
(ii) By lapse of time: The time for acceptance can lapse if the acceptance is not given within
the specified time and where no time is specified, then within a reasonable time.
(iii) By non-fulfillment of condition precedent: Where the acceptor fails to fulfill a condition
precedent to acceptance the proposal gets revoked.
(iv) By death or insanity: Death or insanity of the proposer would result in automatic
revocation of the proposal but only if the fact of death or insanity comes to the
knowledge of the acceptor.
(v) By counter offer
(vi) By the non- acceptance of the offer according to the prescribed or usual mode
(vii) By subsequent illegality

Q12. Comment on the following statements:

(a) Acceptance must be absolute and unqualified.

(b) Acceptance must be in the prescribed mode.
Sol. Acceptance must be absolute and unqualified: As per section 7 of the Indian Contract Act,
1872 acceptance is valid only when it is absolute and unqualified and is also expressed in
some usual and reasonable manner unless the proposal prescribes the manner in which it
must be accepted.

If the proposal prescribes the manner in which it must be accepted, then it must be accepted
accordingly.

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 Example: ‘A’ enquires from ‘B’, “Will you purchase my car for Rs. 2 lakhs?” If ‘B’ replies “I shall
purchase your car for Rs. 2 lakhs, if you buy my motorcycle for Rs. 50000/-, here ‘B’ cannot
be considered to have accepted the proposal. If on the other hand ‘B’ agrees to purchase the
car from ‘A’ as per his proposal subject to availability of valid Registration Certificate / book
for the car, then the acceptance is in place though the offer contained no mention of R.C. book.
This is because expecting a valid title for the car is not a condition. Therefore, the acceptance
in this case is unconditional.

Acceptance must be in the prescribed mode: Where the mode of acceptance is prescribed in
the proposal, it must be accepted in that manner.

But if the proposer does not insist on the proposal being accepted in the manner prescribed
after it has been accepted otherwise, i.e., not in the prescribed manner, the proposer is
presumed to have consented to the acceptance.

Example: If the offer or prescribes acceptance through messenger and offeree sends
acceptance by email, there is no acceptance of the offer if the offer or informs the offeree that
the acceptance is not according to the mode prescribed. But if the offer or fails to do so, it will
be presumed that he has accepted the acceptance and a valid contract will arise.

Q13. Explain the type of contracts in the following agreements under the Indian Contract Act,
1872:

(i) A coolie in uniform picks up the luggage of A to be carried out of the railway station
without being asked by A and A allows him to do so.
(ii) Obligation of finder of lost goods to return them to the true owner
(iii) A contracts with B (owner of the factory) for the supply of 10 tons of sugar, but before
the supply is effected, the fire caught in the factory and everything was destroyed.
Sol.
(i) It is an implied contract and A must pay for the services of the coolie.
Implied Contracts: Implied contracts come into existence by implication. Most often the
implication is by law and or by action. Section 9 of the Indian Contract Act, 1872
contemplates such implied contracts when it lays down that in so far as such proposal or
acceptance is made otherwise than in words, the promise is said to be implied.

(ii) Obligation of finder of lost goods to return them to the true owner cannot be said to
arise out of a contract even in its remotest sense, as there is neither offer and
acceptance nor consent. These are said to be quasi-contracts.
Quasi-Contract: A quasi-contract is not an actual contract but it resembles a contract.

It is created by law under certain circumstances. The law creates and enforces legal
rights and obligations when no real contract exists.

Such obligations are known as quasi-contracts. In other words, it is a contract in which

there is no intention on part of either party to make a contract but law imposes a
contract upon the parties.

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 (iii) The above contract is a void contract.
Void Contract: Section 2 (j) of the Act states as follows: “A contract which ceases to be
enforceable by law becomes void when it ceases to be enforceable”. Thus, a void
contract is one which cannot be enforced by a court of law.

Q14. Explain the type of contracts in the following agreements under the Indian Contract Act,
1872:

(i) X promise to sell his scooter to Y for Rs. 1 Lac. However, the consent of X has been
procured by Y at a gun point.
(ii) A bought goods from B in 2015. But no payment was made till 2019.
(iii) G agrees to give tuitions to H, a pre-engineering student, from the next month and Hin
consideration promises to pay G Rs. 5,000 per month.
Sol.
(i) In the instant case, X is an aggrieved party and the contract is voidable at his option but
not at the option of Y. It means if X accepts the contract, the contract becomes a valid
contract then Y has no option of rescinding the contract.
(ii) B cannot sue A for the payment in 2019 as it has crossed three years and barred by
Limitation Act. A good debt becomes unenforceable after the period of three years as
barred by Limitation Act.
(iii) Where, G agrees to give tuitions to H, a pre-engineering student, from the next month
and H in consideration promises to pay G Rs. 5,000 per month, the contract is executory
because it is yet to be carried out.

Q15. Mr. Aseem is a learned advocate. His car was stolen from his house. He gave an advertisement
in newspaper that he will give the reward of Rs. 10,000 who will give the information about
his car. Mr. Vikram reads the advertisement and on making some efforts got the stolen car
and informed Mr. Aseem. Mr. Aseem found his car but denied giving reward of Rs. 10,000 to
Mr. Vikram with the words, “An advertisement in newspaper is just an invitation to make
offer and not an offer. Hence, he is not liable to make the reward.” State with reasons whether
under Indian Contract Act, 1872, Mr. Vikram can claim the reward of Rs. 10,000.

Sol. Provision

An invitation to offer is different from offer. Quotations, menu cards, price tags,
advertisements in newspaper for sale are not offer. These are merely invitations to public to
make an offer. An invitation to offer is an act precedent to making an offer.

Acceptance of an invitation to an offer does not result in the contract and only an offer
emerges in the process of negotiation. But there is an exception to above provisions.

When advertisement in newspaper is made for reward, it is the general offer to public.

Analysis and conclusion

On the basis of above provisions and facts, it can be said that as advertisement made by Mr.
Aseem to find lost car is an offer, he is liable to pay Rs. 10,000 to Mr. Vikram
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Q16. A coolie in uniform picks up the luggage of R to be carried out of the railway station without
being asked by R and R allows him to do so. Examine whether the coolie is entitled to receive
money from R under the Indian Contact Act, 1872.

Sol. Provision

Implied Contracts: Implied contracts come into existence by implication. Most often the
implication is by law and or by action. Section 9 of the Indian Contract Act, 1872 contemplates
such implied contracts when it lays down that in so far as such proposal or acceptance is made
otherwise than in words, the promise is said to be implied.

Analysis and Conclusion

In the present case, it is an implied contract and R must pay for the services of the coolie.

Q17. Define an offer. Explain the essentials of a valid offer. How an offer is different from an
invitation to offer?

Sol. Definition: The word Proposal and offer are used interchangeably and it is defined under
Section 2(a) of the Indian Contract Act, 1872 as when one person signifies to another his
willingness to do or to abstain from doing anything with a view to obtaining the assent of that
other to such act or abstinence, he is said to make a proposal.

Essentials: The following are important essentials of an offer:

(i) Must be capable of creating legal relation.

(ii) Must be certain, definite and not vague.
(iii) Must be communicated.
(iv) Must be made with a view to obtaining the assent of the other party
(v) May be conditional
(vi) Offer should not contain a term the noncompliance of which would amount to
acceptance
(vii) May be general or specific
(viii) May be expressed or implied
(ix) A statement of price is not an offer
Offer and an Invitation to an offer: In terms of Section 2(a) of the Act, an offer is the final
expression of willingness by the offer or to be bound by the offer should the other party
chooses to accept it. On the other hand, offers made with the intention to negotiate or offers
to receive offers are known as invitation to offer. Thus, where a party without expressing his
final willingness proposes certain terms on which he is willing to negotiate he does not make
an offer, but only invites the other party to make an offer on those terms. Hence, the only thing
that is required is the willingness of the offeree to abide by the terms of offer.

Q18. A sends an offer to B to sell his second-car for Rs. 1,40,000 with a condition that if B does not
reply within a week, he (A) shall treat the offer as accepted. Is A correct in his proposition?
What shall be the position if B communicates his acceptance after one week?

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Sol. Provision

Acceptance to an offer cannot be implied merely from the silence of the offeree, even if it is
expressly stated in the offer itself. Unless the offeree has by his previous conduct indicated
that his silence amount to acceptance, it cannot be taken as valid acceptance.

Analysis and Conclusion

So in the given problem, if B remains silent, it does not amount to acceptance.

The acceptance must be made within the time limit prescribed by the offer. The acceptance of
an offer after the time prescribed by the offeror has elapsed will not avail to turn the offer into
a contract.

Q19. Mr. Pratham applied for a job as principal of a school. The school management decided to
appoint him. One member of the school management committee privately informed Mr.
Pratham that he was appointed but official communication was not given from the school.
Later, the management of the school decided to appoint someone else as a principal. Mr.
Pratham filed a suit against the school for cancellation of his appointment and claimed
damages for loss of salary. State with reasons, will Mr. Pratham be successful in suit filed
against school under the Indian Contract Act, 1872?

Sol. Provision

As per the rules of acceptance, the acceptance should be communicated to offeror by offeree
himself or his authorized agent. Communication of acceptance by third person cannot be
concluded in valid acceptance.

Analysis and Conclusion

In the instant case, Mr. Pratham applied for a job as principal of a school and one member of
the school management committee privately informed Mr. Pratham that he was appointed.
Later, the management of the school appointed someone else as a principal.

On the basis of above provisions and facts, communication of appointment of Mr. Pratham
should be made by school management committee or any authorised agent.

The communication by third person cannot be termed as communication of acceptance.

Therefore, no valid contract was formed between Mr. Pratham and school and Mr. Pratham
cannot file a suit against the school for cancellation of his appointment.

Q20. Father promised to pay his son a sum of rupee one lakh if the son passed

C.A. examination in the first attempt. The son passed the examination in the first attempt, but
father failed to pay the amount as promised. Son files a suit for recovery of the amount. State
along with reasons whether son can recover the amount under the Indian Contract Act, 1872.

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Sol. Provision

Problem asked in the question is based on the provisions of the Indian Contract Act, 1872 as
contained in section 10. According to the provisions there should be an intention to create
legal relationship between the parties. Agreements of a social nature or domestic nature do
not contemplate legal relationship and as such are not contracts, which can be enforced. This
principle has been laid down in the case of Balfour v. Balfour. Accordingly, applying the above
provisions and the case decision,

Analysis and Conclusion

After applying provision to the present case we can conclude that the son cannot recover the
amount of Rs. 1 lakh from father

Q21. Rahul goes to super market to buy a washing machine. He selects a branded washing
machine having a price tag of Rs. 15000 after a discount of Rs. 3000.

Rahul reaches at cash counter for making the payment, but cashier says, “Sorry sir, the
discount was upto yesterday. There is no discount from today. Hence you have to pay Rs.
18000.” Rahul got angry and insists for Rs. 15000. State with reasons whether under Indian
Contract Act, 1872, Rahul can enforce the cashier to sale at discounted price i.e. Rs. 15000.

Sol. Provision

An invitation to offer is different from offer . Quotations, menu cards, price tags,
advertisements in newspaper for sale are not offer. These are merely invitations to public to
make an offer. An invitation to offer is an act precedent to making an offer. Acceptance of an
invitation to an offer does not result in the contract and only an offer emerges in the process
of negotiation.

Analysis and Conclusion

In the instant case, Rahul reaches to super market and selects a washing machine with a
discounted price tag of Rs.15000 but cashier denied to sale at discounted price by saying that
discount is closed from today and request to make full payment. But Rahul insists to sale at
discounted price.

On the basis of above provisions and facts, the price tag with washing machine was not offer.
It is merely an invitation to offer. Hence, it is the Rahul who is making the offer not the super
market. Cashier has right to reject the Rahul’s offer. Therefore, Rahul cannot enforce cashier
to sale at discounted price.

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 THE INDIAN CONTRACT ACT, 1872

UNIT - 2

Q1. “To form a valid contract, consideration must be adequate”. Comment.

Sol. The law provides that a contract should be supported by consideration. So long as consideration
exists, the Courts are not concerned to its adequacy, provided it is of some value.

The adequacy of the consideration is for the parties to consider at the time of making the
agreement, not for the Court when it is sought to be enforced (Bolton v. Modden).

Consideration must however, be something to which the law attaches value though it need not be
equivalent in value to the promise made.

According to Explanation 2 to Section 25 of the Indian Contract Act, 1872, an agreement to which
the consent of the promisor is freely given is not void merely because the consideration is
inadequate but the inadequacy of the consideration may be taken into account by the Court in
determining the question whether the consent of the promisor was freely given.

Q2. Mr. Sohanlal sold 10 acres of his agricultural land to Mr. Mohanlal on 25th September
2020 for Rs. 25 Lakhs. The Property papers mentioned a condition, amongst other details, that
whosoever purchases the land is free to use 9 acres as per his choice but the remaining 1 acre has to
be allowed to be used by Mr. Chotelal, son of the seller for carrying out farming or other activity of his
choice. On 12th October, 2020, Mr. Sohanlal died leaving behind his son and life. On 15th October,
2020 purchaser started construction of an auditorium on the whole 10 acres of land and denied any
land to the son. Now Mr. Chotelal wants to file a case against the purchaser and get a suitable
redressal. Discuss the above in light of provisions of Indian Contract Act, 1872 and decide upon Mr.
Chotelal’s plan of action?
Sol.
Provision
Problem as asked in the question is based on the provisions of the Indian Contract Act, 1872 as
contained in section 2(d) and on the principle ‘privity of consideration’.
Consideration is one of the essential elements to make a contract valid and it can flow from
the promisee or any other person. In view of the clear language used in definition of
‘consideration’ in Section 2(d), it is not necessary that consideration should be furnished by the
promisee only. A promise is enforceable if there is some consideration for it and it is quite immaterial
whether it moves from the promisee or any other person.

The leading authority in the decision of the Chinnaya Vs. Ramayya, held that the consideration
can legitimately move from a third party and it is an accepted principle of law in India.
Analysis and conclusion
In the given problem, Mr. Sohanlal has entered into a contract with Mr. Mohanlal, but Mr. Chotelal has
not given any consideration to Mr. Mohanlal but the consideration did flow from Mr. Sohanlal to Mr.
Mohanlal on the behalf of Mr. Chotelal and such consideration from third party is sufficient to enforce
the promise of Mr. Mohanlal to allow Mr. Chotelal to use 1 acre of land. Further the deed of sale and

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 the promise made by Mr. Mohanlal to Mr. Chotelal to allow the use of 1 acre of land were
executed simultaneously and therefore they should be regarded as one transaction and there was
sufficient consideration for it.

Moreover, it is provided in the law that “in case covenant running with the land, where a person
purchases land with notice that the owner of the land is bound by certain duties affecting land,
the covenant affecting the land may be enforced by the successor of the seller.”

In such a case, third party to a contract can file the suit although it has not moved the
consideration. Hence, Mr. Chotelal is entitled to file a petition against Mr. Mohanlal for
execution of contract.

Q3. The general rule is that an agreement without consideration is void. Discuss the cases where the
agreement though made without consideration will be valid and enforceable as per Indian Contract
Act, 1872.
Or
State the exceptions to the rule “An agreement without consideration is void”.
Or
“No consideration, no contract” Comment.
Or
Are there any circumstances under which a contract, under the provisions of the Indian Contract Act,
1872, without consideration is valid? Explain.
Sol. The general rule is that an agreement made without consideration is void (Section 25).
In every valid contract, consideration is very important. A contract may only be enforceable when
consideration is there.
Exception to general Rule:
1. Natural Love and Affection: Conditions to be fulfilled under section 25(1)
(i) It must be made out of natural love and affection between the parties.
(ii) Parties must stand in near relationship to each other.
(iii) It must be in writing.
(iv) It must also be registered under the law.
A written and registered agreement based on natural love and affection between the parties
standing in near relation (e.g., husband and wife) to each other is enforceable even without
consideration
Example: A husband, by a registered agreement promised to pay his earnings to his wife. Held the
agreement though without consideration, was valid.
Example: A out of natural love and affection promises to give his newly wedded daughter-
in-law a golden necklace worth Rs. 5,00,000. ‘A’ made the promise in writing and signed it and
registered. The agreement is valid.
2. Compensation for past voluntary services: A promise to compensate, wholly or in part, a
person who has already voluntarily done something for the promisor, is enforceable under
Section 25(2). In order that a promise to pay for the past voluntary services be binding, the
following essential factors must exist:
(i) The services should have been rendered voluntarily.
(ii) The services must have been rendered for the promisor.

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 (iii) The promisor must be in existence at the time when services were rendered.
(iv) The promisor must have intended to compensate the promisee.
Example : P finds R’s wallet and gives it to him. R promises to give P Rs.10,000.
This is a valid contract.
Example: Mr. X had helped his nephew Mr. Y to fight a case in the court of law using his
knowledge and intellect. After Mr. Y won the case, he promised Mr. X to pay Rs. 10,000. Held,
this is a valid contract as it is compensation to past services.
3. Promise to pay time barred debt: Where a promise in writing signed by the person
making it or by his authorized agent, is made to pay a debt barred by limitation it is valid
without consideration [Section 25(3)].
Example: A is indebted to C for Rs.60,000 but the debt is barred by the Limitation Act. A sign a
written promise now to pay Rs.50,000 in final settlement of the debt. This is a contract without
consideration, but enforceable.
4. Agency: According to Section 185 of the Indian Contract Act, 1872, no consideration is
necessary to create an agency.
5. Completed gift: In case of completed gifts, the rule no consideration no contract does not
apply. Explanation (1) to Section 25 states “nothing in this section shall affect the validity as
between the donor and donee, of any gift actually made.” Thus, gifts do not require any
consideration.
6. Bailment: No consideration is required to affect the contract of bailment.
Meaning of bailment :- Section 148 of the Indian Contract Act, 1872, defines bailment as the
delivery of goods from one person to another for some purpose. This delivery is made upon a
contract that post accomplishment of the purpose, the goods will either be returned or disposed
of, according to the directions of the person delivering them.
Example : Mr. A hand over the keys of his godown to Mr. Y as Mr. Y had deposited his goods in
the same. Mr. Y gets possession of godown but not the ownership. As soon as Mr. Y lifts his
goods from godown he is liable to hand over the keys back to Mr. A.

7. Charity: If a promisee undertakes the liability on the promise of the person to contribute
to charity, there the contract shall be valid. (Kadarnath v. Gorie Mohammad)
Q4. Define consideration. What are the legal rules regarding consideration under the Indian Contract
Act, 1872?
Or
Define consideration. State the characteristics of a valid consideration.
Sol.
(a) Consideration [Section 2(d) of the Indian Contract Act, 1872]: When at the desire of the
promisor, the promisee or any other person has done or abstained from doing, or does
or abstains from doing or promises to do or abstain from doing something, such an act
or abstinence or promise is called consideration for the promise.
Legal Rules Regarding Consideration

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  Consideration must move at the desire of the promisor: Consideration must be
offered by the promisee or the third party at the desire or request of the promisor. This
implies “return” element of consideration.
(i) Consideration may move from promisee or any other person: In India, consideration may
proceed from the promisee or any other person who is not a party to the contract. In other
words, there can be a stranger to a consideration but not stranger to a contract.
(ii) Executed and executory consideration: A consideration which consists in the performance
of an act is said to be executed. When it consists in a promise, it is said to be executory. The
promise by one party may be the consideration for an act by some other party, and vice versa.

(iii) Consideration may be past, present or future: It is a general principle that consideration is
given and accepted in exchange for the promise. The consideration, if past, may be the motive
but cannot be the real consideration of a subsequent promise. But in the event of the services
being rendered in the past at the request or the desire of the promisor, the subsequent
promise is regarded as an admission that the past consideration was not gratuitous.

(iv) Consideration need not be adequate: Consideration need not to be of any particular value.
It need not be approximately of equal value with the promise for which it is exchanged but it
must be something which the law would regard as having some value.

(v) Performance of what one is legally bound to perform: The performance of an act by a
person who is legally bound to perform the same cannot be consideration for a contract.
Hence, a promise to pay money to a witness ivoid, for it is without consideration. Hence such
a contract is void for want of consideration. But where a person promises to do more that he
is legally bound to do, such a promise provided it is not opposed to public policy, is a good
consideration. It should not be vague or uncertain.
(vi) Consideration must be real and not illusory: Consideration must be real and must not be
illusory. It must be something to which the law attaches some value. If it is legally or
physically impossible it is not considered valid consideration.
(vii) Consideration must not be unlawful, immoral, or opposed to public policy. Only
presence of consideration is not sufficient it must be lawful. Anything which is immoral or
opposed to public policy also cannot be valued as valid consideration.
Q5. Mr. Y given loan to Mr. G of INR 30,00,000. Mr. G defaulted the loan on due date and debt became time
barred. After the time barred debt, Mr. G agreed to settle the full amount to Mr. Y. Whether
acceptance of time barred debt Contract is enforceable in law?
Sol.
Provision
Promise to pay time-barred debts - Section 25 (3): Where there is an agreement, made in
writing and signed by the debtor or by his agent, to pay wholly or in part a time barred debt,
the agreement is valid and binding even though there is no consideration.
Analysis and conclusion
In the given case, the loan given by Mr. Y to Mr. G has become time barred. Thereafter, Mr. G agreed to
make payment of full amount to Mr. Y.

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 Referring to above provisions of the Indian Contract Act, 1872 contract entered between parties post
time barred debt is valid so, Mr. G is bound to pay the agreed amount to Mr. Y provided the
above mentioned conditions of section 25 (3) are fulfilled.
Q6. A stranger to a contract cannot sue, however in some cases even a stranger to contract may enforce a
claim. Explain.
Or
“Only a person who is party to a contract can sue on it”. Explain this statement and describe its
exceptions, if any.
Sol. Though under the Indian Contract Act, 1872, the consideration for an agreement may proceed from a
third party, the third party cannot sue on contract. Only a person who is party to a contract can sue
on it.
Thus, the concept of stranger to consideration is valid and is different from stranger to a contract.
The aforesaid rule, that stranger to a contract cannot sue is known as a “doctrine of privity of
contract”, is however, subject to certain exceptions.
Stranger to a contract cannot sue is known as a “doctrine of privity of contract”. This rule is
however, subject to certain exceptions. In other words, even a stranger to a contract may enforce a
claim in the following cases:
(1) In the case of trust, a beneficiary can enforce his right under the trust, though he was not a
party to the contract between the settler and the trustee.
(2) In the case of a family settlement, if the terms of the settlement are reduced into writing,
the members of family who originally had not been parties to the settlement may enforce
the agreement.
(3) In the case of certain marriage contracts, or arrangements, a provision may be made for
the benefit of a person. The person may enforce the agreement though he is not a party to the
agreement.
(4) In the case of assignment of a contract, when the benefit under a contract has been
assigned, the assignee can enforce the contract.
(5) Acknowledgement or estoppel – where the promisor by his conduct acknowledges
himself as an agent of the third party, it would result into a binding obligation towards
third party.
(6) In the case of covenant running with the land, the person who purchases land with notice
that the owner of land is bound by certain duties affecting land, the covenant affecting
the land may be enforced by the successor of the seller.
(7) Contracts entered into through an agent: The principal can enforce the contracts entered by
his agent where the agent has acted within the scope of his authority and in the name of
the principal.
Q7. Mr. Balwant, an old man, by a registered deed of gift, granted certain landed property to Ms. Reema,
his daughter. By the terms of the deed, it was stipulated that an annuity of Rs. 20, 000 should be paid
every year to Mr. Sawant, who was the brother of Mr. Balwant. On the same day Ms. Reema made a
promise to Mr. Sawant and executed in his favour an agreement to give effect to the stipulation. Ms.

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 Reema failed to pay the stipulated sum. In an action against her by Mr. Sawant, she contended that
since Mr. Sawant had not furnished any consideration, he has no right of action.
Examining the provisions of the Indian Contract Act, 1872, decide, whether the contention of Ms.
Reema is valid?
Sol.
Provision
In India, consideration may proceed from the promise or any other person who is not a party
to the contract. The definition of consideration as given in section 2(d) makes that proposition
clear. According to the definition, when at the desire of the promisor, the promisee or any other
person does something such an act is consideration. In other words, there can be a stranger to a
consideration but not stranger to a contract.

Analysis and conclusion

In the given problem, Mr. Balwant has entered into a contract with Ms. Reema, but Mr. Sawant has
not given any consideration to Ms. Reema but the consideration did flow from Mr. Balwant to Ms.
Reema and such consideration from third party is sufficient to the enforce the promise of Ms. Reema,
the daughter, to pay an annuity to Mr. Sawant. Further the deed of gift and the promise made by
Ms. Reema to Mr. Sawant to pay the annuity were executed simultaneously and therefore they
should be regarded as one transaction and there was sufficient consideration for it.
Thus, a stranger to the contract cannot enforce the contract but a stranger to the
consideration may enforce it. Hence, the contention of Ms. Reema is not valid.
Q8. Mr. Ram Lal Birla was a big businessman of city Pune having two sons and one married daughter.
He decided to gift his one house to his daughter. For this purpose, he called his lawyer at his house
and made a written document for such gift. The lawyer advised him to get the transfer document
properly registered. When they both were going for registration of document, they met with an
accident and both of them died. Later, his daughter found the document and claimed the house on
the basis of that document. Explain, whether she can get the house as gift under the Indian
Contract Act, 1872?
Sol.
Provision
Section 25 of Indian Contract Act, 1872 provides that an agreement made without
consideration is valid if it is expressed in writing and registered under the law for the time
being in force for the registration of documents and is made on account of natural love and
affection between parties standing in a near relation to each other.

Analysis and conclusion

In the instant case, the transfer of house made by Mr. Ram Lal Birla on account of natural love
and affection between the parties standing in near relation to each other is written but not
registered. Hence, this transfer is not enforceable and his daughter cannot get the house as gift
under the Indian Contract Act, 1872.

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 THE INDIAN CONTRACT ACT, 1872

UNIT-3

Q1. Examine the validity of the following contracts as per the Indian Contract Act, 1872 giving reasons :-
(a) X aged 16 years borrowed a loan of Rs. 50,000 for his personal purposes. Few months later he had
become major and could not pay back the amount borrowed, on due date. The lender wants to file a
suit against X.
(b) J contracts to take in cargo for K at a foreign port. J’s government afterwards declares war against
the country in which the port is situated and therefore the contract could not be fulfilled. K wants
to file a suit against J.
Sol.
(a) Provision
According to Section 11 of the Indian Contract Act, 1872, every person is competent to contract who
is of the age of majority according to the law to which he is subject and therefore, a minor is not
competent to contract and any agreement with or by a minor is void from the very beginning. A
minor cannot ratify it on attaining the majority as the original agreement is void ab initio.
According to Section 68 of the Act, a claim for necessaries supplied to a minor is enforceable by law.
Necessaries mean those things that are essentially needed by a minor. They cannot include luxuries or
costly or unnecessary articles.
Analysis and Conclusion
In the present case, X, the borrower, was minor at the time of taking the loan, therefore, the
agreement was void ab initio. Attaining majority thereafter will not validate the contract nor X
can ratify it. The loan was for personal purposes and not for necessaries supplied to him. Hence,
the lender cannot file a suit against X for recovery of the loan as it is not enforceable by law.

(b) Provision
As per Section 56 of the Indian Contract Act, 1872 the subsequent or supervening impossibility
renders the contract void. Supervening impossibility may take place owing to various circumstances
as contemplated under that section, one of which is the declaration of war subsequent to the contract
made.
Analysis and Conclusion
In the instant case the contract when made between J and K was valid but afterwards J’s
government declares war against the country in which the port is situated as
a result of which the contract becomes void. Hence, K cannot file a suit against J for performance
of the contract.
Q2. Mr. S aged 58 years was employed in a Government Department. He was going to retire after two years.
Mr. D made a proposal to Mr. S to apply for voluntary retirement from his post so that Mr. D can be
appointed in his place. Mr. D offered a sum of Rs. 10 Lakhs as consideration to Mr. S in order to induce
him to retire.

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 Mr. S refused at first instance but when he evaluated the amount offered as consideration is just
double of his cumulative remuneration to be received during the tenure of two years of
employment, he agreed to receive the consideration and accepted the above agreement to receive
money to retire from his office.
Whether the above agreement is valid? Explain with reference to provision of Indian Contract Act,
1872.
Sol. Provision
Section 10 of the Indian Contract Act, 1872 provides for the legality of consideration and
objects thereto.

Section 23 of the said Act also states that every agreement of which the object or
consideration is unlawful is void.

The given problem talks about entering into an agreement for traffic relating to public
office, which is opposed to public policy. Public policy requires that there should be no money
consideration for the appointment to an office in which the public is interested. Such
consideration paid, being opposed to public policy, is unlawful.

Analysis and Conclusion

In the given case, Mr. S, who was going to be retired after two years was proposed by Mr. D, to
apply for voluntary retirement from his post, in order that he can be appointed in his place. In lieu
of that Mr. D offered Mr. S a sum of Rs. 10 lakh as consideration. Mr. S refused initially but later
accepted the said offer to receive money to retire from his office.

Here, Mr. S’s promise of sale for Mr. D, an employment in the public services is the consideration
for Mr. D’s promise to pay Rs. 10 lakh. Therefore, in terms of the above provisions of the Indian
Contract Act, the said agreement is not valid. It is void, as the consideration being opposed
to public policy, is unlawful.

Q3. State with reason(s) whether the following agreements are valid or void:
(i) A clause in a contract provided that no action should be brought upon in case of breach.
(ii) Where two courts have jurisdiction to try a suit, an agreement between the parties that the
suit should be filed in one of those courts alone and not in the other.
(iii) X offers to sell his Maruti car to Y. Y believes that X has only Wagon R Car but agrees to buy
it.
(iv) X, a physician and surgeon, employs Y as an assistant on a salary of Rs. 75,000 per month for
a term of two years and Y agrees not to practice as a surgeon and physician during these
two years.
(i) The given agreement is void.
Sol. Reason: As per Section 28 of the Indian Contract Act, 1872, this clause is in restraint of legal
proceedings because it restricts both the parties from enforcing their legal rights.

Note: Alternatively, as per Section 23 of the Indian Contract Act, 1872, this clause in the
agreement defeats the provision of law and therefore, being unlawful, is treated as void.

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 (ii) The given agreement is valid.
Reason: An agreement in restraint of legal proceeding is the one by which any party
thereto is restricted absolutely from enforcing his rights under a contract through a Court.
A contract of this nature is void. However, in the given statement, no absolute restriction is
marked on parties on filing of suit. As per the agreement suit may be filed in one of the courts
having jurisdiction.
(iii) The said agreement is void.
Reason: This agreement is void as the two parties are thinking about different subject
matters so that there is no real consent and the agreement may be treated as void because
of mistake of fact as well as absence of consensus.
(iv) The said agreement is valid.
Reason: An agreement by which any person is restrained from exercising a lawful
profession, trade or business of any kind, is to that extent void. But, as an exception,
agreement of service by which an employee binds himself, during the term of his
agreement, not to compete with his employer is not in restraint of trade.
Q4. Distinguish between wagering agreement and contract of insurance.
Or
Enumerate the differences between ‘Wagering Agreements’ and ‘Contract of Insurance’ with
reference to provision of the Indian Contract Act, 1872.
Sol.
Basis of differences Contracts of Insurance Wagering Agreement
Meaning It is a contract to indemnify It is a promise to pay money
the loss. or money’s worth on the
happening or non- happening
of an uncertain event.

Consideration The crux of insurance contract There is no consideration

is the mutual consideration between the two parties. There
(premium and compensation is just gambling for money.
amount).
Insurable Interest Insured party has insurable There is no property in case of
interest in the life or property wageringagreement.
sought to be insured. There is betting on other’s life
and properties.

47

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 Contract of Except life insurance, the Loser has to pay the fixed
Indemnity contract of insurance indemnifies amount on the happening of
the insured person against loss. uncertain event.

Enforceability It is valid and enforceable It is void and unenforceable

agreement.
Premium Calculation of premium is based No such logical calculations are
on scientific and actuarial required in case of wagering
calculation of risks. agreement.
Public Welfare They are beneficial to the They have been regarded as
society against the public welfare.

Q5. Examine with reason that the given statement is correct or incorrect “Minor is liable to pay for
the necessaries supplied to him”.
Sol. Minor is liable to pay for the necessaries supplied to him: This statement is incorrect. The
case of necessaries supplied to a minor or to any other person whom such minor is legally
bound to support is governed by section 68 of the Indian Contract Act, 1872.
A claim for necessaries supplied to a minor is enforceable by law, only against minor’s
estate, if he possesses. But a minor is not liable for any price that he may promise and never
for more than the value of the necessaries.
There is no personal liability of the minor, but only his property is liable.

Q6. Define Fraud. Whether “mere silence will amount to fraud” as per the Indian Contract Act, 1872?
Sol. Definition of Fraud under Section 17: ‘Fraud’ means and includes any of the following acts
committed by a party to a contract, or with his connivance, or by his agent, with an intent to
deceive another party thereto or his agent, or to induce him to enter into the contract:
(1) the suggestion, as a fact, of that which is not true, by one who does not believe it to
be true;
(2) the active concealment of a fact by one having knowledge or belief of the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specially declares to be fraudulent.
Mere silence will amount to fraud: This statement is incorrect as per the Indian Contract Act,
1872. A party to the contract is under no obligation to disclose the whole truth to the other
party.
‘Caveat Emptor’ i.e. let the purchaser beware is the rule applicable to contracts. There is no
duty to speak in such cases and silence does not amount to fraud. Similarly, there is no duty to
disclose facts which are within the knowledge of both the parties.

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Q7. Explain the term ‘Coercion” and what are the effects of coercion under Indian Contract Act,
1872.
Sol.
(a) Coercion (Section 15 of the Indian Contract Act, 1872): “Coercion’ is the committing, or
threatening to commit, any act forbidden by the Indian Penal Code or the unlawful
detaining, or threatening to detain any property, to the prejudice of any person
whatever, with the intention of causing any person to enter into an agreement.”

Effects of coercion under section 19 of Indian Contract Act, 1872

(i) Contract induced by coercion is voidable at the option of the party whose consent was so
obtained.
(ii) As to the consequences of the rescission of voidable contract, the party rescinding a void
contract should, if he has received any benefit, thereunder from the other party to the
contract, restore such benefit so far as may be applicable, to the person from whom it
was received.
(iii) A person to whom money has been paid or anything delivered under coercion must
repay or return it.
Q8. Mr. X a businessman has been fighting a long drawn litigation with Mr. Y an industrialist. To
support his legal campaign he enlists the services of Mr. C a Judicial officer stating that the
amount of Rs.10 lakhs would be paid to him if he does not take up the brief of Mr. Y.
Mr. C agrees but, at the end of the litigation Mr. X refuses to pay to Mr. C. Decide whether Mr. C
can recover the amount promised by Mr. X under the provisions of the Indian Contract Act,
1872?
Sol.
Provision
The problem as asked in the question is based on Section 10 of the Indian Contract Act, 1872.
This Section says that all agreements are contracts if they are made by the free consent of the
parties competent to contract, for a lawful consideration and with a lawful object and are not
expressly declared to be void. Further, Section 23 also states that every agreement of which
the object is unlawful is void.
Accordingly, one of the essential elements of a valid contract in the light of the said
provision is that the agreement entered into must not be which the law declares to be
either illegal or void. An illegal agreement is an agreement expressly or impliedly prohibited
by law. A void agreement is one without any legal effects.
Analysis and conclusion
The given instance is a case of interference with the course of justice and results as
opposed to public policy. This can also be called as an agreement in restraint of
legal proceedings. This agreement restricts one’s right to enforce his legal rights. Such an
agreement has been expressly declared to be void under section 28 of the Indian Contract Act,
1872. Hence, Mr. C in the given case cannot recover the amount of Rs. 10 lakh promised by Mr. X
because it is a void agreement and cannot be enforced by law.

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Q9. Define Misrepresentation and Fraud.
Sol. Definition of Fraud under Section 17 of the Indian Contract Act, 1872:
‘Fraud’ means and includes any of the following acts committed by a party to a contract, or with
his connivance, or by his agent, with an intent to deceive another party thereto or his agent, or to
induce him to enter into the contract:
(1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
(2) the active concealment of a fact by one having knowledge or belief of the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specially declares to be fraudulent.
As per Section 18 of the Indian Contract Act, 1872, misrepresentation means and includes-
(1) the positive assertion, in a manner not warranted by the information of the person making
it, of that which is not true, though he believes it to be true;
(2) any breach of duty which, without an intent to deceive, gains an advantage to the person
committing it, or anyone claiming under him; by misleading another to his prejudice or to
the prejudice of anyone claiming under him;
(3) causing, however, innocently, a party to an agreement to make a mistake as to the
substance of the thing which is the subject of the agreement.
Q10. Distinction between fraud and misrepresentation.
Sol.

Basis of difference Fraud Misrepresentation

Intention To deceive the other party There is no such intention to
by hiding the truth. deceive the other party.
Knowledge of truth The person making the The person making the
suggestion believes that the statement believes it to be
statement as untrue. true, although it is not true.
Rescission of the The injured party can The injured party is entitled
contract and claim for repudiate the contract and to repudiate the contract or
damages claim damages. sue for restitution but cannot
claim the damages.

Basis of difference Fraud Misrepresentation

Means to discover the The party using the Party can always plead that
truth fraudulent act cannot secure the injured party had the
or protect himself by saying means to discover the truth.
that the injured party had
means to discover the truth.

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Q11. ‘X’ agreed to become an assistant for 2 years to ‘Y’ who was practicing Chartered Accountant at
Jodhpur. It was also agreed that during the term of agreement ‘X’ will not practice as a Chartered
Accountant on his own account within 20 kms of the office of ‘Y’ at Jodhpur. At the end of one
year, ‘X’ left the assistantship of ‘Y’ and started practice on his own account within the said area
of 20 kms.
Referring to the provisions of the Indian Contract Act, 1872, decide whether ‘X’ could be
restrained from doing so?
Sol.
Provision
Agreement in Restraint of Trade: Section 27 of the Indian Contract Act, 1872 deals with
agreements in restraint of trade. According to the said section, every agreement by which
any person is restrained from exercising a lawful profession, trade or business of any
kind, is to that extent void. However, in the case of the service agreements restraint of
trade is valid. In an agreement of service by which a person binds himself during the term
of agreement not to take service with anyone else directly or indirectly to promote any
business in direct competition with that of his employer is not in restraint of trade, so it is
a valid contract.

Analysis and Conclusion

In the instant case, agreement entered by ‘X’ with ‘Y’ is reasonable, and do not amount to
restraint of trade and hence enforceable.
Therefore, ‘X’ can be restrained by an injunction from practicing on his own account in
within the said area of 20 Kms for another one year.
Q12. A student was induced by his teacher to sell his brand new car to the latter at less than the
purchase price to secure more marks in the examination. Accordingly the car was sold.
However, the father of the student persuaded him to sue his teacher. State on what ground the
student can sue the teacher?
Sol.
Provision
A contract brought as a result of coercion, undue influence, fraud or misrepresentation would be
voidable at the option of the person whose consent was caused.
According to section 16 of the Indian Contract Act, 1872, “A contract is said to be induced by
‘undue influence’ where the relations subsisting between the parties are such that one of the
parties is in a position to dominate the will of the other and he uses that position to obtain an
unfair advantage over the other”.
A person is deemed to be in position to dominate the will of another:
(a) Where he holds a real or apparent authority over the other; or
(b) Where he stands in a fiduciary relationship to the other; or
(c) Where he makes a contract with a person whose mental capacity is temporarily or
permanently affected by reason of age, illness or mental or bodily distress for example,
an old illiterate person.

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 Analysis and conclusion
A contract brought as a result of coercion, undue influence, fraud or misrepresentation would be
voidable at the option of the person whose consent was caused. hence Yes, the student can sue
his teacher on the ground of undue influence under the provisions of Indian Contract Act,
1872.

Q13. Explain the term “coercion” and describe its effect on the validity of a contract?
Sol. “Coercion” is the committing or threatening to commit any act forbidden by the Indian
Penal Code 1860, or the unlawful detaining or threatening to detain any property, to the
prejudice of any person whatever, with the intention of causing any person to enter into
an agreement. (Section 15 of the Indian Contract Act, 1872).
It is also important to note that it is immaterial whether the Indian Penal Code, 1860 is or
is not in force at the place where the coercion is employed.
Effects on validity: According to section 19 of the Act, when consent to an agreement is caused
by coercion, the contract is voidable at the option of the party, whose consent was so
caused . The aggrieved party, whose consent was so caused can enforce the agreement or treat
it as void and rescind it. It is seen that in all these cases though the agreement amounts to a
contract, it is voidable. The injured party might insist on being placed in the same position
in which he might have been had the vitiating circumstances not been present.

Where a contract is voidable and the party entitled to avoid it decides to do so by rescinding it,
he must restore any benefit which he might have received from the other party. He
cannot avoid the contract and at the same time enjoy the benefit under the
rescinded/avoided contract. (Section 64)
Q14. “Though a minor is not competent to contract, nothing in the Contract Act prevents him from
making the other party bound to the minor”. Discuss.
Sol. Minor can be a beneficiary or can take benefit out of a contract : Though a minor is not
competent to contract, nothing in the Contract Act prevents him from making the other
party bound to the minor.
For example: A promissory note duly executed in favour of a minor is not void and can be
sued upon by him, because he though incompetent to contract, may yet accept a benefit.
A minor cannot become partner in a partnership firm. However, he may with the consent
of all the partners, be admitted to the benefits of partnership (Section 30 of the Indian
Partnership Act, 1932).
Q15. P sells by auction to Q a horse which P knows to be unsound. The horse appears to be
sound but P knows about the unsoundness of the horse. Is this contract valid in the following
circumstances:
(a) If P says nothing about the unsoundness of the horse to Q.
(b) If P says nothing about it to Q who is P’s daughter who has just come of age.
(c) If Q says to P “If you do not deny it, I shall assume that the horse is sound.” P says nothing
Sol. According to section 17 of the Indian Contract Act, 1872, mere silence as to facts likely to affect
the willingness of a person to enter into a contract is not fraud, unless the circumstances of the

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 case are such that, regard being had to them, it is the duty of the person keeping silence to
speak, or unless his silence is, in itself, equivalent to speech. Hence, in the instant case,
(a) This contract is valid since as per section 17 mere silence as to the facts likely to affect
the willingness of a person to enter into a contract is not fraud. Here, it is not the duty of
the seller to disclose defects.
(b) This contract is not valid since as per section 17 it becomes P’s duty to tell Q about the
unsoundness of the horse because a fiduciary relationship exists between P and his
daughter Q. Here, P’s silence is equivalent to speech and hence amounts to fraud.
(c) This contract is not valid since as per section 17, P’s silence is equivalent to speech
and hence amounts to fraud.
Q16. Explain the concept of ‘misrepresentation’ in matters of contract.
Sol. Misrepresentation: According to Section 18 of the Indian Contract Act, 1872, misrepresentation
means and includes-
(1) the positive assertion, in a manner not warranted by the information of the person making
it, of that which is not true, though he believes it to be true;
(2) any breach of duty which, without an intent to deceive, gains an advantage to the person
committing it, or any one claiming under him; by misleading another to his prejudice or to
the prejudice of any one claiming under him;
(3) causing, however, innocently, a party to an agreement to make a mistake as to the
substance of the thing which is the subject of the agreement.
Q17. Sohan induced Suraj to buy his motorcycle saying that it was in a very good condition. After
taking the motorcycle, Suraj complained that there were many defects in the motorcycle. Sohan
proposed to get it repaired and promised to pay 40% cost of repairs. After a few days, the
motorcycle did not work at all. Now Suraj wants to rescind the contract. Decide giving reasons.
Sol.
Provision
The aggrieved party, in case of misrepresentation by the other party, can avoid or rescind
the contract [Section 19, Indian Contract Act, 1872]. The aggrieved party loses the right to
rescind the contract if he, after becoming aware of the misrepresentation, takes a benefit
under the contract or in some way affirms it.
Analysis and Conclusion
Accordingly, in the given case, Suraj could not rescind the contract, as his acceptance to the offer
of Sohan to bear 40% of the cost of repairs impliedly amount to final acceptance of the
sale.
Q18. Discuss the essentials of Undue Influence as per the Indian Contract Act, 1872
Or
Explain the circumstances in which the person is deemed to be in a position to dominate the will
of the other person under the Indian Contract Act, 1872.
Sol. The essential ingredients under this provision are:

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 (1) Relation between the parties: A person can be influenced by the other when a near
relation between the two exists.
(2) Position to dominate the will: Relation between the parties exist in such a manner that
one of them is in a position to dominate the will of the other. A person is deemed to be in
such position in the following circumstances:
(a) Real and apparent authority: Where a person holds a real authority over the other as
in the case of master and servant, doctor and patient and etc.
Example: A father, by reason of his authority over the son can dominate the will of the
son.
(b) Fiduciary relationship: Where relation of trust and confidence exists between the
parties to a contract. Such type of relationship exists between father and son,
solicitor and client, husband and wife, creditor and debtor, etc.
Example: By reason of fiduciary relationship, a solicitor can dominate the will of his
client and a trustee can dominate the will of the beneficiary.
Example: A spiritual guru induced his devotee to gift to him the whole of his property
in return of a promise of salvation of the devotee. Held, the consent of the devotee was
given under undue influence. Here, the relationship was fiduciary relationship between
Guru and devotee and Guru was in a position to dominate the will of devotee.
(c) Mental distress: An undue influence can be used against a person to get his consent on
a contract where the mental capacity of the person is temporarily or permanently
affected by the reason of mental or bodily distress, illness or of old age.
Example: A doctor is deemed to be in a position to dominate the will of his patient
enfeebled by protracted illness.
(d) Unconscionable bargains: Where one of the parties to a contract is in a position
to dominate the will of the other and the contract is apparently unconscionable
i.e., unfair, it is presumed by law that consent must have been obtained by undue
influence. Unconscionable bargains are witnessed mostly in money-lending
transactions and in gifts.
Example: A youth of 18 years of age, spend thrift and a drunkard, borrowed Rs.
90,000 on a bond bearing compound interest at 2% per mensem (p.m.). It was
held by the court that the transaction is unconscionable, the rate of interest
charged being so exorbitant [Kirpa Ram vs. Sami-Ud-din Ad. Khan (1903)]
(3) The object must be to take undue advantage: Where the person is in a position to
influence the will of the other in getting consent, must have the object to take
advantage of the other.
Example: A teacher asks her daughter to get marry to one of his brilliant students. Both the
girl and boy were smart, settled and intelligent. Here the teacher had a relation which can
have influence on both of them. But as no undue advantage of such influence was taken
such contract of marriage is said to be made by free consent.
Q19. What is a wagering agreement? Describe the transactions which resembles with wagering
transactions but are not void.
Sol. Wagering agreement (Section 30 of the Indian Contract Act, 1872): An agreement by way of
a wager is void. It is an agreement involving payment of a sum of money upon the determination
of an uncertain event.

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 The essence of a wager is that each side should stand to win or lose, depending on the way
an uncertain event takes place in reference to which the chance is taken and in the occurrence
of which neither of the parties has legitimate interest.
For example, A agrees to pay Rs. 50,000 to B if it rains, and B promises to pay a like amount to A
if it does not rain, the agreement will be by way of wager. But if one of the parties has control
over the event, agreement is not a wager.
Transactions resembling with wagering transaction but are not void
(i) Chit fund: Chit fund does not come within the scope of wager (Section 30). In case of a
chit fund, a certain number of persons decide to contribute a fixed sum for a specified
period and at the end of a month, the amount so contributed is paid to the lucky winner
of the lucky draw.
(ii) Commercial transactions or share market transactions: In these transactions in which
delivery of goods or shares is intended to be given or taken, do not amount to wagers.
(iii) Games of skill and Athletic Competition: Crossword puzzles, picture competitions and
athletic competitions where prizes are awarded on the basis of skill and intelligence are
the games of skill and hence such competition are valid. According to the Prize
Competition Act, 1955 prize competition in games of skill are not wagers provided the
prize money does not exceed Rs. 1,000.
(iv) A contract of insurance: A contract of insurance is a type of contingent contract and is
valid under law and these contracts are different from wagering agreements.
Q20. Mr. SHYAM owned a motor car. He approached Mr. HARISH and offered to sell his motor car for
Rs. 3,00,000. Mr. SHYAM told Mr. HARISH that the motor car is running at the rate of 20 KMs per
litre of petrol. Both the fuel meter and the speed meter of the car were working perfectly. Mr.
HARISH agreed with the proposal of Mr. SHYAM and took delivery of the car by paying Rs.
3,00,000/- to Mr. SHYAM. After 10 days, Mr. HARISH came back with the car and stated that the
claim made by Mr. SHYAM regarding fuel efficiency was not correct and therefore there was a
case of misrepresentation. Referring to the provisions of the Indian Contract Act, 1872, decide
and write whether Mr. HARISH can rescind the contract on the above ground.
Sol.
Provision
As per the provisions of Section 19 of the Indian Contract Act, 1872, when consent to an
agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract
voidable at the option of the party whose consent was so caused.
A party to contract, whose consent was caused by fraud or misrepresentation, may, if he
thinks fit, insist that the contract shall be performed, and that he shall be put in the
position in which he would have been if the representations made had been true.
Exception: If such consent was caused by misrepresentation or by silence, fraudulent within the
meaning of section 17, the contract, nevertheless, is not voidable if the party whose consent was
so caused had the means of discovering the truth with ordinary diligence.

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 Analysis and Conclusion
In the situation given in the question, both the fuel meter and the speed meter of the car were
working perfectly, Mr. HARISH had the means of discovering the truth with ordinary
diligence. Therefore, the contract is not voidable. Hence, Mr. HARISH cannot rescind the
contract on the above ground.
Q21. Chandan was suffering from some disease and was in great pain. He went to Dr. Jhunjhunwala
whose consultation fee was Rs. 300. The doctor agreed to treat him but on the condition that
Chandan had to sign a promissory note of Rs. 5000 payable to doctor. Chandan signed the
promissory note and gave it to doctor. On recovering from the disease, Chandan refused to
honour the promissory note. State with reasons, can doctor recover the amount of promissory
note under the provisions of the Indian Contract Act, 1872?
Sol.
Provision
Section 16 of Indian Contract Act, 1872 provides that a contract is said to be induced by “undue
influence” where the relations subsisting between the parties are such that one of the
parties is in a position to dominate the will of the other and uses that
position to obtain an unfair advantage over the other.
Further, a person is deemed to be in a position to dominate the will of another—
(i) where he holds a real or apparent authority over the other, or
(ii) where he stands in a fiduciary relation to the other; or
(iii) where he makes a contract with a person whose mental capacity is temporarily or
permanently affected by reason of age, illness, or mental or bodily distress.
Section 19A provides that when consent to an agreement is caused by undue influence, the
agreement is a contract voidable at the option of the party whose consent was so caused.
Any such contract may be set aside either absolutely or, if the party who was entitled to avoid it
has received any benefit thereunder, upon such terms and conditions as to the Court may seem
just.
Analysis and Conclusion
From the facts of the case, Chandan signed the promissory note under undue influence
applied by doctor. Hence, Dr. Jhunjhunwala cannot recover the amount of promissory
note but can claim his normal consultation fee from Chandan.
Q22. Point out with reason whether the following agreements are valid or void:
(a) Kamala promises Ramesh to lend Rs. 500,000 in lieu of consideration that Ramesh gets
Kamala’s marriage dissolved and he himself marries her.
(b) Sohan agrees with Mohan to sell his black horse. Unknown to both the parties, the horse
was dead at the time of agreement.
(c) Ram sells the goodwill of his shop to Shyam for Rs. 4,00,000 and promises not to carry on
such business forever and anywhere in India.
(d) In an agreement between Prakash and Girish, there is a condition that they will not institute
legal proceedings against each other without consent.
(e) Ramamurthy, who is a citizen of India, enters into an agreement with an alien friend.
Sol. Validity of agreements

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 (a) Void Agreement: As per Section 23 of the Indian Contract Act, 1872, an agreement is void
if the object or consideration is against the public policy.
(b) Void Agreement: As per Section 20 of the Indian Contract Act, 1872 the contracts caused
by mistake of fact are void. There is mistake of fact as to the existence of subject-matter.
(c) Void Agreement: As per Section 27 of the Indian Contract Act, 1872 an agreement in
restraint of trade is void. However, a buyer can put such a condition on the seller of good
will, not to carry on same business. However, the conditions must be reasonable regarding
the duration and the place of the business.
(d) Void Agreement: An agreement in restraint of legal proceedings is void as per Section 28
of the Indian Contract Act, 1872.
(e) Valid Agreement: An agreement with alien friend is valid, but an agreement with alien
enemy is void.
Q23. Rahul, a minor, falsely representing his age, enters into an agreement with a shopkeeper for a
loan amount for purchasing a laptop. He gave his expensive watch as a security and took a loan
of Rs. 40,000. He was very happy to get Rs. 40,000 and quickly went to the market and
purchased a laptop worth Rs. 30,000. He happily spent the rest of the amount with his friends
on a pleasure trip.
Later on, Rahul realized that his watch was an expensive watch and he should not have given
like this to the shopkeeper. So, he went back to the shopkeeper and asked for his watch back.
Also, he refused to repay the loan amount. The shopkeeper disagrees to this and files a case
against minor for recovery of the loan amount. Can the shopkeeper succeed in recovering the
loan amount under the Indian Contract Act, 1872?
Sol.
Provision
As per Section 11 of Indian Contract Act, 1872, a minor is not competent to enter into any
contract. Any agreement with minor is void-ab-initio means void from the very beginning.
When a person forms an agreement with minor, such an agreement is devoid of any legal
consequences for the person because minor cannot be enforced by law to perform his part of
performance in an agreement.
However, if minor obtains any property by fraudulently misrepresenting his age, he can
be ordered to restore the property or goods thus obtained. Although no action can be
taken against the minor, but if has any property (of other party) in his possession, court
can order him to return the same.
Analysis and Conclusion
Hence, in the present case, Rahul is not liable to repay Rs. 40,000 that he has borrowed from
the shopkeeper, but he can be ordered by the court to return the laptop (which was in his
possession) to the shopkeeper.
Q24. “An agreement, the meaning of which is not certain, is void”. Discuss.
Sol. Agreement - the meaning of which is uncertain (Section 29 of the Indian Contract Act,
1872): An agreement, the meaning of which is not certain, is void, but where the meaning
thereof is capable of being made certain, the agreement is valid.

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 For example, A agrees to sell B “a hundred tons of oil”. There is nothing whatever to show
what kind of oil was intended. The agreement is void for uncertainty. But the agreement
would be valid if A was dealer only in coconut oil because in such a case its meaning would be
capable of being made certain.
Q25. Ishaan, aged 16 years, was studying in an engineering college. On 1st March, 2016 he took a loan
of Rs. 2 lakhs from Vishal for the payment of his college fee and agreed to pay by 30th May,
2017. Ishaan possesses assets worth Rs. 15 lakhs. On due date Ishaan fails to pay back the loan
to Vishal. Vishal now wants to recover the loan from Ishaan out of his assets. Decide whether
Vishal would succeed referring to the provisions of the Indian Contract Act, 1872.
Sol.
Provision
According to Section 11 of the Indian Contract Act, 1872, every person is competent to contract
who is of the age of majority according to the law to which he is subject, and who is of sound
mind and is not disqualified from contracting by any law to which he is subject.
A person who has completed the age of 18 years is a major and otherwise he will be
treated as minor. Thus, Ishaan who is a minor is incompetent to contract and any
agreement with him is void [Mohori Bibi Vs Dharmo Das Ghose 1903].
Section 68 of the Indian Contract Act, 1872 however, prescribes the liability of a minor for the
supply of the things which are the necessaries of life to him. It says that though minor is
not personally liable to pay the price of necessaries supplied to him or money lent for the
purpose, the supplier or lender will be entitled to claim the money/price of goods or
services which are necessaries suited to his condition of life provided that the minor has
a property. The liability of minor is only to the extent of the minor’s property.
Analysis and conclusion
Thus, according to the above provision, Vishal will be entitled to recover the amount of loan
given to Ishaan for payment of the college fees from the property of the minor.
Q26. Mr. Shekhar wants to sell his car. For this purpose, he appoints Mr. Nadan, a minor as his agent.
Mr. Shekhar instructs Mr. Nadan that car should not be sold at price less than Rs. 1,00,000. Mr.
Nadan ignores the instruction of Mr. Shekhar and sells the car to Mr. Masoom for Rs. 80,000.
Explain the legal position of contract under the Indian Contract Act, 1872 whether:
(i) Mr. Shekhar can recover the loss of Rs. 20,000 from Mr. Nadan?
(ii) Mr. Shekhar can recover his car from Mr. Masoom?
Sol.
Provision
According to the provisions of Section 11 of the Indian Contract Act, 1872, a minor is
disqualified from contracting. A contract with minor is void-ab-initio but minor can act
as an agent. But he will not be liable to his principal for his acts.
Analysis and Conclusion
In the instant case, Mr. Shekhar appoints Mr. Nadan, a minor as his agent to sale his car.
Mr. Shekhar clearly instructed to Mr. Nadan that the minimum sale price of the car should be
Rs. 1,00,000 yet Mr. Nadan sold the car to Mr. Masoom for Rs. 80,000.

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 (i) Considering the facts, although the contract between Mr. Shekhar and Mr. Nadan is valid,
Mr. Nadan will not be liable to his principal for his acts. Hence, Mr. Shekhar cannot
recover the loss of Rs. 20,000.
(ii) Further, Mr. Masoom purchased the car from agent of Mr. Shekhar, he got good
title. Hence, Mr. Shekhar cannot recover his car from Mr. Masoom.
Q27. Rohan is running a grocery store in Delhi. He sells his grocery business, including goodwill
worth Rs. 1,00,000 to Rohit for a sum of Rs. 5,00,000. After the sale of goodwill, Rohit made
an agreement with Rohan. As per this agreement, Rohan is not to open another grocery store
(similar kind of business) in the whole of India for next ten years. However, Rohan opens
another store in the same city two months later. What are the rights available with Rohit
regarding the restriction imposed on Rohan with reference to Indian Contract Act, 1872?
Sol.
Provision
Section 27 of the Indian Contract Act, 1872 provides that any agreement that restrains a
person from carrying on a lawful trade, profession or business is void agreement. However,
there are certain exceptions to this rule. One of the statutory exceptions includes sale of
Goodwill. The restraint as to sale of goodwill would be a valid restraint provided-
(i) Where the restraint is to refrain from carrying on a similar business
(ii) The restrain should be within the specified local limits
(iii) The restraint should be not to carry on the similar business after sale of goodwill to the
buyer for a price
(iv) The restriction should be reasonable. Reasonableness of restriction will depend upon
number of factors as considered by court.
Analysis and conclusion
In the given case, Rohan has sold the goodwill and there is restraint for not carrying on the
same business of grocery store. However, the restriction imposed on Rohan is
unreasonable as he cannot carry similar business in whole of India for next 10 years.
The restriction on restraint to similar kind of trade should be reasonable to make it a valid
agreement. Therefore, Rohit cannot take any legal action against Rohan as the restriction is
unreasonable as per Section 27 of Indian Contract Act, 1872. Hence, the agreement made
between Rohan and Rohit in restraint of trade is void agreement.

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16 | P a g e
 THE INDIAN CONTRACT ACT, 1872

UNIT-4

Q1. A, B, C and D are the four partners in a firm. They jointly promised to pay Rs. 6,00,000 to F. B and C
have become insolvent. B was unable to pay any amount and C could pay only Rs. 50,000. A is
compelled to pay the whole amount to F. Decide the extent to which A can recover the amount from
D with reference to the provisions of the Indian Contract Act, 1872.
Sol.
Provision
Joint promisors (Section 42 of the Indian Contract Act, 1872)
When two or more persons have made a joint promise, then unless a contrary intention appears by
the contract, all such persons must jointly fulfil the promise.
Any one of joint promisors may be compelled to perform (Section 43)
As per Section 43 of the Indian Contract Act, 1872, when two or more persons make a joint
promise, the promisee may, in the absence of express agreement to the contrary, compel any one
or more of such joint promisors to perform the whole of the promise.
If any one of two or more joint promisors makes default in such contribution, the remaining
joint promisors must bear the loss arising from such default in equal shares.
Analysis and Conclusion
In the instant case, A, B, C and D have jointly promised to pay Rs. 6,00,000 to F. B and C become
insolvent. B was unable to pay any amount and C could pay only Rs. 50,000. A is compelled to pay the
whole amount to F.
Hence, A is entitled to receive Rs. 50,000 from C and Rs. 2,75,000 from D, as worked out below:
From C Rs. 50,000= (C’s Liability Rs. 1,50,000 Less: Amount he could not pay Rs. 1,00,000).
From D Rs. 2,75,000= (D’s Liability Rs.1,50,000+1/2 of liability of B (Loss) (1,50,000*1/2) i.e.
Rs. 75,000+1/2 of C’s liability (Loss) (1,00,000*1/2) i.e., Rs. 50,000) In other words, equal
proportion i.e., Rs. 5,50,000 (i.e.Rs.6,00,000-Rs.50,000) / 2.
Q2. Explain any five circumstances under which contracts need not be performed with the consent of
both the parties
Sol. Under following circumstances, the contracts need not be performed with the consent of both the
parties:
(i) Novation: Where the parties to a contract substitute a new contract for the old, it is called
novation. A contract in existence may be substituted by a new contract either between the
same parties or between different parties the consideration mutually being the discharge of old
contract. Novation can take place only by mutual agreement between the parties. On
novation, the old contract is discharged and consequently it need not be performed.
(Section 62 of the Indian Contract Act, 1872)
(ii) Rescission: A contract is also discharged by recession. When the parties to a contract agree
to rescind it, the contract need not be performed. (Section 62)

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 (iii) Alteration: Where the parties to a contract agree to alter it, the original contract is
rescinded, with the result that it need not be performed. In other words, a contract is also
discharged by alteration. (Section 62)
(iv) Remission: Every promisee may dispense with or remit, wholly or in part, the
performance of the promise made to him, or may extend the time for such performance
or may accept instead of it any satisfaction which he thinks fit. In other words, a contract
is discharged by remission. (Section 63)
(v) Rescinds voidable contract: When a person at whose option a contract is voidable
rescinds it, the other party thereto need not perform any promise therein contained in
which he is the promisor.
Q3. X, Y and Z jointly borrowed Rs. 90,000 from L. Decide each of the following in the light of the
Indian Contract Act, 1872:
(i) Whether L can compel only Y to pay the entire loan of Rs. 90,000?
(ii) Whether L can compel only the legal representatives of Y to pay the loan of Rs. 90,000, if X, Y
and Z died?
(iii) Whether Y and Z are released from their liability to L and X is released from his liability to Y
and Z for contribution, if L releases X from his liability and sues Y and Z for payment?
Sol.
(i) Yes, L can compel only Y to pay Rs. 90,000/- since as per Section 43 of the Indian Contract
Act, 1872, in the absence of express agreement to the contrary, the promisee may compel
any one or more of the joint promisors to perform the whole of the promise.
(ii) As per Section 42, when two or more persons have made a joint promise, then, unless a
contrary intention appears by the contract, all such persons, during their joint lives and after
the death of any of them, his representative jointly with the survivor or survivors and after the
death of last survivor, the representatives of all jointly must fulfill the promise.
In the instant case, if X, Y and Z died then the legal representatives of all (i.e. X, Y and Z) shall be
liable to pay the loan jointly. L cannot compel only the legal representatives of Y to pay the
loan of Rs. 90,000.
(iii) According to Section 44, where two or more persons have made a joint promise, a release
of one of such joint promisors by the promisee does not discharge the other joint
promisor or joint promisors, neither does it free the joint promisors so released from
responsibility to the other joint promisor or promisors.
In this case, the release of X does not discharge Y and Z from their liability. Y and Z remain
liable to pay the entire amount of Rs. 90,000 to L. And though X is not liable to pay to L,
but he remains liable to pay to Y and Z i.e. he is liable to make the contribution to the other
joint promisors.
Q4. Explain what is meant by ‘Supervening Impossibility’ as per the Indian Contract Act, 1872 with
the help of an example. What is the effect of such impossibility?
Sol. According to Section 56 of the Indian Contract Act, 1872, the impossibility of performance may
be of the two types, namely (a) initial impossibility, and (b) subsequent impossibility.

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 Subsequent impossibility is also known as Supervening impossibility i.e. becomes impossible
after entering into contract. When performance of promise become impossible or illegal by
occurrence of an unexpected event or a change of circumstances beyond the contemplation of
parties, the contract becomes void e.g. change in law etc. In other words, sometimes, the
performance of a contract is quite possible when it is made. But subsequently, some event happens
which renders the performance impossible or unlawful. Such impossibility is called the
subsequent or supervening. It is also called the post-contractual impossibility.
Example: ‘A’ and ‘B’ contracted to marry each other. Before the time fixed for the marriage, ‘A’
became mad. In this case, the contract becomes void due to subsequent impossibility, and thus
discharged.
Effect of impossibility: The effect of such impossibility is that it makes the contract void, and the
parties are discharged from further performance of the contract.
Q5. X, Y and Z are partners in a firm. They jointly promised to pay Rs. 3,00,000 to D. Y become insolvent
and his private assets are sufficient to pay 1/5 of his share of debts. X is compelled to pay the whole
amount to D. Examining the provisions of the Indian Contract Act, 1872, decide the extent to which X
can recover the amount from Z.
Sol.
Provision
As per section 43 of the Indian Contract Act, 1872, when two or more persons make a joint promise,
the promisee may, in the absence of express agreement to the contrary, compel any one or more of
such joint promisors to perform the whole of the promise.
Each of two or more joint promisors may compel every other joint promisor to contribute equally
with himself to the performance of the promise, unless a contrary intention appears from the
contract.
If any one of two or more joint promisors makes default in such contribution, the remaining joint
promisors must bear the loss arising from such default in equal shares.
Analysis and conclusion
In the instant case, X, Y and Z jointly promised to pay Rs. 3,00,000. Y become insolvent and his
private assets are sufficient to pay 1/5 of his share of debts. X is compelled to pay the whole amount.
X is entitled to receive Rs. 20,000 from Y’s estate, and Rs. 1,40,000 from Z.
Q6. Mr. Rich aspired to get a self-portrait made by an artist. He went to the workshop of Mr. C an artist
and asked whether he could sketch the former’s portrait on oil painting canvass. Mr. C agreed to the
offer and asked for Rs. 50,000 as full advance payment for the above creative work. Mr. C clarified
that the painting shall be completed in 10 sittings and shall take 3 months.
On reaching to the workshop for the 6th sitting, Mr. Rich was informed that Mr. C became paralyzed
and would not be able to paint for near future. Mr. C had a son Mr. K who was still pursuing his
studies and had not taken up his father’s profession yet?
Discuss in light of the Indian Contract Act, 1872?
(i) Can Mr. Rich ask Mr. K to complete the artistic work in lieu of his father?
(ii) Could Mr. Rich ask Mr. K for refund of money paid in advance to his father?

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 Sol.
Provision
A contract which involves the use of personal skill or is founded on personal consideration
comes to an end on the death of the promisor. As regards any other contract the legal
representatives of the deceased promisor are bound to perform it unless a contrary intention
appears from the contract (Section 37 of the Indian Contract Act, 1872).
But their liability under a contract is limited to the value of the property they inherit from
the deceased.
Analysis and Conclusion
(i) In the instant case, since painting involves the use of personal skill and on becoming Mr.
C paralyzed, Mr. Rich cannot ask Mr. K to complete the artistic work in lieu of his father
Mr. C.
(ii) According to section 65 of the Indian Contract Act, 1872, when an agreement is discovered to
be void or when a contract becomes void, any person who has received any advantage
under such agreement or contract is bound to restore it, or to make compensation for it
to the person from whom he received it.
Hence, in the instant case, the agreement between Mr. Rich and Mr. C has become void because of
paralysis to Mr. C. So, Mr. Rich can ask Mr. K for refund of money paid in advance to his father, Mr.
C.
Q7. Mr. X and Mr. Y entered into a contract on 1st August, 2018, by which. Mr. X had to supply 50 tons
of sugar to Mr. Y at a certain price strictly within a period of 10 days of the contract. Mr. Y also
paid an amount of Rs. 50,000 towards advance as per the terms of the above contract. The mode of
transportation available between their places is roadway only. Severe flood came on 2nd August,
2018 and the only road connecting their places was damaged and could not be repaired within
fifteen days. Mr. X offered to supply sugar on 20th August, 2018 for which Mr. Y did not agree. On
1st September, 2018, Mr. X claimed compensation of Rs. 10,000 from Mr. Y for refusing to accept
the supply of sugar, which was not there within the purview of the contract. On the other hand,
Mr. Y claimed for refund of Rs. 50.000 which he had paid as advance in terms of the contract.
Analyze the above situation in terms of the provisions of the Indian Contract Act, 1872 and decide
on Y’s contention.

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Sol.
Provision
Subsequent or Supervening impossibility (Becomes impossible after entering into contract):
When performance of promise become impossible or illegal by occurrence of an
unexpected event or a change of circumstances beyond the contemplation of parties, the
contract becomes void e.g. change in law etc. Also, according to section 65 of the Indian
Contract
Act, 1872, when an agreement is discovered to be void or when a contract becomes void, any
person who has received any advantage under such agreement or contract is bound to
restore it, or to make compensation for it to the person from whom he received it.
Analysis and conclusion
In the given question, after Mr. X and Mr. Y have entered into the contract to supply 50 tons of
sugar, the event of flood occurred which made it impossible to deliver the sugar within
the stipulated time. Thus, the promise in question became void. Further, Mr. X has to pay
back the amount of Rs. 50,000 that he received from Mr. Y as an advance for the supply of
sugar within the stipulated time. Hence, the contention of Mr. Y is correct.
Q8. Mr. Sonumal a wealthy individual provided a loan of Rs. 80,000 to Mr. Datumal on 26.02.2019.
The borrower Mr. Datumal asked for a further loan of Rs. 1,50,000. Mr. Sonumal agreed but
provided the loan in parts at different dates. He provided Rs. 1,00,000 on 28.02.2019 and
remaining Rs. 50,000 on 03.03.2019. On 10.03.2019 Mr. Datumal while paying off part Rs.
75,000 to Mr. Sonumal insisted that the lender should adjusted Rs. 50,000 towards the loan
taken on·03.03.2019 and balance as against the loan on 26.02.2019. Mr. Sonumal objected to
this arrangement and asked the borrower to adjust in the order of date of borrower of funds.
Now you decide:
(i) Whether the contention of Mr. Datumal correct or otherwise as per the provisions of the
Indian Contract Act, 1872?
(ii) What would be the answer in case the borrower does not insist on such order of
adjustment of repayment?
(iii) What would the mode of adjustment/appropriation of such part payment in case neither
Mr. Sonumal nor Mr. Datumal insist any order of adjustment on their part?
Sol.
Provision
Appropriation of Payments: In case where a debtor owes several debts to the same creditor
and makes payment which is not sufficient to discharge all the debts, the payment shall be
appropriated (i.e. adjusted against the debts) as per the provisions of Section 59 to 61 of the
Indian Contract Act, 1872.
(i) Provision
As per the provisions of 59 of the Act, where a debtor owing several distinct debts to one
person, makes a payment to him either with express intimation or under circumstances
implying that the payment is to be applied to the discharge of some particular debt, the
payment, if accepted, must be applied accordingly.

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 Analysis and conclusion
Therefore, the contention of Mr. Datumal is correct and he can specify the manner of
appropriation of repayment of debt.
(ii) Provision
As per the provisions of 60 of the Act, where the debtor has omitted to intimate and there
are no other circumstances indicating to which debt the payment is to be applied, the
creditor may apply it at his discretion to any lawful debt actually due and payable to him
from the debtor, where its recovery is or is not barred by the law in force for the time
being as to the limitation of suits.
Aanlysis and conclusion
Hence in case where Mr. Datumal fails to specify the manner of appropriation of debt on
part repayment, Mr. Sonumal the creditor, can appropriate the payment as per his
choice.
(iii) Provision
As per the provisions of 61 of the Act, where neither party makes any appropriation, the
payment shall be applied in discharge of the debts in order of time, whether they are or
are not barred by the law in force for the time being as to the limitation of suits. If the debts
are of equal standing, the payments shall be applied in discharge of each
proportionately.
Aanlysis and conclusion
Hence in case where neither Mr. Datumal nor Mr. Sonumal specifies the manner of
appropriation of debt on part repayment, the appropriation can be made in proportion
of debts.
Q9. Mr. S and Mr. R made contract wherein Mr. S agreed to deliver paper cup manufacture machine
to Mr. R and to receive payment on delivery. On the delivery date, Mr. R didn’t pay the agreed
price. Decide whether Mr. S is bound to fulfil his promise at the time of delivery?
Sol.
Provision
As per Section 51 of the Indian Contract Act, 1872, when a contract consists of reciprocal
promises to be simultaneously performed, no promisor needs to perform his promise unless the
promisee is ready and willing to perform his reciprocal promise.
Such promises constitute concurrent conditions and the performance of one of the
promise is conditional on the performance of the other. If one of the promises is not
performed, the other too need not be performed.
Analysis and conclusion
Referring to the above provisions, in the given case, Mr. S is not bound to deliver goods to Mr.
R since payment was not made by him at the time of delivery of goods.
Q10. A received certain goods from B promising to pay Rs. 1,00,000. Later on, A expressed his
inability to make payment. C, who is known to A, pays Rs. 60,000 to B on behalf of However, A
was not aware of the payment. Now B is intending to sue A for the amount of Rs. 1,00,000.
Discuss whether the contention of B is right?

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Sol.
Provision
As per Section 41 of the Indian Contract Act, 1872, when a promisee accepts performance of
the promise from a third person, he cannot afterwards enforce it against the promisor. That
is, performance by a stranger, accepted by the promisee, produces the result of
discharging the promisor, although the latter has neither authorized nor ratified the
act of the third party.
Analysis and Conclusion
Therefore, in the present instance, B can sue only for the balance amount i.e. Rs. 40,000
and not for the whole amount.
Q11. Decide with reasons whether the following agreements are valid or void under the provisions
of the Indian Contract Act, 1872:
(i) Vijay agrees with Saini to sell his black horse for Rs. 3,00,000. Unknown to both the
Parties, the horse was dead at the time of the agreement.
(ii) Sarvesh sells the goodwill of his shop to Vikas for Rs. 10,00,000 and promises not to carry
on such business forever and anywhere in India.
(iii) Mr. X agrees to write a book with a publisher. After few days, X dies in an accident.
(i) As per Section 20 of the Indian Contract Act, 1872, an agreement under by
mistake of fact are void. In this case, there is mistake of fact as to the existence
of the subject- matter, i.e., with respect to the selling of horse which was dead at
the time of the agreement. It is unknown to both the parties. Therefore, it is a
void agreement.
(ii) As per Section 27 of the Indian Contract Act, 1872, an agreement in restraint of trade
is void. However, a buyer can put such a condition on the seller of goodwill, not to
carry on same business, provided that the conditions must be reasonable
regarding the duration and place of the business. Since in the given case,
restraint to carry on business was forever and anywhere in India, so the
agreement in question is void.
(iii) As per section 2(j) of the Contract Act, “A contract which ceases to be enforceable
by law becomes void when it ceases to be enforceable”. In the present case, Mr. X
agrees to write a book with a publisher. After few days, X dies in an accident. Here
the contract becomes void due to the impossibility of performance of the contract.

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Q12. “The basic rule is that the promisor must perform exactly what he has promised to perform.”
Explain stating the obligation of parties to contracts.
Sol. Obligations of parties to contracts (Section 37 of the Indian Contract Act, 1872) The parties to
a contract must either perform, or offer to perform, their respective promises unless such
performance is dispensed with or excused under the provisions of the Contract Act or of any
other law.
Promises bind the representatives of the promisor in case of death of such promisor before
performance, unless a contrary intention appears from the contract.
Example 1: A promises to deliver goods to B on a certain day on payment of Rs. 1,00,000. A
dies before that day. A’s representatives are bound to deliver the goods to B, and B is bound
to pay Rs. 1,00,000 to A’s representatives.
Example 2 A promises to paint a picture for B by a certain day, at a certain price. A dies
before the day. The contract cannot be enforced either by A’s representatives or by B because
it involves use of personal skill.

Analysis of Section 37
A contract being an agreement enforceable by law, creates a legal obligation, which subsists
until discharged. Performance of the promise or promises remaining to be performed is
the principal and most usual mode of discharge.
The basic rule is that the promisor must perform exactly what he has promised to perform.
The obligation to perform is absolute.
Thus, it may be noted that it is necessary for a party who wants to enforce the promise made
to him, to perform his promise for himself or offer to perform his promise. Only after that he
can ask the other party to carry out his promise.
This is the principle which is enshrined in Section 37. Thus, it is the primary duty of each
party to a contract to either perform or offer to perform his promise. He is absolved from
such a responsibility only when under a provision of law or an act of the other party to
the contract, the performance can be dispensed with or excused.
Thus, from above it can be drawn that performance may be actual or offer to perform.
Q13. What will be rights with the promisor in following cases? Explain with reasons:
(a) Mr. X promised to bring back Mr. Y to life again.
(b) A agreed to sell 50 kgs of apple to B. The loaded truck left for delivery on 15 th
March but due to riots in between reached B on 19th March.
(c) An artist promised to paint on the fixed date for a fixed amount of remuneration but met
with an accident and lost his both hands.
(d) Abhishek entered into contract of import of toys from China. But due to disturbance in
the relation of both the countries, the imports from China were banned.
Sol.
(a) The contract is void because of its initial impossibility of performance.

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 (b) Time is essence of this contract. As by the time apples reached B, they were already
rotten. The contract is discharged due to destruction of subject matter of contract.
(c) Such contract is of personal nature and hence cannot be performed due to
occurrence of an event resulting in impossibility of performance of contract.
(d) Such contract is discharged without performance because of subsequent illegality
nature of the contract.
Q14. A enters into a contract with B that he (A) sells his house for Rs. 10,00,000 to B. Further they
both signed an agreement that if B uses the house for gambling purposes, then B shall pay A
Rs. 50,000 for it. B agreed to this, however after a year of sale, B started gambling business in
that house. Can A claim Rs. 50,000 from B? Discuss with reference to the provisions of Indian
Contract Act, 1872.
Sol.
Provision
According to Section 24 of the Indian Contract Act, 1872, in an agreement, where some part
of the object is legal and the other part is illegal, the question arises about the validity and
enforceability of such agreements. Where the legal and illegal part can be severed and
divided, and separated, lawful part of object is enforceable, and the unlawful part of
the object is void.
Analysis and conclusion
In the given case, A sells the house to B, is a valid transaction as the sale of house and
consideration paid for the same i.e. Rs.10,00,000 is valid and enforceable. However, the
agreement to pay Rs. 50,000 for gambling done in the house is illegal and thus void.
Hence, in the instant case, sale of house agreement is valid agreement and gambling
agreement is illegal and not enforceable by law.
Q15. Mr. Singhania entered into a contract with Mr. Sonu to sing in his hotel for six weeks on
every Saturday and Sunday. Mr. Singhania promised to pay Rs. 20,000 for every
performance. Mr. Sonu performed for two weeks but on third week his health condition
was very bad, so he did not come to sing. Mr. Singhania terminated the contract. State in
the light of provisions of the Indian Contract Act, 1872:-
(A) Can Mr. Singhania terminate the contract with Mr. Sonu?
(B) What would be your answer in case Mr. Sonu turns up in fourth week and Mr.
Singhania allows him to perform without saying anything?
(C) What would be your answer in case Mr. Sonu sends Mr. Mika on his place in third
week and Mr. Singhania allows him to perform without saying anything?
Sol.
Provision
According to Section 40 of the Indian Contract Act, 1872, if it appears from the nature of
the case that it was the intention of the parties to any contract that any promise
contained in it should be performed by the promisor himself, such promise must be
performed by the promisor. Section 41 provides that when a promisee accepts
performance of the promise from a third person, he cannot after wards enforce it
against the promisor.

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 Analysis and Conclusion
Therefore, in the instant case:
(a) As Mr. Sonu could not perform as per the contract, Mr. Singhania can repudiate the
contract.
(b) In the second situation, as Mr. Singhania allowed Mr. Sonu to perform in the fourth week
without saying anything, by conduct, Mr. Singhania had given his assent to continue
the contract. Mr. Singhania cannot terminate the contract however he can claim
damages from Mr. Sonu.
(c) In case Mr. Singhania allows Mr. Mika to perform in the third week without saying
anything, by conduct, Mr. Singhania had given his assent for performance by third party.
Now Mr. Singhania cannot terminate the contract nor can claim any damages from
Mr. Sonu.
Q16. Ajay, Vijay and Sanjay are partners of software business and jointly promises to pay Rs. 6,00,
000 to Kartik. Over a period of time Vijay became insolvent, but his assets are sufficient to
pay one-fourth of his debts. Sanjay is compelled to pay the whole. Decide whether Sanjay is
required to pay whole amount himself to Kartik in discharging joint promise under the Indian
Contract Act, 1872.
Sol.
Provision
As per section 43 of the Indian Contract Act, 1872, when two or more persons make a joint
promise, the promisee may, in the absence of express agreement to the contrary, compel any
one or more of such joint promisors to perform the whole of the promise.
Each of two or more joint promisors may compel every other joint promisor to contribute
equally with himself to the performance of the promise, unless a contrary intention appears
from the contract.
If any one of two or more joint promisors makes default in such contribution, the remaining
joint promisors must bear the loss arising from such default in equal shares.
Analysis and conclusion
Therefore, in the instant case, Sanjay is entitled to receive Rs. 50,000 from Vijay’s assets and
Rs. 2,75,000 from Ajay.
Q17. X, Y and Z jointly borrowed Rs. 50,000 from A. The whole amount was repaid to A by Y.
Decide in the light of the Indian Contract Act, 1872 whether:
(i) Y can recover the contribution from X and Z,
(ii) Legal representatives of X are liable in case of death of X,
(iii) Y can recover the contribution from the assets, in case Z becomes insolvent.
Sol.
Provision
Section 42 of the Indian Contract Act, 1872 requires that when two or more persons have
made a joint promise, then, unless a contrary intention appears from the contract, all such
persons jointly must fulfill the promise. In the event of the death of any of them, his
representative jointly with the survivors and in case of the death of all promisors, the
representatives of all jointly must fulfill the promise.

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 Section 43 allows the promise to seek performance from any of the joint promisors. The liability
of the joint promisors has thus been made not only joint but “joint and several”. Section 43
provides that in the absence of express agreement to the contrary, the promise may compel
any one or more of the joint promisors to perform the whole of the promise.
Section 43 deals with the contribution among joint promisors. The promisors, may compel
every joint promisor to contribute equally to the performance of the promise (unless a contrary
intention appears from the contract). If any one of the joint promisors makes default in such
contribution the remaining joint promisors must bear the loss arising from such default in equal
shares.
Analysis and conclusion
As per the provisions of above sections,
(i) Y can recover the contribution from X and Z because X,Y and Z are joint promisors.
(ii) Legal representative of X are liable to pay the contribution to Y. However, a legal
representative is liable only to the extent of property of the deceased received by
him.
(iii) Y also can recover the contribution from Z’s assets.
Q18. State the grounds upon which a contract may be discharged under the provisions of the Indian
Contract Act, 1872.
Sol. Discharge of a Contract:
A contract may be discharged in any one of the following ways:
(i) Discharge by performance: It takes place when the parties to the contract fulfil their
obligations arising under the contract within the time and in the manner prescribed.
Discharge by performance may be
(1) Actual performance; or
(2) Attempted performance.
Actual performance is said to have taken place, when each of the parties has done what
he had agreed to do under the agreement.
When the promisor offers to perform his obligation, but the promisee refuses to accept
the performance, it amounts to attempted performance or tender.
Example: A contracts to sell his car to B on the agreed price. As soon as the car is delivered to
B and B pays the agreed price for it, the contract comes to an end by performance.
Example: A contracted to supply certain quantity of timber to B. B made the supply of timber
at appointed time and place but A refused to accept the delivery. This is called as attempted
performance
(ii) Discharge by mutual agreement: Section 62 of the Indian Contract Act provides if the
parties to a contract agree to substitute a new contract for it, or to rescind or remit
or alter it, the original contract need not be performed.
The principles of Novation, Rescission, Alteration and Remission are already discussed.
Example: A owes B Rs. 1,00,000. A enters into an agreement with B and mortgage his
(A’s), estates for Rs. 50,000 in place of the debt of Rs. 1,00,000. This is a new contract
and extinguishes the old.

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 Example: A owes B Rs. 5,00,000. A pays to B Rs. 3,00,000 who accepts it in full satisfaction of
the debt. The whole is discharged.
(iii) Discharge by impossibility of performance: The impossibility may exist from the very
start. In that case, it would be impossibility ab initio/Initial impossibility.
Alternatively, it may supervene.
Supervening impossibility/Post Contractual impossibility may take place owing to:
(1) an unforeseen change in law;
(2) the destruction of the subject-matter essential to that performance;
(3) the non-existence or non-occurrence of particular state of things, which was
naturally contemplated for performing the contract, as a result of some personal
incapacity like dangerous malady;
(4) the declaration of a war (Section 56).

Example : A agrees with B to discover a treasure by magic. The agreement is void due to initial
impossibility.
Example : A and B contract to marry each other. Before the time fixed for the marriage, A goes
mad. The contract becomes void.
Example : A contracts to act at a theatre for six months in consideration of a sum
paid in advance by B. On several occasions A is too ill to act. The contract to act on
those occasions becomes void.
Example: X agrees to sell his horse to Y for Rs. 5,000 but the horse died in an accident. Here, it
become impossible to perform the contract due to destruction of the subject. Thus, a valid
contract changes into void contract because of impossibility of performance
(iv) Discharge by lapse of time: A contract should be performed within a specified period
as prescribed by the Limitation Act, 1963. If it is not performed and if no action is taken
by the promisee within the specified period of limitation, he is deprived of remedy at
law.
Example : If a creditor does not file a suit against the buyer for recovery of the price within
three years, the debt becomes time-barred and hence irrecoverable.
(v) Discharge by operation of law: A contract may be discharged by operation of law
which includes by death of the promisor, by insolvency etc.
(vi) Discharge by breach of contract: Breach of contract may be actual breach of contract or
anticipatory breach of contract. If one party defaults in performing his part of the contract
on the due date, he is said to have committed breach thereof.
When on the other hand, a person repudiates a contract before the stipulated time for its
performance has arrived, he is deemed to have committed anticipatory breach. If one of
the parties to a contract breaks the promise the party injured thereby, has not only a
right of action for damages but he is also discharged from performing his part of the
contract.

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 Example : A contracted with B to supply 100 kgs of rice on 1st June. But A failed to deliver
the same on said date. This is actual breach of contract. If time is not essential essence of
contract B can give him another date for supply of goods and he will not be liable to claim
for any damages if prior notice for the same is not given to A while giving another date.
(vii) Promisee may waive or remit performance of promise: Every promisee may dispense
with or remit, wholly or in part, the performance of the promise made to him, or may
extend the time for such performance or may accept instead of it any satisfaction which he
thinks fit.

In other words, a contract may be discharged by remission. (Section 63)

Example : A owes B Rs. 5,00,000. C pays to B Rs.1,00,000 and B accepts them, in satisfaction of
his claim on A. This payment is a discharge of the whole claim.
(viii) Effects of neglect of promisee to afford promisor reasonable facilities for
performance: If any promisee neglects or refuses to afford the promisor
reasonable facilities for the performance of his promise, the promisor is excused by
such neglect or refusal as to any non-performance caused thereby. (Section 67)
(ix) Merger of rights: Sometimes, the inferior rights and the superior rights coincide and
meet in one and the same person.
In such cases, the inferior rights merge into the superior rights. On merger, the inferior
rights vanish and are not required to be enforced.
A took a land on lease from B. Subsequently, A purchases that very land. Now, A becomes
the owner of the land and the ownership rights being superior to rights of a lessee, the
earlier contract of lease stands terminated.
Example: A took a land on lease from B. Subsequently, A purchases that very land. Now,
A becomes the owner of the land and the ownership rights being superior to rights of a
lessee, the earlier contract of lease stands terminated.
Q19. Mr. Murari owes payment of 3 bills to Mr. Girdhari as on 31st March, 2020. (i) Rs. 12,120
which was due in May 2016. (ii) Rs. 5,650 which was due in August 2018
(iii) Rs. 9,680 which was due in May 2019. Mr. Murari made payment on 1st April 2020 as
below without any notice of how to appropriate them:
(i) A cheque of Rs. 9,680
(ii) A cheque of Rs. 15,000
Advice under the provisions of the Indian Contract Act, 1872.
Sol.
Provision
If the performance consists of payment of money and there are several debts to be paid, the
payment shall be appropriated as per provisions of Sections 59, 60 and 61 of the Indian
Contract Act, 1872.
(a) The debtor has, at the time of payment, the right of appropriating the payment.
(b) In default of debtor, the creditor has option of election and
(c) in default of either the law will allow appropriation of debts in order of time.

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 Analysis and Conclusion
In the present case, Mr. Murari had made two payments by way of two cheques. One cheque
was exactly the amount of the bill drawn. It would be understood even though not specifically
appropriated by Mr. Murari that it will be against the bill of exact amount. Hence cheque of Rs.
9,680 will be appropriated against the bill of Rs. 9,680 which was due in May 2019.
Cheque of Rs. 15000 can be appropriated against any lawful debt which is due even though the
same is time-barred.
Hence, Mr. Girdhari can appropriate the same against the debt of Rs. 12,120 which was
due in 2016 and balance against Rs. 5650 which was due in August 2018.
Q20. Enumerate the persons by whom a contract may be performed under the provisions of the
Indian Contract Act, 1872.
Sol. As per section 40 of the Indian Contract Act, 1872, the promise under a contract may be
performed, as the circumstances may permit, by the promisor himself, or by his agent or his
legal representative.
(i) Promisor himself: If there is something in the contract to show that it was the intention of
the parties that the promise should be performed by the promisor himself, such promise
must be performed by the promisor.
This means contracts which involve the exercise of personal skill or diligence, or which are
founded on personal confidence between the parties must be performed by the promisor
himself.
(ii) Agent: Where personal consideration is not the foundation of a contract, the promisor or
his representative may employ a competent person to perform it.
(iii) Legal Representatives: A contract which involves the use of personal skill or is founded
on personal consideration comes to an end on the death of the promisor. As regards any
other contract the legal representatives of the deceased promisor are bound to perform it
unless a contrary intention appears from the contract. But their liability under a contract is
limited to the value of the property they inherit from the deceased.
(iv) Third persons: As per Section 41 of the Indian Contract Act, 1872, when a promisee
accepts performance of the promise from a third person, he cannot afterwards enforce it
against the promisor.
That is, performance by a stranger, accepted by the promisee, produces the result of
discharging the promisor, although the latter has neither authorized nor ratified the act of
the third party.
(v) Joint promisors: When two or more persons have made a joint promise, then unless a
contrary intention appears by the contract, all such persons must jointly fulfill the promise.
If any of them dies, his legal representatives must, jointly with the surviving promisors,
fulfill the promise. If all of them die, the legal representatives of all of them must fulfill the
promise jointly.

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Q21. Mr. JHUTH entered into an agreement with Mr. SUCH to purchase his (Mr. SUCH’s) motor car
for Rs. 5,00,000/- within a period of three months. A security amount of Rs. 20,000/- was also
paid by Mr. JHUTH to Mr. SUCH in terms of the agreement.
After completion of three months of entering into the agreement, Mr. SUCH tried to contract Mr.
JHUTH to purchase the car in terms of the agreement. Even after lapse of another three-month
period, Mr. JHUTH neither responded to Mr. SUCH, nor to his phone calls. After lapse of another
period of six months. Mr. JHUTH contracted Mr. SUCH and denied to purchase the motor car. He
also demanded back the security amount of Rs. 20,000/- from Mr. SUCH. Referring to the
provisions of the Indian Contract Act, 1872, state whether Mr. SUCH is required to refund the
security amount to Mr. JHUTH.
Also examine the validity of the claim made by Mr. JHUTH, if the motor car would have
destroyed by an accident within the three month’s agreement period.
Sol.
Provision
In terms of the provisions of Section 65 of the Indian Contract Act, 1872, when an agreement
is discovered to be void or when a contract becomes void, any person who has received
any advantage under such agreement or contract is bound to restore it, or to make
compensation for it to the person from whom he received it.

Analysis and Conclusion

The contract is not a void contract. Mr. SUCH is not responsible for Mr. JHUTH’s negligence.
Therefore, Mr. SUCH can rescind the contract and retain the security amount since the
security is not a benefit received under the contract, it is a security that the purchaser
would fulfill his contract and is ancillary to the contract for the sale of the Motor Car.

Regarding the second situation given in the question, the agreement becomes void due to the
destruction of the Motor car, which is the subject matter of the agreement here.
Therefore, the security amount received by Mr. SUCH is required to be refunded back to
Mr. JHUTH.

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 THE INDIAN CONTRACT ACT, 1872

UNIT-5

Q1. “An anticipatory breach of contract is a breach of contract occurring before the time fixed for
performance has arrived”. Discuss stating also the effect of anticipatory breach on contracts.
Sol. An anticipatory breach of contract is a breach of contract occurring before the time fixed for
performance has arrived. When the promisor refuses altogether to perform his promise
and signifies his unwillingness even before the time for performance has arrived, it is
called Anticipatory Breach.
The law in this regard has very well summed up in Frost v. Knight and Hochster v.
DelaTour:
Section 39 of the Indian Contract Act deals with anticipatory breach of contract and provides as
follows: “When a party to a contract has refused to perform or disable himself from performing,
his promise in its entirety, the promisee may put an end to the contract, unless he has signified,
but words or conduct, his acquiescence in its continuance.”
Effect of anticipatory breach: The promisee is excused from performance or from further
performance. Further he gets an option:
 To either treat the contract as “rescinded and sue the other party for damages from
breach of contract immediately without waiting until the due date of performance; or
 He may elect not to rescind but to treat the contract as still operative, and wait for the
time of performance and then hold the other party responsible for the consequences of
non- performance.
But in this case, he will keep the contract alive for the benefit of the other party as well as
his own, and the guilty party, if he so decides on re-consideration, may still perform his
part of the, contract and can also take advantage of any supervening impossibility
which may have the effect of discharging the contract.
Q2. “Liquidated damage is a genuine pre-estimate of compensation of damages for certain
anticipated breach of contract whereas Penalty on the other hand is an extravagant amount
stipulated and is clearly unconscionable and has no comparison to the loss suffered by the
parties”. Explain.
Sol. Liquidated damage is a genuine pre-estimate of compensation of damages for certain
anticipated breach of contract. This estimate is agreed to between parties to avoid at a later date
detailed calculation and the necessity to convince outside parties.
Penalty on the other hand is an extravagant amount stipulated and is clearly
unconscionable and has no comparison to the loss suffered by the parties.
In terms of Section 74 of the Act “where a contract has been broken, if a sum is named in the
contract as the amount to be paid in case of such breach, or if the contract contains any
other stipulation by way of penalty, the party complaining of the breach is entitled,
whether or not actual damages or loss is proved to have been caused thereby, to receive
from the other party who has broken the contract, a reasonable

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 compensation not exceeding the amount so named, or as the case may be the penalty
stipulated for.
A stipulation for increased interest from the date of default may be a stipulation by way of
penalty.
In terms of Section 74, courts are empowered to reduce the sum payable on breach whether it
is ‘penalty’ or “liquidated damages” provided the sum appears to be unreasonably high.
Sri ChunniLal vs. Mehta & Sons Ltd (Supreme Court)
Supreme Court laid down the ratio that the aggrieved party should not be allowed to
claim a sum greater than what is specific in the written agreement. But even then, the
court has powers to reduce the amount if it considers it reasonable to reduce.
Q3. ‘X’ entered into a contract with ‘Y’ to supply him 1,000 water bottles @ Rs. 5.00 per water
bottle, to be delivered at a specified time. Thereafter, ‘X’ contracts with ‘Z’ for the purchase of
1,000 water bottles @ Rs. 4.50 per water bottle, and at the same time told ‘Z’ that he did so for
the purpose of performing his contract entered into with ‘Y’. ‘Z’ failed to perform his contract in
due course and market price of each water bottle on that day was Rs. 5.25 per water bottle.
Consequently, ‘X’ could not procure any water bottle and ‘Y’ rescinded the contract. Calculate
the amount of damages which ‘X’ could claim from ‘Z’ in the circumstances? What would be
your answer if ‘Z’ had not informed about the ‘Y’s contract? Explain with reference to the
provisions of the Indian Contract Act, 1872.
Sol.
Provision
The problem asked in this question is based on the provisions of Section 73 of the Indian
Contract Act, 1872.
Breach of Contract-Damages: Section 73 of the Indian Contract Act, 1872 lays down that when
a contract has been broken, the party who suffers by such breach is entitled to receive
from the party who has broken the contract compensation for any loss or damage caused
to him thereby which naturally arose in the usual course of things from such breach or
which the parties knew when they made the contract to be likely to result from the
breach of it.

The leading case on this point is “Hadley v. Baxendale” in which it was decided by the Court that
the special circumstances under which the contract was actually made were
communicated by the plaintiff to the defendant, and thus known to both the parties to the
contract, the damages resulting from the breach of such contract which they would reasonably
contemplate, would be the amount of injury which would ordinarily follow from the
breach of contract under these special circumstances so known and communicated.

Analysis and conclusion

In the instant case ‘X’ had intimated to ‘Z’ that he was purchasing water bottles from him
for the purpose of performing his contract with ‘Y’. Thus, ‘Z’ had the knowledge of the specal
circumstances. Therefore, ‘X’ is entitled to claim from ‘Z’ Rs. 500/- at the rate of 0.50 paise i.e.
1000 water bottles x 0.50 paise (difference between the procuring price of water bottles and

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 contracted selling price to ‘Y’) being the amount of profit ‘X’ would have made by the
performance of his contract with ‘Y’.
If ‘X’ had not informed ‘Z’ of ‘Y’s contract, then the amount of damages would have been
the difference between the contract price and the market price on the day of default. In
other words, the amount of damages would be Rs. 750/- (i.e. 1000 water bottles x 0.75
paise).
Q4. M Ltd., contract with Shanti Traders to make and deliver certain machinery to them by
30.6.2017 for Rs. 11.50 lakhs. Due to labour strike, M Ltd. could not manufacture and deliver the
machinery to Shanti Traders. Later, Shanti Traders procured the machinery from another
manufacturer for Rs. 12.75 lakhs. Due to this Shanti Traders was also prevented from
performing a contract which it had made with Zenith Traders at the time of their contract with
M Ltd. and were compelled to pay compensation for breach of contract. Advise Shanti Traders
the amount of compensation which it can claim from M Ltd., referring to the legal provisions of
the Indian Contract Act, 1872.
Sol.
Provision
Section 73 of the Indian Contract Act, 1872 provides for consequences of breach of contract.
According to it, when a contract has been broken, the party who suffers by such breach is
entitled to receive from the party who has broken the contract, compensation for any loss
or damage caused to him thereby which naturally arose in the usual course of things from
such breach or which the parties knew when they made the contract, to be likely to result from
the breach of it. Such compensation is not given for any remote and indirect loss or damage
sustained by reason of the breach. It is further provided in the explanation to the section that in
estimating the loss or damage from a breach of contract, the means which existed of remedying
the inconvenience caused by the non- performance of the contract must be taken into account.
Analysis and conclusion
Applying the above principle of law to the given case, M Ltd. is obliged to compensate for
the loss of Rs. 1.25 lakh (i.e. Rs. 12.75 minus Rs. 11.50 = Rs. 1.25 lakh) which had naturally
arisen due to default in performing the contract by the specified date.
Regarding the amount of compensation which Shanti Traders were compelled to make to Zenith
Traders, it depends upon the fact whether M Ltd., knew about the contract of Shanti
Traders for supply of the contracted machinery to Zenith Traders on the specified date. If
so, M Ltd is also obliged to reimburse the compensation which Shanti Traders had to pay
to Zenith Traders for breach of contract. Otherwise M Ltd is not liable.
Q5. A & B entered into a contract to supply unique item, alternate of which is not available in the
market. A refused to supply the agreed unique item to B. What directions could be given by the
court for breach of such contract.
Sol.
Provision
Where there is a breach of contract for supply of a unique item, mere monetary damages
may not be an adequate remedy for the other party. In such a case, the court may give
order for specific performance and direct the party in breach to carry out his promise
according to the terms of contract.

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 Analysis and conclusion
Here, in this case, the court may direct A to supply the item to B because the refusal to
supply the agreed unique item cannot be compensated through money.
Q6. Seema was running a boutique in New Delhi. She has to deliver some cloth to her friend Kiran
who was putting up an exhibition at Mumbai. Seema delivered the sewing machine and some
cloth to a railway company to be delivered at a place where the exhibition was to be held.
Seema expected to earn an exceptional profit from the sales made at this exhibition however
she did not bring this fact to the notice of the railway’s authorities. The goods were delivered
at the place after the conclusion of the exhibition. On account of such breach of contract by
railways authorities, can Seema recover the loss of profits under the Indian Contract Act,
1872?
Sol.
Provision
As per Section 73 to 75 of Indian Contract Act, 1872, Damage means a sum of money
claimed or awarded in compensation for a loss or an injury. Whenever a party commits
a breach, the aggrieved party can claim the compensation for the loss so suffered by
him. General damages are those which arise naturally in the usual course of things
from the breach itself. (Hadley Vs Baxendale). Therefore, when breach is committed by
a party, the defendant shall be held liable for all such losses that naturally arise in the
usual course of business. Such damages are called ordinary damages . However, special
damages are those which arise in unusual circumstances affecting the aggrieved party and
such damages are recoverable only when the special circumstances were brought to the
knowledge of the defendant. If no special notice is given, then the aggrieved party can only
claim the ordinary damages.

Analysis and conclusion

In the given case, Seema was to earn an exceptional profit out of the sales made at the
exhibition, however she never informed about it to the railway authorities. Since the
goods were delivered after the conclusion of the exhibition, therefore Seema can recover
only the losses arising in the ordinary course of business. Since no notice about special
circumstances was given to railways authorities, she could not recover the loss of
profits.
Q7. What is the law relating to determination of compensation, on breach of contract, contained in
section 73 of the Indian Contract Act, 1872?
Sol. Compensation on Breach of Contract: Section 73 of the Indian Contract Act, 1872 provides that
when a contract has been broken, the party who suffers by such breach is entitled to receive
from the party who has broken the contract, compensation for any loss or damage caused to
him thereby which naturally arose in the usual course of things from such breach or
which the parties knew when they made the contract, to be likely to result from the breach of it.
Such compensation is not given for any remote and indirect loss or damage sustained by
reason of the breach.

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 The explanation to the section further provides that in estimating the loss or damage from a
breach of contract, the means which existed of remedying the inconvenience caused by the
non- performance of the contract must be taken into account.
Q8. Mr. X was a Disk Jockey at a five star hotel bar. As per the contract, he is supposed to perform
every weekend (i.e. twice a week). Mr. X will be paid Rs. 1500 per day. However, after a month,
Mr. X willfully absents himself from the performance.
(i) Does the hotel have the right to end the contract?
(ii) If the hotel sends out a mail to X that they are interested to continue the contract and X
accepts, can the hotel rescind the contract after a month on this ground subsequently?
(iii) In which of the cases – (termination of contract or continuance of contract) can the hotel
claim damages that it has suffered as a result of this breach?
Sol.
Provision
By analyzing Section 39 of the Indian Contract Act 1872, it is understood that when a party to a
contract has refused to perform or disabled himself from performing his promise
entirely, the following two rights accrue to the aggrieved party (promisee)
(a) To terminate the contract
(b) To indicate by words or by conduct that he is interested in its continuance.
In either of the two cases, the promisee would be able to claim damages that he suffers.
Analysis and Conclusion
In the given case,
(i) Yes, the hotel has the right to end the contract with Mr. X, the DJ.
(ii) The hotel has the right to continue the contract with X. But once this right is exercised, they
cannot subsequently rescind the contract on this ground subsequently.
(iii) In both the cases, the hotel (promisee) is entitled to claim damages that has been suffered
as a result of breach.
Q9. Mr. Murti was travelling to Manali with his wife by bus of Himalya Travels Pvt. Ltd. Due to
some technical default in the bus, the driver has to stop the bus in a mid way in cold night.
Driver advised the passenger to get the shelter in nearest hotel which was at a distance of
only one kilometre from that place. The wife of Mr. Murti caught
cold and fell ill due to being asked to get down and she had to walk in cold night to
reach hotel. Mr. Murti filed the suit against Himalya Travels Pvt. Ltd. for damages for the
personal inconvenience, hotel charges and medical treatment for his wife. Explain, whether
Mr. Murti would get compensation for which he filed the suit?
Sol.
Provision
Section 73 of Indian Contract Act, 1872 provides that when a contract has been broken, the
party who suffers by such breach is entitled to receive, from the party who has broken the
contract, compensation for any loss or damage caused to him thereby, which naturally
arose in the usual course of things from such breach, or which the parties knew, when
they made the contract, to be likely to result from the breach of it. But such compensation is
not to be given for any remote and indirect loss or damage sustained by reason of the
breach.

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Analysis and conclusion
In the instant case, Mr. Murti filed the suit against Himalya Travels Pvt. Ltd. for damages for
the personal inconvenience, hotel charges and medical treatment for his wife.
On the basis of above provisions and facts of the case, it can be said that Mr. Murti can claim
damages for the personal inconvenience and hotel charges but not for medical
treatment for his wife because it is a remote or indirect loss.

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 THE INDIAN CONTRACT ACT, 1872

UNIT-6

Q1. Explain the-term ‘Quasi Contracts’ and state their characteristics.

Or
What is meant by ‘Quasi -Contract’? State any three salient features of a quasi-contract as per the
Indian Contract Act, 1872.
Sol.
(a) Meaning of ‘Quasi Contract’: Under certain special circumstances obligation resembling
those created by a contract is imposed by law although the parties have never
entered into a contract. Such obligations imposed by law are referred to as ‘Quasi
Contracts’.
Such a contract resembles with a contract so far as result or effect is concerned but it has
little or no affinity with a contract in respect of mode of creation.
These contracts are based on the doctrine that a person shall not be allowed to enrich
himself unjustly at the expense of another.
The salient features of Quasi-contract:
1. It does not arise from any agreement of the parties concerned but it is imposed by law.
2. The right under it is always a right to money and generally though not always to a
liquidated sum of money.
3. It is a right which is available not against all the world, but against a particular person
or persons only, so that in this respect it resembles a contractual right.
4. It is a duty and not promise is the basis of such contract.
5. A suit for its breach may be filed in the same way as in case of a complete contract.
Q2. X, a minor was studying in M.Com. in a college. On 1st July, 2019 he took a loan of ` 1,00,000 from
B for payment of his college fees and to purchase books and agreed to repay by 31st December,
2019. X possesses assets worth ` 9 lakhs. On due date, X fails to pay back the loan to B. B now
wants to recover the loan from X out of his (X’s) assets. Referring to the provisions of Indian
Contract Act, 1872 decide whether B would succeed.
Sol.
Provision
According to section 68 of Indian Contract Act, 1872, if a person, incapable of entering into a
contract, or any one whom he is legally bound to support, is supplied by another person
with necessaries suited to his condition in life, the person who has furnished such
supplies is entitled to be reimbursed from the property of such incapable person.
Analysis and conclusion
Since the loan given to X is for the necessaries suited to the conditions in life of the minor,
his assets can be sued to reimburse B. Yes, B can proceed against the assets of X.
Q3. P left his carriage on D’s premises. Landlord of D seized the carriage against the rent due from D.
P paid the rent and got his carriage released. Can P recover the amount from D?

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Sol.
Provision
Section 69 states a person who is interested in the payment of money which another person
is bound by law to pay, and who therefore pays it, is entitled to get it reimbursed by the other.
Analysis and Conclusion
In the present case, D was lawfully bound to pay rent. P was interested in making the
payment to D’s landlord as his carriage was seized by him. Hence being an interested
party P made the payment and can recover the same from D.
Q4. Explain the term Contingent Contract with reference to the Indian Contract Act, 1872 with the
help of an example. Also discuss the rules relating to enforcement of a contingent contract.
Sol.
Or
Explain the meaning of ‘Contingent Contracts’ and state the rules relating to such contracts.
(a) Definition of ‘Contingent Contract’ (Section 31 of the Indian Contract Act, 1872): A
contract to do or not to do something, if some event, collateral to such contract,
does or does not happen.
Example: A contracts to pay B Rs. 1,00,000 if B’s house is burnt. This is a contingent contract.
Rules Relating to Enforcement: The rules relating to enforcement of a contingent contract
are laid down in sections 32, 33, 34, 35 and 36 of the Act.
(a) Enforcement of contracts contingent on an event happening: Where a contract
identifies happening of a future contingent event, the contract cannot be enforced
until and unless the event ‘happens’. If the happening of the event becomes
impossible, then the contingent contract is void.
(b) Enforcement of contracts contingent on an event not happening: Where a
contingent contract is made contingent on non-happening of an event, it can be enforced
only when its happening becomes impossible.
(c) A contract would cease to be enforceable if it is contingent upon the conduct of
a living person when that living person does something to make the ‘event’ or
‘conduct’ as impossible of happening.
(d) Contingent on happening of specified event within the fixed time: Section 35 says
that Contingent contracts to do or not to do anything, if a specified uncertain event
happens within a fixed time, becomes void if, at the expiration of time fixed, such event
has not happened, or if, before the time fixed, such event becomes impossible.
(e) Contingent on specified event not happening within fixed time: Section 35 also says
that - “Contingent contracts to do or not to do anything, if a specified uncertain event
does not happen within a fixed time, may be enforced by law when the time fixed
has expired, and such event has not happened or before the time fixed has expired, if it
becomes certain that such event will not happen”.
(f) Contingent on an impossible event (Section 36): Contingent agreements to do or
not to do anything, if an impossible event happens are void, whether the
impossibility of the event is known or not to the parties to the agreement at the time
when it is made.

2|Page
 Q5. What is Contingent Contract? Discuss the essentials of Contingent Contract as per the Indian
Contract Act, 1872
Sol.
(a) According to section 31 of the Indian Contract Act, 1872, contingent contract means a
contract to do or not to do something, if some event, collateral to such contract, does or
does not happen.
Example: Contracts of Insurance, indemnity and guarantee.
Essentials of a contingent contract
(a) The performance of a contingent contract would depend upon the happening or
non-happening of some event or condition. The condition may be precedent or
subsequent.
(b) The event referred to, is collateral to the contract. The event is not part of the
contract. The event should be neither performance promised nor a consideration for a
promise.
(c) The contingent event should not be a mere ‘will’ of the promisor. The event should
be contingent in addition to being the will of the promisor.
(d) The event must be uncertain. Where the event is certain or bound to happen, the
contract is due to be performed, then it is a not contingent contract.
Q6. X found a wallet in a restaurant. He enquired of all the customers present there but the true
owner could not be found. He handed over the same to the manager of the restaurant to keep
till the true owner is found. After a week he went back to the restaurant to enquire about the
wallet. The manager refused to return it back to X, saying that it did not belong to him.
In the light of the Indian Contract Act, 1872, can X recover it from the Manager?
Sol.
Provision
Responsibility of finder of goods (Section 71 of the Indian Contract Act, 1872): A
person who finds goods belonging to another and takes them into his custody is subject
to same responsibility as if he were a bailee.
Thus, a finder of lost goods has:
(i) to take proper care of the property as man of ordinary prudence would take
(ii) no right to appropriate the goods and
(iii) to restore the goods if the owner is found.
Analysis and conclusion
In the light of the above provisions, the manager must return the wallet to X, since X is
entitled to retain the wallet found against everybody except the true owner.
Q7. What do you mean by Quantum Meruit and state the cases where the claim for Quantum Meruit
arises?
1. Quantum Meruit: Where one person has rendered service to another in circumstances
which indicate an understanding between them that it is to be paid for although no
particular remuneration has been fixed, the law will infer a promise to pay.
Quantum Meruit i.e. as much as the party doing the service has deserved. It covers a case
where the party injured by the breach had at time of breach done part but not all of the work

3|Page
 which he is bound to do under the contract and seeks to be compensated for the value of the
work done. For the application of this doctrine, two conditions must be fulfilling ed:
(1) It is only available if the original contract has been discharged.
(2) The claim must be brought by a party not in default.
The object of allowing a claim on quantum meruit is to recompensate the party or
person for value of work which he has done. Damages are compensatory in nature
while quantum meruit is restitutory. It is but reasonable compensation awarded on
implication of a contract to remunerate.
The claim for quantum meruit arises in the following cases:
(a) when an agreement is discovered to be void or when a contract becomes void.
(b) When something is done without any intention to do so gratuitously.
(c) Where there is an express or implied contract to render services but there is no
agreement as to remuneration.
(d) When one party abandons or refuses to perform the contract.
(e) Where a contract is divisible and the party not in default has enjoyed the benefit of
part performance.
(f) When an indivisible contract for a lump sum is completely performed but badly the
person who has performed the contract can claim the lump sum, but the other party
can make a deduction for bad work.
Q8. Explain the meaning of ‘Quasi-Contracts’. State the circumstances which are identified as
quasi contracts by the Indian Contract Act, 1872.
1. Quasi-Contracts: Even in the absence of a contract, certain social relationships give
rise to certain specific obligations to be performed by certain persons. These are
known as “quasi-contracts” as they create some obligations as in the case of regular
contracts. Quasi-contracts are based on the principles of equity, justice and good
conscience.
The salient features of quasi-contracts are:
(i) such a right is always a right to money and generally, though not always, to a
liquidated sum of money;
(ii) does not arise from any agreement between the parties concerned but the
obligation is imposed by law and;
(iii) the rights available are not against all the world but against a particular person or
persons only, so in this respect it resembles to a contractual right.
Circumstances Identified as Quasi-Contracts:
1. Claim for necessaries supplied to persons incapable of contracting: Any person
supplying necessaries of life to persons who are incapable of contracting is entitled
to claim the price from the other person’s property. Similarly, where money is paid to
such persons for purchase of necessaries, reimbursement can be claimed.
2. Payment by an interested person: A person who has paid a sum of money which
another person is obliged to pay, is entitled to be reimbursed by that other person
provided that the payment has been made by him to protect his own interest.

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 3. Obligation of person enjoying benefits of non-gratuitous act: Where a person
lawfully does anything for another person, or delivers anything to him not
intending to
do so gratuitously and such other person enjoys the benefit thereof, the latter is
bound to pay compensation to the former in respect of, or to restore, the thing so done or
delivered.
4. Responsibility of finder of goods: A person who finds goods belonging to another
person and takes them into his custody is subject to same responsibility as if he
were a bailee.
5. Liability for money paid or thing delivered by mistake or by coercion: A person to
whom money has been paid or anything delivered by mistake or under coercion,
must repay or return it.
In all the above cases contractual liability arises without any agreement between the
parties.
Q9. PQR, a hospital in Delhi, recruits Dr. A, on contract basis for a period of 3 months. The hospital
management promises to pay Dr. A, a lumpsum amount of Rs. 1,00,000 if Dr. A test positive
for noval corona virus (Covid 19) during the contract period of 3 months.
Identify the type of contract and highlight the rule of enforcement. Also, what will happen
if Dr. A does not contract Covid 19.
Sol.
Provision
Section 31 of the Indian Contract Act, 1872 provides that “A contract to do or not to do
something, if some event, collateral to such contract, does or does not happen” is a
Contingent Contract. Section 35 says that Contingent contracts to do or not to do
anything, if a specified uncertain event happens within a fixed time, becomes void if, at the
expiration of time fixed, such event has not happened, or if, before the time fixed, such
event becomes impossible.
Analaysis and conclusion
In the instant case, the contract between PQR hospital & Dr. A is a Contingent Contract
because the promisor, PQR hospital need to perform his obligation of paying Dr. A, the
lumpsum amount of Rs. 1,00,000, only if he contracts with Covid 19 within a span of 3
months.
In Case, if Dr. A does not contract Covid 19, then the contract stands void
automatically.

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 THE INDIAN CONTRACT ACT, 1872

UNIT - 7

Q1. S asks R to beat T and promises to indemnify R against the consequences. R beats T and is fined
50,000. Can R claim 50,000 from S.
Sol.
Provision
A contract of indemnity to be valid must fulfil all the essentials of a valid contract which includes:
(a) Offer and acceptance
(b) Intention to create legal obligation
(c) Consideration
(d) Competency to contract
(e) Free consent
(f) Lawful object
(g) The agreement must not be expressly declared to be void. Eg: Agreement in restraint of trade
(h) The terms of the agreement must not be vague or uncertain
(i) The agreement must be capable of performance- An agreement to do an impossible act is void.
(j) Legal formalities
Analysis and conclusion
R cannot claim ₹50,000 from S because the object of the agreement was unlawful.
Q2. State the rights of the indemnity-holder when sued?
Sol. According to the Section 125 of the Indian Contract Act,1872 the indemnity holder i.e., promisee in a
contract of indemnity, acting within the scope of his authority, is entitled to recover from the
promisor:
(i) all damages which he may be compelled to pay in any suit in respect of any matter to which the
promise to indemnify applies.
(ii) all costs which he may be compelled to pay in any such suit, if in bringing or defending it, he did
not contravene the orders of the promisor, and acted as it would have been prudent for him to
act in the absence of any contract of indemnity, or if the promisor authorised him to bring or
defend the suit.
(iii) all sums which he may have paid under the terms of any compromise of any such suit, if the
compromise was not contrary to the orders of the promisor and was one which it would have
been prudent for the promisee to make in the absence of any contract of indemnity, or if the
promisor authorised him to compromise the suit.
(iv) Section 125 is by no means exhaustive, which deals only with his rights in the event of his being
sued. The indemnity holder has other rights besides those mentioned above. If he has incurred a
liability and that liability is absolute, he is entitled to call upon his indemnifier to save him from
that liability and to pay it off.
Q3. Define ‘Contract of Indemnity’ as per the Indian Contract Act, 1872. What are the parties to a
contract of indemnity? Give an example to explain the contract of indemnity.

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 There are two parties in this form of contract. The party who promises to indemnify/ save
the other party from loss is known as ‘indemnifier, whereas the party who is promised to be
saved against the loss is known as ‘indemnified’ or indemnity holder.
Example: A may contract to indemnify B against the consequences of any proceedings which
C may take against B in respect of a sum of ₹5000/- advanced by C to B. In consequence,
when B who is called upon to pay the sum of money to C fails to do so, C would be able to
recover the amount from A as provided in Section 124.
Q4. Define contract of indemnity and contract of guarantee and state the conditions when
guarantee is considered invalid?
Sol. Section 124 of the Indian Contract Act, 1872 says that “A contract by which one party
promises to save the other from loss caused to him by the conduct of the promisor himself,
or the conduct of any person”, is called a “contract of indemnity”.
Section 126 of the Indian Contract Act says that “A contract to perform the promise made or
discharge liability incurred by a third person in case of his default.” is called as “contract of
guarantee”.
The conditions under which the guarantee is invalid or void are stated in section 142,143 and
144 of the Indian Contract Act are:
(i) Guarantee obtained by means of misrepresentation.
(ii) Creditor obtained any guarantee by means of keeping silence as to material
circumstances.
(iii) When contract of guarantee is entered into on the condition that the creditor shall not
act upon it until another person has joined in it as co-surety and that other party fails to
join as such.
Q5. Distinguish between a contract of Indemnity and a contract of Guarantee as per The Indian
Contract Act, 1872.
Sol.

1 Point of Contract of Indemnity Contract of Guarantee

distinction
Number of There are only two parties namely There are three parties creditor,
party/Parties to the indemnifier [promisor] and principal debtor and surety.
the contract the indemnified [promisee]
Nature of liability The liability of the indemnifier is The liability of the surety is
primary and unconditional. secondary and conditional as
the primary liability is that of
the principal debtor.
Time of liability The liability of the indemnifier The liability arises only on the
arises only on the happening of a non performance of an existing
contingency. promise or non- payment of
an existing debt.

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 Time to act The indemnifier need not act at The surety acts at the request
the Request of indemnity holder of principal debtor.
Right to sue third Indemnifier cannot sue a third Surety can proceed against
party party for loss in his own name as principal debtor in his own right
there is no privity of contract. Such because he gets all the right of
a right would arise only if there is a creditor after discharging the
an assignment in his favour. debts.
Purpose Reimbursement of loss For the security of the creditor

Q6. Paul (minor) purchased a smart phone on credit from a mobile dealer on the surety given by Mr.
Jack, (a major). Paul did not pay for the mobile. The mobile dealer demanded the payment from
Mr. Jack because the contract entered with Paul (minor) is void. Mr. Jack argued that he is not
liable to pay the amount since Paul (Principal Debtor) is not liable. Whether the argument is
correct under the Indian Contract Act, 1872? What will be your answer if Jack and Paul both are
minor?
Sol. In the case of a contract of guarantee, where a minor is a principal debtor, the contract is
still valid. In the given question, the contract is a valid contract and Jack (major) shall be liable
to pay the amount even if Paul (Principal debtor) is not liable (as Paul i s minor).
If both Jack and Paul are minors then the agreement of guarantee is void because the surety as
well as the principal debtor are incompetent to contract.
Q7. ‘Surendra’ guarantees ‘Virendra’ for the transactions to be done between ‘Virendra’ & ‘Jitendra’
during the month of March, 2021. ‘Virendra’ supplied goods of ₹30,000 on 01.03.2021 and of
₹20,000 on 03.03.2021 to ‘Jitendra’. On 05.03.2021, ‘Surendra’ died in a road accident. On
10.03.2021, being ignorant of the death of ‘Surendra’, ‘Virendra’ further supplied goods of
₹40,000. On default in payment by
‘Jitendra’ on due date, ‘Virendra’ sued on legal heirs of ‘Surendra’ for recovery of ₹90,000.
Describe, whether legal heirs of ‘Surendra’ are liable to pay ₹90,000 under provisions of Indian
Contract Act 1872. What would be your answer, if the estate of ‘Surendra’ is worth of ₹45,000
only?
Sol.
Provision
According to section 131 of Indian Contract Act 1872, in the absence of a contract to contrary,
a continuing guarantee is revoked by the death of the surety as to the future transactions.
The estate of deceased surety, however, liable for those transactions which had already
taken place during the lifetime of deceased. Surety’s estate will not be liable for the
transactions taken place after the death of surety even if the creditor had no knowledge of
surety’s death.
Analysis and conclusion
In this question, ‘Surendra’ was surety for the transactions to be done between ‘Virendra’
& ‘Jitendra’ during the month of March’ 2021. ‘Virendra’ supplied goods of ₹30,000, ₹20,000
and of ₹40,000 on 01.03.2021, 03.03.2021 and 10.03.02021 respectively. ‘Surendra’ died in a
road accident but this was not in the knowledge of ‘Virendra’. When ‘Jitendra’ defaulted in

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 payment, ‘Virendra’ filed suit against legal heirs of ‘Surendra’ for recovery of full amount i.e.
₹90,000.
On the basis of above, it can be said in case of death of surety (‘Surendra’), his legal heirs are
liable only for those transactions which were entered before 05.03.2021 i.e. for ₹50,000. They
are not liable for the transaction done on 10.03.2021 even though Virendra had no
knowledge of death of Surendra.
Further, if the worth of the estate of deceased is only ₹45,000, the legal heirs are liable for
this amount only.
Q8. Megha advances to Nisha ₹5,000 on the guarantee of Prem. The loan carries interest at ten
percent per annum. Subsequently, Nisha becomes financially embarrassed. On Nisha’s
request, Megha reduces the interest to six per cent per annum and does not sue Nisha for one
year after the loan becomes due. Nisha becomes insolvent. Can Megha sue Prem?
Decide your answer in reference to the provisions of the Contract Act, 1872.
Sol.
Provision
According to section 133 of the Indian Contract Act, 1872, where there is any variance in the
terms of contract between the principal debtor and creditor without surety’s consent, it
would discharge the surety in respect of all transactions taking place subsequent to such
variance.
Analysis and Conclusion
Here, in the given situation, Megha cannot sue Prem, because a surety is discharged from
liability when, without his consent, the creditor makes any change in the terms of his contract
with the principal debtor, no matter whether the variation is beneficial to the surety or does
not materially affect the position of the surety.
Q9. Mr. Shashank, is employed as a cashier on a monthly salary of ₹10,000 by XYZ bank for a period
of three years. Yash gave surety for Shashank’s good conduct. After nine months, the financial
position of the bank deteriorates. Then Shashank agrees to accept a lower salary of ₹5,000/- per
month from Bank. Two months later, it was found that Shashank has misappropriated cash
since the time of his appointment. What is the liability of Yash? Decide your answer in reference
to the provisions of the Contract Act, 1872.
Sol.
Provision
According to section 133 of the Indian Contract Act, 1872, where there is any variance in the
terms of contract between the principal debtor and creditor without surety’s consent, it would
discharge the surety in respect of all transactions taking place subsequent to such variance.
Thus, if the creditor makes any variance (i.e. change in terms) without the consent of the surety,
then surety is discharged as to the transactions subsequent to the change.
Analysis and Conclusion
In the instant case Yash is liable as a surety for the loss suffered by the bank due to
misappropriation of cash by Shashank during the first nine months but not for
misappropriations committed after the reduction in salary.

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Q10. A contracts with B for a fixed price to construct a house for B within a stipulated time. B would
supply the necessary material to be used in the construction. C guarantees A’s performance of
the contract. B does not supply the material as per the agreement. Is C discharged from his
liability?
Sol.
Provision
According to section 134 of the Indian Contract Act, 1872, 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.
Analysis and Conclusion
In the given case, B does not supply the necessary material as per the agreement. Hence, C is
discharged from his liability.
Q11. Mr. Chetan was appointed as Site Manager of ABC Constructions Company on a two years
contract at a monthly salary of ₹50,000. Mr. Pawan gave a surety in respect of Mr. Chetan’s
conduct. After six months the company was not in position to pay ₹50,000 to Mr. Chetan
because of financial constraints. Chetan agreed for a lower salary of ₹30,000 from the company.
This was not communicated to Mr. Pawan. Three months afterwards it was discovered that
Chetan had been doing fraud since the time of his appointment. What is the liability of Mr.
Pawan during the whole duration of Chetan’s Appointment?

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 Sol.
Provision
As per the provisions of Section 133 of the Indian Contract Act, 1872, if the creditor makes
any variance (i.e. change in terms) without the consent of the surety, then surety is
discharged as to the transactions subsequent to the change.

Analysis and conclusion

In the instant case, Mr. Pawan is liable as a surety for the loss suffered by ABC Constructions
company due to misappropriation of cash by Mr. Chetan during the first six months but not
for misappropriations committed after the reduction in salary.
Hence, Mr. Pawan, will be liable as a surety for the act of Mr. Chetan before the change in the
terms of the contract i.e., during the first six months. Variation in the terms of the contract (as
to the reduction of salary) without consent of Mr. Pawan, will discharge Mr. Pawan from all
the liabilities towards the act of the Mr. Chetan after such variation
Q12. Manoj guarantees for Ranjan, a retail textile merchant, for an amount of ₹1,00,000, for which
Sharma, the supplier may from time to time supply goods on credit basis to Ranjan during the
next 3 months.
After 1 month, Manoj revokes the guarantee, when Sharma had supplied goods on credit for
₹40,000. Referring to the provisions of the Indian Contract Act, 1872, decide whether Manoj
is discharged from all the liabilities to Sharma for any subsequent credit supply. What would
be your answer in case Ranjan makes default in paying back Sharma for the goods already
supplied on credit i.e. ₹40,000?
Sol.
Provision
Discharge of Surety by Revocation: As per section 130 of the Indian Contract Act, 1872 a
specific guarantee cannot be revoked by the surety if the liability has already accrued. A
continuing guarantee may, at any time, be revoked by the surety, as to future transactions,
by notice to the creditor, but the surety remains liable for transactions already entered into.
Analysis and conclusion
As per the above provisions, liability of Manoj is discharged with relation to all subsequent
credit supplies made by Sharma after revocation of guarantee, because it is a case of
continuing guarantee.
However, liability of Manoj for previous transactions (before revocation) i.e. for ₹40,000
remains. He is liable for payment of ₹40,000 to Sharma because the transaction was already
entered into before revocation of guarantee.
Q13. C, the holder of an over due bill of exchange drawn by A as surety for B, and accepted by B,
contracts with X to give time to B. Is A discharged from his liability?
Sol.
Provision
According to Section 136 of the Indian Contract Act, 1872, 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.

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 Analysis and conclusion
In the given question the contract to give time to the principal debtor is made by the creditor
with X who is a third person. X is not the principal debtor. Hence, A is not discharged.
Q14. ‘A’ gives to ‘M’ a continuing guarantee to the extent of ₹8,000 for the fruits to be supplied by ‘M’
to ‘S’ from time to time on credit. Afterwards ‘S’ became embarrassed and without the
knowledge of ‘A’, ‘M’ and ‘S’ contract that ‘M’ shall continue to supply ‘S’ with fruits for ready
money and that payments shall be applied to the then existing debts between ‘S’ and ‘M’.
Examining the provision of the Indian Contract Act, 1872, decide whether ‘A’ is liable on his
guarantee given to M.
Sol.
Provision
Discharge of surety by variance in terms of contract: The problem asked in the question is
based on the provisions of the Indian Contract Act, 1872 as contained in Section 133. The
section provides that 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.
Analysis and conclusion
In the given problem, ‘M’ and ‘S’ entered into arrangement by entering into a new contract
without knowledge of the Surety ‘A’. Since, the variance made in the contract is without the
surety’s consent in the existing contract, as per the provision, ‘A’ is not liable on his guarantee
for the fruits supplied after this new arrangement. The reason for such a discharge is that the
surety agreed to be liable for a contract which is no more there now and he is not liable on the
altered contract because it is different from the contract made by him.
Q15. Mr. Ram was employed as financer in “Swaraj Ltd” on the surety of his good conduct, given by Mr.
Janak, a good friend of the director of the company. Mr. Ram was kept on the salary of ₹45,000
per month. After 3 years, the company went into losses and so company decided for the cost
cutting by retrenching of many employees and reducing the salaries of the employees. Mr. Ram
was also proposed either to quit the job or continued with the lower salary of ₹35,000 per
month. He accepted and continued with the job. After few months, it was reported by accounts
department of the company that Mr. Ram manipulated with the funds of the company.

As per the provisions of the Indian Contract Act, 1872, analyse the legal positions of Mr. Janak, in
the given situations:
(i) Mr. Ram has manipulated the funds of the company since the time of his appointment.
(ii) Mr. Ram has manipulated the funds of the company since from few months before when
he accepted to continue the job on lower salary.
Sol.
Provision
Section 133 of the Indian Contract Act, 1872 deals with the provision related to the
discharge of the surety. Provisions states that where there is any variance in the terms of
contract between the principal debtor and creditor without surety’s consent it would
discharge the surety in respect of all transactions taking place subsequent to such variance.

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 Analysis and conclusion
Following is the answer in the light of the above provision:
(i) In case where, Mr. Ram has manipulated the funds of the company since the time of his
appointment. In this case Mr. Janak is liable as a surety for the loss suffered by the
Swaraj Company due to manipulation of the funds by Mr. Ram during the three years of
his service.
(ii) In case where, Mr. Ram has manipulated the funds of the company since from few
months before when he accepted to continue the job on lower salary. In this case,
variance in the terms of the contract (i.e., to work on lower salary) was made without
surety’s consent. For all the transactions taking place subsequent to such variance, shall
discharge the surety for the loss suffered by the Swaraj company.
Q16. Mr. CB was invited to guarantee an employee Mr. BD who was previously dismissed for
dishonesty by the same employer. This fact was not told to Mr. CB. Later on, the employee
embezzled funds. Whether CB is liable for the financial loss as surety under the provisions of
the Indian Contract Act, 1872?
Mr. X agreed to give a loan to Mr. Y on the security of four properties. Mr. A gave guarantee
against the loan. Actually Mr. X gave a loan of smaller amount on the security of three
properties. Whether Mr. A is liable as surety in case Mr. Y failed to repay the loan?
Sol.
Provision
(i) As per section 143 of the Indian Contract Act, 1872, any guarantee which the creditor
has obtained by means of keeping silence as to material circumstances, is invalid.
Analysis and conclusion
In the given instance, Mr. CB was invited to give guarantee of an employee Mr. BD to the same
employer who previously dismissed Mr. BD for dishonesty. This fact was not told to Mr. CB.
Here, keeping silence as to previous dismissal of Mr. BD for dishonesty is a material fact and if
Mr. BD later embezzled the funds of the employer, Mr. CB will not be held liable for the financial
loss as surety since such a contract of guarantee entered is invalid in terms of the above
provisions.
Provision
(ii) As per the provisions of section 133 of the Indian Contract Act, 1872, 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.
Analysis and conclusion
In the given instance, the actual transaction was not in terms of the guarantee given by Mr. A.
The loan amount as well as the securities were reduced without the knowledge of the surety. So,
accordingly, Mr. A is not liable as a surety in case Y failed to repay the loan
Q17. Satya has given his residential property on rent amounting to ₹25,000 per month to Tushar. Amit
became the surety for payment of rent by Tushar. Subsequently, without Amit’s consent, Tushar
agreed to pay higher rent to Satya. After a few months of this, Tushar defaulted in paying the
rent.

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 Explain the meaning of contract of guarantee according to the provisions of the Indian Contract
Act, 1872. State the position of Amit in this regard.
Sol.
(i) Contract of guarantee: As per the provisions of section 126 of the Indian Contract Act, 1872,
a contract of guarantee is a contract to perform the promise made or discharge the
liability, of a third person in case of his default.
Three parties are involved in a contract of guarantee:
 Surety- person who gives the guarantee,
 Principal debtor- person in respect of whose default the guarantee is given,
 Creditor- person to whom the guarantee is given

(ii) Provision
According to the provisions of section 133 of the Indian Contract Act, 1872, where there is any
variance in the terms of contract between the principal debtor and creditor without surety’s
consent, it would discharge the surety in respect of all transactions taking place subsequent
to such variance.
Analysis and conclusion
In the instant case, Satya (Creditor) cannot sue Amit (Surety), because Amit is discharged from
liability when, without his consent, Tushar (Principal debtor) has changed the terms of his
contract with Satya (creditor). It is immaterial whether the variation is beneficial to the surety
or does not materially affect the position of the surety.
Q18. Mr. D was in urgent need of money amounting to ₹5,00,000. He asked Mr. K for the money. Mr. K
lent the money on the sureties of A, B and N without any contract between them in case of
default in repayment of money by D to K. D makes default in payment. B refused to contribute,
examine whether B can escape liability under the Indian Contract Act, 1872?
Sol.
Provision
Co-sureties liable to contribute equally (Section 146 of the Indian Contract act, 1872):
Equality of burden is the basis of Co-suretyship. This is contained in section 146 which states
that “when 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”.
Analysis and conclusion
Accordingly, on the default of D in payment, B cannot escape from his liability. All the three
sureties A, B and N are liable to pay equally, in absence of any contract between them.
Q19. ‘C’ advances to ‘B’, ₹2,00,000 on the guarantee of ‘A’. ‘C’ has also taken a further security for the
same borrowing by mortgage of B’s furniture worth ₹2,00,000 without knowledge of ‘A’. C’
cancels the mortgage. After 6 months ‘B’ becomes insolvent and ‘C’ ‘sues ‘A’ his guarantee.
Decide the liability of ‘A’ if the market value of furniture is worth ₹80,000, under the Indian
Contract Act, 1872.

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Sol.
Provision
Surety’s right to benefit of creditor’s securities: According to section 141 of the Indian
Contract Act, 1872, 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 of the existence of such security or not; and, if the creditor loses, or,
without the consent of the surety, parts with such security, the surety is discharged to the
extent of the value of the security.
Analysis and conclusion
In the instant case, C advances to B, ₹2,00,000 rupees on the guarantee of A. C has also taken a
further security for ₹2,00,000 by mortgage of B’s furniture without knowledge of A. C cancels
the mortgage. B becomes insolvent, and C sues A on his guarantee. A is discharged from liability
to the amount of the value of the furniture i.e. ₹80,000 and will remain liable for balance
₹1,20,000.

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Page | 11
 THE INDIAN CONTRACT ACT, 1872

UNIT -8

Q1. State the essential elements of a contract of bailment.

Sol. Essential elements of a contract of bailment: Section 148 of the Indian Contract Act, 1872 defines the
term ‘Bailment’. A ‘bailment’ the pledges are 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 essential elements of the contract of the bailment are:
1. Delivery of goods: The essence of bailment is delivery of goods by one person to another.
2. Bailment is a contract: In bailment, the delivery of goods is upon a contract that when the purpose
is accomplished, the goods shall be returned to the bailor.
3. Return of goods in specific: The goods are delivered for some purpose and it is agreed that the
specific goods shall be returned.
4. Ownership of goods: In a bailment, it is only the possession of goods which is transferred and the
bailor continues to be the owner of the goods.
5. Property must be movable: Bailment is only for movable goods and never for immovable goods or
money.
Q2. Examine whether the following constitute a contract of ‘Bailment’ under the provisions of the Indian
Contract Act, 1872:
(i) V parks his car at a parking lot, locks it, and keeps the keys with himself.
(ii) Seizure of goods by customs authorities.
Sol.
Provision
As per Section 148 of the Act, bailment is the delivery of goods by one person to another for some
purpose, upon a contract, that the goods shall, when the purpose is accomplished, be returned or
otherwise disposed of according to the directions of the person delivering them.
For a bailment to exist the bailor must give possession of the bailed property and the bailee must
accept it. There must be a transfer in ownership of the goods.
Analysis and conclusion
(i) No. Mere custody of goods does not mean possession. In the given case, since the keys of the car
are with V, Section 148, of the Indian Contract Act, 1872 shall not applicable.
(ii) Yes, the possession of the goods is transferred to the custom authorities. Therefore, bailment
exists and section 148 is applicable.
Q3. Mrs. Shivani delivered her old silver jewellery to Mr. Y a Goldsmith, for the purpose of making anklet
out of it. Every evening she used to receive the unfinished good (anklet) to put it into box kept at Mr.
Y’s Shop. She kept the key of that box with herself. One night, the anklet was stolen from that box. Was
there a contract of bailment? Whether the possession of the goods (actual or constructive) delivered,
constitute contract of bailment or not? Give your answer as per the provisions of the Indian Contract
Act, 1872.

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Sol.
Provision
Section 148 of Indian Contract Act 1872 defines ‘Bailment’ as 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 direction of the person delivering them.
According to Section 149 of the Indian Contract Act, 1872, 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. Thus, delivery is necessary to constitute bailment.
Analysis and conclusion
Thus, the mere keeping of the box at Y’s shop, when Mrs. Shivani herself took away the key cannot
amount to delivery as per the meaning of delivery given in the provision in section 149.
Therefore, in this case there is no contract of bailment as Mrs. Shivani did not deliver the complete
possession of the good by keeping the keys with herself.
Q4. Mrs. A delivered her old silver jewellery to Mr. Y a Goldsmith, for the purpose of making new a silver
bowl out of it. Every evening she used to receive the unfinished good (silver bowl) to put it into box kept
at Mr. Y’s Shop. She kept the key of that box with herself. One night, the silver bowl was stolen from that
box. Whether the possession of the goods (actual or constructive) delivered, constitute contract of
bailment or not?
Sol.
Provision
Section 148 of Indian Contract Act 1872 defines ‘Bailment’ as 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 direction of the person delivering them.
According to Section 149 of the Indian Contract Act, 1872, 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. Thus, delivery is necessary to constitute bailment.
Analysis and conclusion
Thus, the mere keeping of the box at Y’s shop when Mrs. A herself took away the key cannot amount to
delivery as per the meaning of delivery given in the provision in
section 149. Therefore, in this case there is no contract of bailment as Mrs. A did not deliver the
complete possession of the good by keeping the keys with herself.
Q5. On the basis of reward, what are various categories of bailment?
Sol. On the basis of reward, bailment can be classified into two types:
(i) Gratuitous Bailment: The word gratuitous means free of charge. So, a gratuitous bailment is one
when the provider of service does it gratuitously i.e. free of charge. Such bailment would be either
for the exclusive benefits of bailor or bailee.
(ii) Non-Gratuitous Bailment: Non gratuitous bailment means where both the parties get some
benefit i.e. bailment for the benefit of both bailor & bailee.
Q6. Ramesh hires a carriage of Suresh and agrees to pay ₹1500 as hire charges. The carriage is unsafe,
though Suresh is unaware of it. Ramesh is injured and claims compensation for injuries suffered by
him. Suresh refuses to pay. Discuss the liability of Suresh.

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 Sol.
Provision
Problem asked in the question is based on the provisions of the Indian Contract Act, 1872 as contained
in Section 150.
The section provides that if the goods are bailed for hire, the bailor is responsible for such damage,
whether he was or was not aware of the existence of such faults in the goods bailed.
Analysis and conclusion
Accordingly, applying the above provisions in the given case Suresh is responsible to compensate
Ramesh for the injuries sustained even if he was not aware of the defect in the carriage.
Q7. Ashley bails his jewelry with Barn on the condition to safeguard in bank’s safe locker. However, Barn
kept it in safe locker at his residence, where he usually keeps his own jewelry. After a month all
jewelry was lost in a religious riot. Ashley filed a suit against Barn for recovery. Referring to provisions
of the Indian Contract Act, 1872, state whether Ashely will succeed.
Sol.
Provision
According to section 151 of the Indian Contract Act, 1872, 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.
According to section 152 of the Indian Contract Act, 1872, the bailee, in the absence of any special
contract, is not responsible for the loss, destruction or deterioration of the thing bailed, if he has taken
the amount of care of it described in section 151.
Analysis and conclusion
Thus, Barn is liable to compensate Ashley for his negligence to keep jewelry at his residence. Here,
Ashley and Barn agreed to keep the jewelry at the Bank’s safe locker and not at the latter’s residence.
Q8. Amit lends a horse to Bimal for his own riding only. However, Bimal allows Chinku, a member of his
family to ride the horse. Chinku rides the horse with care, but the horse falls and is injured.
As per the provisions of the Indian Contract Act, 1872, analyse the liability of Bimal in the given
situation.
Sol.
Provision
According to section 154 of the Indian Contract Act, 1872, 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.
Analysis and conclusion
Hence, Bimal is liable to make compensation to Amit for the injury done to the horse.
Q9. Amar bailed 50 kg of high quality sugar to Srijith, who owned a kirana shop, promising to give ₹200 at
the time of taking back the bailed goods. Srijith’s employee, unaware of this, mixed the 50 kg of sugar
belonging to Amar with the sugar in the shop and packaged it for sale when Srijith was away. This
came to light only when Amar came asking for the sugar he had bailed with Srijith, as the price of the
specific quality of sugar had trebled. What is the remedy available to Amar under the Indian Contract
Act, 1872?

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 Sol.
Provision
According to Section 157 of the Indian Contract Act, 1872, if the bailee, without the consent of the
bailor, mixes the goods of the bailor with his own goods, in such a manner that it is impossible to
separate the goods bailed from the other goods and deliver them back, the bailor is entitled to be
compensated by the bailee for the loss of the goods.
Analysis and conclusion
In the given question, Srijith’s employee mixed high quality sugar bailed by Amar and then packaged
it for sale. The sugar when mixed cannot be separated. As Srijith’s employee has mixed the two kinds
of sugar, he (Srijith) must compensate Amar for the loss of his sugar.

Q10. What is the liability of a bailee making unauthorized use of goods bailed?
Sol. Liability of bailee making unauthorised use of goods bailed: According to section 154 of the
Indian Contract Act, 1872, 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.
Q11. Mr. Dhannaseth delivers a rough blue sapphire to a jeweler, to be cut and polished. The jeweler
carries out the job accordingly. However, now Mr. Dhanna seth refuses to make the payment and
wants his blue sapphire back. The jeweler denies the delivery of goods without payment. Examine
Sol.
Provision
According to section 170 of the Indian Contract Act, 1872, where the bailee has, in accordance with the
purpose of the bailment, rendered any service involving the exercise of labour or skill in respect of the
goods bailed, he has, in the absence 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.
Thus, in accordance with the purpose of bailment if the bailee by his skill or labour improves the
goods bailed, he is entitled for remuneration for such services. Towards such remuneration, the bailee
can retain the goods bailed if the bailor refuses to pay the remuneration. Such a right to retain the
goods bailed is the right of particular lien. He however does not have the right to sue.
Where the bailee delivers the goods without receiving his remuneration, he has a right to sue the
bailor.
Analysis and conclusion
In such a case the particular lien may be waived. The particular lien is also lost if the bailee does not
complete the work within the time agreed.
Hence, in the given situation the jeweller is entitled to retain the stone till he is paid for the services he
has rendered.
Q12. Raj gives his umbrella to Manoj during raining season to be used for two days during Examinations.
Manoj keeps the umbrella for a week. While going to Raj’s house to return the umbrella, Manoj
accidently slips and the umbrella is badly damaged. Taking into account the provisions of the Indian
Contract Act, 1872, who will bear the loss and why?

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 Sol.
Provision
It is the duty of 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. [Section 160 of the Indian Contract Act, 1872] If, by the
default of the bailee, the goods are not returned, delivered or tendered at the proper time, he is
responsible to bailor for any loss, destruction or deterioration of goods from that time. [Section 161]
Analysis and conclusion
In the instant case, Manoj shall have to bear the loss since he failed to return the umbrella within the
stipulated time and Section 161 clearly says that where a bailee fails to return the goods within the
agreed time, he shall be responsible to the bailor for any loss, destruction or deterioration of the goods
from that time notwithstanding the exercise of reasonable care on his part.
Q13. Megha lends a sum of ₹20,000 to Bhim, on the security of two shares of a Prema Limited on 1st April
2019. On 15th June, 2019, the company issued two bonus shares. Bhim returns the loan amount of
₹20,000 with interest but Megha returns only two shares which were pledged and refuses to give the
two bonus shares. Advise Bhim in the light of the provisions of the Indian Contract Act, 1872.
Sol.
Provision
Bailee’s Duties and Liabilities: The problem as asked in the question is based on the provisions of
Section 163(4) of the Indian Contract Act, 1872. As per the section, “in the absence of any contract to the
contrary, the bailee is bound to deliver to the bailor, any increase or profit which may have accrued from
the goods bailed.”
Analysis and conclusion
In the given question, Megha received 2 bonus shares on the 2 pledged shares of Prema Limited.
Applying the provisions of the Indian Contract Act, 1872, to the given case, the bonus shares are an
increase on the shares pledged by Bhim to Megha. So, Megha is liable to return the shares along with the
bonus shares.
Hence Bhim the bailor, is entitled to receive the original shares as well as bonus shares (after he has
repaid the loan amount).
Q14. What are the rights available to the finder of lost goods under Section 168 and Section 169 of the Indian
Contract Act, 1872.
Sol. As per the provisions of section 168 and 169 of the Indian Contract Act, 1872, 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 ‘finder of lost goods’ can ask for reimbursement for expenditure incurred for preserving the goods
and also for searching the true owner. If the real owner refuses to pay compensation, the ‘finder’ cannot
sue but retain the goods so found.
Further, where the real owner has announced any reward, the finder is entitled to receive the reward.
The right to collect the reward is a primary and a superior right even more than the right to seek
reimbursement of expenditure.

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 The finder though has no right to sell the goods found in the normal course; he may sell the goods if the
real owner cannot be found with reasonable efforts or if the owner refuses to pay the lawful charges
subject to the following conditions:
(i) when the article is in danger of perishing and losing the greater part of the value or
(ii) when the lawful charges of the finder amounts to two-third or more of the value of the article found.
Q15. Mr. Stefen owns a chicken firm near Gurgaon, where he breeds them and sells eggs and live chicken to
retail shops in Gurgaon. Mr. Flemming also owns a similar firm near Gurgaon, doing the same
business. Mr. Flemming had to go back to his native place in Australia for one year. He needed money
for travel so he had pledged his firm to Mr. Stefen for one year and received a deposit of ₹25 lakhs and
went away. At that point of time, stock of live birds were 100,000 and eggs 10,000. The condition was
that when Flemming returns, he will repay the deposit and take possession of his firm with live birds
and eggs.
After one year Flemming came back and returned the deposit. At that time there were 109,000 live
birds (increase is due to hatching of eggs out of 10,000 eggs he had left), and 15,000 eggs.
Mr. Stefen agreed to return 100,000 live birds and 10,000 eggs only.
State the duties of Mr. Stefen as Pawnee and advise Mr. Flemming about his rights in the given case.
Sol.
Provision
According to section 163 of the Indian Contract Act, 1872, in the absence of any contract to the
contrary, the bailee is bound to deliver to the bailor, or according to his directions, any increase or
profit which may have accrued from the goods bailed.
Analysis and conclusion
In the given question, when Mr. Flemming returned from Australia there were 1,09,000 live birds and
15,000 eggs (1,00,000 birds and 10,000 eggs were originally deposited by Mr. Flemming). Mr. Stefen
agreed to return 1,00,000 live birds and 10,000 eggs only and not the increased number of live birds
and eggs.
In the light of the provision of law and facts of the question, following are the answers:
Duties of Mr. Stefen: Mr. Stefen (pawnee) is bound to deliver to Mr. Flemming (pawnor), any increase
or profit (9,000 live birds and 5,000 eggs) which has occurred from the goods bailed (i.e the live birds
and eggs).
Right of Mr. Flemmimg: Mr. Flemming is entitled to recover from Pawnee any increase in goods so
pledged
Q16. Radheshyam borrowed a sum of ₹50,000 from a Bank on the security of gold on 1.07.2019 under an
agreement which contains a clause that the bank shall have a right of particular lien on the gold
pledged with it. Radheshyam thereafter took an unsecured loan of ₹20,000 from the same bank on
1.08.2019 for three months. On 30.09.2019 he repaid entire secured loan of ₹50,000 and requested
the bank to release the gold pledged with it. The Bank decided to continue the lien on the gold until the
unsecured loan is fully repaid by Radheshyam. Decide whether the decision of the Bank is valid within
the provisions of the Indian Contract Act, 1872 ?

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Sol.
Provision
General lien of bankers: According to section 171 of the Indian Contract Act, 1872, 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 the effect.
Section 171 empowers the banker with general right of lien in absence of a contract whereby it is
entitled to retain the goods belonging to another party, until all the dues are discharged.

Analysis and conclusion

Here, in the first instance, the banker under an agreement has a right of particular lien on the gold
pledged with it against the first secured loan of ₹50,000/-, which has already been fully repaid by
Radheshyam.
Accordingly, Bank’s decision to continue the lien on the gold until the unsecured loan of ₹20,000/-
(which is the second loan) is not valid.
Q17. Mr. Avinash wanted a loan for expanding his business, from ABC Bank. Mr. Avinash has pledged the
stock of his business to obtain the loan from bank. However, the expansion of business did not reap the
desired results and Mr. Avinash was not able to repay the loan. Now, ABC bank wants to retain the
stock for adjustment of their loan. Advise, ABC Bank whether they can retain the stock for the
adjustment of their loan and also for payment of interest. Give your answer as per the provisions of the
Contract Act, 1872.
Sol.
Provision
According to section 173 of the Indian Contract Act, 1872, the pawnee may retain the goods pledged, not
only for payment of the debt or the performance of the promise, but 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.
Analysis and conclusion
Hence, ABC Bank can retain the stock of business of Mr. Avinash, not only for adjustment of the loan but
also for payment of interest.
Q18. Give four differences between Bailment and Pledge
Sol. Distinction between bailment and pledge: The following are the distinction between bailment and pledge:
1. As to purpose: Pledge is a variety of bailment. Under pledge goods are bailed as a security for a loan
or a performance of a promise. In regular bailment the goods are bailed for other purpose than the
two referred above. The bailee takes them for repairs, safe custody etc.
2. As to right of sale: The pledgee enjoys the right to sell only on default by the pledgor to repay the
debt or perform his promise, that too only after giving due notice. In bailment the bailee, generally,
cannot sell the goods. He can either retain or sue for non-payment of dues.
3. As to right of using goods: Pledgee has no right to use goods. A bailee can, if the terms so provide,
use the goods.

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 4. Consideration: In pledge there is always a consideration whereas in a bailment there may or may
not be consideration.
5. Discharge of contract: Pledge is discharged on the payment of debt or performance of promise
whereas bailment is discharged as the purpose is accomplished or after specified time.
Q19. (i) Srushti acquired valuable diamond at a very low price by a voidable contract under the provisions of
the Indian Contract Act, 1872. The voidable contract was not rescinded. Srushti pledged the
diamond with Mr. VK. Is this a valid pledge under the Indian Contract Act, 1872?
(ii) Whether a Pawnee has a right to retain the goods pledged.
Sol.
Provision
(i) Pledge by person in possession under voidable contract [Section 178A of the Indian Contract Act,
1872]: When the pawnor has obtained possession of the goods pledged by him under a contract
voidable under section 19 or section 19A, but the contract has not been rescinded at the time of
the pledge, the pawnee acquires a good title to the goods, provided he acts in good faith and
without notice of the pawnor’s defect of title.
Analysis and conclusion
Therefore, the pledge of diamond by Srushti with Mr. VK is valid.
(ii) Right of retainer [Section 173 of the Indian Contract Act, 1872]: Yes, the pawnee may retain the
goods pledged, not only for payment of the debt or the performance of the promise, but 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.
Q.20. As per the Indian Contract Act, 1872, answer the following:
(i) Definition of Pledge, pawnor and pawnee
(ii) Essential characteristics of contract of pledge
Sol.
(i) “Pledge”, “pawnor” and “pawnee” defined [Section 172]:
The bailment of goods as security for payment of a debt or performance of a promise is
called “pledge”. The bailor is in this case called the “pawnor”. The bailee is called the
“pawnee”.
(ii) Since Pledge is a special kind of bailment, all the essential of bailment are also essentials of
Pledge. Apart from that, the characteristics of the pledge are:
(a) There shall be a bailment of security against payment or performance of the promise.
(b) The subject matter of pledge is goods.
(c) Goods pledged for shall be in existence
(d) There shall be delivery of goods from pledger to pledgee.

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 THE INDIAN CONTRACT ACT, 1872

UNIT-9

Q1. A appoints M, a minor, as his agent to sell his watch for cash at a price not less than₹700. M sells
it to D for ₹350. Is the sale valid? Explain the legal position of M and D, referring to the
provisions of the Indian Contract Act, 1872.
Sol.
Provision
According to the provisions of Section 184 of the Indian Contract Act, 1872, as between the
principal and a third person, any person, even a minor may become an agent. But no person who
is not of the age of majority and of sound mind can become an agent, so as to be responsible to
his principal. Thus, if a person who is not competent to contract is appointed as an agent, the
principal is liable to the third party for the acts of the agent.
Analysis and conclusion
Thus, in the given case, D gets a good title to the watch. M is not liable to A for his negligence in
the performance of his duties.
Q2. Explain the following as per the provisions of the Indian Contract Act, 1872
(i) What is the meaning of ‘Agent’ and ‘Principal’?
(ii) Who can appoint an agent.
Sol.
(i) Agent: means a person employed to do any act for another or to represent another in
dealing with the third persons and
The principal: means a person for whom such act is done or who is so represented.
(ii) Who may employ an agent: According to section 183 of the Indian Contract Act, 1872,
“any person who has attained majority according to the law to which he is subject, and who
is of sound mind, may employ an agent.” Thus, a minor or a person of unsound mind cannot
appoint an agent.
Q3. State with reason whether the following statement is correct or incorrect: Ratification of agency
is valid even if knowledge of the principal is materially defective
Sol. Incorrect: Section 198 of the Indian Contract Act, 1872 provides that for a valid ratification, the
person who ratifies the already performed act must be without defect and have clear knowledge
of the facts of the case. If the principal’s knowledge is materially defective, the ratification is not
valid and hence no agency.
Q4. Mr. Navin owns a big car and has leased his car to Mrs. Susie. The lease agreement is terminable
on three month’s notice. Mr. Bhalla, not being authorised by Mr. Navin, demands on behalf of Mr.
Navin, the delivery of the car and gives a notice of termination of lease agreement to Mrs. Susie
who was in possession of the car at that time. Examine whether Mr. Navin can ratify the notice
sent by Mr. Bhalla. Give your answer as per the provisions of the Contract Act, 1872.
Sol.
Provision
According to section 200 of the Indian Contract Act, 1872, an act done by one person on behalf of
another, without such other person’s authority, which, if done with authority, would have the

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 effect of subjecting a third person to damages, or of terminating any right or interest of a third
person, cannot, by ratification, be made to have such effect.

Analysis and conclusion

In other words, when the interest of third parties is affected, the principle of ratification does not
apply. Ratification cannot relate back to the date of contract if third party has in the intervening
time acquired rights. Thus, in the instant case the notice cannot be ratified by Navin, so as to be
binding on Susie.
Q5. What is the meaning of ‘Agency by estoppel’? What are the essential conditions for creation of an
agency by estoppel? Give your answer with respect to the provisions the Indian Contract Act,
1872.
Sol. An agency by estoppel is based on the principle of estoppel. The principle of estoppel lays down
that “when one person by declaration (representation), act or omission has intentionally caused
or permitted another person to believe a thing to be true and to act upon such belief, he shall not
be allowed to deny his previous statement or he shall be stopped to deny his previous statement
or conduct”.
The agency by Estoppel is provided under section 237 of the Indian Contract Act. Section 237
states: “When an agent has without authority done acts or incurred obligations to third persons
on behalf of his principal the principal is bound by such acts or obligations if he has by his words
or conduct induced such third persons to believe that such acts and obligations were within the
scope of the agent’s authority”.
According to section 237 of the Contract Act, an agency by estoppel may be created when
following essentials are fulfilled:
(i) the principal must have made a representation;
(ii) the representation may be express or implied;
(iii) The representation must state that the agent has an authority to do certain act although
really he has no authority;
(iv) The principal must have induced the third person by such representation; and
(v) The third person must have believed the representation and made the contract on the
belief of such representation.
Q6. A rented his house to B on lease for 3 years. The lease agreement is terminable on 3 month
notice by either party.
C, the son of A, being in need of a separate house to live, served a notice on B, without any
authority, to vacate the house within a month and requested his father A to ratify his action.
Examine whether it shall be valid for A to ratify the action of C taking into account the
provisions of the Indian Contract Act, 1872?
Sol.
Provision
As per section 200 of the Indian contract Act, 1872, an act done by one person on behalf of
another, without such other person’s authority, which, if done with authority, would have the
effect of subjecting a third person to damages, or of terminating any right or interest of a third
person, cannot, by ratification, be made to have such effect.

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 Analysis and conclusion
In the given instance, A rented his house to B on lease for 3 years. The lease agreement was
terminable on three months’ notice. C, son of A, gives notice of termination to B, without any
authority, to vacate the house within a month. Also requested A to ratify his action. Here by the
act of C, the interest of B is affected, therefore the principle of ratification does not apply.
Hence, it’s not valid for A to ratify the action of C, thereby causing the notice to be binding on B.
Q7. Rahul, a transporter was entrusted with the duty of transporting tomatoes from a rural farm to a
city by Aswin. Due to heavy rains, Rahul was stranded for more than two days. Rahul sold the
tomatoes below the market rate in the nearby market where he was stranded fearing that the
tomatoes may perish. Can Aswin recover the loss from Rahul on the ground that Rahul had acted
beyond his authority?
Sol.
Provision
Agent’s authority in an emergency (Section 189 of the Indian Contract Act, 1872): An agent has
authority, in an emergency, to do all such acts for the purpose of protecting his principal from
loss as would be done by a person of ordinary prudence, in his own case, under similar
circumstances.
Analysis and conclusion
In the instant case, Rahul, the agent, was handling perishable goods like ‘tomatoes’ and can
decide the time, date and place of sale, not necessarily as per instructions of the Aswin, the
principal, with the intention of protecting Aswin from losses. Here, Rahul acts in an emergency
as a man of ordinary prudence, so Aswin will not succeed against him for recovering the loss.

Q8. Aarthi is the wife of Naresh. She purchased some sarees on credit from M/s Rainbow Silks,
Jaipur.
M/s Rainbow Silks, Jaipur demanded the amount from Naresh. Naresh refused. M/s Rainbow
Silks, Jaipur filed a suit against Naresh for the said amount. Decide in the light of provisions of
the Indian Contract Act, 1872, whether M/s Rainbow Silks, Jaipur would succeed?
Sol.
Provision
The situation asked in the question is based on the provisions related with the modes of
creation of agency relationship under the Indian Contract Act, 1872.
Agency may be created by a legal presumption; in a case of cohabitation by a married woman
(i.e. wife is considered as an implied agent of her husband). If wife lives with her husband, there
is a legal presumption that a wife has authority to pledge her husband’s credit for necessaries.
But the legal presumption can be rebutted in the following cases:
(i) Where the goods purchased on credit are not necessaries.
(ii) Where the wife is given sufficient money for purchasing necessaries.
(iii) Where the wife is forbidden from purchasing anything on credit or contracting debts.
(iv) Where the trader has been expressly warned not to give credit to his wife.

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 If the wife lives apart for no fault on her part, wife has authority to pledge her husband’s credit
for necessaries. This legal presumption can be rebutted only in cases (iii) and (iv) above.
Analysis and conclusion
Applying the above conditions in the given case M/s Rainbow Silks will succeed. It can recover
the said amount from Naresh if sarees purchased by Aarthi are necessaries for her.
Q9. What is agent’s authority in case of an emergency. What are the essential conditions to be
satisfied to constitute a valid emergency. Give your answer as per the provisions of the Indian
Contract Act, 1872.
Sol. An agent has authority, in an emergency, to do all such acts for the purpose of protecting his
principal from loss as would be done by a person of ordinary prudence, in his own case, under
similar circumstances.
To constitute a valid agency in an emergency, following conditions must be satisfied.
(i) Agent should not be a in a position or have any opportunity to communicate with his
principal within the time available.
(ii) There should have been actual and definite commercial necessity for the agent to act
promptly.
(iii) The agent should have acted bonafide and for the benefit of the principal.
(iv) The agent should have adopted the most reasonable and practicable course under
circumstances, and
(v) The agent must have been in possession of the goods belonging to his principal and
which are the subject of contract.
Q10. Comment on the following ‘Principal is not always bound by the acts of a sub-agent’.
Sol. The statement is correct. Normally, a sub-agent is not appointed, since it is a delegation of
power by an agent given to him by his principal. The governing principle is, a delegate cannot
delegate’. (Latin version of this principle is, “delegates non potest delegare”). However, there
are certain circumstances where an agent can appoint sub-agent. In case of proper appointment
of a sub-agent, by virtue of Section 192 of the Indian Contract Act, 1872 the principal is bound
by and is held responsible for the acts of the sub-agent. Their relationship is treated to be as if
the sub-agent is appointed by the principal himself.
However, if a sub-agent is not properly appointed, the principal shall not be bound by the acts
of the sub- agent. Under the circumstances the agent appointing the sub-agent shall be bound
by these acts and he (the agent) shall be bound to the principal for the acts of the sub-agent.
Q11. Mr. Bhalla instructs Aman, a merchant, to buy a ship for him. Aman employs a ship surveyor of
good reputation to choose a ship for Mr. Bhalla. The surveyor makes the choice negligently and
the ship turns out to be unseaworthy and is lost. Now, Mr. Bhalla holds Aman responsible for
the same. Examine as per the provisions of the Contract Act, 1872, whether Aman is responsible
to Mr. Bhalla.
Sol.
Provision
According to section 194 of the Indian Contract Act, 1872, where an agent, holding an express
or implied authority to name another person to act for the principal in the business of the

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 agency, has named another person accordingly, such person is not a sub-agent, but an agent of
the principal for such part of the business of the agency as is entrusted to him.
Further, as per section 195, in selecting such agent for his principal, an agent is bound to
exercise the same amount of discretion as a man of ordinary prudence would exercise in his
own case; and, if he does this, he is not responsible to the principal for the acts or negligence of
the agent so selected.
Analysis and conclusion
Thus, in the present case, Aman is not, but the surveyor is, responsible to Mr. Bhalla.
Q12. Azar consigned electronic goods for sale to Aziz. Aziz employed Rahim a reputed auctioneer to
sell the goods consigned to him through auction. Aziz authorized Rahim to receive the proceeds
and transfer those proceeds once in 45 days. Rahim sold goods on auction for₹2,00,000 but
before transferring the proceeds of the auction, became insolvent. Assess the liability of Aziz
according to the provisions of the Indian Contract Act, 1872.
Sol.
Provision
According to section 195 of the Contract Act, 1872, in selecting an agent (substituted) for his
principal, an agent is bound to exercise the same amount of discretion as a man of ordinary
prudence would exercise in his own case; and, if he does this, he is not responsible to the
principal for the acts or negligence of the agent so selected.
Thus, while selecting a “substituted agent” the agent is bound to exercise same amount of
diligence as a man of ordinary prudence and if he does so he will not be responsible for acts or
negligence of the substituted agent.
Analysis and conclusion
Hence, if Aziz has exercised same amount of diligence as a man of ordinary prudence would, he
shall not be responsible to Azar for the proceeds of the auction.
Q13. Mr. Ahuja of Delhi engaged Mr. Singh as his agent to buy a house in West Extension area. Mr.
Singh bought a house for₹20 lakhs in the name of a nominee and then purchased it himself
for₹24 lakhs. He then sold the same house to Mr. Ahuja for₹26 lakhs. Mr. Ahuja later comes to
know the mischief of Mr. Singh and tries to recover the excess amount paid to Mr. Singh. Is he
entitled to recover any amount from Mr. Singh? If so, how much? Explain.
Sol.
Provision
The problem in this case, is based on the provisions of the Indian Contract Act, 1872 as
contained in Section 215 read with Section 216. The two sections provide that where an agent
without the knowledge of the principal, deals in the business of agency on his own account, the
principal may:
(i) repudiate the transaction, if the case shows, either that the agent has dishonestly concealed
any material fact from him, or that the dealings of the agent have been disadvantageous to
him.
(ii) claim from the agent any benefit, which may have resulted to him from the transaction.

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 Analysis and conclusion
Therefore, based on the above provisions, Mr. Ahuja is entitled to recover₹6 lakhs from Mr.
Singh being the amount of profit earned by Mr. Singh out of the transaction.
Q14. ABC Ltd. sells its products through some agents and it is not the custom in their business to
sell the products on credit. Mr. Pintu, one of the agents sold goods of ABC Ltd. to M/s. Parul
Pvt. Ltd. (on credit) which was insolvent at the time of such sale. ABC Ltd. sued Mr. Pintu for
compensation towards the loss caused due to sale of products to M/s. Parul Pvt. Ltd. Will ABC
Ltd. succeed in its claim?
Sol.
Provision
To conduct the business of agency according to the principal’s directions (Section 211 of the
Indian Contract Act, 1872): An agent is bound to conduct the business of his principal
according to the direction given by the principal, or, in the absence of any such directions,
according to the custom which prevails in doing business of the same kind at the place where
the agent conducts such business. When the agent acts otherwise, if any loss be sustained, he
must make it good to his principal, and, if any profit accrues, he must account for it.
Analysis and conclusion
In the present case, Mr. Pintu, one of the agents, sold goods of ABC Ltd. to M/s Parul Pvt. Ltd.
(on credit) which was insolvent at the time of such sale. Also, it is not the custom in ABC Ltd.
to sell the products on credit.
Hence, Mr. Pintu must make good the loss to ABC Ltd.
Q15. Pankaj appoints Shruti as his agent to sell his estate. Shruti, on looking over the estate before
selling it, finds the existence of a good quality Granite-Mine on the estate, which is unknown
to Pankaj. Shruti buys the estate herself after informing Pankaj that she (Shruti) wishes to
buy the estate for herself but conceals the existence of Granite- Mine. Pankaj allows Shruti to
buy the estate, in ignorance of the existence of Mine. State giving reasons in brief the rights of
Pankaj, the principal, against Shruti, the agent. Give your answer as per the provisions of the
Contract Act, 1872.
What would be your answer if Shruti had informed Pankaj about the existence of Mine before
she purchased the estate, but after two months, she sold the estate at a profit of₹10 lac?
Sol.
Provision
Agent’s duty to disclose all material circumstances & his duty not to deal on his own account
without principal’s consent. The problem is based on Sections 215 & 216 of the Indian
Contract Act, 1872. According to Section 215, if an agent deals on his own account in the
business of the agency, without obtaining the consent of his principal and without acquainting
him with all material circumstances, then the principal may repudiate the transaction.
On the other hand, section 216 provides that, if an agent, without the knowledge of his
principal, acts on his own account in the business of the agency, then the principal may claim
any benefit which may have accrued to the agent from such a transaction.

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 Analysis and conclusion
Hence in the first instance, though Pankaj had given his consent to Shruti permitting the latter to
act on his own account in the business of agency, Pankaj may still repudiate the sale as the
existence of the mine, a material circumstance, had not been disclosed to him.
In the second instance, Pankaj had knowledge that Shruti was acting on her own account and
also that the mine was in existence; hence, Pankaj cannot repudiate the transaction under
section 215. Also, under Section 216, he cannot claim any benefit from Shruti as he had
knowledge that Shruti was acting on her own account in the business of the agency.

Q16. “An agent is neither personally liable nor can he personally enforce the contract on behalf of the
principal.” Comment.
Sol. According to section 230 of the Indian Contract Act, 1872, in the absence of any contract to that
effect, an agent cannot personally enforce contracts entered into by him on behalf of his
principal, nor is he personally bound by them. Thus, an agent cannot personally enforce, nor be
bound by, contracts on behalf of principal.
Presumption of contract to the contrary: But such a contract shall be presumed to exist in the
following cases:
(i) Where the contract is made by an agent for the sale or purchase of goods for a merchant
resident abroad/foreign principal.
(ii) Where the agent does not disclose the name of his principal or undisclosed principal; and
(iii) Where the principal, though disclosed, cannot be sued.
Q17. X has made an agency agreement with Y to authorize him to purchase goods on the behalf of X for
the year 2020 only. The agency agreement was signed by both and it contains all the terms and
conditions for the agent. It has a condition that Y is allowed to purchase goods maximum upto the
value of₹10 lakhs only. In the month of April 2020, Y has purchased a single item of₹12 lakhs
from Z as an agent of X. The market value of the item purchased was₹14 lakhs but a discount of₹2
lakhs was given by Z. The agent Y has purchased this item due to heavy discount offered and the
financially benefit to X.
After delivery of the item Z has demanded the payment from X as Y is the agent of X. But X denied
to make the payment stating that Y has exceeded his authority as an agent therefore he is not
liable for this purchase. Z has filed a suit against X for payment.
Decide whether Z will succeed in his suit against X for recovery of payment as per provisions of
The Indian Contract Act, 1872.
Sol.
Provision
An agent does all acts on behalf of the principal but incurs no personal liability. The liability
remains that of the principal unless there is a contract to the contrary. An agent also cannot
personally enforce contracts entered into by him on behalf of the principal. In the light of section
226 of the Indian Contract Act, 1872, Principal is considered to be liable for the acts of agents
which are within the scope of his authority.

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 Further section 228 of the Indian Contract Act, 1872 states that where an agent does more than
he is authorized to do, and what he does beyond the scope of his authority cannot be separated
from what is within it, the principal is not bound to recognize the transaction.
Analysis and conclusion
In the given case, the agency agreement was signed between X and Y, authorizing Y to purchase
goods maximum upto the value of₹10 lakh. But Y purchased a single item of ₹12 lakh from Z as an
agent of X at a discounted rate to financially benefit to X. On demand of payment by Z, X denied
saying that Y has exceeded his authority therefore he is not liable for such purchase. Z filed a suit
against X for payment.
As said above, liability remains that of the principal unless there is a contract to the contrary. The
agency agreement clearly specifies the scope of authority of Y for the purchase of goods, however
he exceeded his authority as an agent. Therefore, in the light of section 228 as stated above, since
the transaction is not separable, X is not bound to recognize the transaction entered between Z
and Y, and therefore may repudiate the whole transaction. Hence, Z will not succeed in his suit
against X for recovery of payment.
Q18. Bhupendra borrowed a sum of₹3 lacs from Atul. Bhupendra appointed Atul as his agent to sell his
land and authorized him to appropriate the amount of loan out of the sale proceeds. Afterward,
Bhupendra revoked the agency.
Decide under the provisions of the Indian Contract Act, 1872 whether the revocation of the said
agency by Bhupendra is lawful.
Sol.
Provision
According to Section 202 of the Indian Contract Act, 1872 an agency becomes irrevocable where
the agent has himself an interest in the property which forms the subject-matter of the agency,
and such an agency cannot, in the absence of an express provision in the contract, be terminated
to the prejudice of such interest.
Analysis and conclusion
In the instant case, the rule of agency coupled with interest applies and does not come to an end
even on death, insanity or the insolvency of the principal.
Thus, when Bhupendra appointed Atul as his agent to sell his land and authorized him to
appropriate the amount of loan out of the sale proceeds, interest was created in favour of Atul
and the said agency is not revocable. The revocation of agency by Bhupendra is not lawful.
Q19. Akash is a famous manufacturer of leather goods. He appoints Prashant as his agent. Prashant is
entrusted with the work of recovering money from various traders to whom Akash sells leather
goods. Prashant is paid a monthly remuneration of₹15,000. Prashant during a particular month
recovers₹40,000 from traders on account of Akash. Prashant gives back₹25,000 to Akash, after
deducting his salary.
Examine with reference to relevant provisions of the Indian Contract Act, 1872, whether act of
Prashant is valid.

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 Sol.
Provision
The given problem is based on the provision related to ‘agency coupled with interest’. According
to Section 202 of the Indian Contract Act, 1872 an agency becomes irrevocable where the agent
has himself an interest in the property which forms the subject-matter of the agency, and such an
agency cannot, in the absence of an express provision in the contract, be terminated to the
prejudice of such interest.
Analysis and conclusion
In the given instance, Akash appointed Prashant as his agent to recover money from various
traders to whom Akash sold his leather goods, on a monthly remuneration of₹15,000. Prashant
during a month recovers₹40,000 from traders on account of Akash. Prashant after deducting his
salary give the rest amount to Akash.
In the said case, interest was created in favour of Prashant and the said agency is not revocable,
therefore, the act of Prashant is valid.
Q20. Explain whether the agency shall be terminated in the following cases under the provisions of the
Indian Contract Act, 1872:
(i) A gives authority to B to sell A’s land, and to pay himself, out of the proceeds, the debts due
to him from A. Afterwards, A becomes insane.
(ii) A appoints B as A’s agent to sell A’s land. B, under the authority of A, appoints C as agent of
B. Afterwards, A revokes the authority of B but not of C. What is the status of agency of C ?
Sol.
(i) Provision
According to section 202 of the Indian Contract Act, 1872, where the agent has himself an
interest in the property which forms the subject matter of the agency, the agency cannot, in the
absence of an express contract, be terminated to the prejudice of such interest.
In other words, when the agent is personally interested in the subject matter of agency, the
agency becomes irrevocable.
Analysis and conclusion
In the given question, A gives authority to B to sell A’s land, and to pay himself, out of the
proceeds, the debts due to him from A. As per the facts of the question and provision of law, A
cannot revoke this authority, nor it can be terminated by his insanity.
(ii) Provision
According to section 191 of the Indian Contract Act, 1872, a “Sub-agent” is a person employed
by, and acting under the control of, the original agent in the business of the agency. Section 210
provides that, the termination of the authority of an agent causes the termination (subject to the
rules regarding the termination of an agent’s authority) of the authority of all sub-agents
appointed by him.
Analysis and conclusion
In the given question, B is the agent of A, and C is the agent of B. Hence, C becomes a sub- agent.
Thus, when A revokes the authority of B (agent), it results in termination of authority of sub-
agent appointed by B i.e. C (sub-agent).

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 CHAPTER 3 - THE SALE OF GOODS ACT, 1930

UNIT-1

Q1. Distinguish between ‘Sale’ and ‘Hire Purchase’ under the Sale of Goods Act, 1930.
Sol.
Basis of difference Sale Hire-Purchase
Time of passing property Property in the goods is The property in goods passes
transferred to the buyer to the hirer upon payment of
immediately at the time of the last instalment.
contract
Position of the party The position of the buyer is The position of the hirer is
that of the owner of the that of a bailee till he pays
goods. the last instalment.
Termination of contract The buyer cannot terminate The hirer may, if he so likes,
the contract and is bound to terminate the contract by
pay the price of the goods. returning the goods to its
owner without any liability
to pay the remaining
instalments.
Burden of risk of insolvency The seller takes the risk of The owner takes no such
of the buyer any loss resulting from the risk, for if the hirer fails to
insolvency of the buyer. pay an instalment, the owner
has right to take back the
goods.
Transfer of title The buyer can pass a good The hirer cannot pass any
title to a bona fide purchaser title even to a bona fide
from him. purchaser.
Resale The buyer in sale can resell The hire purchaser cannot
the goods. resell unless he has paid all
the instalments.

Q2. What is meant by delivery of goods under the Sale of Goods Act, 1930? State various modes of
delivery.
Or
Explain the term “Delivery and its form” under the Sale of Goods Act, 1930.
Sol.
(a) Delivery of goods [section 2(2) of the Sale of Goods Act, 1930]: Delivery means voluntary
transfer of possession from one person to another. As a general rule, delivery of goods may
be made by doing anything, which has the effect of putting the goods in the possession of the
buyer, or any person authorized to hold them on his behalf.

Modes of delivery: Following are the modes of delivery for transfer of possession:
(i) Actual delivery: When the goods are physically delivered to the buyer.
(ii) Constructive delivery: When it is effected without any change in the custody or actual
possession of the thing as in the case of delivery by attornment (acknowledgement) e.g.,

1|Page
 where a warehouseman holding the goods of A agrees to hold them on behalf of B, at A’s
request.
(iii) Symbolic delivery: When there is a delivery of a thing in token of a transfer of something
else, i.e., delivery of goods in the course of transit may be made by handing over
documents of title to goods, like bill of lading or railway receipt or delivery orders or the key
of a warehouse containing the goods is handed over to buyer.

Q3. Differentiate between Ascertained and Unascertained Goods with example.

Sol. Ascertained Goods are those goods which are identified in accordance with the agreement
after the contract of sale is made. This term is not defined in the Act but has been judicially
interpreted.
In actual practice the term ‘ascertained goods’ is used in the same sense as ‘specific
goods.’ When from a lot or out of large quantity of unascertained goods, the number or
quantity contracted for is identified, such identified goods are called ascertained goods.
Example: A wholesaler of cotton has 100 bales in his godown. He agrees to sell 50 bales and
these bales were selected and set aside. On selection, the goods become ascertained. In this
case, the contract is for the sale of ascertained goods, as the cotton bales to be sold are
identified and agreed after the formation of the contract. It may be noted that before the
ascertainment of the goods, the contract was for the sale of unascertained goods
Unascertained goods: The goods which are not specifically identified or ascertained at
the time of making of the contract are known as ‘unascertained goods’. They are indicated
or defined only by description or sample.
Example: X has ten horses. He promises to sell one of them but does not specify which horse
he will sell. It is a contract of sale of unascertained goods
Q4. State briefly the essential element of a contract of sale under the Sale of Goods Act, 1930.
Sol. Essentials of Contract of Sale
The following elements must co-exist so as to constitute a contract of sale of goods under the
Sale of Goods Act, 1930.
(i) There must be at least two parties
(ii) The subject matter of the contract must necessarily be goods
(iii) A price in money (not in kind) should be paid or promised.
(iv) A transfer of property in goods from seller to the buyer must take place.
(v) A contract of sale may be absolute or conditional [section 4(2)].
(vi) All other essential elements of a valid contract must be present in the contract of
sale.
Q5. Classify the following transactions according to the types of goods they are:
(i) A wholesaler of cotton has 100 bales in his godown. He agrees to sell 50 bales and these
bales were selected and set aside.
(ii) A agrees to sell to B one packet of sugar out of the lot of one hundred packets lying in his
shop.
(iii) T agrees to sell to S all the apples which will be produced in his garden this year.

2|Page
 Sol.
(i) A wholesaler of cotton has 100 bales in his godown. So, the goods are existing goods. He
agrees to sell 50 bales and these bales were selected and set aside. On selection, the goods
become ascertained.
In this case, the contract is for the sale of ascertained goods, as the cotton bales to be
sold are identified and agreed after the formation of the contract.

(ii) If A agrees to sell to B one packet of sugar out of the lot of one hundred packets lying in his
shop, it is a sale of existing but unascertained goods because it is not known which
packet is to be delivered.

(iii) T agrees to sell to S all the apples which will be produced in his garden this year. It is
contract of sale of future goods, amounting to ‘an agreement to sell.’
Q6. Archika went to a jewellery shop and asked the shopkeeper to show the gold bangles with
white polish. The shopkeeper informed that he has gold bangles with lots of designs but not
in white polish rather if Archika select gold bangles in his shop, he will arrange white polish
on those gold bangles without any extra cost. Archika select a set of designer bangles and pay
for that. The shopkeeper requested Archika to come after two days for delivery of those
bangles so that white polish can be done on those bangles. When Archika comes after two
days to take delivery of bangles, she noticed that due to white polishing , the design of bangles
has been disturbed. Now, she wants to avoid the contract and asked the shopkeeper to give
her money back but shopkeeper has denied for the same.
(a) State with reasons whether Archika can recover the amount under the Sale of Goods Act,
1930.
(b) What would be your answer if shopkeeper says that he can repair those bangles but he
will charge extra cost for same?
Sol.
Provision
As per Section 4(3) of the Sale of Goods Act, 1930, where under a contract of sale, the
property in the goods is transferred from the seller to the buyer, the contract is called a sale,
but where the transfer of the property in the goods is to take place at a future time or
subject to some condition thereafter to be fulfilled, the contract is called an agreement
to sell and as per Section 4(4), an agreement to sell becomes a sale when the time elapses or
the conditions are fulfilled subject to which the property in the goods is to be transferred.

Analysis and conclusion

(a) On the basis of above provisions and facts given in the question, it can be said that there
is an agreement to sell between Archika and shopkeeper and not a sale. Even the
payment was made by Archika, the property in goods can be transferred only after
the fulfilment of conditions fixed between buyer and seller. As the white polish was
done but original design is disturbed due to polishing, bangles are not in original position.
Hence, Archika has right to avoid the agreement to sell and can recover the price
paid.

3|Page
 (b) On the other hand, if shopkeeper offers to bring the bangles in original position by
repairing, he cannot charge extra cost from Archika. Even he has to bear some
expenses for repair; he cannot charge it from Archika.

Q7. X contracted to sell his car to Y. They did not discuss the price of the car at all. X later refused to
sell his car to Y on the ground that the agreement was void being uncertain about price. Can Y
demand the car under the Sale of Goods Act, 1930?
Sol.
Provision
Payment of the price by the buyer is an important ingredient of a contract of sale. If the
parties totally ignore the question of price while making the contract, it would not
become an uncertain and invalid agreement. It will rather be a valid contract and the
buyer shall pay a reasonable price. (Section 9 of the Sale of Goods Act, 1930)
Analysis and conclusion
In the give case, X and Y have entered into a contract for sale of car but they did not fix the
price of the car. X refused to sell the car to Y on this ground. Y can legally demand the car
from X and X can recover a reasonable price of the car from Y.

Q8. Explain the term goods and other related terms under the Sale of Goods Act, 1930.
Sol. “Goods” means every kind of movable property other than actionable claims and
money; and includes stock and shares, growing crops, grass, and things attached to or
forming part of the land, which are agreed to be severed before sale or under the
contract of sale. [Section 2(7) of the Sales of Goods Act, 1930]

‘Actionable claims’ are claims, which can be enforced only by an action or suit, e.g., debt.
A debt is not a movable property or goods. Even the Fixed Deposit Receipts (FDR) are
considered as goods under Section 176 of the Indian Contract Act read with Section 2(7)
of the Sales of Goods Act.

Q9. A agrees to buy a new TV from a shop keeper for Rs. 30,000 payable partly in cash of Rs.
20,000 and partly in exchange of old TV set. Is it a valid Contract of Sale of Goods? Give
reasons for your answer.
Sol.
Provision
It is necessary under the Sales of Goods Act, 1930 that the goods should be exchanged
for money. If the goods are exchanged for goods, it will not be called a sale. It will be
considered as barter. However, a contract for transfer of movable property for a definite
price payable partly in goods and partly in cash is held to be a contract of Sale of Goods.
Analysis and conclusion
In the given case, the new TV set is agreed to be sold for Rs. 30,000 and the price is
payable partly in exchange of old TV set and partly in cash of Rs. 20,000. So, in this
case, it is a valid contract of sale under the Sales of Goods Act, 1930.

4|Page
Q10. A agrees to sell to B 100 bags of sugar arriving on a ship from Australia to India within next
two months. Unknown to the parties, the ship has already sunk. Does B have any right
against A under the Sale of Goods Act, 1930?
Sol.
Provision
Section 8 of the Sales of Goods Act, 1930 provides that where there is an agreement to
sell specific goods and the goods without any fault of either party perish, damaged or
lost, the agreement is thereby avoided. This provision is based on the ground of
supervening impossibility of performance which makes a contract void.

Analysis and conclusion

In this case, B, the buyer has no right against A the seller. as, all the following conditions
required to treat it as a void contract are fulfilled in the above case:
(i) There is an agreement to sell between A and B
(ii) It is related to specific goods
(iii) The goods are lost because of the sinking of ship before the property or risk passes to
the buyer.
(iv) The loss of goods is not due to the fault of either party.

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 THE SALE OF GOODS ACT, 1930

UNIT -2

Q1. “A breach of condition can be treated as a breach of warranty”. Explain this statement as per
relevant provisions of the Sale of Goods Act, 1930.
Sol. Section 13 of the Sale of Goods Act, 1930 specifies cases where a breach of condition be treated as a
breach of warranty. As a result of which the buyer loses his right to rescind the contract and can
claim damages only.
In the following cases, a contract is not avoided even on account of a breach of a condition:
(i) Where the buyer altogether waives the performance of the condition. A party may for his
own benefit, waive a stipulation. It should be a voluntary waiver by buyer.
(ii) Where the buyer elects to treat the breach of the conditions, as one of a warranty.
That is to say, he may claim only damages instead of repudiating the contract. Here, the buyer
has not waived the condition but decided to treat it as a warranty.
(iii) Where the contract is non-severable and the buyer has accepted either the whole
goods or any part thereof. Acceptance means acceptance as envisaged in Section 72 of
the Indian Contract Act, 1872.
(iv) Where the fulfilment of any condition or warranty is excused by law by reason of
impossibility or otherwise.
Q2. TK ordered timber of 1 inch thickness for being made into drums. The seller agreed to supply
the required timber of 1 inch. However, the timber supplied by the seller varies in thickness
from 1 inch to 1.4 inches. The timber is commercially fit for the purpose for which it was
ordered. TK rejects the timber. Explain with relevant provisions of the Sale of Goods Act,
1930 whether TK can reject the timber.
Sol.
Provision
According to Section 15 of the Sale of Goods Act, 1930 where there is a contract for the
sale of goods by description, there is an implied condition that the goods shall
correspond with the description. The buyer is not bound to accept and pay for the goods
which are not in accordance with the description of goods.
Thus, it has to be determined whether the buyer has undertaken to purchase the goods by
their description, i.e., whether the description was essential for identifying the goods where
the buyer had agreed to purchase. If that is required and the goods tendered
do not correspond with the description, it would be breach of condition entitling the
buyer to reject the goods.
Analysis and Conclusion
In the instant case, as the timber supplied by seller varies in thickness from 1 inch to 1.4
inches, it does not correspond with the description ordered by TK i.e. of 1 inch, TK may
reject the timber.
Q3. What are the differences between a ‘Condition’ and ‘Warranty’ in a contract of sale?
Or
Difference between conditions and warranties.

1|Page
Sol. The following are important differences between conditions and warranties:-
Point of differences Condition Warranty
Meaning A condition is a stipulation A warranty is a stipulation
essential to the main collateral to the main
purpose of the contract. purpose of the contract.
Right in case of breach The aggrieved party can The aggrieved party can
repudiate the contract or claim only damages in case
claim damages or both in the of breach of warranty.
case of breach of condition.
Conversion of stipulations A breach of condition may A breach of warranty cannot
be treated as a breach of be treated as a breach of
warranty. condition.

Q4. Mr. T was a retail trader of fans of various kinds. Mr. M came to his shop and asked for an
exhaust fan for kitchen. Mr. T showed him different brands and Mr. M approved of a
particular brand and paid for it. Fan was delivered at Mr. M’s house; at the time of opening
the packet he found that it was a table fan. He informed Mr. T about the delivery of the
wrong fan. Mr. T refused to exchange the same, saying that the contract was complete after
the delivery of the fan and payment of price.
(i) Discuss whether Mr. T is right in refusing to exchange as per provisions of Sale of
Goods Act, 1930?
(ii) What is the remedy available to Mr. M?
Sol.
Provision
(i) According to Section 15 of the Sale of Goods Act, 1930, where the goods are sold by
sample as well as by description, the implied condition is that the goods supplied
shall correspond to both with the sample and the description. In case, the goods
do not correspond with the sample or with description or vice versa or both, the
buyer can repudiate the contract.
Further, as per Section 16(l) of the Sales of Goods Act, 1930, when the buyer makes
known to the seller the particular purpose for which the goods are required and he
relies on the judgment or skill of the seller, it is the duty of the seller to supply such
goods as are reasonably fit for that purpose.
Analysis and conclusion
In the given case, Mr. M had revealed Mr. T that he wanted the exhaust fan for the
kitchen. Since the table fan delivered by Mr. T was unfit for the purpose for which Mr.
M wanted the fan, therefore, T cannot refuse to exchange the fan.
Provision
(ii) When one party does not fulfill his obligation according to the agreed terms, the
other party may treat the contract as repudiated or can insist for performance as
per the original contract.

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 Analysis and conclusion
Accordingly, the remedy available to Mr. M is that he can either rescind the contract or
claim refund of the price paid by him or he may require Mr. T to replace it with the fan
he wanted.
Q5. Mr. Das, a general store owner went to purchase 200 kg of Basmati Rice of specific length from a
whole seller. He saw the samples of rice and agreed to buy the one for which the price was
quoted as Rs. 150 per kg. While examining the sample Mr. Das failed to notice that the rice
contained a mix of long and short grain of rice.
The whole seller supplied the required quantity exactly the same as shown in the sample.
However, when Mr. Das sold the rice to one of his regular customers she complained that the
rice contained two different qualities of rice and returned the rice.
With reference to the provisions of the Sales of Goods Act, 1930, discuss the options open to Mr.
Das for grievance redressal. What would be your answer in case Mr. Das
specified his exact requirement as to length of rice?
Sol.
Provision
As per the provisions of Sub-Section (2) of Section 17 of the Sale of Goods Act, 1930,
in a contract of sale by sample, there is an implied condition that:
(a) the bulk shall correspond with the sample in quality;
(b) the buyer shall have a reasonable opportunity of comparing the bulk with the
sample.
Analysis and Conclusion
In the instant case, Mr. Das on examination of the sample on which he agreed to buy, failed to
notice that it contained a mix of long and short grain of rice.
In the light of the provisions of Sub-Clause (b) of Sub-Section (2) of Section 17 of the Act, Mr.
Das will not be successful as he examined the sample of Basmati rice (which exactly
corresponded to the entire lot) without noticing the fact that even though the sample was
that of Basmati Rice but it contained a mix of long and short grains. It could have been
discovered by Mr. Das, by an ordinary examination of the goods that it contained a mix of
long and short grains. This reflects lack of due diligence on part of Mr. Das.
Therefore, Mr. Das, the buyer does not have any option available to him for grievance
redressal.
In case Mr. Das specified his exact requirement as to length of rice, then there is an
implied condition that the goods shall correspond with the description. If it is not so, then
in such case, seller will be held liable.

Q6. M/s Woodwor th & Associates, a firm dealing with the wholesale and retail buying and selling of
various kinds of wooden logs, customized as per the requirement of the customers. They dealt
with Rose wood, Mango wood, Teak wood, Burma wood etc. Mr. Das, a customer came to the
shop and asked for wooden logs measuring 4 inches broad and 8 feet long as required by the
carpenter. Mr. Das specifically mentioned that he required the wood which would be best suited
for the purpose of making wooden doors and window frames. The Shop owner agreed and

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 arranged the wooden pieces cut into as per the buyers requirements. The carpenter visited Mr.
Das’s house next day, and he found that the seller has supplied Mango Tree wood which would
most unsuitable for the purpose. The: carpenter asked Mr. Das to return the wooden logs as it
would not meet his requirements. The Shop owner refused to return the wooden logs on the
plea that logs were cut to specific requirements of Mr. Das and hence could not be resold.
(i) Explain the duty of the buyer as well as the seller according to the doctrine of “Caveat
Emptor”.
(ii) Whether Mr. Das would be able to get the money back or the right kind of wood as required
serving his purpose?

Sol. (i) Duty of the buyer according to the doctrine of “Caveat Emptor”: In case of sale of goods, the
doctrine ‘Caveat Emptor’ means ‘let the buyer beware’. When sellers display their goods in the
open market, it is for the buyers to make a proper selection or choice of the goods. If the goods
turn out to be defective, he cannot hold the seller liable. The seller is in no way
responsible for the bad selection of the buyer. The seller is not bound to disclose the
defects in the goods which he is selling.
Duty of the seller according to the doctrine of “Caveat Emptor”: The following exceptions to
the Caveat Emptor are the duties of the seller:
1. Fitness as to quality or use
2. Goods purchased under patent or brand name
3. Goods sold by description
4. Goods of Merchantable Quality
5. Sale by sample
6. Goods by sample as well as description
7. Trade usage
8. Seller actively conceals a defect or is guilty of fraud
(ii) As Mr. Das has specifically mentioned that he required the wood which would be
best suited for the purpose of making wooden doors and window frames but the
seller supplied Mango tree wood which is most unsuitable for the purpose. Mr.
Das is entitled to get the money back or the right kind of wood as required serving his
purpose. It is the duty of the seller to supply such goods as are reasonably fit for
the purpose mentioned by buyer. [Section 16(1) of the Sale of Goods Act, 1930]
Q7. What is the Doctrine of “Caveat Emptor”? What are the exceptions to the Doctrine of “Caveat
Emptor”?
Or
Explain the term “Caveat-Emptor” under the Sale of Goods Act, 1930? What are the exceptions
to this rule?
Sol. Caveat Emptor
In case of sale of goods, the doctrine ‘Caveat Emptor’ means ‘let the buyer beware’. When
sellers display their goods in the open market, it is for the buyers to make a proper
selection or choice of the goods.

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If the goods turn out to be defective, he cannot hold the seller liable. The seller is in no way
responsible for the bad selection of the buyer. The seller is not bound to disclose the defects in
the goods which he is selling.
The rule is enunciated in the opening words of section 16 of the Sale of Goods Act, 1930 which
runs thus: “Subject to the provisions of this Act and of any other law for the time being in
force, there is no implied warranty or condition as to the quality or fitness for any
particular purpose of goods supplied under a contract of sale”
Exceptions: Following are the exceptions to the doctrine of Caveat Emptor:
1. Fitness as to quality or use: Where the buyer makes known to the seller the particular
purpose for which the goods are required, so as to show that he relies on the seller’s skill or
judgment and the goods are of a description which is in the course of seller’s business to
supply,
it is the duty of the seller to supply such goods as are reasonably fit for that purpose
[Section 16 (1) of the Sales of Goods Act, 1930].
2. Goods purchased under patent or brand name: In case where the goods are
purchased under its patent name or brand name, there is no implied condition that
the goods shall be fit for any particular purpose [Section 16(1)].
3. Goods sold by description: Where the goods are sold by description there is an
implied condition that the goods shall correspond with the description [Section 15].
If it is not so then seller is responsible.
4. Goods of Merchantable Quality: Where the goods are bought by description from a seller
who deals in goods of that description there is an implied condition that the goods shall
be of merchantable quality.
The rule of Caveat Emptor is not applicable. But where the buyer has examined the
goods this rule shall apply if the defects were such which ought to have not been
revealed by ordinary examination [Section 16(2)].
5. Sale by sample: Where the goods are bought by sample, this rule of Caveat Emptor
does not apply if the bulk does not correspond with the sample [Section 17].
Goods by sample as well as description: Where the goods are bought by sample as
well as description, the rule of Caveat Emptor is not applicable in case the goods do
6. not correspond with both the sample and description or either of the condition [Section
15].
7. Trade Usage: An implied warranty or condition as to quality or fitness for a
particular purpose may be annexed by the usage of trade and if the seller deviates
from that, this rule of Caveat Emptor is not applicable [Section 16(3)].
8. Seller actively conceals a defect or is guilty of fraud: Where the seller sells the goods
by making some misrepresentation or fraud and the buyer relies on it or when the
seller actively conceals some defect in the goods.

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 So that the same could not be discovered by the buyer on a reasonable examination,
then the rule of Caveat Emptor will not apply. In such a case the buyer has a right to
avoid the contract and claim damages.
Q8. Mrs. Geeta went to the local rice and wheat wholesale shop and asked for 100 kgs of Basmati
rice. The Shopkeeper quoted the price of the same as Rs. 125 per kg to which she agreed. Mrs.
Geeta insisted that she would like to see the sample of what will be provided to her by the
shopkeeper before she agreed upon such purchase. The shopkeeper showed her a bowl of rice
as sample. The sample exactly corresponded to the entire lot The buyer examined the sample
casually without noticing the fact that even though the sample was that of Basmati Rice but it
contained a mix of long and short grains. The cook on opening the bags complained that the dish
if prepared with the rice would not taste the same as the quality of rice was not as per
requirement of the dish.
(i) Now Mrs. Geeta wants to file a suit of fraud against the seller alleging him of selling mix of
good and cheap quality rice. Will she be successful?
(ii) Explain the basic law on sale by sample under Sale of Goods Act 1930?
(iii) Decide the fate of the case and options open to the buyer for grievance redressal as per
the provisions of Sale of Goods Act 1930?
(iv) What would be your answer in case Mrs. Geeta specified her exact requirement as to
length of rice?
Sol.
(i) Provision
As per the provisions of Sub-Section (2) of Section 17 of the Sale of Goods Act, 1930, in a
contract of sale by sample, there is an implied condition that:
a. the bulk shall correspond with the sample in quality;
b. the buyer shall have a reasonable opportunity of comparing the bulk with the sample.
Analysis and Conclusion
In the instant case, in the light of the provisions of Sub-Clause (b) of Sub-Section (2) of Section
17 of the Act, Mrs. Geeta will not be successful as she casually examined the sample of rice
(which exactly corresponded to the entire lot) without noticing the fact that even though the
sample was that of Basmati Rice but it contained a mix of long and short grains.
Sale by Sample: (Section 17 of the Sale of Goods Act, 1930): As per the provisions of Sub-
Section (1) of section 17 of the Sale of Goods Act, 1930, a contract of sale is a contract for sale by
sample where there is a term in the contract, express or implied, to that effect.
As per the provisions of Sub-Section (2) of section 17 of the Sale of Goods Act, 1930, in a
contract of sale by sample, there is an implied condition that:
a. that the bulk shall correspond with the sample in quality;
b. that the buyer shall have a reasonable opportunity of comparing the bulk with the sample.
c. that the goods shall be free from any defect, rendering them unmerchantable, which would
not be apparent on reasonable examination of the sample.
In the instant case, the buyer does not have any option available to him for grievance
redressal.

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 (ii) In case Mrs. Geeta specified her exact requirement as to length of rice, then there is an
implied condition that the goods shall correspond with the description. If it is not so, the
seller will be held liable.
Q9. Explain the “condition as to Merchantability” and “condition as to wholesomeness” under the
Sale of Goods Act, 1930.
Sol. Condition as to Merchantability [Section 16(2) of the Sale of Goods Act, 1930]: Where
goods are bought by description from a seller who deals in goods of that description
(whether he is the manufacturer or producer or not), there is an implied condition that
the goods shall be of merchantable quality.
Provided that, if the buyer has examined the goods, there shall be no implied condition as
regards defects which such examination ought to have revealed.
The expression “merchantable quality”, though not defined, nevertheless connotes goods
of such a quality and in such a condition a man of ordinary prudence would accept them
as goods of that description. It does not imply any legal right or legal title to sell.
Example: If a person orders motor horns from a manufacturer of horns, and the horns supplied
are scratched and damaged owing to bad packing, he is entitled to reject them as un-
merchantable.
Condition as to wholesomeness: In the case of eatables and provisions, in addition to the
implied condition as to merchantability, there is another implied condition that the goods
shall be wholesome.
Example: A supplied F with milk. The milk contained typhoid germs. F’s wife consumed the milk
and was infected and died. Held, there was a breach of condition as to fitness and A was liable to
pay damages.
Q10. For the purpose of making uniform for the employees, Mr. Yadav bought dark blue coloured
cloth from Vivek, but did not disclose to the seller the purpose of said purchase. When uniforms
were prepared and used by the employees, the cloth was found unfit. However, there was
evidence that the cloth was fit for caps, boots and carriage lining. Advise Mr. Yadav whether he is
entitled to have any remedy under the sale of Goods Act, 1930?
Sol.
Provision
Fitness of Cloth: As per the provision of Section 16(1) of the Sale of Goods Act, 1930, an implied
condition in a contract of sale that an article is fit for a particular purpose only arises
when the purpose for which the goods are supplied is known to the seller, the buyer relied
on the seller’s skills or judgement and seller deals in the goods in his usual course of business.

Analysis and Conclusion

In this case, the cloth supplied is capable of being applied to a variety of purposes, the buyer
should have told the seller the specific purpose for which he required the goods. But he
did not do so. Therefore, the implied condition as to the fitness for the purpose does not
apply. Hence, the buyer will not succeed in getting any remedy from the seller under the Sale of
Goods Act, 1930.
Q11. What is an Implied Warranty and state the various types of Implied Warranties

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 Sol. Implied Warranties: It is a warranty which the law implies into the contract of sale. In other
words, it is the stipulation which has not been included in the contract of sale in express
words. But the law presumes that the parties have incorporated it into their contract.
It will be interesting to know that implied warranties are read into every contract of sale
unless they are expressly excluded by the express agreement of the parties.
These may also be excluded by the course of dealings between the parties or by usage of
trade (Section 62).
Implied Warrants:
1. Warranty as to undisturbed possession [Section 14(b)]: An implied warranty that
the buyer shall have and enjoy quiet possession of the goods.
That is to say, if the buyer having got possession of the goods, is later on disturbed in his
possession, he is entitled to sue the seller for the breach of the warranty.
2. Warranty as to non-existence of encumbrances [Section 14(c)]: An implied
warranty that the goods shall be free from any charge or encumbrance in favour of
any third party not declared or known to the buyer before or at the time the contract is
entered into.
3. Warranty as to quality or fitness by usage of trade [Section 16(3)]: An implied
warranty as to quality or fitness for a particular purpose may be annexed or
attached by the usage of trade.
4. Disclosure of dangerous nature of goods: Where the goods are dangerous in nature
and the buyer is ignorant of the danger, the seller must warn the buyer of the
probable danger.
If there is a breach of warranty, the seller may be liable in damages.
Q12. Mrs. G bought a tweed coat from P. When she used the coat, she got rashes on her skin as her
skin was abnormally sensitive. But she did not make this fact known to the seller i.e. P. Mrs. G
filled a case against the seller to recover damages. Can she recover damages under the Sale of
Goods Act, 1930?
Sol.
Provision
According to Section 16(1) of Sales of Goods Act, 1930, normally in a contract of sale there is no
implied condition or warranty as to quality or fitness for any particular purpose of goods
supplied. The general rule is that of “Caveat Emptor” that is “let the buyer beware”. But
where the buyer expressly or impliedly makes known to the seller the particular purpose
for which the goods are required and also relies on the seller’s skill and judgement and that
this is the business of the seller to sell such goods in the ordinary course of his business, the
buyer can make the seller responsible.
Analysis and Conclusion
In the given case, Mrs. G purchased the tweed coat without informing the seller i.e. P about
the sensitive nature of her skin. Therefore, she cannot make the seller responsible on the
ground that the tweed coat was not suitable for her skin. Mrs. G cannot treat it as a breach of
implied condition as to fitness and quality and has no right to recover damages from the seller.

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Q13. Mr. T was a retailer trader of fans of various kinds. Mr. M came to his shop and asked for an
exhaust fan for kitchen. Mr. T showed him different brands and Mr. M approved of a particular
brand and paid for it. Fan was delivered at Mr. M’s house; at the time of opening the packet he
found that it was a table fan. He informed Mr. T about the delivery of the wrong fan. Mr. T
refused to exchange the same, saying that the contract was complete after the delivery of the fan
and payment of price.
(i) Discuss whether Mr. T is right in refusing to exchange as per provisions of the Sale of Goods
Act, 1930?
(ii) What is the remedy available to Mr. M?

Sol.
Provision
According to Section 15 of the Sale of Goods Act, 1930, where the goods are sold by sample as
well as by description, the implied condition is that the goods supplied shall correspond
to both with the sample and the description. In case, the goods do not correspond with the
sample or with description or vice versa or both, the buyer can repudiate the contract.
Further, as per Section 16(1) of the Sales of Goods Act, 1930, when the buyer makes known to
the seller the particular purpose for which the goods are required and he relies on the judgment
or skill of the seller, it is the duty of the seller to supply such goods as are reasonably fit for that
purpose.
Analysis and conclusion
(i) In the given case, Mr. M had revealed Mr. T that he wanted the exhaust fan for the
kitchen. Since the table fan delivered by Mr. T was unfit for the purpose for which Mr.
M wanted the fan, therefore, T cannot refuse to exchange the fan.
(ii) When one party does not fulfill his obligation according to the agreed terms, the other
party may treat the contract as repudiated or can insist for performance as per the
original contract. Accordingly, the remedy available to Mr. M is that he can either
(a) rescind the contract or
(b) claim refund of the price paid by him or
(c) he may require Mr. T to replace it with the fan he wanted.
Q14. AB Cloth House, a firm dealing with the wholesale and retail buying and selling of various
kinds of clothes, customized as per the requirement of the customers. They dealt with Silk,
Organdie, cotton, khadi, chiffon and many other different varieties of cloth. Mrs. Reema, a
customer came to the shop and asked for specific type of cloth suitable for making a saree for
her daughter’s wedding. She specifically mentioned that she required cotton silk cloth which
is best suited for the purpose. The Shop owner agreed and arranged the cloth pieces cut into
as per the buyers’ requirements. When Reema went to the tailor for getting the saree
stitched, she found that seller has supplied her cotton organdie material, cloth was not
suitable for the said purpose. It has heavily starched and not suitable for making the saree
that Reema desired for. The Tailor asked Reema to return the cotton organdie cloth as it
would not meet his requirements. The Shop owner refused to return the cloth on the plea
that it was cut to specific requirements of Mrs. Reema and hence could not be resold.

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 (i) With reference to the doctrine of “Caveat Emptor’ explain the duty of the buyer as well as
the seller.
(ii) Also explain whether Mrs. Reema would be able to get the money back or the right kind
of cloth as per the requirement?
Sol.
(i) Duty of the buyer according to the doctrine of “Caveat Emptor”: In case of sale of goods,
the doctrine ‘Caveat Emptor’ means ‘let the buyer beware’. When sellers display their goods in
the open market, it is for the buyers to make a proper selection or choice of the goods. If the
goods turn out to be defective, he cannot hold the seller liable. The seller is in no way
responsible for the bad selection of the buyer. The seller is not bound to disclose the defects
in the goods which he is selling
(i) Provision
Duty of the seller according to the doctrine of “Caveat Emptor”: The following
exceptions to the Caveat Emptor are the duties of the seller:
a. Fitness as to quality or use
b. Goods purchased under patent or brand name
c. Goods sold by description
d. Goods of Merchantable Quality
e. Sale by sample
f. Goods by sample as well as description
g. Trade usage
h. Seller actively conceals a defect or is guilty of fraud
Analysis and conclusion
Based on the above provision and facts given in the question, it can be concluded that Mrs.
Reema is entitled to get the money back or the right kind of cloth as required serving her
purpose. It is the duty of the seller to supply such goods as are reasonably fit for the
purpose mentioned by buyer. [Section 16(1) of the Sale of Goods Act, 1930].
Q15. Certain goods were sold by sample by A to B, who in turn sold the same goods by sample to C
and C by sample sold the goods to D. The goods were not according to the sample. Therefore, D
who found the deviation of the goods from the sample rejected the goods and gave a notice to C.
C sued B and B sued A. Advise B and C under the Sale of Goods Act, 1930.
Sol.
Provision
when the goods are sold by sample the goods must correspond to the sample in quality and the
buyer should be given reasonable time and opportunity of comparing the bulk with the sample.
Analysis and conclusion
In the instant case, D who noticed the deviation of goods from the sample can reject the
goods and treat it as a breach of implied condition as to sample Whereas C can recover
only damages from B and B can recover damages from A. For C and B it will not be treated
as a breach of implied condition as to sample as they have accepted and sold the goods
according to Section 13(2) of the Sales of Goods Act, 1930.
Q16. Ram consults Shyam, a motor-car dealer for a car suitable for touring purposes to promote the
sale of his product. Shyam suggests ‘Maruti’ and Ram accordingly buys it from Shyam. The car

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 turns out to be unfit for touring purposes. What remedy Ram is having now under the Sale of
Goods Act, 1930?
Sol.
Provision
Condition and warranty (Section 12): A stipulation in a contract of sale with reference to
goods which are the subject thereof may be a condition or a warranty. [Sub-section (1)]
“A condition is a stipulation essential to the main purpose of the contract, the breach of
which gives rise to a right to treat the contract as repudiated”. [Sub-section (2)]
“A warranty is a stipulation collateral to the main purpose of the contract, the breach of which
gives rise to a claim for damages but not to a right to reject the goods and treat the contract as
repudiated”. [Sub-section (3)]
Whether a stipulation in a contract of sale is a condition or a warranty depends in each
case on the construction of the contract. A stipulation may be a condition, though called a
warranty in the contract. [Sub-section (4)]
Analysis and conclusion
In the instant case, the term that the ‘car should be suitable for touring purposes’ is a
condition of the contract. It is so vital that its non-fulfilment defeats the very purpose for
which Ram purchases the car. Ram is therefore entitled to reject the car and have refund of
the price.
Q17. “There is no implied warranty or condition as to quality or fitness for any particular purpose of
goods supplied under a contract of sale.” Discuss the significance and State exceptions, if any.
Sol. The statement given in the question is the fundamental principle of law of sale of goods,
sometime expressed by the maxim ‘Caveat Emptor’ meaning thereby ‘Let the buyer be aware’.
In other words, it is no part of the seller’s duty in a contract of sale of goods to give the
buyer an article suitable for a particular purpose, or of particular quality, unless the
quality or fitness is made an express terms of the contract.
The person who buys goods must keep his eyes open, his mind active and should be
cautious while buying the goods.
If he makes a bad choice, he must suffer the consequences of lack of skill and judgement in the
absence of any misrepresentation or guarantee by the seller.
There are, however, certain exceptions to the rule which are stated as under:
1. Fitness as to quality or use: Where the buyer makes known to the seller the particular
purpose for which the goods are required, so as to show that he relies on the seller’s
skill or judgment and the goods are of a description which is in the course of seller’s
business to supply, it is the duty of the seller to supply such goods as are reasonably fit for
that purpose [Section 16 (1)].
2. Goods purchased under patent or brand name: In case where the goods are purchased
under its patent name or brand name, there is no implied condition that the goods shall be
fit for any particular purpose [Section 16(1)].

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 3. Goods sold by description: Where the goods are sold by description there is an implied
condition that the goods shall correspond with the description [Section 15]. If it is not
so, then seller is responsible.

4. Goods of Merchantable Quality: Where the goods are bought by description from a
seller who deals in goods of that description there is an implied condition that the goods
shall be of merchantable quality.
The rule of Caveat Emptor is not applicable. But where the buyer has examined the goods,
this rule shall apply if the defects were such which ought to have not been revealed by
ordinary examination [Section 16(2)].
5. Sale by sample: Where the goods are bought by sample, this rule of Caveat Emptor does
not apply if the bulk does not correspond with the sample [Section 17].
6. Goods by sample as well as description: Where the goods are bought by sample as well
as description, the rule of Caveat Emptor is not applicable in case the goods do not
correspond with both the sample and description or either of the condition [Section 15].
7. Trade Usage: An implied warranty or condition as to quality or fitness for a particular
purpose may be annexed by the usage of trade and if the seller deviates from that, this
rule of Caveat Emptor is not applicable [Section 16(3)].
8. Seller actively conceals a defect or is guilty of fraud: Where the seller sells the goods
by making some misrepresentation or fraud and the buyer relies on it or when the
seller actively conceals some defect in the goods so that the same could not be discovered
by the buyer on a reasonable examination, then the rule of Caveat Emptor will not apply.
In such a case the buyer has a right to avoid the contract and claim damages.
Q18. Prashant reaches a sweet shop and ask for 1 Kg of ‘Burfi’ if the sweets are fresh. Seller replies’
“Sir, my all sweets are fresh and of good quality.” Prashant agrees to buy on the condition that
first he tastes one piece of ‘Burfi’ to check the quality. Seller gives him one piece to taste.
Prashant, on finding the quality is good, ask the seller to pack. On reaching the house, Prashant
finds that ‘Burfi’ is stale not fresh while the piece tasted was fresh. Now, Prashant wants to avoid
the contract and return the ‘Burfi’ to seller.
State with reason whether Prashant can avoid the contract under the Sale of Goods Act, 1930?
Will your answer be different if Prashant does not taste the sweet?
Sol.
Provision
By virtue of provisions of Section 17 of the Sale of Goods Act, 1930, in the case of a contract for
sale by sample there is an implied condition that the bulk shall correspond with the sample in
quality and the buyer shall have a reasonable opportunity of comparing the bulk with the
sample. According to Section 15, where there is a contract for the sale of goods by description,
there is an implied condition that the goods shall correspond with the description. If the goods
do not correspond with implied condition, the buyer can avoid the contract and reject the goods
purchased.

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 Analysis and conclusion
In the instant case, the sale of sweet is sale by sample and the quality of bulk does not
correspond with quality of sample. Hence, Prashant can return the sweet and avoid the
contract
In the other case, the sale of sweet is the case of sale by description and the quality of
goods does not correspond with description made by seller. Hence, answer will be same.
Prashant can return the sweet and avoid the contract.
Q19. Mr. P was running a shop selling good quality washing machines. Mr. Q came to his shop and
asked for washing machine which is suitable for washing woollen clothes. Mr. P showed him a
particular machine which Mr. Q liked and paid for it. Later on, when the machine was delivered
at Mr. Q’s house, it was found that it was wrong machine and also unfit for washing woollen
clothes. He immediately informed Mr. P about the delivery of wrong machine. Mr. P refused to
exchange the same, saying that the contract was complete after the delivery of washing
machine and payment of price. With reference to the provisions of Sale of Goods Act, 1930,
discuss whether Mr. P is right in refusing to exchange the washing machine?
Sol.
Provision
According to Section 15 of the Sale of Goods Act, 1930, whenever the goods are sold as per
sample as well as by description, the implied condition is that the goods must
correspond to both sample as well as description. In case the goods do not correspond to
sample or description, the buyer has the right to repudiate the contract.
Further under Sale of Goods Act, 1930 when the buyer makes known to the seller the particular
purpose for which the goods are required and he relies on his judgment and skill of the seller, it
is the duty of the seller to supply such goods which are fit for that purpose.
Analysis and conclusion
In the given case, Mr. Q has informed to Mr. P that he wanted the washing machine for washing
woollen clothes. However, the machine which was delivered by Mr. P was unfit for the purpose
for which Mr. Q wanted the machine.
Based on the above provision and facts of case, we understand that there is breach of implied
condition as to sample as well as description, therefore Mr. Q can either
(a) repudiate the contract or
(b) claim the refund of the price paid by him or
(c) he may require Mr. P to replace the washing machine with desired one.
Q20. A person purchased bread from a baker’s shop. The piece of bread contained a stone in it which
broke buyer’s tooth while eating. What are the rights available to the buyer against the seller
under the Sale of Goods Act, 1930?
Sol.
Provision
This is a case related to implied condition as to wholesomeness which provides that the eatables
and provisions must be wholesome that is they must be fit for human consumption.

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Analysis and conclusion
In this case, the piece of bread contained a stone which broke buyer’s tooth while eating,
thereby considered unfit for consumption. Hence, the buyer can treat it as breach of implied
condition as to wholesomeness and can also claim damages from the seller.

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 THE SALE OF GOODS ACT, 1930

UNIT-3

Q1. “Risk Prima Facie passes with property.” Elaborate in the context of the Sales of Goods Act, 1930.
Sol. Risk prima facie passes with property (Section 26 of the Sales of Goods Act, 1930)
According to Section 26, unless otherwise agreed, the goods remain at the seller’s risk until
the property therein is transferred to the buyer, but when the property therein is
transferred to the buyer, the goods are at the buyer’s risk whether delivery has been made
or not.
It is provided that, where delivery has been delayed because of the fault of either buyer or
seller, the goods are at the risk of the party in fault as regards any loss which might not have
occurred but for such fault.
Provided also that nothing in this section shall affect the duties or liabilities of either seller or
buyer as bailee of the goods of the other party.
Q2. What is appropriation of goods under the Sale of Goods Act, 1930? State the essentials regarding
appropriation of unascertained goods.
Or
State the various essential elements involved in the sale of unascertained goods and its
appropriation as per the Sale of Goods Act, 1930.
Sol. Appropriation of goods: Appropriation of goods involves selection of goods with the intention of
using them in performance of the contract and with the mutual consent of the seller and the buyer.
The essentials regarding appropriation of unascertained goods are:
(a) There is a contract for the sale of unascertained or future goods.
(b) The goods should conform to the description and quality stated in the contract.
(c) The goods must be in a deliverable state.
(d) The goods must be unconditionally (as distinguished from an intention to appropriate)
appropriated to the contract either by delivery to the buyer or his agent or the carrier.
(e) The appropriation must be made by:
(i) the seller with the assent of the buyer; or
(ii) the buyer with the assent of the seller.
(f) The assent may be express or implied.
(g) The assent may be given either before or after appropriation.

Q3. “A non-owner can convey better title to the bonafide purchaser of goods for value.” Discuss the
cases when a person other than the owner can transfer title in goods as per the provisions of the
Sales of Goods Act, 1930?
Or
Explain the circumstances in detail in which non-owner can convey better title to Bona fide
purchaser of goods for value as per the Sale of Goods Act, 1930.
Or
“Nemo Dat Quod Non Habet” – “None can give or transfer goods what he does not himself own.”
Explain the rule and state the cases in which the rule does not apply under the provisions of the
Sale of Goods Act, 1930.

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Sol. In the following cases, a non-owner can convey better title to the bona fide purchaser of goods for
value.
(1) Sale by a Mercantile Agent: A sale made by a mercantile agent of the goods for document of
title to goods would pass a good title to the buyer in the following circumstances; namely;
(a) If he was in possession of the goods or documents with the consent of the owner;
(b) If the sale was made by him when acting in the ordinary course of business as a
mercantile agent; and
(c) If the buyer had acted in good faith and has at the time of the contract of sale, no
notice of the fact that the seller had no authority to sell (Proviso to Section 27).
Mercantile Agent means an agent having in the customary course of business as
such agent authority either to sell goods, or to consign goods for the purposes of
sale, or to buy goods, or to raise money on the security of goods [Section 2(9)].
(2) Sale by one of the joint owners (Section 28): If one of several joint owners of goods
has the sole possession of them by permission of the co-owners, the property in the
goods is transferred to any person who buys them from such joint owner in good faith
and has not at the time of the contract of sale notice that the seller has no authority
to sell.
(3) Sale by a person in possession under voidable contract: A buyer would acquire a
good title to the goods sold to him by a seller who had obtained possession of the goods
under a contract voidable on the ground of coercion, fraud, misrepresentation or undue
influence provided that the contract had not been rescinded until the time of the sale
(Section 29).

(4) Sale by one who has already sold the goods but continues in possession thereof: If a
person has sold goods but continues to be in possession of them or of the documents
of title to them, he may sell them to a third person, and if such person obtains the
delivery thereof in good faith and without notice of the previous sale, he would have
good title to them, although the property in the goods had passed to the first buyer
earlier.
A pledge or other disposition of the goods or documents of title by the seller in possession
are equally valid [Section 30(1)].
(5) Sale by buyer obtaining possession before the property in the goods has vested in
him: Where a buyer with the consent of the seller obtains possession of the goods
before the property in them has passed to him, he may sell, pledge or otherwise
dispose of the goods to a third person, and if such person obtains delivery of the
goods in good faith and without notice of the lien or other right of the original seller
in respect of the goods, he would get a good title to them [Section 30(2)]. However, a
person in possession of goods under a ‘hire-purchase’ agreement which gives him only an
option to buy is not covered within the section unless it amounts to a sale.
(6) Effect of Estoppel: Where the owner is estopped by the conduct from denying the seller’s
authority to sell, the transferee will get a good title as against the true owner.

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 But before a good title by estoppel can be made, it must be shown that the true owner
had actively suffered or held out the other person in question as the true owner or as
a person authorized to sell the goods.
(7) Sale by an unpaid seller: Where an unpaid seller who had exercised his right of lien or
stoppage in transit resells the goods, the buyer acquires a good title to the goods as
against the original buyer [Section 54 (3)].
(8) Sale under the provisions of other Acts:
(i) Sale by an Official Receiver or Liquidator of the Company will give the purchaser a
valid title.
(ii) Purchase of goods from a finder of goods will get a valid title under circumstances
[Section 169 of the Indian Contract Act, 1872]
(iii) A sale by pawnee can convey a good title to the buyer [Section 176 of the Indian
Contract Act, 1872]
Q4. Mr. G sold some goods to Mr. H for certain price by issue of an invoice, but payment in respect of
the same was not received on that day. The goods were packed and lying in the godown of Mr. G.
The goods were inspected by H’s agent and were found to be in order. Later on, the dues of the
goods were settled in cash. Just after receiving cash, Mr. G asked Mr. H that goods should be taken
away from his godown to enable him to store other goods purchased by him. After one day, since
Mr. H did not take delivery of the goods, Mr. G kept the goods out of the godown in an open space.
Due to rain, some goods were damaged.
Referring to the provisions of the Sale of Goods Act, 1930, analyse the above situation and decide
who will be held responsible for the above damage.
Will your answer be different, if the dues were not settled in cash and are still pending?
Sol.
Provision
According to section 44 of the Sales of Goods Act, 1932, when the seller is ready and willing to
deliver the goods and requests the buyer to take delivery, and the buyer does not within a
reasonable time after such request take delivery of the goods, he is liable to the seller for any loss
occasioned by his neglect or refusal to take delivery and also for a reasonable charge for the care
and custody of the goods
The property in the goods or beneficial right in the goods passes to the buyer at appoint of time
depending upon ascertainment, appropriation and delivery of goods. Risk of loss of goods prima
facie follows the passing of property in goods. Goods remain at the seller’s risk unless the property
there in is transferred to the buyer, but after transfer of property therein to the buyer the goods are
at the buyer’s risk whether delivery has been made or not.
Analysis and Conclusion
In the given case, since Mr. G has already intimated Mr. H, that he wanted to store some other
goods and thus Mr. H should take the delivery of goods kept in the godown of Mr. G, the loss
of goods damaged should be borne by Mr. H.
If the price of the goods would not have settled in cash and some amount would have been pending,
then Mr. G will be treated as an unpaid seller and he can enforce the following rights against
the goods as well as against the buyer personally:

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 (a) Where under a contract of sale the property in the goods has passed to the buyer and the
buyer wrongfully neglects or refuses to pay for the goods according to the terms of the
contract, the seller may sue him for the price of the goods. [Section 55(1) of the Sales of
Goods Act, 1930]
(b) Where under a contract of sale the price is payable on a day certain irrespective of
delivery and the buyer wrongfully neglects or refuses to pay such price, the seller may
sue him for the price although the property in the goods has not passed and the goods
have not been appropriated to the contract. [Section 55(2) of the Sales of Goods Act, 1930].
Q5. Describe the consequences of “destruction of goods” under the Sale of Goods Act, 1930, where the
goods have been destroyed after the agreement to sell but before the sale is affected.
Sol. Destruction of Goods-Consequences: In accordance with the provisions of the Sale of Goods Act,
1930 as contained in Section 7, a contract for the sale of specific goods is void if at the time
when the contract was made; the goods without the knowledge of the seller, perished or
become so damaged as no longer to answer to their description in the contract, then the
contract is void ab initio.
This section is based on the rule that where both the parties to a contract are under a mistake as to
a matter of fact essential to a contract, the contract is void.
In a similar way Section 8 provides that an agreement to sell specific goods becomes void if
subsequently the goods, without any fault on the part of the seller or buyer, perish or become so
damaged as no longer to answer to their description in agreement before the risk passes to the
buyer. This rule is also based on the ground of impossibility of performance as stated above.

It may, however, be noted that section 7 and 8 apply only to specific goods and not to
unascertained goods.
If the agreement is to sell a certain quantity of unascertained goods, the perishing of even
the whole quantity of such goods in the possession of the seller will not relieve him of his
obligation to deliver the goods.
Q6. J the owner of a Fiat car wants to sell his car. For this purpose he hand over the car to P, a
mercantile agent for sale at a price not less than Rs. 50, 000. The agent sells the car for Rs. 40, 000
to A, who buys the car in good faith and without notice of any fraud. P misappropriated the money
also. J sues A to recover the Car. Decide given reasons whether J would succeed.
Sol.
Provision
The problem in this case is based on the provisions of the Sale of Goods Act, 1930 contained in the
proviso to Section 27. The proviso provides that a mercantile agent is one who in the
customary course of his business, has, as such agent, authority either to sell goods, or to
consign goods, for the purpose of sale, or to buy goods, or to raise money on the security of
goods [Section 2(9)]. The buyer of goods from a mercantile agent, who has no authority from the
principal to sell, gets a good title to the goods if the following conditions are satisfied:
1. The agent should be in possession of the goods or documents of title to the goods with
the consent of the owner.
2. The agent should sell the goods while acting in the ordinary course of business of a
mercantile agent.
3. The buyer should act in good faith.

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 4. The buyer should not have at the time of the contract of sale notice that the agent has no
authority to sell.
Analysis and Conclusion
In the instant case, P, the agent, was in the possession of the car with J’s consent for the purpose of
sale. A, the buyer, therefore obtained a good title to the car. Hence, J in this case, cannot recover the
car from A.
Q7. What are the rules related to Acceptance of Delivery of Goods?
Sol. Rules related to acceptance of delivery: Acceptance is deemed to take place when the
buyer-
(a) intimates to the seller that he had accepted the goods; or
(b) does any act to the goods, which is inconsistent with the ownership of the seller; or
(c) retains the goods after the lapse of a reasonable time, without intimating to the seller
that he has rejected them (Section 42).
Ordinarily, a seller cannot compel the buyer to return the rejected goods; but the seller is
entitled to a notice of the rejection.
Where the seller is ready and willing to deliver the goods and requests the buyer to take
delivery, and the buyer does not take delivery within a reasonable time, he is liable to the
seller for any loss occasioned by the neglect or refusal to take delivery, and also
reasonable charge for the care and custody of the goods (Sections 43 and 44).
Q8. Mr. S agreed to purchase 100 bales of cotton from V, out of his large stock and sent his men to
take delivery of the goods. They could pack only 60 bales. Later on, there was an accidental fire
and the entire stock was destroyed including 60 bales that were already packed. Referring to the
provisions of the Sale of Goods Act, 1930 explain as to who will bear the loss and to what extent?
Sol.
Provision
Section 26 of the Sale of Goods Act, 1930 provides that unless otherwise agreed, the goods
remain at the seller’s risk until the property therein is transferred to the buyer, but when
the property therein is transferred to the buyer, the goods are at buyer’s risk.
whether delivery has been made or not. Further Section 18 read with Section 23 of the Act
provide that in a contract for the sale of unascertained goods, no property in the goods is
transferred to the buyer, unless and until the goods are ascertained and where there is
contract for the sale of unascertained or future goods by description, and goods of that
description and in a deliverable state are unconditionally appropriated to the contract,
either by the seller with the assent of the buyer or by the buyer with the assent of the
seller, the property in the goods thereupon passes to the buyer. Such assent may be
express or implied.
Analysis and conclusion
Applying the aforesaid law to the facts of the case in hand, it is clear that Mr. S has the right to
select the good out of the bulk and he has sent his men for same purpose.
Hence the problem can be answered based on the following two assumptions and the answer
will vary accordingly.

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 (i) Where the bales have been selected with the consent of the buyer’s representatives: In this case
the 60 bales has been transferred to the buyer and goods have been appropriated to the
contract. Thus, loss arising due to fire in case of 60 bales would be borne by Mr. S. As
regards 40 bales, the loss would be borne by Mr. V, since the goods have not been identified
and appropriated.
(ii) Where the bales have not been selected with the consent of buyer’s representatives: In this
case, the goods has not been transferred at all and hence the loss of 100 bales would be
borne by Mr. V completely.
Q9. Ms. R owns a two Wheeler which she handed over to her friend Ms. K on sale or return basis. Even
after a week, Ms. K neither returned the vehicle nor made payment for it. She instead pledged the
vehicle to Mr. A to obtain a loan. Ms. R now wants to claim the two Wheeler from Mr. A. Will she
succeed?
Examine with reference to the provisions of the Sale of Goods Act, 1930, what recourse is available
to Ms. R?
Would your answer be different if it had been expressly provided that the vehicle would remain the
property of Ms. R until the price has been paid?
Sol.
Provision
As per the provisions of Section 24 of the Sale of Goods Act, 1930, when goods are delivered to
the buyer on approval or “on sale or return” or other similar terms, the property therein
passes to the buyer-
(a) when the buyer signifies his approval or acceptance to the seller or does any other act
adopting the transaction;
(b) if he does not signify his approval or acceptance to the seller but retains the goods
without giving notice of rejection, then, if a time has been fixed for the return of the goods,
on the expiration of such time, and, if no time has been fixed, on the expiration of a reasonable
time; or
(c) he does something to the good which is equivalent to accepting the goods e.g. he pledges
or sells the goods.
Analysis and conclusion
Referring to the above provisions, we can analyse the situation given in the question:
(i) In the instant case, Ms. K, who had taken delivery of the two wheeler on Sale or Return basis
pledged the two wheeler to Mr. A, has attracted the third condition that she has done
something to the good which is equivalent to accepting the goods e.g. she pledges or sells the
goods. Therefore, the property therein (two wheeler) passes to Mr. A. Now in this situation,
Ms. R cannot claim back her two wheeler from Mr. A, but she can claim the price of the
two wheeler from Ms. K only.

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 (ii) It may be noted that where the goods have been delivered by a person on “sale or return” on
the terms that the goods were to remain the property of the seller till they are paid for, the
property therein does not pass to the buyer until the terms are complied with, i.e., price is paid
for. Hence, in this case, it is held that at the time of pledge, the ownership was not transferred
to Ms. K. Thus, the pledge was not valid and Ms. R could recover the two wheeler from
Mr. A.
Q10. A went to B’s shop and selected some jewellery. He falsely represented himself to be a man of
credit and thereby persuaded B to take the payment by cheque. He further requested him to
hand over the particular type of ring immediately. On the due date, when the seller, B
presented the cheque for payment, the cheque was found to be dishonoured. Before B could
avoid the contract on the ground of fraud by A, he had sold the ring to C. C had taken the ring
in good faith and without any notice of the fact that the goods with A were under a voidable
contract. Discuss if such a sale made by non-owner is valid or not as per the provisions of Sale
of Goods Act, 1930?
Sol.
Provision
Section 27 of Sale of Goods Act, 1930 states that no man can sell the goods and give a good
title unless he is the owner of the goods. However, there are certain exceptions to this
rule of transfer of title of goods.
One of the exceptions is sale by person in possession under a voidable contract (Section
29 of Sale of Goods Act, 1930)
1. If a person has possession of goods under a voidable contract.
2. The contract has not been rescinded or avoided so far
3. The person having possession sells it to a buyer
4. The buyer acts in good faith
5. The buyer has no knowledge that the seller has no right to sell.
Then, such a sale by a person who has possession of goods under a voidable contract shall
amount to a valid sale and the buyer gets the better title.
Analysis and conclusion
Based on the provisions, Mr. A is in possession of the ring under a voidable contract as per
provisions of Indian Contract Act, 1872. Also, B has not rescinded or avoided the contract, Mr. A
is in possession of the ring and he sells it new buyer Mr. C who acts in good faith and has no
knowledge that A is not the real owner. Since all the conditions of Section 29 of Sale of Goods
Act, 1930 are fulfilled, therefore sale of ring made by Mr. A to Mr. C is a valid sale.
Q11. Referring to the provisions of the Sale of Goods Act, 1930, state the circumstances under which
when goods are delivered to the buyer “on approval” or “on sale or return” or other similar
terms, the property therein passes to the buyer.
Ms. Preeti owned a motor car which she handed over to Mr. Joshi on sale or return basis. After a
week, Mr. Joshi pledged the motor car to Mr. Ganesh. Ms. Preeti now claims back the motor car
from Mr. Ganesh. Will she succeed? Referring to the provisions of the Sale of Goods Act, 1930,
decide and examine what recourse is available to Ms. Preeti.

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 Sol.
Provision
As per the provisions of Section 24 of the Sale of Goods Act, 1930, when goods are delivered to
the buyer on approval or “on sale or return” or other similar terms, the property therein
passes to the buyer-
(a) when the buyer signifies his approval or acceptance to the seller or does any other act
adopting the transaction;
(b) if he does not signify his approval or acceptance to the seller but retains the goods
without giving notice of rejection, then, if a time has been fixed for the return of the goods,
on the expiration of such time, and, if no time has been fixed, on the expiration of a reasonable
time; or
(c) he does something to the good which is equivalent to accepting the goods e.g. he pledges
or sells the goods.
Analysis and conclusion
Referring to the above provisions, we can analyse the situation given in the question.
Since, Mr. Joshi, who had taken delivery of the Motor car on Sale or Return basis and pledged
the motor car to Mr. Ganesh, has attracted the third condition that he has done something to
the good which is equivalent to accepting the goods e.g. he pledges or sells the goods. Therefore,
the property therein (Motor car) passes to Mr. Joshi. Now in this situation, Ms. Preeti cannot
claim back her Motor Car from Mr. Ganesh, but she can claim the price of the motor car from
Mr. Joshi only.
Q12. Akansh purchased a Television set from Jethalal, the owner of Gada Electronics on the condition that
first three days he will check its quality and if satisfied he will pay for that otherwise he will return
the Television set. On the second day, the Television set was spoiled due to an earthquake. Jethalal
demands the price of Television set from Akansh. Whether Akansh is liable to pay the price under
the Sale of Goods Act,1930? If not, who will ultimately bear the loss?
Sol.
Provision
As per the provisions of Section 24 of the Sale of Goods Act, 1930, when goods are delivered to
the buyer on approval or “on sale or return” or other similar terms, the property therein
passes to the buyer-

(i) when the buyer signifies his approval or acceptance to the seller or does any other act
adopting the transaction;
(ii) if he does not signify his approval or acceptance to the seller but retains the goods
without giving notice of rejection, then, if a time has been fixed for the return of the
goods, on the expiration of such time, and, if no time has been fixed, on the expiration of a
reasonable time; or
(iii) he does something to the good which is equivalent to accepting the goods e.g. he
pledges or sells the goods.
Further, as per Section 8, where there is an agreement to sell specific goods, and subsequently the
goods without any fault on the part of the seller or buyer perish or become so damaged as no longer

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 to answer to their description in the agreement before the risk passes to the buyer, the agreement is
thereby avoided.
Analysis and conclusion
According to above provisions and fact, the property is not passes to Akansh i.e. buyer as no
condition of Section 24 is satisfied. Hence, risk has not passed to buyer and the agreement is
thereby avoided. Akansh is not liable to pay the price. The loss finally should be borne by
Seller, Mr. Jethalal.
Q13. Sohan is a trader in selling of wheat. Binod comes to his shop and ask Sohan to show him some good
quality wheat. Binod is satisfied with the quality of wheat. Sohan agrees to sell 100 bags of wheat to
Binod on 10th June 2021. The delivery of wheat and the payment was to be made in next three
months i.e. by 10 th September 2021 by Binod. Before the goods are delivered to Binod, Sohan gets
another customer Vikram in his shop who is ready to pay higher price for the wheat. Sohan sells the
goods of Binod (which were already lying in his possession even after sale) to Vikram. Vikram has
no knowledge that Sohan is not the owner of goods. With reference to Sale of Goods Act,1930,
discuss if such a sale made by Sohan to Vikram is a valid sale?
Sol.
Provision
The given question deals with the rule related to transfer of title of goods. Section 27 of the Sale of
Goods Act ,1930 specify the general rule “ No man can sell the goods and give a good title unless he
is the owner of the goods”. The latin maxim “ NEMO DET QUOD NON HABET”. However, there
are certain exceptions to this rule. One of the exceptions is given in Section 30 (1) of Sale of
Goods Act,1930 wherein the sale by seller in possession of goods even after sale is made, is
held to be valid. If the following conditions are satisfied, then it amounts to a valid sale although
the seller is no more the owner of goods after sale.
(i) A seller has possession of goods after sale
(ii) with the consent of the other party (i.e. buyer)
(iii) the seller sells goods (already sold) to a new buyer
(iv) the new buyer acts in good faith
(v) The new buyer has no knowledge that the seller has no authority to sell.
Analysis and conclusion
In the given question, the seller Sohan has agreed to sell the goods to Binod, but delivery of the
goods is still pending. Hence Sohan is in possession of the goods and this is with the consent of
buyer i.e. Binod. Now Sohan sell those goods to Vikram, the new buyer. Vikram is buying the
goods in good faith and also has no knowledge that Sohan is no longer the owner of goods.
Since all the above conditions given under Section 30 (1) of Sale of Goods Act, 1930 are satisfied,
therefore the sale made by Sohan to Vikram is a valid sale even if Sohan is no longer the
owner of goods.
Q14. Avyukt purchased 100 Kgs of wheat from Bhaskar at Rs. 30 per kg. Bhaskar says that wheat is in his
warehouse in the custody of Kishore, the warehouse keeper. Kishore confirmed Avyukt that he can
take the delivery of wheat from him and till then he is holding wheat on Avyukt’s behalf. Before
Avyukt picks the goods from warehouse, the whole wheat in the warehouse has flowed in flood.

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 Now Avyukt wants his price on the contention that no delivery has been done by seller. Whether
Avyukt is right with his views under the Sale of Goods Act, 1930.
Sol.
Provision
As per the provisions of the Sale of Goods Act, 1930 there are three modes of delivery,
(i) Actual delivery, (ii) Constructive delivery and (iii) Symbolic delivery. When delivery is affected
without any change in the custody or actual possession of the things, it is called constructive
delivery or delivery by acknowledgement. Constructive delivery takes place when a person in
possession of goods belonging to seller acknowledges to the buyer that he is holding the goods on
buyer’s behalf.

Analysis and Conclusion

In the instant case, Kishore acknowledges Avyukt that he is holding wheat on Avyukt’s
behalf. Before picking the wheat from warehouse by Avyukt, whole wheat was flowed in
flood.
On the basis of above provisions and facts, it is clear that possession of the wheat has been
transferred through constructive delivery. Hence, Avyukt is not right. He cannot claim the
price back.
Q15. A, B and C were joint owner of a truck and the possession of the said truck was with B. X purchased
the truck from B without knowing that A and C were also owners of the truck. Decide in the light of
provisions of Sales of Goods Act 1930, whether the sale between B and X is valid or not?
Sol.
Provision
According to Section 28 of the Sales of Goods Act, sale by one of the several joint owners is valid if
the following conditions are satisfied:
 One of the several joint owners has the sole possession of them.
 Possession of the goods is by the permission of the co-owners.
 The buyer buys them in good faith and has not at the time of contract of sale knowledge
that the seller has no authority to sell.
Analysis and conclusion
In the above case, A, B and C were the joint owners of the truck and the possession of the
truck was with B. Now B sold the said truck to X. X without knowing this fact purchased the
truck from B.
The sale between B and X is perfectly valid because Section 28 of the Sales of Goods Act provides
that in case one of the several joint owners has the possession of the goods by the permission of
the co- owners and if the buyer buys them in good faith without the knowledge of the fact that
seller has no authority to sell, it will give rise to a valid contract of sale.
Q16. X agreed to purchase 300 tons of wheat from Y out of a larger stock. X sent his men with the sacks
and 150 tons of wheat were put into the sacks. Then there was a sudden fire and the entire stock
was gutted. Who will bear the loss and why?

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Sol.
Provision
According to Section 21 of the Sales of Goods Act, 1930, if the goods are not in a deliverable state
and the contract is for the sale of specific goods, the property does not pass to the buyer unless:
(i) The seller has done his act of putting the goods in a deliverable state and
(ii) The buyer has knowledge of it.
Sometimes the seller is required to do certain acts so as to put the goods in deliverable state like
packing, filling in containers etc. No property in goods passes unless such act is done and buyer
knows about it.
Analysis and conclusion
In the given case, X has agreed to purchase 300 tons of wheat from Y out of a larger stock. X sent his
men (agent) to put the wheat in the sacks. Out of 300 tones only 150 tons were put into the
sacks. There was a sudden fire and the entire stock was gutted. In this case, according to the
provisions of law, 150 tons sale has taken place. So, buyer X will be responsible to bear the loss.
The loss of rest of the wheat will be that of the seller Y.
The wheat which was put in the sacks fulfils both the conditions that are:
(1) The wheat is put in a deliverable state in the sacks.
(2) The buyer is presumed to have knowledge of it because the men who put the wheat in the
sacks are that of the buyer.
Q17. The buyer took delivery of 20 tables from the seller on sale or return basis without examining them.
Subsequently, he sold 5 tables to his customers. The customer lodged a complaint of some defect in
the tables. The buyer sought to return tables to the seller. Was the buyer entitled to return the
tables to the seller under the provisions of the Sale of Goods Act, 1930?
Sol.
Provision
According to Section 24 of the Sales of Goods Act, 1930, in case of delivery of goods on approval
basis, the property in goods passes from seller to the buyer:
(i) When the person to whom the goods are given either accepts them or does an act which
implies adopting the transaction.
(ii) When the person to whom the goods are given retains the goods without giving his approval
or giving notice of rejection beyond the time fixed for the return of goods and in case no time is
fixed after the lapse of reasonable time.
Analysis and conclusion
In the given case, seller has delivered 20 tables to the buyer on sale or return basis. Buyer received
the tables without examining them. Out of these 20 tables, he sold 5 tables to his customer. It
implies that he has accepted 5 tables out of 20.
When the buyer received the complaint of some defect in the tables, he wanted to return all the
tables to the seller. According to the provisions of law he is entitled to return only 15 tables to the
seller and not those 5 tables which he has already sold to his customer. These tables are already
accepted by him so the buyer becomes liable under the doctrine of “Caveat Emptor”.

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Q18. A delivered a horse to B on sale and return basis. The agreement provided that B should try the
horse for 8 days and return, if he did not like the horse. On the third day the horse died without the
fault of B. A files a suit against B for the recovery of price. Can he recover the price?
Sol.
Provision
According to Section 24 of the Sale of Goods Act, 1930, “When the goods are delivered to the buyer
on approval or on sale or return or other similar terms the property passes to the buyer;
(i) when he signifies his approval or acceptance to the seller,
(ii) when he does any other act adopting the transaction and
(iii) if he does not signify his approval or acceptance to the seller but retains goods beyond a
reasonable time.”
Analysis and conclusion
A delivered the horse to B on sale or return basis. It was decided between them that B will try the
horse for 8 days and in case he does not like it, he will return the horse to the owner A. But on the
third day the horse died without any fault of B. The time given by the seller A to the buyer B has not
expired yet.
Therefore, the ownership of the horse still belongs to the seller A. B will be considered as the
owner of the horse only when B does not return the horse to A within stipulated time of 8
days.
The suit filed by A for the recovery of price from B is invalid and he cannot recover the price
from B. [Section 24]

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 THE SALE OF GOODS ACT, 1930

UNIT-4

Q1. AB sold 500 bags of wheat to CD. Each bag contains 50 Kilograms of wheat. AB sent 450 bags by
road transport and CD himself took remaining 50 bags. Before CD receives delivery of 450 bags
sent by road transport, he becomes bankrupt. AB being still unpaid, stops the bags in transit. The
official receiver, on CD’s insolvency claims the bags. Decide the case with reference to the
provisions of the Sale of Goods Act, 1930.
Sol.
Provision
Right of stoppage in transit (Section 50 of the Sale of Goods Act, 1930):
Subject to the provisions of this Act, when the buyer of goods becomes insolvent, the unpaid
seller who has parted with the possession of the goods has the right of stopping them in
transit, that is to say, he may resume possession of the goods as long as they are in the course
of transit and may retain them until paid or tendered price of the goods.
When the unpaid seller has parted with the goods to a carrier and the buyer has become
insolvent, he can exercise this right of asking the carrier to return the goods back, or not to
deliver the goods to the buyer.
Analysis and conclusion
In the instant case, CD, the buyer becomes insolvent, and 450 bags are in transit. AB, the
seller, can stop the goods in transit by giving a notice of it to CD. The official receiver, on
CD’s insolvency cannot claim the bags.
Q2. Ram sells 200 bales of cloth to Shyam and sends 100 bales by lorry and 100 bales by Railway.
Shyam receives delivery of 100 bales sent by lorry, but before he receives the delivery of the bales
sent by railway, he becomes bankrupt. Ram being still unpaid, stops the goods in transit. The
official receiver, on Shyam’s insolvency claims the goods. Decide the case with reference to the
provisions of the Sale of Goods Act, 1930.
Sol.
Provision
Right of stoppage of goods in transit: The problem is based on section 50 of the Sale of Goods
Act, 1930 dealing with the right of stoppage of the goods in transit available to an unpaid
seller. The section states that the right is exercisable by the seller only if the following conditions
are fulfilled.
(i) The seller must be unpaid
(ii) He must have parted with the possession of goods
(iii) The goods must be in transit
(iv) The buyer must have become insolvent
(v) The right is subject to the provisions of the Act.
Analysis and conclusion
Applying the provisions to the given case, Ram being still unpaid, can stop the 100 bales of
cloth sent by railway as these goods are still in transit.

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Q3. What are the rules which regulate the Sale by Auction under the Sale of Goods Act, 1930?
Or
Referring to the provisions of the Sale of Goods Act, 1930, state the rules provided to regulate the
“Sale by Auction.”
Sol. Legal Rules of Auction sale: Section 64 of the Sale of Goods Act, 1930 provides following rules
to regulate the sale by auction:
(a) Where goods are sold in lots: Where goods are put up for sale in lots, each lot is prima
facie deemed to be subject of a separate contract of sale.
(b) Completion of the contract of sale: The sale is complete when the auctioneer
announces its completion by the fall of hammer or in any other customary manner and
until such announcement is made, any bidder may retract from his bid.
(c) Right to bid may be reserved: Right to bid may be reserved expressly by or on behalf of
the seller and where such a right is expressly reserved, but not otherwise, the seller or
any one person on his behalf may bid at the auction.
(d) Where the sale is not notified by the seller: Where the sale is not notified to be
subject to a right to bid on behalf of the seller, it shall not be lawful for the seller to
bid himself or to employ any person to bid at such sale, or for the auctioneer knowingly to
take any bid from the seller or any such person; and any sale contravening this rule may
be treated as fraudulent by the buyer.
(e) Reserved price: The sale may be notified to be subject to a reserve or upset price; and
(f) Pretended bidding: If the seller makes use of pretended bidding to raise the price, the
sale is voidable at the option of the buyer.

Q4. Discuss the rights of an unpaid seller against the buyer under the Sales of Goods Act,1930.
Sol. The right against the buyer are as follows:
1. Suit for price (Section 55)
(a) Where under a contract of sale, the property in the goods has passed to the buyer and
the buyer wrongfully neglects or refuses to pay for the goods according to the terms
of the contract, the seller may sue him for the price of the goods. [Section 55(1)]
(b) Where under a contract of sale, the price is payable on a certain day irrespective of
delivery and the buyer wrongfully neglects or refuses to pay such price, the seller may
sue him for the price although the property in the goods has not passed and the goods
have not been appropriated to the contract. [Section 55(2)].
2. Suit for damages for non-acceptance (Section 56): Where the buyer wrongfully neglects
or refuses to accept and pay for the goods, the seller may sue him for damages for non-
acceptance.
As regards measure of damages, Section 73 of the Indian Contract Act, 1872 applies in this
case.
3. Repudiation of contract before due date (Section 60): Where the buyer repudiates the
contract before the date of delivery, the seller may treat the contract as rescinded and sue
damages for the breach. This is known as the ‘rule of anticipatory breach of contract’.
4. Suit for interest [Section 61]: Where there is specific agreement between the seller and the
buyer as to interest on the price of the goods from the date on which payment becomes
due, the seller may recover interest from the buyer.

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 If, however, there is no specific agreement to this effect, the seller may charge interest on the
price when it becomes due from such day as he may notify to the buyer.
In the absence of a contract to the contrary, the Court may award interest to the seller in a suit
by him at such rate as it thinks fit on the amount of the price from the date of the tender of the
goods or from the date on which the price was payable.
Q5. Mr. D sold some goods to Mr. E for Rs. 5,00,000 on 15 days credit. Mr. D delivered the goods. On
due date Mr. E refused to pay for it. State the position and rights of Mr. D as per the Sale of Goods
Act, 1930.
Sol.
(a) Position of Mr. D: Mr. D sold some goods to Mr. E for Rs. 5,00,000 on 15 days credit. Mr. D
delivered the goods. On due date Mr. E refused to pay for it. So, Mr. D is an unpaid seller as
according to section 45(1) of the Sale of Goods Act,1930 the seller of goods is deemed to be
an ‘Unpaid Seller’ when the whole of the price has not been paid or tendered and the seller
had an immediate right of action for the price.
Rights of Mr. D: As the goods have parted away from Mr. D, therefore, Mr. D cannot
exercise the right against the goods, he can only exercise his rights against the buyer i.e.
Mr. E which are as under:
(i) Suit for price (Section 55)
In the mentioned contract of sale, the price is payable after 15 days and Mr. E refuses to
pay such price, Mr. D may sue Mr. E for the price.
(ii) Suit for damages for non-acceptance (Section 56): Mr. D may sue Mr. E for damages
for non-acceptance if Mr. E wrongfully neglects or refuses to accept and pay for the
goods. As regards measure of damages, Section 73 of the Indian Contract Act, 1872
applies.
(iii) Suit for interest [Section 61]: If there is no specific agreement between the Mr. D and
Mr. E as to interest on the price of the goods from the date on which payment becomes
due, Mr. D may charge interest on the price when it becomes due from such day as he
may notify to Mr. E.

Q6. What are the rights of an unpaid seller against goods under the Sale of Goods Act, 1930? Explain
the rights of unpaid seller against the goods.
Sol.
(a) Rights of an unpaid seller against the goods: As per the provisions of Section 46 of the
Sale of Goods Act, 1930, notwithstanding that the property in the goods may have passed to
the buyer, the unpaid seller of goods, as such, has by implication of law:
(a) a lien on the goods for the price while he is in possession of them;
(b) in case of the insolvency of the buyer, a right of stopping the goods in transit after he
has parted with the possession of them;
(c) a right of re-sale as limited by this Act. [Sub-section (1)]
Where the property in goods has not passed to the buyer, the unpaid seller has, in addition to his
other remedies, a right of withholding delivery similar to and co-extensive with his rights of lien
and stoppage in transit where the property has passed to the buyer. [Sub-section (2)]

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 These rights can be exercised by the unpaid seller in the following circumstances:
(i) Right of lien (Section 47): According to sub-section (1), the unpaid seller of goods who is in
possession of them is entitled to retain possession of them until payment or tender of the
price in the following cases, namely:-
(a) where the goods have been sold without any stipulation as to credit;
(b) where the goods have been sold on credit, but the term of credit has expired;
(c) where the buyer becomes insolvent.
(ii) Right of stoppage in transit (Section 50): When the buyer of goods becomes insolvent,
the unpaid seller who has parted with the possession of the goods has the right of
stopping them in transit, that is to say, he may resume possession of the goods as long
as they are in the course of transit, and may retain them until paid or tendered price of
the goods.
(iii) Right to re-sell the goods (Section 54): The unpaid seller can exercise the right to re-sell the
goods under the following conditions:
1. Where the goods are of a perishable nature
2. Where he gives notice to the buyer of his intention to re-sell the goods
3. Where an unpaid seller who has exercised his right of lien or stoppage in transit
resells the goods
4. A re-sale by the seller where a right of re-sale is expressly reserved in a contract of
sale
5. Where the property in goods has not passed to the buyer
Q7. Describe the term “unpaid seller” under the Sale of Goods Act, 1930? When can an unpaid seller
exercise the right of stoppage of goods in transit?
Sol. Unpaid Seller: According to Section 45 of the Sale of Goods Act, 1930, the seller of goods is
deemed to be an ‘Unpaid Seller’ when-
(a) the whole of the price has not been paid or tendered.
(b) a bill of exchange or other negotiable instrument has been received as conditional
payment, and it has been dishonored.
Right of stoppage of goods in transit
When the unpaid seller has parted with the goods to a carrier and the buyer has become
insolvent, he can exercise this right by asking the carrier to return the goods back, or not to
deliver the goods to the buyer.
However, the right of stoppage in transit is exercised only when the following conditions
are fulfilled:
(a) The seller must be unpaid.
(b) The seller must have parted with the possession of goods.
(c) The goods must be in the course of transit.
(d) The buyer must have become insolvent.
(e) The right is subject to provisions of the Act.

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Q8. What are the rights of buyer against the seller, if the seller commits a breach of contract under
the Sale of Goods Act, 1930?
Sol. If the seller commits a breach of contract, the buyer gets the following rights against the seller:
1. Damages for non-delivery [Section 57]: Where the seller wrongfully neglects or refuses
to deliver the goods to the buyer, the buyer may sue the seller for damages for non-
delivery.
2. Suit for specific performance (Section 58): Where the seller commits of breach of the
contract of sale, the buyer can appeal to the court for specific performance.
The court can order for specific performance only when the goods are ascertained or
specific.
3. Suit for breach of warranty (Section 59): Where there is breach of warranty on the part
of the seller, or where the buyer elects to treat breach of condition as breach of warranty,
the buyer is not entitled to reject the goods only on the basis of such breach of
warranty. But he may –
(i) set up against the seller the breach of warranty in diminution or extinction of the
price; or
(ii) sue the seller for damages for breach of warranty.
4. Repudiation of contract before due date (Section 60): Where either party to a contract
of sale repudiates the contract before the date of delivery, the other may either treat the
contract as subsisting and wait till the date of delivery, or he may treat the contract
as rescinded and sue for damages for the breach.
5. Suit for interest:
(1) Nothing in this Act shall affect the right of the seller or the buyer to recover interest or
special damages, in any case where by law interest or special damages may be
recoverable, or to recover the money paid where the consideration for the payment of
it has failed.
(2) In the absence of a contract to the contrary, the court may award interest at such
rate as it thinks fit on the amount of the price to the buyer in a suit by him for the
refund of the price in a case of a breach of the contract on the part of the seller from
the date on which the payment was made.
Q9. Explain the provisions of law relating to unpaid seller’s ‘right of lien’ and distinguish it from the
“right of stoppage the goods in transit”.
Sol. Right of lien of an unpaid seller The legal provisions regarding the right of lien of an unpaid
seller has been stated from Sections 47 to 49 of the Sale of Goods Act, 1930 which may be
enumerated as follows:
(i) According to Section 47, the unpaid seller of the goods who is in possession of them
is entitled to retain possession of them until payment or tender of the price in the
following cases namely:
(a) where the goods have been sold without any stipulation as to credit.
(b) where the goods have been sold on credit, but the term of credit has expired; or
(c) where the buyer becomes insolvent.

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 The seller may exercise his right of lien not withstanding that he is in possession of the goods as
agent or bailee for the buyer.
(ii) Section 48 states that where an unpaid seller has made part delivery of the goods, he may
exercise his right of lien on the remainder, unless such part delivery has been made under
such circumstances as to show an agreement to waive the lien.
(iii) According to Section 49 the unpaid seller loses his lien on goods:
(a) when he delivers the goods to a carrier or other bailee for the purpose of
transmission to the buyer without reserving the right of disposal of the goods.
(b) when the buyer or his agent lawfully obtains possession of the goods;
(c) by waiver thereof.
The unpaid seller of the goods, having a lien thereon, does not lose his lien by reason only that
he has obtained a decree to the price of the goods.
Right of lien and Right to stoppage the goods in transit; distinction:
(i) The essence of a right of lien is to retain possession whereas the right of stoppage in
transit is right to regain possession.
(ii) Seller should be in possession of goods under lien while in stoppage in transit
(i) Seller should have parted with the possession (ii) possession should be with a
carrier and (iii) Buyer has not acquired the possession.
(iii) Right of lien can be exercised even when the buyer is not insolvent, but it is not
the case with right of stoppage in transit.
(iv) Right of stoppage in transit begins when the right of lien ends. Thus, the end of the
right of lien is the starting point of the right of stoppage the goods in transit.
Q10. Suraj sold his car to Sohan for Rs. 75,000. After inspection and satisfaction, Sohan paid Rs.
25,000 and took possession of the car and promised to pay the remaining amount within a
month. Later on Sohan refuses to give the remaining amount on the ground that the car was not
in a good condition. Advise Suraj as to what remedy is available to him against Sohan.
Sol.
Provision
As per the section 55 of the Sale of Goods Act, 1930 an unpaid seller has a right to institute a suit
for price against the buyer personally. The said Section lays down that:
(i) Where under a contract of sale the property in the goods has passed to buyer and the
buyer wrongfully neglects or refuses to pay for the goods, the seller may sue him for
the price of the goods [Section 55(1)].
(ii) Where under a contract of sale the price is payable on a certain day irrespective of
delivery and the buyer wrongfully neglects or refuses to pay such price, the seller
may sue him for the price. It makes no difference even if the property in the goods has
not passed and the goods have not been appropriated to the contract [Section 55(2)].
Analysis and conclusion
This problem is based on above provisions. Hence, Suraj will succeed against Sohan for
recovery of the remaining amount. Apart from this Suraj is also entitled to:
(1) Interest on the remaining amount
(2) Interest during the pendency of the suit.
(3) Costs of the proceedings.

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Q11. Rachit arranges an auction to sale an antic wall clock. Megha, being one of the bidders, gives
highest bid. For announcing the completion of sale, the auctioneer fall the hammer on table but
suddenly hammer brakes and damages the watch. Megha wants to avoid the contract. Can she
do so under the provisions of the Sale of Goods Act, 1930?
Sol.
Provision
By virtue of provisions of Section 64 of the Sale of Goods Act, 1930, in case of auction sale, the
sale is complete when the auctioneer announces its completion by the fall of the hammer
or in some other customary manner.
Analysis and conclusion
In the instant case, Megha gives the highest bid in the auction for the sale of antic wall clock
arranged by Rachit. While announcing the completion of sale by fall of hammer on the table,
hammer brakes and damages the clock.
On the basis of above provisions, it can be concluded that the sale by auction cannot be
completed until hammer comes in its normal position after falling on table. Hence, in the
given problem, sale is not completed. Megha will not be liable for loss and can avoid the
contract.
Q12. When can an unpaid seller of goods exercise his right of lien over the goods under the Sale of
Goods Act? Can he exercise his right of lien even if the property in goods has passed to the
buyer? When such a right is terminated? Can he exercise his right even after he has obtained a
decree for the price of goods from the court?
Sol.
A lien is a right to retain possession of goods until the payment of the price. It is available to the
unpaid seller of the goods who is in possession of them where-
(i) the goods have been sold without any stipulation as to credit;
(ii) the goods have been sold on credit, but the term of credit has expired;
(iii) the buyer becomes insolvent.
The unpaid seller can exercise ‘his right of lien even if the property in goods has passed on
to the buyer. He can exercise his right even if he is in possession of the goods as agent or bailee
for the buyer.
Termination of lien: An unpaid seller losses his right of lien thereon-
(i) When he delivers the goods to a carrier or other bailee for the purpose of
transmission to the buyer without reserving the right of disposal of the goods;
(ii) When the buyer or his agent lawfully obtains possession of the goods;
Yes, he can exercise his right of lien even after he has obtained a decree for the price of
goods from the court.
Q13. A agrees to sell certain goods to B on a certain date on 10 days credit. The period of 10 days
expired and goods were still in the possession of A. B has also not paid the price of the goods. B
becomes insolvent. A refuses to deliver the goods to exercise his right of lien on the goods. Can
he do so under the Sale of Goods Act, 1930?

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Sol.
Provision
Lien is the right of a person to retain possession of the goods belonging to another until
claim of the person in possession is satisfied. The unpaid seller has also right of lien over
the goods for the price of the goods sold.
Section 47(1) of the Sales of Goods Act, 1930 provides that the unpaid seller who is in the
possession of the goods is entitled to exercise right of lien in the following cases:
1. Where the goods have been sold without any stipulation as to credit
2. Where the goods have been sold on credit but the term of credit has expired
3. Where the buyer has become insolvent even though the period of credit has not yet
expired.
Analysis and conclusion
In the given case, A has agreed to sell certain goods to B on a credit of 10 days. The period
of 10 days has expired. B has neither paid the price of goods nor taken the possession of
the goods. That means the goods are still physically in the possession of A, the seller. In the
meantime B, the buyer has become insolvent. In this case, A is entitled to exercise the right
of lien on the goods because the buyer has become insolvent and the term of credit has
expired without any payment of price by the buyer.
Q14. A, who is an agent of a buyer, had obtained the goods from the Railway Authorities and loaded
the goods on his truck. In the meantime, the Railway Authorities received a notice from B, the
seller for stopping the goods in transit as the buyer has become insolvent. Referring to the
provisions of Sale of Goods Act, 1930, decide whether the Railway Authorities can stop the
goods in transit as instructed by the seller?
Sol.
Provision
The right of stoppage of goods in transit means the right of stopping the goods after the seller
has parted with the goods. Thereafter the seller regains the possession of the goods.
This right can be exercised by an unpaid seller when he has lost his right of lien over the
goods because the goods are delivered to a carrier for the purpose of taking the goods to
the buyer. This right is available to the unpaid seller only when the buyer has become
insolvent. The conditions necessary for exercising this right are:
1 The buyer has not paid the total price to the seller
2 The seller has delivered the goods to a carrier thereby losing his right of lien
3 The buyer has become insolvent
4 The goods have not reached the buyer, they are in the course of transit. (Section 50, 51 and
52)
Analysis and conclusion
In the given case A, who is an agent of the buyer, had obtained the goods from the railway
authorities and loaded the goods on his truck. After this the railway authorities received a notice
from the seller B to stop the goods as the buyer had become insolvent.
According to the Sales of Goods Act, 1930, the railway authorities cannot stop the goods
because the goods are not in transit. A who has loaded the goods on his truck is the agent

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 of the buyer. That means railway authorities have given the possession of the goods to the
buyer. The transit comes to an end when the buyer or his agent takes the possession of the
goods.
Q15. J sold a machine to K. K gave a cheque for the payment. The cheque was dishonoured. But J
handed over a delivery order to K. K sold the goods to R on the basis of the delivery order. J
wanted to exercise his right of lien on the goods. Can he do so under the provisions of the Sale of
Goods Act, 1930?
Sol.
Provision
The right of lien and stoppage in transit are meant to protect the seller. These will not be
affected even when the buyer has made a transaction of his own goods which were with the
seller under lien. But under two exceptional cases these rights of the seller are affected:
1 When the buyer has made the transaction with the consent of the seller
2 When the buyer has made the transaction on the basis of documents of title such as
bill of lading, railway receipt or a delivery order etc.
Analysis and conclusion
In the given case, J has sold the machine to K and K gave a cheque for the payment. But
the cheque was dishonoured that means J, the seller is an unpaid seller. So, he is entitled to
exercise the right of lien, but according to section 53(1) his right of lien is defeated because
he has given the document of title to the buyer and the buyer has made a transaction of
sale on the basis of this document. So, R who has purchased the machine from K can demand
the delivery of the machine.

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 CHAPTER 4 - THE COMPANIES ACT, 2013

Q1. What do you mean by the term Capital? Describe its classification in the domain of
Company Law
Sol.
(a) Meaning of capital: The term capital has variety of meanings. But in relation to a company
limited by shares, the term ‘capital’ means ‘share capital’. Share capital means capital of
the company expressed in terms of rupees divided into shares of fixed amount.
(b) Classification of capital: In the domain of Company Law, the term capital can be classified
as follows:
(a) Nominal or authorized or registered capital:
This expression means such capital as is authorized by memorandum of a company to be
the maximum amount of share capital of the company.
(b) Issued capital: It means such capital as the company issues from time to time for
subscription.
(c) Subscribed capital: As such part of the capital which is for the time being subscribed
by the members of a company.
(d) Called up capital: As such part of the capital which has been called for payment. It is
the total amount called up on the shares issued.
(e) Paid-up capital: It is the total amount paid or credited as paid up on shares issued. It is
equal to called up capital less calls in arrears.

Q2. BC Private Limited and its subsidiary KL Private Limited are holding 90,000 and 70,000
shares respectively in PQ Private Limited. The paid-up share capital of PQ Private Limited
is Rs. 30 Lakhs (3 Lakhs equity shares of Rs. 10 each fully paid). Analyse with reference to
provisions of the Companies Act, 2013 whether PQ Private Limited is a subsidiary of BC
Private Limited. What would be your answer if KL Private Limited is holding 1,60,000
shares in PQ Private Limited and no shares are held by BC Private Limited in PQ Private
Limited?
Sol.
Provision
(a) Section 2(87) defines “subsidiary company” in relation to any other company
(that is to say the holding company), means a company in which the holding
company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power either at
its own or together with one or more of its subsidiary companies:

For the purposes of this section:

a company shall be deemed to be a subsidiary company of the holding company even if
the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary
company of the holding company;
(I) “layer” in relation to a holding company means its subsidiary or subsidiaries.

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 Analysis and conclusion
In the instant case, BC Private Limited together with its subsidiary KL Private Limited
is holding 1,60,000 shares (90,000+70,000 respectively) which is more than one half
in nominal value of the Equity Share Capital of PQ Private Limited. Hence, PQ Private
Limited is subsidiary of BC Private Limited.
(b) In the second case, the answer will remain the same. KL Private Limited is a holding
1,60,000 shares i.e., more than one half in nominal value of the Equity Share
Capital of PQ Private Limited (i.e., holding more than one half of voting
power). Hence, KL Private Limited is holding company of PQ Private Company and
BC Private Limited is a holding company of KL Private Limited.
Hence, by virtue of Chain relationship, BC Private Limited becomes the holding
company of PQ Private Limited.

Q3. ABC Limited was registered as a public company. There were 245 members in the
company. Their details are as follows:

Directors and their relatives 190

Employees 15
Ex-employees
(shares were allotted when they were employees) 20
Others 20
(Including 10 joint holders holding shares jointly in the name of father and
son)
Sol.
The Board of directors of the company propose to convert it into a private company. Advice
whether reduction in the number of members is necessary for conversion.

Provision
In lines with Section 2 (68) of the Companies Act, 2013, a private company by its Articles,
limits the number of its members to 200.
Provided that, where two or more persons hold one or more shares in a company
jointly, they shall, for the purposes of this clause, be treated as a single member.
It is further provided that, following persons shall not be included in the number of
members:
(i) Persons who are in the employment of the company; and
(ii) Persons, who, having been formerly in the employment of the company, were
members of the company while in that employment and have continued to be
members after the employment ceased.
Analysis and conclusion
In the given case, ABC Limited was having 245 members in the company. The Board of
Directors of said company proposes to convert it into private company.
As per the facts, ABC Limited has members constituting of Directors & their relatives,
employees, Ex-employees and others including 10 joint holders. In line with the
requirement for being a private company, following shall be restricted to be as members i.e.,
Directors & their relatives & joint holders holding shares jointly constituting 200
members (190+10).

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 Accordingly, ABC Limited when converted to private company shall not be required
to reduce the number of members as the number of members as per requirement of a
private company, is fulfilled that is of maximum 200 members.

Q4. Explain Doctrine of ‘Indoor Management’ under the Companies Act, 2013. Also state the
circumstances where the outsider cannot claim relief on the ground of ‘Indoor
Management’.
Sol. Doctrine of Indoor Management (The Companies Act, 2013): According to the “doctrine of
indoor management” the outsiders, dealing with the company though are supposed to have
satisfied themselves regarding the competence of the company to enter into the proposed
contracts are also entitled to assume that as far as the internal compliance to procedures
and regulations by the company is concerned, everything has been done properly.
They are bound to examine the registered documents of the company and ensure
that the proposed dealing is not inconsistent therewith, but they are not bound to do
more. They are fully entitled to presume regularity and compliance by the company
with the internal procedures as required by the Memorandum and the Articles.
This doctrine is a limitation of the doctrine of “constructive notice” and popularly known
as the rule laid down in the celebrated case of Royal British Bank v. Turqu and. Thus,
the doctrine of indoor management aims to protect outsiders against the company.
The above mentioned doctrine of Indoor Management or Turqu and Rule has limitations of
its own. That is to say, it is inapplicable to the following cases, namely:
(a) Actual or constructive knowledge of irregularity: The rule does not protect any
person when the person dealing with the company has notice, whether actual
or constructive, of the irregularity.
(b) Suspicion of Irregularity: The doctrine in no way, rewards those who behave
negligently. Where the person dealing with the company is put upon an inquiry, for
example, where the transaction is unusual or not in the ordinary course of business,
it is the duty of the outsider to make the necessary enquiry.
(c) Forgery: The doctrine of indoor management applies only to irregularities which
might otherwise affect a transaction but it cannot apply to forgery which must be
regarded as nullity.

Q5. SK Infrastructure Limited has a paid-up share capital divided into 6,00,000 equity shares
of INR 100 each. 2,00,000 equity shares of the company are held by Central Government
and 1,20,000 equity shares are held by Government of Maharashtra. Explain with reference
to relevant provisions of the Companies Act, 2013, whether SK Infrastructure Limited can be
treated as Government Company
Sol.
(a) Provision
Government Company [Section 2(45) of the Companies Act, 2013]: Government
Company means any company in which not less than 51% of the paid-up share capital is
held by-
(i) The Central Government, or
(ii) By any State Government or Governments, or
(iii) Partly by the Central Government and partly by one or more State Governments,
and the section includes a company which is a subsidiary company of such a
Government company.

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 Analysis and conclusion
In the instant case, paid up share capital of SK Infrastructure Limited is 6,00,000 equity shares
of Rs. 100 each. 200,000 equity shares are held by Central government and 1,20,000 equity
shares are held by Government of Maharashtra. The holding of equity shares by both
government is 3,20,000 which is more than 51% of total paid up equity shares.

Hence, SK Infrastructure Limited is a Government company.

Q6. Ravi Private Limited has borrowed Rs. 5 crores from Mudra Finance Ltd. This debt is ultra
vires to the company. Examine, whether the company is liable to pay this debt? State the
remedy if any available to Mudra Finance Ltd.?

Sol.
Provision
As per the facts given, Ravi Private Limited borrowed Rs. 5 crore from Mudra Finance Ltd. This
debt is ultra vires to the company, which signifies that Ravi Private Limited has borrowed
the amount beyond the expressed limit prescribed in its memorandum.
This act of the company can be said to be null and void.
In consequence, any act done or a contract made by the company which travels beyond the
powers not only of the directors but also of the company is wholly void and inoperative in law
and is therefore not binding on the company.

Analysis and conclusion

So is being the act void in nature, there being no existence of the contract between the Ravi
Private Ltd. and Mudra Finance Ltd. Therefore, the company Ravi Private Ltd. is liable to
pay this debt amount upto the limit prescribed in the memorandum.
Remedy available to the Mudra Finance Ltd.: The impact of the doctrine of ultra vires is
that a company can neither be sued on an ultra vires transaction, nor can it sue on it. Since
the memorandum is a “public document”, it is open to public inspection. Therefore, a company
which deals with the other, is deemed to know about the powers of the company.
So, Mudra Finance Ltd. can claim for the amount within the expressed limit prescribed in its
memorandum.

Q7. Sound Syndicate Ltd., a public company, its articles of association empowers the managing
agents to borrow both short and long term loans on behalf of the company, Mr. Liddle, the director
of the company, approached Easy Finance Ltd., a non banking finance company for a loan of Rs.
25,00,000 in name of the company. The Lender agreed and provided the above said loan. Later
on, Sound Syndicate Ltd. refused to repay the money borrowed on the pretext that no resolution
authorizing such loan have been actually passed by the company and the lender should have
enquired about the same prior providing such loan hence company not liable to pay such loan.
Sol.
Analyze the above situation in terms of the provisions of Doctrine of Indoor Management
under the Companies Act, 2013 and examine whether the contention of Sound Syndicate
Ltd. is correct or not?
Provision
Doctrine of Indoor Management
According to this doctrine, persons dealing with the company need not inquire whether
internal proceedings relating to the contract are followed correctly, once they are
satisfied that the transaction is in accordance with the memorandum and articles of
association.
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 Stakeholders need not enquire whether the necessary meeting was convened and held properly
or whether necessary resolution was passed properly. They are entitled to take it for granted that
the company had gone through all these proceedings in a regular manner.
The doctrine helps protect external members from the company and states that the people are
entitled to presume that internal proceedings are as per documents submitted with the Registrar of
Companies.
Thus,
1. What happens internal to a company is not a matter of public knowledge. An outsider can
only presume the intentions of a company, but do not know the information he/she is not
privy to.
2. If not for the doctrine, the company could escape creditors by denying the authority of officials to
act on its behalf.
Analysis and conclusion
In the given question, Easy Finance Ltd. being external to the company, need not enquire
whether the necessary resolution was passed properly. Even if the company claim that no
resolution authorizing the loan was passed, the company is bound to pay the loan to Easy
Finance Ltd.

Q8. What do you mean by “Companies with charitable purpose” (section 8) under the Companies
Act, 2013? Mention the conditions of the issue and revocation of the licence of such company by
the government.
Sol. Formation of companies with charitable purpose etc. (Section 8 company):
Section 8 of the Companies Act, 2013 deals with the formation of companies which
are formed to
 promote the charitable objects of
➢ commerce,
➢ art,
➢ science,
➢ sports,
➢ education,
➢ research,
➢ social welfare,
➢ religion,
➢ charity,
➢ protection of environment etc.
Such company intends to apply its profit in
 promoting its objects and
 prohibiting the payment of any dividend to its members.
Examples of section 8 companies are FICCI, ASSOCHAM, National Sports Club of India, CII etc.
Power of Central government to issue the license–
(i) Section 8 allows the Central Government to register such person or association of
persons as a company with limited liability without the addition of words ‘Limited’ or
‘Private limited’ to its name, by issuing licence on such conditions as it deems fit.
(ii) The registrar shall on application register such person or association of persons as a
company under this section.
(iii) On registration the company shall enjoy same privileges and obligations as of a
limited company.

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 Revocation of license: The Central Government may by order revoke the licence of the
company where
(a) the company contravenes any of the requirements or the conditions of this sections
subject to which a licence is issued or
(b) where the affairs of the company are conducted fraudulently, or violative of the
objects of the company or prejudicial to public interest, and on revocation the
Registrar shall put ‘Limited’ or ‘Private Limited’ against the company’s name in the
register. But before such revocation, the Central Government must give it a
written notice of its intention to revoke the licence and opportunity to be heard
in the matter.

Q9. A company registered under section 8 of the Companies Act, 2013, earned huge profit during the
financial year ended on 31st March, 2018 due to some favorable policies declared by the
Government of India and implemented by the company. Considering the development, some
members of the company wanted the company to distribute dividends to the members of the
company. They approached you to advise them about the maximum amount of dividend that can
be declared by the company as per the provisions of the Companies Act, 2013. Examine the
relevant provisions of the Companies Act, 2013 and advise the members accordingly.

Sol. A company that is registered under section 8 of the Companies Act, 2013, is prohibited from the
payment of any dividend to its members.
The company in question is a section 8 company and hence it cannot declare dividend.
Thus, the contention of members is incorrect.

Q10. There are cases where company law disregards the principle of corporate personality or the
principle that the company is a legal entity distinct from its shareholders or members. Elucidate

Or
Some of the creditors of Pharmaceutical Appliances Ltd. have complained that the company was
formed by the promoters only to defraud the creditors and circumvent the compliance of legal
provisions of the Companies Act, 2013. In this context they seek your advice as to the meaning of
corporate veil and when the promoters can be made personally liable for the debts of the
company.

Sol. Corporate Veil refers to a legal concept whereby the company is identified separately from
the members of the company.
However, this veil can be lifted which means looking behind the company as a legal person, i.e.,
disregarding the corporate entity and paying regard, instead, to the realities behind the legal facade.
Where the Courts ignore the company, and concern themselves directly with the members or
managers, the corporate veil may be said to have been lifted. Only in appropriate
circumstances, the Courts are willing to lift the corporate veil and that too, when questions of
control are involved rather than merely a question of ownership.
Lifting of Corporate Veil
The following are the cases where company law disregards the principle of corporate personality
or the principle that the company is a legal entity distinct and separate from its shareholders or
members:
 Trading with enemy: If the public interest is likely to be in jeopardy, the Court may be willing
to crack the corporate shell
 Where corporate entity is used to evade or circumvent tax, the corporate veil may be lifted
 Where companies form other companies as their subsidiaries to act as their agent
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  Company is formed to circumvent welfare of employees
 Where the device of incorporation is adopted for some illegal or improper purpose:
Where the device of incorporation is adopted for some illegal or improper purpose, e.g., to
defeat or circumvent law, to defraud creditors or to avoid legal obligations.

Q11. Mr. Anil formed a One Person Company (OPC) on 16th April, 2018 for manufacturing electric cars.
The turnover of the OPC for the financial year ended 31st March, 2019 was about Rs. 2.25 Crores.
His friend Sunil wanted to invest in his OPC, so they decided to convert it voluntarily into a
private limited company. Can Anil do so?
Sol. As per the provisions of Sub-Rule (7) of Rule 3 of the Companies (Incorporation) Rules, 2014, an
OPC cannot convert voluntarily into any kind of company except section 8 company. Mr.
Anil can convert the OPC into a private limited company along with Sunil.

Q12. “The Memorandum of Association is a charter of a company”. Discuss. Also explain in brief the
contents of Memorandum of Association.
Sol. The Memorandum of Association of company is in fact its charter; it defines its constitution
and the scope of the powers of the company with which it has been established under the Act. It is
the very foundation on which the whole edifice of the company is built.
Object of registering a memorandum of association:
 It contains the object for which the company is formed and therefore identifies the possible
scope of its operations beyond which its actions cannot go.
 It enables shareholders, creditors and all those who deal with company to know what its
powers are and what activities it can engage in.
 A memorandum is a public document under Section 399 of the Companies Act, 2013.
Consequently, every person entering into a contract with the company is presumed to have the
knowledge of the conditions contained therein
The shareholders must know the purposes for which his money can be used by the company
and what risks he is taking in making the investment.
A company cannot depart from the provisions contained in the memorandum however
imperative may be the necessity for the departure. It cannot enter into a contract or engage in any
trade or business, which is beyond the power confessed on it by the memorandum. If it does so, it
would be ultra vires the company and void.
Contents of the memorandum: The memorandum of a company shall state—
(a) the name of the company (Name Clause) with the last word “Limited” in the case of a
public limited company, or the last words “Private Limited” in the case of a private
limited company. This clause is not applicable on the companies formed under
section 8 of the Act.
(b) the State in which the registered office of the company (Registered Office clause) is to
be situated;
(c) the objects for which the company is proposed to be incorporated and any matter
considered necessary in furtherance thereof (Object clause);
(d) the liability of members of the company (Liability clause), whether limited or
unlimited
(e) the amount of authorized capital (Capital Clause) divided into share of fixed amounts and
the number of shares with the subscribers to the memorandum have agreed to take,
indicated opposite their names, which shall not be less than one share. A company not
having share capital need not have this clause.

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 (f) the desire of the subscribers to be formed into a company. The Memorandum shall
conclude with the association clause. Every subscriber to the Memorandum shall take at
least one share, and shall write against his name, the number of shares taken by him.

Q13. A, an assessee, had large income in the form of dividend and interest. In order to reduce his tax
liability, he formed four private limited company and transferred his investments to them in
exchange of their shares. The income earned by the companies was taken back by him as
pretended loan. Can A be regarded as separate from the private limited company he formed?
Sol.
Provision
The House of Lords in Salomon Vs Salomon & Co. Ltd. laid down that a company is a person
distinct and separate from its members, and therefore, has an independent separate legal
existence from its members who have constituted the company. But under certain circumstances the
separate entity of the company may be ignored by the courts. When that happens, the courts ignore
the corporate entity of the company and look behind the corporate façade and hold the persons in
control of the management of its affairs liable for the acts of the company. Where a company is
incorporated and formed by certain persons only for the purpose of evading taxes, the courts have
discretion to disregard the corporate entity and tax the income in the hands of the appropriate
assesse.
In Dinshaw Maneckjee Petit case it was held that the company was not a genuine company at all
but merely the assessee himself disguised that the legal entity of a limited company. The
assessee earned huge income by way of dividends and interest. So, he opened some
companies and purchased their shares in exchange of his income by way of dividend and
interest. This income was transferred back to assessee by way of loan. The court decided that the
private companies were a sham and the corporate veil was lifted to decide the real owner
of the income.

Analysis and conclusion

In the instant case, the four private limited companies were formed by A, the assesse, purely and
simply as a means of avoiding tax and the companies were nothing more than the façade of
the assesse himself. Therefore, the whole idea of Mr. A was simply to split his income into
four parts with a view to evade tax. No other business was done by the company.
Hence, A cannot be regarded as separate from the private limited companies he formed.

Q14. What are the significant points of Section 8 Company which are not applicable for other
companies? Briefly explain with reference to provisions of the Companies Act, 2013
Sol. Section 8 Company- Significant points
 Formed for the promotion of commerce, art, science, religion, charity, protection of the
environment, sports, etc.
 Requirement of minimum share capital does not apply.
 Uses its profits for the promotion of the objective for which formed.
 Does not declare dividend to members.
 Operates under a special licence from the Central Government.
 Need not use the word Ltd./ Pvt. Ltd. in its name and adopt a more suitable name such as club,
chambers of commerce etc.
 Licence revoked if conditions contravened.
 On revocation, the Central Government may direct it to
➢ Converts its status and change its name
➢ Wind–up
➢ Amalgamate with another company having similar object.
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 ➢ Can call its general meeting by giving a clear 14 days notice instead of 21 days.
➢ Requirement of minimum number of directors, independent directors etc. does not apply.
➢ Need not constitute Nomination and Remuneration Committee and Shareholders
Relationship Committee.
➢ A partnership firm can be a member of Section 8 company.

Q15. Mike Limited company incorporated in India having Liaison office at Singapore. Explain in detail
meaning of Foreign Company and analysis., on whether Mike Limited would be called as Foreign
Company as it established a Liaison office at Singapore as per the provisions of the Companies
Act, 2013?
Sol.
Provision
Foreign Company [Section 2(42) of the Companies Act, 2013]: It means any company or body
corporate incorporated outside India which—
(i) has a place of business in India whether by itself or through an agent,
physically or through electronic mode; and
(ii) conducts any business activity in India in any other manner.

Analysis and conclusion

Since Mike Limited is a company incorporated in India, hence, it cannot be called as a
foreign company. Even though, Liaison was officially established at Singapore, it would not
be called as a foreign company as per the provisions of the Companies Act, 2013.

Q16. Explain the concept of “Dormant Company” as envisaged in the Companies Act, 2013.
Sol.
1. Dormant Company (Section 455 of the Companies Act, 2013)
Where a company is formed and registered under this Act for a future project or to hold
an asset or intellectual property and has no significant accounting transaction, such a
company or an inactive company may make an application to the Registrar in such manner
as may be prescribed for obtaining the status of dormant company.
“Inactive company” means a company which has not been carrying on any business or
operation, or has not made any significant accounting transaction during the last two
financial years, or has not filed financial statements and annual returns during the last two
financial years.
“Significant accounting transaction” means any transaction other than –
(a) payment of fees by a company to the Registrar;
(b) payments made by it to fulfil the requirements of this Act or any other law;
(c) allotment of shares to fulfil the requirements of this Act; and
(d) payments for maintenance of its office and records.

Q17. The Articles of Association of XYZ Ltd. provides that Board of Directors has authority to issue
bonds provided such issue is authorized by the shareholders by a necessary resolution in the
general meeting of the company. The company was in dire need of funds and therefore, it issued
the bonds to Mr. X without passing any such resolution in general meeting. Can Mr. X recover the
money from the company? Decide referring the relevant provisions of the Companies Act, 2013.
Sol.
Provision
According to the Doctrine of Indoor Management, if an act is authorized by the articles or
memorandum, an outsider is entitled to assume that all the detailed formalities for doing

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 that act have been observed. As per the case of the Royal British Bank vs. Turquand [1856]
6E & B 327, the directors of R.B.B. Ltd. gave a bond to T. The articles empowered the directors to
issue such bonds under the authority of a proper resolution. In fact, no such resolution was
passed. Notwithstanding that, it was held that T could sue on the bonds on the ground that
he was entitled to assume that the resolution had been duly passed. This is the doctrine of
indoor management, popularly known as Turquand Rule.

Analysis and conclusion

Since, the given question is based on the above facts, accordingly here in this case Mr. X can
recover the money from the company considering that all required formalities for the
passing of the resolution have been duly complied.

Q18. When a company is registered, it is clothed with a legal personality. Explain.

Sol. When a company is registered, it is clothed with a legal personality. It comes to have almost the
same rights and powers as a human being. Its existence is distinct and separate from that of
its members. A company can own property, have bank account, raise loans, incur liabilities and
enter into contracts.
(a) It is at law, a person different altogether from the subscribers to the memorandum of
association. Its personality is distinct and separate from the personality of those who
compose it.
(b) Even members can contract with company, acquire right against it or incur
liability to it. For the debts of the company, only its creditors can sue it and not its
members.
A company is capable of owning, enjoying and disposing of property in its own name.
Although the capital and assets are contributed by the shareholders, the company
becomes the owner of its capital and assets. The shareholders are not the private or joint
owners of the company’s property.

Q19. Flora Fauna Limited was registered as a public company. There are 230 members in the company
as noted below:
Directors and their relatives 190
Employees 15
Ex-Employees (Shares were allotted when they were employees) 10
5 couples holding shares jointly in the name of husband and wife (5*2) 10
Others 5
Sol.
The Board of Directors of the company propose to convert it into a private company. Also advise
whether reduction in the number of members is necessary.
Provision
According to section 2(68) of the Companies Act, 2013, “Private company” means a company
having a minimum paid-up share capital as may be prescribed, and which by its articles,
except in case of One Person Company, limits the number of its members to two hundred.
However, where two or more persons hold one or more shares in a company jointly,
they shall, for the purposes of this clause, be treated as a single member.
It is further provided that -
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were
members of the company while in that employment and have continued to be members
after the employment ceased, shall not be included in the number of members.
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 Analysis and conclusion
In the instant case, Flora Fauna Limited may be converted into a private company only if the
total members of the company are limited to 200.
Total Number of members

Directors and their relatives 190

5 Couples (5*1) 5
Others 5
Total 200
Therefore, there is no need for reduction in the number of members since existing
number of members are 200 which does not exceed maximum limit

Q20. Can a non-profit organization be registered as a company under the Companies Act, 2013? If so,
what procedure does it have to adopt?
Sol. Yes, a non-profit organization be registered as a company under the Companies Act, 2013
by following the provisions of section 8 of the Companies Act, 2013. Section 8 of the
Companies Act, 2013 deals with the formation of companies which are formed to
 promote the charitable objects of commerce, art, science, sports, education, research, social
welfare, religion, charity, protection of environment etc.
Such company intends to apply its profit in
 promoting its objects and
 prohibiting the payment of any dividend to its members.
The Central Government has the power to issue license for registering a section 8 company.
(i) Section 8 allows the Central Government to register such person or association of
persons as a company with limited liability without the addition of words ‘Limited’ or
‘Private limited’ to its name, by issuing licence on such conditions as it deems fit.
(ii) The registrar shall on application register such person or association of persons as
a company under this section.
(iii) On registration the company shall enjoy same privileges and obligations as of a
limited company.

Q21. Examine the following whether they are correct or incorrect along with reasons:
(a) A company being an artificial person cannot own property and cannot sue or be sued.
(b) A private limited company must have a minimum of two members, while a public limited
company must have at least seven members.
Sol.
(a) Incorrect: A company is an artificial person as it is created by a process other than
natural birth. It is legal or judicial as it is created by law. It is a person since it is
clothed with all the rights of an individual.
Further, the company being a separate legal entity can own property, have banking
account, raise loans, incur liabilities and enter into contracts. Even members can
contract with company, acquire right against it or incur liability to it.
It can sue and be sued in its own name. It can do everything which any natural
person can do except be sent to jail, take an oath, marry or practice a learned
profession. Hence, it is a legal person in its own sense.
(b) Correct: Section 3 of the Companies Act, 2013 deals with the basic requirement
with respect to the constitution of the company.
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 In the case of a public company, any 7 or more persons can form a company
for any lawful purpose by subscribing their names to memorandum and
complying with the requirements of this Act in respect of registration. In
exactly the same way, 2 or more persons can form a private company

Q22. Briefly explain the doctrine of “ultravires” under the Companies Act, 2013. What are
the consequences of ultravires acts of the company?
Sol. Doctrine of ultra vires: The meaning of the term ultra vires is simply “beyond (their)
powers”. The legal phrase “ultra vires” is applicable only to acts done in excess of the
legal powers of the doers. This presupposes that the powers in their nature are limited.
It is a fundamental rule of Company Law that the objects of a company as stated in
its memorandum can be departed from only to the extent permitted by the Act, thus
far and no further.
In consequence, any act done or a contract made by the company which travels
beyond the powers not only of the directors but also of the company is wholly void and
inoperative in law and is therefore not binding on the company.
On this account, a company can be restrained from employing its fund for purposes other
than those sanctioned by the memorandum. Likewise, it can be restrained from carrying on
a trade different from the one it is authorised to carry on.
The impact of the doctrine of ultra vires is that a company can neither be sued on an ultra
vires transaction, nor can it sue on it. Since the memorandum is a “public document”, it
is open to public inspection. Therefore, when one deals with a company one is
deemed to know about the powers of the company. If in spite of this you enter into a
transaction which is ultra vires the company, you cannot enforce it against the
company.
An act which is ultra vires the company being void, cannot be ratified by the shareholders
of the company. Sometimes, act which is ultra vires can be regularized by ratifying it
subsequently.

Q23. ABC Limited has allotted equity shares with voting rights to XYZ Limited worth Rs. 15
Crores and issued Non-Convertible Debentures worth Rs. 40 Crores during the Financial
Year 2019-20. After that total Paid-up Equity Share Capital of the company is Rs. 100
Crores and Non-Convertible Debentures stands at Rs. 120 Crores.

Define the Meaning of Associate Company and comment on whether ABC Limited and XYZ
Limited would be called Associate Company as per the provisions of the Companies Act, 2013?
Sol.
Provision
As per Section 2(6) of the Companies Act, 2013, an Associate Company in relation to another
company, means a company in which that other company has a significant influence, but
which is not a subsidiary company of the company having such influence and includes a joint
venture company.
The term “significant influence” means control of at least 20% of total share capital,
or control of business decisions under an agreement.

Analysis and conclusion

In the given case, as ABC Ltd. has allotted equity shares with voting rights to XYZ
Limited of Rs. 15 cr, which is less than requisite control of 20% of total share capital
(i.e 100 cr) to have a significant influence of XYZ Ltd. Since the said requirement is
not complied, therefore ABC Ltd. and XYZ Ltd. are not associate companies as per the
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 Companies Act, 2013. Holding/allotment of non-convertible debentures has no relevance
for ascertaining significant influence.

Q24. SK Infrastructure Limited has a paid up share capital divided into 6,00,000 equity shares of
Rs. 100 each. 2,00,000 equity shares of the company are held by Central Government and
1,20,000 equity shares are held by Government of Maharashtra. Explain with reference to
relevant provisions of the Companies Act, 2013, whether SK Infrastructure Limited can be
treated as Government Company.
Sol.
Provision
Government Company [Section 2(45) of the Companies Act, 2013]: Government
Company means any company in which not less than 51% of the paid-up share capital is held
by-
(i) the Central Government, or
(ii) by any State Government or Governments, or
(iii) partly by the Central Government and partly by one or more State Governments, and the
section includes a company which is a subsidiary company of such a Government
company.

Analysis and conclusion

In the instant case, paid up share capital of SK Infrastructure Limited is 6,00,000 equity
shares of Rs. 100 each. 200,000 equity shares are held by Central government and 1,20,000
equity shares are held by Government of Maharashtra. The holding of equity shares by
both government is 3,20,000 which is more than 51% of total paid up equity shares.
Hence, SK Infrastructure Limited is a Government company.

Q25. Jagannath Oils Limited is a public company and having 220 members. Of which 25 members
were employee in the company during the period 1st April 2006 to 28th June 2016. They
were allotted shares in Jagannath Oils Limited first time on 1st July 2007 which were sold
by them on 1st August 2016. After some time, on 1st
Sol.
December 2016, each of those 25 members acquired shares in Jagannath Oils Limited which
they are holding till date. Now company wants to convert itself into a private company.
State with reasons:
(a) Whether Jagannath Oils Limited is required to reduce the number of members.
(b) Would your answer be different if above 25 members were the employee in Jagannath
Oils Limited for the period from 1st April 2006 to 28th June 2017?
Provision
According to Section 2(68) of Companies Act, 2013, “Private company” means a company having
a minimum paid-up share capital as may be prescribed, and which by its articles:
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two hundred:
Provided that where two or more persons hold one or more shares in a company jointly, they shall,
for the purposes of this clause, be treated as a single member:
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were members of
the company while in that employment and have continued to be members after the
employment ceased, shall not be included in the number of members; and
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 (iii) prohibits any invitation to the public to subscribe for any securities of the company;

Analysis and conclusion

(a) Following the provisions of Section 2(68), 25 members were employees of the company
but not during present membership which was started from 1st December 2016 i.e. after the
date on which these 25 members were ceased to the employee in Jagannath Oils Limited.
Hence, they will be considered as members for the purpose of the limit of 200
members. The company is required to reduce the number of members before
converting it into a private company.
(b) On the other hand, if those 25 members were ceased to be employee on 28th June 2017, they
were employee at the time of getting present membership. Hence, they will not be
counted as members for the purpose of the limit of 200 members and the total
number of members for the purpose of this sub-section will be 195. Therefore,
Jagannath Oils Limited is not required to reduce the number of members before converting it
into a private company.

Q26. A, B and C has decided to set up a new club with name of ABC club having objects to
promote welfare of Christian society. They planned to do charitable work or social activity
for promoting the art work of economically weaker section of Christian society. The company
obtained the status of section 8 company and started operating from 1st April, 2017
onwards.

However, on 30th September 2019, it was observed that ABC club was violating the objects
of its objective clause due to which it was granted the status of section 8 Company under
the Companies Act 2013.

Discuss what powers can be exercised by the central government against ABC club, in such a
case?
Sol. Section 8 of the Companies Act, 2013 deals with the formation of companies which are
formed to promote the charitable objects of commerce, art, science, education, sports etc.
Such company intends to apply its profit in promoting its objects. Section 8 companies are
registered by the Registrar only when a license is issued by the Central Government to them.
Since ABC Club was a Section 8 company and it was observed on 30 th September, 2019 that
it had started violating the objects of its objective clause. Hence in such a situation the
following powers can be exercised by the Central Government:
The Central Government may by order revoke the licence of the company where
the company contravenes any of the requirements or the conditions of this sections subject
to which a licence is issued or where the affairs of the company are conducted fraudulently,
or violative of the objects of the company or prejudicial to public interest, and on revocation
the Registrar shall put ‘Limited’ or ‘Private Limited’ against the company’s name in the
register. But before such revocation, the Central Government must give it a written
notice of its intention to revoke the licence and opportunity to be heard in the matter.
Where a licence is revoked, the Central Government may, by order, if it is satisfied that it
is essential in the public interest, direct that the company be wound up under this Act
or amalgamated with another company registered under this section.
However, no such order shall be made unless the company is given a reasonable
opportunity of being heard.

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 Where a licence is revoked and where the Central Government is satisfied that it is
essential in the public interest that the company registered under this section should be
amalgamated with another company registered under this section and having similar
objects, then, notwithstanding anything to the contrary contained in this Act, the Central
Government may, by order, provide for such amalgamation to form a single company with
such constitution, properties, powers, rights, interest, authorities and privileges and with
such liabilities, duties and obligations as may be specified in the order.

Q27. An employee Mr. Karan signed a contract with his employer company ABC Limited that he
will not solicit the customers after leaving the employment from the company. But after Mr.
Karan left ABC Limited, he started up his own company PQR Limited and he started
soliciting the customers of ABC Limited for his own business purposes.

ABC Limited filed a case against Mr. Karan for breach of the employment contract and for
soliciting their customers for own business. Mr. Karan contended that there is corporate
veil between him, and his company and he should not be personally held liable for this.

In this context, the company ABC Limited seek your advice as to the meaning of corporate
veil and when the veil can be lifted to make the owners liable for the acts done by a
company?
Sol. Corporate Veil: Corporate Veil refers to a legal concept whereby the company is identified
separately from the members of the company.
The term Corporate Veil refers to the concept that members of a company are shielded from
liability connected to the company’s actions. If the company incurs any debts or
contravenes any laws, the corporate veil concept implies that members should not be
liable for those errors. In other words, they enjoy corporate insulation.
Thus, the shareholders are protected from the acts of the company.
However, under certain exceptional circumstances the courts lift or pierce the
corporate veil by ignoring the separate entity of the company and the promoters and
other persons who have managed and controlled the affairs of the company. Thus,
when the corporate veil is lifted by the courts, the promoters and persons exercising
control over the affairs of the company are held personally liable for the acts and
debts of the company.
The following are the cases where company law disregards the principle of corporate
personality or the principle that the company is a legal entity distinct and separate from
its shareholders or members:
(i) To determine the character of the company i.e. to find out whether co-enemy or
friend.
(ii) To protect revenue/tax
(iii) To avoid a legal obligation
(iv) Formation of subsidiaries to act as agents
(v) Company formed for fraud/improper conduct or to defeat law

Q28. ABC Pvt. Ltd., is a Private Company having five members only. All the members of the
company were going by car to Mumbai in relation to some business. An accident took
place and all of them died. Answer with reasons, under the Companies Act, 2013 whether
existence of the company has also come to the end?

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Sol.
Provision
Death of all members of a Private Limited Company, Under the Companies Act, 2013:
The most distinguishing feature of a company is its being a separate entity from the
shareholders and promoters who form it. This lends stability and perpetuity to the
company form of business organization. In short, a company is brought into existence
by a process of law and can be terminated or wound up or brought to an end only by
a process of law. Its life is not impacted by the death, insolvency or retirement of any
or all shareholder(s) or director(s).
The provision for transferability or transmission of the shares helps to preserve
the perpetual existence of a company by allowing the constitution and identity of
shareholders to change.

Analysis and conclusion

In the present case, ABC Pvt. Ltd. does not cease to exist even by the death of all its
shareholders. The legal process will be for the successors of the deceased
shareholders to get the shares registered in their names by way of the process
which is called “transmission of shares”. The company will cease to exist only when it is
wound up by a due process of law.

Q29. Explain clearly the doctrine of ‘Indoor Management’ as applicable in cases of companies
registered under the Companies Act, 2013. Explain the circumstances in which an
outsider dealing with the company cannot claim any relief on the ground of ‘Indoor
Management’.

Or
The persons (not being members) dealing with the company are always protected by the
doctrine of indoor management. Explain. Also, explain when doctrine of Constructive
Notice will apply.
Sol. Doctrine of Indoor Management: The Doctrine of Indoor Management is the
exception to the doctrine of constructive notice. The aforesaid doctrine of
constructive notice does in no sense mean that outsiders are deemed to have notice
of the internal affairs of the company.
For instance, if an act is authorised by the articles or memorandum, an outsider is
entitled to assume that all the detailed formalities for doing that act have been observed.
This can be explained with the help of a landmark case The Royal British Bank vs.
Turquand. This is the doctrine of indoor management popularly known as
Turquand Rule.
FACTS of the Royal British Bank vs. Turquand
Mr. Turquand was the official manager (liquidator) of the insolvent Cameron’s Coalbrook
Steam, Coal and Swansea and Loughor Railway Company. It was incorporated under the
Joint Stock Companies Act, 1844. The company had given a bond for £ 2,000 to the Royal
British Bank, which secured the company’s drawings on its current account. The bond was
under the company’s seal, signed by two directors and the secretary.

When the company was sued, it alleged that under its registered deed of settlement (the
articles of association), directors only had power to borrow up to an amount authorized
by a company resolution. A resolution had been passed but not specifying how much the
directors could borrow.

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 Held, it was decided that the bond was valid, so the Royal British Bank could enforce the
terms. He said the bank was deemed to be aware that the directors could borrow only up
to the amount resolutions allowed. Articles of association were registered with Companies
House, so there was constructive notice.
But the bank could not be deemed to know which ordinary resolutions passed,
because these were not registrable. The bond was valid because there was no
requirement to look into the company’s internal workings. This is the indoor
management rule, that the company’s indoor affairs are the company’s problem.
You will notice that the aforementioned rule of Indoor Management is important to
persons dealing with a company through its directors or other persons. They are entitled to
assume that the acts of the directors or other officers of the company are validly
performed, if they are within the scope of their apparent authority.
So long as an act is valid under the articles, if done in a particular manner, an outsider
dealing with the company is entitled to assume that it has been done in the manner
required.

Q30. What are the exceptions to the Doctrine of Indoor Management?

Sol.
(a) Actual or constructive knowledge of irregularity: The rule of Indoor
management does not protect any person when the person dealing with the
company has notice, whether actual or constructive, of the irregularity.
In Howard vs. Patent Ivory Manufacturing Co. where the directors could not defend
the issue of debentures to themselves because they should have known that the
extent to which they were lending money to the company required the assent of the
general meeting which they had not obtained.
Likewise, in Morris v Kansseen, a director could not defend an allotment of shares
to him as he participated in the meeting, which made the allotment. His
appointment as a director also fell through because none of the directors appointed
him was validly in office.
(b) Suspicion of Irregularity: The doctrine in no way, rewards those who behave
negligently. Where the person dealing with the company is put upon an inquiry, for
example, where the transaction is unusual or not in the ordinary course of business,
it is the duty of the outsider to make the necessary enquiry.
The protection of the “Turquand Rule” is also not available where the
circumstances surrounding the contract are suspicious and therefore invite
inquiry.

Suspicion should arise, for example, from the fact that an officer is purporting to act in
matter, which is apparently outside the scope of his authority. Where, for example, as in
the case of Anand Bihari Lal vs. Dinshaw & Co. the plaintiff accepted a transfer of a
company’s property from its accountant, the transfer was held void. The plaintiff
could not have supposed, in absence of a power of attorney that the accountant had
authority to effect transfer of the company’s property.

Similarly, in the case of Haughton & Co. v. Nothard, Lowe & Wills Ltd. where a person
holding directorship in two companies agreed to apply the money of one company
in payment of the debt to other, the court said that it was something so unusual “that
the plaintiff were put upon inquiry to ascertain whether the persons making the
contract had any authority in fact to make it.”
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 Any other rule would “place limited companies without any sufficient reasons for so
doing, at the mercy of any servant or agent who should purport to contract on their
behalf.”
(c) Forgery: The doctrine of indoor management applies only to irregularities which
might otherwise affect a transaction but it cannot apply to forgery which must be
regarded as nullity. Forgery may in circumstances exclude the ‘Turquand
Rule’.
The only clear illustration is found in the Ruben v Great Fingall Consolidated. In
this case the plaintiff was the transferee of a share certificate issued under the seal of
the defendant’s company.
The company’s secretary, who had affixed the seal of the company and forged
the signature of the two directors, issued the certificate.
The plaintiff contended that whether the signature were genuine or forged
was apart of the internal management, and therefore, the company should be
estopped from denying genuineness of the document. But it was held, that the rule
has never been extended to cover such a complete forgery.

Q31. Narendra Motors Limited is a government company. Shah Auto Private Limited is a private
company having share capital of ten crores in the form of ten lacs shares of Rs. 100 each.
Narendra Motors Limited is holding five lacs five thousand shares in Shah Auto Private
Limited. Shah Auto Private Limited claimed the status of Government Company. Advise
as legal advisor, whether Shah Auto Private Limited is government company under the
provisions of Companies Act, 2013?
Sol.
Provision
According to the provisions of Section 2(45) of Companies Act, 2013, Government
Company means any company in which not less than 51% of the paid-up share capital is
held by-
(i) the Central Government, or
(ii) by any State Government or Governments, or
(iii) partly by the Central Government and partly by one or more State Governments, and
the section includes a company which is a subsidiary company of such a
Government company.
According to Section 2(87), “subsidiary company” in relation to any other company (that
is to say the holding company), means a company in which the holding exercises or
controls more than one-half of the total voting power either at its own or together with one
or more of its subsidiary companies.
Analysis and conclusion
By virtue of provisions of Section 2(87) of Companies Act, 2013, Shah Auto Private
Limited is a subsidiary company of Narendra Motors Limited because Narendra
Motors Limited is holding more than one-half of the total voting power in Shah Auto
Private Limited. Further as per Section 2(45), a subsidiary company of Government
Company is also termed as Government Company. Hence, Shah Auto Private Limited being
subsidiary of Narendra Motors Limited will also be considered as Government Company.

Q32. What is meant by a Guarantee Company? State the similarities and dissimilarities between
a Guarantee Company and a Company having Share Capital.
Or

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 Explain the meaning of Guarantee Company? State the similarities and dissimilarities
between a ‘Guarantee Company’ and ‘Company Limited by Shares’
Sol. Meaning of Guarantee Company: Section 2(21) of the Companies Act, 2013 defines a
Company Limited by Guarantee as a company having the liability of its members
limited by the memorandum to such amount as the members may respectively
undertake to contribute to the assets of the company in the event of its being
wound up.
Thus, the liability of the members of a guarantee company is limited to a stipulated
amount in terms of individual guarantees given by members and mentioned in the
memorandum. The members cannot be called upon to contribute more than such
stipulated amount for which each member has given a guarantee in the memorandum of
association.
Similarities and dis-similarities between the Guarantee Company and the Company
limited by shares: The common features between a “guarantee company” and the
“company limited share” are legal entity and limited liability.
In case of a company limited by shares, the liability of its members is limited to the
amount remaining unpaid on the shares held by them. Both these type of companies have
to state this fact in their memorandum that the members’ liability is limited.
However, the dissimilarities between a ‘guarantee company’ and ‘company limited
by shares’ is that in the former case the members will be called upon to discharge
their liability only after commencement of the winding up of the company and only
to the
extent of amounts guaranteed by them respectively; whereas in the case of a
company limited by shares, the members may be called upon to discharge their
liability at any time, either during the life of the company or during the course of
its winding up.

Q33. Examine with reasons whether the following statement is correct or incorrect:
Sol. Affixing of Common seal on company’s documents is compulsory.
Incorrect: The common seal is a seal used by a corporation as the symbol of its
incorporation. The Companies (Amendment) Act, 2015 has made the common seal
optional by omitting the words “and a common seal” from Section 9 so as to provide
an alternative mode of authorization for companies who opt not to have a common
seal.
This amendment provides that the documents which need to be authenticated by a
common seal will be required to be so done, only if the company opts to have a common seal.
In case a company does not have a common seal, the authorization shall be made by
two directors or by a director and the Company Secretary, wherever the company has
appointed a Company Secretary.

Q34. Mr. X had purchased some goods from M/s ABC Limited on credit. A credit period of one
month was allowed to Mr. X. Before the due date Mr. X went to the company and wanted
to repay the amount due from him. He found only Mr. Z there, who was the factory
supervisor of the company. Mr. Z told Mr. X that the accountant and the cashier were on
leave, he is in-charge of receiving money and he may pay the amount to him. Mr. Z issued a
money receipt under his signature. After two months M/s ABC Limited issued a notice to
Mr. X for non-payment of the dues within the stipulated period. Mr. X informed the
company that he had already cleared the dues and he is no more responsible for the same.
He also contended that Mr. Z is an employee of the company whom he had made the
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 payment and being an outsider, he trusted the words of Mr. Z as duty distribution is a job of
the internal management of the company.
Analyse the situation and decide whether Mr. X is free from his liability.
Sol.
Provision
Doctrine of Indoor Management: The Doctrine of Indoor Management is the
exception to the doctrine of constructive notice. The doctrine of constructive notice
does not mean that outsiders are deemed to have notice of the internal affairs of
the company. For instance, if an act is authorised by the articles or memorandum, an
outsider is entitled to assume that all the detailed formalities for doing that act have been
observed.
The doctrine of Indoor Management is important to persons dealing with a
company through its directors or other persons. They are entitled to assume that the
acts of the directors or other officers of the company are validly performed, if they
are within the scope of their apparent authority. So long as an act is valid under the artic
les, if done in a particular manner, an outsider dealing with the company is entitled to
assume that it has been done in the manner required.
Analysis and conclusion
In the given question, Mr. X has made payment to Mr. Z and he (Mr. Z) gave to receipt of
the same to Mr. X. Thus, it will be rightful on part of Mr. X to assume that Mr. Z was
also authorised to receive money on behalf of the company. Hence, Mr. X will be
free from liability for payment of goods purchased from M/s ABC Limited, as he has
paid amount due to an employee of the company.

Q35. Alfa school started imparting education on 1.4.2010, with the sole objective of providing
education to children of weaker society either free of cost or at a very nominal fee
depending upon the financial condition of their parents. However, on 30th March 2018, it
came to the knowledge of the Central Government that the said school was operating by
violating the objects of its objective clause due to which it was granted the status of a section
8 company under the Companies Act, 2013. Describe what powers can be exercised by the
Central Government against the Alfa School, in such a case?
Sol. Section 8 of the Companies Act, 2013 deals with the formation of companies which are
formed to promote the charitable objects of commerce, art, science, education, sports etc.
Such company intends to apply its profit in promoting its objects. Section 8 companies are
registered by the Registrar only when a license is issued by the Central Government to
them.
Since, Alfa School was a Section 8 company and it had started violating the objects of its
objective clause, hence in such a situation the following powers can be exercised by the
Central Government:
The Central Government may by order revoke the licence of the company
where the company contravenes any of the requirements or the conditions of this
sections subject to which a licence is issued or where the affairs of the company are
conducted fraudulently, or violative of the objects of the company or prejudicial to public
interest, and on revocation the Registrar shall put ‘Limited’ or ‘Private Limited’ against
the company’s name in the register. But before such revocation, the Central Government
must give it a written notice of its intention to revoke the licence and opportunity to be
heard in the matter.

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 Where a licence is revoked, the Central Government may, by order, if it is satisfied that
it is essential in the public interest, direct that the company be wound up under
this Act or amalgamated with another company registered under this section.
However, no such order shall be made unless the company is given a reasonable
opportunity of being heard.
Where a licence is revoked and where the Central Government is satisfied that it is
essential in the public interest that the company registered under this section should be
amalgamated with another company registered under this section and having similar
objects, then, notwithstanding anything to the contrary contained in this Act, the

Central Government may, by order, provide for such amalgamation to form a single
company with such constitution, properties, powers, rights, interest, authorities and
privileges and with such liabilities, duties and obligations as may be specified in the
order.

Q36. ABC Limited was into sale and purchase of iron rods. This was the main object of the
company mentioned in the Memorandum of Association. The company entered into a
contract with Mr. John for some finance related work. Later on, the company repudiated
the contract as being ultra vires.

With reference to the same, briefly explain the doctrine of “ultravires” under the
Companies Act, 2013. What are the consequences of ultravires acts of the company?
Sol.
Provision
Doctrine of ultra vires: The meaning of the term ultra vires is simply “beyond (their)
powers”. The legal phrase “ultra vires” is applicable only to acts done in excess of the
legal powers of the doers. This presupposes that the powers in their nature are
limited. It is a fundamental rule of Company Law that the objects of a company as
stated in its memorandum can be departed from only to the extent permitted by
the Act, thus far and no further. In consequence, any act done or a contract made by
the company which travels beyond the powers not only of the directors but also of
the company is wholly void and inoperative in law and is therefore not binding on
the company. On this account, a company can be restrained from employing its fund
for purposes other than those sanctioned by the memorandum. Likewise, it can be
restrained from carrying on a trade different from the one it is authorised to carry
on.
The impact of the doctrine of ultra vires is that a company can neither be sued on
an ultra vires transaction, nor can it sue on it. Since the memorandum is a “public
document”, it is open to public inspection. Therefore, when one deals with a company one
is deemed to know about the powers of the company. If in spite of this you enter into a
transaction which is ultra vires the company, you cannot enforce it against the company.
An act which is ultra vires the company being void, cannot be ratified even by the
unanimous consent of all the shareholders of the company.
Analysis and conclusion
Hence in the given case, ABC Limited cannot enter into a contract outside the purview of its
object clause of memorandum of association as it becomes ultra vires and thus null and
void

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Q37. The paid-up capital of Ram Private Limited is Rs. 10 Crores in the form of 7,00,000 Equity
Shares of Rs. 100 each and 3,00,000 Preference Shares of Rs. 100 each. Lakhan Private
Limited is holding 3,00,000 Equity Shares and 3,00,000 Preference Shares in Ram Private
Limited. State with reason, Whether Ram Private Limited is subsidiary of Lakhan Private
Limited?
Sol.
Provision
According to Section 2(87) of Companies Act, 2013 “subsidiary company” in relation to any
other company (that is to say the holding company), means a company in which the holding
company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power either at its own
or together with one or more of its subsidiary companies:
For the purposes of this section —
(i) the composition of a company’s Board of Directors shall be deemed to be controlled by
another company if that other company by exercise of some power exercisable by it
at its discretion can appoint or remove all or a majority of the directors;
(ii) the expression “company” includes anybody corporate;

Analysis and conclusion

In the instant case, Ram Private Limited is having paid-up capital of Rs.10 Crores in the
form of 7,00,000 Equity Shares of Rs.100 each and 3,00,000 Preference Shares of Rs.100 each.
Lakhan Private Limited is holding 3,00,000 Equity Shares and 3,00,000 Preference Shares in
Ram Private Limited.
On the basis of provisions o f Section 2(87) and facts of the given problem, Lakhan
Private Limited is holding 3,00,000 Equity Shares of total equity paid up share capital
of Ram Private Limited. Therefore, as Lakhan Private Limited does not exercises or
controls more than one-half of the total voting power in Ram Private Limited, Ram
Private Limited is not subsidiary of Lakhan Private Limited.

Q38. The Object Clause of Memorandum of Association of ABC Pvt. Ltd. authorised the company
to carry on the business of trading in Fruits and Vegetables. The Directors of the company
in recently concluded Board Meeting decided and accordingly, the company ordered for
fish for the purpose of trading. FSH Limited supplied fish to ABC Pvt. Ltd. worth Rs. 36
Lakhs. The members of the company convened an extraordinary general meeting and
negated the proposal of the Board of Directors on the ground of ultra vires acts. FSH
Limited being aggrieved of the said decision of ABC Pvt Ltd. seeks your advice. Advice
them.
Sol.
Provision
Doctrine of ultra vires: The meaning of the term ultra vires is simply” ‘beyond (their)
powers”. The legal phrase “ultra vires” is applicable only to acts done in excess of the
legal powers of the doers. This presupposes that the powers in their nature are limited. It
is a fundamental rule of Company Law that the objects of a company as stated in its
memorandum can be departed from only to the extent permitted by the Act, thus
far and no further. In consequence, any act done or a contract made by the company
which travels beyond the powers not only of the directors but also of the company is
wholly void and inoperative in law and is therefore not binding on the company.

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 On this account, a company can be restrained from employing its fund for purposes other
than those sanctioned by the memorandum. Likewise, it can be restrained from carrying
on a trade different from the one it is authorized to carry on. The impact of the doctrine
of ultra vires is that a company can neither be sued on an ultra vires transaction, nor can
it sue on it. Since the memorandum is a “public document”, it is open to public
inspection. Therefore, when one deal s with a company one is deemed to know about
the powers of the company. If in spite of this you enter into a transaction which is
ultra vires the company, you cannot enforce it against the company.

Analysis and conclusion

Therefore, the resolution passed by the Board of Director ABC Pvt. Limited for an ultra
vires transaction is invalid. As a result of this, the transaction entered into the
supply of fish with FSH Limited is not legal and is void.

Q39. What is the meaning of “Certificate of Incorporation” under the provisions of the
Companies Act, 2013? What are the effects of registration of a company?
Sol. Under section 7(2) the Registrar shall on the basis of documents and information filed
for the formation of a company, shall register all the documents and information and issue
a certificate that the company is incorporated in the prescribed form to the effect that
the proposed company is incorporated under this Act.
The company becomes a legal entity form the date mentioned in the certificate of
incorporation and continues to be so till it is wound up.
Effects of registration of a company
Section 9 of the Companies Act, 2013 provides that, from the date of incorporation
mentioned in the certificate of incorporation, such of the subscribers to the Memorandum and
all other persons, as may from time to time become members of the company, shall be a body
corporate by the name contained in the memorandum, capable forthwith of exercising all
the functions of an incorporated company under this Act and having perpetual suceession
with power to acquire, hold and dispose of property, both movable and immovable, tangible
and intangible, to contract and to sue and be sued by the said name. Accordingly, when a
company is registered and a certificate of incorporation is issued by the Registrar, three
important consequences follow:
(a) the company becomes a distinct legal entity. Its life commences from the date
mentioned in the certificate of incorporation capable of entering into contracts in its own
name, acquiring, holding and disposing of property of any nature whatsoever and
capable of suing and being sued in its own name.
(b) it acquires a life of perpetual existence by the doctrine of succession. The
members may come and go, but it goes on forever, unless it is wound up.
Its property is not the property of the shareholders. The shareholders have a
right to share in the profits of the company as and when declared either as
dividend or as bonus shares. Likewise any liability of the company is not the
liability of the individual shareholders

Q40. FAREB Limited was incorporated by acquisition of FAREB & Co., a partnership firm,
which was earlier involved in many illegal activities. The promoters furnished some false
information and also suppressed some material facts at the time of incorporation of the
company. Some members of the public (not being directors or promoters of the
company) approached the National Company Law Tribunal (NCLT) against the
incorporation status of FAREB Limited. NCLT is about to pass the order by directing that
the liability of the members of the company shall be unlimited.
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Sol.
Given the above, advice on whether the above order will be legal and mention the
precaution to be taken by NCLT before passing order in respect of the above as per the
provisions of the Companies Act, 2013.
(i) As per section 7(7) of the Companies Act, 2013, where a company has been got
incorporated by furnishing false or incorrect information or representation or by
suppressing any material fact or information in any of the documents or declaration filed
or made for incorporating such company or by any fraudulent action, the Tribunal
may, on an application made to it, on being satisfied that the situation so
warrants, direct that liability of the members shall be unlimited.
Hence, the order of NCLT will be legal. Precautions: Before making any order,—
(a) the company shall be given a reasonable opportunity of being heard in the
matter; and
(b) the Tribunal shall take into consideration the transactions entered into by the
company, including the obligations, if any, contracted or payment of any liability.

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 CHAPTER - 5 - THE INDIAN PARTNERSHIP ACT, 1932
UNIT-1

Q1. Mr. XU and Mr. YU are partners in a partnership firm. Mr. XU introduced MU (an employee) as his
partner to ZU. MU remained silent. ZU, a trader believing MU as partner supplied 50 Laptops to the
firm on credit. After expiry of credit period, ZU did not get amount of Laptop sold to the
partnership firm. ZU filed a suit against XU and MU for the recovery of price. Does MU is liable for
such purpose?
Sol.
Provision
As per Section 28 of Indian Partnership Act, 1932, Partnership by holding out is also known as
partnership by estoppel. Where a man holds himself out as a partner, or allows others to do it,
he is then stopped from denying the character he has assumed and upon the faith of which
creditors may be presumed to have acted. A person may himself, by his words or conduct have
induced others to believe that he is a partner or he may have allowed others to represent him as a
partner. The result in both the cases is identical.
Analysis and conclusion
In the given case, MU (the Manager) is also liable for the price because he becomes a partner
by holding out as per Section 28 of Indian Partnership Act, 1932.
Q2. Ms. Lucy while drafting partnership deed taken care of few important points. What are those
points? She want to know the list of information which must be part of partnership deed drafted by
her. Also, give list of information to be included in partnership deed?
Sol. Ms. Lucy while drafting partnership deed must take care of following important points:
 No particular formalities are required for an agreement of partnership.
 Partnership deed may be in writing or formed verbally. The document in writing containing the
various terms and conditions as to the relationship of the partners to each other is called the
‘partnership deed’.
 Partnership deed should be drafted with care and be stamped according to the provisions of the
Stamp Act, 1899.
 If partnership comprises immovable property, the instrument of partnership must be in
writing, stamped and registered under the Registration Act.
List of information included in Partnership Deed while drafting Partnership Deed by
Ms. Lucy:
1. Name of the partnership firm.
2. Names of all the partners.
3. Nature and place of the business of the firm.
4. Date of commencement of partnership.
4. Duration of the partnership firm.
5. Capital contribution of each partner.
6. Profit Sharing ratio of the partners.
7. Admission and Retirement of a partner.
8. Rates of interest on Capital, Drawings and loans.
9. Provisions for settlement of accounts in the case of dissolution of the firm.
10. Provisions for Salaries or commissions, payable to the partners, if any.

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 11. Provisions for expulsion of a partner in case of gross breach of duty or fraud.
Note: Ms. Lucy may add or delete any provision according to the needs of the partnership firm.
Q3. Define partnership and name the essential elements for the existence of a partnership as per the
Indian Partnership Act, 1932. Explain any two such elements in detail.
Sol. Definition of Partnership: ‘Partnership’ is the relation between persons who have agreed to
share the profits of a business carried on by all or any of them acting for all. (Section 4 of the
Indian Partnership Act, 1932)
The definition of the partnership contains the following five elements which must co-exist
before a partnership can come into existence:
1. Association of two or more persons
2. Agreement
3. Business
4. Agreement to share Profits
5. Business carried on by all or any of them acting for all
ELEMENTS OF PARTNERSHIP
The definition of the partnership contains the following five elements which must co- exist
before a partnership can come into existence:
1. Association of two or more persons: Partnership is an association of 2 or more
persons.
Again, only persons recognized by law can enter into an agreement of partnership.
Therefore, a firm, since it is not a person recognized in the eyes of law cannot be a
partner.
Again, a minor cannot be a partner in a firm, but with the consent of all the partners, may
be admitted to the benefits of partnership.
The Partnership Act is silent about the maximum number of partners but Section 464 of the
Companies Act, 2013 read with the relevant Rules has now put a limit of 50 partners in
any association / partnership firm.
2. Agreement: It may be observed that partnership must be the result of an agreement
between two or more persons. There must be an agreement entered into by all the persons
concerned.
This element relates to voluntary contractual nature of partnership. Thus, the nature of
the partnership is voluntary and contractual. An agreement from which relationship of
Partnership arises may be express.
It may also be implied from the act done by partners and from a consistent course of
conduct being followed, showing mutual understanding between them. It may be oral or in
writing.
3. Business: In this context, we will consider two propositions. First, there must exist a
business. For the purpose, the term ‘business’ includes every trade, occupation and
profession.
The existence of business is essential. Secondly, the motive of the business is the
“acquisition of gains” which leads to the formation of partnership. Therefore, there can be

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 no partnership where there is no intention to carry on the business and to share the profit
thereof.
4. Agreement to share profits: The sharing of profits is an essential feature of
partnership.
There can be no partnership where only one of the partners is entitled to the whole of the
profits of the business. Partners must agree to share the profits in any manner they choose.
But an agreement to share losses is not an essential element. It is open to one or more
partners to agree to share all the losses. However, in the event of losses, unless agreed
otherwise, these must be borne in the profit-sharing ratio.
5. Business carried on by all or any of them acting for all: The business must be carried on
by all the partners or by anyone or more of the partners acting for all. This is the cardinal
principle of the partnership Law. In other words, there should be a binding contract of
mutual agency between the partners.
An act of one partner in the course of the business of the firm is in fact an act of all partners.
Each partner carrying on the business is the principal as well as the agent for all the other
partners. He is an agent in so far as he can bind the other partners by his acts and he is a
principal to the extent that he is bound by the act of other partners.
It may be noted that the true test of partnership is mutual agency rather than sharing
of profits. If the element of mutual agency is absent, then there will be no partnership.
Q4. State whether the following are partnerships:
(i) A and B jointly own a car which they used personally on Sundays and holidays and let it on
hire as taxi on other days and equally divide the earnings.
(ii) Two firms each having 12 partners combine by an agreement into one firm.
(iii) A and B, co-owners, agree to conduct the business in common for profit.
(iv) Some individuals form an association to which each individual contributes Rs. 500 annually.
The objective of the association is to produce clothes and distribute the clothes free to the
war widows.
(v) A and B, co-owners share between themselves the rent derived from a piece of land.A and B
buy commodity X and agree to sell t e commodity with sharing the profits equally.
Sol.
(i) No, this is not a case of partnership because the sharing of profits or of gross returns
accruing from property holding joint or common interest in the property would not by
itself make such persons partners.
Alternatively, this part can also be answered as below:
Yes, this is a case of partnership, as the car is used personally only on Sundays and holidays
and used for most of the days as a Taxi. Hence, it is inferred that the main purpose of
owning the car is to let it for business purpose. Also, there is an agreement for
equally dividing the earnings.
(ii) Yes, this is a case of partnership because there is an agreement between two firms to
combine into one firm.
(iii) Yes, this is a case of partnership because A & B, co-owners, have agreed to conduct a
business in common for profit.

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 (iv) No, this is not a case of partnership as no charitable association can be floated in
partnership.
(v) No, this is not a case of partnership as they are co-owners and not the partners. Further,
there exist no business.
(vi) Yes, this is a case of partnership as there exist the element of doing business and sharing of
profits equally.
Q5. “Sharing in the profits is not conclusive evidence in the creation of partnership”.
Comment.
Sol. Sharing of profit is an essential element to constitute a partnership. But it is only a prima
facie evidence and not conclusive evidence, in that regard. The sharing of profits or of gross
returns accruing from property by persons holding joint or common interest in the property
would not by itself make such persons partners.
Although the right to participate in profits is a strong test of partnership, and there may be cases
where, upon a simple participation in profits, there is a partnership, yet whether the relation
does or does not exist must depend upon the whole contract between the parties.
Where there is an express agreement between partners to share the profit of a business
and the business is being carried on by all or any of them acting for all , there will be no
difficulty in the light of provisions of Section 4, in determining the existence or otherwise
of partnership.
But the task becomes difficult when either there is no specific agreement or the agreement is
such as does not specifically speak of partnership. In such a case for testing the existence or
otherwise of partnership relation, Section 6 has to be referred.
According to Section 6, regard must be had to the real relation between the parties as
shown by all relevant facts taken together. The rule is easily stated and is clear but its
application is difficult.
Cumulative effect of all relevant facts such as written or verbal agreement, real intention
and conduct of the parties, other surrounding circumstances etc., are to be considered
while deciding the relationship between the parties and ascertaining the existence of
partnership.
Hence, the statement is true / correct that mere sharing in the profits is not conclusive
evidence.
Q6. What do you mean by “Particular Partnership” under the Indian Partnership Act, 1932?
Sol. Particular partnership: A partnership may be organized for the prosecution of a single
adventure as well as for the conduct of a continuous business. Where a person becomes a
partner with another person in any particular adventure or undertaking, the partnership is
called ‘particular partnership’.
A partnership, constituted for a single adventure or undertaking is, subject to any
agreement, dissolved by the completion of the adventure or undertaking.

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Q7. Who is a nominal partner under the Indian Partnership Act, 1932 ? What are his liabilities?
Sol. Nominal Partner: A person who lends his name to the firm, without having any real
interest in it, is called a nominal partner. Liabilities: He is not entitled to share the
profits of the firm.
Neither he invests in the firm nor takes part in the conduct of the business. He is, however
liable to third parties for all acts of the firm.
Q8. Business carried on by all or any of them acting for all.” Discuss the statement under the
Indian Partnership Act, 1932.
Sol.
(a) Business carried on by all or any of them acting for all: The business must be
carried on by all the partners or by anyone or more of the partners acting for all.
In other words, there should be a binding contract of mutual agency between the
partners.
An act of one partner in the course of the business of the firm is in fact an act of all
partners. Each partner carrying on the business is the principal as well as the agent for
all the other partners.
He is an agent in so far as he can bind the other partners by his acts and he is a principal to
the extent that he is bound by the act of other partners.
It may be noted that the true test of partnership is mutual agency. If the element of
mutual agency is absent, then there will be no partnership.

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 In KD Kamath & Co., the Supreme Court has held that the two essential conditions to be
satisfied are that:
(1) there should be an agreement to share the profits as well as the losses of business; and
(2) the business must be carried on by all or any of them acting for all, within the meaning of
the definition of ‘partnership’ under section 4.
The fact that the exclusive power and control, by agreement of the parties, is vested in
one partner or the further circumstance that only one partner can operate the bank
accounts or borrow on behalf of the firm are not destructive of the theory of
partnership provided the two essential conditions, mentioned earlier, are satisfied.
Q9. What is the conclusive evidence of partnership? State the circumstances when partnership is
not considered between two or more parties.

Sol. Conclusive evidence of partnership: Existence of Mutual Agency which is the cardinal
principle of partnership law is very much helpful in reaching a conclusion with respect
to determination of existence of partnership. Each partner carrying on the business is the
principal as well as an agent of other partners. So, the act of one partner done on behalf of
firm, binds all the partners.
If the element of mutual agency relationship exists between the parties constituting a
group formed with a view to earn profits by running a business, a partnership may be
deemed to exist.
Circumstances when partnership is not considered between two or more parties:
Various judicial pronouncements have laid to the following factors leading to no partnership
between the parties:
(i) Parties have not retained any record of terms and conditions of partnership.
(ii) Partnership business has maintained no accounts of its own, which would be open
to inspection by both parties
(iii) No account of the partnership was opened with any bank
(iv) No written intimation was conveyed to the Deputy Director of Procurement with
respect to the newly created partnership.
Q10. “Whether a group of persons is or is not a firm, or whether a person is or not a partner in a
firm.” Explain the mode of determining existence of partnership as per the Indian Partnership
Act, 1932?
Sol. (b) Mode of determining existence of partnership (Section 6 of the Indian Partnership
Act, 1932): In determining whether a group of persons is or is not a firm, or whether a
person is or not a partner in a firm, regard shall be had to the real relation between the
parties, as shown by all relevant facts taken together.
For determining the existence of partnership, it must be proved.
1. There was an agreement between all the persons concerned
2. The agreement was to share the profits of a business and
3. the business was carried on by all or any of them acting for all.

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 1. Agreement: Partnership is created by agreement and not by status (Section 5). The
relation of partnership arises from contract and not from status; and in particular, the
members of a Hindu Undivided family carrying on a family business as such are not
partners in such business.
2. Sharing of Profit: Sharing of profit is an essential element to constitute a
partnership. But, it is only a prima facie evidence and not conclusive evidence, in that
regard. The sharing of profits or of gross returns accruing from property by persons
holding joint or common interest in the property would not by itself make such persons
partners.
Although the right to participate in profits is a strong test of partnership, and there may
be cases where, upon a simple participation in profits, there is a partnership, yet
whether the relation does or does not exist must depend upon the whole contract
between the parties.
3. Agency: Existence of Mutual Agency which is the cardinal principle of partnership
law, is very much helpful in reaching a conclusion in this regard. Each partner
carrying on the business is the principal as well as an agent of other partners. So,
the act of one partner done on behalf of firm, binds all the partners.
If the elements of mutual agency relationship exist between the parties constituting a
group formed with a view to earn profits by running a business, a partnership may be
deemed to exist
Q11. State the differences between Partnership and Hindu Undivided Family.
Sol.
Basis of difference Partnership Joint Hindu family
Mode of creation Partnership is created The right in the joint family
necessarily by an agreement. is created by status means its
creation by birth in the family.
Death of a member Death of a partner ordinarily The death of a member in the leads
to the dissolution of Hindu undivided family does not
partnership. give rise to dissolution of the
family business.
Management All the partners are equally The right of management of joint
entitled to take part in the family business generally vests in
partnership business. the Karta, the governing male
member or female member of the
family.
Authority to bind Every partner can, by his The Karta or the manager, has
act, bind the firm. the authority to contract for the
family business and the other
members in the family.

PW

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 Liability In a partnership, the liability In a Hindu undivided family,
of a partner is unlimited. only the liability of the Karta
is unlimited, and the other
coparcener are liable only to the
extent of their share in the profits
of the family business.
Calling for accounts A partner can bring a suit On the separation of the joint
on closure against the firm for accounts, family, a member is not entitled
provided he also seeks the to ask for account of the family
dissolution of the firm. business.
Governing Law A partnership is governed A Joint Hindu Family business is
by the Indian Partnership governed by the Hindu Law.
Act, 1932.
Minor’s capacity In a partnership, a minor In Hindu undivided family
cannot become a partner, business, a minor becomes a
though he can be admitted to member of the ancestral business
the benefits of partnership, by the incidence of birth. He does
only with the consent of all not have to wait for attaining
the partners. majority.
Continuity A firm subject to a contract A Joint Hindu family has the
between the partners continuity till it is divided. The
gets dissolved by death or status of Joint Hindu family is
insolvency of a partner. not thereby affected by the death
of a member.
Number of Members In case of Partnership Members of HUF who carry on
number of members should a business may be unlimited in
not exceed 50. number.
Share in the business In a partnership, each In a HUF, no coparceners has a
partner has a defined share definite share. His interest is a
by virtue of an agreement fluctuating one. It is capable of
between the partners. being enlarged by deaths in the
family diminished by births in
the family.

Q12. Explain the following kinds of partnership under the Indian Partnership Act, 1932:
(i) Partnership at will
(ii) Particular partnership
Sol.
(i) Partnership at will: According to Section 7 of the Indian Partnership Act, 1932,
partnership at will is a partnership when:

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 1. no fixed period has been agreed upon for the duration of the partnership; and
2. there is no provision made as to the determination of the partnership.
These two conditions must be satisfied before a partnership can be regarded as a partnership
at will. But, where there is an agreement between the partners either for the duration of the
partnership or for the determination of the partnership, the partnership is not partnership at
will.
Where a partnership entered into for a fixed term is continued after the expiry of such
term, it is to be treated as having become a partnership at will.
A partnership at will may be dissolved by any partner by giving notice in writing to all the
other partners of his intention to dissolve the same.
(ii) Particular partnership: A partnership may be organized for the prosecution of a
single adventure as well as for the conduct of a continuous business. Where a
person becomes a partner with another person in any particular adventure or
undertaking the partnership is called ‘particular partnership’.
A partnership, constituted for a single adventure or undertaking is, subject to any
agreement, dissolved by the completion of the adventure or undertaking.
Q13. Explain the provisions of the Indian Partnership Act, 1932 relating to the creation of
Partnership by holding out.
Sol. Partnership by holding out is also known as partnership by estoppel. Where a man holds
himself out as a partner, or allows others to do it, he is then stopped from denying the
character he has assumed and upon the faith of which creditors may be presumed to
have acted.
A person may himself, by his words or conduct have induced others to believe that he is a
partner or he may have allowed others to represent him as a partner. The result in both the
cases is identical.
Example: X and Y are partners in a partnership firm. X introduced A, a manager, as his
partner to Z. A remained silent. Z, a trader believing A as partner supplied 100 T.V sets to the
firm on credit. After expiry of credit period, Z did not get amount of T.V sets sold to the
partnership firm. Z filed a suit against X and A for the recovery of price . Here, in the given
case, A, the Manager is also liable for the price because he becomes a partner by holding out
(Section 28, Indian Partnership Act, 1932).
It is only the person to whom the representation has been made and who has acted
thereon that has right to enforce liability arising out of ‘holding out’.

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 QUESTIONS FOR PRACTICE

PART-B

Q1. State the modes by which a partner may transfer his interest in the firm in favour of another
person under the Indian Partnership Act, 1932. What are the rights of such a transferee?
Sol. Section 29 of the Indian Partnership Act, 1932 provides that a share in a partnership is
transferable like any other property, but as the partnership relationship is based on mutual
confidence, the assignee of a partner’s interest by sale, mortgage or otherwise cannot
enjoy the same rights and privileges as the original partner.
The rights of such a transferee are as follows:
(1) During the continuance of partnership, such transferee is not entitled
(a) to interfere with the conduct of the business,
(b) to require accounts, or
(c) to inspect books of the firm.
He is only entitled to receive the share of the profits of the transferring partner and he
is bound to accept the profits as agreed to by the partners, i.e., he cannot challenge the
accounts.
(2) On the dissolution of the firm or on the retirement of the transferring partner, the
transferee will be entitled, against the remaining partners:
(a) to receive the share of the assets of the firm to which the transferring partner
was entitled, and
(b) for the purpose of ascertaining the share, he is entitled to an account as from
the date of the dissolution.
By virtue of Section 31, no person can be introduced as a partner in a firm without the
consent of all the partners.
A partner cannot by transferring his own interest, make anybody else a partner in his
place, unless the other partners agree to accept that person as a partner. At the same
time, a partner is not debarred from transferring his interest.
A partner’s interest in the partnership can be regarded as an existing interest and
tangible property which can be assigned.
Q2. Whether a minor may be admitted in the business of a partnership firm? Explain the rights of a
minor in the partnership firm.
Sol. A minor cannot be bound by a contract because a minor’s contract is void and not merely
voidable. Therefore, a minor cannot become a partner in a firm because partnership is
founded on a contract.
Though a minor cannot be a partner in a firm, he can nonetheless be admitted to the
benefits of partnership under Section 30 of the Indian Partnership Act, 1932. In other words,
he can be validly given a share in the partnership profits.
When this has been done and it can be done with the consent of all the partners then the
rights and liabilities of such a partner will be governed under Section 30 as follows:

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 Rights:
(i) A minor partner has a right to his agreed share of the profits and of the firm.
(ii) He can have access to, inspect and copy the accounts of the firm.
(iii) He can sue the partners for accounts or for payment of his share but only when
severing his connection with the firm, and not otherwise.
(iv) On attaining majority, he may within 6 months elect to become a partner or not to
become a partner. If he elects to become a partner, then he is entitled to the share to
which he was entitled as a minor. If he does not, then his share is not liable for any acts
of the firm after the date of the public notice served to that effect.
Q3. M/s XYZ & Associates, a partnership firm with X, Y, Z as senior partners were engaged in the
business of carpet manufacturing and exporting to foreign countries. On 25th August, 2018, they
inducted Mr. G, an expert in the field of carpet manufacturing as their partner. On 10th January
2020, Mr. G was blamed for unauthorized activities and thus expelled from the partnership by
united approval of rest of the partners.
Examine whether action by the partners was justified or not?
What should have the factors to be kept in mind prior expelling a partner from the firm by other
partners according to the provisions of the Indian Partnership Act, 1932?
Sol.
Provision
Expulsion of a Partner (Section 33 of the Indian Partnership Act, 1932):
A partner may not be expelled from a firm by a majority of partners except in exercise, in good
faith, of powers conferred by contract between the partners.
The test of good faith as required under Section 33(1) includes three things:
 The expulsion must be in the interest of the partnership.
 The partner to be expelled is served with a notice.
 He is given an opportunity of being heard.
If a partner is otherwise expelled, the expulsion is null and void.
Analysis and conclusion
(i) Action by the partners of M/s XYZ & Associates, a partnership firm to expel Mr. G from the
partnership was justified as he was expelled by united approval of the partners exercised
in good faith to protect the interest of the partnership against the unauthorized activities
charged against Mr. G. A proper notice and opportunity of being heard has to be given to
Mr. G.

(ii) The following are the factors to be kept in mind prior expelling a partner from the firm by
other partners:
(a) the power of expulsion must have existed in a contract between the partners;
(b) the power has been exercised by a majority of the partners; and
(c) it has been exercised in good faith.
Q4. A, B and C are partners in a firm. As per terms of the partnership deed, A is entitled to 20 percent
of the partnership property and profits. A retires from the firm and dies after 15 days. B and C
continue business of the firm without settling accounts. Explain the rights of A’s legal
representatives against the firm under the Indian Partnership Act, 1932?

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 Sol.
Provision
Section 37 of the Indian Partnership Act, 1932 provides that where a partner dies or otherwise
ceases to be a partner and there is no final settlement of account between the legal
representatives of the deceased partner or the firms with the property of the firm, then, in the
absence of a contract to the contrary, the legal representatives of the deceased partner or the
retired partner are entitled to claim either.
(1) Such shares of the profits earned after the death or retirement of the partner which is attributable to
the use of his share in the property of the firm; or
(2) Interest at the rate of 6 per cent annum on the amount of his share in the property.
Analysis and conclusion
Based on the aforesaid provisions of Section 37 of the Indian Partnership Act, 1932, in the given problem,
A’s Legal representatives shall be entitled, at their option to:
(a) the 20% shares of profits (as per the partnership deed); or
(b) interest at the rate of 6 per cent per annum on the amount of A’s share in the property.

Q.5 Master X was introduced to the benefits of partnership of M/s ABC & Co. with the consent of all partners.
After attaining majority, more than six months elapsed and he failed to give a public notice as to whether
he elected to become or not to become a partner in the firm. Later on, Mr. L, a supplier of material to M/s
ABC & Co., filed a suit against M/s ABC & Co. for recovery of the debt
due.
In the light of the Indian Partnership Act, 1932, explain:
(i) To what
(ii) extent X will be liable if he failed to give public notice after attaining majority?
(iii) Can Mr. L recover his debt from X?
Sol.
Provision
As per the provisions of Section 30(5) of the Indian Partnership Act, 1932, at any time
within six months of his attaining majority, or of his obtaining knowledge that he had
been admitted to the benefits of partnership, whichever date is later, such person may
give public notice that he has elected to become or that he has elected not to become a
partner in the firm, and such notice shall determine his position as regards the firm.
However, if he fails to give such notice, he shall become a partner in the firm on the expiry of
the said six months.
If the minor becomes a partner by his failure to give the public notice within specified time,
his rights and liabilities as given in Section 30(7) are as follows:
(A) He becomes personally liable to third parties for all acts of the firm done since he
was admitted to the benefits of partnership.
(B) His share in the property and the profits of the firm remains the same to which he
was entitled as a minor.
Analysis and conclusion
In the instant case, since, X has failed to give a public notice, he shall become a partner in
the M/s ABC & Co. and becomes personally liable to Mr. L, a third party.
(i) In the light of the provisions of Section 30(7) read with Section 30(5) of the Indian
Partnership Act, 1932, since X has failed to give public notice that he has not elected

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 to not to become a partner within six months, he will be deemed to be a partner
after the period of the above six months and therefore, Mr. L can recover his debt from
him also in the same way as he can recover from any other partner.
Q6. Mr. A (transferor) transfer his share in a partnership firm to Mr. B (transferee). Mr. B is not
entitled for few rights and privileges as Mr. A (transferor) is entitled therefor. Discuss in brief
the points for which Mr. B is not entitled during continuance of partnership?
Sol.
Provision
As per Section 29 of Indian Partnership Act, 1932, a transfer by a partner of his interest in the
firm, either absolute or by mortgage, or by the creation by him of a charge on such interest,
does not entitle the transferee, during the continuance of the firm, to interfere in the conduct
of business, or to require accounts, or to inspect the books of the firm, but entitles the
transferee only to receive the share of profits of the transferring partner, and the transferee
shall accept the account of profits agreed to by the partners.

Analysis and conclusion

In the given case during the continuance of partnership, such transferee Mr. B is not
entitled:
 to interfere with the conduct of the business.
 to require accounts.
 to inspect books of the firm.

However, Mr. B is only entitled to receive the share of the profits of the transferring partner
and he is bound to accept the profits as agreed to by the partners, i.e. he cannot challenge the
accounts.
Q7. M, N and P were partners in a firm. The firm ordered JR Limited to supply the furniture. P
dies, and M and N continues the business in the firm’s name. The firm did not give any notice
about P’s death to the public or the persons dealing with the firm. The furniture was delivered
to the firm after P’s death, fact about his death was known to them at the time of delivery.
Afterwards the firm became insolvent and failed to pay the price of furniture to JR Limited.
Explain with reasons:
(a) Whether P’s private estate is liable for the price of furniture purchased by the firm?
(b) Whether does it make any difference if JR Limited supplied the furniture to the firm
believing that all the three partners are alive?
Sol.
Provision
According to Section 35 of the Indian Partnership Act, 1932, where under a contract
between the partners the firm is not dissolved by the death of a partner, the estate
of a deceased partner is not liable for any act of the firm done after his death.
Further, in order that the estate of the deceased partner may be absolved from
liability for the future obligations of the firm, it is not necessary to give any notice
either to the public or the persons having dealings with the firm.

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 Analysis and conclusion
In the given question, JR Limited has supplied furniture to the partnership firm, after P’s
death. The firm did not give notice about P’s death to public or people dealing with the firm.
Afterwards, the firm became insolvent and could not pay JR Limited.
In the light of the facts of the case and provisions of law:

(i) Since the delivery of furniture was made after P’s death, his estate would not be
liable for the debt of the firm. A suit for goods sold and delivered would not lie against
the representatives of the deceased partner. This is because there was no debt due in
respect of the goods in P’s lifetime.
(ii) It will not make any difference even if JR Limited supplied furniture to the firm
believing that all the three partners are alive, as it is not necessary to give any notice
either to the public or the persons having dealings with the firm, so the estate of the
deceased partner may be absolved from liability for the future obligations of the firm.
Q8. Discuss the liability of a partner for the act of the firm and liability of firm for act of a partner to
third parties as per Indian Partnership Act, 1932.
Sol. Liability of a partner for acts of the firm (Section 25 of the Indian Partnership Act, 1932):
Every partner is liable, jointly with all the other partners and also severally, for all acts of
the firm done while he is a partner.
The partners are jointly and severally responsible to third parties for all acts which come
under the scope of their express or implied authority. This is because that all the acts done
within the scope of authority are the acts done towards the business of the firm.
The expression ‘act of firm’ connotes any act or omission by all the partners or by any
partner or agent of the firm, which gives rise to a right enforceable by or against the firm.
Again in order to bring a case under Section 25, it is necessary that the act of the firm, in respect
of which liability is brought to be enforced against a party, must have been done while he was a
partner.
Liability of the firm for wrongful acts of a partner and for misapplication by partners
(Sections 26 & 27 of the Indian Partnership Act, 1932): Where: by the wrongful act or omission
of a partner in the ordinary course of the business of a firm, or with the authority of his
partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable
therefore to the same extent as the partner.
A partner acting within his apparent authority receives money or property from a third party
and misapplies it, or a firm in the course of its business receives money or property from a third
party, and the money or property is misapplied by any of the partners while it is in the custody
of the firm, the firm is liable to make good the loss.
Q9. Define Implied Authority. In the absence of any usage or custom of trade to the contrary, the
implied authority of a partner does not empower him to do certain acts. State the acts which are
beyond the implied authority of a partner under the provisions of the Indian Partnership Act,
1932?

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Sol. According to Section 19 of the Indian Partnership Act, 1932, subject to the provisions of Section
22, the act of a partner which is done to carry on, in the usual way, business of the kind carried
on by the firm, binds the firm.
The authority of a partner to bind the firm conferred by this section is called his “implied
authority”.
In the absence of any usage or custom of trade to the contrary, the implied authority of a partner
does not empower him to-
(a) submit a dispute relating to the business of the firm to arbitration;
(b) open a banking account on behalf of the firm in his own name;
(c) compromise or relinquish any claim or portion of a claim by the firm;
(d) withdraw a suit or proceedings filed on behalf of the firm;
(e) admit any liability in a suit or proceedings against the firm;
(f) acquire immovable property on behalf of the firm;
(g) transfer immovable property belonging to the firm; and
(h) enter into partnership on behalf of the firm.
Q10. Mr. M is one of the four partners in M/s XY Enterprises. He owes a sum of Rs. 6 crore to his
friend Mr. Z which he is unable to pay on due time. So, he wants to sell his share in the firm to
Mr. Z for settling the amount. In the light of the provisions of the Indian Partnership Act, 1932,
discuss each of the following:
(i) Can Mr. M validly transfer his interest in the firm by way of sale?
(ii) What would be the rights of the transferee (Mr. Z) in case Mr. M wants to retire from the
firm after a period of 6 months from the date of transfer?
Sol.
Provision
According to Section 29 of the Indian Partnership Act, 1932,
(1) A transfer by a partner of his interest in the firm, either absolute or by mortgage,
or by the creation by him of a charge on such interest, does not entitle the
transferee, during the continuance of the firm, to interfere in the conduct of business, or
to require accounts, or to inspect the books of the firm, but entitles the transferee only to
receive the share of profits of the transferring partner, and the transferee shall accept
the account of profits agreed to by the partners.
(2) If the firm is dissolved or if the transferring partner ceases to be a partner, the
transferee is entitled as against the remaining partners to receive the share of the assets
of the firm to which the transferring partner is entitled, and, for the purpose of
ascertaining that share, to an account as from the date of the dissolution.
Analysis and conclusion
In the light of facts of the question and provision of law:
(i) Yes, Mr. M can validly transfer his interest in the firm by way of sale.
(ii) On the retirement of the transferring partner (Mr. M), the transferee (Mr. Z) will be
entitled, against the remaining partners:
(a) to receive the share of the assets of the firm to which the transferring partner was
entitled, and

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 (b) for the purpose of ascertaining the share, he is entitled to an account as from the
date of the dissolution.
So, in this case on Mr. M’s retirement, Mr. Z would be entitled to receive the value of
Mr. M’s share to the extent of Rs. 6 crore in the firm’s assets.
Q11. Sohan, Rohan and Jay were partners in a firm. The firm is dealer in office furniture. They have
regular dealings with M/s AB and Co. for the supply of furniture for their business. On 30th
June 2018, one of the partners, Mr. Jay died in a road accident. The firm has ordered M/s AB
and Co. to supply the furniture for their business on 25 May 2018, when Jay was also alive.
Now Sohan and Rohan continue the business in the firm’s name after Jay’s death. The firm did
not give any notice about Jay’s death to the public or the persons dealing with the firm. M/s
AB and Co. delivered the furniture to the firm on 25 July 2018. The fact about Jay’s death was
known to them at the time of delivery of goods. Afterwards the firm became insolvent and
failed to pay the price of furniture to M/s AB and Co. Now M/s AB and Co. has filed a case
against the firm for recovery of the price of furniture. With reference to the provisions of
Indian Partnership Act, 1932, explain whether Jay’s private estate is also liable for the price of
furniture purchased by the firm?
Sol.
Provision
According to Section 35 of the Indian Partnership Act, 1932, where under a contract
between the partners the firm is not dissolved by the death of a partner, the estate of a
deceased partner is not liable for any act of the firm done after his death.
Further, in order that the estate of the deceased partner may be absolved from liability for
the future obligations of the firm, it is not necessary to give any notice either to the public or
the persons having dealings with the firm.
Analysis and conclusion
In the light of the facts of the case and provisions of law, since the delivery of furniture was
made after Jay’s death, his estate would not be liable for the debt of the firm. A suit for
goods sold and delivered would not lie against the representatives of the deceased
partner.
This is because there was no debt due in respect of the goods in Jay’s lifetime. He was
already dead when the delivery of goods was made to the firm and also it is not necessary to
give any notice either to the public or the persons having dealings with the firm on a death of
a partner (Section 35). So, the estate of the deceased partner may be absolved from
liability for the future obligations of the firm.
Q12. X, Y and Z are partners in a Partnership Firm. They were carrying their business successfully
for the past several years. Spouses of X and Y fought in ladies club on their personal issue and
X’s wife was hurt badly. X got angry on the incident and he convinced Z to expel Y from their
partnership firm. Y was expelled from partnership without any notice from X and Z.
Considering the provisions of the Indian Partnership Act, 1932, state whether they can expel
a partner from the firm. What are the criteria for test of good faith in such circumstances?

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Sol.
Provision
A partner may not be expelled from a firm by a majority of partners except in
exercise, in good faith, of powers conferred by contract between the partners. It is, thus,
essential that:
(i) the power of expulsion must have existed in a contract between the partners;
(ii) the power has been exercised by a majority of the partners; and
(iii) it has been exercised in good faith.
If all these conditions are not present, the expulsion is not deemed to be in bonafide
interest of the business of the firm.
The test of good faith as required under Section 33(1) includes three things:
 The expulsion must be in the interest of the partnership.
 The partner to be expelled is served with a notice.
 He is given an opportunity of being heard.
If a partner is otherwise expelled, the expulsion is null and void.
Analysis and conclusion
Thus, according to the test of good faith as required under Section 33(1), expulsion
of
Partner Y is not valid.
Q13. What is the provision related to the effect of notice to an acting partner of the firm as per
the Indian Partnership Act, 1932?
Sol. Effect of notice to an acting partner of the firm According to Section 24 of the Indian
Partnership Act, 1932, notice to a partner who habitually acts in the business of the firm of
any matter relating to the affairs of the firm operates as notice to the firm, except in the
case of a fraud on the firm committed by or with the consent of that partner.
Thus, the notice to one is equivalent to the notice to the rest of the partners of the
firm, just as a notice to an agent is notice to his principal.
This notice must be actual and not constructive. It must further relate to the firm’s
business. Only then it would constitute a notice to the firm.
Q14. Discuss the provisions regarding personal profits earned by a partner under the Indian
Partnership Act, 1932?
Sol. Personal Profit earned by Partners (Section 16 of the Indian Partnership Act, 1932)
According to section 16, subject to contract between the partners:
(a) If a partner derives any profit for himself from any transaction of the firm, or
from the use of the property or business connection of the firm or the firm
name, he shall account for that profit and pay it to the firm;
(b) If a partner carries on any business of the same nature and competing with that
of the firm, he shall account for and pay to the firm all profits made by him in
that business.

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Q15. “Though a minor cannot be a partner in a firm, he can nonetheless be admitted to the
benefits of partnership.” Referring to the provisions of the Indian Partnership Act, 1932,
state the rights which can be enjoyed by a minor partner.

Sol. Rights which can be enjoyed by a minor partner:

(i) A minor partner has a right to his agreed share of the profits and of the firm.
(ii) He can have access to, inspect and copy the accounts of the firm.
(iii) He can sue the partners for accounts or for payment of his share but only when
severing his connection with the firm, and not otherwise.
(iv) On attaining majority, he may within 6 months elect to become a partner or not to
become a partner. If he elects to become a partner, then he is entitled to the share to
which he was entitled as a minor.
If he does not, then his share is not liable for any acts of the firm after the date of the
public notice served to that effect.
Q16. State the liabilities of a minor partner both:
(a) Before attaining majority and
(b) After attaining majority
Sol.
(I) Liabilities of a minor partner before attaining majority:
(a) The liability of the minor is confined only to the extent of his share in the
profits and the property of the firm.
(b) Minor has no personal liability for the debts of the firm incurred during his
minority.
(c) Minor cannot be declared insolvent, but if the firm is declared insolvent his share
in the firm vests in the Official Receiver/ Assignee.
(ii) Liabilities of a minor partner after attaining majority:
Within 6 months of his attaining majority or on his obtaining knowledge that he had
been admitted to the benefits of partnership, whichever date is later, the minor partner
has to decide whether he shall remain a partner or leave the firm.
Where he has elected not to become partner he may give public notice that he has elected not
to become partner and such notice shall determine his position as regards the firm. If he fails
to give such notice he shall become a partner in the firm on the expiry of the said six
months.

Q17. State the legal position of a minor partner after attaining majority:
(c) When he opts to become a partner of the same firm.
(d) When he decide not to become a partner.
Sol. When he becomes partner: If the minor becomes a partner on his own willingness or by his
failure to give the public notice within specified time, his rights and liabilities as given in
Section 30(7) of the Indian Partnership Act, 1932, are as follows:
(a) He becomes personally liable to third parties for all acts of the firm done since he
was admitted to the benefits of partnership.
(b) His share in the property and the profits of the firm remains the same to which he
was entitled as a minor.

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 When he elects not to become a partner:
(a) His rights and liabilities continue to be those of a minor up to the date of giving
public notice.
(b) His share shall not be liable for any acts of the firm done after the date of the
notice.
(c) He shall be entitled to sue the partners for his share of the property and profits. It
may be noted that such minor shall give notice to the Registrar that he has or has
not become a partner.
Q18. Mr. M, Mr. N and Mr. P were partners in a firm, which was dealing in refrigerators. On 1st
October, 2018, Mr. P retired from partnership, but failed to give public notice of his
retirement. After his retirement, Mr. M, Mr. N and Mr. P visited a trade fair and enquired
about some refrigerators with latest techniques. Mr. X, who was exhibiting his
refrigerators with the new techniques was impressed with the interactions of Mr. P and
requested for the visiting card of the firm. The visiting card also included the name of Mr. P
as a partner even though he had already retired. Mr. X. supplied some refrigerators to the
firm and could not recover his dues from the firm. Now, Mr. X wants to recover the dues
not only from the firm, but also from Mr. P. Analyse the above case in terms of the
provisions of the Indian Partnership Act, 1932 and decide whether Mr. P is liable in this
situation.
Sol.
Provision
A retiring partner continues to be liable to third party for acts of the firm after his
retirement until public notice of his retirement has been given either by himself or
by any other partner. But the retired partner will not be liable to any third party if
the latter deals with the firm without knowing that the former was partner.
Also, if the partnership is at will, the partner by giving notice in writing to all the other
partners of his intention to retire will be deemed to be relieved as a partner without giving
a public notice to this effect.
Also, as per section 28 of the Indian Partnership Act, 1932, where a man holds
himself out as a partner, or allows others to do it, he is then stopped from denying
the character he has assumed and upon the faith of which creditors may be
presumed to have acted.
Analysis and conclusion
In the light of the provisions of the Act and facts of the case, Mr. P is also liable to Mr.
X.
Q19. When the continuing guarantee can be revoked under the Indian Partnership Act, 1932?
Sol. Revocation of continuing guarantee (Section 38 of the Indian Partnership Act, 1932)
According to section 38, a continuing guarantee given to a firm or to third party in respect of
the transaction of a firm is, in the absence of an agreement to the contrary, revoked as to
future transactions from the date of any change in the constitution of the firm. Such change
may occur by the death, or retirement of a partner, or by introduction of a new partner.

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Q20. Comment on ‘the right to expel partner must be exercised in good faith’ under the Indian
Partnership Act, 1932.
Sol. A partner may not be expelled from a firm by a majority of partners except in exercise, in
good faith, of powers conferred by contract between the partners. It is, thus, essential that:
(i) the power of expulsion must have existed in a contract between the partners;
(ii) the power has been exercised by a majority of the partners; and
(iii) it has been exercised in good faith.
If all these conditions are not present, the expulsion is not deemed to be in bona fide
interest of the business of the firm.
Q21. P, Q, R and S are the partners in M/S PQRS & Co., a partnership firm which deals in trading of
Washing Machines of various brands. Due to the conflict of views between partners, P & Q
decided to leave the partnership firm and started competitive business on 31st July, 2019, in
the name of M/S PQ & Co. Meanwhile, R & S have continued using the property in the name of
M/S PQRS & Co. in which P & Q also has a share.
Based on the above facts, explain in detail the rights of outgoing partners as per the Indian
Partnership Act, 1932 and comment on the following:
(i) Rights of P & Q to start a competitive business.
(ii) Rights of P & Q regarding their share in property of M/S PQRS & Co
Sol.
Provision
Rights of outgoing partner to carry on competing business (Section 36 of the Indian
Partnership Act, 1932)
An outgoing partner may carry on business competing with that of the firm and he may
advertise such business, but subject to contract to the contrary, he may not,-
(a) use the firm name,
(b) represent himself as carrying on the business of the firm or
(c) solicit the custom of persons who were dealing with the firm before he ceased to be
a partner.
(1) Although this provision has imposed some restrictions on an outgoing partner, it
effectively permits him to carry on a business competing with that of the firm.
However, the partner may agree with his partners that on his ceasing to be so, he
will not carry on a business similar to that of the firm within a specified period or
within specified local limits. Such an agreement will not be in restraint of trade if
the restraint is reasonable [Section 36 (2)]
Analysis and conclusion
From the above, we can infer that P & Q can start competitive business in the name of
M/S PQ & Co after following above conditions in the absence of any agreement.
Provision
Right of outgoing partner in certain cases to share subsequent profits (Section 37 of the
Indian Partnership Act, 1932)
According to Section 37, where any member of a firm has died or otherwise ceased to
be partner, and the surviving or continuing partners carry on the business of the

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 firm with the property of the firm without any final settlement of accounts as
between them and the outgoing partner or his estate, then, in the absence of a contract to
the contrary, the outgoing partner or his estate is entitled at the option of himself or his
representatives to such share of the profits made since he ceased to be a partner as
may be attributable to the use of his share of the property of the firm or to interest
at the rate of six per cent per annum on the amount of his share in the property of
the firm.

Analysis and conclusion

In the instant case, P & Q can share in property of M/s PQRS & Co. keeping in view of the
above provisions.
Q22. Explain in detail the circumstances which lead to liability of firm for misapplication by
partners as per provisions of the Indian Partnership Act, 1932.
Sol. Where-
(a) a partner acting within his apparent authority receives money or property from
a third party and misapplies it, or
(b) a firm in the course of its business receives money or property from a third
party, and the money or property is misapplied by any of the partners while it is
in the custody of the firm, the firm is liable to make good the loss.
It may be observed that the workings of the two clauses of Section 27 is designed to bring out
clearly an important point of distinction between the two categories of cases of
misapplication of money by partners.
Clause (a) covers the case where a partner acts within his authority and due to his
authority as partner, he receives money or property belonging to a third party and
misapplies that money or property. For this provision to the attracted, it is not necessary
that the money should have actually come into the custody of the firm.
On the other hand, the provision of clause (b) would be attracted when such money or
property has come into the custody of the firm and it is misapplied by any of the
partners.
The firm would be liable in both the cases.
Q23. What do you mean by “implied authority” of the partners in a firm? Point out the extent of
partner’s implied authority in case of emergency, referring to the provisions of the Indian
Partnership Act, 1932.
Sol. Implied Authority of Partner as Agent of the Firm (Section 19): Subject to the provisions
of section 22, the act of a partner which is done to carry on, in the usual way, business of
the kind carried on by the firm, binds the firm.
(1) The authority of a partner to bind the firm conferred by this section is called his “implied
authority”.
(2) In the absence of any usage or custom of trade to the contrary, the implied authority of a
partner does not empower him to-
(a) Submit a dispute relating to the business of the firm to arbitration;
(b) open a banking account on behalf of the firm in his own name;
(c) compromise or relinquish any claim or portion of a claim by the firm;

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 (d) withdraw a suit or proceedings filed on behalf of the firm;
(e) admit any liability in a suit or proceedings against the firm;
(f) acquire immovable property on behalf of the firm;
(g) transfer immovable property belonging to the firm; and
(h) enter into partnership on behalf of the firm.
Mode Of Doing Act To Bind Firm (Section 22): In order to bind a firm, an act or instrument
done or executed by a partner or other person on behalf of the firm shall be done or
executed in the firm name, or in any other manner expressing or implying an intention to
bind the firm.
Q24. “Partner indeed virtually embraces the character of both a principal and an agent”. Describe the
said statement keeping in view of the provisions of the Indian Partnership Act, 1932.
Sol. “Partner indeed virtually embraces the character of both a principal and an agent”: Subject
to the provisions of section 18 of the Indian Partnership Act, 1932, a partner is the agent of the
firm for the purposes of the business of the firm.
A partnership is the relationship between the partners who have agreed to share the
profits of the business carried on by all or any of them acting for all (Section 4). This
definition suggests that any of the partners can be the agent of the others.
Section 18 clarifies this position by providing that, subject to the provisions of the Act, a
partner is the agent of the firm for the purpose of the business of the firm. The partner
indeed virtually embraces the character of both a principal and an agent.
So far as he acts for himself and in his own interest in the common concern of the
partnership, he may properly be deemed as a principal and so far as he acts for his
partners, he may properly be deemed as an agent.
The principal distinction between him and a mere agent is that he has a community of interest
with other partners in the whole property and business and liabilities of partnership, whereas an
agent as such has no interest in either.
The rule that a partner is the agent of the firm for the purpose of the business of the firm
cannot be applied to all transactions and dealings between the partners themselves. It is
applicable only to the act done by partners for the purpose of the business of the firm.
Q25. Moni and Tony were partners in the firm M/s MOTO & Company. They admitted Sony as partner
in the firm and he is actively engaged in day-to-day activities of the firm. There is a tradition in the
firm that all active partners will get a monthly remuneration of Rs. 20,000 but no express
agreement was there. After admission of Sony in the firm, Moni and Tony were continuing getting
salary from the firm but no salary was given to Sony from the firm. Sony claimed his remuneration
but denied by existing partners by saying that there was no express agreement for that. Whether
under the Indian Partnership Act, 1932, Sony can claim remuneration from the firm?
Sol.
Provision
By virtue of provisions of Section 13(a) of the Indian Partnership Act, 1932 a partner is not entitled
to receive remuneration for taking part in the conduct of the business. But this rule can always be
varied by an express agreement, or by a course of dealings, in which event the partner will be

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 entitled to remuneration. Thus, a partner can claim remuneration even in the absence of a
contract, when such remuneration is payable under the continued usage of the firm. In
other words, where it is customary to pay remuneration to a partner for conducting the
business of the firm, he can claim it even in the absence of a contract for the payment of the
same.
Analysis and conclusion
In the given problem, existing partners are getting regularly a monthly remuneration
from firm customarily being working partners of the firm. As Sony also admitted as
working partner of the firm, he is entitled to get remuneration like other partners.
Q26. Ram & Co., a firm consists of three partners A, B and C having one third share each in the firm.
According to A and B, the activities of C are not in the interest of the partnership and thus
want to expel C from the firm. Advise A and B whether they can do so quoting the relevant
provisions of the Indian Partnership Act, 1932.
Sol.
Provision
It is not possible for the majority of partners to expel a partner from the firm without
satisfying the conditions as laid down in Section 33 of the Indian Partnership Act, 1932.
The essential conditions before expulsion can be done are:
(i) the power of expulsion must have existed in a contract between the partners;
(ii) the power has been exercised by a majority of the partners; and
(iii) It has been exercised in good faith.
The test of good faith includes:
(a) that the expulsion must be in the interest of the partnership;
(b) that the partner to be expelled is served with a notice; and
(c) that the partner has been given an opportunity of being heard.
Analysis and conclusion
Thus, in the given case A and B the majority partners can expel the partner only if the above
conditions are satisfied and procedure as stated above has been followed.
Q27. State the legal consequences of the following as per the provisions of the Indian Partnership
Act, 1932:
(i) Retirement of a partner
(ii) Insolvency of a partner
Sol. Retirement of A Partner (Section 32):
(1) A partner may retire:
(a) with the consent of all the other partners;
(b) in accordance with an express agreement by the partners; or
(c) where the partnership is at will, by giving notice in writing to all the other
partners of his intention to retire.
(2) A retiring partner may be discharged from any liability to any third party for acts of the
firm done before his retirement by an agreement made by him with such third party and
the partners of the reconstituted firm, and such agreement may be implied by a course
of dealing between the third party and the reconstituted firm after he had knowledge of
the retirement.

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 (3) Notwithstanding the retirement of a partner from a firm, he and the partners continue to
be liable as partners to third parties for any act done by any of them which would
have been an act of the firm if done before the retirement, until public notice is given
of the retirement:
Provided that a retired partner is not liable to any third party who deals with the firm
without knowing that he was a partner.
(4) Notices under sub-section (3) may be given by the retired partner or by any partner of
the reconstituted firm.
Insolvency of a partner (Section 34)
(1) The insolvent partner cannot be continued as a partner.
(2) He will be ceased to be a partner from the very date on which the order of
adjudication is made.
(3) The estate of the insolvent partner is not liable for the acts of the firm done after
the date of order of adjudication.
(4) The firm is also not liable for any act of the insolvent partner after the date of the
order of adjudication,
(5) Ordinarily but not invariably, the insolvency of a partner results in dissolution of a firm;
but the partners are competent to agree among themselves that the adjudication of a
partner as an insolvent will not give rise to dissolution of the firm
Q28. A, B and C are partners of a partnership firm carrying on the business of construction of
apartments. B who himself was a wholesale dealer of iron bars was entrusted with the work
of selection of iron bars after examining its quality. As a wholesaler, B is well aware of the
market conditions. Current market price of iron bar for construction is Rs. 350 per Kilogram.
B already had 1000 Kg of iron bars in stock which he had purchased before price hike in the
market for Rs. 200 per Kg. He supplied iron bars to the firm without the firm realising the
purchase cost. Is B liable to pay the firm the extra money he made, or he doesn’t have to
inform the firm as it is his own business and he has not taken any amount more than the
current prevailing market price of Rs. 350? Assume there is no contract between the partners
regarding the above.
Sol.
Provision
According to section 16 of the Indian Partnership Act, 1932, subject to contract between
partners:
(a) if a partner derives any profit for himself from any transaction of the firm, or from
the use of the property or business connection of the firm or the firm name, he shall
account for that profit and pay it to the firm;
(b) if a partner carries on any business of the same nature as and competing with that of
the firm, he shall account for and pay to the firm all profits made by him in that
business.

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 Analysis and conclusion
In the given scenario, Mr. B had sold iron bar to the firm at the current prevailing market
rate of Rs. 350 per Kg though he had stock with him which he bought for Rs. 200 per Kg.
Hence, he made an extra profit of Rs. 150 per Kg. This is arising purely out of transactions with
the firm. Hence, Mr. B is accountable to the firm for the extra profit earned thereby
Q29. Mr. A (transferor) transfers his share in a partnership firm to Mr. B (transferee). Mr. B felt that
the book of accounts was displaying only a small amount as profit inspite of a huge turnover.
He wanted to inspect the book of accounts of the firm arguing that it is his entitlement as a
transferee. However, the other partners were of the opinion that Mr. B cannot challenge the
books of accounts. As an advisor, help them solve the issue applying the necessary provisions
from the Indian Partnership Act, 1932.
Sol.
Provision
As per Section 29 of the Indian Partnership Act, 1932, during the continuance of the business,
a transferee is not entitled
 To interfere with the conduct of the business
 To require the accounts
 To inspect the books of the firm He is only entitled to his share of profit.

Analysis and conclusion

Keeping the above points, in the given case, since the partnership business is in continuance,
Mr. B is bound to accept the profits as agreed to by the partners. He cannot challenge the
accounts. He is only entitled to receive the share of profits of Mr. A (transferring partner).
Q30. A, B and C are partners in a firm called ABC Firm. A, with the intention of deceiving D, a supplier
of office stationery, buys certain stationery on behalf of the ABC Firm. The stationery is of use in
the ordinary course of the firm’s business. A does not give the stationery to the firm, instead
brings it to his own use. The supplier D, who is unaware of the private use of stationery by A,
claims the price from the firm. The firm refuses to pay for the price, on the ground that the
stationery was never received by it (firm). Referring to the provisions of the Indian Partnership
Act, 1932 decide:
Whether the Firm’s contention shall be tenable?
What would be your answer if a part of the stationery so purchased by A was delivered to the
firm by him, and the rest of the stationery was used by him for private use, about which neither
the firm nor the supplier D was aware?
Sol.
Provision
The problem in the question is based on the ‘Implied Authority’ of a partner provided in Section
19 of the Indian Partnership Act, 1932. The section provides that subject to the provisions of
Section 22 of the Act, the act of a partner, which is done to carry on, in the usual way,
business of the kind carried on by the firm, binds the firm. The authority of a partner to
bind the firm conferred by this section is called his ‘Implied Authority’ [Sub-Section (1) of
section 19]. Furthermore, every partner is in contemplation of law the general and accredited
agent of the partnership and may consequently bind all the other partners by his acts in all

16 | P a g e
 matters which are within the scope and object of the partnership. Hence, if the partnership is of
a general commercial nature, he may buy goods on account of the partnership.

Analysis and conclusion

Considering the above provisions and explanation, the questions as asked in the problem may be
answered as under:
(i) The firm’s contention is not tenable, for the reason that the partner, in the usual
course of the business on behalf of the firm has an implied authority to bind the firm.
The firm is, therefore, liable for the price of the goods.
(ii) In the second case also, the answer would be the same as above, i.e. the implied
authority of the partner binds the firm.
In both the cases, however, the firm ABC can take action against A, the partner but it has to pay
the price of stationery to the supplier D.
Q31. A, B, and C are partners of a partnership firm ABC & Co. The firm is a dealer in office furniture. A
was in charge of purchase and sale, B was in charge of maintenance of accounts of the firm and C
was in charge of handling all legal matters. Recently through an agreement among them, it was
decided that A will be in charge of maintenance of accounts and B will be in charge of purchase
and sale. Being ignorant about such agreement, M, a supplier supplied some furniture to A, who
ultimately sold them to a third party. Referring to the provisions of the Partnership Act, 1932,
advise whether M can recover money from the firm.
What will be your advice in case M was having knowledge about the agreement?
Sol.
Provision
According to Section 20 of the Indian Partnership Act, 1932, the partners in a firm may, by
contract between the partners, extend or restrict implied authority of any partners.
Not with standing any such restriction, any act done by a partner on behalf of the firm
which falls within his implied authority binds the firm, unless the person with whom
he is dealing knows of the restriction or does not know or believe that partner to be a
partner.
The implied authority of a partner may be extended or restricted by contract between the
partners. Under the following conditions, the restrictions imposed on the implied
authority of a partner by agreement shall be effective against a third party:
1. The third party knows above the restrictions, and
2. The third party does not know that he is dealing with a partner in a firm.

Analysis and conclusion

Now, referring to the case given in the question, M supplied furniture to A, who ultimately sold
them to a third party and M was also ignorant about the agreement entered into by the partners
about the change in their role. M also is not aware that he is dealing with a partner in a firm.
Therefore, M on the basis of knowledge of implied authority of A, can recover money from
the firm.

17 | P a g e
 But in the second situation, if M was having knowledge about the agreement, he cannot recover
money from the firm.
Q32. X, Y and Z are partners in a Partnership Firm. They were carrying their business successfully for
the past several years. Due to expansion of business, they planned to hire another partner Mr A.
Now the firm has 4 partners X, Y, Z and A. The business was continuing at normal pace. In one of
formal business meeting, it was observed that Mr. Y misbehaved with Mrs. A (wife of Mr. A). Mr.
Y was badly drunk and also spoke rudely with Mrs. A. Mrs. A felt very embarrassed and told her
husband Mr. A about the entire incident. Mr. A got angry on the incident and started arguing and
fighting with Mr. Y in the meeting place itself. Next day, in the office Mr. A convinced X and Z that
they should expel Y from their partnership firm. Y was expelled from partnership without any
notice from X, A and Z.
Considering the provisions of the Indian Partnership Act, 1932, state whether they can
expel a partner from the firm. What are the criteria for test of good faith in such
circumstances?
Sol.
Provision
According to Section 33 of Indian Partnership Act, 1932, a partner may not be expelled from a
firm by a majority of partners except in exercise, in good faith, of powers conferred by contract
between the partners. It is, thus, essential that:
(i) the power of expulsion must have existed in a contract between the partners;
(ii) the power has been exercised by a majority of the partners; and
(iii) it has been exercised in good faith.

If all these conditions are not present, the expulsion is not deemed to be in bonafide interest of
the business of the firm.
The test of good faith as required under Section 33(1) includes three things:
 The expulsion must be in the interest of the partnership.
 The partner to be expelled is served with a notice.
 He is given an opportunity of being heard.
If a partner is otherwise expelled, the expulsion is null and void.
Analysis and conclusion
According to the test of good faith as required under Section 33(1), expulsion of Partner Y is
not valid as he was not served any notice and also he was not given an opportunity of
being heard. Also the matter of fight between A and Y was on personal reasons, hence not
satisfying the test of good faith in the interest of partnership. Since the conditions given under
above provisions are not satisfied, the expulsion stands null and void.
Q33. Mahesh, Suresh and Dinesh are partners in a trading firm. Mahesh, without the knowledge or
consent of Suresh and Dinesh borrows himself Rs. 50,000 from Ramesh, a customer of the firm, in
the name of the firm. Mahesh, then buys some goods for his personal use with that borrowed
money. Can Mr. Ramesh hold Mr. Suresh & Mr. Dinesh liable for the loan? Explain the relevant
provisions of the Indian Partnership Act, 1932.

18 | P a g e
Sol.
Provision
Implied authority of a partner As per sections 19 and 22 of the Indian Partnership
Act,1932 unless otherwise provided in the partnership deed, every partner has an
implied authority to bind every other partner for acts done in the name of the firm,
provided the same falls within the ordinary course of business and is done in a usual
manner.
Analysis and conclusion
Mahesh has a right to borrow the money of Rs. 50,000/- from Ramesh on behalf of
his firm in the usual manner. Since, Ramesh has no knowledge that the amount was
borrowed by Mahesh without the consent of the other two partners, Mr. Suresh and
Mr. Dinesh, he can hold both of them (Suresh and Dinesh) liable for the re-payment
of the loan.

19 | P a g e
 THE INDIAN PARTNERSHIP ACT, 1932

UNIT -3

Q1. What is the procedure of registration of a partnership firm under the Indian Partnership Act,
1932?
Sol.
(1) (SECTION 58): (1) The registration of a firm may be effected at any time by sending by post
or delivering to the Registrar of the area in which any place of business of the firm is
situated or proposed to be situated, a statement in the prescribed form and
accompanied by the prescribed fee, stating-
(a) The firm’s name
(b) The place or principal place of business of the firm,
(c) The names of any other places where the firm carries on business,
(d) the date when each partner joined the firm,
(e) the names in full and permanent addresses of the partners, and
(f) the duration of the firm.

(2) The statement shall be signed by all the partners, or by their agents specially authorised in
this behalf.
(3) Each person signing the statement shall also verify it in the manner prescribed.
(4) A firm name shall not contain any of the following words, namely:
Note: ‘Crown’, Emperor’, ‘Empress’, ‘Empire’, ‘Imperial’, ‘King’, ‘Queen’, ‘Royal’, or words
expressing or implying the sanction, approval or patronage of Government except when
the State Government signifies its consent to the use of such words as part of the firm-name
by order in writing.
Q2. When does dissolution of a partnership firm take place under the provisions of the Indian
Partnership Act, 1932? Explain.
Sol. Dissolution of Firm: The Dissolution of Firm means the discontinuation of the jural
relation existing between all the partners of the Firm. But when only one of the partners
retires or becomes in capacitated from acting as a partner due to death, insolvency or
insanity, the partnership, i.e., the relationship between such a partner and other is
dissolved, but the rest may decide to continue.
In such cases, there is in practice, no dissolution of the firm. The particular partner goes out, but
the remaining partners carry on the business of the Firm.
In the case of dissolution of the firm, on the other hand, the whole firm is dissolved.
The partnership terminates as between each and every partner of the firm.
Dissolution of a Firm may take place (Section 39 - 44)
(a) as a result of any agreement between all the partners (i.e., dissolution by agreement);
(b) by the adjudication of all the partners, or of all the partners but one, as insolvent
(i.e., compulsory dissolution);
(c) by the business of the Firm becoming unlawful (i.e., compulsory dissolution);
(d) subject to agreement between the parties, on the happening of certain contingencies,
such as:

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 (i) effluence of time;
(ii) completion of the venture for which it was entered into;
(iii) death of a partner;
(iv) insolvency of a partner.
(e) by a partner giving notice of his intention to dissolve the firm, in case of partnership
at will and the firm being dissolved as from the date mentioned in the notice, or if no
date is mentioned, as from the date of the communication of the notice; and
(f) by intervention of court in case of:
(i) a partner becoming the unsound mind;
(ii) permanent incapacity of a partner to perform his duties as such;
(iii) Misconduct of a partner affecting the business;
(iv) willful or persistent breach of agreement by a partner;
(v) ransfer or sale of the whole interest of a partner;
(vi) improbability of the business being carried on save at a loss;
(g) the court being satisfied on other equitable grounds that the firm should be
dissolved.
Q3. “Indian Partnership Act does not make the registration of firms compulsory nor does it impose
any penalty for non-registration.” In light of the given statement, discuss the consequences of
non- registration of the partnership firms In India?
Or
“Indian Partnership Act does not make the registration of firms compulsory nor does it impose
any penalty for non-registration.” Explain. Discuss the various disabilities or disadvantages that
a non-registered partnership firm can face in brief?
Sol. Under the English Law, the registration of firms is compulsory. Therefore, there is a penalty for
non-registration of firms. But the Indian Partnership Act does not make the registration of firms
compulsory nor does it impose any penalty for non-registration.
However, under Section 69, non-registration of partnership gives rise to a number of
disabilities which we shall presently discuss. Although registration of firms is not
compulsory, yet the consequences or disabilities of non-registration have a persuasive pressure
for their registration. These disabilities briefly are as follows:
(i) No suit in a civil court by firm or other co-partners against third party: The firm or
any other person on its behalf cannot bring an action against the third party for breach
of contract entered into by the firm, unless the firm is registered and the persons suing are
or have been shown in the register of firms as partners in the firm.
In other words, a registered firm can only file a suit against a third party and the
persons suing have been in the register of firms as partners in the firm.
(ii) No relief to partners for set-off of claim: If an action is brought against the firm by a third
party, then neither the firm nor the partner can claim any set-off, if the suit be valued
for more than Rs. 100 or pursue other proceedings to enforce the rights arising from any
contract.
(iii) Aggrieved partner cannot bring legal action against other partner or the firm: A
partner of an unregistered firm (or any other person on his behalf) is precluded from
bringing legal action against the firm or any person alleged to be or to have been a partner

2|Page
 in the firm. But, such a person may sue for dissolution of the firm or for accounts and
realization of his share in the firm’s property where the firm is dissolved.
(iv) Third party can sue the firm: In case of an unregistered firm, an action can be brought
against the firm by a third party.
Q4. Subject to agreement by partners, state the rules that should be observed by the partners in
settling the accounts of the firm after dissolution under the provisions of the Indian Partnership
Act, 1932.
Sol. Mode of Settlement of partnership accounts: As per Section 48 of the Indian Partnership Act,
1932, in settling the accounts of a firm after dissolution, the following rules shall, subject to
agreement by the partners, be observed:
(i) Losses, including deficiencies of capital, shall be paid first out of profits, next out of
capital, and, lastly, if necessary, by the partners individually in the proportions in
which they were entitled to share profits;
(ii) The assets of the firm, including any sums contributed by the partners to make up
deficiencies of capital, must be applied in the following manner and order:
(a) in paying the debts of the firm to third parties;
(b) in paying to each partner rateably what is due to him from capital;
(c) in paying to each partner rateably what is due to him on account of capital; and
(d) the residue, if any, shall be divided among the partners in the proportions in
which they were entitled to share profits.

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Q5. Distinguish between dissolution of firm and dissolution of partnership.
Or
“Dissolution of a firm is different from dissolution of Partnership”. Discuss.
Sol.

S. No. Basis of Difference Dissolution of Firm Dissolution of Partnership

1. Continuation of It involves discontinuation of It does not affect
business business in partnership. continuation of business. It
involves only reconstitution
of the firm.
2. Winding up It involves winding up of the It involves only
firm and requires realization reconstitution and requires
of assets and settlement of only revaluation of assets
liabilities. and liabilities of the firm.
3. Order of court A firm may be dissolved by Dissolution of partnership
the order of the court. is not ordered by the court.
4. Scope It necessarily involves It may or may not involve
dissolution of partnership. dissolution of firm.
5. Final closure of It involves final closure of It does not involve final
books books of the firm. closure of the books of the
firm.
Q6. Mr. A. Mr. B and Mr. C were partners in a partnership firm M/s ABC & Co., which is engaged in
the business of trading of branded furniture. The name of the partners was clearly written
along with the firm name in front of the head office of the firm as well as on letter-head of the
firm. On 1st October, 2018, Mr. C passed away. His name was neither removed from the list of
partners as stated in front of the head office nor from the letter-heads of the firm. As per the
terms of partnership, the firm continued its operations with Mr. A and Mr. B as partners. The
accounts of the firm were settled and the amount due to the legal heirs of Mr. C was also
determined on 10th October, 2018. But the same was not paid to the legal heirs of Mr. C. On
16th October, 2018, Mr. X, a supplier supplied furniture worth Rs. 20,00,000 to M/s ABC &
Co. M/s ABC & Co. could not repay the amount due to heavy losses. Mr. X wants to recover the
amount not only from M/s ABC & Co., but also from the legal heirs of Mr. C.
Analyses the above situation in terms of the provisions of the Indian Partnership Act, 1932
and decide whether the legal heirs of Mr. C can also be held liable for the dues towards Mr. X.
Sol.
Provision
Generally, the effect of the death of a partner is the dissolution of the partnership, but
the rule in regard to the dissolution of the partnership, by death of partner, is subject to a
contract between the parties and the partners are competent to agree that the death of
one will not have the effect of dissolving the partnership as regards the surviving
partners unless the firm consists of only two partners. In order that the estate of the
deceased partner may be absolved from liability for the future obligations of the firm, it is not
necessary to give any notice either to the public or the persons having dealings with the firm.

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 Analysis and conclusion
In the light of the provisions of the Act and the facts of the question, Mr. X (creditor) can
have only a personal decree against the surviving partners (Mr. A and Mr. B) and a
decree against the partnership assets in the hands of those partners. A suit for goods
sold and delivered would not lie against the representatives of the deceased partner. Hence,
the legal heirs of Mr. C cannot be held liable for the dues towards Mr. X.
Q7. Ram, Mohan and Gopal were partners in a firm. During the course of partnership, the firm
ordered Sunrise Ltd. to supply a machine to the firm. Before the machine was delivered, Ram
expired. The machine, however, was later delivered to the firm. Thereafter, the remaining
partners became insolvent and the firm failed to pay the price of machine to Sunrise Ltd.
Explain with reasons:
(i) Whether Ram’s private estate is liable for the price of the machine purchased by the firm?
(ii) Against whom can the creditor obtain a decree for the recovery of the price?
Sol.
Provision
Partnership Liability: The problem in question is based on the provisions of the Indian
Partnership Act, 1932 contained in Section 35. The Section provides that where under a
contract between the partners the firm is not dissolved by the death of a partner, the estate of
a deceased partner is not liable for any act of the firm done after his death.
Analysis and conclusion
Therefore, considering the above provisions, the problem may be answered as follows:
(i) Ram’s estate in this case will not be liable for the price of the Machinery
purchased. This is because there was not debt due in respect of the goods in Ram’s
life time.
(ii) The creditors in this case can have only a personal decree against the surviving
partners and decree against the partnership assets in the hands of those partners.
However, since the surviving partners are already insolvent, no suit for recovery of the debt
would lie against them. A suit for goods sold and delivered would not lie against the
representative of the deceased partner.
Q8. State the grounds on which Court may dissolve a partnership firm in case any partner files a
suit for the same.
Or
What are the various grounds under the Indian Partnership Act, 1932, on which the Court
may, at the suit of the partner, dissolve a firm?
Sol. Dissolution by the Court (Section 44 of the Indian Partnership Act, 1932):
Court may, at the suit of the partner, dissolve a firm on any of the following ground:
(a) Insanity/unsound mind: Where a partner (not a sleeping partner) has become
of unsound mind, the court may dissolve the firm on a suit of the other partners or
by the next friend of the insane partner. Temporary sickness is no ground for
dissolution of firm.
(b) Permanent incapacity: When a partner, other than the partner suing, has become
in any way permanently incapable of performing his duties as partner, then the

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 court may dissolve the firm. Such permanent incapacity may result from
physical disability or illness etc.
(c) Misconduct: Where a partner, other than the partner suing, is guilty of conduct which
is likely to affect prejudicially the carrying on of business, the court may order for
dissolution of the firm, by giving regard to the nature of business.
It is not necessary that misconduct must relate to the conduct of the business.
The important point is the adverse effect of misconduct on the business. In each case
nature of business will decide whether an act is misconduct or not.
(d) Persistent breach of agreement: Where a partner other than the partner suing,
wilfully or persistently commits breach of agreements relating to the
management of the affairs of the firm or the conduct of its business, or otherwise so
conduct himself in matters relating to the business that it is not reasonably
practicable for other partners to carry on the business in partnership with him,
then the court may dissolve the firm at the instance of any of the partners.
Following comes in to category of breach of contract:
o Embezzlement,
o Keeping erroneous accounts
o Holding more cash than allowed
o Refusal to show accounts despite repeated request etc.
Example If one of the partners keeps erroneous accounts and omits to enter receipts
or if there is continued quarrels between the partners or there is such a state of things
that destroys the mutual confidence of partners, the court may order for dissolution
of the firm.
(e) Transfer of interest: Where a partner other than the partner suing, has transferred
the whole of his interest in the firm to a third party or has allowed his share to
be charged or sold by the court, in the recovery of arrears of land revenue due
by the partner, the court may dissolve the firm at the instance of any other
partner.
(f) Continuous/Perpetual losses: Where the business of the firm cannot be carried
on except at a loss in future also, the court may order for its dissolution.
(g) Just and equitable grounds: Where the court considers any other ground to be just
and equitable for the dissolution of the firm, it may dissolve a firm. The following are
the cases for the just and equitable grounds-
(i) Deadlock in the management.
(ii) Where the partners are not in talking terms between them.
(iii) Loss of substratum.
(iv) Gambling by a partner on a stock exchange.
Q9. Referring to the Provisions of the Indian Partnership Act, 1932, answer the following:
(i) What are the consequences of Non-Registration of Partnership firm?
(ii) What are the rights which won’t be affected by Non-Registration of Partnership firm?

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 Sol. Consequences of Non-registration of partnership firm:
Under Section 69 of the Indian Partnership Act, 1932 non-registration of partnership gives
rise to a number of disabilities.
Though registration of firms is not compulsory, yet the consequences or disabilities of non-
registration have a persuasive pressure for their registration. Following are the
consequences:
(a) No suit in a civil court by firm or other co-partners against third party: The firm or
any other person on its behalf cannot bring an action against the third party for breach
of contract entered into by the firm.
(b) No relief to partners for set-off of claim: If an action is brought against the firm by a
third party, then neither the firm nor the partner can claim any set-off, if the suit be
valued for more than Rs. 100 or pursue other proceedings to enforce the rights arising
from any contract.
(c) Aggrieved partner cannot bring legal action against other partner or the firm: A
partner of an unregistered firm (or any other person on his behalf) is precluded from
bringing legal action against the firm or any person alleged to be or to have been a
partner in the firm.
(d) Third-party can sue the firm: In case of an unregistered firm, an action can be brought
against the firm by a third party.
Non-registration of a firm does not, however, affect the following rights:
1. The right of third parties to sue the firm or any partner.
2. The right of partners to sue for the dissolution of the firm or for the settlement
of the accounts of a dissolved firm, or for realization of the property of a
dissolved firm.
3. The power of an Official Assignees, Receiver of Court to release the property of
the insolvent partner and to bring an action.
4. The right to sue or claim a set-off if the value of suit does not exceed Rs. 100 in
value.
Q10. A & Co. is registered as a partnership firm in 2015 with A, B and C partners. In 2016, A dies. In
2017, B and C sue X in the name and on behalf of A & Co., without fresh registration. Decide
whether the suit is maintainable. Whether your answer would be same if in 2017 B and C had
taken a new partner D and then filed a suit against X without fresh registration?
Sol.
Provision
As regards the question whether in the case of a registered firm (whose business was carried on
after its dissolution by death of one of the partners), a suit can be filed by the remaining partners
in respect of any subsequent dealings or transactions without notifying to the Registrar of Firms,
the changes in the constitution of the firm, it was decided that the remaining partners should
sue in respect of such subsequent dealings or transactions even though the firm was not
registered again after such dissolution and no notice of the partner was given to the Registrar.
Analysis and conclusion
The test applied in these cases was whether the plaintiff satisfied the only two
requirements of Section 69 (2) of the Act namely,

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 (a) the suit must be instituted by or on behalf of the firm which had been
registered;
(b) the person suing had been shown as partner in the register of firms. In view of
this position of law, the suit is in the case by B and C against X in the name and
on behalf of A & Co. is maintainable.
Now, in 2017, B and C had taken a new partner, D, and then filed a suit against X
without fresh registration. Where a new partner is introduced, the fact is to be
notified to Registrar who shall make a record of the notice in the entry relating to
the firm in the Register of firms. Therefore, the firm cannot sue as D’s (new
partner’s) name has not been entered in the register of firms. It was pointed out that in
the second requirement, the phrase “person suing” means persons in the sense of
individuals whose names appear in the register as partners and who must be all partners
in the firm at the date of the suit.
Q11. P, X, Y and Z are partners in a registered firm A & Co. X died and P retired. Y and Z filed a suit
against W in the name and on behalf of firm without notifying to the Registrar of firms about
the changes in the constitution of the firm. Is the suit maintainable?
Sol.
Provision
As regards the question whether in the case of a registered firm (whose business was carried
on after its dissolution by death of one of the partners), a suit can be filed by the remaining
partners in respect of any subsequent dealings or transactions without notifying to the
Registrar of Firms, the changes in the constitution of the firm, it was decided that the
remaining partners should sue in respect of such subsequent dealings or transactions
even though the firm was not registered again after such dissolution and no notice of
the partner was given to the Registrar.
The test applied in these cases was whether the plaintiff satisfied the only two requirements
of Section 69 (2) of the Act namely,
(i) the suit must be instituted by or on behalf of the firm which had been registered;
(ii) the person suing had been shown as partner in the register of firms.
Analysis and conclusion
In view of this position of law, the suit is in the case is maintainable.
Q12. M/s XYZ & Company is a partnership firm. The firm is an unregistered firm. The firm has
purchased some iron rods from another partnership firm M/s LMN & Company which is also
an unregistered firm. M/s XYZ & Company could not pay the price within the time as decided.
M/s LMN & Company has filed the suit against M/s XYZ
& Company for recovery of price. State under the provisions of the Indian Partnership Act,
1932;
(a) Whether M/s LMN & Company can file the suit against M/s XYZ & Company?
(b) What would be your answer, in case M/s XYZ & Company is a registered firm while M/s
LMN & Company is an unregistered firm?
(c) What would be your answer, in case M/s XYZ & Company is an unregistered firm while
M/s LMN & Company is a registered firm?

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 Sol.
Provision
According to provisions of Section 69 of the Indian Partnership Act, 1932 an unregistered
firm cannot file a suit against a third party to enforce any right arising from contract,
e.g., for the recovery of the price of goods supplied. But this section does not prohibit a
third party to file suit against the unregistered firm or its partners. Analysis and
conclusion
(a) On the basis of above, M/s LMN & Company cannot file the suit against M/s XYZ &
Company as M/s LMN & Company is an unregistered firm.
(b) In case M/s XYZ & Company is a registered firm while M/s LMN & Company is an
unregistered firm, the answer would remain same as in point a) above.
(c) In case M/s LMN & Company is a registered firm, it can file the suit against M/s XYZ
& Company.
Q13. MN partnership firm has two different lines of manufacturing business. One line of business is
the manufacturing of Ajinomoto, a popular seasoning & taste enhancer for food. Another line
of business is the manufacture of paper plates & cups. One fine day, a law is passed by the
Government banning Ajinomoto’ use in food and to stop its manufacturing making it an
unlawful business because it is injurious to health. Should the firm compulsorily dissolve
under the Indian Partnership Act, 1932? How will its other line of business (paper plates &
cups) be affected?
Sol.
Provision
According to Section 41 of the Indian Partnership Act, 1932, a firm is compulsorily
dissolved;
(a) by the adjudication of all the partners or of all the partners but one as insolvent,
or
(b) by the happening of any event which makes it unlawful for the business of the firm
to be carried on or for the partners to carry it on in partnership.
However, where more than one separate adventure or undertaking is carried on by the firm,
the illegality of one or more shall not of itself cause the dissolution of the firm in respect of its
lawful adventures and undertakings.
Analysis and conclusion
Here, MN has to compulsorily dissolve due to happening of law which bans the usage of
ajinomoto. Else the business of the firm shall be treated as unlawful.
However, the illegality of ajinomoto business will in no way affect the legality or
dissolution of the other line of business (paper plates & cups). MN can continue with
paper plates and cup manufacture.

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 CHAPTER - 6 THE LIMITED LIABILITY PARTNETSHIP ACT, 2008

Q1. State the rules regarding registered office of a Limited Liability Partnership (LLP) and change
therein as per provisions of the Limited Liability Partnership Act, 2008. (5 Marks)
Sol. Registered office of LLP and change therein (Section 13):
(1) Every LLP shall have a registered office to which all communications and notices may be
addressed and where they shall be received.
(2) A document may be served on a LLP or a partner or designated partner thereof by

sending it by post under a certificate of posting or by registered post or by any other

manner, as may be prescribed, at the registered office and any other address
specifically declared by the LLP for the purpose in such form and manner as may be
prescribed.
(3) A LLP may change the place of its registered office and file the notice of such change with
the Registrar in such form and manner and subject to such conditions as may be prescribed
and any such change shall take effect only upon such filing.
(4) If any default is made in complying with the requirements of this section, the limited
liability partnership and its every partner shall be liable to a penalty of five hundred rupees
for each day during which the default continues, subject to a maximum of fifty thousand
rupees for the limited liability partnership and its every partner.
Q2. Limited Liability Partnership (LLP) gives the benefits of limited liability of a company on one
hand and the flexibility of a partnership on the other. Discuss.
Or
LLP gives the benefits of limited liability of a company and the flexibility of a partnership
Or
“LLP is an alternative corporate business form that gives the benefits of limited liability of a
company and the flexibility of a partnership”. Explain.

Sol. Limited Liability: Every partner of a LLP is, for the purpose of the business of LLP, the
agent of the LLP, but not of other partners (Section 26 of the LLP Act, 2008). The liability of
the partners will be limited to their agreed contribution in the LLP, while the LLP it self will be
liable for the full extent of its assets.
Flexibility of a partnership: The LLP allows its members the flexibility of organizing their
internal structure as a partnership based on a mutually arrived agreement. The LLP form
enables entrepreneurs, professionals and enterprises providing services of any kind or engaged
in scientific and technical disciplines, to form commercially efficient vehicles suited to their
requirements. Owing to flexibility in its structure and operation, the LLP is a suitable
vehicle for small enterprises and for investment by venture capital.

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Q3. What are the essential elements to form a LLP in India as per the LLP Act, 2008?
Sol. Essential elements to incorporate LLP-
Under the LLP Act, 2008, the following elements are very essential to form a LLP in India:
(i) To complete and submit incorporation document in the form prescribed with the
Registrar electronically;
(ii) To have at least two partners for incorporation of LLP [Individual or body
corporate];
(iii) To have registered office in India to which all communications will be made and
received;
(iv) To appoint minimum two individuals as designated partners who will be
responsible for number of duties including doing of all acts, matters and things as are
required to be done by the LLP. Atleast one of them should be resident in India.
(v) A person or nominee of body corporate intending to be appointed as designated
partner of LLP should hold a Designated Partner Identification Number (DPIN)
allotted by MCA.
(vi) To execute a partnership agreement between the partners inter se or between the
LLP and its partners. In the absence of any agreement the provisions as set out in First
Schedule of LLP Act, 2008 will be applied.
(vii) LLP Name.

Q4. Explain the steps involved therein under the LLP Act, 2008.
Sol Steps to incorporate LLP:
1. Name reservation:
 The first step to incorporate Limited Liability Partnership (LLP) is reservation of name
of LLP
 Applicant has to file e-Form 1 for ascertaining availability and reservation of the name
of a LLP business.
2. Incorporate LLP:
 After reserving a name, user has to file e - Form 2 for incorporating a new Limited
Liability Partnership (LLP).
 E- Form 2 contains the details of LPP Proposed to be incorporated, partner’s/
designated partner’s details and consent of the partners/ designated partners to act as
partners/ designated partners]
3. LLP Agreement
 Execution of LLP Agreement is mandatory as per Section 23 of the Act.
 LLP Agreement is required to be filed with the registrar in e-Form 3 within 30 days
of incorporation of LLP
Q5. What do you mean by Limited Liability Partnership (LLP)? What are the advantages for forming
a LLP for doing business?
Sol.
1. LLP: A LLP is a new form of legal business entity with limited liability. It is an alternative
corporate business vehicle that not only gives the benefits of limited liability at low
compliance cost but allows its partners the flexibility of organising their internal structure
as a traditional partnership.

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 The LLP is a separate legal entity and, while the LLP itself will be liable for the full
extent of its assets, the liability of the partners will be limited.
LLP is an alternative corporate business form that gives the benefits of limited
liability of a company and the flexibility of a partnership.
Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm
structure’ LLP is called a hybrid between a company and a partnership.
Advantages of LLP form:
(a) LLP is organized and operates on the basis of an agreement.
(b) It provides flexibility without imposing detailed legal and procedural requirements
(c) It enables professional/technical expertise and initiative to combine with financial
risk taking capacity in an innovative and efficient manner.
(d) It is easy to form
(e) In LLP form, all partners enjoy limited liability
(f) Flexible capital structure is there in this form
(g) It is easy to dissolve
Q6. List the differences between the Limited Liability Partnership and the Limited Liability
Company.
Sol.

S. No. Basis LLP Limited Liability Company

1. Regulating Act The LLP Act,2008 The companies Act, 2013

Members/ The persons who contribute The persons who invest the
Partners to LLP are known as partners money in the shares are known
2.
of the LLP as members of the company.

Internal The internal governance The internal governance

governance structure of a LLP is governed structure of a company is
3. structure by contract agreement regulated by statute (i.e.,
between the partners Companies Act, 2013).

Name Name of the LLP to contain the Name of the public company to contain
word “Limited Liability the word “limited” and Pvt. Co. to
4.
partnership” or “LLP” as suffix. contain the word “Private limited” as
suffix.

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 No. of Minimum – 2 members Private company:
members/ Maximum – No such limit on Minimum – 2 members
partners the members in the Act. The Maximum 200 members Public
members of the LLP can be company:
individuals/or body corporate Minimum – 7 members
5.
through the nominees Maximum – No such limit
on the members.
Members can be
organizations, trusts, another
business form or individuals.
Liability of Liability of a partners is Liability of a member is limited
members/ limited to the extent of to the amount unpaid on the
6.
partners agreed contribution in case shares held by them.
of intention is fraud.
Management The business of the company The affairs of the company are
managed by the partners managed by board of directors
7. including the designated elected by the shareholders.
partners authorized in the
Agreement.
Minimum Minimum 2 designated Pvt. Co. – 2 directors
number of partners. Public co. – 3 directors
8. directors/
designated
Partners

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Q7. What is the meaning of the Limited Liability Partnership? State the various characteristics of
it?
Sol.
1. Meaning of Limited Liability Partnership (LLP): A LLP is a new form of legal business
entity with limited liability. It is an alternative corporate business vehicle that not only gives
the benefits of limited liability at low compliance cost but allows its partners the flexibility of
organising their internal structure as a traditional partnership.

The LLP is a separate legal entity and, while the LLP itself will be liable for the full extent of
its assets, the liability of the partners will be limited.
LLP is an alternative corporate business form that gives the benefits of limited liability of a
company and the flexibility of a partnership.
Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm
structure’ LLP is called a hybrid between a company and a partnership.
Characteristic/Salient Features of LLP
1. LLP is a body corporate: Section 2(1)(d) of the LLP Act, 2008 provides that a LLP is a
body corporate formed and incorporated under this Act and is a legal entity
separate from that of its partners and shall have perpetual succession.
Therefore, any change in the partners of a LLP shall not affect the existence, rights or
liabilities of the LLP. Section 3 of LLP Act provides that a LLP is a body corporate formed
and incorporated under this Act and is a legal entity separate from that of its partners.
2. Perpetual Succession: The LLP can continue its existence irrespective of changes
in partners. Death, insanity, retirement or insolvency of partners has no impact on the
existence of LLP. It is capable of entering into contracts and holding property in its own
name.
3. Separate Legal Entity: The LLP as a separate legal entity, is liable to the full extent of
its assets but liability of the partners is limited to their agreed contribution in the LLP. In
other words, creditors of LLP shall be the creditors of LLP alone.
4. Mutual Agency: No partner is liable on account of the independent or un-authorized
actions of other partners, thus individual partners are shielded from joint liability
created by another partner’s wrongful business decisions or misconduct. In other words,
all partners will be the agents of the LLP alone. No one partner can bind the other
partner by his acts.
5. LLP Agreement: Mutual rights and duties of the partners within a LLP are governed
by an agreement between the partners. The LLP Act, 2008 provides flexibility to
partner to devise the agreement as per their choice. In the absence of any such
agreement, the mutual rights and duties shall be governed by the provisions of the LLP
Act, 2008.
6. Artificial Legal Person: A LLP is an artificial legal person because it is created by a
legal process and is clothed with all rights of an individual.
It can do everything which any natural person can do, except of course that, it cannot be
sent to jail, cannot take an oath, cannot marry or get divorce nor can it practice a learned
profession like CA or Medicine.

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 A LLP is invisible, intangible, immortal (it can be dissolved by law alone) but not
fictitious because it really exists.
7. Common Seal: A LLP being an artificial person can act through its partners and
designated partners. LLP may have a common seal, if it decides to have one
[Section 14(c)]. Thus, it is not mandatory for a LLP to have a common seal.
It shall remain under the custody of some responsible official and it shall be affixed in
the presence of at least 2 designated partners of the LLP.
8. Limited Liability: Every partner of a LLP is, for the purpose of the business of LLP,
the agent of the LLP, but not of other partners (Section 26). The liability of the
partners will be limited to their agreed contribution in the LLP. Such contribution
may be of tangible or intangible nature or both.
Example: The professionals like Engineering consultants, Legal Advisors and
Accounting
Professional are afraid of entering into business due to unlimited liability. Hence the LLP
partnership Act provides an avenue for these professionals to Limited Liability
Partnership firms which restricts their liability to the agreed amount. This has
encouraged Professionals to form LLP.
9. Management of Business: The partners in the LLP are entitled to manage the business
of LLP. But only the designated partners are responsible for legal compliances.
10. Minimum and Maximum number of Partners: Every LLP shall have least two
partners and shall also have at least 2 individuals as designated partners, of whom
at least one shall be resident in India. There is no maximum limit on the partners in
LLP.
11. Business for Profit Only: The essential requirement for forming LLP is carrying on a
lawful business with a view to earn profit. Thus, LLP cannot be formed for charitable
or non-economic purpose.
12. Investigation: The Central Government shall have powers to investigate the affairs
of an LLP by appointment of competence authority for the purpose.
13. Compromise or Arrangement: Any compromise or agreements including merger and
amalgamation of LLPs shall be in accordance with the provisions of the LLP Act, 2008.
14. Conversion into LLP: A firm, private company or an unlisted public company
would be allowed to be converted into LLP in accordance with the provisions of LLP
Act, 2008.
15. E-Filling of Documents: Every form or application of document required to be filed
or delivered under the act and rules made thereunder, shall be filed in computer
readable electronic form on its website www.mca.gov.in and authenticated by a partner
or designated partner of LLP by the use of electronic or digital signature.
16. Foreign LLPs: Section 2(1)(m) defines foreign limited liability partnership “as a limited
liability partnership formed, incorporated, or registered outside India which
established as place of business within India”. Foreign LLP can become a partner in
an Indian LLP

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Q8. What is the procedure for changing the name of Limited Liability Partnership (LLP) under the
LLP Act, 2008?
Sol.
(1) Notwithstanding anything contained in sections 15 and 16, if through inadvertence or
otherwise, a limited liability partnership, on its first registration or on its registration by
a new body corporate, its registered name;”>name, is registered by a name which is
identical with or too nearly resembles to—
(a) that of any other limited liability partnership or a company; or
(b) a registered trade mark of a proprietor under the Trade Marks Act, 1999, as is likely
to be mistaken for it, then on an application of such limited liability partnership or
proprietor referred to in clauses (a) and (b) respectively or a company, the Central
Government may direct that such limited liability partnership to change its name or
new name within a period of three months from the date of issue of such direction:
Provided that an application of the proprietor of the registered trademarks shall be
maintainable within a period of three years from the date of incorporation or
registration or change of name of the limited liability partnership under this Act.
(2) Where a limited liability partnership changes its name or obtains a new name under
sub-section (1), it shall within a period of fifteen days from the date of such change, give
notice of the change to Registrar along with the order of the Central Government, who
shall carry out necessary changes in the certificate of incorporation and within thirty
days of such change in the certificate of incorporation, such limited liability partnership
shall change its name in the limited liability partnership agreement.
(3) If the limited liability partnership is in default in complying with any direction given
under sub-section (1), the Central Government shall allot a new name to the limited
liability partnership in such manner as may be prescribed and the Registrar shall enter
the new name in the register of limited liability partnerships in place of the old name
and issue a fresh certificate of incorporation with new name, which the limited liability
partnership shall use thereafter:
Provided that nothing contained in this sub-section shall prevent a limited liability
partnership from subsequently changing its name in accordance with the provisions of
section 16.
Q9. What do you mean by Designated Partner? Whether it is mandatory to appoint Designated
partner in a LLP?
Sol. Every limited liability partnership shall have at least two designated partners who are
individuals and at least one of them shall be a resident in India:

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 Provided that in case of a limited liability partnership in which all the partners are bodies
corporate or in which one or more partners are individuals and bodies corporate, at least two
individuals who are partners of such limited liability partnership or nominees of such bodies
corporate shall act as designated partners.
Explanation. For the purposes of this section, the term resident in India means a person
who has stayed in India for a period of not less than one hundred and twenty days during
the financial year.
(1) Subject to the provisions of sub-section (1),
(i) if the incorporation document specifies who are to be designated partners, such
persons shall be designated partners on incorporation; or states that each of the
partners from time to time of limited liability partnership is to be designated
partner, every partner shall be a designated partner;
(ii) any partner may become a designated partner by and in accordance with the limited
liability partnership agreement and a partner may cease to be a designated partner
in accordance with limited liability partnership agreement.
An individual shall not become a designated partner in any limited liability
partnership unless he has given his prior consent to act as such to the limited
liability partnership in such form and manner as may be prescribed.
(iii) Every limited liability partnership shall file with the Registrar the particulars of
every individual who has given his consent to act as designated partner in such form
and manner as may be prescribed within thirty days of his appointment.
An individual eligible to be a designated partner shall satisfy such conditions
and requirements as may be prescribed.
Every designated partner of a limited liability partnership shall obtain
a Designated Partners Identification Number (DPIN) from the Central
Government and the provisions of sections 153 to 159 (both inclusive) of the
Companies Act, 2013 shall apply mutatis mutandis for the said purpose.

Q10. Differentiate between a LLP and a partnership firm?

Sol.
S. No. Basis LLP Partnership firm
Regulating Act The Limited Liability Partnership The Indian Partnership Act,
1.
Act, 2008 1932
2. Body corporate It is a body corporate. It is not a body corporate.
Separate legal entity It is a legal entity separate It is a group of persons with
3.
from its members. no separate legal entity
Creation It is created by a legal process It is created by an agreement
4. called registration under the between the partners.
LLP Act, 2008.

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 Registration Registration is mandatory. Registration is voluntary.
5. LLP can sue and be sued in its Only the registered partnership firm
own name. can sue the third parties
Perpetual The death, insanity, The death, insanity,
succession retirement or insolvency of retirement or insolvency of
the partner(s) does not affect the partner(s) may affect its
6.
its existence of LLP. Members existence. It has no perpetual
may join or leave but its Succession.
existence continues forever.
Name Name of the LLP to contain No guidelines. the partners
7. the word limited liability can have any name as per
partners (LLP) as suffix. their choice.
Liability Liability of each partner Liability of each partner is
limited to the extent to agreed unlimited. It can be extended
8.
contribution except in case of upto the personal assets of
willful fraud. the partners.
Mutual agency Each partner can bind the Each partner can bind
9. LLP by his own acts but not the firm as well as other
the other partners. partners by his own acts.
Designated At least two designated There is no provision for
partners partners and atleast one of such partners under the
10.
them shall be resident in Partnership Act, 1932.
India.
Common seal It may have its common seal There is no such concept in
11.
as its official signatures. Partnership.
Legal compliance's Only designated partners All partners are responsible
are responsible for all the for all the compliances and
12.
compliances and penalties penalties under the Act.
under this Act.
Annual filing of LLP is required to file: Partnership firm is not
documents Annual statement of accounts required to file any annual
13. Statement of solvency document with the registrar
Annual return with the of firms.
registration of LLP every year.
Foreign Foreign nationals can become Foreign nationals cannot
14. partnership a partner in a LLP. become a partner in a
partnership firm.
Minor as partner Minor cannot be admitted to Minor can be admitted to the
the benefits of LLP. benefits of the partnership
15.
with the prior consent of
the existing partners.

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Q11. Who are the individuals which shall not be capable of becoming a partner of a Limited Liability
Partnership?
Sol. Partners (Section 5 of Limited Liability Partnership Act, 2008): Any individual or body
corporate may be a partner in a LLP.
However, an individual shall not be capable of becoming a partner of a LLP, if—
(a) he has been found to be of unsound mind by a Court of competent jurisdiction and the
finding is in force;
(b) he is an undischarged insolvent; or
(c) he has applied to be adjudicated as an insolvent and his application is pending.
Q12. What are the effects of registration of LLP?
Sol. On registration of a LLP , by its name, it shall be capable of : (Section 14):
(1) Suing and being sued
(2) Acquiring, owning, holding and developing or property, whether movable or
immovable, tangible or intangible
(3) Having a common seal, if it decided to have one
(4) Doing and suffering such other acts and things as bodies corporate may lawfully
do and suffer
Q13. Examine the concept of LLP.
Sol. Meaning – A LLP is a new form of legal business entity with limited liability. It is an
alternative corporate business vehicle that gives the benefits of limited liability but allows its
partners the flexibility of organizing their internal structure as a traditional partnership.
The LLP is a separate legal entity and, while the LLP itself will be liable for the full extent of
its assets, the liability of the partners will be limited.
Concept of “limited liability partnership”:
 The LLP can continue its existence irrespective of changes in partners. It is capable
of entering into contracts and holding property in its own name.
 The LLP is a separate legal entity, is liable to the full extent of its assets but liability of
the partners is limited to their agreed contribution in the LLP.
 Further, no partner is liable on account of the independent or un-authorized
actions of other partners, thus individual partners are shielded from joint liability
created by another partner’s wrongful business decisions or misconduct.
 Mutual rights and duties of the partners within a LLP are governed by an
agreement between the partners or between the partners and the LLP as the case
may be. The LLP, however, is not relieved of the liability for its other obligations as a
separate entity.
 LLP is an alternative corporate business form that gives the benefits of limited
liability of a company and the flexibility of a partnership.

10 | P a g e
 CHAPTER 7 - THE NEGOTIABLE INSTRUMENTS ACT, 1881

Q1. Rama executes a promissory note in the following form, ‘I promise to pay a sum of `10,000 after
three months’.
Decide whether the promissory note is a valid promissory note.
Sol. The promissory note is an unconditional promise in writing. In the above question the amount is
certain but the date and name of payee is missing, thus making it a bearer instrument.
As per Reserve Bank of India Act, 1934, a promissory note cannot be made payable to bearer -
whether on demand or after certain days. Hence, the instrument is illegal as
per Reserve Bank of India Act, 1934 and cannot be legally enforced.
Q2. Are the following instruments signed by Mr. Honest is valid promissory Notes? Give the reasons.
(a) I promise to pay D’s son `10000 for value received (D has two sons)
(b) I promise to pay `5000/- on demand at my convenience
Who is the competent authority to issue a promissory note ‘payable to bearer’?
Your answers shall be in accordance with the provisions of the Negotiable Instruments Act, 1881.
Sol.
Provision
Promissory Note: As per the provisions of Section 4 of the Negotiable Instruments Act, 1881, a
promissory note is an instrument in writing (not being a bank-note or a currency note) containing
an unconditional undertaking, signed by the maker, to pay a certain sum of money to or to the order
of a certain person, or to the bearer of the instruments.
Analysis and conclusion
(a) This is not a valid promissory note as D has two sons and it is not specified in the promissory
note that which son of D is the payee.
(b) This is not a valid promissory note as details of the payee are not mentioned in it and it is not an
unconditional undertaking.
Moreover, a promissory note cannot be made payable to the bearer (Section 31 of Reserve Bank of
India Act, 1934). Only the Reserve Bank or the Central Government can make or issue a promissory
note ‘payable to bearer’.
Q3. Mr. V draws a cheque of `11,000 and gives to Mr. B by way of gift. State with reason whether-
(i) Mr. B is a holder in due course as per the Negotiable Instrument Act, 1881?
(ii) Mr. B is entitled to receive the amount of `11,000 from the bank?

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Sol.
Provision
According to section 9 of the Negotiable Instrument Act, 1881, “Holder in due course” means-
any person who for consideration becomes the possessor of a promissory note, bill of
exchange or cheque if payable to bearer or the payee or endorsee thereof, if payable to order,
before the amount in it became payable and without having sufficient cause to believe that
any defect existed in the title of the person from whom he derived his title.
Analysis and conclusion
In the instant case, Mr. V draws a cheque of `11,000 and gives to Mr. B by way of gift.
(i) Mr. B is holder but not a holder in due course since he did not get the cheque for value
and consideration.
(ii) Mr. B’s title is good and bonafide. As a holder, he is entitled to receive `11,000 from the
bank on whom the cheque is drawn.
Q4. Ram draws a cheque of `1 lakh. It was a bearer cheque. Ram kept the cheque with himself.
After some time, Ram gives this cheque to Shyam as a gift on his birthday. Decide whether
Shyam is having a valid title over the cheque and whether Shyam is a holder in due course or
not in relation to this cheque as per the Section 9 of the Negotiable Instruments Act 1881.
Sol.
Provision
“Holder in due course” [Section 9 of the Negotiable Instruments Act, 1881]:
‘Holder in due course’ means any person who for consideration becomes the possessor of a
promissory note, bill of exchange or cheque if payable to bearer or the payee or endorsee
thereof, if payable to order, before the amount in it became payable and without having
sufficient cause to believe that any defect existed in the title of the person from whom he
derived his title.
Analysis and conclusion
In the instant case, Ram draws a cheque for `1 lakh and hands it over to Shyam by way of gift.
Here, Shyam’s title is good and bonafide. As a holder he is entitled to receive `1 lakh from the
bank on whom the cheque is drawn. However, Shyam is not a holder in due course as he does
not get the cheque for value and consideration.
Q5. State with reasons whether each of the following instruments is an Inland Instrument or a
Foreign Instrument as per The Negotiable Instruments Act, 1881:
(i) Ram draws a Bill of Exchange in Delhi upon Shyam a resident of Jaipur and accepted to be
payable in Thailand after 90 days of acceptance.
(ii) Ramesh draws a Bill of Exchange in Mumbai upon Suresh a resident of Australia and
accepted to be payable in Chennai after 30 days of sight.

(iii) Ajay draws a Bill of Exchange in California upon Vijay a resident of Jodhpur and accepted
to be payable in Kanpur after 6 months of acceptance.
(iv) Mukesh draws a Bill of Exchange in Lucknow upon Dinesh a resident of China and
accepted to be payable in China after 45 days of acceptance.

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Sol.
Provision
“Inland instrument” and “Foreign instrument” [Sections 11 & 12 of the Negotiable
Instruments Act, 1881] A promissory note, bill of exchange or cheque drawn or made in India
and made payable in, or drawn upon any person resident in India shall be deemed to be an
inland instrument.
Any such instrument not so drawn, made or made payable shall be deemed to be foreign
instrument.
Analysis and conclusion
Following are the answers as to the nature of the Instruments:
(i) In first case, Bill is drawn in Delhi by Ram on a person (Shyam), a resident of Jaipur (though
accepted to be payable in Thailand after 90 days) is an Inland instrument.
(ii) In second case, Ramesh draws a bill in Mumbai on Suresh resident of Australia and
accepted to be payable in Chennai after 30 days of sight, is an Inland instrument.
(iii) In third case, Ajay draws a bill in California (which is situated outside India) and accepted
to be payable in India (Kanpur), drawn upon Vijay, a person resident in India (Jodhpur),
therefore the Instrument is a Foreign instrument.
(iv) In fourth case, the said instrument is a Foreign instrument as the bill is drawn in India by
Mukesh upon Dinesh, the person resident outside India (China) and also payable outside
India (China) after 45 days of acceptance.

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Q6. Explain the meaning of ‘Negotiation by delivery’ with the help of an example. Give your
answer as per the provisions of the Negotiable Instruments Act, 1881
Sol. Negotiation by delivery: According to section 47 of the Negotiable Instruments Act, 1881,
subject to the provisions of section 58, a promissory note, bill of exchange or cheque payable
to bearer is negotiable by delivery thereof.
Exception: A promissory note, bill of exchange or cheque delivered on condition that it is not
to take effect except in a certain event is not negotiable (except in the hands of a holder for
value without notice of the condition) unless such event happens.
Example: A, the holder of a negotiable instrument payable to bearer, delivers it to B’s agent
to keep for B. The instrument has been negotiated.
Q7. Anjum’ drew a cheque for `20,000 payable to ‘Babloo’ and delivered it to him. ‘Babloo’
indorsed the cheque in favour of ‘Rehansh’ but kept it in his table drawer. Subsequently,
‘Babloo’ died, and cheque was found by ‘Rehansh’ in ‘Babloo’s table drawer. ‘Rehansh’ filed
the suit for the recovery of cheque. Whether ‘Rehansh’ can recover cheque under the
provisions of the Negotiable Instrument Act 1881?
Sol.
Provision
According to section 48 of the Negotiable Instrument Act 1881, a promissory note, bill of
exchange or cheque payable to order, is negotiable by the holder by indorsement and delivery
thereof.
The contract on a negotiable instrument until delivery remains incomplete and revocable.
The delivery is essential not only at the time of negotiation but also at the time of making or
drawing of negotiable instrument.
The rights in the instrument are not transferred to the indorsee unless after the indorsement
the same has been delivered. If a person makes the indorsement of instrument but before the
same could be delivered to the indorsee the indorser dies, the legal representatives of the
deceased person cannot negotiate the same by mere delivery thereof. [Section 57]
Analysis and conclusion
In the given case, cheque was indorsed properly but not delivered to indorsee i.e.
‘Rehansh’, Therefore, ‘Rehansh’ is not eligible to claim the payment of cheque.
Q8. Manoj owes money to Umesh. Therefore, he makes a promissory note for the amount in
favour of Umesh, for safety of transmission he cuts the note in half and posts one half to
Umesh. He then changes his mind and calls upon Umesh to return the half of the note which
he had sent. Umesh requires Manoj to send the other half of the promissory note. Decide how
rights of the parties are to be adjusted in reference to the Negotiable Instruments Act, 1881.
Sol.
Provision
The question arising in this problem is whether the making of promissory note is complete
when one half of the note was delivered to Umesh. Under Section 46 of the Negotiable
Instruments Act, 1881, the making of a promissory note is completed by delivery, actual or

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 constructive. Delivery refers to the whole of the instrument and not merely a part of it.
Delivery of half instrument cannot be treated as constructive delivery of the whole.
Analysis and conclusion
So, the claim of Umesh to have the other half of the promissory note sent to him is not
maintainable. Manoj is justified in demanding the return of the first half sent by him. He can
change his mind and refuse to send the other half of the promissory note.
Q9. Bholenath drew a cheque in favour of Surendar. After having issued the cheque; Bholenath
requested Surendar not to present the cheque for payment and gave a stop payment request
to the bank in respect of the cheque issued to Surendar. Decide, under the provisions of the
Negotiable Instruments Act, 1881 whether the said acts of Bholenath constitute an offence?
Sol.
Provision
As per the facts stated in the question, Bholenath (drawer) after having issued the cheque,
informs Surender (drawee) not to present the cheque for payment and as well gave a stop
payment request to the bank in respect of the cheque issued to Surender.
Section 138 of the Negotiable Instruments Act, 1881, is a penal provision in the sense that
once a cheque is drawn on an account maintained by the drawer with his banker for
payment of any amount of money to another person out of that account for the discharge
in whole or in part of any debt or liability, is informed by the bank unpaid either because of
insufficiency of funds to honour the cheques or the amount exceeding the arrangement
made with the bank, such a person shall be deemed to have committed an offence.
Once a cheque is issued by the drawer, a presumption under Section 139 of the Negotiable
Instruments Act, 1881 follows and merely because the drawer issues a notice thereafter to
the drawee or to the bank for stoppage of payment, it will not preclude an action under
Section 138.
Also, Section 140 of the Negotiable Instruments Act, 1881, specifies absolute liability of the
drawer of the cheque for commission of an offence under the section 138 of the Act.
Section 140 states that it shall not be a defence in a prosecution for an offence under
section 138 that the drawer had no reason to believe when he issued the cheque that the
cheque may be dishonoured on presentment for the reasons stated in that section.

Analysis and conclusion

Accordingly, the act of Bholenath, i.e., his request of stop payment constitutes an offence
under the provisions of the Negotiable Instruments Act, 1881.

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