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LAW OF CONTRACTS-II (FA4D) LECTURE NOTES
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LAW OF CONTRACTS – II

UNIT I – INDEMNITY
“If the indemnified had incurred a liability and that liability is absolute, he is entitled
to call upon the indemnifier to save him from the liability and pay it off”.

MEANING OF CONTRACT
A contract is an agreement, either written or spoken, between two or more parties that
creates a legal obligation. The terms of a contract are enforceable by law, with clearly
defined penalties and remedies should the contract by breached. A breach of contract is a
failure, without legal excuse, to perform any parts of the contract.
A contract is created when there is an offer, consideration, and acceptance between
two or more parties.
CONTRACT OF INDEMNITY
Sections 124 -125 of the Indian Contract Act deals with “Contract of Indemnity”.
Indemnity is protection against loss, especially in the form of a promise to pay, or payment
for loss of money, goods, etc. It is a security against, or compensation for loss, etc. In a
contract of indemnity, the person who promises to indemnify is known as “indemnifier”
means someone who protects against or compensates for the loss of the damage received.
“Indemnified” or “indemnity holder” means the other party who is compensated against the
loss suffered.
Example-
A contract to indemnify B against the consequences of any proceedings which C may
take against B in respect of a certain sum of Rs.200. This is a contract of indemnity.
In the case of Mangladha Ram vs. Ganda Mal the vendor’s promise to the vendee to be
liable if title to the land was disturbed was held to be one of indemnity.

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INDEMNIFIER
The person who makes a promise to indemnity against the loss or to make good the
loss (promisor) is called indemnity-holder.

INDEMNITY-HOLDER
The person in whose favour such a promise to indemnify is made (promise) is called
indemnity-holder.
Example
Anil enters into a contract with Swapnil to indemnity him against the consequences of
any proceedings which Mrinal may initiate against Swapnil in respect of a certain sum of Rs.
2000/-. In this contract, Anil is the indemnifier and Swapnil is the indemnity-holder.
DEFINITION IN ENGLISH LAW
Under English law, the word ‘indemnity’ carries a much wider meaning than given to it
under the Indian Contract Act. It includes the contract to save the promise from a loss,
whether it be caused by human agency or any other event like an accident and fire. Indeed,
every contract of insurance, other than life insurance, is a contract of indemnity. It is to be
found in the facts of Adamson vs. Jarvis.
Adamson vs. Jarvis
The plaintiff, an auctioneer, sold certain cattle on the instruction of the defendant. It
subsequently turned out that the livestock did not belong to the defendant, but to another
person, who made the auctioneer in his turn sued the defendant for indemnity for the loss he
had thus suffered by acting on the defendant’s direction. The court laid down that he would
be indemnified by the defendant.
Thus “indemnity” in English law means a promise to save a person harmless from the
consequences of an act. The promise may be express or it may be implied from the
circumstances of the case.

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DEFINITION IN INDIAN LAW

The term “indemnity” is defined under Sec 124 of the Indian Contract Act which is
somewhat narrower.
Sec 124: A contract by which one party promises to save the other from loss caused
to him by the conduct of the promisor himself, or by the conduct of any other person
is called “contract of indemnity”.
Illustration:
‘A’ contracts to indemnify ‘B’ against the consequences of any proceedings which C may
take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.
Thus the scope of “indemnity” is by the very process of definition restricted to cases where
there is a promise to indemnify against loss, caused:
a) By the promisor himself, or
b) By any other person.

The definition excludes from its purview cases of loss arising from accidents like fire or
perils of the sea. Loss must be caused by some human agency.

INSURANCE INDEMNITY:
Almost all insurances other than life and personal accident insurance are contract of
indemnity. The insurer’s promise to indemnify is an absolute one. A suit can be filed
immediately upon failure of performance, irrespective of actual loss.
DIFFERENCE BETWEEN CONTRACT OF INDEMNITY AND CONTRACT OF
GUARANTEE

BASIS OF
DISTINCTION INDEMNITY GURARANTEE
There are two parties in a contract of There are three parties in a
Parties indemnity, namely the contract of guarantee, namely

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 Indemnifier the
 Indemnity holder.  Principal debtor
 Creditor
 Surety
It consists of only one contract It consists of three contracts-
between the indemnifier and the A contract between principal
No. of contracts indemnity holder. The indemnifier debtor and creditor wherein
promises to indemnify the the debtor promises to
indemnified/indemnity holder in perform his obligation/make
event of a certain loss. payment. The contract
between surety and creditor
wherein the surety promises
to perform the aforesaid
obligation/make the payment
if the principal debtor makes
a default. An implied
contract between the surety
and the principal debtor. The
principal debtor bounds
himself to indemnify the
surety for the sum that he has
paid under the guarantee
undertaken by him.
The liability of the indemnifier is The liability of the surety is a
primary. The liability in a contract of secondary one, i.e., his
indemnity is contingent in the sense obligation to pay arises only
that it may or may not arise. when the principal debtor
Nature of liability defaults. Liability in a

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contract of guarantee is
continuing in the sense that
once the guarantee has been
acted upon, the liability of
the surety automatically
arises. However, the said
liability remains in
suspended animation until
the debtor makes default.
The liability of an indemnifier is not Liability of surety is
conditional on the default of conditional on the default of
somebody else. Example, Mrinal the principal debtor.
promises the shopkeeper to pay, by Example, Anil buys goods
Default of third telling him that, “Let Anil have the from a seller and Mrinal tells
person goods, I will be your paymaster". the seller and Mrinal tells the
This is a contract of indemnity as the seller that if Anil doesn’t pay
promise to pay by Mrinal is not you, I will. This is a contract
conditional on default by A nil. of guarantee. this, the
liability of Mrinal is
conditional on non-payment
by Anil.
Principal debt No requirement of the principal debt. Principal debt is necessary.
(refer to the previous
example)
Once the indemnifier indemnifies the After the surety has made the
Whether subsequent indemnity holder, he cannot recover payment, he stops into the
recovery is possible that amount from anybody else. shoes of the creditor and can
recover the sums paid by him

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from the principal debtor.

Whether a contract In India, contracts of indemnity may In India, a contract of
has to be in writing be either oral or written. guarantee may be either oral
or can be oral as well or written.
RIGHTS OF INDEMNITY-HOLDER:
Sec 125 of the Act deals with the rights of the indemnity-holder when sued. The indemnity-
holder, acting within the scope of his authority, is entitled to recover the following amounts:
1) All damages which he may be compelled to pay in any suit in respect of any matter to
which the promise of indemnity applies;
2) All costs which he may be compelled to pay in such suits if, in bringing or defending
it, he did not contravene the order 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
authorized him to bring or defend the suit;
3) 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 authorized him to compromise the suit.

SEC 125 NOT EXHAUSTIVE

The original English rule was that indemnity was payable only after the indemnity-holder
had suffered actual loss by paying off the claim. The maxim of law was “you must be
indemnified before you can claim to be indemnified”. But the law is now different
because it created a great hardship in those cases where the indemnity-holder was not in a
position to meet the claim out of his pocket. Therefore, the court of equity stepped in and
mitigated the rigour of the common law. The court of equity held that if his liability had
become absolute then he is entitled either to get the indemnifier to pay off the claim or to pay
into court sufficient money which would constitute a fund for paying off the claim whenever
it was made. The process of transformation is well-explained by Chagla J of the Bombay
High Court in.
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Gajanan Mareshwar vs. Moreshwar Madan

The plaintiff was lease-holder of a plot of land under the Bombay Municipality. He
transferred the lease to the defendant. The Municipality gave its approval but did not execute
a separate lease in favour of the defendant. So the lease continued to stand in the name of the
plaintiff. The defendant borrowed Rs. 5,000/- from A. The lease-hold interest was given as
security to A. Since the leasehold stand in plaintiff’s name, at defendant’s request, plaintiff
executed the mortgage though it was the defendant that was interested and was really liable
to pay. The mortgage contained a personal covenant under which the plaintiff could be made
liable. The defendant did not pay the mortgage loan. Then the plaintiff brought the suit.
The question is whether plaintiff can sue on the indemnity before he suffered any loss.
It was held by the Chagla, J., that Sec. 124 and 125 are not exhaustive. The indemnified has
his remedies when he suffers loss. But in equity in England he can sue when his liability has
become absolute and need not wait until he has suffered loss. This remedy is available in
India also.
Chagla, J., observed: “If the indemnified had incurred a liability and that liability is absolute,
he is entitled to call upon the indemnifier to save him from the liability and pay it off”.
RIGHTS OF THE INDEMNIFIER
Contract Act is silent about the rights of indemnifier. In Jaswant Singh Vs State on 15 July
1965. It was held that the rights of indemnifier are the same as the rights of surety. After
paying all damages the indemnifier takes the position of indemnity holder and has right over
the property. He is required to indemnify promisee up to the amount of losses as mentioned
in terms and conditions of the contract. He takes the position of the creditor after setting all
his claims.
RIGHTS TO USE THE THIRD PARTY
As soon as the indemnifier has indemnified the indemnity-holder against the damages and
amount of the property, he is entitled to have full rights over the property and has the right to
sue the third party for that property too. Before paying damages to the indemnity holder, he
cannot sue the third party.

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Illustration
A has promised B to indemnify him in case he suffers damage to his car because of C.
afterwards when B suffers the damage because of C and asks for money from A. A
indemnifies him and gets the right over the car. Now A has a right to sue C and claim
damage.
COMPENSATE LOSSES WHICH ARE COVERED IN THE DEED
The indemnifier has a right to pay for only those losses which are covered in the contract of
indemnity. In Ramaswami Vs Muthukrishna High Court ordered the indemnifier to pay the
plaintiffs only for a sum of Rs. 1236/- which was the actual loss suffered by him. The further
appeal filed in Supreme Court to recover more amount from the defendant was dismissed.
Right under Doctrine of Subrogation
According to surety’s subrogation rights, after the claims of the former creditor, the surety
steps into the shoes of the creditor and in certain cases is entitled to receive the whole amount
from the debtor. Similarly indemnifier also has right in some cases to recover the money or
possession.
RIGHTS OF INDEMNITY SECTION – 59
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.
Illustration
1. A owes B, among other debts, 1,000 rupees upon a promissory note which falls due
on the first June. He owes B no other debt of that amount. On the first June A pays to
B Rs.1000. The payment is to be applied to the discharge of the promissory note.
2. A owes to B, among other debts, the sum of Rs.567. B writes to A and demands
payments of this sum. A sends to B Rs. 567. This payment is to be applied to the
discharge of the debt of which B had demanded payment.

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RIGHTS OF INDEMNITY SECTION – 145

In every contract of guarantee there is an implied promise by the principal debtor to
indemnity the surety, and the surety is entitled to recover from the principal debtor whatever
sum he has rightfully paid under the guarantee, but, no sums which he has paid wrongfully.
Illustration
1. B is indebted to C, and A is surety for the debt. C demands payment form A, and in
his refusal sues him for the amount. A defends the suit, having reasonable grounds for
doing so, but is compelled to pay the amount of the debt with costs. He can recover
form B the amount paid by him for costs, as well as the principal debt.
2. C lands B a sum of money, and A, at the request of B, accepts a bill of exchange
drawn by B upon A to secure the amount. C the holder of the bill, demands payment
of it from A, and, on A refusal to pay, sues him upon the bill. A not having reasonable
grounds for so doing, defends the suit, and has to pay the amount of the bill and costs.
He can recover form B the amount of the bill, but not the sum paid for costs, as there
was no real ground for defending the action.
RIGHTS OF INDEMNITY SECTION -164
The bailor is responsible to the bailee for any loss which the bailee may sustain by reason
that the bailor was not entitled to make the bailment, or to receive back the goods, or to give
directions respecting them.
RIGHTS OF INDEMNITY SECTION – 222
The employer of an agent is bound to indemnify him against the consequences of all lawful
acts done by such agent in exercise of the authority conferred upon him.
Illustration
1. B, at Singapore upon instructions from A of Calcutta, contracts with C o deliver
certain goods to him. A does not send the goods to B, and C sues B for breach of
contract. B informs A of the suit, and A authorizes him to defend the suit. B defends

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the suit, and is compelled to pay damages and costs, and incurs expenses. A is liable
to B for such damages, costs and expenses.
2. B, a broker at Calcutta, by the orders of A, a merchant there, contracts with C for the
purchase of 10 casks of oil for A. Afterwards A refuses to receive the oil, and C sues
B. B informs A, who repudiates the contract altogether. B defends, but
unsuccessfully, and has to pay damages and costs and incurs expenses. A is liable to
B for such damages, costs and expenses.

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UNIT – II GUARANTEE
DEFINITION
Sections 126-147 of the Indian Contract Act deals with “Guarantee”. The terms
“contract of guarantee”, “surety”, “principal debtor” and “creditor” are defined under Sec
126 of the Indian Contract Act.
Sec.126: A “contract of guarantee” is a contract to perform the promise, or discharge
the liability, of a third person in case of his default. The person who gives the
guarantee is called the “surety”; the person in respect of whose default the guarantee
is given is called the “principal debtor”, and the person to whom the guarantee is
given is called the “creditor”. A guarantee may be either oral or written.
Example A takes a loan from a bank. A promises to the bank to repay the loan. B also makes
a promise to the bank saying that if A does not repay the loan “then I will pay”. In this case,
A is the principal debtor, who undertakes to repay the loan, B is the surety, whose liability is
secondary because he promises to perform the same duty in case there is default on the part
of A. The bank in whose favour the promise has been made is the creditor.
The object of a contract of guarantee is to provide additional security to the creditor in the
form of promise by the surety to fulfill certain obligation, in case the principal debtor fails to
do that.
In every contract of guarantee, there are three parties, the creditor, the principal debtor and
the surety. There are three contracts in a contract of guarantee. Firstly, the principal debtor
himself makes a promise in favour of the creditor to perform a promise, etc. Secondly, the
surety undertakes to be liable towards the creditor if the principal debtor makes a default.
Thirdly, an implied promise by the principal debtor in favour of the surety that in case the
surety has to discharge the liability of the default of the principal debtor, the principal debtor
shall indemnify the surety for the same. When a borrower both sign an agreement in favour
of a bank, they are jointly and severally liable under that contract. So the contract of
guarantee is no doubt tripartite in nature.

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CONTRACT OF GUARANTEE INVOLVES THREE PARTIES

1. Principal debtor
2. Creditor
3. Surety
The guarantee may be in written form or oral form.
SURETY
A person who gives a guarantee in a contract is called surety according to section 126 of the
Indian Contract Act, 1872.
The surety is the person who is responsible to pay when the person.
Example
‘A’ takes a loan from ‘B’, and ‘C’ promises to pay back the amount if ‘A’ fails to pay it on
time. In this case, ‘C’ is said to be a surety.
PRINCIPAL DEBTOR
A person for whom the guarantee to pay back the amount on his default is given in a contract
of guarantee is said to be the principal debtor according to Section 126 of the Indian Contract
Act, 1872.
ESSENTIAL FEATURES OF GUARANTEE
The following are the essential requisites of a valid guarantee:
1.Must be made with the agreement of all three parties
All the three parties to the contract i.e the principal debtor, the creditor, and the surety must
agree to make such a contract with the agreement of each other. Here it is important to note
that the surety takes his responsibility to be liable for the debt of the principal debtor only on
the reques t of the principal debtor. Hence communication either express or implied by the
principal debtor to the surety is necessary. The communication of the surety with the creditor
to enter into a contract of guarantee without the knowledge of the principal debtor will not
constitute a contract of guarantee.
Illustration
Sam lends money to Akash. Sam is the creditor and Akash is the principal debtor. Sam

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approaches Raghav to act as the surety without any information to Akash. Raghav agrees.
This is not valid.
2.Consideration
According to section 127 of the act, anything is done or any promise made for the benefit of
the principal debtor is sufficient consideration to the surety for giving the guarantee. The
consideration must be a fresh consideration given by the creditor and not a past
consideration. It is not necessary that the guarantor must receive any consideration and
sometimes even tolerance on the part of the creditor in case of default is also enough
consideration.
State Bank of India v Premco Saw Mill(1983), the State Bank gave notice to the debtor-
defendant and also threatened legal action against her, but her husband agreed to become
surety and undertook to pay the liability and also executed a promissory note in favor of the
State Bank and the Bank refrained from threatened action. It was held that such patience and
acceptance on the bank’s part constituted good consideration for the surety.
Illustration:
B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will
guarantee the payment of the price of the goods. C promises to guarantee the payment in
consideration of A’s promise to deliver the goods. This is a sufficient consideration for C’s
promise.
3.Liability
In a contract of guarantee, the liability of a surety is secondary. This means that since the
primary contract was between the creditor and principal debtor, the liability to fulfill the
terms of the contract lies primarily with the principal debtor. It is only on the default of the
principal debtor that the surety is liable to repay.
4.Presupposes the existence of a Debt
The main function of a contract of guarantee is to secure the payment of the debt taken by the
principal debtor. If no such debt exists then there is nothing left for the surety to secure.
Hence in cases when the debt is time-barred or void, no liability of the surety arises. The

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House of Lords in the Scottish case of Swan vs. Bank of Scotland (1836) held that if there is
no principal debt, no valid guarantee can exist.
5.Must contain all the essentials of a valid contract
Since a contract of guarantee is a type of contract, all the essentials of a valid contract will
apply in contracts of guarantee as well. Thus, all the essential requirements of a valid
contract such as free consent, valid consideration offer, and acceptance, intention to create a
legal relationship etc are required to be fulfilled.
6.No Concealment of Facts
The creditor should disclose to the surety the facts that are likely to affect the surety’s
liability. The guarantee obtained by the concealment of such facts is invalid. Thus, the
guarantee is invalid if the creditor obtains it by the concealment of material facts.
7.No Misrepresentation
The guarantee should not be obtained by misrepresenting the facts to the surety. Though the
contract of guarantee is not a contract of Uberrima fides i.e., of absolute good faith, and thus,
does not require complete disclosure of all the material facts by the principal debtor or
creditor to the surety before he enters into a contract. But the facts, that are likely to affect the
extent of surety’s responsibility, must be truly represented.
Illustration:
A engages B as clerk to collect money for him. B fails to account for some of his receipts and
A in consequence calls upon him to furnish security for his duly accounting. C gives his
guarantee for B’s duly accounting. A does not acquaint C with B’s previous conduct. B
afterwards makes default. The guarantee is invalid.
London General Omnibus Co. vs. Holloway
The defendant was invited to give a guarantee for the fidelity of a servant. The employer had
earlier dismissed him for dishonesty, but did not disclose this fact to the surety. The servant
committed another embezzlement. The surety was held not liable.

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DISTINCTION BETWEEN GUARANTEE AND INDEMNITY – GUARANTEE AND

INSURANCE
INDEMNITY AND GUARANTEE DISTINGUISHED
Indemnity and guarantee have this common feature that both are devices for providing
protection against a probable loss. In either case the loss may arise due to human conduct.
However, the technique for providing protection, the need and occasion for protection and
the number of parties involved make some differences between them.
a) There are two parties in a contract of indemnity, the indemnifier and the indemnity-
holder or indemnified. There are three parties in a contract of guarantee, the creditor,
the principal debtor and the surety.
b) Contract of indemnity consists of only one contract under which the indemnifier
promises to indemnify the indemnified in the event of a certain loss. There are three
contracts in a contract of guarantee. One contract is between the principal debtor and
the creditor in respect of a certain promise or obligation undertaken to be performed
by the principal debtor. By a second contract, the surety undertakes to perform the
same obligation which the principal has undertaken, in case the principal debtor
makes a default. The third contact, which is an implied one, is between the principal
debtor and the surety. By this contract, the principal debtor is bound to indemnify the
surety for whatever sum the surety has rightfully paid under the guarantee.
c) The object of a contract of guarantee is the security of the creditor. It presupposes a
principal debtor and a certain debt or an obligation for which the principal debtor is
primarily liable. A contract of indemnity is made to protect the promisee against some
likely loss.
d) In a contract of guarantee, the liability of the surety is only a secondary one. Surety’s
liability arises only when the principal debtor makes a default. The liability of the
indemnifier in a contract of indemnity is a primary one. He undertakes to be liable
when the contemplated situation is there.

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e) In a contract of guarantee, after the surety had discharged his liability and paid to the
creditor, he steps into the shoes of the creditor and he can realize the payments made
by him, from the principal debtor. In a contract of indemnity, the loss falls on the
indemnifier and, therefore, after the indemnifier had indemnified the indemnity-
holder, he cannot recover the amount from anybody.
f) In England, a contract of guarantee should be in writing whereas a contract of
indemnity may be either oral or in writing. There is no such distinction in India. In
India, whether it is a contract of indemnity or guarantee, the same may be either oral
or in writing.
EXTENT OF SURETY’S LIABILITY
The fundamental principle about the surety’s liability, as laid down in Section 128, is that the
liability of the surety is co-extensive with that of the principal debtor. The surety may,
however, by an agreement place a limit upon his liability. The section is as follows:

Sec. 128: The liability of the surety is co-extensive with that of the principal debtor,
unless it otherwise provided by the contract.
The provision that the surety’s liability is coextensive with that of the principal debtor means
that his liability is exactly the same as that of the principal debtor. It means that on a default
having been made by the principal debtor, the creditor can recover from the surety all what
he could have recovered from the principal debtor. For instance, the principal debtor makes a
default in the payment of a debt of Rs. 10,000/-. The creditor may recover from the surety the
sum of Rs. 10,000/- plus interest becoming due thereon as well as the amount spent by him in
recovering that amount.
If the principal debtor’s liability is reduced, e.g., after the creditor has recovered a part of the
sum due from him out of his property, the liability of the surety is also reduced accordingly.
1. Co-extensive:
The first principle governing surety’s liability is that it is co-extensive with that of the
principal debtor. The expression “co-extensive with that of the principal debtor” shows the
maximum extent of the surety’s liability. He is liable for the whole of the amount for which
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the principal debtor is liable and he is liable for no more. Where the principal debtor
acknowledges liability and this has the effect of extending the period of limitation against
him the surety also becomes affected by it.
Where a person gives a guarantee upon a contract that creditor shall not act upon it until
another person has joined in it as co-surety, the guarantee is not valid if that other person
does not join.
National Provincial Bank of England vs. Brackenbury
The defendant signed a guarantee which on the face of it was intended to be joint and several
guarantee of three other persons with him. One of them did not sign. There being no
agreement between the bank and the co-guarantors to dispense with his signature, the
defendant was held not liable.
Action against principal debtor alone:
The creditor can proceed against the principal debtor alone. His suit cannot be rejected on the
ground that he has not joined the guarantor as a defendant to the suit.
Suit against surety alone:
A suit against the surety without even impleading the principal debtor has been held to be
maintainable. A contract of guarantee was made enforceable by its terms against the
guarantors severally and jointly with that of the principal debtor company. It was held that
the creditor had the option to sue the company along with guarantors as co-defendants or
guarantors alone.
2. Surety’s Right to Limit his Liability or make it Conditional:
It is open to the surety to place a limit upon his liability. He may expressly declare his
guarantee to be limited to a fixed amount, for example, that “my liability under this guarantee
shall not at any time exceed the sum of 650 pounds”. In such a case, whatever owing from
the principal debtor, the liability of the surety cannot go beyond the sum so specified.

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KINDS OF GUARANTEE
1. Specific or Simple Guarantee
The form of guarantee that sticks to a single debt or a particular transaction is called a
specific guarantee. In such a guarantee, as and when the debt is repaid or the promise
if fulfilled, the liability is discharged.
2. Continuing Guarantee
A type of guarantee that stretches to a number of transactions is continuing guarantee.
In such a guarantee, the liability of the surety continues till it is revoked.
Based on time
3. Retrospective Guarantee
A guarantee given by the surety for an existing debt or promise, is a retrospective
guarantee.
4. Prospective Guarantee
Any guarantee given by the surety for the ensuing debt or promise is a prospective
guarantee.
LIABILITY UNDER CONTINUING GUARANTEE
Section 129 of the Act deals with “continuing guarantee”.
Sec. 129: A guarantee which extends to a series of transaction, is called a “continuing
guarantee”.
Illustrations:
a) A guarantees payment to B, a tea dealer, to the amount of 100 pounds, for any tea he
may from time to time supply to C. B supplies C with tea to the above value of 100
pounds and C pays B for it. Afterwards, B supplies C with tea to the value of 200
pounds. C fails to pay. The guarantee given by A was a continuing guarantee, and he
is accordingly liable to the extent of 100 pounds.
b) A guarantees payment to B of the price of five sacks of flour, to be delivered by B to
C and to be paid for in a month. B delivers five sacks to C. C pays for them.
Afterwards, B delivers four sacks to C which C did not pay for. The guarantee given

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by A was not a continuing guarantee, and accordingly he is not liable for the price of
the four sacks.

A guarantee of this kind is intended to cover a number of transactions over a period of time.
The surety undertakes to be answerable to the creditor for his dealings with the debtor for a
certain time. A guarantee for a single specific transaction comes to an end as soon as the
liability under that transaction ends.
Kay vs Groves
The guarantee was in these terms:
“I hereby agree to be answerable to K for the amount of five sacks of flour to be delivered to
T, payable in one month”. Five sacks were actually supplied and T paid for them. Further
supplies were made during the same month, for which T failed to pay. The surety was then
sued. The court held that it was not a continuing guarantee and, therefore, there was no
liability for parcels delivered for various subsequent periods.
A ‘continuing guarantee’ is different from an ordinary guarantee. It may, however, be noticed
that a guarantee in respect of only one facility of specified sum of money, is not at all
continuing guarantee within the meaning of Section 129. A continuing guarantee cannot be
mistaken as perpetual guarantee or perennial guarantee.
REVOCATION OF CONTINUING GUARANTEE:
Sec 130 provides that a continuing guarantee may at any time be revoked by the surety, as to
future transactions, by notice to the creditor. The revocation does not affect transactions
entered into prior to the date of revocation. His liability in respect of the transactions which
have already been made continues to exist, whereas his liability for the future transaction
comes to an end.
Under Sec 131, the death of the surety also automatically puts an end to the continuing
guarantee, as regards future transactions.
DISCHARGE OF SURETY FROM LIABILITY
A surety is said to be discharged from liability when his liability comes to an end. The Act
recognizes the following modes of discharge:
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a) By Revocation (Sec 130):

Ordinarily a guarantee is not recoverable when once it is acted upon. Section 130 provides
for revocation of continuing guarantees.
Sec. 130: A continuing guarantee may at any time be revoked by the surety, as to
future transactions, by notice to the creditor.
Illustration:
A guarantees to B, to the extent of 10,000 rupees, that C shall pay all the bills that B shall
draw upon him. B draws upon C. C accepts the bill. A gives notice of revocation. C
dishonours the bill at maturity. A is liable upon his guarantee.
Revocation becomes effective for the future transactions while the surety remains liable for
transactions already entered into.
Offord vs. Davies
A promised in favour of B that if B discounted bill for C, A would guarantee the payment of
bills to the extent of 600 pounds, during a period of 12 calendar months. Some bills were
discounted by B and the payment for the same was made. Thereafter, A gave notice to B that
A would no more guarantee the discounting of any bills. In spite of the notice, B continued to
discount bills. The bills not having been paid, B sued A for the same. It was held that A could
not be made liable as a surety for the bills discounted by B, after A’s notice to B.
b) By Death of Surety (Sec 131):
A continuing guarantee is also determined by the death of the surety unless there is a contract
to the contrary. Once again, the termination becomes effective only for the future
transactions. The surety’s heirs can be sued for liability already incurred.
Sec. 131: The death of the surety operates, in the absence of any contract to the
contrary, as a revocation of a continuing guarantee, so far as regards future
transactions.
c) By Variance (Sec 133):
When the surety has undertaken liability on certain terms, it is expected that they will remain
unchanged during the whole period of guarantee. If there is any variance in the terms of the

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contract between the principal debtor and the creditor, without the consent of the surety, the
surety gets discharged as regards transactions subsequent to such a change. The reason for
such a discharge is that the surety agreed to be liable for a contract which is no more there,
and he is not liable on the altered contract because it is different from the contract made by
him. Section 133 makes a provision in this regard.
Sec. 133: 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.
Bonar vs. Macdonald
The defendant guaranteed the conduct of a manager of a bank. The bank afterwards raised his
salary on the condition that he would be liable for one-fourth of the losses on discounts
allowed by him. No communication of this new arrangement was made to the surety. The
manager allowed a customer to overdraw his account and the bank lost a sum of money. It
was held that the surety could not be called on to make good the loss as the fresh agreement
was a substitution of a new agreement for the former which discharged the surety.
If there is a written contract of guarantee and there is no variance of the same in writing, the
validity of the contract is not affected.
Amrit Lal vs. State Bank of Travancore
The credit limit of the debtor, which has been fixed at Rs. 1,00,000 was first reduced to Rs.
50,000 and then again raise to Rs. 1,00,000 without consulting the surety. This was done by
oral instructions to the cashier only. It was held that in this case there was no variation in the
terms of the contract within the meaning of Section 133, and, therefore, the surety had not
been discharged thereby.
The surety would be liable for all transactions which had taken place prior to variation.
Variation can discharge surety only with regard to such of those transactions which take
place subsequent to variation.

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d) By Release or Discharge of Principal Debtor (Sec 134):

Sec. 134: The surety is discharged by any contract between the creditor and the
principal debtor, by which the principal debtor is released, by any act or omission of
the creditor, the legal consequence of which is the discharge of the principal debtor.
Illustrations:
a) A contracts with B to grow a crop of indigo on A’s land and to deliver it to B at a
fixed rate, and C guarantees A’s performance of this contract. B diverts a stream of
water which is necessary for irrigation of A’s land, and thereby prevents him from
raising the indigo. C is no longer liable on his guarantee.
b) A contracts with B for a fixed price to build a house for B within a stipulated time, B
supplying the necessary timber. C guarantees A’s performance of the contract. B
omits to supply the timber, C is discharged from his suretyship.

It has already been noted that according to Section 128, the liability of the surety is
coextensive with that of the principal debtor. Therefore, if by any contract between the
creditor and the principal debtor, the principal debtor is released, or by any act or omission of
the creditor, the principal debtor is discharged, the surety will also be discharged from his
liability accordingly.
e) Composition, Extension of time and Promise not to sue (Sec 135):
Section 135 mentions further circumstances when a contract between the creditor and the
principal debtor can result in the discharge of the surety.
Sec. 135: A contract between the creditor and the principal debtor by which the
creditor makes a composition with, or promises to give time to, or not to sue, the
principal debtor, discharges the surety, unless the surety assents to such contract.
The section provides for three modes of discharge from liability:
 Composition;
 Promise to give time; and
 Promise not to sue the principal debtor.

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(i) Composition:
If the creditor makes a composition with the principal debtor, without consulting the surety,
the latter is discharged. Composition inevitably involves variation of the original contract,
and, therefore, the surety is discharged. For example, A borrows Rs. 10,000 from B. C stands
as a surety as regards the repayment of loan by A to B. Thereafter, A and B agree that A may
repay Rs. 5,000 instead of Rs. 10,000. C is thereby discharged from liability as a surety.
(ii) Promise to give time:
Promise to give time to the principal debtor means extending the period of payment which
was not contemplated in the contract of guarantee. The surety expects that the creditor will
take the performance from the principal debtor without any delay. If the creditor causes the
delay by giving more time to the principal debtor and then the surety is asked to be liable on
the debtor’s default, this would delay the surety’s action for reimbursement against the
principal debtor, and, therefore, such an arrangement works to the prejudice of the surety.
(iii) Promise not to Sue:
If the creditor under an agreement with the principal debtor promises not to sue him, the
surety is discharged. “The main reason is that a surety is entitled at any time to require the
creditor to call upon the principal debtor to pay off the debt” when it is due and this right is
positively violated when the creditor promises not to sue the principal debtor.
f) By Impairing Surety’s Remedy:
Section 139 incorporates the rule that when the act or omission on the part of the creditor is
inconsistent with the interest of the surety, and the same results in impairing surety’s
eventual remedy against the principal debtor, the surety is discharged thereby.
Sec. 139: If the creditor does any act which is inconsistent with the right of the surety,
or omits to do an act which his duty to the surety requires him to do, and the eventual
remedy of the surety himself against the principal debtor is thereby impaired, the
surety is discharged.
If the creditor does any act which is inconsistent with rights of the surety, or omits to do any
act which his duty to the surety requires him to do, and the eventual remedy of the surety

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himself against the principal debtor is impaired, the surety is discharged. It is the plain duty
of the creditor not to do anything inconsistent with the rights of the surety. A surety is
entitled, after paying off the creditor, to his indemnity from the principal debtor. If the
creditor’s act or omission deprives the surety of the benefit of this remedy, the surety is
discharged.
State of M.P. vs. Kaluram
The State of M.P. made a contract for the sale of ‘felled trees’ with one Jagat Ram, who was
the highest bidder in the auction sale. The payment for these trees was to be made by
instalments. Kaluram was a surety for the payment by the purchaser of trees. The purchaser
failed to pay the second and subsequent instalments. The State of M.P. did not take any steps
to recover this amount, nor did they stop the removal of the felled trees on default of
payment. It was held that since the State Govt. had failed to take necessary steps to recover
the amount from the purchaser by allowing him to take away the trees, the surety’s remedy
against the purchaser had thereby been impaired, the surety was discharged from his liability.
RIGHTS OF SURETY
A surety has certain rights against the principal debtor, the creditor and the co-sureties.
RIGHTS AGAINST PRINCIPAL DEBTOR
Following are the rights of the surety against the principal debtor:
1) Right of Subrogation (S. 140)
2) Right to Indemnity (S. 145)

1) Right of Subrogation (S. 140):

Section 140 provides for the right of subrogation. When the principal debtor makes a default
in the performance of his duty, and on such a default, the surety makes the necessary
payment or makes performance of all what he is liable for, he becomes invested with all the
rights which the creditor had against the principal debtor. In other words, the surety steps into
the shoes of the creditor and by an action against the principal debtor, he can recover from
him all that, which could have been recovered by the creditor. This is known as surety’s right
of subrogation.
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2) Right to Indemnity (S. 145):

In a contract of guarantee, when the principal debtor makes a default, the surety has to make
the payment to the creditor. This payment is made by him on behalf of the principal debtor.
After making such payment, he can recover the same from the principal debtor. Such a claim
can be made by the surety only in respect of the sums he has rightfully paid under the
guarantee, but not the sums which he has paid wrongfully. Section 145 contains this
provision.
In every contract of guarantee there is an implied promise by the principal debtor to
indemnify the surety. The right enables the surety to recover from the principal debtor
whatever sum he has rightfully paid under the guarantee, but not sums which he paid
wrongfully.
RIGHTS AGAINST CREDITOR
The surety enjoys the following rights against the creditor:
1) Right to Securities (S. 141)
2) Right to Share Reduction
3) Right of Set Off

1) Right to Securities (S. 141):

Section 141 deals with rights of securities which says that “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”. It is, however, not necessary that at the time of making
the contract, the surety should be aware of the securities which the creditor had. It becomes
the duty of the creditor not to lose or part with such securities belonging to the principal
debtor which he possesses at the time of making of the contract of guarantee. If the creditor,
without the consent of the surety, loses or parts with such securities, this is an act prejudicial
to the interest of the surety and he is discharged thereby.
Illustration:
C advances to B, his tenant, 2000 rupees on the guarantee of A. C has also a further security
for the 2000 rupees by a mortgage of B’s furniture. C cancels the mortgage. B becomes
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insolvent, and C sues A on his guarantee. A is discharged from liability to the amount of the
value of the furniture.
Goverdhandas Goculdas Tejpal vs. Bank of Bengal
Certain mortgages were given to a bank as security for debts amounting to Rs. 3,15,000. The
plaintiff, who was a surety in part, paid Rs. 1,25,000 and claimed that he was entitled to that
extent to stand in the place of the Bank and to receive a share of the proceeds of the said
securities proportioned to the sum which he has paid. Farran J considered the English
authorities and following them, said: “A surety who has paid the debt, which he has
guaranteed, has a right to the securities held by the creditors, because as between the
principal debtor and surety the principal is under an obligation to indemnify the surety”.
2) Right to Share Reduction:
This right may be illustrated by the case of
Hobson vs. Bass
J gave a guarantee to B in the following words: “I hereby guarantee to you the payment of all
goods you may supply to E.H., but so as my liability to you under this or any other guarantee
shall not at any time exceed the sum of 250 pounds”. E gave a similar guarantee. B supplied
goods to E.H., to the amount of 657 pounds. E.H. became bankrupt. B proved the whole sum
in the insolvency of E.H. and then called on the guarantors who paid him 250 pounds each.
Subsequently B received from the receiver a sum of 2s, and, 1d… in the pound on 657
pounds. It was held that each of the guarantors was entitled to a part of the dividend bearing
to the whole the same proportion as 250 to 657 pounds.
3) Right to Set-off:
If the creditor sues the surety, the surety may have the benefit of the set-off, if any, that the
principal debtor had against the creditor. He is entitled to use the defences of the debtor
against the creditor.
RIGHTS AGAINST CO-SURETIES
Where a debt has been guaranteed by more than one person, they are called co-sureties.
Some of their rights against each other are:

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1) Effect of Releasing a Surety;

2) Right to Contribution.

1) Effect of Releasing a Surety (S. 138):

The creditor may at his will release any of the co-sureties from his liability. But that will not
operate as a discharge of his co-sureties. However, the released co-surety will remain liable
to the others for contribution in the event of default.
2) Right to Contribution (Ss. 146-147):
Where there are several sureties for the same debt and the principal debtor has committed a
default, each surety is liable to contribute equally to the extent of the default. If one of them
has been compelled to pay more than his share, he can recover contribution from his co-
sureties so as to equalize the loss as between all of them.

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UNIT-III BAILMENT
Bailment implies a sort of relationship in which the personal property of one person
temporarily goes into the possession of another. The ownership of the articles or goods is in
one person and the possession in another. The circumstances in which this happens are
numerous. Delivering a cycle, watch or any other article for repair, or leaving a cycle or car,
etc., at a stand, depositing luggage or books in a cloakroom, delivering gold to a goldsmith
for making ornaments, delivering garments to a dry-cleaner, delivering goods for carriage,
warehousing or storage and so forth, are all familiar situations which create the relationship
of bailment.
DEFINITION
“Bailment” is defined in Section148 of the Indian Contract Act:
Sec. 148: A “bailment” is the delivery of goods by one person to another for some
purpose, upon a contract that they shall, when the purpose is accomplished, be
returned or otherwise disposed of according to the directions of the person delivering
them. The person delivering the goods is called the “bailor”. The person to whom
they are delivered is called the “bailee”.
ESSENTIALS OF BAILMENT AND CLASSIFICATION OF BAILMENT
ESSENTIALS FEATURES OF BAILMENT
The following are the essential features of bailment:
1) Contract
2) Delivery of possession;
3) Delivery should be upon contract;
4) Delivery should be upon some purpose;
5) Return or dispose of goods according to the direction;
6) Movable goods.

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1.Contract
There must be a valid contract between the bailor and the bailee. The delivery of goods
should be made under a contract. If the goods are delivered without any contract. Example,
by mistake, there is no bailment. The contract may be expressed or implied.
2.Delivery of Possession:
The first important characteristic of bailment is “the delivery of possession” by one person to
another. “Delivery of possession” for this purpose should be distinguished from a mere
“custody”. “One who has custody without possession, like a servant, or a guest using his
host’s goods is not a bailee”. The goods must be handed over to the bailee for whatever is the
purpose of bailment. Once this is done, a bailment arises, irrespective of the manner in which
this happens.

Kaliaperumal Pillai vs. Visalakshmi

A lady handed over to a goldsmith certain jewels for the purpose of being melted and making
for new jewels. Every evening as soon as the goldsmith’s work for the day was over, the lady
used to receive half-made jewels from the goldsmith and put them into a box in the
goldsmith’s room and keep the key in her possession. The jewels were lost one night. But the
lady’s action against the goldsmith failed.
Bank Locker:
On the same principle, the hiring of a bank’s locker and storing things in it would not
constitute a bailment. Things kept there are in a way put in a hired portion of the premises
and not entrusted to the bank. The position would, however, be different if the locker in the
safe deposit vault of the bank can be operated even without the key of the customer.
National Bank of Lahore vs. Sohan Lal
The appellant bank used to maintain a safe deposit vault in its Jullundur City branch, where
locker cabinets were rented to customers for the safe custody of jewellery and other
valuables. One key pertaining to a locker was given to the customer, without which the
locker could not be opened. The bank manager of that branch fraudulently filed the levers of
the locks of the lockers rented to the plaintiffs, so that now those locks could be opened even
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without the key with the customer. The valuables kept by the plaintiffs in the locker were
found missing. Apart from the question of vicarious liability of the bank for the fraud of its
agent, the question of the liability of the bank as a bailee for the customer’s valuables in the
locker had also arisen. The bank contended that since one key, and thereby the control of the
valuables in the locker, was with the customer, the Bank could not be considered to be a
bailee of the valuables in the locker. It was held that, as in this case, the locker could be
operated even without the key with the customer, customer’s control over the valuables in
that locker had gone, and the same was with the bank, and, therefore, the bank was bailee and
was liable as such, for the loss of the belongings of the customer in the lockers. In addition to
that, the bank was, of course, also liable on account of its vicarious liability for the fraud
committed by the bank manager.
Actual or Constructive Delivery:
Section 149 explains the meaning of delivery of possession.
Sec. 149: The delivery to the bailee may be made by doing anything which has the
effect of putting the goods in the possession of the intended bailee or of any person
authorized to hold them on his behalf.
Delivery of possession is of two kinds, namely:
a) Actual delivery, and
b) Constructive delivery.

When the bailor hands over to the bailee physical possession of the goods, is called “actual
delivery”. “Constructive delivery” takes place when there is no change of physical
possession, goods remaining where they are, but something which has the effect of putting
them in the possession of the bailee. For example, delivery of a railway receipt amounts to
delivery of the goods.
Fazal vs. Salamat Raj
The defendant was holding the plaintiff’s mare under the execution of a decree. The plaintiff
satisfied the decree and the court ordered redelivery of the mare to the plaintiff. The
defendant, however, refused to do so unless his maintenance charges were also paid. The
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mare was stolen from his custody. Holding him liable, the court said that after the delivery
order had been passed, the relation of bailor and bailee was established.
3. Delivery should be upon Contract:
Delivery of goods should be made for some purpose and upon a contract that when the
purpose is accomplished the goods shall be returned to the bailor. When a person’s goods go
into the possession of another without any contract, there is no bailment within the meaning
of its definition in Section 148.
Ram Gulam vs. Govt. of U.P.
The plaintiff’s ornaments, having been stolen, were recovered by the police and, while in
police custody, were stolen again. The plaintiff brought an action to recover the value of the
property. The State was held not liable, firstly, because it did not occupy the position of a
bailee and, therefore, it was not liable as such, and secondly, the police, when it took and
kept the property in its possession, was acting in discharge of the obligations imposed by
law, rather than in obedience to some executive orders.
4. Delivery should be for some purpose:
Bailment of goods is always made for some purpose and is subject to the condition that when
the purpose is accomplished the goods will be returned to the bailor or disposed of according
to his mandate. If the person to whom the goods are delivered is not bound to restore them to
the person delivering them or to deal with them according to his directions, their relationship
will not be that of bailor and bailee.
Jagdish Chandra Trikha vs. Punjab National Bank
The plaintiff’s father had entrusted a box containing 480 tolas, i.e., about 5600 grams gold
ornaments and jewellery to the defendant Bank at Peshawar (now in Pakistan) before the
partition of the country. The jewellery box was locked, wrapped and sealed when delivered.
A proper receipt describing the contents of the box was given by the Bank. From Peshawar
the box came to Lahore Branch of the Bank and thereafter to the Delhi branch. It was found
that when the jewellery box was delivered to the plaintiff in Delhi, it was not in the same
condition as it was delivered at Peshawar. The Lahore branch of the bank had put their own

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wrapper on the box and it was now locked. The plaintiff claimed the gold ornaments and
jewellery deposited with the bank or their value amounting to Rs. 3,72,400. It was held that
the position of the Bank was that of a bailee and it failed in its duty to take care of the goods
and return them to the plaintiff. The Bank was held liable to pay the sum of Rs. 3,72,400
along with simple interest @ 12% p.a. from the date of the institution of the suit till the date
of realization of the amount.
If a person assumes the custody of another person’s goods, even without any formal
arrangement, this is sufficient to constitute bailment.
Ultzen vs. Nicols
The plaintiff went to the defendant’s restaurant for the purpose of dining there. When the
plaintiff entered the restaurant, a waiter took the plaintiff’s coat from him without being
requested to do so, and hung it on a hook behind the plaintiff. When the plaintiff wanted to
leave, he found that the coat had been lost. It was held that the defendant was the bailee of
the coat as his servant had assumed the possession of the same and he was, therefore, liable
for its loss which was due to his negligence.
5.Return or dispose of goods to the direction
In bailment the goods are delivered for specific purpose. After the purpose is accomplished
the goods may be returned to the bailor in the same or altered direction, condition or maybe
disposed of as directed by bailor. If the person to whom the goods are delivered is not bound
to restore them to the person delivering them or to deal with them according to the mandate
their relationship will not be that of bailor and bailee.
6.Movable goods
Goods in bailment involves every type of movable good. Now the question arises whether
money can be considered as movable property. Money or legal tender are not to be bailed.
The money deposited cannot be bailed as money doesn’t come under goods and the same
money is not returned to the client. Bailor should own the property or must be in possession.

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RIGHTS AND DUTIES OF THE BAILOR AND BAILEE

DUTY OF BAILOR
According to Section 150 which deals with the duty of bailor, bailors are of two kinds,
namely;
1) Gratuitous bailor, and
2) Bailor for Reward.

A person who lends his articles or goods without any charge, is called a “gratuitous bailor”.
His duty is naturally much less than that of a bailor for hire or consideration.
1) Duty of Gratuitous Bailor:
Speaking of the duty of a gratuitous bailor, section 150 says, “the bailor is bound to disclose
to the bailee faults in the goods bailed, of which the bailor is aware and which materially
interfere with the use of them, or expose the bailee to extraordinary risks; and if he does not
make such disclosure, he is responsible for damage arising to the bailee directly from such
faults. 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”.
Illustrations:
a) A lends a horse, which he knows to be vicious, to B. he does not disclose the fact that
the horse is vicious. The horse runs away. B is thrown and injured. A is responsible to
B for damage sustained.
b) A hires a carriage of B. The carriage is unsafe, though B is not aware of it, and A is
injured. B is responsible to A for the injury.

Section 150 imposes a duty on the bailor of defective goods which interfere with the use of
them, or expose the bailee to extraordinary risks. He is bound to disclose those faults in the
goods which create the risk and of which he is aware. If he fails to make such disclosure, he
is responsible for damage arising to the bailee directly from such fault. This duty is of
gratuitous bailor or the bailor without reward, because when the bailor bails the goods for

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reward, he is liable for the damage caused by the defective goods even though he is not
aware of the defect in them.

2) Duty of Bailor for Reward:

The duty of a bailor for consideration is much greater. He is making profit from his
profession and, therefore, it is his duty to see that the goods which he delivers are reasonably
safe for the purpose of the bailment. It is the defence for him to say that he was not aware of
the defect. Section 150 clearly says that “if the goods are bailed for hire, the bailor is
responsible for such damage, whether he was or was not aware of such faults in the goods
bailed”. He has to examine the goods and remove such defects as reasonable examination
would have disclosed.
Hyman & Wife vs. Nye & Sons
The plaintiff hired a carriage and horses from the defendant for a particular journey. The
carriage being defective, it was upset and the plaintiff was injured thereby. The defendant
was held liable for the injury to the plaintiff.
DUTIES OF BAILEE
The following are the duties of every bailee:
a) Duty of reasonable care (Ss. 151-152)
b) Duty not to make unauthorized use (S. 154)
c) Duty not to mix (Ss. 155-157)
d) Duty to return (Ss. 160-161)
e) Duty not to set up “jus tertii”
f) Duty to return increase (S. 163)

1) Duty of Reasonable Care (Sec 151-152)

Section 151 lays down this duty in the following terms:
Sec. 151: 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

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circumstances take, of his own goods of the same bulk, quality and value as the goods
bailed.
Houghland vs. R.R. Low (Luxury Coaches) Ltd
The plaintiff was a passenger in one of the defendant’s coaches. She had her suitcase put in
the boot of the coach from where it was lost. The trial judge found that this was technically a
gratuitous bailment. Even so it was held that the standard of care was that of reasonable care
and was the same whether the bailment was gratuitous or for reward.
Martin vs. London County Council
The plaintiff was brought to a paid hospital as a patient. On her entry, the hospital officials
took charge of two pieces of jewellery and a gold cigarette case. They were subsequently
stolen by a thief who broke into the room in which they were kept. It was held that the
defendants were bailees for reward and were liable for the loss as they had failed to exercise
care which the nature and quality of the articles required.
In India, however, Section 151 prescribes a uniform standard of care in all cases of bailment,
that is, a degree of care which a man of ordinary prudence would take of his goods of the
same type and under similar circumstances. If the care devoted by the bailee falls below this
standard, he will be liable for loss of or damage to the goods:
Sec. 152: 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.
Where the loss has been due to the act of the bailee’s servant, he would be liable if the
servant’s act is within the scope of his employment.
Sanderson vs. Collins
The defendant sent his carriage to the plaintiff for repairs and the latter lent his own carriage
to the defendant while the repairs were going on. The defendant’s coachman, without his
knowledge, took away the carriage for his own purpose and damaged it. The defendant was
held not liable as the coachman at the time when the injury was done to the carriage was not
acting within the course of his employment.

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Newman vs. Bourne & Hollingsworth

The plaintiff went to the defendant’s shop to buy a coat. She was wearing a coat fastened
with a diamond brooch, and she took the coat off, and put it on a glass case with the brooch
by the side of it. When leaving she forgot the brooch and it was handed by an assistant to the
shopwalker who put it in his desk, from where it was lost. The defendant was held liable.
2) Duty not to make Unauthorised Use (Sec 154):
Section 154 says that “if the bailee makes use of the goods bailed which is not according to
the conditions of the bailment, he is liable to make compensation to the bailor for any
damage arising to the goods from or during such use of them”.
Illustration:
A lends a horse to B for his own riding only. B allows C, a member of his family, to ride the
horse, C rides with care, but the horse accidentally falls and is injured. B is liable to make
compensation to A for the injury done to the horse.
Goods must be used by the bailee strictly for the purpose for which they have been bailed to
him. Any unauthorized use of the goods would make the bailee absolutely liable for any loss
of or damage to the goods. Even an act of God or inevitable accident would be no defence.
3) Duty not to Mix (Sec 155-157)
The bailee should maintain the separate identity of the bailor’s goods. He should not mix his
own goods with those of the bailor and without his consent. If the goods are mixed with the
consent of the bailor, both will have a proportionate interest in the mixture thus produced (S.
155). If the mixture is made without bailor’s consent, and if the goods can be separated, or
divided, the bailee is bound to bear the expenses of separation as well as any damage arising
from the mixture (S. 156). But if the mixture is beyond separation, the bailee must
compensate the bailor for his loss.
Illustration to Sec. 156:
A bails 100 bales of cotton marked with a particular mark to B. B without A’s consent, mixes
the 100 bales with other bales of his own, bearing a different mark; A is entitled to have his

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100 bales returned, and B is bound to bear all the expenses incurred in the separation of the
bales, and any other incidental damage.
Illustration to Sec. 157:
A bails a barrel of Cape flour worth Rs. 45 to B. B, without A’s consent, mixes the flour with
country flour of his own, worth only Rs. 25, a barrel. B must compensate A for the loss of his
flour.
4) Duty to Return (Sec 160-161)
Section 160 provides for the duty to return. “It is the duty of the bailee to return, or deliver
according to the bailor’s directions, the goods bailed, without demand, as soon as the time for
which they were bailed has expired, or the purpose for which they were bailed has been
accomplished”.
Sec. 161: If, by the default of the bailee, the goods are not returned, delivered or
tendered at the proper time, he is responsible to the bailor for any loss, destruction or
deterioration of the goods from that time.
When the purpose of bailment is accomplished or the time for which the goods were bailed
has expired, the bailee should return the goods to the bailor without demand. If he fails to do
so, he will keep the goods at his risk and will be responsible for any loss of or damage to the
goods arising howsoever.
Shaw & Co. vs. Symmons & Sons
The plaintiff entrusted books to the defendant, a bookbinder, to be bound, the latter
promising to return them within a reasonable time. The plaintiff having required the
defendant to deliver the whole of the books then bound, the defendant failed to deliver them
within a reasonable time and they were subsequently burnt in an accidental fire on his
premises. The defendant was held liable in damages for the loss of the books.
5) Duty not to set up “jus tertii”:
A bailee is not entitled to set up, as against the bailor’s demand, the defence of jus tertii, that
is to say, that the goods belong to a third person. The bailee is estopped from denying the
right of the bailor to bail the goods and to receive them back.

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Sec. 166: If the bailor has no title to the goods, and the bailee, in good faith, delivers
them back to, or according to the directions of the bailor, the bailee is not responsible
to the owner in respect of such delivery.
6) Duty to Return Increase (Sec 163)
In the absence of any agreement to the contrary, the bailee is bound to return to the bailor
natural increases or profits accruing to the goods during the period of bailment. This is so
provided in Section 163.
Sec. 163: 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.
Illustration:
A leaves a cow in the custody of B to taken care of. The cow has a calf. B is bound to deliver
the calf as well as the cow to A.
RIGHTS OF BAILEE
1) Right to Compensation (Sec 164)
Section 164 provides that if the bailor has no right to bail the goods, or to receive them back
or to give directions respecting them and consequently the bailee is exposed to some loss, the
bailor is responsible for the same.
2) Right to Expenses or Remuneration (Sec 158)
A bailee is entitled to recover his agreed charges. But where there is no such agreement at all,
Section 158 comes into play. The section says that where the bailee is required by the terms
of bailment to keep or carry the goods or to do some work upon them for the benefit of the
bailor, and the contract provides for no reward, the bailee has a right to ask the bailor for
payment of necessary expenses incurred by him for the purpose of the bailment.
3) Right Of Lien (Sec 170-171)
If the bailee’s lawful charges are not paid he may retain the goods. The right to retain any
property until the charges due in respect of the property are paid, is called the right of lien.
Liens are of two kinds, namely:

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a) Particular lien, and

b) General lien.

(a) Particular Lien

As a general rule a bailee is entitled only to particular lien, which means the right to retain
only that particular property in respect of which the charge is due. This right is provided for
in Section 170 of the Act.
Illustrations:
i. A delivers a rough diamond to B, a jeweler, to be cut and polished, which is
accordingly done. B is entitled to retain the stone till he is paid for the services he has
rendered.
ii. A gives cloth to B, a tailor, to make into a coat. B promises A to deliver the coat as
soon as it is finished, and to give a three months’ credit for the price. B is not entitled
to retain the coat until he is paid.

Hutton vs. Car Maintenance Co.

The owner of a car gave it to a company to maintain it for three years on a fixed annual
payment. An amount having become due for maintenance charges, the company claimed lien
on the car. It was held that inasmuch as what the company did was not to improve the car,
but only to maintain it in its former condition, the company had no lien on the car.
(b) General Lien (Sec 171)
The right of “general lien” as provided for in Section 171, means the right to hold the goods
bailed as security for a general balance of account. The right of particular lien entitles a
bailee to detain only that particular property in respect of which charges are due. But general
lien entitled the bailee to detain any goods bailed to him for any amount due to him whether
in respect of those goods or any other goods.
Parties Entitled to General Lien:
The right of general lien is a privilege and is specially conferred by Section 171 on certain
kinds of bailees only. They are:

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a) Bankers,
b) Factors,
c) Wharfingers,
d) Attorneys of a High Court, and
e) Policy-brokers.

a) Bankers
“The general lien of bankers, as judicially recognized and dealt with in Section 171, attaches
to all goods and securities deposited with them as bankers by a customer or by a third person
on a customer’s account, provided there is no contract, express or implied, inconsistent with
such lien”.
Mercantile Bank of India Ltd vs. Rochaldas Gidumal & Co.
A customer gave his banker a sum of money for transmission by telegraphic transfer to his
own firm at another place. The bank purported to hold the money for their balance of account
against the firm. The court held that money given for telegraphic transfer is given for a
special purpose inconsistent with the exercise of the right of lien.
Where the customer has two accounts, a deposit account and a loan account, the banker may
in the exercise of its lien, transfer the money in the deposit to the loan account without any
specific instructions of the depositor to that effect.
b) Factors
The word “factor” in India, as in England, means an agent entrusted with possession of goods
for the purpose of selling them for his principal. He is given the possession of the goods in
the ordinary course of his business for the purpose of sale. He has a general lien on the goods
of his principal for his balance of account against the principal.
c) Wharfingers
“Wharf means a place contiguous to water, used for the purpose of loading and unloading
goods, and over which the goods pass in loading and unloading. It is essential to a wharf that
goods should be in transit over it. The primary idea is that, it is a place used, not for storing
goods, but in the process of their transit to or from water”. Wharfinger “is he that owns or
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keeps a wharf, or hath the oversight or the management of it”. A wharfinger has general lien
on the goods bailed to him until his wharfage, which means, charges due for the use of his
wharf, are paid.
d) Attorney of High Court
An attorney or a solicitor who is engaged by a client is entitled to general lien until the fee
for his professional service and other costs incurred by him are paid. The right extends to the
proceeds of the action that come to the hands of the attorney. He has a right of lien over
funds which are deposited with the court.
e) Policy Brokers
An insurance agent who is employed to effect a policy of marine insurance is called a policy
broker. His lien extends to any balance on any insurance account due to him from the person
who employed him to effect the policy.
4) Right to Sue
Section 180 enables a bailee to sue any person who has wrongfully deprived him of the use
or possession of the goods bailed or has done them any injury. The bailee’s rights and
remedies against the wrongdoer are just the same as those of the owner. An action may,
therefore, be brought by the bailee or bailor. “Whatever is obtained by way of relief or
compensation in any such suit shall, as between the bailor and the bailee, be dealt with
according to their respective interests”.
BAILMENT AND PLEDGE DISTINGUISHED
1. Bailment is a wider term. It includes pledge. Pledge is a kind of bailment, where the goods
are delivered by one person to another as security for payment of debt or performance of a
promise. It means that if the goods serve as security, it is pledge whereas when the goods are
given for some other purpose, for example, a watch is given for repairs, it is bailment.
2. In case of bailment, if the bailor does not pay the lawful charges due to the bailee in
respect of services, etc. rendered by the bailee, the bailee can exercise lien over the goods
bailed, i.e., he can retain them until the necessary payment is made to him. In case of pledge,
the pledgee has not only a right to retain the goods pledged until the repayment of debt or

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performance of the promise, etc. but in the event of default by the pawnor in payment of the
debt, or performance of the promise at the stipulated time, he may even sell the goods, after
giving a notice of sale to the pawnor.
PLEDGE – DEFINITION – RIGHTS OF THE PAWNER AND PAWNEE
DEFINITION
Section 172 defines pledge:
Sec. 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”.
Thus a pledge is only a special kind of bailment, and the chief basis of distinction is the
object of the contract. Where the object of the delivery of the goods is to provide security for
a loan or for the fulfillment of an obligation, that kind of bailment is called pledge. “Pawn or
pledge is a bailment of personal property as a security for some debt or engagement. A
pawner is one who being liable to an engagement gives to the person to whom he is liable a
thing to be held as security for payment of his debt or the fulfillment of his liability”.
ESSENTIAL FEATURES
Following are the essential characteristics of a pledge:
1. Delivery of Possession:
“Delivery of the chattel pawned is a necessary element in the making of a pawn”. The
property pledged should be delivered to the pawnee. Delivery of the possession may be
actual or constructive. Delivery of the key of the godown where the goods are stored, is an
illustration of constructive delivery.
Pledge by Hypothecation
Sometimes the goods are allowed to remain in the custody of the pledger for a special
purpose.

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Reeves vs. Capper

The captain of a ship pledged his chronometer with the shipowner who allowed him to use
the instrument for the purpose of a voyage. The captain pledged it over again with another
person. The question was whether the first pledge was valid. The court held that it was.
In the same way a constructive pledge comes into existence as soon as the pawner, without
actually delivering the goods, agrees to hold them for the pawnee and promises to deliver
them on demand.
Bank of Chittoor vs. Narasimbulu
A cinema projector and accessories were pledged with a bank. The bank allowed the property
to remain with the pledgers, since they formed the equipment of a running cinema.
Subsequently the pledgers sold the machinery. The court held that the sale was subject to the
pledge. “There was a constructive delivery or delivery by attornment to the bank”.
2. In Pursuance of Contract
“Pledge is a conveyance to a contract, and it is essential to a valid pledge that delivery of the
chattel shall be made by the pledger to the pledgee in pursuance of the contract of pledge”.
But it is not necessary that delivery of possession and the loan should be contemporaneous.
“Delivery and advance need not be simultaneous and a pledge may be perfected by delivery
after the advance is made”.
RIGHTS OF PAWNEE
A pawnee has the following rights under the Act:
1) Right of Retainer (Sec 173-174)
The first important right of a pawnee is the right to retain the goods pledged until his dues are
paid. He has a right to retain the goods not only for payment of the debt or performance of
the promise, but for the interest due on the debt, and all necessary expenses incurred by him
in respect of the possession or for the preservation of the goods pledged.
The pledgee can retain the goods only for the payment of that particular debt for which the
goods were pledged and not for any other debt or promise, unless there is a contract to the
contrary.

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2) Right to Extraordinary Expenses (S. 175)

The pawnee is entitled to receive from the pawner extraordinary expenses incurred by him
for the preservation of the goods pledged. For such expenses, however, he does not have the
right to retain the goods. He can only sue to recover them. This right is provided for in
Section 175.
3) Right to Sell (S. 176)
Upon a default being made by the pawner in the payment of the debt or performance of the
promise, the pledgee gets two distinct rights under Section 176 of the Act. Firstly, the
pledgee may sue upon the debt and retain the goods as a collateral security. Secondly, he may
sell the goods after reasonable notice of the intended sale to the pawner.
The right to sue is a personal action and rests upon the contract of loan quite apart from the
pledge. But until the money due is recovered, the pledged goods may be retained, though
they would have to be surrendered when the loan is realized. If by reason of his own act, the
pledgee is unable to return the goods, he cannot have judgment for the debt.
Lallan Prasad vs. Rahmat Ali
The defendant borrowed Rs. 20,000 from the plaintiff on a promissory note and gave him
aeroscrapes worth about Rs. 35,000 as security for the loan. The plaintiff sued for repayment
of the loan, but was unable to produce the security, having sold it, and, therefore, his action
for the loan was rejected.
WHO CAN PLEDGE
Ordinarily goods may be pledged by the owner or by any person with the owner’s authority.
A pledge made by any other person may not be valid. Thus, for example, where goods were
left in the possession of a servant, while the owner was temporarily absent, a pledge made by
the servant was held to be invalid. The principle is necessary to protect the individual interest
in the ownership of property. But interest acquired in the course of lawful commercial
transactions equally deserves to be protected. Accordingly, Sections 178 and 179 provide for
certain circumstances in which a person, being left in possession with the consent of the
owner, may make a valid pledge though without the owner’s property.

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1. Pledge by Mercantile Agent (Sec 178)

The first exception is in favour of a pledge created by a mercantile agent. Section 178
provides that where a mercantile agent is, with the consent of the owner, in possession of
goods or documents of title to goods, any pledge made by him while acting in the ordinary
course of business shall be valid, provided that the pawnee acts in good faith and has no
notice of the fact that the agent has no authority to pledge. The necessary conditions of
validity under the section are as follows:
(i) Mercantile agent
There should be a mercantile agent. The explanation to the section says that the expression
“mercantile agent” has the same meaning as is assigned to it by Indian Sale of Goods Act,
1930. In this Act, “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 purpose of
sale, or to buy goods or to raise money on the security of goods”. [S. 2(9), Sale of Goods
Act]
(ii) Possession with Owner’s Consent
The mercantile agent should be in possession of the goods or documents of title with the
consent of the owner. If the consent is real, it is immaterial that it was obtained by fraud or
misrepresentation or with dishonest intention. All these things may make the person
receiving possession liable for some offence, but the consent of the owner actually given is
not annulled thereby.
(iii) In the Course of Business
Goods have been entrusted to the agent in his capacity as a mercantile agent and he should be
in possession in that capacity. If the goods are entrusted to him in a different capacity, it is
not open to a third party who takes a pledge from him to say that they were in his possession
as a mercantile agent and therefore, he had the power to create a pledge.
(iv) Good Faith
The last essential requirement is that the pawnee should act in good faith and should not have
at the time of the pledge notice that the pawner has no authority to pledge.

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Pledge by Documents of Title (Sec 178A)

Where a mercantile agent is in possession of the documents of title relating to his principal’s
goods, and if he pledges the same, the pledgee gets a good title if he acts in good faith and
without notice.
2. Person in Possession under Voidable Contract
Where goods are pledged by a person who has obtained possession under a voidable contract,
the pledge is valid, provided that the contract has not been rescinded at the time of the pledge
and the pledgee has acted in good faith and without notice of the pledger’s defect of title.
Phillips vs. Brooks Ltd.
A fraudulent person, pretending to be a man of credit, induced the plaintiff to give him a
valuable ring in return for his cheque which proved worthless. Before the fraud could be
discovered, the ring was pledged with the defendants. The pledge was held to be valid, it
being made by a person in possession under a voidable contract.
3. Pledge by Pledgee (Sec 179)
Section 179, which is he relevant provision says, that where a person pledges goods in which
he has only a limited interest, the pledge is valid to the extent of that interest. Thus, when a
pledgee further pledges the goods the pledge will be valid only to the extent of his interest
and his interest is the amount for which the goods have been given to him as a security. If he
pledges for a larger amount, the original pledger will still be entitled to his goods on paying
the amount for which he himself pledged the goods.

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UNIT-IV SALE OF GOODS

DEFINITION OF SALE AND AGREEMENT TO SELL – DISTINCTION BETWEEN
SALE AND AGREEMENT TO SELF – CONTRACT OF WORK AND LABOUR –
HIRE PURCHASE AGREEMENT – BAILMENT – EXCHANGE – GIFT
DEFINITION OF SALE AND AGREEMENT TO SELL
Section 4 of the Sale of Goods Act, 1930 deals with “Sale and Agreement to Sell”.
A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the
property in goods to the buyer for a price. There may be a contract of sale between one part-
owner and another [Sec 4(1)].
A contract of sale may be absolute or conditional. [Sec 4(2)]
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. [Sec 4(3)]
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. [Sec 4(4)]
DISTINCTION BETWEEN SALE AND AN AGREEMENT TO SELL
Section 4 of the Sale of Goods Act defines a contract of sale as including both an outright
sale and an agreement to sell. The contract is called a sale when the property in the goods,
i.e., ownership of the goods, is thereby transferred from the seller to the buyer. It is called an
agreement to sell where the transfer of property is to take place only at a future date or when
some condition is to be fulfilled therefor. An agreement to sell becomes transformed into a
sale when the transfer of ownership from the seller to the buyer is actually effected.
An agreement of sale is not the same as sale and the title to the property, agreed to be sold,
still vests with the vendor, but in the case of sale, title to the property vests with the
purchaser.
The important points of distinction between sale and agreement to sell are as follows:

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1) An agreement to sell gives rise to a jus in personam, i.e., a right available against an
ascertained person (the buyer or the seller as the case may be). A sale creates a jus in
rem, i.e., a right available against the world at large;
2) In a sale the risk of loss of the property is within the buyer who has become the
owner. In an agreement to sell the risk of loss remains with the seller since he has not
yet parted with the ownership;
3) If there is only an agreement to sell, the seller may resell the property to a bona fide
purchaser for value without notice of the prior agreement. Such a purchaser acquires a
good title and the seller exposes himself to an action in damages for breach of his
original agreement. Where there is an actual sale, the subsequent purchaser cannot
acquire a title;
4) If the buyer becomes insolvent, the seller in the case of an agreement to sell is not
bound to part with the goods until he paid in full. If the transaction is a sale, he has to
deliver the goods and claim only a dividend in the insolvency of the buyer;
5) For a contract by the buyer, the remedy of the seller in an agreement for sale of goods
is to sue for damages. His remedy is to sue for the price when the transaction is a sale
and not a mere agreement to sell.
6) From the point of view of the seller, an agreement to sell is an executory contract
since he has to perform his part of the contract, viz., transferring of ownership, at a
later date. A sale, however, would be an executed contract since the seller has already
done what he has promised to do under the contract, the ownership having been
already transferred to the buyer.

DISTINCTION BETWEEN SALE AND CONTRACT FOR WORK AND LABOUR

A distinction is to be drawn between a contract of sale and a contract for work and labour. In
England the distinction between these two transactions is important, for, under the Statute of
Frauds a sale can be proved only when evidenced by a written memorandum but a contract
for work and labour may be proved by oral evidence.

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Lee vs. Griffin

A dentist was to make a set of dentures and fit them to the mouth of his client. The artificial
teeth were made but the client died before they could be fit to his mouth. The action was
brought against his legal representatives and was based upon a contract for work and labour.
It was held by Blackburn, J., that the transaction was really one of sale and not one for work
and labour.
The distinctive test propounded is whether the agreement if carried out, would result in the
transfer of a chattel or not. In that case the dentist was to make the dentures and if the
agreement was carried out that chattel itself would pass to the other party to the agreement. It
was thus a sale and not a mere contract for work and labour. Suppose a printer is engaged to
print a book on paper supplied by the publisher. Then the contract would relate not to a sale
but to work and labour on the part of the printer.
DISTINCTION BETWEEN SALE AND HIRE-PURCHASE AGREEMENT
A hire purchase agreement should be distinguished from an actual sale. In an actual sale the
buyer immediately becomes the owner of the goods, which are in the subject matter of the
sale. In a hire-purchase agreement, however, the owner retains his ownership and gives the
hirer only a right to use the chattel in consideration of periodical payments to be made by the
hirer. These periodical payments are no doubt instalments of price and the hirer has the
option of becoming the owner by paying all the instalments stipulated for under the hire-
purchase agreement. The hirer then may, eventually become the buyer but until this happens
there is no transfer of property from the owner to the hirer.
The legal consequences of this distinction are of vital importance. In a hire-purchase
agreement the hirer cannot give a good title to an innocent purchaser from him since he has
no ownership at all. In a sale, however, a buyer in possession of the goods can give a good
title to a third party even before he has himself paid the price. Further, the insolvency of the
hirer will not affect the owner in a hire-purchase agreement for he can take back his chattel
as his owner. In a sale, however, the unpaid seller can only look for a dividend if the buyer
happens to become insolvent.

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Helby vs. Mathews

The plaintiff was the owner of a piano. A took possession of the piano agreeing to pay the
price in 36 monthly instalments of 10 shillings each. A pledged the piano with the defendant
after a few months. Under the contract with the plaintiff A was to become the owner after
payment of the last instalment and had the option to return the piano at any time and
terminate the contract. It was held by the House of Lords that the agreement was only a hire-
purchase agreement and that A had no right to pledge the piano. The plaintiff could,
therefore, recover the piano from the defendant. Where there is no such option, though the
owner is given right to terminate the agreement when there is default in payment of the
instalments, the contract is one for sale and the buyer can give a good title to an innocent
third party.
DISTINCTION BETWEEN SALE AND BAILMENT
The object of sale is to make the buyer owner of the goods delivered to him. In a bailment
also there is delivery of goods by the owner to someone else, i.e., to the bailee. The object of
bailment, however, is not to make the bailee owner of the goods. The bailee has to deliver the
goods in specie to the bailor after the purpose of the bailment is fulfilled.
DISTINCTION BETWEEN SALE AND EXCHANGE
In sale, consideration must be consideration known as ‘price’. If goods are given in exchange
for goods, it is known as exchange.
DISTINCTION BETWEEN SALE AND GIFT
In case of gift as in sale there is a transfer of ownership in the goods from one person to
another but in gift the transfer is gratis, i.e., without any consideration whereas in the case of
sale, the transfer has to be money consideration only.
DEFINITIONS – GOODS – SPECIFIC GOODS – FUTURE GOODS –
MERCANTILE AGENT – DOCUMENTS OF TITLE OF GOODS
DEFINITION OF GOODS
Section 2(7) of the Sale of Goods Act defines the term “goods” which “means every kind of
moveable property other than actionable claims and money; and includes stock and shares,

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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.
Thus “goods” means moveable property other than actionable claims and money. An
actionable claim is a claim realizable by action in a court of law. Thus if A enters into a
contract with B, the contractual claim is an actionable claim. After breach is committed, it is
only a mere right to sue. A mere right to sue is not transferable. An insurance policy gives to
an actionable claim. Moveable property can be transferred by delivery. An actionable claim
can be transferred only by means of a written instrument signed by the transferor.
The scope of the definition of the word “goods” under the Indian Sale of Goods Act is wider
than that under the English Act. The English Act does not expressly include ‘Stock and
Shares’ and accordingly they would not be goods under the English Act. In A.M.P.
Arunachalam vs. A.R. Krishna Murthy, it was pointed out that exhaustive definition of
‘goods’ in the Indian Act makes it clear that even ‘Stock and Shares’ can be treated as
‘goods’ and dealt with as such.
Things attached to the land are called fixtures. Ceiling fans in a house are fixtures. If they are
agreed to be severed from the land before sale, they can be treated as moveable property.
Growing crops and grass are moveable property. In short, whatever is not immovable
property is movable property.
DEFINITION OF SPECIFIC GOODS
According to Section 2(14), “Specific Goods” means those goods which have been identified
and agreed upon at the time of contract of sale, if the exact thing which is the subject-matter
of the contract is known to the parties, it is known as specific goods. For example, if A
agrees to sell 100 bags of wheat to B and for the purpose of that contract, out of 1000 bags,
which he has in his godown, he earmarks 100 bags at the time of making his contract with B,
the goods sold are specific. For specific goods, it is necessary that such goods must be
identified and agreed upon at the time of making of the contract and not subsequently.

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Vijay Minerals Pvt. Ltd. vs. Bikash Chandra Deb

There was a contract for the sale of Manganese and iron ores which were excavated and
raised for delivery from mines ex pit mouth. In other words, only such ores were sold and to
be delivered as had been excavated and raised. It was held to be sale of specific goods. In this
case, the sale was of specific goods and specific performance of the contract could be
granted.
DEFINITION OF FUTURE GOODS
Section 2(6) defines the term “future goods” which means “goods to be manufactured or
produced or acquired by the seller after the making of the contract of sale”.
Future goods are those which are in existence at the time when the contract for sale of goods
is entered into. They are to be manufactured or produced after the date of the contract.
“Goods”, would include stocks and shares under the Indian Law but not under the English
Law.
A contract to sell and deliver the crop raised with seed to be sown, or to sell oil not yet
pressed, relates to one of future goods.
Future goods should be distinguished from unascertained goods. Unascertained goods are
existing but not identified and agreed upon at the time of sale. A may promise to sell 50 bags
of rice out of the 500 bags in his godown. This is a sale of unascertained goods. If, however,
he promises to sell paddy, which he intends to grow upon his field, it is a sale of future
goods.
Even future goods may be sold.
MERCANTILE AGENT
Section 2(9) of the Sale of Goods Act deals with “mercantile agent”. It means a mercantile
agent having in the customary course of business 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.
An agent is a person who brings about contractual relations between his principal and third
parties. If customarily in the course of his business he has authority to sell the goods of the

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principal or consign them for sale or to buy goods for the principal or to raise money on the
security of such goods he is called mercantile agent.
An ordinary agent who has no authority to sell cannot give a good title to the buyer. But a
mercantile agent in possession of goods with the consent of the principal can convey a good
title to a bona fide purchaser when he sells such goods in the ordinary course of his business.
Lowther vs. Harris
The plaintiff made arrangement for disposal of some furniture and tapestry belonging to him
through P acting as his agent. P, who obtained possession of some of the articles by fraud
sold them to defendant and absconded with the amount. The question arose whether ‘P’ was
a ‘Mercantile Agent’. Answering the question in the affirmative it was observed: “In my
opinion P, who had his own shops and who received and took cheques in his own registered
business name and earned commissions, was not a mere servant but an agent even though his
discretionary authority was limited”.
DOCUMENT OF TITLE TO GOODS
Section 2(4) deals with “document of title to goods” which “includes a bill of lading, dock-
warrant, warehouse-keeper’s certificate, wharfinger’s certificate, railway receipt, multimodal
transport document warrant or order for the delivery of goods and any other document used
in the ordinary course of business as proof of the possession or control of goods, or
authorizing or purporting to authorize, either by endorsement or by delivery, the possessor of
the document to transfer or receive goods thereby represented”.
A document of title to goods is one used in the ordinary course of business and treated as one
conferring a right to possession or authorizing by endorsement on it or by mere delivery, the
possessor of it to receive goods mentioned in such document. The document thus symbolizes
the goods. Its purchaser may either himself receive the goods or transfer such right to
someone else by delivering the document or by making a suitable endorsement on it.
Instances of documents of title to goods are the following:

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1. Bill of Lading:
This is a receipt for goods shipped aboard a ship named in the bill and signed by the Captain
of the ship or his representative.
J.V. Gokal & Co. (P) Ltd. vs. Asst. Collector, Sales Tax
It has been pointed out that “a bill of lading is a writing signed on behalf of the owner of the
Ship in which the goods are embarked, acknowledging the receipt of the goods and
undertaking to deliver them at the end of the voyage subject to such conditions as may be
mentioned in the bill of lading”. It is well settled that a bill of lading represents the goods,
and the transfer of it operates as Transfer of Goods.
2. Dock Warrant
It is a document authorizing the person presenting it to receive possession of goods. It is
issued by a Dock owner and specifies the goods which are to be delivered.
3. Railway Receipt
Railway Receipt is a document of title, as per the definition of the term in Section 2(4), Sale
of Goods Act and enables the person mentioned as consignee to give a valid discharge in
respect of the goods to which it relates. Hence, a consignee of goods or an endorsee of a
railway receipt though he be an agent of the consignor has sufficient interest in the goods to
file a suit against the railway.
HOW IS SALE MADE – RULES FOR FIXING PRICE AND EFFECT OF GOODS
GETTING DAMAGES OR PERISHED IN A CONTRACT OF SALE
CONTRACT OF SALE HOW MADE
Section 5 of the Act deals with contract of sale how made. A contract of sale is made by an
offer to buy or sell goods for a price and the acceptance of such offer. The contract may
provide for the immediate delivery of the goods or immediate payment of the price or both,
or for the delivery or payment by instalments, or that the delivery or payment or both shall be
postponed. Subject to the provisions of any law for the time being in force, a contract of sale
may be made in writing and partly by word of mouth or may be implied from the conduct of
the parties.

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GOODS PERISHING BEFORE MAKING OF CONTRACT

Section 7 of the Act deals with ‘goods perishing before making of contract’. Where there is a
contract for the sale of specific goods, the contract is void if the goods without the
knowledge of the seller have, at the time when the contract was made, perished or become so
damaged as no longer to answer to their description in the contract.
GOODS PERISHING BEFORE SALE BUT AFTER AGREEMENT TO SELL
Section 8 of the Act says 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 to answer to their description in the agreement before the risk
passes to the buyer, the agreement is thereby avoided.
RULES FOR FIXING PRICE
Section 9 of the Act deals with “Ascertainment of Price” which says the price in a contract of
sale may be fixed by the contract or may be left to be fixed in manner thereby agreed or may
be determined by the course of dealing between the parties. Where the price is not
determined in accordance with the foregoing provisions, the buyer shall pay the seller a
reasonable price. What is a reasonable price is a question of fact dependent on the
circumstances of each particular case.
One of the essential conditions for a contract of sale of goods is the fixation of price. The
price may either fixed by the contract or left to be fixed in a manner therein specified. So the
contract between A and B for the sale of two cars at a valuation to be made by X is valid. In
such a case Sec 10 provides that when the third party does not make the valuation the
agreement becomes void. There is a proviso to the Section. When the goods are delivered
and appropriated by the buyer, he has to pay a reasonable price therefor. If part of the goods
are delivered to and appropriated by the buyer, he should pay a reasonable price therefor.
STIPULATION AS TO TIME AND OTHER STIPULATION
In a contract of sale of goods there may be various terms or stipulations. Such stipulations
may be either conditions or warranties. If a stipulation forms the very basis of the contract,
or, as stated in Sec 12(2), is essential to the main purpose of the contract, it is called a

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condition. On the other hand, if the stipulation is not essential to the main purpose of the
contract but is only of secondary importance, or as Sec 12(3) puts it, is collateral to the main
purpose of the contract, it is called a warranty.
CONDITIONS AND WARRANTIES
Section 11 of the Act deals with stipulations as to time. It says “unless a different intention
appears from the terms of the contract, stipulations as to time of payment are not deemed to
be of the essence of a contract of sale. Whether any other stipulation as to time is of the
essence of the contract or not depends on the terms of the contract”.
Section 12 of the Act deals with condition and warranty. A stipulation in a contract of sale
with reference to goods, which are the subject thereof, may be a condition or a warranty [Sec
12(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. [Sec 12(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. [Sec 12(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. [Sec 12(4)]
DISTINGUISH A WARRANTY FROM A CONDITION
In a contract for sale of goods there would be several stipulations. Some of the stipulations
are essential to the main purpose of the contract. Section 11of the Act for instance has no
application when the defendants unequivocally state that, unless and until the advance is
paid, the contract would not come into existence. Where thus the parties treat that the
payment or advance is a vital element in the bargain and the advance is paid only after the
offer is revoked, there is no contract to be enforced.

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Sundarabayamma vs. Venkateswara & Co.

In a contract for the sale of goods a stipulation as to the time of delivery would be treated as a
condition because punctual delivery is necessary for merchants to fulfill their commitments
to their customers.
Bowes vs. Shand
There was a stipulation for shipping rice in a particular month. When this was not done, it
was held that there was breach of condition of the contract. When a condition of the contract
is broken the buyer can reject the goods and repudiate the contract.
Express stipulation as to time must be held to be of essence of contract and not a mere
warranty, even if the time was further extended by mutual consent of parties. Thus where
time is considered to be essence of the contract the extended date itself becomes a condition
and the essence of the contract.
Some stipulations in a contract of sale are not essential to its main purpose but are collateral
to it. The breach of such stipulation gives rise to a claim for damages but does not enable the
buyer to reject the goods. Such a stipulation is a warranty.
The essential distinction between a condition and warranty is that the breach of the former at
the stage of agreement entitles the buyer to put an end to the contract while the breach of
warranty only gives rise to a claim for damages.
Bettini vs. Gye
There was a contract by a musician with the Director of an opera to sing at a concert in
London. The musician agreed that he would be in London for rehearsals six days before the
commencement of the performance. He arrived only two days prior to the date fixed for the
performance. The Director wanted to put an end to the contract. His right to do so would
depend upon whether the stipulation was a condition or a warranty. It was held that it was not
a term essential to the main purpose of the contract and was, therefore, only a warranty. The
Director could not therefore terminate the contract. He could only recover damages for
breach of the warranty.

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Shanklin Pier Ltd. vs. Detel Products Ltd.

The respondents expressly warranted to the owners of a pier that their paint would last have a
life of 7 to 10 years; on the strength of that representation, the appellants directed their
contractors to buy and use the paints of the respondents. The paints, however, proved to be a
failure and it was held that the representation was a warranty. It was further held that “the
consideration for the warranty was that the appellants were entitled to recover da damages for
the breach of the express warranty, although the contract of sale was between the respondents
and the contractors”.
Ingham vs. Emes
A hair dresser applied a particular hair dye to a customer. She developed as a result
dermatitis. She however knew that she had a particular allergy to that hair-dye and the fact
was not disclosed to the hair dresser. It was held in the circumstances, “there is an implied
term in the contract that the materials used in the preparation of the dye were reasonably fit,
for the purpose for which they were required. The implied warranty extends only to the
dyeing of the hair of normal persons who had successfully passed the test…………”
WHEN CONDITION TO BE TREATED AS WARRANTY
Section 13 of the Sales of Goods Act, 1930, provides that breach of a condition is treated as a
breach of warranty in the following cases:
a) When the buyer waiver the condition or elects to treat it as a breach of warranty and
not as a ground for treating the contract as repudiated; or
b) When the contract is not severable and the buyer has accepted the goods or part
thereof.

When the contract of sale is not severable and the buyer has accepted the goods or part
thereof, the breach of condition has got to be treated as a breach of warranty. The idea behind
the provision is that when the buyer has a choice of either accepting or rejecting the goods
and he chooses to accept them, his right of rejection can no more be exercised.

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IMPLIED CONDITIONS AND WARRANTIES

Parties may expressly provide any conditions and warranties in their contract. Apart from
what may be provided by the parties for the contract, certain conditions and warranties, as
provided in Sections 14 to 17, are impliedly there in every contract of sale of goods. The
implied conditions and warranties provided in the Act are binding in every contract of sale
unless they are inconsistent with any express conditions and warranties agreed to by the
parties.
IMPLIED CONDITIONS
1. Implied Conditions as to Title
Section 14(a) of the Act provides that “in a contract of sale, unless the circumstances of the
contract are such as to show a different intention, there is an implied condition on the part of
the seller that, in the case of a sale, he has a right to sell the goods and that, in the case of an
agreement to sell, he will have a right to sell the goods at the time when the property is to
pass”.
Thus the law implies a condition that the seller has a right to sell the goods agreed to be sold.
Mathew Varkey vs. T.C. Abraham
Where the plaintiff purchaser claimed damages for breach of condition as to the title of the
car sold by the defendant alleged to be stolen and seized by the police, the claim for damages
cannot be sustained in the absence of proof and pleading of loss of title by the plaintiff owing
to seizure of car by police.
2. Correspondence between Sample and Goods supplied
There is a condition that the goods agreed to be supplied should correspond with the
description given by the seller and accepted by the buyer. Even if a sample of goods was
shown, there is a condition that the bulk of goods should not only correspond with the sample
but should also correspond with the description. Further, when the seller ordinarily deals in
goods of that description a condition is implied that the goods shall be of merchantable
quality, i.e., fit to be bought even for the purpose of selling it again, so that a reasonable man
would after examining the goods accept them as conforming to the description given of it.

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Sec 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; and, if the sale is by sample as
well as by description, it is not sufficient that the bulk of the goods corresponds with the
sample if the goods do not also correspond with the description.
Varley vs. Whipp
In this case, a sale was made of a second-hand reaping machine, which the defendant had not
seen and which was represented to be two months old and nearly new, and cut only 50 or 60
acres and it was found that the machine was an old one repaired, it was held that there was a
breach of a condition and the machine could be returned.
3. Condition as to Quality or Fitness
When the buyer relies upon the seller’s skill or judgment in buying goods for a particular
purpose specified by him and the goods are such as are sold by the seller in the course of his
business, a condition is implied that the goods should be fit for the particular purpose
mentioned by the buyer.
Ranbir Singh vs. Hindustan General Electric Supply Corporation Ltd.
In this case, the plaintiff, a layman, purchases a Saba radio set from the defendant without
examining it and the radio gave trouble from the very beginning , it was held that a suit for
the refund of the price would lie both against the manufacturer and the dealer.
Priest vs. Last
A hot water bottle was purchased from the defendant, a retail chemist, and it was found that
the bottle could stand only hot but not boiling water. It burst and scalded the plaintiff’s wife.
It was held that the seller was responsible for damages.
Myers & Co. vs. Brent Cross Service Co.
In this case, repairer purchased from the manufacturers six connecting rods, and fitted them
to the plaintiff’s motor car and on account of a latent defect not detectable by ordinary
diligence or skill, the rod broke causing damages to the engine and the court held that the
implied warranty of fitness also applied to contracts for repairs.

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It should, however, be pointed out that this condition as regards fitness would apply only
under normal circumstances. If an article supplied is found unfit because of some
abnormality or idiosyncrasy of the buyers, the seller will not be liable unless such
abnormality was made known to the seller.
Griffiths vs. Peter Conway Ltd.
The plaintiff ordered a tweed coat of the defendant and found that after wearing the same she
developed dermatitis owing to some abnormality in her skin and the court held that the
warranty had not been broken.
The proviso to Sec 16(1) states: “Provided that, in the case of a contract for the sale of a
specified article under its patent or other trade name, there is no implied condition as to
fitness for any particular purpose”.
Chanter vs. Hopkins
The buyer wrote and said “send me your patent smoke consuming furnace for fitting up my
brewery”. It was found that the furnace supplied was not fit for the purpose. It was held that
the purchase was of a defined and well-known type of furnace and so the sellers were not
liable.
4. Condition as to Merchantability
For application of the condition that the goods shall be of merchantable quality, two
requirements are to be satisfied:
a) The goods should have been bought by description; and
b) From the seller who deals in goods of the description.

Peer Mohammed vs. Dalooram

In this case, black yarn was purchased and the same was found damaged by the white ants, it
was held that this condition as regards ‘merchantability’ was broken.
Frost vs. Aylesbury Dairy Co.
In this case, milk was supplied and instituted a suit for damages on the ground that the milk
contained typhoid germs as a result of which his wife contracted typhoid fever and died and

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he had to incur medical expenses and was put to loss of services and funeral expenses, the
court held that the company was responsible for the damage.
Chaproniere vs. Mason
In this case, where a bun sold, contained a piece of stone, with the result that the purchaser’s
teeth were broken in eating the bun, the seller was held liable.
5. Implied Condition as to Sale by Sample
There is further an implied condition as per Sec 17 of the Act, that where goods are
purchased by sample the bulk shall correspond with the sample.
CAVEAT EMPTOR
Caveat emptor means ‘Purchaser, beware’. When a person enters into a contract for the
purchase of goods, this maxim comes into operation and the buyer will be obliged to fulfill
the contract even if he has made any mistake in assessing the quality of the goods which he is
buying. The maxim, however, has certain important exceptions: The law implies certain
conditions and warranties on the part of the seller so that the purchaser can rely upon them
and escape the results of this maxim. Thus, there is an implied condition as to title. If it is
found that the seller had no title, the buyer can recover the price and even claim damages.
Rowland vs. Divall
It was found that the seller of a motor car had no title and the buyer had to surrender
possession of the car to the true owner after making use of it for some months. It was held
that the buyer was entitled to recover the full price, which he had paid. The maxim caveat
emptor will have no application to such a case because there is an implied condition that the
seller has title to the goods sold by him.
So far as the quality of the goods is concerned, there is an implied condition that the goods
should correspond to the description. This condition is implied even if a sample was shown.
In such a case even if the goods correspond to the sample, the buyer can reject them if they
do not correspond to the description. Further, if the seller is a person who deals in goods of
that description, it is also an implied condition that the goods should be of merchantable
quality.

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The buyer may require the goods for a particular purpose. In such a case if the goods turned
out to be unfit for that particular purpose he cannot ordinarily reject the goods. The maxim
caveat emptor would apply. If the buyer makes known to the seller the specific purpose and
relies upon the seller’s skill and judgment in selecting the goods for that purpose and it is in
the course of the seller’s business to supply such goods, a condition is implied that the goods
supplied shall be reasonably fit for that purpose. No doubt if the sale relates to a specified
article under a well-known patent or trade name there would be no such implied condition as
to fitness.
IMPLIED WARRANTIES
The warranties which are implied are the following:
1. Warranty of Quiet Enjoyment
According to Section 14(b), in a contract of sale unless the circumstances of the case show
different intention, there is an implied warranty that the buyer shall have and enjoy
possession of the goods. It means that the buyer’s possession of the goods will not be
disturbed.
Niblett vs. Confectioners’ Materials Co.
The sellers had consigned tins of condensed milk bearing the labels “Nissly Brand” which
was the trade mark of one “Nestle Co”. Since the sellers had no right to sell the goods with
such labels, the buyers were not allowed to have the possession of the goods unless the labels
had been removed. The buyers having received the goods without labels, suffered loss as the
same had to be sold for a lower price. It was held that there was not only a breach of the
condition that the seller has a right to sell the goods, there was also a breach of implied
warranty of quite possession and, therefore, the sellers were bound to compensate the buyers.
2. Warranty of Freedom from Encumbrance
According to Section 14(c), there is an implied warranty that the goods sold shall be free
from any charge or encumbrance in favour of any third party. If there is a charge or
encumbrance on the goods sold and the buyer has to discharge the same, he is entitled to get
compensation for the same from the seller. If the charge or encumbrance of the goods is

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known to the buyer at the time of the contract of sale, he becomes bound by the same and
does not have any right to claim compensation for discharging the same.
RULE AS TO PASSING OFF PROPERTY
TRANSFER OF PROPERTY
The expression ‘Sale of Goods’ is a composite expression consisting of a bargain or contract
of sale, payment or promise of payment of price, delivery of goods and actual passing of title.
The essence of sale is thus the transfer of title to the goods for the price paid or to be paid.
Sometimes the property or the ownership in the goods may be transferred when the contract
has been entered into and sometimes at a later time. For the purpose of transfer of property,
goods may be classified into two classes, i.e., specific and unascertained.
TRANSFER OF PROPERTY IN ASCERTAINED GOODS
According to Section 18 of the Act, where there is 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. Goods are said to be “ascertained” goods when they are identified and agreed
upon between the parties to the sale. When this is done at the time the contract is made, the
contract would be in respect of specified or ascertained.
Section 19 of the Act provides that in the case of contract for the sale of specific goods the
transfer of ownership from the seller t the buyer would be effected according to the intention
of the parties. The intention may be expressed or implied from the terms of the contract, the
conduct of the parties and the other circumstances of the case. The relevant provisions as to
ascertained goods may be given below:
1. Property passes at the time of the Contract itself
When specific goods are in the deliverable state, the property passes to the buyer at the time
of the contract itself. When the goods are in a deliverable state they are in such a state that
the buyer is bound to take delivery of them. (Sec. 20)
2. Circumstances delaying Passing of Property to a point of time beyond the date of the
Contract

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(i) Goods not in Deliverable State

When the goods, though specific, are not in deliverable state, the property therein does not
pass at the time of the contract. The seller should do what is necessary for putting them into a
deliverable state and give notice of it to the buyer before property can pass to the buyer.
(Sec 21)
Acraman vs. Maurice
There was a contract for the sale of timber. The buyer marked out those parts of the certain
oak trees, which he had selected. According to the usage of the trade the seller had to sever
the portions rejected. Before this was done, the seller became bankrupt. It was held that the
buyer could not lop off the rejected portions and carry away the timber. This was because
until the seller had severed the rejected portions, the goods could not said to be in a
deliverable state and so property therein could not pass to the buyer.
(ii) Price of goods to be determined by weighing etc
Though the goods are ascertained and in a deliverable state, property cannot pass until the
price of the lot sold has been ascertained. At the time of the contract only the rate per unit of
goods may have been fixed. Unless this at least is done there would no valid contract at all
since one of the essentials of a sale is the price. The actual value of the goods at the rate
agreed upon may have to be determined by measuring or weighing or testing the goods. Until
the seller does this and gives notice of it to the buyer, property in the goods cannot pass to the
buyer. (Sec 22)
Zagury vs. Furnell
In this case, some bales of goat skin were sold at 57 shillings per dozen. Before the skins
were counted, they were destroyed by fire. It was held that the loss was to be borne by the
seller himself as the property could not pass to the buyer before the skins were counted and
their actual price was ascertained.
NEMO DAT QUOD NON HABET
Ordinarily a buyer cannot get a better title than what the seller had. Nemo dat quod non habet
is the maxim embodied in Section 27 of the Sale of Goods Act. It means “no one can give

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that which he does not have”. A buyer of goods can acquire no better title to the goods than
what the seller had. This is the general rule. However, Section 27 recognises certain
exception to this rule. Following are some of the exceptions:
1. Sale by a Mercantile Agent without actual authority to sell
Section 2 defines a mercantile agent. He is one who has authority to sell and buy goods or
raise money on their security in the customary course of business as such agent. A mercantile
agent can confer a good title upon the seller even when he has no actual authority to sell in
certain circumstances. The buyer gets a valid title binding upon the true owner when the
following conditions are satisfied:
1) The purchase should be from a mercantile agent.
2) The seller (mercantile agent) should be in possession of the goods or documents of
title thereto.
3) The seller should have such possession with the consent of the true owner.
4) The sale should be made in the ordinary course of business of the seller.
5) The buyer should act in good faith.
6) The buyer should not have at the time of the transaction notice of the seller’s want of
authority to sell.

When these conditions are satisfied the buyer gets a good title to the property. When any of
these conditions is not satisfied the buyer does not get a valid title and the sale will not bind
the principal or the mercantile agent.
2. Sale by one of several Joint Owners
Suppose A, B and C are the joint owners of certain goods. A remains in sole possession of
the goods with the consent of B and C. though A may have no authority to sell the goods, if
he does so, he can give a good title to the buyer. Of course, the buyer should buy in good
faith without having notice that the seller had no authority to sell. If he is a bona fide
purchaser without such notice he acquires a good title. (S. 28)

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This section has been applied to the case of a Hindu Joint family. Where a cow was owned
by three persons and was left in the possession of one of them, a bona fide purchaser of the
cow from the latter gets a good title to it.
3. Person with Voidable Title conferring a valid title
A is in possession of goods having obtained them from B under a contract with him. Suppose
the contract with B is vitiated by fraud, coercion or undue influence. In such a case B rescind
the contract and recover his goods. Before he does so, suppose A sells the goods to C. If C is
a bona fide purchaser who had no notice of A’s defect in title, he can acquire a good title to
the goods. This means that C has acquired a better title to the goods than what A had. (S. 29)
There seems to be a significant difference between the English Law and the Indian Law on
this point. While the English Act uses the words “when the sellers of goods have a voidable
title thereto”, the Indian Act uses the words “where the seller has obtained ‘possession’ under
a voidable contract. The Indian Law thus makes possession of the goods on the part of the
seller absolutely necessary.
4. Transfer by Seller in Possession after sale
When A sells goods to B, he should deliver possession to B. Suppose A neglects to take
possession and A continues in possession of the goods. If A sells or pledges the goods to C, a
good title can be claimed by C provided he acted in good faith without notice of the prior
sale. [S. 30(1)]
This section does not require that the seller must be in actual physical possession of the
goods. It is enough that he should have such control over the goods as to transfer possession
by making over the documents of title.
5. Transfer by Buyer in Possession before actual sale or payment of full price
Suppose A agrees to buy goods from B and takes delivery before the actual sale is effected.
In such a case he has no title to the goods. Even if a sale is effected but the price is not paid,
there would be a defect in the buyer’s title since the goods would be subject to the vendor’s
lien for unpaid purchase money. In either of these cases if A sells the goods he would be

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doing so without title or with a defective title. Still the buyer acquires a good title provided
he receives the good faith without notice of the rights of the original seller. [S. 30(2)]
This section is designed to protect an innocent purchaser who has received the property in
good faith and without notice of lien or other right of the original seller in respect of the
goods. “It is based on public policy and the larger interests of society”.
UNPAID VENDOR
Section 45 of the Act defines the term “Unpaid Seller”. An unpaid vendor is one who has not
received full payment of the price. An unpaid vendor has the following rights:
1) A lien in respect of the unpaid price. (S. 47)
2) A right of stoppage in transit. (S. 50)
3) A right of re-sale (S. 54)

1. Unpaid Vendor’s Lien

A vendor of goods requires protection when he has parted with ownership of the goods in
favour of the buyer but has not yet received the price of the goods. The law protects him by
conceding to him the right of lien. A lien is a right to detain goods in one’s custody until
some claim of the holder of the lien is satisfied. The unpaid vendor’s lien entitles him to
retain the goods sold until the price is paid.
The unpaid vendor’s lien arises in the following circumstances:
i. The property in the goods should have passed to the buyer;
ii. The price or part of it should remain unpaid.
iii. There should be no stipulation for supply of goods on credit.

Sparatali vs. Benecke

In this case, goods were sold “to be paid for in cash in one month less 5 per cent discount”,
the transaction was held to be one of a sale not for cash but on a month’s credit. If there was
any such stipulation the period for giving credit was granted should have expired. The
stipulation for giving credit may be ignored when the buyer becomes insolvent.
The unpaid vendor’s lien is subject to the following limitations:

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i. It cannot be exercised when the vendor has parted with the possession of the goods.
Possession is not lost simply because the seller is holding the goods as a bailee or
agent of the buyer.
ii. Delivery of the goods to a carrier for transmission to the buyer without the seller
reserving to himself the right of disposal of the goods causes a loss of the lien.
iii. Unpaid vendor’s lien is lost by waiver, i.e., by a contact between the buyer and the
seller, express or implied, by which the seller is not to have the right of lien.
iv. The lien cannot be exercised unless there is unpaid price.

2. Stoppage in Transit
Section 50 deals with the right of stoppage in transit. Goods are said to be in transit when
they have been dispatched by the seller through a carrier for transmission to the buyer but
have not yet been taken delivery of by the buyer or his agent. The transit ends if the goods
are delivered to the buyer even before the goods arrive at the appointed destination. It is at an
end also if the carrier acknowledges to the buyer that he is holding the goods on behalf of the
buyer even though actual delivery to the buyer is not effected.
i. The buyer should have become insolvent. Mere non-payment of price is not sufficient
to exercise this right.
ii. The goods should be in transit i.e., they should be in the hands of a middleman. The
middleman is usually the carrier or other bailee to whom they are delivered for
purpose of transmission to the buyer. The duration of transit is defined by Section 51.
iii. The seller should be unpaid. He is regarded as unpaid when he has not received the
whole price stipulated in respect of the transaction.

When these conditions are satisfied the unpaid vendor can exercise the right of stoppage of
goods in transit.
Effect of Stoppage in Transit
Two modes of effecting stoppage in transit are mentioned in Section 52 of the Act.
(i) Taking Actual Possession

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When the seller regains actual possession, stoppage in transit is effectively brought about.
(ii) By the Seller giving notice of his claim to the Middleman having possession
The seller may give notice to the middleman or to the principal of the middleman. When it is
given to the principal, the notice would be effective only when it has been given in time to
enable the principal to instruct his servant concerned not to deliver the goods to the buyer.
3. Right of Re-sale
One of the remedies of the unpaid seller is to re-sell at the buyer’s risk. That is, the loss on
the re-sale can be recovered from the defaulting buyer. This right arises only when the
property in the goods has passed to the buyer. If the property in the goods has not passed to
the buyer, the seller’s remedy is to sue for damages.
REMEDIES AVAILABLE TO SELLER AND BUYER
Suite for Repudiation of contract before due date/anticipatory breach
According to section 60, in case where either buyer or seller repudiates the contract before
the due date or in other words refuses before the due date or in other words refuses before the
due date to perform the terms of the contract on the due date, the other party has two options.
First, wait for the due date and after the nonperformance by the other party sue him for
damages. Second, sue immediately without waiting for the actual nonperformance of the
terms of the contract.
In Hochster vs. De La Tour (1853)
The service of the plaintiff was to start from1st June. But the defendant informed on 11 th May
that he does not require the services anymore. The court held that the plaintiff is entitled to
sue for damages before 1st June.
Interest by way of damages and Special Damages
The section 61 vests the right to recover interest or special damages where law interest or
special damages may be recoverable or in the case where recovery of the money paid where
the consideration for the payment of it has failed has to be made.
The court may award interest at the rate which it deems reasonable and fit to the seller for
the amount of price from the date of the tender of the goods or from the date on which the

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price was payable or to the buyer for the refund of price in case of breach of contract from
the date the payment was made.
AUCTION SALES
An auction sale is a public sale. The goods are sold to all members of the public at large who
are assembled in on place for the auction. Such interested buyers are the bidders.
The price they are offering for the goods is the bid. And the goods will be sold to the bidder
with the highest bid.
The person carrying out the auction sale is the auctioneer. He is the agent of the seller. So all
the rules of the la of agency apply to him.
But if an auctioneer wishes to sell his own property as the principal he can do so. And he
need not disclose this fact, it is not a requirement under the law.
As we saw previously, the rules regarding an auction sale are found in the Sale of Goods Act.
Section 64 of the Act specifically deals with the rules governing an suction sale. Let us take a
brief look.
Goods Sold in Lots
In an auction sale, there can be many goods up for sale of many kinds. If some particular
goods are put up for sale in a lot, then each such lot will be considered a separate subject of a
separate contract of sale. So each lit ill prima facie be the subject of its own contract of sale.
Completion of Sale
The sale is complete when the auctioneer says it is complete. This can be done by auction
also-like the falling of the hammer, or any such customary auction. Till the auctioneer does
not announce the completion of the sale the prospective buyers can keep bidding.
Seller may Reserve Right to Bid
The seller may reserve his right to bid. To do so he must expressly reserve such right to bid.
In this case, the seller on any person on his behalf can bid at the auction.

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Sale Not Notified

If the seller has not notified of his right to bid he may not do so under any circumstances.
Then neither the seller nor any person on his behalf can bid at the auction. If done then it will
be unlawful.
The auctioneer also cannot accept such bids from the seller or any other person on his behalf.
And any sale that contravenes this rule is to be treated as fraudulent by the buyer.
Reserve Price
An auction sale may be subject to a reserve price or an upset price. This means the auctioneer
will not sell the goods for any price below the said reserve price.
Pretend Bidding
But if the seller or any other person appointed by him employs pretend bidding to raise the
price of the goods, the sale is voidable at the option of the buyer. That means the buyer can
choose to honor the contract or he can choose to void it.
No Credit
The auctioneer cannot sell the goods on credit as per his wishes. He cannot accept a bill of
exchange either unless the seller is expressly fine with it.

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UNIT-V AGENCY
DEFINITION OF CONTRACT OF AGENCY – CREATION OF AGENCY – KINDS
OF AGENCY
DEFINITION OF “AGENT”
“Agent” is defined in Section 182 of the Act as follows:
Sec 182: An “agent” is a person employed to do any act for another, or to represent another
in dealings with third person. The person for whom such act is done, or who is so
represented, is called the “principal”.
CREATION OF AGENCY
In the words of Desai J of the Supreme Court: “The relation of agency arises whenever one
person called the agent has authority to act on behalf of another called the principal and
consents so to act. The relationship has its genesis in a contract”.
The relationship of principal and agent may be created in any of the following ways:
1) By express appointment;
2) By the conduct or situation of the parties;
3) By necessity of the case;
4) By subsequent ratification of an unauthorized act.

1) By Express Appointment
Any person who is competent to contract and who is of sound mind may appoint an agent.
The appointment may be expressed in writing or it may be oral.
Delhi Electric Supply Undertaking vs. Basanti Devi
Under the Salary Saving Scheme adopted by the LIC of India, the employer when authorized
by the LIC to collect premium amount from the salary of an employee and forward it to the
LIC, becomes an agent of the employee for that purpose. Where such an employer failed in
forwarding the amount to the LIC and consequently the policy was in the state of lapse at the
time of the employee’s death, the National Commission under the Consumer Protection Act,
1986 directed the employer to pay the amount due to the employee under the policy. The

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Supreme Court did not approve this decision and directed to pay Rs. 25,000 as the costs of
the proceedings.
2) Implied Agencies
Implied agencies arise from the conduct, situation or relationship of parties. Whenever a
person places another in a situation in which that other is understood to represent or to act for
him, he becomes an implied agent.
Estoppel
One of the well-known illustrations of implied agency is agency by holding out or estoppel.
Pickering vs. Busk
A purchaser of hemp allowed it to remain in the custody of the broker through whom he had
bought it. The broker’s ordinary business was to buy and sell hemp. He sold the hemp and
received the price. The Court held that the sale and receipt of money were binding on the
principal.
A recent illustration is a decision of the Orissa High Court:
A landlord appointed a tahsildar to manage his agricultural lands. He let out the lands to
tenant in certain terms.
An authority of this kind was not given to him and, therefore, the question was whether the
tenancy agreements would bind the landlord. It was held that the landlord had, by making the
tahsildar incharge of the lands, created an appearance of authority which, according to the
prevailing usages, included the right to sue.
Husband and Wife
A wife living with her husband has the implied authority of the husband to buy articles of
household necessity. A wife’s implied authority to bind her husband by her credit purchases
is, however, subject to some important limitations. In the first place, it is necessary that the
husband and wife should be living together. Secondly, they must be living together in a
domestic establishment of their own. “The mere fact of marriage does not make the wife an
agent in law of her husband”; nor the fact of living together is sufficient.

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Debenham vs. Mellon

The defendant was the manager of a hotel, where his wife acted as the manageress. They
lived together in the same hotel, but had no domestic establishment of their own. The wife
incurred with a tradesman a debt for clothes, payment for which was demanded from the
husband. But he was not held liable, the court saying that the mere habit of cohabitation did
not give rise to presumption of agency, unless it was in a domestic establishment.
Thirdly, the wife can run her husband into debt only for necessaries. Lastly, the husband will
not be liable if he makes a reasonable allowance to his wife for her needs.
Girdhari Lal vs. Crawford
The Allahabad High Court held that the husband will not be liable even if the fact of
allowance is not known to the seller.
The husband can negative liability by proving:
i. That he expressly warned the tradesman not to supply goods no credit;
ii. That the wife was already supplied with sufficiency of articles in question;
iii. That the wife was supplied with sufficient means for the purpose of buying the
articles without the husband’s credit.

Husband not Implied Agent of Wife

A husband has no original, inherent or implied power to act as an agent for his wife. His
authority can arise from an appointment as agent, expressly or impliedly, or by ratification by
his wife of acts done by him on her behalf.
3. Agency of Necessity
The reason for the agency of necessity has been thus stated by Story: “Although the powers
of the agents are, ordinarily, limited to particular acts; yet… extraordinary emergencies may
arise, in which a person, who is an agent, may, from the necessities of the case, be justified in
assuming extraordinary powers; and… his acts fairly done, under such circumstances, will be
binding upon his principal”.

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Originated with Marine Adventures

The principle of agency of necessity was first applied to cases of marine adventures.
Unforeseen emergencies may arise in the course of a marine adventure which may threaten
the goods and the master of the ship is not able to communicate with the principal. In such
circumstances the master gets the power and it is also his duty to sell the goods in order to
save their value. The sale will bind the cargo owner. The same principle was later applied to
carriers by land.
Sims & Co. vs. Midland Rly. Co.
A quality of butter was consigned with the defendant railway company. It was delayed in
transit was owing to the strike. The goods being perishable the company sold them. The sale
was held binding on the owner. The company’s action was justified by the necessities of the
case and it was not practicable to get instructions from the owner.
Great Northern Rly. Co. vs. Swafield
A horse, having been consigned with the defendant company, was not received by anyone at
the destination. The company had no arrangement of its own to keep animals and, therefore,
placed the horse with a livery stable-keeper. The company’s action was held to be reasonably
necessary in the circumstances and, therefore, the company was allowed to recover the
charges of stable-keeper.
Conditions for Application of the Principle
The conditions which enable a person to act as an agent of necessity of another have been
stated by McCardie J in Prager vs. Blastpiel Stamp & Heacock Ltd.
(i) Inability to Communicate with Principal
In the first place, it is of course clear that the agency of necessity does not arise if the agent
can communicate with his principal. The basis of this requirement is that if the principal’s
directions can be obtained the agent should ask it before acting.
Gwilliam vs. Twist
While the defendant’s omnibus was being driven by their servant, a policeman, thinking that
the driver was drunk, ordered him to discontinue driving, the omnibus being then only a

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quarter of a mile from the defendants’ yard. The driver and the conductor then authorized a
person who happened to be standing by to drive the omnibus home. That person through his
negligence injured the plaintiff. The plaintiff’s action against the owners failed, because the
defendants might have been easily communicated with and, therefore, there was no necessity
for their servants to employ another person.
(ii) Act should be Reasonably Necessary
In the next place, it is essential for the agent to prove that the sale was necessary.
Sacha vs. Milkos
The defendant allowed the plaintiff to store certain furniture in his house free of charge.
Thereafter, they lost touch with each other. Some three years later, the defendant needed the
space taken up by the furniture and wrote two letters to him at an address supplied by his
bank, but received no reply. His attempt to reach the plaintiff by telephone also failed. He
then sold the furniture. Six years later the plaintiff claimed the furniture. It was held that
those facts gave rise to no agency of necessity.
Munro vs. Willmott
The plaintiff left her car in the defendant’s yard without payment. The storage was intended
to be for a short time, but the car remained there for several years. It became an obstacle
owing to the conversion of the yard into a garage. After unsuccessful efforts to communicate
with the plaintiff the car was repaired and sold. The court held that the facts showed no
emergency which would have entitled the defendant to sell as an agent of necessity.
(iii) Bona Fide in the Interest of Party Concerned
In the third place, an alleged agent of necessity must satisfy the court that he was acting bona
fide in the interest of the parties concerned.
Tronson vs. Dent
The Privy Council plainly indicated that bona fide was essential in addition to actual
necessity.

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KINDS OF AGENCY
a) General Agent
b) Special Agent
c) Mercantile Agent

a) General Agent
The principal appoints a general agent to do anything within his authority in all transactions
or in all transactions relating to a specific trade, business or matter. The principal grants the
authority to the agent to act on his behalf.
It may be assumed by the third party that such an agent has the authority to do all that is
usual for a general agent to do. Any private restrictions on the agents’s authority do not affect
the third party.
b) Special Agent
He is the one who is appointed or employed to do or perform only a specific act, task or
function. Outside of this special act, task or function, he has no authority or power. In this
case, the third party cannot assume that the agent has unlimited authority. Thus, any act of
the agent outside his authority cannot bind the principal.
c) Mercantile Agent
As per section 2(9) of the Sale of goods Act, 1930, a mercantile agent is a person who in the
customary course of business has an agent’s authority either to sell or consign the goods for
the purpose of sale or to buy goods or to raise money on the security of goods. Thus, this
definition covers the following:
i) Factors
A factor is a person who is appointed to sell goods which are put in his possession or to buy
goods for his principal. He is the evident owner of the goods in his custody and can this sell
them in his own name and receive payment for them.
He also has an insurable interest in the goods in his custody and a general lien regarding any
claim that he may have to arise out of the agency.

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ii) Brokers
A broker is a person whose business is to make contracts with the other parties for the sale
and purchase of goods or securities for brokerage.
He does not have the possession of the goods and acts in the name of the principal. Also, he
has no lien over goods because he has no possession of goods.
iii) Del Credere Agent
A Del credere agent is a person who ensures or guarantees his principal that the creditors of
goods will pay for the goods they buy for extra remuneration. In the case of failure to pay by
the third party, he needs to pay the due amount to his principal.
iv) Bankers
The relation between a banker and a customer is basically that of a debtor and creditor.
However, when a banker buys or sells securities or collects cheque dividends, interests, bills
of exchange or promissory notes on behalf of his customer, he becomes the agent of his
customer. Thus, he has a general lien on all the securities in his possession regarding the
general balance due to him by the customer.
v) Partners
As per the Partnership Act, every partner is an agent as wellas the principal of every other
partner in a Partnership firm. Also, every partner is the agent of the firm for the business of
the firm.
vi) Auctioneers
An auctioneer is a person who sells the goods by auction. An auction is a process by which
goods are sold to the highest bidder in a public competition. He cannot warrant his
principal’s title to the goods.
He is the agent of the seller until the goods are auctioned or knocked down. However, after
the knockdown, he becomes the agent of the buyer. Also, he is evidence that the sale took
place.

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DISTINCTION BETWEEN AGENT AND SERVANT AND INDEPENDENT

CONTRACTOR
AGENT AND SERVANT
The distinction between an “agent” and a “servant” has been underlined by the Supreme
Court in Lakshminarayan Ram Gopal & Sons Ltd. vs. Government of Hyderabad. The main
points which have been emphasized are as follows:
1. An agent has the authority to act on behalf of his principal and to create contractual
relations between the principal and a third party. This kind of power is not generally
enjoyed by a servant.
2. “A principal has the right to direct what the agent has to do; but a master has not only
that right, but also the right to say how it is to done”. A servant acts under the direct
control and supervision of his master and is bound to conform to all reasonable orders
given to him in the course of his work.
3. The mode of remuneration is generally different. A servant is paid by way of salary or
wages, an agent receives commission on the basis of work done.
4. A master is liable for a wrongful act of his servant if it is committed in the course of
the servant’s employment. A principal is liable for his agent’s wrong done within the
“scope of authority”.
5. A servant usually serves only one master, but an agent may work for several
principals at the same time.

WHO MAY BE AN AGENT - KINDS OF AGENTS – AUTHORITY OF THE

DIFFERENT KINDS OF AGENTS – AUTHORITY OF AGENTS – OSTENSIBLE
AND EMERGENCY – DELEGATION OF AUTHORITY – DELEGATUS NON
POTEST DELEGARE – SUB AGENT – SUBSTITUTED AGENT
ESSENTIALS OF AGENCY
1. Principal should be Competent
The first requisite is that the principal should be competent to contract.

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Sec 183. Who may employ agent: Any person who is of the age of majority according to the
law to which he is subject, and who is of sound mind, may employ an agent.
It follows that a minor cannot appoint an agent. The appointment of an agent involves a
contract, and a minor’s agreement is void.
The principle that every person has the right to appoint an agent for any purpose does not
apply where the act to be performed is personal in character or when it is annexed to a public
office or to an office involving any fiduciary obligation.
2. Agent need not be Competent
Sec 184. Who may be an agent: As between the principal and third persons, any person may
become an agent, but no person who is not of the age of majority and of sound mind can
become an agent, so as to be responsible to his principal according to the provisions in that
behalf herein contained.
The agent need not be competent to contract. Section 184 lays down very clearly that “as
between the principal and third persons any person may become an agent”. Ordinarily, an
agent incurs no personal liability while contracting for his principal and, therefore, it is not
necessary that he should be competent to contract.
3. Consideration for Appointment not Necessary
Sec 185. Consideration not necessary: No consideration is necessary to create an agency.
Lastly, Section 185 provides that no consideration is necessary to create an agency.
Generally an agent is remunerated by way of commission for services rendered, but no
consideration is immediately necessary at the time of appointment.
KINDS OF AGENTS
Following are some of the kinds of agents:
1. Factor
The word ‘factor’ in India as in England means an agent entrusted with the possession of
goods for the purpose of selling them. “He is a mercantile agent whose ordinary course of
business is to dispose of goods, of which he is entrusted with the possession or control of his
principal”.

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2. Broker
A ‘broker’ also is a kind of mercantile agent. He is appointed to negotiate and make contracts
for the sale or purchase of property on behalf of his principal but is not given possession of
the goods.
3. Del Credere Agent
This is another ype of mercantile agent. In ordinary cases the only function of the agent is to
effect a contract between his principal and a third party. The agent then drops out. He can
neither sue on the contract nor he is held liable for the failure of the third party to perform.
But where an agent undertakes, on the payment of some extra commission, to be liable to the
principal for the failure of the third party to perform the contract, he is called des credere
agent and his extra commission for the guarantee is known as del credere commission.
Hastie vs. Couturier
The defendants acting as del credere agents sold the plaintiff’s goods which were supposed to
be on a voyage but which unknown to the parties had already been sold by the captain owing
to damage by heat. The buyer repudiated the contract and, therefore, the agents were sued for
the buyer’s failure to perform. The question was, “whether the defendants are responsible by
reason of their charging a del credere commission, though they have not guaranteed by
writing”. The court said that they were. “A higher reward is paid in consideration of their
taking greater care in sales to their customers and also for assuming a greater responsibility
for the solvency and performance of their contracts by their vendees. This is the main object
of reward being given to them. “Keeping this in view, the court held that del credere agent is
not a contract of guarantee, therefore, a writing is not necessary.
A del credere agent is, however, not liable to the buyer for any default on the part of his
principal. Nor is he liable for any disputes between the principal and the buyer relating to the
contract or sum due.
AGENT’S AUTHORITY
The acts of the agent within the scope of his authority bind the principal. Section 226 of the
Contract Act gives the statutory effect to the principle by declaring that “contracts entered

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into through an agent, and obligations arising from acts done by an agent, may be enforced in
the same manner, and will have the same legal consequences, as if the contracts had been
entered into and the acts done by the principal in person.
Illustrations
a) A buys goods from B, knowing that he is the agent for their sale, but not knowing
who is the principal. B’s principal is the person entitled to claim from A the price of
the goods, and A cannot, in a suit by the principal, set-off against that claim a debt
due to himself from B.
b) A, being B’s agent, with authority to receive money on his behalf, receives from C a
sum of money due to B. C is discharged of his obligation to pay the sum in question
to B.

It is necessary for this effect to follow that the agent must have done the act within the scope
of this authority. The authority of an agent means his capacity to bind the principal.
1. Actual Authority
Actual authority of an agent is the authority conferred on him by the principal. It is of two
kinds, namely, express or implied. Section 186 and 187 provides this.
Sec 186: The authority of an agent may be expressed or implied.
Sec 187: An authority is said to be express when it is given by words spoken or written. An
authority is said to be implied when it is inferred from the circumstances of the case, and
things spoken or written, or the ordinary course of dealing, may be accounted circumstances
of the case.
a) Express Authority
Where the authority is conferred by words, spoken or written, it is called express authority.
Hambro vs. Burnard
An agent was appointed to underwrite policies. He underwrote a policy which in fact
amounted to a guarantee of a company’s debts. He knew the precarious condition of the
company, but being interested in it, wanted to help it. The principal was held liable because

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the third party could not have known with what motive the agent was underwriting a
particular policy.
b) Implied Authority
“An authority is said to be implied when it is inferred from the circumstances of the case; and
things spoken or written or the ordinary course of dealing, may be accounted circumstances
of the case”.
Implied authority is an instance of real or actual authority for it is conferred upon the agent
by the conduct of the principal as interpreted in the circumstances of the case.
If P tells A that he is to act as manager, this is really a compendious way of stating that he is
to do all the acts as manager would ordinarily do. Those acts might well be termed as express
authority. However, it is often said that if an agent is placed in a certain position he has
implied authority to do all the acts a person in that position ordinarily does.
Ryan vs. Pilkington
An estate agent was appointed to find a purchaser for certain property. He accepted a deposit
from a prospective customer and misappropriated it. The principal was held liable, because
an estate agent has an implied authority to take a deposit. He cannot, however, receive
payment or give any warranty unless actually authorized.
SCOPE OF AUTHORITY
Thus the extent of an agent’s authority, whether express or implied, depends upon:
i. The nature of the act or business he is appointed to do;
ii. Things which are incidental to the business or are usually done in carrying it out;
iii. The usual customs and usages of the trade.

This is the essence of Section 188 which defines the extent of the agent’s authority in the
following words:
Sec 188: “An agent, an authority to do an act, has authority to do every lawful thing which is
necessary in order to do such an act.
An agent having an authority to carry on a business, has authority to do every lawful thing
necessary for the purpose, or usually done in the course, of conducting such business”.
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Dingle vs. Hare

An agent was authorized to sell artificial manure. He had no authority to give any warranty
about the goods. Yet he warranted to the buyer that the manure contained 30 per cent
phosphate of lime. The warranty turned out to be false and the principal was sued for its
breach. He was held liable, because it was usual in the artificial manure trade to give a
warranty of this kind.
Thus every agent has the implied authority to act according to the customs and usages of a
particular market or trade. The principal is bound by such usages even if he is unaware of
them. But the custom or usage must not be unlawful or unreasonable.
Robinson vs. Mollett
R authorized a broker M to purchase for him 50 tons of tallow. M supplied his own tallow as
there was a custom in his trade to buy large quantities of tallow in his own name and then to
allocate it to his principals. The House of Lords held the custom to be unreasonable. It made
M wholesaler rather than an agent. It also created a conflict between his duty to the principal
and his personal interest.
AUTHORITY OF SPECIAL AGENTS
a. Factor
A factor is a mercantile agent who is put in possession of the goods of his principal for sale.
He has the authority to sell them in his own name, to warrant them if it is usual to do so, to
fix the selling price and to receive payment.
b. Broker
A broker is a mercantile agent appointed to sell the goods of his principal but he is not given
possession thereof. He may sell the goods in his own name and may receive the payment. But
if he discloses the name of the principal, he cannot receive payment. He may act according to
the usual course of business except where a usage is unreasonable or unlawful. He may sell
on reasonable credit.

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c. Estate or House Agent

A house or estate agent is in a different position from a broker. Therefore, the parties do not
ordinarily contemplate that the agent should have the authority to complete the transaction in
such cases. That is why it has been held both in England and in India, that authority given to
a broker to negotiate a sale and find a purchaser, without furnishing him with all the terms
means ‘to find a man willing to become a purchaser and not to bind him and make him a
purchaser’.

Abdulla Ahmed vs. Animendra Kissen Mitter

The facts of the case were that an estate broker was appointed with an authority for one
month to negotiate the sale of a property on certain terms as to price and with which his
commission was also linked. Before the expiry of the one month he found a customer ready
and willing to purchase and communicated the fact to the principal. The principal terminated
the authority of the agent and directly entered into account with a nominee of the person
found by the agent. The agent claimed his commission. It was held that the agent having
negotiated the sale and secured a buyer who made a firm offer acquired the right to
commission on the basis of the preferred price subject to the condition that the buyer should
complete the transaction, and as this condition was fulfilled, the agent’s right to commission
became absolute and could not be affected by the circumstances that the principal for some
reason of his own sold the property at a lower price.
d. Auctioneer
An auctioneer is an agent to sell goods at a public auction. He, therefore, does not have the
authority to sell by private contract. He cannot sell on credit, or accept any payment other
than cash, or warrant the goods. He acts both for seller and buyer and, therefore, can sign the
contract for both.
e. Power of Attorney Holder
Except where a matter is required to be done personally, acts and statements of a power of
attorney are attributable to the principal. The principal was a non-resident landlord. He

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wanted to evict the tenant. The statement made by the attorney to the effect that his principal
was in personal need of the premises was held to be receivable in evidence for ordering
eviction.
f. Agent of Life Insurance Corporation
An agent of the Life Insurance Corporation did not perform his duty to deposit the premium
amount with LIC. It was held that LIC could not shirk its responsibility to pay the amount
assured under the policy.
OSTENSIBLE OR APPARENT AUTHORITY
The doctrine of ostensible authority is given in Section 237 of the Contract Act.
Sec 237: 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.
Illustration
A consigns goods to B for sale, and give him instructions not to sell under a fixed price. C
being ignorant of B’s instructions, enters into a contract with B to buy the good at a price
lower than the reserved price. A is bound by the contract.
The apparent authority of an agent is thus explained by Denning LJ: “Ostensible or apparent
authority is the authority of an agent as it appears to others. It often coincides with actual
authority. Thus, when the board of directors appoint one of their members to be a managing
director they invest him not only with implied authority, but also with ostensible authority to
do all such things as fall within the usual scope of that office. Other people who see him
acting as managing director are entitled to assume that he has the usual authority of a
managing director. But sometimes ostensible authority exceeds actual authority.
For instance, when the board appoints the managing director, they may expressly limit his
authority by saying he is not to order goods worth more than 500 pounds without sanction of
the board. In that case his actual authority is subject to the 500 ponds limitation, but his
ostensible authority includes all the usual authority of a managing director. The company is

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bound by his ostensible authority in his dealings with those who do not know of the
limitation. Thus, if he orders goods worth 1000 ponds, the company is bound to the other
party who does not know of the 500 pounds limitation”.
Watteau vs. Fenwick
The defendants had forbidden the manager of their hotel from buying cigars on credit. The
plaintiff gave cigars to the manager on credit, which were used in business. The manager’s
name appeared over the board, the plaintiff trusted him and had never heard of the
defendants. Being unable to recover the price from the manager, the plaintiff sued the
defendant. The court found that “cigars were ….such as would be naturally be supplied to
and dealt in such an establishment”. Wills J, therefore, held that “once it is established that
the defendant was the real principal, the ordinary doctrine as to principal and agent applied,
that the principal is liable for all the acts of the agent which are within the authority usually
confided to an agent of that character, notwithstanding limitations, as between the principal
and the agent, put upon that authority”.
Ishaq Abdul Karim vs. Madan Lal
In pursuance of an agreement the plaintiff dispatched a wagonload of potatoes to the
defendant. The latter refused to take delivery. The plaintiff then sent his agent to take
delivery and to sell them at the available price. The defendant offered to the agent a less sum
of money in full payment, which the agent accepted. The plaintiff received the money but
brought an action for the balance. It was held that the defendant could presume that the agent
who was sent to sell at the available price had the ostensible authority to settle with the
defendant at a less price.
Apparent Authority is Real Authority
The statement portrays the truth in Lord Ellenborough’s observation that “apparent authority
is the real authority”. Whether there is appearance of authority in a particular case depends
upon the facts of the case. An appearance of authority may, for example, arise from the
course of business. A well-known authority is Humbro vs. Burnard.

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Representation of Authority by Conduct

A representation of apparent authority has to emanate from some conduct of the principal.
There must be some conduct on his part which enabled the agent to occupy a position of
apparent authority. The representation which creates “apparent” authority may take a variety
of forms of which the commonest is representation by conduct, that is, by permitting the
agent to act in some way in the conduct of the principal’s business with other persons.
For example, a principal used to order goods from the plaintiff. He had a servant whom he
never authorized nor ever sent out for buying goods. The servant was dismissed and after that
on two occasions he bought goods from the plaintiff in the principal’s name. Each time the
principal paid the account in ignorance. He was held entitled to recover back the money, for
he had done nothing to enable his servant to acquire an appearance of authority.
Kannelles vs. Locke
The principal was held liable for the acts of a complete imposter. The plaintiff arrived at
night at a hotel. She was greeted by a man in the corridor. He booked a room for her and took
charge of their valuable articles and issued a receipt in the principal’s name. He disappeared
with the articles. The hotel-keeper was held liable because the imposter could not have
occupied that position of apparent authority without hotel-keeper’s negligence.
Panorama Development (Guildford) Ltd. Vs. Fidelis Furnishing Fabrics
The plaintiff ran a cars-on-hire business. The defendant company’s secretary hired cars from
the plaintiff ostensibly for the company’s business, telling him that the cars were wanted to
carry important customers of the company. He wrote on the company’s paper ordering the
cars, signing himself “Company Secretary”. In fact, he used the cars himself and not for the
company’s purposes. It was held that the secretary had ostensible authority to enter into
contracts for hiring cars for which the company must pay.
Continuance of Apparent Authority till Termination
An apparent authority once created continues to exist unless it is terminated by a notice to the
third party. It cannot be terminated or restricted privately.

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Agent’s Possession
The possession of servant or agent is that of his master or principal for all purposes. A suit
against servant or agent cannot be maintained on the basis of such possession. It is well
settled that the possession of the agent is the possession of the principal and in view of the
fiduciary relationship the defendant cannot be permitted to claim his own possession.
David Lyell vs. John Lawson Kennedy
The agent who was collecting the rents from the tenants on behalf of the owner and
depositing it in a separate earmarked account continued to do so even after the death of the
owner. After more than 12 years of the owner’s death his heir’s assignee brought the action
against the agent for possession and the agent defendant pleaded adverse possession and
limitation. The plaintiff succeeded in the first court. But the action was dismissed by the
Court of Appeal. The House of Lords reversed the decision of the Court of Appeal and
remarked, “For whom, and on whose behalf were those rents received after Ann Duncan’s
death? Not by the respondent for himself, or on his own behalf, anymore than during her
lifetime”.
AGENTS AUTHORITY IN EMERGENCY (S. 189)
Sec 189: An agent has an 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.
Illustrations
A consign provisions to B at Calcutta, with directions to send them immediately to C, at
Cuttack. B may sell the provisions at Calcutta, if they will not bear journey to Cuttack
without spoiling.
This section creates a special authority in emergency. An act done in the exercise of this
extended authority would bind the principal if the agent was not able to communicate with
his principal and that he acted in good faith in the interest of the parties concerned.

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WHERE AGENT EXCEEDS AUTHORITY

Where an agent exceeds his authority, actual or apparent, the principal is not bound by the
excess work, but where it is separable from the authorized work the principal is bound to that
extent (S. 227).
For example, an agent is authorized to insure a ship. He insures the ship as well as the goods
under separate policies. The principal is bound by the policy on the ship. If he had taken out
only one policy in excess of instructions, the principal would not have been bound.
Where the authorized work is not separable from the rest, the principal may repudiate the
whole of the transaction (S. 228).
For example, an agent is authorized to buy 500 sheep. He buys 500 sheep and 200 lambs for
one sum of 6000 rupees. The principal may repudiate the whole transaction.
EFFECT OF NOTICE TO AGENT
The effect of the provision is that notice given to or information obtained by an agent in all
the course of the business transacted by him on behalf of his principal, shall, as between the
principal and third parties have the same legal consequences as if it had been given to or
obtained by the principal.
LIABILITY FOR AGENT’S WRONGFUL ACTS (S. 238)
Section 238 of the Contract Act lays down the principle by which the liability of the principal
for the wrongful acts of the agent is to be determined.
Illustration
A, being B’s agent for the sale of goods, induces C to buy them by a misrepresentation,
which he was not authorized by B to make. The contract is voidable, as between B and C, at
the option of C.
To fix the principal with vicarious liability for the wrongs of his agent it is necessary that the
wrong must have been committed in the course of the principal’s business. Although the
particular act may not be authorized but if it is done in the course of carrying on the
authorized business, the principal is liable.

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1. MISREPRESENTATIONS AND FRAUDS

An agent appointed to sell his principal’s goods or property has often to make statement
concerning the nature and quality of the property and, in his enthusiasm to find a customer,
may make exaggerated statements. The law does not like to hold the principal liable for the
agent’s extravagant statement unless it finds some fault with the principal himself.
Fuller vs. Wilson
An estate agent stated to the purchaser that the house under sale was free from rates and
taxes. The principal was aware, but the agent was not, that the house was subject to taxes and
taxes were levied soon after the purchased the house. The principal would have been held
liable.
Briess vs. Wooley
A director of a company started negotiations for a contract without any authority and made
fraudulent misrepresentations. Subsequently he was authorized to complete the contract, but
did nothing to correct the misrepresentations. The company was held liable.
Cornfoot vs. Fowke
The plaintiff had employed an agent to let a house. The defendant was in contact with the
agent for a house. The defendant asked the agent: “if there was any objection to the house”,
to which he answered that there was not; the defendant entered into and signed the
agreement, but afterwards discovered that the adjoining house was a brothel, and on that
ground declined to fulfill the agreement. He claimed the right to avoid the agreement as there
was fraudulent concealment of a material fact. But he was held bound by the agreement.
There was no guilt in the principal because he neither knew nor had authorized the statement
to be made. There was no guilt in the agent because he did not know that there was a brothel.
This decision has been criticized. It should be the duty of the principal to apprise the agent of
the whole situation, otherwise he creates the risk of innocent misrepresentation being made
by the agent.
Despite criticism, the decision was followed in Armstrong vs. Strain.

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Armstrong vs. Strain

One Mr. Strain, a retired practitioner, “owned a bungalow in an area notoriously prone to
produce settlements because of the heavy clay sub soil. The bungalow has suffered severely
from this scourge and had already been underpinned three times”. He was naturally anxious
to dispose it off and entrusted it to his partners for this purpose. His partners arranged it with
another firm, which found Armstrong as buyer. The bungalow was described to be “in a very
nice condition” and one of the partners of the latter firm valued it at 2000 pounds for
mortgage purposes. The agents knew of the last underpinning but not of the two earlier ones.
Within two months of the transaction the bungalow collapsed finally. But Armstrong’s action
hold the principal liable in damages for the fraud failed. The court found no conscious
falsehood and, therefore, acquitted the principal “and the unfortunate Armstrong were left
with the ruins of a bungalow”.
2. AGENT’S TORTS
“One who chooses to do business through an agent may in certain situations be liable for a
tort committed by the agent. The doctrine of respondeat superior (let the superior answer)
will be applied to make the principal liable where the agents commits a tort while engaged in
the business of the principal, or, as it commonly said, when the tort is committed by the agent
while acting in the course of and within the scope of his agency”.
Lloyd vs. Grace Smith & Co.
Grace Smith & Co were a firm of solicitors of some repute and respectability. Mrs Lloyd, a
widow, being dissatisfied with the income of her two cottages, consulted the firm’s clerk,
who was incharge of the conveyancing business, as to how to improve the income. He
advised her to dispose of the cottages. He asked her to bring the title deeds which she did and
obtained her signature on two papers. He converted these papers into a sale deed to himself
and subsequently disposed of the property and misappropriated the proceeds. It was held
“that the firm were responsible for the fraud committed by their representative in the course
of his employment”.

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DUTIES OF AGENT
The following are the duties imposed by law upon every agent.
1. Duty to Execute Mandate
The first and foremost duty of every agent is to carry out the mandate of his principal. He
should perform the work which he has been appointed to do. Any failure in this respect
would make the agent absolutely liable for the principal’s loss.
Pannalal Jankidas vs. Mohanlal
A commission agent purchased goods for his principal and stored them in a godown pending
their dispatch. The agent was under instruction to insure them. He actually charged the
premium for insurance, but failed to insure the goods. The goods were lost in an explosion in
the Bombay harbor. The agent was held liable to compensate the principal for his minus the
amount received under the Bombay Explosion (Compensation) Ordinance, 1944, under
which the Government paid compensation up to fifty per cent in respect of the uninsured
merchandise lost in the explosion.
2. Duty to Follow Instructions or Customs (S. 211)
Section 211provides that an agent is bound to conduct the business of his principal according
to the directions given by the principal and to keep himself within the confines of his
authority.
Illustration
B, a broker, in whose business, it is not the custom to sell on credit , sells goods of A on
credit to C, whose credit at the time was very high. C, before payment, becomes insolvent. B
must make good the loss to A.
Lilley vs. Doubleday
An agent was instructed to warehouse his principal’s goods at a particular place. He placed a
part of them at a different warehouse which was equally safe. But the goods were destroyed
without negligence. The agent was held liable for the loss.

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3. Duty of Reasonable Care and Skill (S. 212)

Every agent is bound to carry on the business of agency with reasonable skill and care. The
standard of care and skill which an agent has to bestow depends upon the nature of his
profession. If the principal suffers any loss owing to the agent’s want of care or skill the
agent must compensate the principal for such loss.
Illustration
A, a merchant in Calcutta, has an agent, B, in London, to whom a sum of money is paid on
A’s account, with orders to remit. B retains the money for a considerable time. A, in
consequence of not receiving the money, becomes insolvent. B is liable for the money and
interest from the day on which it ought to have been paid, according to the usual rate, and for
any further direct loss – as e.g., by variation of rate of exchange – but not further.
Under Sec. 214, it is also the duty of an agent, in cases of difficulty, to use all reasonable
diligence of communicating with his principal, and in seeking to obtain his instructions.
4. Duty to Avoid Conflict of Interest
Under Section 215, if an agent deals on his own account in the business of the agency,
without first obtaining the consent of his principal and acquainting him with all material
circumstances which have come to his own knowledge on the subject, the principal may
repudiate the transaction, if the case shows, either that any material fact has been dishonestly
concealed from him by the agent, or that the dealings of the agent have been disadvantageous
to him.
Under Section 216, if an agent, without the knowledge of his principal, deals in the business
of the agency on his own account instead of on account of his principal, the principal is
entitled to claim from the agent any benefit which may have resulted to him from the
transaction.
5. Duty not to make Profit
Another aspect of this principle is the duty of the agent not to make any secret profit in the
business of agency. His relationship with the principal is of fiduciary nature and this requires
absolute good faith in the conduct of agency.

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6. Duty to Remit Sums (S. 218)

The agent is bound to pay to his principal all sums received on his account. The agent is,
however, entitled to deduct his lawful charges, but subject only to this right, the principal’s
money must be remitted to him even if it has been received in pursuance to a void or illegal
contract. The agent has to perform this duty even if his earnings for the principal flow out of
void or illegal transactions.
7. Duty to Maintain Accounts (S. 213)
Accounts are necessary for the proper performance of the agent’s other duties, for example,
the duty to remit sums to the principal.
8. Duty not to Delegate (S. 190)
Delegatus non potest delegare is a well-known maxim of the law of agency. The principal
chooses a particular agent because he has trust and confidence in his integrity and
competence. Ordinarily, therefore, the agent cannot further delegate the work which has been
delegated to him by his principal.
RIGHTS OF AGENT
1. Right of Remuneration (S. 219)
Every agent is entitled to his agreed remuneration, or if there is no agreement, to a reasonable
remuneration.
2. Right of Retainer (S. 217)
The agent has the right to retain his principal’s money until his claims, if any, in respect of
his remuneration or advances made or expenses incurred in conducting the business of
agency are paid. The right can be exercised on “any sums received on account of the
principal in the business of the agency”. He can retain only such money as in his possession.
3. Right of Lien (S. 221)
In addition to the above right of retainer, the “agent has the right to retain the goods, papers
and other property, whether movable or immovable, of the principal received by him, until
the amount due to himself for commission, disbursements and services in respect of the same
has been paid or accounted for to him”.

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The conditions of this right are:

i. The agent should be lawfully entitled to receive from the principal a sum of money by
way of commission earned or disbursements made or services rendered in the proper
execution of the business of agency.
ii. The property over which the lien is to be executed should belong to the principal and
it should have been received by the agent in his capacity and during the course of his
ordinary duties as agent.
iii. The agent has only a particular lien. A particular lien attaches only to that specific
subject-matter in respect of which the charges are due. No other property can be
retained.

Loss of Lien
The agent’s lien is lost in the following cases:
i. Lien, being a possessory right, is lost as soon as possession is lost. Possession is lost
when the agent delivers the goods to the principal himself or to a carrier for the
purpose of transmission to the principal. In the latter case, the agent cannot revive his
lien by stopping the goods in transit. But where the property has been delivered for a
special purpose, like safe custody, which is inconsistent with lien, the lien is not lost.
ii. The lien is lost, when the agent waives his right. Waiver may arise out of an
agreement express or implied or may be inferred from conduct inconsistent with the
right.
iii. The agent’s lien is subject to a contract to the contrary and, therefore, does not exist
where the agent has by his agreement with the principal excluded it.

4. Right to Indemnity (Ss. 222-223)

According to Section 222, the employer of an agent is bound to indemnify him against the
consequences of all lawful acts done by such agent in exercise of the authority conferred
upon him.

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The right to indemnity extends to all loses and expenses incurred by the agent in the conduct
of the business. The agent must have been damnified in the lawful conduct of the business of
agency.
Under Section 223, where one person employs another to do an act, and the agent does the
act in good faith, the employer is liable t indemnify the agent against the consequences of
that act, though it causes an injury to the rights of third persons.
Adamson vs. Jarvis
The plaintiff, an auctioneer, sold certain cattle on the instruction of the defendant. It
subsequently turned out that the livestock did not belong to the defendant, but to another
person, who made the auctioneer in his turn sued the defendant for indemnity for the loss he
had thus suffered by acting on the defendant’s direction. The court laid down that he would
be indemnified by the defendant.
Under Section 224, where one person employs another to do an act which is criminal, the
employer is not liable to the agent, either upon an express or an implied promise, to
indemnify him against the consequences of that act.
5. Right to Compensation (S. 225)
According to Section 225, the principal must make compensation to his agent in respect of
injury caused to such agent by the principal’s neglect or want of skill.
Thus every principal owes to his agent the duty of care not to expose him to unreasonable
risks.
Illustration
A employs B as a bricklayer in building a house, and puts up the scaffolding himself. The
scaffolding is unskillfully put up, and B is in consequence hurt. A must make compensation
to B.
DELEGATUS NON POTEST DELEGARE
Delegatus non potest delegare is a well-known maxim of the law of agency. The principal
chooses a particular agent because he has trust and confidence in his integrity and

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competence. Ordinarily, therefore, the agent cannot further delegate the work which has been
delegated to him by his principal.
The principal and exceptions are stated in Section 190:
Section 190 says that an agent cannot lawfully employ another to perform acts which he has
expressly or impliedly undertaken to perform personally, unless by the ordinary custom of
trade a sub-agent may, or, from the nature of the agency, a sub-agent must, be employed.
But there are exceptions. In the following cases the agent may delegate the work to another:
1. Nature of Work
Sometimes the very nature of work makes it necessary for the agent to appoint a sub-agent.
For example, an agent appointed to sell an estate may retain the services of an auctioneer and
the one authorized to file a suit may engage a lawyer. A banker instructed to make payment
to a particular person at the particular place may appoint a banker who has an office at that
place. A banker authorized to let out a house and collect rents may entrust the work to an
estate agent.
2. Trade Custom
Secondly, a sub-agent may be appointed and the work delegated to him if there is ordinary
custom of trade to that effect.
3. Ministerial Action
An agent cannot, of course, delegate acts which he has expressly or impliedly undertaken to
perform personally, e.g. acts requiring personal or professional skill. But the agent may
delegate acts which are purely ministerial in nature, e.g. authority to sign.
4. Principal’s Consent
The principal may expressly allow his agent to appoint a sub-agent. His consent may also be
implied from the conduct of the parties. The principal may ratify his agent’s unauthorized
delegation.
A person who is appointed by the agent and to whom the principal’s work is delegated is
known as “sub-agent”. Section 191 defines “sub-agent” as “a person appointed by and acting
under the control of the original agent in the business of the agency”.

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SUB-AGENT (S. 191)

Sec 191: A “sub-agent” is a person employed by, and acting under the control of, the original
agent in the business of the agency.
When a sub-agent is appointed, what relationship is constituted between the principal and the
sub-agent and the agent depends upon whether the sub-agent has been properly or improperly
appointed.
(a) Improper Delegation (S. 193)
According to Section 193, delegation is improper when it is not authorized, that is, when it is
not within any of the recognized exceptions. The effect is that the principal is not bound by
the appointment. He is not represented by that person, nor bound by his acts. That person is
also not responsible to the principal. But the agent will be responsible for any act of that
person. The agent stands in the position of principal towards that person and is as such
responsible for his acts to third parties.
(b) Proper Delegation (S. 192)
Sec 192. Representation of principal by sub-agent properly appointed – Where a sub-agent is
properly appointed, the principal is, so far as regards third persons, represented by the sub-
agent and is bound by and responsible for his acts, as if he were an agent originally appointed
by the principal.
Agent’s responsibility for sub-agent – The agent is responsible to the principal for the acts of
the sub-agent.
Sub-agent’s responsibility – The sub-agent is responsible for his acts to the agent, but not to
the principal, except in case of fraud or willful wrong.
1. Principal Represented by Sub-agent
In the first place, so far as regards third persons, the principal is represented by the sub-agent.
He is bound by and responsible for his acts as if he were an agent originally appointed by the
principal.

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2. Agent’s Responsibility for Sub-agent

Secondly, the agent is responsible to the principal for the acts of the sub-agent. If, for
example, the sub-agent has misappropriated the principal’s property or its sale proceeds, the
agent is responsible for the same. There is no privity of contract between the principal and
the sub-agent and, therefore, he cannot sue the sub-agent, except for fraud or willful wrong.
Even where fraud or willful wrong is established the principal has the choice to sue either the
agent or the sub-agent. But the agent may exempt himself from such liability.
3. Sub-agent’s Liability to Principal
The sub-agent is not directly liable to the principal, except for fraud and willful wrong.
Calico Printer’s Assn vs. Barclays Bank
A sub-agent failed to insure the principal’s goods, which were destroyed by fire. But the
principal could not recover against the sub-agent.
Summan Singh vs. N.C. Bank of New Year
The plaintiff in a foreign country appointed the N.C. Bank to deliver a sum of money to one
Pritam Singh of Jullundur, whose address was given. The bank instructed its Bombay branch
accordingly. The Bombay branch appointed the Punjab National Bank which delivered the
money to a wrong person. The plaintiff’s action against either bank failed. The Punjab
National Bank was held not liable on the principle that a sub-agent is not liable to the
principal except when he is guilty of fraud or willful wrong. The wrong delivery was due
only to negligence. The N.C. Bank had exempted itself from the consequences of wrong
delivery.
SUBSTITUTED AGENT (Ss. 194-195)
Sec 194: Where an agent, holding an express or implied authority to name another person to
act for the principal in the business of the 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.

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Illustration
A directs B, his solicitor, to sell estate by auction, and to employ an auctioneer for the
purpose. B names C, an auctioneer, to conduct the sale. C is not a sub-agent, but is A’s agent
for the conduct of the sale.
Sec 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.
ESSENTIALS OF RATIFICATION AND ITS EFFECT
RATIFICATION
The doctrine of ratification comes into play when a person has done an act on behalf of
another without his knowledge or consent. The doctrine gives the person on whose behalf the
act is done an option either to adopt the act by ratification or to disown it. Ratification is thus
a kind of affirmation of unauthorized acts. It is thus explained in Section 196. Ratification
may be expressed or implied.
Sec 196: Where acts are done by one person on behalf of another, but without his knowledge
or authority, he may elect to ratify or to disown such acts. If he ratify them, the same effects
will follow as if they had been performed by his authority.
Sec 197: Ratification may be expressed or may be implied in the conduct of the person on
whose behalf the acts are done.
Illustration
A, without authority, buys goods for B. Afterwards B sells them to C on his account. B’s
account implies a ratification of the purchase made for him by A.
REQUIREMENTS OF RATIFICATION
A valid ratification has to fulfill certain certain conditions. Some of them are as follows:

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a) On behalf of another
In the first place, it is necessary that the act in question must have been done on behalf of the
person who wants to ratify it. The agent must profess to act as an agent and on behalf of an
identifiable person.
Keighley Maxseted & Co. vs. Durant
K.M. & Co, authorized their agent to buy Karachi wheat at specified rates on their joint
account. Wheat was not obtainable at those rates. He bought wheat from Durant at a higher
rate. He did so in the hope and confidence that his act would be adopted by the principals, but
he never mentioned the principals and contracted in his own name. The principals approved
the purchase, but, when the price of wheat fell, refused to take delivery. Durant sued the
agent and the principals for breach of contract. But the principals were held not liable. The
agent, having contracted in his own name, his act was not open to anybody’s ratification and,
therefore, the purported ratification was ineffective.
b) Competence of Principal
Since ratification relates back to the date when the contract was originally made by the agent,
it is necessary that the principal who purports to ratify must be in existence at the time of the
contract and should also be competence. It is this principle which prevents a person from
ratifying a contract made by him during his minority.
c) What Acts can be Ratified (Act should be Lawful) (Sec. 200)
Sec. 200: 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.
Illustrations
(i) A, not being authorized thereto by B, demands, on behalf of B, the delivery of a
chattel, the property of B, from C, who is in possession of it. This demand cannot
be ratified by B, so as to make C liable for damages for his refusal to deliver.

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(ii) A holds a lease from B, terminable on three months’ notice. C, an unauthorized

person, gives notice of termination to A. The notice cannot be ratified by B, so as
to be binding on A.

Only Lawful Acts can be Ratified

Only lawful acts are open to ratification. An act which is void from the very beginning
cannot be ratified.
Acts which would become Injurious by Ratification
Similarly, acts which would become injurious to others by ratification cannot be ratified.
This principle is incorporated in Sec. 200 which says that an act cannot be ratified which by
ratification “would have the effect of subjecting a third person to damages”.
Acts done on Behalf of Government
Such acts are ratifiable in the same way in which private acts can be.
d) Knowledge of Facts (Sec. 198)
“To constitute a binding adoption of acts a priori unauthorized these conditions must exist:
i. The acts must have been done for and in the name of the supposed principal, and
ii. There must be full knowledge of what those acts were, or such an unqualified
adoption that the inference may properly be drawn that the principal intended to take
upon himself the responsibility for such acts, whatever they were”.

e) Whole Transaction (Sec 199)

A person cannot ratify a part of the transaction which is beneficial to him and repudiate the
rest. So a ratification of a part of a transaction operates as a ratification of the whole of the
transaction.
f) Within Reasonable Time
A ratification to be effective must come within reasonable time. If a time is fixed for
performance of the contract, ratification must come before that time otherwise it will be too
late.

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EFFECTS OF RATIFICATION
Ratification has the following effects:
1) It establishes the relationship of principal and agent insofar as the act ratified is
concerned between the person ratifying and the person doing the act.
2) Ratification establishes the relationship of contract between the principal and the third
party.

DOCTRINE OF RELATION BACK

Ratification relates back to the date on which the agent first contracted. Section 196 declares
that if an unauthorized act is ratified by the person on whose behalf it was done, “the same
effects will follow as if they had been performed by his authority”. Thus there is a contract
between the principal and the third party, not from the date of ratification, but from the date
when the agent first contracted.
Bolton Partners vs. Lambert
The defendant made an offer to the managing director of a company who, having no
authority to do so, accepted it. That gave the company an option to ratify the contract. The
company ratified only after the defendant had withdrawn his offer. The company sued the
defendant for specific performance. The company was held entitled to it. The company’s
ratification related back to the date on which the managing director first accepted the offer.
Thus there was a contract between the company and the defendant from that date. The
defendant’s revocation of his offer was ineffective.
Watson vs. Davies
The defendant offered to sell his property to a charitable institution. The offer was accepted
by a few members of the board “subject to approval by full members of the board”. The day
on which the board was to meet, the defendant withdrew his offer. The board ratified it and
brought an action for specific performance. The ratification was held to be too late, and the
revocation effective.

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PRINCIPAL AND THIRD PARTIES – THE DOCTRINE OF UNDISCLOSED –

PRINCIPAL AND CONCEALED PRINCIPAL
RIGHTS AND LIABILITIES OF UNDISCLOSED PRINCIPAL
The rights and liabilities of a principal under contracts made by his agent depend upon
whether:
a) The principal’s existence and name were disclosed by the agent;
b) The principal’s existence was disclosed but not his name;
c) Neither existence nor name of the principal was disclosed.

a) WHERE THE PRINCIPAL IS DISCLOSED

Where the existence of the principal is disclosed, Section 226 applies, according to which the
agent’s acts and contracts “will have the same legal consequence as if the contracts had been
entered into and the acts done by the principal in person”. The principal may sue the third
party upon the contract and vice versa.
The agent can neither sue nor be sued upon a contract made by him on behalf of his
principal. “The contract is the contract of the principal, not that of the agent, and prima facie
at common law the only person who can sue is the principal and the only person who can be
sued is the principal”.
b) UNNAMED PRINCIPAL
Even where the agent does not disclose the name of his principal, but discloses his own
representative character, the contract will be the contract of the principal, unless there is
something in its form or signature to show that the agent intended to be personally liable.
Where an agent signed the contract as a broker, “to my principals”, but did not disclose who
the principals were, he was not personally liable. “There is nothing whatever on the contract
to show that the defendant intended to act otherwise than as a broker”.
c) UNDISCLOSED PRINCIPAL
The doctrine of undisclosed principal comes into play when the agent neither discloses the
existence of his principal nor his representative character. In such circumstances the question
arises what are the mutual rights and liabilities of the principal, the agent and the third party.
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There is nothing unusual in this doctrine insofar as the relations between the agent and the
third party are concerned. Since the agent has contracted in his own name, he is bound by the
contract. He may be sued on it and he has the right to sue the third party, and the principal is
not liable in such a case.
But the principal too has the right to intervene and assert his position as an undisclosed party
to the contract. This right of the principal is protected by the Contract Act itself. Section 231
declares:
“If an agent makes a contract with a person who neither knows, nor has reason to suspect that
he is an agent, his principal may require the performance of the contract…..”
This right of the principal has been described as “anomalous” because it does not fit in any of
the established principles of the law of contract. “The rule which permits an undisclosed
principal to sue and be sued on a contract to which he is not a party, though well-established,
is itself an anomaly”.
Similarly, in Bowstead’s Law of Agency, the doctrine is described as “surprising but well-
established by the cases”.
Scrimshire vs. Alderton
A farmer’s oats were sold by a del credere factor without disclosing the name or existence of
the farmer. The factor became bankrupt. The farmer discovered the buyer and informed him
not to pay the factor. Even so the buyer paid him. LEE CJ was of opinion that the buyer
should be responsible to the undisclosed principal in such cases.
The right of the undisclosed principal to intervene and sue the third party is, however, subject
to the following qualifications. They are laid down in Sections 231 and 232.
Illustration
A, who owes 500 rupees to B, sells 1000 rupees worth of rice to B. A is acting as agent for C
in the transaction, but B has no knowledge nor reasonably ground of suspicion that such is
the case. C cannot compel B to take the rice without allowing him to set-off A’s debt.

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Subject to Equities
Firstly, the other contracting party would have against the principal “the same rights which
he would have had against the agent if the agent had been principal”.
Montagu vs. Forwood
The plaintiffs, who were acting for the owners of a cargo, employed B & Co as their agents
to collect from underwriters contributions in respect of general average loss. B & Co not
being brokers, employed the defendants, who were brokers at Lloyd’s, to collect the money,
and they did so. At the time when the defendants received the money there was a debt due to
them from B & Co. The defendants did not know and there was nothing to lead them to
suppose, that B & Co were not acting as principals in the matter and the defendants believed
that B & Co were acting as principals. It was held that the defendants were entitled to stand
in the position in which they would have stood if B & Co had really been principals; and that
consequently, the defendants were entitled to set-off against the demand of the plaintiffs for
the money which they had collected the debt due to them from B & Co.
But where the third party does not believe the agent to be a principal or there are suspicious
circumstances he may not be able to claim a set-off.
Isaac Cooke vs. Henry Douglas Eshelby
L & Co sold cotton to C, in their own names, but really on behalf of an undisclosed principal.
C knew that L & Co were in the habit of dealing both for principals and on their own account
and had no belief on the subject whether they made this contract on their own account or for
a principal. It was held that C could not, in an action brought by the principal for the price of
cotton, set-off a debt due from L & Co.
Third Party’s Right to Repudiate Executory Contract
Secondly, if the principal discloses himself before the contract is completed, the third party
may repudiate the contract if he can show that if he had known who the principal was or that
the agent was not the principal, he would not have contracted. The right of the third party to
repudiate the contract arises only when the identity of the undisclosed principal would have
been so material to him that if he had known the true facts, he would not have contracted.

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Said vs. Butt

A theatre ticket was purchased by a person through an undisclosed agent knowing full well
that a ticket would not have been issued to him on personal grounds. It was held that the
theatre-owner had the right to repudiate the contract and exclude him from admission.
Undisclosed Principal cannot Intervene against Express Terms
Lastly, an undisclosed principal cannot intervene if some express or implied term of the
contract excludes him from doing so.
Third Party’s Right against Undisclosed Principal
Just as the undisclosed principal has the right to sue the third party, the latter has the right to
sue the principal.
Davison vs. Donaldson
The managing owner and the ship’s husband purchased goods on credit from the plaintiff for
the purposes of the ship. The undisclosed partner settled his account with the husband
believing that the latter had paid the plaintiff. But he had not done so and had gone bankrupt.
The plaintiff sued the principal. The court said: “Where a person is supplied with goods it is
his duty to see that the seller is paid… Partners ought not to settle with their co-partners
without satisfying themselves that the payments have been actually made”.
PERSONAL LIABILITY OF AGENT (S. 230)
Sec 230: “In the absence of any contract to that effect, an agent cannot personally enforce
contract entered into by him on behalf of his principal, nor is he personally bound by them.
Presumption of contract to contrary – Such a contract shall be presumed to exist in
the following cases-
1) Where the contract is made by an agent for the sale or purchase of goods for a
merchant resident abroad;
2) Where the agent does not disclose the name of his principal;
3) Where the principal, though disclosed, cannot be sued.

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AGENT CANNOT SUE OR BE SUED UNLESS CONTRARY CONTRACT

It has already been seen that the chief function of an agent is to establish contractual
relationship between his principal and third parties. The agent then drops out. He can neither
sue nor be sued on contracts made by him on his principal’s behalf. Unless it is shown that
there is a contract to the effect of binding the agent, entered into on behalf of the named
principal, the agent cannot be bound by it.
PRESUMPTION OF CONTRARY CONTRACT
In the following cases there is presumption of a contract to the contrary:
1. Foreign Principal
When an agent contracts for “a merchant resident abroad” there is the presumption that the
agent undertakes personal liability [S. 230(1)]. The original presumption of English Law was
that the agent alone was liable and he had no right to pledge the credit of a foreign principal.
The presumption still stands, but it has declined in importance. The presumption was needed
at a time when it was difficult to sue foreign principals and for the convenience of merchants
a usage came into existence that the agent of a foreign principal incurs personal liability. But
now on account of changed conditions of international trade, merchants trust each other and
agents do not like to incur personal liability.
2. Principal Unnamed
The presumption of agent’s personal liability arises when he “does not disclose the name of
his principal”. Where an agent contracts for an undisclosed principal, he definitely is
personally liable, being a party to the contract. But when he contracts for an unnamed
principal, there is only a presumption of his personal liability. The presumption may arise
even where the agent discloses his representative character, but not the name of his principal.
3. Non-Existent or Incompetent Principal
An agent is presumed to incur personal liability where he contracts on behalf of a principal
who, “though disclosed cannot be sued”. An agent who contracts for a minor, the minor
being not liable, the agent becomes personally liable. This result may not, however, follow
where the other party already knows that the principal is minor.

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4. Pretended Agent (S. 235)

Where a person pretends to act as the agent of another, he may be saved by the principal by
ratifying his act. But if no ratification is forthcoming the pretended agent becomes personally
liable to the third party for any loss that he may have suffered by relying upon the
representation of authority. It would make no difference to his liability that he honestly
believed that he had the authority in question or that, even if he did not have it, his principal
would ratify his act. The false representation must be the cause of the contract.
5. Breach of Warranty of Authority
Closely allied to the liability of a pretended agent is the liability of an agent for breach of
warranty of authority. Where a person is in fact an agent, but exceeds his authority, or
represents to have a kind of authority which he in fact does not have, he commits breach of
warranty of authority and is personally liable to the third party for any loss caused to him by
reason of acting on the false representation.
Collins vs. Wright
W was land agent for one G. W agreed to grant to the plaintiff a lease of G’s farm for 12 and
half years. He honestly believed that he had the authority to do so. But G refused to execute
the lease and he proved that he had given no such authority to the agent. W, having died in
the meantime, the plaintiff sued his executors for the loss he had suffered in entering upon
the farm, and they were held liable.
TERMINATION OF AGENCY AND WHEN IT BECOMES IRREVOCABLE
DETERMINATION OF AGENCY
The relationship of principal and agent may end up in any of the ways mentioned in Section
201.
Sec 201: An agency is terminated by the principal revoking his authority; or by the agent
renouncing the business of the agency; or by the business of the agency being completed; or
by either the principal or agent dying or becoming of unsound mind; or by the principal being
adjudicated an insolvent under the provisions of any Act for the time being in force for the
relief of insolvent debtors.

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The section for the following modes of termination:

1) Revocation;
2) Renunciation by agents;
3) Completion of business;
4) Principal or agent’s death;
5) Principal or agent becoming person of unsound mind;
6) Insolvency of principal;
7) Expiry of time.

1. By Revocation (Sec 203)

The principal may revoke his agent’s authority and that puts an end to the agency. Section
207 further provides that revocation may be expressed or implied in the conduct of the
principal.
A empowers B to let A’s house. Afterwards A lets it himself. This is an implied revocation of
B’s authority.
Revocation is subject to the following conditions:
i. Revocation operates Prospectively (Sec 204)
Sec 204: The principal cannot revoke the authority given to his agent after the authority has
been partly exercised, so far as regards such acts and obligations as arise from acts already
done in the agency.
Illustration
A authorizes B to buy 1000 bales of cotton on account of A, and to pay for it out of A’s
money remaining in B’s hands. B buys 1000 bales of cotton in his own name, so as to make
himself personally liable for the price. A cannot revoke B’s authority so far as regards
payment for the cotton.
Even where the agent has partly exercised his authority, the principal may revoke it for the
future. But it is irrevocable “as regards such acts and obligations as arise from acts already
done in the agency”.

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ii. Notice Precedent to Revocation (Sec 206)

where an agency has been created for a fixed price, a reasonable notice would be necessary
to terminate it.
iii. Liability to Compensate (Sec 205-206)
If the agency is determined without reasonable notice, “the damages thereby resulting to the
agent must be made good” by the principal. Where an agency has been created for a fixed
period, compensation would have to be paid for its premature termination, if the termination
is without sufficient cause.
AGENCY COUPLED WITH INTEREST (Sec 202)
In certain circumstances, however, an agency becomes irrevocable. This happens when the
agent is personally interested in the subject-matter of agency.
Illustration
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. A cannot revoke this authority, nor can it be terminated by his insanity or
death.
An agency of this kind is not even terminated by the principal’s death.
2. Renunciation by Agent (Sec 206)
An agent may renounce the business of agency in the same manner in which the principal has
the right of revocation. In the first place, if the agency is for a fixed period, the agent would
have to compensate the principal for any premature renunciation without sufficient cause.
Secondly, a reasonable notice of renunciation is necessary. If the agent renounces without
proper notice, he shall have to make good any damage thereby resulting to the principal.
3. Completion of Business (Sec 201)
An agency is automatically and by operation of law determined when its business is
completed.
4. Death or Insanity (Sec 201)
An agency is determined automatically on the death or insanity of the principal or agent.

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5. Principal’s Insolvency (Sec 201)

An agency ends on the principal being adjudicated insolvent.
5. On Expiry of Time (Sec 201)
Where an agent has been appointed for a fixed term, the expiration of the term puts an end to
the agency, whether the purpose of the agency has been accomplished or not. An agency
comes to an automatic end on the expiry of its term.
EFFECTS OF TERMINATION (Sec 208)
Sec 208: The termination of the authority of an agent does not, so far as regards the agent,
take effect before it becomes known to him, or, so far as regards third persons, before it
becomes known to them.
Illustration
A directs B to sell goods for him, and agrees to give five per cent commission on the price
fetched by the goods. A afterwards, by letter, revokes B’s authority. B, after the letter is sent,
but before he receives it, sells the goods for 100 rupees. The sale is binding on A, and B is
entitled to five rupees as his commission.
As between the principal and the agent, the authority of the agent ends when he comes to
know of the termination.
But as regards third persons, the agency does not terminate until they come to know of the
fact of termination.
Termination of Sub-Agency
When the authority of an agent terminates, it entails the termination of the authority of all
sub-agents appointed by him. Section 210 is as follows:
Sec 210: The termination of the authority of an agent causes the termination of the authority
of all sub-agents appointed by him.
Agent’s Duty on Termination (Sec 209)
Sec 209: When an agency is terminated by the principal dying or becoming of unsound mind,
the agent is bound to take, on behalf of the representatives of his late principal, all reasonable
steps for the protection and preservation of the interests entrusted to him.

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UNIT-VI PARTNERSHIP
DEFINITION OF PARTNERSHIP – ESSENTIALS OF PARTNERSHIP – JOINT
HINDU – PARTNERSHIP
The Law of Partnership originally formed part of the Indian Contract Act. It was contained in
Chapter XI, Sec. 239 to 266. This chapter was repealed and replaced by a separate Act, the
Indian Partnership Act in 1932.
DEFINITION OF PARTNERSHIP
Sir Frederick Pollock defines “Partnership” as “the relation which subsists between persons
who have agreed to share the profits of a business carried on by all or any of them on behalf
of all of them”.
Section 4 of the Indian Partnership Act, 1932, defines the term “partnership”, according to
which “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. Persons who have entered into
partnership with one another are called individually “partners” and collectively “a firm”, and
the name under which their business carried on is called the “firm-name”.
ESSENTIALS OF PARTNERSHIP
The following are the essential ingredients of partnership:
1. Relation between Partners
Partnership is a special type of contract. Being a contract, there should be necessarily more
than one person to bring about the relationship of partnership. A partnership has its source in
a contract. It is not a creature of law arising from status such as a Hindu Joint family trading
firm.
2. Agreement to share profits of business
The contract which gives rise to a partnership has to provide for the sharing of profits among
the partners. Profits mean the net return after deduction of all expenses.
3. The business should be carried on by all or any of the partners acting for all of them
All the partners collectively are called the firm. The essence of partnership consists in each
partner being an agent of the firm. That is why it is sometimes said that the law of

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partnership is only a branch of law of the law of Agency. It is only when there is such mutual
agency that a partnership arises.
Cox vs. Hickman
In this case, some traders for the purpose of paying their debts assigned their business to
certain creditors as trustees to carry on the business and discharge the debts. In the course of
that business goods were purchased from Hickman. Cox was one of the trustees but he took
no part in the transaction. He was however sued as a partner. It was contended that Cox being
a creditor would also get a share in the profits earned by the business and therefore a partner.
The House of Lords held that participation in profits is not the real test of partnership. Unless
the trade is carried on by persons each of whom is an agent of the others a partnership does
not arise. It was accordingly held that there was no partnership and that, therefore, Cox was
not liable to Hickman for the price of goods purchased by the other trustees.
KINDS OF PARTNERS
1. Nominal Partner
A nominal partner is one who allows his name to be used as if he were a member of the firm.
There is really no partnership agreement between him and the partners. He has no share in
the profits. However, he would be liable for the acts of the firm inasmuch as he has permitted
his name to be used by the firm as though he were a partner.
2. Sleeping Partner
A sleeping partner is to be distinguished from a nominal partner. He is a real partner but
takes no active part in the business. He is entitled to the profits of the business and is liable to
third parties like other partners.
3. Partner only for Profits
There may be an agreement between the partners by which one of them is to be given a share
in the profits but is not bound to share in the losses. Such an agreement is valid. However,
such a partner would be liable to third parties dealing with the firm just like the other
partners. His agreement gives him no immunity so far as parties dealing with the firm are

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concerned. It only enables him, when accounts are taken between the partners, to insist that
no losses should be debited to his account.
4.Minor Partner
A minor is a person who is yet to attain the age of majority in the law of the land. According
to Section 3 of the Indian Majority Act, 1875 a person is deemed to have attained the age of
majority when he attains 18 years of age. However, a minor can also be appointed to claim
the benefits of the partnership.
It is pertinent to note that, section 11 of the Indian Contract Act, 1872 prohibits a minor from
entering into an agreement, as the agreement entered by a minor is void ab initio. However,
the Partnership Act, 1932 allows a minor to enjoy benefits of partnership when a set of rules
and procedures are complied in accordance with the law. A minor will share the profits of the
firm, however, his liability for losses is only limited to his share of the firm.
A minor person after attaining the age of majority (18 years of age)needs to decide within 6
months if he is willing to become a partner for the firm. If at all a minor partner decides to
continue as a partner or wishes to retire, in both the cases he needs to make such declaration
by a public notice.
5.Outgoing partner
An outgoing partner is a partner who voluntarily retires without dissolving the firm. He
leaves the existing firm. Therefore he is called as an outgoing or retiring partner. Such a
partner is liable for all his debts and obligations incurred before his retirement. However, he
can be held liable for his future obligations, if at all he fails to give a public notice stating his
retirement from the partnership firm.
DISTINCTION BETWEEN PARTNERSHIP AND HINDU UNDIVIDED FAMILY
1) A joint Hindu family arises from status as a creature of law. A partnership arises from
a contract.
2) The membership of a joint family firm fluctuates with the births and deaths of
coparceners. In the case of partnership, new members can be admitted only with the

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consent of the existing parties. The death of one partner puts an end to the
partnership.
3) A joint family can be represented only by its Manager, usually the eldest senior male
coparcener. In a partnership, there is mutual agency and each partner is an agent of
the firm.
4) The junior members of joint family are not personally bound to pay the debts of the
joint family. In the case of a partnership, every partner is personally liable for
partnership for partnership debts.
5) Junior coparcener cannot call upon the joint family manager for accounts of his past
dealings in connection with the family business. In a partnership, each partner can
call upon others for an account of his dealings with the partnership firm.

PARTNERSHIP AND CO-OWNERSHIP

1) Co-ownership need not arise from any contract. Partnership has its source only in an
agreement.
2) One co-owner can generally transfer his interest in favour of a third party and make
the transferee a co-owner even without the consent of the other co-owners. In a
partnership a new member cannot be admitted without the consent of all the partners.
3) There is no mutual agency in co-ownership. One co-owner is not bound by the acts of
the other co-owners. A partnership, however, cannot arise unless there is mutual
agency, each partner being the agent of all the others.
4) A co-owner can demand a partition of the property. The right of a partner, however, is
not to have a partition but an account of the profits.
5) A co-owner managing the property held in co-ownership can claim no lien for the
expenditure incurred by him in such management. A partner, however, can claim a
lien in respect of moneys expended by him on behalf of the firm.

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Mollow March & Co. vs. Court of Wards

A firm borrowed money and agreed to pay besides 12% interest a commission at 20% on its
profits. It was held that this sharing of profits did not make the lender a partner. The
relationship was one of debtor and creditor and not of partnership.
MUTUAL RIGHTS AND DUTIES OF PARTNERS
GENERAL DUTIES OF PARTNERS
Section 9 to 11 of the Indian Partnership Act contain the general duties to be observed by
partners.
1. Section 9 of the Act lays down the following duties of partners.
a) The partners are bound to carry on the business of the firm to the greatest common
advantage. This is one of the first principles of Law of Partnership, for just like
agency, mutual confidence is the foundation of the partnership relationship.
b) They have to be just and faithful to each other.
c) They have to render true accounts and full information of all things, affecting the firm
to any partner or his legal representative. The concerned partner should maintain true,
proper and correct accounts of the partnership business and allow the other partners to
have free access to such accounts, to inspect them and to take copies of them either
by themselves or by their agent at all reasonable times. If he fails to maintain proper
accounts or mixes up his private affairs with those of the partnership, he will have to
account for the same.

2. Under Section 10 of the Act, it is the duty of every partner to “indemnify the firm for any
loss caused to it by his fraud in the conduct of the business of the firm”.
3. Section 11 of the Act provides that “the mutual rights and duties of the partners of a firm
may be determined by contract between the partners and such contract may be express or
implied by a course of dealing”.

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Ex parte Barber
In this case, the partners have for a long period adopted a certain mode of valuing the assets,
or adjusting the profit and loss account, it was held that mode will be binding, though it was
not strictly consistent with the original articles.
MUTUAL RIGHTS AND LIABILITIES OF PARTNERS
The mutual rights and liabilities of the partners are stated in Chapter III of the Partnership
Act dealing with the relations of partners to one another. Their mutual rights are as follows:
1. Right to share in Profits
The contract of partnership provides for the share, which each partner would be entitled to
take in the profits earned by the firm. It also provides for the manner in which losses are to be
borne. If the contract of partnership is silent on these points the partners share the profits
equally and bear the losses equally. [Sec 13(b)]
2. Right of interest on Capital
The deed of partnership may provide for payment of interest to the partners on the capital
invested by them in the firm. Such interest, however, will be payable only out of profits, if
any, earned by the firm. [Sec 13(c)]
3. Interest on Advances
Sometimes a partner advances money to the firm over and above the capital, which he has to
invest in the firm. If the deed of partnership does not make any specific provision for
payment of interest on such advances the partner making such an advance can claim interest
at 6 per cent per annum. This interest on advances is payable not only out of the profits but
out of the entire partnership assets. [Sec 13(d)]
4. Right to Indemnity
In the course of the partnership business; or in emergencies partners have to incur liabilities
and to make payments. The partner who has done so can claim from the firm an indemnity.
[Sec 13(e)]

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5. Right to take part in Management

The deed of partnership provides how the work of partnership is to be conducted. Usually the
business would be conducted by the partners who have contributed the bulk of the capital for
the partnership and who may be called Senior Partners. Sometimes the conduct of the
business is in the hands of a working partner who may not have contributed capital but who
was skill and is prepared to contribute his labour for the partnership. Where the deed of
partnership is silent about the management, every partner has a right to take part in the
conduct of the partnership business. [Sec 13(a)]
6. Right to be Consulted
Sometimes differences of opinion exist among the partners in regard to the conduct of the
business. In such a case a decision taken by the majority of the partners binds the firm. It is
necessary, however, before the decision is taken, to consult all the partners for every partner
has a right to express his opinion before a decision is arrived at. Further new partners cannot
be introduced with the consent of the existing partners (Sec 31). A majority decision can
result in the expulsion of a partner only when such power is conferred by the deed of
partnership and is exercised in good faith (Sec 33)
7. Right of access to Accounts
Every partner can insist upon to inspection of the books of the firm, take copies thereof or
extracts therefrom. [Sec 12(d)]
The duties of the partners inter se, subject to specific provision in the deed of partnership are
as follows:
1. Duty to be Diligent
Every partner is bound to attend to his duties diligently. [Sec 12(b)]
2. Not to claim Remuneration
A partner cannot claim remuneration for taking part in the conduct of the partnership
business. This is because his right is to share in the profits.

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3. To observe Good Faith

It is the general duty of a partner to be just and faithful to other partners, render true accounts
and communicate to other partner’s information affecting the firm. (Sec 9)
4. To indemnify for willful neglect
The partner is bound to indemnify the firm for losses occasioned by his willful neglect.
5. To indemnify for Fraud
A partner has to indemnify the firm for losses occasioned by his fraud. (Sec 10)
6. To account for Personal Profits
The relationship between partners is a fiduciary relationship. So one partner cannot take
advantage of his position as such to make personal profits. If a partner makes a private profit
out of partnership transactions, he has to account for such profits to the firm. (Sec 16)
7. To account for profits in Competing Business
If a partner conducts a business similar to that of the partnership in competition with the
partnership business, he has to account for the profits made therein. [Sec 16(b)]
DOCTRINE OF HOLDING OUT
A partnership is a relation, which arises by contract. Two persons can become partners only
when there is a contract between them for the purpose for that purpose. Such contract gives
them rights as partners and also imposes liabilities.
A partnership by estoppels is an exceptional case where even in the absence of a contract a
partner becomes liable as if he were a partner. When a person represents himself or permits
himself to be represented to be a partner in a firm, and a third party, on the faith of that
representation gives a credit to the firm, he becomes liable as a partner to such third party.
Such a partner may be called a partner by estoppels or holding out. He only incurs liability to
third parties who have dealt with the firm in good faith under the impression that he was a
partner of the firm. It is immaterial that the person holding himself out as a partner did not
make a direct representation to the person who came to know of that representation and dealt
with the firm, believing in that representation.

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MINOR AS A PARTNER
MINORS ADMITTED TO THE BENEFITS OF PARTNERSHIP
Admission to Benefits of Partnership
A partnership is a contract. So the parties who form a partnership should have contractual
capacity. A minor having no contractual capacity cannot be a partner at the formation of a
partnership. Once a partnership is created by others, however, it is possible to admit a minor
to the benefits of partnership. This is because a partnership is based upon mutual agency and
a minor may be an agent.

Addl. C.I.T. vs. U.K.P. Kumar

Under the partnership deed in question the minors were to share losses as well, it was held
that the partnership was illegal, and was not entitled to be registered. It was observed in that
case, “that under general law of partnership a minor cannot be a full partner liable to share in
the losses. He can only be admitted to the benefits of the partnership”.
Effects of Minor’s Admission to Benefits of Partnership
When a minor is admitted to the benefits of a partnership, he incurs no personal liability for
the acts of the firm. His share in the partnership, however, would be liable for the acts of the
firm.
Babu vs. Official Assignee
It was pointed out that the minor’s separate property cannot be proceeded against for
realization of a partnership debt, and “to render the share of the minor liable, for the firm’s
debts, the essential pre-requisite is to show that the minor was ‘admitted to the benefits of
partnership’ in terms of the Section”.
The minor can inspect the accounts of the firm. He would be entitled to his share of the
profits of the firm. Section 30(4) of the Act lays down the minor’s ultimate remedy for
enforcing his rights, which will take the form of a suit for accounts and payment of his share.
Position after Becoming a Major
(i) Time for Election

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After becoming a major, a person who had been admitted to the benefits of a partnership may
elect to become or not to become a partner. He should make his election within six months of
attaining majority. If he did not know within that period that he had been admitted to the
benefits of the partnership, he can make his election within six months of obtaining such
knowledge.
(ii) Effect of Election not to become a Partner
If he elects not to become a partner, he should give a public notice to that effect. Until he
gives public notice, his rights and liabilities continue to be those of a minor. From the date of
the notice he will have no liability for any acts of the firm done after that date.
(iii) Effect of Election in favor of becoming a Partner
If he elects to become a partner, he may give a public notice. If he does not give a public
notice he becomes a partner on the expiry of six months from the date of becoming a major
or obtaining knowledge of his admission to the partnership, whichever is later. He becomes a
full-fledged partner. He becomes a partner liable not only for the future acts of the firm but
all the acts done form the time of his admission to the benefits of the partnership. But under
the English Law, he will become personally liable only for the acts of the firm done after his
becoming a major.
RIGHTS AND LIABILITIES OF INCOMING AND OUTGOING PARTNERS
The rights and liabilities of incoming and outgoing partners are contained in Sections 31 and
32 of the Partnership Act.
INCOMING PARTNERS
Section 31(1) lays down, that subject to contract between the partners, and to the right of a
minor to exercise his option under Section 30, “the consent of all the partners is necessary for
the introduction of a new partner”. Clause 2 of Section 31 deals with the liability of the
incoming partner.
Seville vs. Robertson
It was pointed out that “generally speaking, an incoming partner’s liability is one with
respect to transactions subsequent to his becoming a partner”. As observed by Lindley,

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“when a new member is admitted he becomes one of the firm for the future, but not as from
the past, and his present connection with the firm is no evidence that he ever expressly or
impliedly authorized which may have been done prior to his admission”.
OUTGOING PARTNERS
In R.G.P. Khatri vs. Bhimraj, it was pointed out that “the word ‘retire’ in Section 32 of the
Partnership Act is confined to cases where a partner withdraws from a firm and the
remaining partners continue to carry on the business without dissolution as between them. It
does not cover a case where a partner withdraws from the firm by dissolution and not by
retirement”.
A partner may retire:
a) With the consent of all the other partners; or
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.

DISSOLUTION OF A FIRM
DISSOLUTION BY THE COURT
According to Section 44 of the Act, the partnership may be dissolved by the Court in certain
situation. In some cases the partners cannot put an end to the partnership without resorting to
the court of law. The court grants this relief on the following grounds:
1. Lunacy of a Partner
Even the next friend of the lunatic may approach the court in such a case for dissolving the
firm. The court for dissolution of partnership on this ground has to be satisfied that the
insanity will be permanent.
2. A partner becoming Incapacitated
When a partner becomes disabled, e.g., by disease, to perform his duties as a partner, the
other partner can ask for dissolution of the firm.

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Whitwell vs. Arthur

A suit for dissolution was brought on the ground that a partner had become incapable of
performing his duties as a partner owing to an attack of paralysis, and where the medical
evidence revealed that the defendant’s condition was rapidly improving and the incapacity
was only of a temporary nature, it was held by the court that there was no sufficient ground
for dissolution and all proceedings were stayed with liberty to apply again, if occasion is
arose.
3. Misconduct
If a partner is guilty of serious misconduct, it would adversely affect the business of the firm.
So the other partners in such a case have a right to ask for dissolution of the firm. For
instance, the conviction of a partner for a crime will furnish a ground to the other partners to
ask for the dissolution of the firm.
If, however, the conduct of a partner has not affected the essence of the partnership
dissolution will not be ordered even though the articles of partnership provide for dissolution
in case any of the partners should do any act to the discredit or injury of the partnership.
4. Wilful Breach
If one of the partners persistently disregards the duties undertaken by him with reference to
the management of the business, the other partners will find it impracticable to carry on
business. Then any of the other partners can sue for dissolution of the firm.
5. Assignment of Partnership Right
It is no doubt open to a partner to transfer even the whole of his interest in the firm to a third
party. Such action would, however, furnish a ground for the other partners to call upon the
court to dissolve the firm.
6. Firm working at a Loss
When it is found that losses are inevitable and the chances of profits being earned have faded
out, it would be improvident to continue the business. The court may at the suit of a partner
dissolve the firm in such case.

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7. Other Equitable Grounds

The court may find it equitable that the firm should be dissolved. This is a residual category
not covered by the enumeration in Section 44(a) - (f). It confers a power upon the court to
decree the dissolution of a firm even in the absence of the specified grounds particularly
mentioned in Section 44.
SALE OF GOODWILL AFTER DISSOLUTION
According to Lord Lindley, goodwill denoted “the benefit arising from connection and
reputation”. A firm which has built up a business acquires a reputation for honesty in
dealings and for quality of its goods. It is its goodwill. It is of advantage to person to have
this goodwill and to be able to represent to the world that he is carrying on a business
previously carried on and has already a reputation in the market. Under Section 14 the
property of a firm includes the goodwill of the business.
When a firm is dissolved, its goodwill also may be sold like any other asset. Goodwill may
be sold either separately or along with other property of the firm.
If the buyer of the firm wants additional protection for exploiting the goodwill of the firm,
which he has purchased, he can secure it only by an agreement with the partners of the
dissolved firm. Under such an agreement the partners may undertake not to carry on a
business similar to that of the firm.
It is no doubt true that agreements in restraint of trade are generally invalid. An exception,
however, is recognized when the goodwill of a firm is the subject-matter of the sale.

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UNIT-VII CONSUMER PROTECTION

"A customer is the most important visitor on our premises. He is not dependent on
us. We are dependent on him. He is not an interruption in our work. He is the
purpose of it. He is a part of it. We are not doing him a favor by serving him. He is
doing us a favor by giving us an opportunity to do so."
- Gandhiji
HISTORY OF CONSUMER PROTECTION MOVEMENT IN INDIA
The consumer movement in India is as old as trade and commerce itself. Even in Kautilya’s
Arthshastra, there are references to the concept of protection of consumers against the
exploitation by trade and industry, short weighment and measurements, adulteration along
with the punishment for these offences. There was, however, no organized and systematic
movement actually safeguarding the interests of the consumers. Prior to Independence,
consumer interests were considered mainly under laws like the Indian Penal Code,
Agricultural Production Grading and Marketing Act 1937, and Drugs and Cosmetics Act,
1940. Even though different parts of India had varying degrees of awareness, in general the
level of awareness was low.
The objective of the consumer movement is to secure the interests of the consumer against all
types of unfair trade practices. Consumerism may be defined as a social force within the
environment designed to aid and protect the consumers by exerting legal, moral and
economic pressures on business and government.
HISTORICAL REVIEW
Way back in the middle of the 19th century, a section of consumers in England organized
themselves to protest against exploitation of labour by the textile industry and they gave a
call to boycott the buying of textiles manufactured by such erring companies. There were
also similar moves by another section against employment of child and women labour, and
slavery. Towards the end of the 19th century, there were sporadic attempts by consumers in
the U.K. America and Europe to form Buyers Clubs in order to avoid middlemen and
profiteering. The buyers’ clubs were like informal consumer cooperatives where goods were

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purchased directly from the producers and supplied to consumers to assure quality, prevent
adulteration and ensure a reasonable price. Laws aimed at the protection of consumers are
not confined to modern times. In 200 BC there were laws in India against food adulteration.
The Laws of Manu which are several centuries old refer to punishments to be given to
dishonest traders.
CONSUMER MOVEMENT IN INDIA
India’s history reveals that in various periods and regimes of different kings and dynasties
prior to the British rule, there were enactments to punish the dishonest and unfair traders and
producers. The laws of Manu and Chanakya’s ‘Arthasastra’ also refer to the punishments to
be awarded to dishonest traders. The British introduced in India laws such as the Sale of
Goods Act, Weights and Measurements Act which were being followed in England. Some
organized effort to protect consumers from the middlemen was made in the 1940s by eminent
freedom fighters such as Sri. Tanguturi Prakasam, Sri C. Rajagopalachari, etc. in Southern
India. Today, consumer organizations such as the Mumbai Grahak Panchayat in Mumbai are
continuing this approach to consumer welfare by organizing the procurement and distribution
of essential items to their members.
The origin and growth of the consumer movement in India which has many similarities to the
movements elsewhere, can be divided into three significant stages-
 The first stage constitutes the 1960s in which organisations such as the Consumer
Guidance Society of India (Bombay) were formed to inform and educate consumers
on the quality of goods and services and to conduct simple tests on goods of daily
consumption.
 During the second phase, 1970-1980, shortages in the supply of essential
commodities and the unsatisfactory functioning of the Public Distribution System
(PDS) led activists to form consumer organizations in their towns and localities to
ventilate their grievances to the authorities concerned.
 The third phase of growth covering the period from 1981 to 1990 signifies expansion
and consolidation of the consumer movement in India, especially after 1986. With the

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enactment of the Consumer Protection Act, 1986, there has been a spurt in the
number of new organizations in the country

DEFINITION OF COMPLAINANT, COMPLAINT, CONSUMER, GOODS,

RESTRICTIVE TRADE PRACTICES, SERVICE, UNFAIR TRADE PRACTICES
COMPLAINANT
Complainant means
(i) A consumer, or
(ii) Any voluntary consumer association registered under the Companies Act, 1956, or
under any other law for the time being in force; or
(iii) The Central Government or any State Government, who or which makes a
complaint; or
(iv) One or more consumers where there are numerous consumers having the same
interest;
(v) In case of death of a consumer, his legal heir or representative; who or which
makes a complaint [Section 2(1)(b)]
COMPLAINT
Complaint means any allegation in writing made, with a view to obtaining any relief, by a
complainant that
(i) An unfair trade practice or a restrictive trade practice has been adopted by any
trader or service provider;
(ii) The goods bought by him or agreed to be bought by him suffer from one or more
defects;
(iii) The services hired or availed of or agreed to be hired or availed of by him suffer
from deficiency in any respect;
(iv) A trader or the service provider, as the case may be, has charged for the goods or
for the services mentioned in the complaint, a price in excess of the price—
— Fixed by or under any law for the time being in force;
— Displayed on the goods or any package containing such goods;
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— Displayed on the price list exhibited by him by or under any law for the
time being in force
— Agreed between the parties.
(v) Goods which will be hazardous to life and safety when used are being offered for
sale to the public,—
— In contravention of any standards relating to safety of such goods as
required to be complied with, by or under any law for the time being in force;
— If the trader could have known with due diligence that the goods so offered
are unsafe to the public.
(vi) Services which are hazardous or likely to be hazardous to life and safety of the
public when used, are being offered by the service provider which such person could
have known with due diligence to be injurious to life and safety. [Section 2(1)(c)].
CONSUMER
Section 2(d) of the CPA defines "consumer" as a person who:

(a) Buys any goods for a consideration which has been paid or promised or partly paid and
partly promised, or under any system of deferred payment and includes any user of such
goods other than the person who buys such goods for a consideration paid or promised or
partly paid or partly promised, or under any system of deferred payment, when such use is
made with the approval of such person, but does not include a person who obtains such
goods for resale or for any commercial purpose;

(b) Hires or avails of any services for consideration which has been paid or promised or
partly paid and partly promised, or under any system of deferred payment and includes any
beneficiary of such services other than the person who hires or avails of the services for a
consideration paid or promised, or partly paid and partly promised, or under any system of
deferred payment, when such services are availed of with the approval of the first mentioned
person but does not include a person who avails of such services for any commercial
purpose. It may, however, be noted that "commercial purpose" does not include use by a

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person of goods bought and services exclusively for the purposes of earning his livelihood by
means of self-employment."

From the above definition, it can be observed that:

 The goods or services must have been purchased or hired or availed of for a
consideration which has been paid in full or in part or under a system of deferred
payment, i.e., in respect of hire-purchase transactions;
 The goods purchased should not be meant for resale or for a commercial purpose.
Goods purchased by a dealer in the ordinary course of his business and those which
are in the course of his business to supply would be deemed to be for re-sale;
 In addition to the purchaser(s) of goods, or hirer(s) or user(s) of services, any
beneficiary of such services, a user of goods/services with the approval of the
purchaser or hirer or user would also be deemed to be a "consumer" under the Act.

GOODS

Goods, in terms of Section 2(1)(i) has been defined to mean goods as defined in the Sale of
Goods Act, 1930. As per Section 2(7) of the Sale of Goods Act, 1930 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. Therefore, most consumer
products come under the purview of this definition.

In Morgan Stanley Mutual Fund v. Kartik Das (1994) 3 CLJ 27, the Supreme Court held
that an application for allotment of shares cannot constitute goods. It is after allotment, rights
may arise as per the articles of association of the company. At the stage of application there
is no purchase of goods for consideration and again the purchaser cannot be called the hirer
of services for consideration.

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RESTRICTIVE TRADE PRACTICES

Restrictive Trade Practice means a trade practice which tends to bring about manipulation of
price or its conditions of delivery or to affect flow of supplies in the market relating to goods
or services in such a manner as to impose on the consumers unjustified costs or restrictions
and shall include—
(a) delay beyond the period agreed to by a trader in supply of such goods or in
providing the services which has led or is likely to lead to rise in the price;
(b) any trade practice which requires a consumer to buy, hire or avail of any goods or,
as the case may be, services as condition precedent to buying, hiring or availing of other
goods or services.[Section 2(1)(nn)].
SERVICE
The term ‘service’ is defined under Section 2(1)(o) as to mean service of any description
which is made available to potential users and includes, but not limited to the provision of
facilities in connection with banking, financing, insurance, transport, processing, supply of
electrical or other energy, board or lodging or both, housing construction, entertainment,
amusement or the purveying of news or other information, but does not include the rendering
of any service free of charge or under a contract of personal service. Passengers travelling by
trains on payment of the stipulated fare charged for the ticket are ‘consumers’ and the facility
of transportation by rail provided by the railway administration is a ‘service’ rendered for
consideration as defined in the Act Subscribers of telephones would also be ‘consumer’
under the Act.
Service Rendered under Medicare Insurance Scheme: Service rendered by a medical
practitioner or hospital/nursing home can not be regarded as service rendered free of charge,
if the person availing the service has taken an insurance policy for medical care where under
the charges for consultation, diagnosis and medical treatment are borne by the insurance
company and such service would fall within the ambit of ‘service’ as defined in Section 2(1)

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(o). Similarly, where as a part of the conditions of service, the employer bears the expenses
of medical treatment of an employee and his family members dependent on him, service
rendered to such an employee and his family members would not be free of charge and
would constitute ‘service’ under Section 2(1)(o) of the Act.
In State of Haryana v. Santra [2000(3) SCALE 417], the Supreme Court held that in a
country where the population has been increasing rapidly and the Government has taken up
the family planning as an important programme, the medical officer as also the State
Government must be held responsible in damages if the family planning operation is a failure
on account of the medical officers negligence because this has created additional burden on
the parents of the child.
In the case of Alex J. Rebello v. Vice Chancellor, Banglore University and others, 2003
CTJ 575 (CP) (NCDRC) the National Commission has held that the University in conducting
examination, evaluating answer sheets and publishing the result was not performing any
service for consideration and a candidate who appeared for the examination cannot be
regared as a consumer.
UNFAIR TRADE PRACTICES
An unfair trade practice refers to that malpractice of a trader that is unethical or fraudulent.
These practices cause an inconvenience or grievance to consumers.

An unfair trade practice is defined under Section 2(1)(r) of the Consumer Protection Act,
1986. According to this definition, it is a trade practice carried out for the promotion of sale.
It is the distribution or utilisation of any good or service by adopting a deceptive method or
practice.

The following practices fall under unfair trade practice:

1. An oral or written statement or visible representation that:

– Falsely represents a good or service to be of a particular standard, quality, grade and

so on.

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– Falsely represents any re-built, second-hand, reconditioned, renovated or old goods

as new.

– Represents that a good or service has sponsorship, approval, uses, benefits and so
on which they do not have. The same could apply to the seller or service provider.

– Makes a misleading or false representation regarding the need and usefulness of any
good or service.

– Provides to the public any warranty or guarantee of the performance of the length of
the life of the product. A service can be continued till deemed satisfactory.

– Gives a misleading image of the good, service or trade like the price of the product.

For the above clauses, any statement made via expression by sellers on the wrapper or
container of the item can qualify for unfair trade practice. The information of the product is
also placed inside the item, attached to the product, or accompanying it.

2. An advertisement published in any newspaper or other means of communication to the

general public may also result in unfair trade practice if the price communicated is
misleading or a bargain price. This means that an unfair trade practice would be when a
rational individual on reading, hearing or seeing the advertisement would think to be a
bargain price as compared to the product’s ordinary sale price.

3. Wrongful or deceitful permissions or expressions like:

– Offering gifts, prizes and so on without any intention of actually fulfilling the
expression.

– Putting across a product as free of charge when it is actually not as the cost is being
covered partly or wholly in the transaction amount.

– Conducting games of chance or skill like the lottery in order to promote a particular
product directly or indirectly.

– Not granting participants of a scheme their prize by closing the information about
the final results of the scheme.

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4. Allowing the sale of products, having the knowledge or reason to believe that the product
is not up to the standards of a competent authority. This could be in terms of design, contents,
packaging, etc.

5. Permitting the hoarding or destruction of products with the intention of raising the prices
of the goods.

CONSUMER PROTECTION COUNCILS

In terms of Section 7 of the Consumer Protection Act, 1986, the State Govt. set up the State
Consumer Protection Council. The Council was re-constituted under Notification No. 32(B)-
DCA consisting of 85 members. The Minister-in-Charge, Consumer Affairs Department is
the Chairman of the Council. The Council holds at least two meetings a year. The list of
members is given in Annex XIX.
The object of the State Consumer Protection Council is to promote the rights of the
Consumers as laid down in clauses (a) to (f) of Section 6 of the C.P. Act. 1986 as re-
produced below:-
(a) The right to be protected against the marketing of goods 19[and services] which are
hazardous to life and property;
(b) The right to be informed about the quality, quantity, potency, purity, standard and
price of goods 19[or services, as the cases may be], so as to protect the consumer
against unfair trade practice;
(c) The right to be assured, wherever possible, access to a variety of goods 19[and
services] at competetive prices;
(d) The right to be heard and to be assured that consumer’s interest will receive due
consideration at appropriate forums;
(e) The right to seek redressal against unfair trade practices 19[or restrictive trade
practices] or unscrupulous exploitation of consumers; and
(f) The right to consumer’s education.

CONSUMER DISPUTES REDRESSAL AGENCIES

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Section 9 of the Consumer Protection Act, 1986 provides for the setting up of three
Consumer Disputes Redressal Agencies each at the district, state and national level. These
are
1) District Consumer Redressal Agencies at the district level;
2) State Consumer Disputes Redressal Commission at the state level; and
3) National Consumer Disputes Redressal Commission at the national level.

THE DISTRICT FORUM

According to Section 9(a), every state government required to set up a District Forum in each
of its districts. The district forum is the “backbone of the redressal machinery” under the
1986 Act. Each district forum consists of a President and two other members. All of them are
appointed by the State Government. The President is required to be a person, who is or has
been or is qualified to be a District Judge. Two other members must not be less than 35 years
of age. One of whom must be a woman.[Sec. 10(a)]
Jurisdiction of the District Forum
Section 11 of the Act deals with the subject of jurisdiction of a District Consumer Disputes
Redressal Forum. The term ‘jurisdiction’ signifies and includes the following types of
jurisdiction:
a) The Pecuniary Jurisdiction
b) The Subject-matter Jurisdiction
c) The Territorial Jurisdiction.

a) Pecuniary Jurisdiction
According to Section 11(1), subject to the other provisions of the 1986 Act, the District
Forum shall have the jurisdiction to entertain complaints where the value of the goods or
services and the compensation, if any, claimed does not exceed rupees twenty lakhs.
b) Subject-matter of Jurisdiction

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As per the provisions of the 1986 Act, the district forum has jurisdiction over goods and
services. According to Consumer Protection Act, 1986, a complaint relating to defect in
goods, deficiency in services and complaint against the unfair trade practices relating to
goods and services could form the subject-matter of a complaint. However, the Consumer
Protection (Amendment) Act, 1993 enabled a district forum to entertain complaints where a
trader resorts to restrictive trade practices or in cases where the goods bought or agreed to be
bought by a consumer or services hired or availed of or agreed to be hired or availed by him
suffer from any deficiency. The Amendment Act, 1993 also enabled a District Forum to
entertain complaints regarding goods which will be hazardous to life and safety to users and
are being offered for sale to the public in contravention of the provisions of any law for the
time being in force.
c) Territorial Jurisdiction
Section 11(2) of the Act deals with the issues relating to the territorial jurisdiction of a
district forum. The aforesaid section lays down that a complaint shall be instituted in a
district forum within the local limits of whose jurisdiction:
a) The opposite party or each of the opposite parties, where there are more than one, at
the time of the institution of the complaint, actually and voluntarily resides or carries
on business or has a branch office or personally works for gain; or
b) Any of the opposite parties, where there are more than one, at the time of institution
of the complaint, actually or voluntarily resides, or carries on business or has a branch
office, or personally works for gain provided that in such case either the permission
of the District forum is given, or the parties who do not reside, or carry on business or
have a branch office, or personally work for gain, as the case may be, acquiesce in
such institution; or
c) The cause of action, wholly or in part, arises.

THE STATE COMMISSION

The 1986 Act envisages the establishment of a State Consumer Disputes Redressal
Commission in each and every state and union territory of the country. It consists of a
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President and not less than two and not more than such number of members, as may be
prescribed. Further, a state commission has an original, revisional and an appellate
jurisdiction.
Section 16 of the Act deals with the composition of the state commission. According to
Section 16(1) of the Act, each state commission shall consist of :
i. A person who is, or has been a Judge of High Court, appointed by the State
Government, who shall be its President;
ii. Not less than two and not more than such number of members, as may be prescribed,
and one of whom shall be a woman.
Jurisdiction

The jurisdiction of the state commission is discussed below:

a) Pecuniary Jurisdiction
According to Section 17(1)(a)(i), the State Commission has the jurisdiction to entertain the
complaints where the value of the goods or services and compensation, if any, claimed
exceed rupees twenty lakhs but does not exceed rupees one crore.
b) Subject Matter Jurisdiction
The Act clearly restricts the original jurisdiction of the state commission to entertain
complaints in respect of goods or services. A consumer dispute to be settled by a state
commission should, therefore, be limited to defect in goods, deficiency in services and
complaint against the unfair or restrictive trade practices or charging of price for goods in
excess of the price fixed by the law or displayed by the trader or the package containing such
goods. The Amendment Act, 1993 also enabled a State Commission to entertain complaints
regarding goods which will be hazardous to life and safety to users and are being offered for
sale to the public in contravention of the provisions of any law for the time being in force.
c) Territorial Jurisdiction
According to Section 17(2) of the 1986 Act, a complaint shall be instituted in a state
commission within the limits of whose jurisdiction:

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i. The opposite party or each of the opposite parties, where there are more than one, at
the time of the institution of the complaint, actually and voluntarily resides or carries
on business or has a branch office or personally works for gain; or
ii. Any of the opposite parties, where there are more than one, at the time of institution
of the complaint, actually or voluntarily resides, or carries on business or has a branch
office, or personally works for gain provided that in such case either the permission
of the state commission is given, or the parties who do not reside, or carry on business
or have a branch office, or personally work for gain, as the case may be, acquiesce in
such institution; or
iii. The cause of action, wholly or in part, arises.

d) Appellate Jurisdiction
Under the 1986 Act, the state commission has been vested with the power to entertain
appeals against the decisions of the district forum within a period of thirty days from the date
of the order.
e) Appellate Jurisdiction
Under the Act, the state commission shall have jurisdiction “to call for records and pass
appropriate orders in any consumer disputes which is pending before or has been decided by
any district forum within the state, which it appears to the state commission that such district
forum has exercised a jurisdiction not vested or has acted in exercise of the jurisdiction
illegally or with material integrity.
NATIONAL COMMISSION
In the hierarchy of the three tier consumer disputes redressal mechanism envisaged and
established under the 1986 Act, the National Commission is at the apex level. The authority
of the commission extends to the whole of India.
According to Section 20 of the Act, it consists of:
i. A person who is or has been a judge of the supreme court, to be appointed by the
central government, who shall be its president;

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ii. Not less than four and not more than such number of members as may be prescribed
and one of whom shall be a woman.

Jurisdiction
The national commission being the apex consumer disputes redressal agency, has been
vested with the pecuniary, the appellate and the revisional jurisdiction.
a) Pecuniary Jurisdiction
According to Section 21(a), the national commission shall have jurisdiction to entertain
consumer complaints where the value of the goods or services and compensation, if any,
exceeds rupees one crore.
b) Appellate Jurisdiction
The 1986 Act empowers the National commission to entertain appeals against the orders of
any state commission. However, the procedure for filing the appeals has been laid down in
the Consumer Protection Rules, 1987 framed by the central government.
c) Revisional Jurisdiction
The National Commission has also been vested with jurisdiction for the purpose of ensuring
that the state commissions exercise their powers within the limits of jurisdiction fixed for
them by the law. It has the jurisdiction to call for the records or pass appropriate orders in
any consumer dispute which is pending before or has been decided by any state commission
that such state commission has exercised jurisdiction not vested in it by law or has failed to
exercise a jurisdiction so vested, or has acted in the exercise of its jurisdiction illegally or
with material irregularity.
PENALTIES (Sec 27)
Where a trader or a person against whom a complaint is made or the complainant fails or
omits to comply with any order made by the District Forum, the State Commission or the
National Commission, as the case may be, such trader or person or the complainant shall be
punishable with imprisonment for a term which shall not be less than 1 month but which may
extend to 3 years, or with fine which shall not be less then Rs.2,000/- but which may extend
to Rs.10,000/- or with both.
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Provide that the District Forum, the State Commission or the National Commission, as the
case may be, if it is satisfied that the circumstances of any case so require, impose a sentence
of imprisonment or fine, or both, for a term lesser than the minimum term and the amount
lesser than the minimum amount, specified in this section.

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