6 Full Law Notes Foundation by JKSC

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Chapter No. Topics Page No.
1. THE INDIAN CONTRACT ACT, 1872 1 - 51
2. SALE OF GOODS ACT, 1930 52 - 85
3. THE INDIAN PARTNERSHIP ACT, 1932 86 - 116
4. THE LIMITED LIABILITY PARTNERSHIP ACT, 2008 117 - 122
5. THE COMPANIES ACT, 2013 123 - 148
6. Questions paper - May 2018 149 - 150
7. Questions paper - Nov 2018 151 - 153

J.K.SHAH CLASSES CA FOUNDATION - LAW
CHAPTER 1 - THE INDIAN CONTRACT ACT, 1872

UNIT 1: NATURE OF CONTRACTS
This is one of the oldest in the Indian law regime, passed by the legislature of pre-
independence India and received its assent on 25th April, 1872. But this Act was
introduced on 1st September, 1872.
It is applicable to whole of India except Jammu and Kashmir.
• DEFINITION OF CONTRACT :
The term ‘contract’ is defined in Section 2 (h) of Indian Contract Act, as under : “An
agreement enforceable by law is a contract”.
Contract = An agreement + Enforceability.
• DEFINITION OF AGREEMENT :
The term ‘agreement’ is defined in Section 2 (e) of the Indian Contract Act, as under:
“Every promise and every set of promises forming the consideration for each other, is
an agreement.”
Agreement = Offer + Acceptance.
All Contracts are agreements but all agreements are not contracts.
Basis of Agreement Contract

Meaning Every promise and every set of Agreement enforceable by law.
promises, forming the consideration Agreement + Legal enforceability
for each other. Offer + Acceptance
Scope It's a wider term including both It is used in a narrow sense with
legal and social agreement. the specification that contract is
only legally enforceable agreement.
Legal obligation It may not create legal obligation. Necessarily creates a legal
An agreement does not always obligation. A contract always grants
grant rights to the parties certain rights to every party.
Nature All agreement are not contracts. All contracts are agreements.
Example:
• DEFINITION OF PROPOSAL/OFFER:
OFFER
DEFINITION CHARACTERISTICS TYPES LAPSE OF OFFER
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DEFINITION:
The term proposal/offer has been defined in Section 2 (a) as under:
“When one person signifies to another his willingness to do or to abstain (not to do) from
doing anything, with a view to obtaining the assent of that another to such act or
abstinence, he is said to make a proposal.“
CHARACTERISTICS:
(1) Offer must be capable of creating legal relationship :
Case law: In Balfour v. Balfour, a husband promised to pay maintenance allowance
every month to his wife. When he failed to perform this promise, she brought an action to
enforce it. As it is an agreement of domestic nature, it was held that it does not
contemplate to create any legal obligation.
(2) The terms of the offer must be definite and certain:
The terms of the offer must be definite, unambiguous and certain and not vague.
(3) Offer must be different from invitation to offer.
An offer should be distinguished from an invitation to offer. An offer is definite and
capable of converting an intention into a contract. Whereas an invitation to an offer is
only a circulation of an offer, it is an attempt to induce offers and precedes a definite
offer.
Difference between offer & Invitation to offer

Offer Invitation to Offer
(i) Person expresses his willingness to (i) Person is inviting other people to
be bound by the terms of the make an offer
offer if other party excepts.
(ii) Offers leads to acceptance (ii) Invitation to offers lays to offer
Example – application form filled up Example – Issue of prospectus by
by students for taking admission in college
college
Case law: Harvey vs. Facie [1893]

In this case, Privy Council succinctly explained the distinction between an offer
and an invitation to offer. In the given case, the plaintiffs through a telegram asked
the defendants two questions namely,
(i) Will you sell us Bumper Hall Pen? and
(ii) Telegraph lowest cash price.
The defendants replied through telegram that the "lowest price for Bumper Hall Pen is
£ 900". The plaintiffs sent another telegram stating "we agree to buy Bumper Hall
Pen at £ 900". However the defendants refused to sell the property at the price.
The plaintiffs sued the defendants contending that they had made an offer to sell
the property at £ 900 and therefore they are bound by the offer.
However the Privy Council did not agree with the plaintiffs on the ground that while
plaintiffs had asked two questions, the defendant replied only to the second
question by quoting the price but did not answer the first question but reserved
their answer with regard to their willingness to sell. Thus they made no offer at all.
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Their Lordships held that the mere statement of the lowest price at which the
vendor would sell contained no implied contract to sell to the person who had
enquired about the price.
Case law: Mac Pherson vs Appanna [1951]: Where the owner of the property had
said that he would not accept less than £ 6000/- for it. This statement did not
indicate any offer but indicated only an invitation to offer.
(4) Offer should be communicated.
Unless an offer is properly communicated, there can be no acceptance of it.
As per Lalman Shukla vs Gauri Dutt, Gauri announced a reward for anyone who
found his nephew. Lalman found the nephew in ignorance of reward. Held that, he is
not entitled to reward as a person cannot accept an offer so long as he is unaware of
its existence.
(5) Offer can be express or implied.
An offer which is expressed by words, written or spoken, is called an express offer.
The offer which is expressed by conduct, is called an implied offer.
(6) Offer can be conditional.
Such conditional offer should be accepted along with the condition.
(7) Offer should not contain a term non-compliance of which would directly lead
to acceptance.
Example:
TYPES OF OFFER:
(1) General offer: It is an offer made to public in general. Anybody knowing about
the offer can accept such offer. No written acceptance is compulsory. Any person
coming forward, acting accordingly can accept the offer.
Case Law: In Carlill v/s Carbolic & Smoke Balls Co., a sole proprietary concern
manufacturing a medicine which was a carbolic ball whose smoke could cure
influenza issued an advertisement for sale of this medicine. The advertisement
also included a reward of £100 to any person who contracted influenza, after using
the medicine. Mrs.Carlill bought these smoke balls and used them as directed but
contracted influenza. It was held that Mrs.Carlill was entitled to a reward of £100
as she had fulfilled the condition for acceptance as the advertisement did not
require any communication of compliance of the condition, it was not necessary to
communicate the same.
(2) Specific/Special offer: When offer is made to a definite person/ definite group
of persons, it is known as special specific offer. Such offers can be accepted by
that specified person only.
(3) Cross offer: When two parties exchange identical offer in ignorance at the time
of each other's offer. The offers are called cross offers. There is no binding
contract in such case as one's offer cannot be constituted as acceptance by other.
Example:
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(4) Counter offer: When the offeree, offers to qualified acceptance to the offer,
subject to modification and variation in terms of original offer he is said to have
made a counter offer. A counter offer does not amount to acceptance of original
offer.
Example:
(5) Standing, open or continuing offer: An offer is allowed to remain open for
acceptance over a period of time is known as a standing, open or continuing offer.
LAPSE OF OFFER:
An offer should be accepted before it lapses (i.e. comes to an end). An offer may come to
an end in any of the following ways stated in Section 6 of the Indian Contract Act:
1. By communication of notice of revocation by offeror:
An offer may come to an end by communication of notice of revocation by the offerer.
an offeror can revoke his offer at any time before he becomes bound by it.
2. By lapse of time:
Where time is fixed for the acceptance of the offer, and it is not accepted within the
fixed time, the offer comes to an end automatically on the expiry of fixed time. Where
no time for acceptance is prescribed, the offer has to be accepted within reasonable
time. The term ‘reasonable time’ will depend upon the facts and circumstances of
each case.
3. By failure to accept condition in conditional offer:
Where, the offer requires that some condition must be fulfilled before the
acceptance of the offer, the offer lapses, if it is accepted without fulfilling the
condition.
4. By the death or insanity of the offeror/offeree:
Where, the offeror dies or becomes insane, the offer comes to an end if the fact of
his death or insanity comes to the knowledge of the acceptor before he makes his
acceptance. But if the offer is accepted in ignorance of the fact of death or insanity
of the offeror, the acceptance is valid. This will result in a valid contract, and legal
representatives, of the deceased offeror shall be bound by the contract. On the
death of offeree before acceptance, the offer also comes to an end by operation of
law.
5. By counter-offer by the offeree:
Where, a counter-offer is made by the offeree, then the original offer automatically
comes to an end, as the counter-offer amounts to rejections of the original offer.
6. By rejection of offer by the offeree:
Where, the offeree rejects the offer, the offer comes to an end. Once the offeree
rejects the offer, he cannot revive the offer by subsequently attempting to accept it.
The rejection of offer may be express or implied.
• DEFINITION OF ACCEPTANCE:
ACCEPTANCE
DEFINITION CHARACTERISTICS
DEFINITION: The term acceptance has been defined in Section 2(b) as under:
“When the person to whom the proposal is made signifies his assent thereto, the
proposal is said to be accepted. A proposal when accepted becomes a promise”.
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CHARACTERISTICS OF ACCEPTANCE:
1. The acceptance must be communicated:
The acceptance is, completed only when it has been communicated to the offerer.
Until the acceptance is communicated, it does not create any legal relations.
2. The acceptance must be communicated by a person who has the authority to
accept.
3. The acceptance must be absolute and unqualified:
As a conditional acceptance is counter offer.
4. Acceptance must be within a specific/reasonable time :
The acceptance must be made while the offer is still in force, i.e. before the offer
lapses. If any time-limit is prescribed in the offer, it should be accepted within the
prescribed time-limit. However, if not time is prescribed, it must be accepted within “a
reasonable time”.
5. Acceptance can be express or implied.
Case law: Lilly White vs. Mannuswamy (1970)
P delivered some clothes to drycleaner for which she received a laundry receipt
containing a condition that in case of loss, customer would be entitled to claim 15% of
the market price of value of the article, P lost her new saree. Held, the terms were
unreasonable and P was entitled to recover full value of the saree from the
drycleaner.
In the case referred above, the respective documents have been accepted
without a protest and hence amounted to tacit acceptance.
6. Acceptance should be via prescribed mode of communication.
Accepted in prescribed mode Not accepted in prescribed mode
Valid Offeror does not object Offeror objects
Valid Notice by offeror to

offeree to accept in
prescribed mode
Offeree accepts in Offeror does not

accept prescribe mode prescribed mode
Valid Invalid
COMMUNICATION OF OFFER AND ACCEPTANCE AND REVOCATION OF

OFFER AND ACCEPTANCE :
1. Communication of offer is complete when it comes to the knowledge of offeree.
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2. Communication of acceptance is complete
As against Offeror As against Offeree
When offeree puts the When the acceptance

acceptance in a course of comes to the
transmission and it is beyond knowledge of offeror
his reach to stop it
3. Revocation of offer is valid before offeree puts the acceptance in course of

transmission and it is out of his reach to stop it.
4. Revocation of acceptance is valid before acceptance comes to the knowledge of
offeror.
Example:
A offered, by a letter, to sell his car to B for Rs. 4,00,000. The letter was posted on
1st Jan which reached B on 4th Jan. B accepted the offer and posted his letter of
acceptance on 6th Jan. Here, A became bound by the offer on 6th Jan. In this case,
the offer could be revoked by A at any time before 6th Jan.
B accepted the offer and posted his letter of acceptance on 6th Jan which reached
A on 9th Jan. Here, B becomes, bound by his acceptance on 9th Jan. In this case,
the acceptance could be revoked at any time before 9th Jan.
• TYPES OF CONTRACTS
1. Valid contract: A valid contract is an agreement enforceable by law
[Sec. 2(h)]. A valid contract is that contract which fulfills all the essential
elements
2. Void Contract: It is a contract without any legal effect and cannot be
enforced in a Court of Law. Section 2(i) defines a void contract as "a
contract which ceases to be enforceable by law becomes void when if
ceases to be enforceable".
Void Agreement: Agreement which is not enforceable by law from the
beginning
3. Voidable Contract: As per Section 2(i), "an agreement which is enforceable by
law at the option of one or more the parties but not at the option of the other or
others is a voidable contract" .
Example: A contract brought about as a result of Coercion, Undue
influence, Fraud or misrepresentation would be voidable at the option of
the person whose consent was caused by any one of these factors.
S. Basis Void Contract Voidable Contract

No.
1 Meaning A Contract ceases to be An agreement which is enforceable
enforceable by law becomes void by law at the option of one or more
when it ceases to be of the parties thereto, but not at the
enforceable. option of the other or others, is a
voidable contract.
2 Cause A contract becomes void due to A contract becomes a voidable
change in law or change in contract if the consent of a party
circumstances beyond the was not free.
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3 Performance A void contract cannot be If the aggrieved party does not,
of contract performed. within reasonable time, exercise his
right to avoid the contract, any
party can sue the other for claiming
4 Rights A void contract does not grant The party whose consent was not
any right to any party. free has the right to rescind the
4. Illegal Agreement: It is a contract which the law forbids to be made.

The court will not only enforce such a contract but also connected
contracts. All illegal agreements are void but all void agreements or
contracts are not necessarily illegal.
Basis of difference Void agreement Illegal agreement

Scope A void agreement is not An illegal agreement is always
necessarily illegal. void.
Nature Not forbidden under law. Are forbidden under law.
Punishment Parties are not liable for any Parties to illegal agreements are
punishment under the law. liable for punishment.
Collateral It's not necessary that Agreements collateral to illegal
Agreement agreements collateral to void agreements are always void.
agreements may also be void.
It may be valid also.
5. Unenforceable contract: W here a contract is good in substance but

because of some technical defect i.e., absence in writing, barred by,
imitation etc., one or both the parties cannot sue upon it, it is
described as an unenforceable contract..
6. Express contract: A contract which is made by words either spoken
or written is said to be an express contract..
7. Implied contract: By implied contract means implied by law (i.e.,) the
law implies a contract though parties never intended.
Example: A delivers by mistake goods at B's warehouse instead of at
C's place. Here there is an obligation on the part of B to return the
goods to A, though they never intended to enter into a contract.
8. Tacit contract: A contract is said to be tacit when it has to be inferred from
the conduct of the parties.
Example: Obtaining cash through automatic teller machine, sale by fall of
hammer at an auction sale.
9. Executed contract: If the consideration for the promise in a contract (i.e.,
any act or forbearance) is given or executed, such type of contract is called
contract with executed consideration.
10. Executory contract: It is so called because the reciprocal promises
or obligation which serves as consideration is to be performed in
future.
11. Unilateral contract: A unilateral contract is a one - sided contract in
which only one party has to perform his promise.
12. Bilateral contract: W here the obligation or promise in a contract is
outstanding on the part of both the parties, it is known as bilateral
contract.
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• TYPES OF CONTRACTS AS PER ENGLISH LAW
The English Law classifies the contract into:
(i) Formal contracts, and
(ii) Simple contracts.
(i) Formal Contracts include (a) Contract of record and (b) Contract under
Seal.
(a) Contract of Record: A contract of record is either a judgment of a
court. A judgment is an obligation imposed by a Court upon one or
more persons in favour of another or others. As a matter of fact it is
not a contract in the real sense, since it is not based upon any
agreement between the two parties. Contracts of record derive
their binding force from the authority of the Court.
(b) Contract under Seal: A contract under seal is one which derives its
binding force from its form alone. It is in writing and is signed,
sealed and delivered by the parties.
(ii) Simple Contracts: All other contracts.
• ESSENTIAL ELEMENTS OF A VALID CONTRACT

In order to become a valid contract, an agreement must have the following
essential elements :
1. There must be an offer and its acceptance: In an agreement there must be
an offer by one party and its acceptance by the other. The offer when accepted
becomes agreement.
2. There must be mutual consent of the parties: The parties to an agreement
must have the mutual consent i.e., they must agree upon the same thing and in
the same sense. This means that there must be consensus ad idem (i.e.,
meeting of minds).
3. There must be legal obligation: An agreement must create legal
obligations i.e., an obligation enforceable by law. If the parties do not
intend to create legal obligation, there is no contract between them. An
obligation which gives rise to a moral or social obligation only is not a
contract e.g., an invitation to a friend for dinner creates a mere social
obligation.
4. There must be free consent of the parties: If the consent of the parties
is not free, then no valid contract comes into existence. The consent is
not free when it is obtained by coercion, undue influence, fraud,
misrepresentation of facts and mutual mistake of fact.
5. The parties must be competent to contract: It means that the parties must be
capable of entering into a contract. The minors, or persons of unsound mind are
not competent to contact. If the parties are not competent to contract, then no
valid contract comes into existence.
6. The agreement must be supported by lawful consideration: The lawful
consideration is that which is neither fraudulent, forbidden by law, immoral nor
opposed to public policy etc. If the consideration is not lawful, then no valid
contract comes into existence.
7. The object of the agreement must be lawful: A lawful object is that which is
neither fraudulent, forbidden by law, immoral, nor opposed to public policy etc.
8. The agreement must not be declared to be void: If certain agreement is
expressly declared to be void by the law of the country, then such agreement if
entered into, shall not be enforceable by Courts of Law.
9. The agreement must be certain: The meaning of the agreement must be
certain. In other words, an agreement whose meaning is not certain, is not valid.
10. The performance must not be impossible: The performance of an agreement
must be possible. An agreement to do an impossible act is not valid.
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UNIT 2: CONSIDERATION
• INTRODUCTION:
The term ‘consideration’ may be defined as the price of the promise. This
term is used in the sense of quid pro quo (i.e., something in return). It
means that when a party to an agreement promises to do something, he
must get something in return. This ‘something’ which a party gets in
return is the consideration.
• DEFINITION:
The term ‘consideration’ is defined in section 2 (d) of the Indian Contract Act, as
under:
“When at the desire of the promisor, the promisee or any other person
did or abstained from doing, or does or abstains from doing, or promises
to do or abstain from doing something, such act or abstinence is called a
consideration for the promise”.
• CHARACTERISTICS OF CONSIDERATION:
1. The consideration must move (i.e., must be done or promised to be
done) at the desire of the promisor :
An act or abstinence, which forms consideration for the promise, must be
done or promised to be done according to the desire of the promisor
Case law: In Durga Prasad v. Baldeo, D (defendant) promised to pay to P
(plaintiff) a certain commission on articles which would be sold through their
agency in a market. Market was constructed by P at the desire of the C
(Collector), and not at the desire of the D. D was not bound to pay as it was
without
2. It may move from the promisee or any other person :

Consideration may move from promisee or if the promisor has no objection
from any other person.
Case law: In Chinnayya v/s Ramayya, A, a daughter in consideration of
some property received from her father, entered into an agreement
with C, her uncle to pay him annuity. Later on, she refused to pay on
the ground that her uncle, a promisee, has not given consideration.
It was held, that consideration had moved from her father and as such
she was liable to pay.
3. Consideration can be past, present or future:

It can be executed or executory. But in England, past consideration is
no consideration.
4. Consideration need not be adequate:

Consideration whether in the sense of benefit or in the sense of
detriment, need not be adequate to the promise. Law requires the
presence of consideration, but does not inquire about the adequacy.
5. It must be real and not illusory :

The consideration to be valid must. be ‘real’ and ‘valuable’ and must not be
‘imaginary’.
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6. It must not be illegal, immoral, or opposed to public policy :
The consideration given for an agreement must be a lawful one. Where the
consideration to a contract is illegal, immoral or against public policy, the courts
do not allow an action on such contract.
7. Consideration can be executed or executory.
8. It can be negative or positive.
9. Consideration for an act which a person a legally bound to perform is not

a valid consideration.
Example: A promised to pay Rs. 5000 to B (a Police Officer) for investigating a
crime, which B was already bound to investigate by law. Here A’s promise to
pay the amount is without valid consideration as B is already under a legal
obligation to investigate the crime.
• DOCTRINE OF PRIVITY OF CONTRACTS

Since a contract is a private relationship between parties who make it, the
rights and obligations under such a contract are strictly confined to them. This
is known as the doctrine of “privity of contract”. It is a general rule of law that a
person who is not a party to the contract cannot sue.
The rule is “Stranger to contract cannot sue.But a stranger to a
consideration can sue”.
Exception to Rule” A stranger to a contract cannot sue”:
Under the Indian Law, the following are the exceptions to the rule that a stranger to a
contract cannot sue.
(1) Beneficiaries in the case of trust:

An agreement to create a trust can be enforced by the beneficiary,
though he was not a party to the contract between the settlor and the
trustees.
Example:
(2) Written family settlements:

In the case of family settlement, if the terms of settlement are reduced in
writing, members of the family who were not a party to the settlement
can also enforce their claim.
Example:
(3) Partition of Hindu Undivided Family:

In the case of certain marriage contracts a female member can enforce a
provision for marriage expense based on a petition made by the Hindu
undivided family.
Example:
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(4) Assignment of contract:
Where there is an assignment of a contract, the assignee can enforce
the contract for various benefits that would accrue to him on account
of the assignment.
Example:
(5) Acknowledgement of Debts:

In case of part performance of a contractual obligations or where there
is acknowledgment of liability on account of estoppel, a third party can
sue for benefits. W here for example ‘A’ gives ` 25000/- to ‘B’ to be
given to ‘C’ and ‘B’ informs ‘C’ that B is holding it on behalf of C,
but subsequently refuses to pay ‘C’ then ‘C’ can sue and enforce his
claim.
(6) Covenants with land:

Where a piece of land which is sold to buyer with certain covenants
relating to land and the buyer is kept on notice of the covenants with
certain duties, there the successors to the seller can enforce these
covenants.
Example:
(7) Contracts made by the agent:

The principal can enforce the contracts entered by his agent where the
agent has acted within the scope of his authority and in the name of
the principal.
Example:
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• NO CONSIDERATION, NO CONTRACT
Every agreement must be supported by a consideration and agreement
without consideration is void.
To this general rule there are certain exceptions which are mentioned in Section
25 of the Indian Contract Act.
(1) Out of Natural Love and Affection :
Where an agreement is expressed in writing and registered under law
for the time being in force for the registration of documents and is
made on account of natural love and affection between the parties
standing in a near relation to each other is enforceable even if there
is no consideration. Nearness of relationship, however, does not
necessarily imply love and affection.
Example:
(2) Compensation paid for past voluntary services:

A promise to compensate wholly or in part for past voluntary services
rendered by someone to promisor does not require consideration for
being enforced. However the past services must have been rendered
voluntarily to the promisor. Further the promisor must have been in
existence at that time and he must have intended to compensate.
Example:
(3) Promise to pay debts barred by limitation:

Where there is a promise in writing to pay a debt, which was barred by
limitation, is valid without consideration.
Example:
(4) Creation of Agency:

No consideration is necessary to create an agency
Example:
(5) In case of completed gifts, no consideration is necessary.
(6) Bailment:
Bailment is a contract where goods are delivered for a particular purpose and
once the purpose is served, goods are to be returned back. There are 2
parties; bailor and bailee.
Bailment can be gratuitous. i.e. without consideration.
Example:
(7) Charity
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UNIT 3: OTHER ESSENTIAL ELEMENTS OF A VALID CONTRACT
• CAPACITY OF PARTIES
The ‘capacity to contract’ means the competence (i.e., capability) of the parties to
enter into a valid contract.
The term ‘capacity to contract’ is defined in Section 11 of the Indian Contract Act, as
under :
“Every person is competent to contract who is of the age of the majority according to
the law to which he is subject, and who is of sound mind, and is not disqualified from
contracting by any law to which he is subject.”
An agreement will be valid and enforceable only if the parties to it are legally
competent to enter into contract.
Following persons are not competent to contract:
1. Minors :
A minor is a person who is below the age of eighteen years.
An agreement with a minor is void ab initio i.e., absolutely void, and
cannot be enforced in a court of law.
Case law: In Mohiri Bibee vs. Dharmodos Ghose, a minor, mortgaged
his house in favour of a money-lender, to secure a loan of Rs. 20,000. A
part of this amount (Rs. 10,500) was actually advanced to minor by
money lender. Subsequently, minor sued for the cancellation of the
mortgage on the plea that he was minor when he executed the
mortgage. In this case, the mortgage was held void, and was thus
cancelled. Further moneylender’s request for the repayment of the
amount advanced to minor as part consideration for the mortgage was
also not accepted. Privy Council held that as the minor’s contract was
absolutely void, therefore, there was no question of refunding money in
these circumstances.
The minor’s contracts do not impose any liability on his parents or
guardians.
Though an agreement with minor is void, valid contract can be entered
into with the guardian on behalf of the minor. The guardian must be
competent to make the contract and the contract should be for the
benefit of the minor. But not all contracts by guardian are valid.
A parent/guardian cannot bind a minor in a contract to purchase
immovable properties
A minor can be a beneficiary.
A minor cannot become partner in a partnership firm. However, he may
with the consent of all the partners, be admitted to the benefits of
partnership.
Minor can always plead minority:
Any money advanced to a minor cannot be recovered as he can plead
minority and that the contract is void. Even if there had been false
representation at the time of borrowing that he was a major, the amount
lent to him cannot be recovered.
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Ratification of agreement not permitted:
A minor on his attaining majority cannot validate any agreement which
was entered into when he was minor, as the agreement was void.
Similarly a minor cannot sign fresh promissory notes on his attaining
majority in lieu of promissory notes executed for a loan transaction
when he was minor, or a fresh agreement without consideration.
Minor’ property liable for necessaries :
Sometimes, a person supplies necessaries to a minor. In such cases,
the supplier of necessaries can claim reimbursement from the property
of minor, but not personally from the minor.
The minor as an agent :
A minor can be appointed as an agent. But he will not be liable for his
acts as an agent
2. Person of unsound mind :

As per Section 12, a person is of unsound mind if he is not capable of understanding
the terms of contract and form a rational judgement as to its effect.
Unsound mindedness is
Permanent Temporary
Idiot Usually sound but occasionally unsound
Void If contract is entered during
Lucid Intervals Lunatic intervals Valid Void
3. Persons disqualified by law

The following persons, who are disqualified by the law to which they are subject are
not competent to enter into a contract.
1. Alien enemies:
An ‘alien’ is a person who is a foreigner to the land. He may be either an ‘alien
friend’ or an ‘alien enemy.’ If the country of the alien is at peace with the country
of his stay, he is an alien friend. And if a war is declared between the two
countries, he is termed as an alian enemy.
2. Insolvents:
When a person is declared as an insolvent, his property shall vest with the
Receiver or ‘Official Assignee’. However, this disqualification of an insolvent is
removed ‘when the court passes an order of discharge.
3. Convicts:
A convict cannot enter into a contract while he is undergoing imprisonment. But
when he is pardoned or the sentence expires, he becomes capable of entering
into a contract. Thus, the incapacity is only during the period of sentence.
4. Corporation and a company:

The contractual capacity of the corporation is expressly defined by the
Special Act under which it is created. W hereas, the contractual capacity
of a company, registered under the Companies Act 2013, is regulated
by the terms of its ‘Memorandum of Association’ and the provisions of
the Companies Act.
: 14 :
5. Foreign sovereigns, diplomatic staff, and accredited representatives of
foreign states:
Such persons can enter into valid contracts and can enforce them in Indian
courts. However, a suit cannot be filed against them, in the Indian courts,
without the prior sanction of the central government.
• FREE CONSENT
The term ‘consent’ is defined in Section 13 of the Indian Contract Act, as under
“Two or more persons are said to consent when they agree upon the same thing
in the same sense. “ It is also known as consensus ad idem (i.e., meetings of
the minds). For the creation of contract, there must be consensus ad
idem.
The term ‘free consent’ may be defined as the consent which is obtained
by the free will of the parties, and neither party was forced or induced to
give his consent. It is defined in Section 14 of the Indian Contract Act, as
under :
Consent is said to be free when it is not caused by :
1. Coercion, as defined in Section 15, or
2. Undue influence, as defined in Section 16, or
3. Fraud, as defined in Section 17, or
4. Misrepresentation, as defined in Section 18, or
5. Mistake, subject to the provisions of Sections 20, 21 and 22.
• COERCION
“Coercion is committing or threatening to commit, any act forbidden by the
Indian Penal Code or unlawfully detaining or threatening to detain any
property, to the prejudice of any person whatever with the intention of
causing any person to enter into an agreements. (Section 15)
It is not necessary that coercion must proceed from the party to the contract
since relationship is not required. It may proceed from a third party who is
not a party to the contract.
It is immaterial whether Indian Penal Code is or is not in force in the place
where coercion is employed.
Physical force is involved.
Suicide also amounts to coercion.
When consent to an agreement is caused by coercion, the agreement is a
contract voidable at the option of the party whose consent was caused. In
other words, either aggrieved party can rescind the contract or affirm the
contract.
Example:
: 15 :
• UNDUE INFLUENCE
A contract is said to be induced by “undue influence” where the relations
subsisting between the parties are such that one of the parties is in a position
to dominate the will of the other and uses that position to obtain an unfair
advantage of the other.
A person is deemed to be in a position to dominate the will of the other, when
he holds authority, real or apparent over the other, or when he stands in a
fiduciary relation to other.
Following types of relations are judicially held to be of trust and confidence:’
(a) Lawyer and client.
(b) Doctor and patient.
(c) Spiritual adviser and devotee.
(d) Parents and child, etc
Mental force is involved
Can be exercised between same parties only as relationship is required.
The effect of undue influence is that it makes the contract voidable at the
option of the party whose consent is obtained by undue influence, i.e.,
such party can put an end to the contract if he so chooses
DIFFERENCE BETWEEN COERCION AND UNDUE INFLUENCE:

Coercion Undue Influence
1. The consent is given under the threat 1. The consent is given by a person who
of an offence forbidden by Indian is so situated in relation to another
Penal Code or detaining or that the other position to dominate his
threatening to detain property will.
unlawfully.
2. It is not necessary that some sort of 2. In case of undue influence, there is
relationship must exist between bound to be some sort of relationship.
parties.
3. Coercion need not proceed from 3. Undue influence is always exercised
parties to the contract. between parties to the agreement.
4. Coercion is mainly of physical nature. 4. Undue influence is of moral/mental
nature.
• FRAUD
The term ‘fraud’ may be defined as an intentional, deliberate or willful
misstatement of facts, which are material for the formation of a
contract.
Fraud means and includes any of the following acts committed by a party to a
contract with intent to deceive another party thereto or to induce him to enter
into the contract :
1. The active concealment of a fact by one having knowledge or belief of the
fact;
2. A promise made without any intention of performing it;
3. Any other act fitted to deceive;
4. Any such act or omission as the law specially declares to be fraudulent.
5. Person making the statement does not believe it as true
Example: A, intending to cheat B, falsely represented that five tonnes of ice
was manufactured daily in his factory. And thereby, induced B to buy the
factor. In fact, the production was 3.5 tonnes per day. The contract is voidable
at the option of B, as his consent is obtained by fraud.
: 16 :
Mere silence does not amount to fraud. But when silence is equivalent
to speech or when there is a duty to speak and the person does not
speak, it amounts to fraud.
The effect of fraud is that it makes the contract voidable at the option of the
party whose consent was obtained by fraud i.e., such party may put an end to
the contract if he so chooses. Aggrieved party can claim damages.
• MISREPRESENTATION
The term ‘misrepresentation’ may be defined as an innocent misstatement of
facts which are material for the contract. In other words, misrepresentation is a
false representation which is made innocently (i.e., without any intention to
deceive the other party),
A ‘representation: means a statement of facts made by one party to the other
with a view to induce the other party to enter into the contract.
There is no intention to cheat, hence it is not forbidden by Indian Penal Code
Person making the statement does believes it as true
The effect of misrepresentation is that it makes the contract voidable at the
option of the party whose consent was obtained by misrepresentation i.e., such
party may put an end to the contract if he so chooses. Aggrieved party cannot
claim damages (Section 19)
Example: A, by misrepresentation, lead B erroneously to believe that five
hundred T.V. sets were manufactured per month in his factory. Upon this
representation, B bought the factory. The actual production was found to be
only four hundred sets per month. Here, B’s consent is caused by
misrepresentation, and thus, the contract is voidable at his option
• MISTAKE
Mistake
Law Fact
Indian Law Foreign Law Bilateral Mistake Unilateral

Mistake
(Both parties are (One Party is at Not
Excusable Excusable at mistake) mistake)
Valid Void Void Valid
(a) Mistake of Law: A mistake of law does not render a contract void as
one can’t take excuse of ignorance of the law of his own country.
Since the mistake of Indian law cannot be given as an excuse, the
contract must be performed after rectifying the mistake, hence the
contract is valid. A mistake of foreign law is excusable and is treated
like a mistake of fact. Contract may be avoided on such mistake.
(b) Mistake of Fact: W here the contracting parties misunderstood each
other and are at cross purposes, there is a bilateral or mutual mistake. W
here both the parties to an agreement are under a mistake as to a matter
of fact essential to the agreement, the agreement is void. For example, A
offers to sell his Ambassador
Car to B, who believes that A has only Fiat Car agrees to buy the car.
Here the two parties are thinking about different subject matter so that
there is no real consent and the agreement is void.
: 17 :
W here only one of the party to a contract is under a mistake,i.e.
unilateral mistake, the contract will not become void. A mistake on the
part of one party only not caused or actively assisted by the act of the
other party, cannot invalidate an agreement.
• UNLAWFUL OBJECT AND UNLAWFUL CONSIDERATION

1. Agreement forbidden by law: Acts forbidden by law means acts that are
punishable under any Statute or Rules or Regulations made under any
Statute.
2. Agreement defeating the provisions of law or defeating any rule for the time
being in force.
3. Where object or consideration is unlawful because it involves or causing
injury to a person or loss of property.
4. Where consideration is immoral.
5. Where object is fraudulent.
6. An agreement which is against the general public, is said to be an
agreement opposed to public policy.
a) Trading with an enemy :
Trading with an enemy is regarded as opposed to public policy. Thus,
an agreement made with an alien enemy is unlawful on the ground of
public policy, and is void.
b) Trafficking in public offices :

The agreements which affect the normal working of government offices
are void as they are opposed to public policy e.g., appointment
decisions in consideration of money are void. Similarly, the agreement
for the procurement of a public recognition such as Param Veer Chakra
or any other title, for monetary or other consideration, is void.
c) Interference with course of law and justice:

Any agreement with the object of inducing a judicial officer or
administrative officer of the state to act corruptly or not impartially is void.
d) Stifling prosecution:
Any agreement to stifle or prevent illegally any prosecution is void as it
would amount to perversion or abuse of justice.
Example:
e) Maintenance and Champerty:

Maintenance is promotion of litigation in which the litigant has no
interest. Champerty is bargain whereby one party agrees to assist the
other in recovering property with a view to sharing the profit of litigation.
Example:
: 18 :
f) Marriage brokerage contracts :
An agreement to procure the marriage of a person in consideration of a
sum of money is called a ‘marriage brokerage contract’. Such
agreements being opposed to public policy are void.
g) Interest against obligation:

The following is example of agreement that are void as they tend to
create an interest against obligation. The object of such agreements is
opposed to public policy. A, who is the manager of a firm, agrees to
pass a contract to X if X pay to A 20000 privately; the agreement is void.
h) Agreement for the creation of monopolies:

Agreements having for their object the establishment of monopolies are
opposed to public policy and therefore void.
• AGREEMENTS EXPRESSLY DECLARED AS VOID

1. Agreement in restraint of marriage (Section 26):
Every agreement in restraint of marriage of any person other than a minor, is
void. So if a person, being a major, agrees for good consideration not to
marry, the promise is not binding.
Exceptions:
(1) Minors
(2) Restraint for particular reasonable period is valid.
2. Agreement in restraint of trade (Section 27):

Any agreement through which a person is restrained from exercising a lawful
profession, trade or business of any kind is to that extent void. The object of
this law is to protect trade. The restraint, even if it is partial, will make the
agreement void.
However there are certain exceptions:
(i) Where a person sells his business along with the goodwill to another
person, agrees not to carry on same line of business in certain
reasonable local limits, such an agreement is valid.
(ii) An agreement through which an outgoing partner will not carry on the
business of the firm for a reasonable time will be valid, though it is in
restraint of trade.
(iii) An agreement of service through which an employee commits not to
compete with his employer is not in restraint of trade. Example: ‘B’ is a
Doctor and he employs ‘A’ a junior Doctor as his assistant. ‘A’ agrees
not to practice as Doctor during the period of his employment with ‘B’ as
a Doctor independently. Such an agreement will be valid.
(iv) Trade Combinations are valid as long as they are not creating monopoly
are valid: An agreement between manufacturer and a wholesale
merchant that the entire production during a period will be sold by the
manufacturer to the wholesale merchant is not in restraint of trade. An
agreement among sellers not to sell a particular product below a
particular price is not an agreement in restraint of trade.
3.
: 19 :
4. Agreement in restraint of legal proceedings (Section 28):
An agreement in restraint of legal proceedings resulting in restriction of one’s
right to enforce legal rights is void. Similarly any agreement which abridges
the usual period for commencing the legal proceedings is also void.
However there are certain exceptions:
(i) A contract by which the parties agree that any dispute between them in
respect of any subject shall be referred to arbitration and that only the
amount awarded in such arbitration shall be recoverable is a valid
contract.
(ii) Contracts specifying the courts.
5. Agreement the meaning of which is uncertain (Section 29):
Where the meaning of the terms of an agreement is uncertain or if it is not
capable of being understood with certainty, then the agreement is void.
Example: A agreed to sell his radio to B for Rs. 500 or Rs. 800. The
agreement is void as there is no certainty about the price. It is not clear
whether the price is Rs. 500 or Rs. 800.
6. Wagering Agreements (Section 30):

The term ‘wagering agreement’ or ‘wager’ may be defined as an
agreement in which one person agrees to pay certain amount of
money (i.e., stake money) to the other person on the happening
or non-happening of a specified uncertain event. The wagering
agreements are void.
But collateral to wagering are valid.
Illegal agreements are void and collateral to illegal are also void.
Example :
A and B enter into an agreement that if it rains on Monday, A will pay
Rs. 100 to B. And if it does not rain on Monday, B will pay Rs. 100 to
A. This is a wagering agreement.
The Act provides that an agreement to buy lottery tickets is one
by way of wager and is void. However any subscription or
contribution or agreement towards such subscription or
contribution towards any plate or prize or sum of money, of the
value of `500 or more to be awarded to a winner of a horse race
is not unlawful.
A promissory note given out of a wagering contract is not
enforceable by way of a suit.
Speculative transactions are valid as it involves skill.
: 20 :
UNIT 4: PERFORMANCE OF CONTRACT
• INTRODUCTION
After the formation of a valid contract, the next step is the fulfillment of the
object that the parties had agreed to do. For the fulfillment of the object, the
parties become liable to perform their respective obligations. W hen the
parties perform their respective obligations, the object is fulfilled and the
liability of the parties comes to an end. After the performance, the contract is
said to be discharged. Thus, ‘performance’ is one of the various modes of
discharge of the contract.
• CONTRACT WILL BE PERFORMED BY:

1. Promisor himself: If there is something in the contract to show that it was
the intention of the parties that the promise should be performed by the
promisor himself, such promise must be performed by the promisor
(Section 40). This means contracts which involve the exercise of
personal skill or diligence, or which are founded on personal
confidence between the parties must be performed by the promisor
himself
2. Agent: W here personal consideration is not the foundation of a contract,

the promisor or his representative may employ a competent person to
perform it.(Section 40)
3. Representatives: A contract which involves the use of personal skill or is

founded on personal consideration comes to an end on the death of the
promisor. As regards any other contract the legal representatives of the
decreased promisor are bound to perform it unless a contrary intention
appears from the contract (Section 37). But their liability under a contract
is limited to the value of the property they inherit from the deceased.
4. Third persons: W hen a promisee accepts performance of the promise
from a third person, he cannot afterwards enforce it against the
promisor. That is performance by a stranger, accepted by the promisee,
produces the result of discharging the promisor, although the latter has
neither authorised nor ratified the act of the third party. (Section 41)
• DISTINCTION BETWEEN SUCCESSION AND ASSIGNMENT Succession:

When the benefits of a contract are succeeded by a process of law, both the
burden and the benefit would sometimes devolve on the legal heir. For
example ‘B’ is the son of ‘A’. Upon A’s death ‘B’ will inherit all the assets and
liabilities of ‘A’ [These assets and liabilities are also referred to as debts and
estates] Thus ‘B’ will be liable to all the debts of ‘A’, but if the liabilities
inherited are more than the value of the estate [assets] inherited it will be
possible to pay only to the extent of assets inherited.
Assignment: Assignment is voluntary transfer of right. Unlike succession,

the assignor can assign only the assets to the assignee and not the liabilities.
: 21 :
• REQUISITES OF A VALID TENDER:
A tender to be valid must fulfill the following conditions:
(1) It must be unconditional:
The tender must be in accordance with the terms of the contract
(2) Tender must be at a proper time and place:

What is proper place and time normally can be gathered from the intention of
the parties, the circumstances of the case as well as prevailing custom in the
trade.
(3) Tender must be within reasonable time.
(4) Tender must give reasonable opportunity for inspection :

If the offer is an offer to deliver anything to the promisee, the promisee
must have a reasonable opportunity of seeing that the thing offered is
the thing which the promisor is bound by his promise to deliver.
• EFFECT OF REFUSAL OF A PARTY TO PERFORM:

When a party to a contract has refused to perform or disabled himself from
performing his promise in its entirety, the following two rights accrue to the
aggrieved party namely:
(i) To terminate the contract; OR
(ii) Continue the contract.
The aggrieved party can also claim damages.
Example :
A, a singer, enters into a contract with B, the manager of a theatre, to sing
at his theatre two nights in every week during the next two months, and B
agrees to pay her Rs. 100 for each night’s performance. On the sixth night,
A wilfully absents herself from the theatre. B is at liberty to put an end to the
contract.
• LIABILITY OF JOINT PROMISORS

Where two or more persons enter into a joint agreement with one or more person,
the promise is known as a joint promise.
Example:
A, B, and C jointly borrowed a sum of Rs.15,000 from X, and jointly promised to
repay the amount. It is a joint promise.
1. The joint promisors or their representatives must jointly perform the

promise :
The joint promisors must jointly fulfill the promise during their joint life
time. And if anyone of them dies, his legal representatives must jointly
with the surviving promisors fulfill the promise. On the death of all the
promisors, the representatives of all of them must jointly fulfill the
promise
2. The promisee may compel anyone of the joint promisors to perform the
promise:
Example:
A, B and C jointly promised to pay Rs. 30,000 to D. In this case D may compel
either A, or B or C to pay him the entire sum of Rs. 30,000.
: 22 :
3. Rights and liabilities of the joint promisors among themselves:
(a) Joint promisors are liable to contribute equally :
If a joint promisor has been compelled to perform the whole of the
promise, he may require the other joint promisors to make an equal
contribution towards the performance of the promise [Section 43].
(b) Joint promisors liable to share losses equally:
If any one of the joint promisors does not make any contribution, the
remaining joint promisors should bear the loss in equal shares [Section
43].
4. The promisee may release one of the joint promisors:

Where a promisee releases one of the joint promisors, the release of one
promisor does not discharge the other joint promisor or promisors. Thus, the
remaining joint promisors continue to be liable to pay the amount.
• RIGHTS OF JOINT PROMISEES

1. There may be joint promisees also i.e., one person may make a promise to
more than one persons jointly.
2. The joint promisees have the joint right to ask for the performance of the
promise.
3. Where one person has made a joint promise to, more than one person, then all
the promisees must jointly claim performance so long as all are alive.
4. If anyone of them dies, his legal representatives must jointly with the surviving
promisees claims the performance. On the death of all the joint promisees, the
legal representatives of all of them must jointly claim the performance.
Example:
A and B jointly lent Rs. 10,000 to C. And C promised A and B jointly to repay them
that amount on a specified day. Here, A and B must jointly claim the performance. If
A dies before performance, the right to claim performance rests with A’s
representative jointly with B. And if both A and B die, the rights to claim performance
rests with the representatives of both of them.
• TIME AND PLACE FOR PERFORMANCE:

The rules regarding the time and place for performance are contained in Sections 46
to 50 of the Indian Contract Act, which may be discussed as under:
1. Where the day for performance is not specified in the contract, and the
promisor himself has to perform the promise without being asked (i.e., without
any demand) by the promisee the promise must be performed within a
reasonable time [Section 46].
2. Where the time for performance is not specified in the contract, and the
promisor himself has to perform the promise without being asked (i.e., without
any demand) by the promisee, promise may be performed at any time during
the usual hours of business on the specified day. But the promise should be
performed at the place where it was required to be performed [Section 47].
: 23 :
3. Where the day for the performance is specified in the contract and the
promisor has to perform it only on being asked (i.e., on demand) by
the promisee, then the promisee must first apply to the promisor (i.e.,
make a demand on the promisor) for the performance of the promise
Promisee’s duty to specify day, time, place for performance [Section
48].
4. Where the place for performance is not specified in the contract, and the
promisor himself has to perform the promise without being asked by the
promisee, then the promisor, must first apply to the promisee to appoint a
reasonable place for the performance of the promise. And thereafter, he should
perform the premise at the place appointed by the promisee [Section 49].
5. Where the manner and time for performance is prescribed by the promisee
himself, the promise should be performed in the manner and at the time
prescribed by the promisee [Section 50].
• PERFORMANCE OF RECIPROCAL PROMISES

Definition of a Reciprocal Promise
The term ‘reciprocal promise’ is defined in Section 2(f) of the Indian
Contract Act, as under :
“Promises which form the consideration or part of consideration for each other
are called reciprocal promises.”
Thus, when a contract consists of exchange of promises, the promises are
called reciprocal promises.
Example :
A and B promised to marry each other. These are reciprocal promises. In
this case, A’s promise is the consideration for B’s promise. And B’s
promise is the consideration for A’s promise.
Kinds of Reciprocal Promises and their Performance

Following are the rules relating to the performance of different kinds of
reciprocal promises:
1. Mutual and concurrent:
These are the promises which are to be performed simultaneously
i.e., at the same time. In such promises, the promisor is not bound to
perform his promise, unless the promisee is ready and willing to perform
his own promise [Section 51].
2. Conditional and dependent:
These are the promises where the performance of the promise by one
party depends on the prior performance of the promise by the other
party. In such promises if the party who is bound to perform his promise
first, fails to perform it, then he cannot claim performance from the other
party. Moreover, the defaulting party becomes liable to pay the
compensation to the other party for the loss suffered by the other on
account of the non- performing of the contract [Section 54].
3. Mutual and independent:
These are the promises where each party must perform his promise
independently without waiting for the other party to perform his promise,
or without waiting whether or not the other party is willing to perform his
promise. In such promises, if either party fails to perform his promise, the
other party may proceed against him for the damages. Though a party can
recover damages from the defaulting party, but he cannot excuse himself
from the performance by reason of the non-performance by the defaulting
party.
: 24 :
Effects of Preventing the Performance of Reciprocal Promises
Where one party to a reciprocal promise prevents the other party from
performing his promise, the contract becomes voidable at the option of the party
who is so prevented. And the party so prevented may also recover
compensation from the other party for any loss suffered due to non-
performance of the contract [Section 53]. Thus, a party so prevented may put
an end to the contract, and can also recover compensation from the party who
so prevents.
Legal and Illegal Reciprocal Promises

Following are the rules regarding enforcement of legal and illegal reciprocal
promises:
Promises to do legal things and other illegal things :
Sometimes, the persons enter into reciprocal promise, firstly to do
certain things which are legal, and secondly to do certain other things
which are illegal. In such cases, the first set of promises is a valid
contract and can be enforced in a Court of Law. But the second set
is a void agreement and thus, cannot be enforced in a Court of Law
[Section 57 & 58].
Example :
A and B agreed that A shall sell his house for Rs. 40 lakhs. And that if B
used it as gambling house, the price shall be Rs. 60 lakhs. In this case, the
first set of reciprocal promises, namely to sell the house and to pay Rs. 40
lakh for it, is a valid contract and can be enforced. But the second set,
namely, to sell the house and to pay Rs. 60 lakhs for it if the house is used
as a gambling house, is a void agreement and cannot be enforced. In the
second set of promises, the object is unlawful.
But if the things are inseparable then the entire agreement is void.
• EFFECTS OF FAILURE TO PERFORM AT A TIME FIXED IN A CONTRACT IN

WHICH TIME IS ESSENTIAL
When time element in a contract is When time element in a

contract is essential not essential
If promisor fails to perform within If promisor fails to perform within fixed

time fixed time
Promisee can Promisee can
Rescind the Affirm the contract Only

contract (+) Claim damages
(+) Claim damages
Claim damages
: 25 :
• IMPOSSIBILITY OF PERFORMANCE
(1) Impossibility existing at the time of contract: Even at the time of entering into the
agreement, it may be impossible to perform certain contracts at the beginning or
inception itself. The impossibility of performance may be known or may not be known
to the parties
(i) If the impossibility is known to the parties : A agreed with B to discover a
treasure by magic. And B agreed to pay Rs. 500 to A for this act. This
agreement is void
(ii) If unknown to the parties: Even where both the promisor and the promisee
are ignorant of the impossibility the contract is void.
Example:
(iii) If known only to the promisor: Where the promisor alone knows it is
impossible to perform or even if he does not know but he should have known
about the impossibility with reasonable diligence, the promisee is entitled to
claim compensation for the loss suffered because of failure of the promisor to
perform.
Example:
(2) Supervening impossibility: When performance of a promise becomes impossible

on account of subsequent developments of events or change in circumstances, which
are beyond the contemplation of parties, the contract becomes void.The idea of
“supervening impossibility” is referred to as ‘doctrine of frustration’ in English law..
Supervening impossibility can arise due to a variety of circumstances as stated
below.
(i) Accidental destruction of the subject matter of the contract :
Example:
(ii) Non-existence or no -occurrence of a particular state of things:

Example:
(iii) Incapacity to perform a contract of personal services: In case of contract of

personal service, disability or incapacity to perform, caused by an Act of God
e.g. illness, constitutes lawful excuse for non- performance of the contract. For
example: A, a circus motor cyclist, contracted with B, the owner of a circus, to
perform particular action on his motor cycle. -Before the performance, A died.
In this case, the contract is discharged.
(iv) Change in law: Performance of a contract may also become impossible due to
change in law subsequently. The law passed subsequently may prohibit the act
which may form part as basis of contract. Here the parties are discharged from
their obligations. For example ‘A’ and ‘B’ may agree to start a business for sale
of lottery and contribute capital for the business. If the business of sale of
lottery ticket is banned by a subsequent law, parties need not keep up their
legal obligations.
(v) Outbreak of war: Outbreak of war will affect the enforceability of contracts in
prohibiting or restraining transaction with alien enemy.
: 26 :
• APPROPRIATION OF PAYMENTS
Sometimes, a debtor owes several debts to the same creditor and makes payment
which is not sufficient to discharge all the debts. In such cases, the payment is
appropriated (i.e., adjusted against the debts) as per Sections 59 to 61 of the
Indian Contract Act. These sections contain the rules as to against which debt the
payment is to be appropriated, and’ may be discussed as under :
1. Where the debtor has stated that the payment made by him should be
adjusted against a particular debt, the creditor must do so if he accepts the
payment [Section 59]. And if there is no express, intimation by the debtor,
the law will gather his intention from the circumstances regarding the
payment, e.g., if the amount paid by the debtor is the exact amount of one of
the debts, it must be used to discharge that particular debt.
2. Where the debtor makes payment without any indication about the
appropriation of the payment, the creditor may adjust the payment according
to his discretion. The creditor would like to adjust the payment against a debt
which is not likely to be recovered. But he can adjust the payment only
against the legal debts and not against the illegal or disputed debts. However,
the creditor may also adjust the payment against the debts which are time
barred [Section 60].
3. W here the debtor does not expressly intimate anything about the
appropriation of the payment and the creditor also fails to make any
appropriation, the law prefers to wipe out the earlier debt in order of
time irrespective of the fact that some of them are time barred [Section
61]., And if there are several debts of the same date, the payment
shall be adjusted against each debt proportionately.
• CONTRACTS WHICH NEED NOT BE PERFORMED

1. Novation :
The term ‘novation’ means the substitution of existing contract for a new
contract. In other words, when the parties to a contract agree to substitute the
existing contract by a new contract, it is known as novation. The novation
must be with the mutual consent of all the parties.
For example, A owes money to B under a contract. It is agreed between A, B
and C that B shall thenceforth accept C as his debtor, instead of A. The old debt
of A to B is at an end, and a new debt from C to B has been contracted.
2. Rescission :
The term ‘rescission’ means the cancellation of the contract. A contract may
be rescinded by mutual agreement between the parties at any time before it
is discharged by performance or in some other way.
3. Alteration :
The term ‘alteration’ means change in one or more terms of the contract. The
alteration is valid when it is made with the consent of all the parties. And the
valid alteration discharges the original contract, and the parties become
bound by the new contract (i.e., contract with altered terms).It is important to
note here that in case of a written contract, the material alteration by one
party without the consent of the other, also discharges the contract.
: 27 :
4. Remission :
The term ‘remission’ means the acceptance of lesser fulfillment of the terms
of the promise, e.g., acceptance of a less sum of money where more is due.
In other words, the remission is the lesser fulfillment of the promise made.
The remission is the valid discharge of the whole of the liability under the
contract.
For example, A owed Rs. 5,000 to B. A paid Rs. 2,000 to B, and B accepted
it in full satisfaction. In this case, A is ,discharged from his liability of Rs.
5,000.
• RESTORATION OF BENEFIT UNDER A VOID CONTRACT

Quantum Meruit (as much as is earned): If any work is done, get paid for it and if
any benefit is received then pay for it.
1. Any benefit received under voidable contract which is subsequently avoided
is to be returned back (Section 64)
2. Any benefit received under void contract is to be returned back (Section 65)
• COMMUNICATION OF REMISSION
Remission must be communicated to the other party in the same manner as a
proposal is communicated. Similarly, a remiission may be revoked in the same
manner as a proposal is revoked.
• EFFECTS OF NEGLECT OF PROMISEE

If any promisee neglects or refuses to afford the promisor facilities for the
performance of a promise, the promisor is excused from the performance of his
promise.
: 28 :
UNIT 5: BREACH OF CONTRACT
• INTRODUCTION
In case of a valid contract, the parties are bound to perform their respective
obligations. If any party fails to perform his obligations, there occurs a breach of
the contract. The ‘breach of contract’ means the failure of a party to perform him
obligations.
The party who fails to perform his obligations, is said to have committed
a breach of contract. And a breach of a contract discharges the aggrieved
party from performing his obligations. The breach of contract is of the
following two types:
1. Anticipatory Breach 2. Actual Breach
1. Anticipatory Breach of Contract

It occurs when, prior to the due date of performance, the promisor absolutely
refuses or disables himself from the performance of his obligations. In other
words, it is a declaration by one party of his intention not to perform his
obligations under the contract. Thus, the anticipatory breach is’ the premature
destruction of the contract, i.e., the repudiation of the contract before due
date of performance. “
Example :
A contracted to supply to B 100 pieces of denims on 15th December 2006.
But before the due date of performance (i.e., 15th December, 2006), A
informed B that he is not going to supply the denims at all. On A’s refusal to
supply the goods, the anticipatory breach of the contract occurs. And B may
put an end to the contract.
The anticipatory breach may take place either by express refusal to perform the
contract, or by some act of the promisor which makes the performance
impossible.
Example :A agreed to marry B. But before the agreed date of marriage, A
married C. This is anticipatory breach of contract by A’s conduct which has
made the performance impossible.
In case of an anticipatory breach of the contract, the aggrieved party may
exercise either of the following two options :
(i) He may treat the contract as discharged and bring an immediate action
for damages.
(ii) He may treat the contract as operative and wait till the time of
performance arrives.
2. Actual Breach of Contract
It occurs when, on the due date of performance or during the performance, a
party fails to perform his obligations. Thus, the actual breach of contract may
be discussed under the following two heads.
i. Actual breach of contract on the due date of performance :
Sometimes, on the due date of performance, one party fails to perform
his obligations. In such cases, the other party is discharged from the
performance of his obligations, and can hold the guilty party liable for
the breach of contract.
Example :
A agreed to sell his car to B on 1st June. But on 1st June, A refused to
sell the car to B. On A’s refusal to sell the car, there occurred a breach
of the contract. And B can hold A liable for the breach of contract.
: 29 :
ii. Actual breach of contract during its performance :
Sometimes, one party performs his obligations under the contract but
the other party fails or refuses to perform his obligations. It is an actual
breach of contract during its performance. And sometimes, one party,
no doubt, performs his obligations but not strictly according to the
contract. It is also an actual breach of contract. This type of breach of
contract occurs when the party, performing the contract, commits a
breach of the essential conditions to contract.
Example :
A contracted to sell certain goods to B of particular description to be
delivered on 15th March. On the due date of delivery, A delivered the
goods to B. But the goods did not conform to the description. In this
case, the breach of contract is committed during the performance of the
contract as A has not performed the contract according to its terms. And
thus, B is not bound to take delivery of the goods and pay for them.
DAMAGES FOR BREACH OF CONTRACT

The term ‘damages’ may be defined as the monetary compensation payable by the
defaulting party to the aggrieved party for the loss suffered by him. On the breach
of the contract, the aggrieved party may file a suit for damages against the party
who is guilty of the breach of the contract. And the guilty party is liable to pay
damages to the aggrieved party.
Kinds of Damages
Following are the different kinds of damages :
1. Actual/Ordinary/ Usual damages :
These are the damages which are payable for the loss arising
naturally and directly, in the usual course, from the breach of contract.
In other words, the ordinary damages are due to natural and probable
consequence of the breach of the contract
Example :
A contracted to give his ship to B on hire for one year, from 1st of January, for
Rs. 50,000. Subsequently, A broke his promise. And on 1st of January, B
hired another similar ship for one year for Rs. 60,000, as no other ship was
available for Rs. 50,000. In this case, A liable to pay B, by way of
compensation, Rs. 10,000 (i.e., the difference between the contract price
and the price for which B could hire another similar ship for one year from 1st
of January).
2. Liquidated damages :
Sometimes, the amount of compensation fixed for the breach of the contract
is fair and genuine pre-estimate of the probable damages. Such an amount
is known as liquidated damages.
Example:
3. Special damages :
These are the damages which are payable for the loss arising due to some
special or unusual circumstances. In other words, the special damages are
not due to the natural and probable consequences of the breach of the
contract.
The special damages are recoverable only if the parties knew about them
and agree at the time of contract.
: 30 :
Example :
A delivered a machine to B a common carrier, to be conveyed to A’s mill
without delay. A also informed B that his mill was stopped for want of the
machine. B unreasonably delayed the delivery of the machine, and in
consequence A lost a profitable contract with the government. In this case, is
entitled to receive from B, by way of compensation, the average amount of
profit which would hall been made by running the mill during the period of
delay. But he cannot recover the loss sustained due to the loss of the
government contract, as A’s contract with the government was not brought
the notice of B.
4. Exemplary/ vindictive/ punitive damages:

The exemplary damages are claim with the intention of punishing the
party in default. As a general rule, the exemplary damaged are not
awarded for the breach of contract as they are punitive in nature.
However, in following two cases, the court may award exemplary
damages:
(i) Where there is a breach of a promise to marry: In such cases, the
damages will include compensation for loss to the feelings and
reputation of the aggrieved party.
(ii) Where a banker wrongfully dishonors customer s cheque, e.g., dishonor
of customer’s cheque when the banker has sufficient funds to the credit
of the customer. In such cases, the damages are awarded taking into
consideration the loss to the prestige and goodwill of the customer. The
general rule, in this connection is, the smaller the amount of cheque the
greater is the insult, and thus greater the amount of damages.
5. Nominal damages:
These are the damages which are very small in amount. Such
damages are awarded simply to establish the right of the party to claim
damages for the breach of contract even though the party has suffered
no loss. Such damages are for nominal amounts like ten rupees or
even ten paise.
Example:
6. Damages for deterioration caused by delay:

Compensation can be recovered even without notice for damages or
‘deterioration’ caused to goods on account of delay by carriers
amounting to breach of contract. Here the word “deterioration” means
not only physical damages but also loss of opportunity.
Case Law: In Wilson vs. Lancashire and Yorkshire Railway Company,
the plaintiff bought velvet with a view to making it into caps for sale
during spring. But due to delay in transit, he was unable to use the
velvet for making caps for sale during season.
7. Remote or indirect damages :

These are the damages which are payable for the loss arising due to some
remote or indirect causes. Generally, the remote damages are not
recoverable.
: 31 :
• LIQUIDATED DAMAGES AND PENALTY
Sometimes, at the time of the formation of the contract, the parties fix the amount
of compensation that will be payable in case of breach of the contract. The amount
so specified may be (a) liquidated damages, or (b) penalty.
1. Liquidated damages :
Sometimes, the amount of compensation fixed for the breach of the contract is
fair and genuine pre-estimate of the probable damages. Such an amount is
known as liquidated damages.
2. Penalty :
Sometimes, the amount of compensation fixed for the breach of the contract is
not fair and genuine pre-estimate of the probable damages, but is
disproportionate to the damages which may result in case of the breach of the
contract. Such an amount is known as penalty.
Liquidated damages Penalty

1. Imposed by way of compensation 1. Imposed by way of punishment
2. It is an assessed amount of loss 2. It is not based on actual. It is
based on actual. imposed to prevent parties from
committing the breach.
3. English Law recognizes the 3. Section 74 of the act does not
difference between the two recognize any difference between
(liquidated damages & penalty) the two.
The sum so named determines only the maximum liability. And the courts
cannot allow damages beyond that limit, i.e., the courts cannot increase the
amount of damages beyond the amount specified in the contract itself.
In terms of Section 74, courts are empowered to reduce the sum payable on
breach whether it is ‘penalty’ or “liquidated damages” provided the sum
appears to be unreasonably high.
• ADDITIONAL REMEDIES AVAILABLE IN CASE OF BREACH OF

CONTRACT:
Apart from claiming damages, following remedies are available in case of breach of
contract:-
(1) Suit for Quantum Meruit: W here the aggrieved party in the contract
has given any advance and if subsequently if there is breach, then the
advance can be claimed back under the principle of Quantum Meruit.
(2) Rescission of contract : W hen a contract is broken by one party, the
other party may treat the contract as rescinded. In such a case the other
party is discharged from performing his part of promise and is entitled
to claim compensation for any loss that he might have suffered.
(3) Suit for Specific Performance :
The term ‘specific performance’ may be defined as the actual carrying
out the respective obligation by both the parties. Sometimes,
(i) the damages are not an adequate remedy for breach of the contract
or
: 32 :
(ii) the damages cannot be estimated or
(iii) the subject matter of contract is unique in nature.
In such cases, the party aggrieved by the breach may bring an action for
specific performance of the contract. And the court may direct the defaulting
party to carry out his obligations according to the terms of the contract.
It may be noted that the specific performance of the contract cannot be claimed
as a matter of right. The courts are always at discretion to grant the relief by
specific performance. The courts may, at their discretion, order specific
performance of contracts.
However, in following cases the specific performance cannot be ordered by

court:
(i) If the performance involves personal skills
(ii) If the performance is continuous in nature
Example:
(4) Suit for Injunction :

The term ‘injunction’ may be defined as an order of the courts restraining a
person from doing something which he promised not to do. In this case also, the
courts are at discretion to issue an injunction order. It is, usually, issued in
cases where the compensation in terms of money is not an adequate relief.
Sometimes, a party to a contract does something which he had promised not to
do. In such cases, the aggrieved party may file a suit for injunction. And the
courts may at their discretion, issue an order restraining such person from doing
what he promised not to do.
Case Law: In Lumely v. Wagner, A, a singer, agreed to sing at B’s theatre for
certain period. She further agreed that during the prescribed period she will not
sing at any other theatre. Afterwards, A made a contract with C to sing at his
theatre, and refused to sing at B’s theatre. B filed a suit restraining A from
singing at C’s theatre. It was held that although A could not be compelled to
sing at B’s theatre, but she could be restrained by injunction from singing at C’s
theatre.
• DISCHARGE OF CONTRACT
A contract may be discharged either by an Act of the parties or by an
operation of law in the different base set out below :
(1) Discharge by performance: It takes place when the parties to the

contract fulfill their obligations arising under the contract within the time
and in the manner prescribed. Discharge by performance may be 1)
actual performance or 2) attempted performance. Actual performance is
said to have taken place, when each of the parties has done what he
had agreed to do under the agreement. W hen the promisor offers to
perform his obligation, but the promisee refuses to accept the
performance, it amounts to attempted performance or tender.
: 33 :
(2) Discharge by mutual agreement: Section 62 of the Indian Contract
Act provides if the parties to a contract agree to substitute a new
contract for it, or to refund or remit or alter it, the original contract need
not be performed.
(3) By impossibility of performance: The impossibility may exist from the
very start. In that case, it would be impossibility ab initio.
Alternatively, it may supervene. Supervening impossibility may take
place owing to: a) an unforeseen change in law, b) the destruction of
the subject-matter essential to that performance c) the non- existence or
non-occurrence of particular state of things, which was naturally
contemplated for performing the contract, as a result of some personal
incapacity like dangerous malady, or declaration of a war (Section 56).
(4) Discharge by lapse of time: A contract should be performed within a
specific period as prescribed by the Limitation Act, 1963. If it is not
performed and if no action is taken by the promisee within the specified
period of limitation, he is deprived of remedy at law. For example, if a
creditor does not file a suit against the buyer for recovery of the price
within three years the debt becomes time; barred and hence
irrecoverable.
(5) Discharge by operation of law: A contract may be discharged by
operation of law which includes by death of the promisor, by insolvency
etc.
(6) Discharge by breach of contract: Breach of contract may be actual
breach of contract or anticipatory breach of contract. If one party defaults
in performing his part of the contract on the due late, he is said to have
committed a breach thereof. W hen, on the other hand, a person
repudiates a contract before the stipulate time for its performance has
arrived, he is deemed to have committed anticipatory breach. If one of
the parties to a contract breaks the promise the party injured thereby has
not only a right of action for damages but he is also discharged from
performing his part of the contract (Section 64).
(7) A promise may dispense with or remit the performance of the promise made to
him or may accept any satisfaction he thinks fit. In the first case the contract will
be discharged by remission and in the second by accord and satisfaction
(Section 63)
(8) When a promisee neglects or refuses to afford the promisor reasonable facilities
for the performance of the promise, the promisor’ is excused by such neglect or
refusal (Section 67).
: 34 :
UNIT 6: CONTINGENT AND QUASI CONTRACTS CONTINGENT CONTRACTS
• DEFINITION
Definition of a Contingent Contract
The term ‘contingent contract’, in simple words, may be defined as a conditional
contract. This term, in legal words, is defined in Section 31 of the Indian Contract Act,
as under: contract, does or does not happen.”
Example: A contracts to pay Rs.10,000 to B if his (B’s) house is burnt. This is a
contingent contract as its performance is dependent upon an uncertain event (i.e.,
burning of B’s house).
• ESSENTIALS OF A CONTINGENT CONTRACT

Following are the essential elements of a valid contingent contract :
1. There must be a valid contract :
A contract to do or not to do something must be legally valid, i.e., it must fulfil
the basic requirements of a valid contract.
2. The performance of the contract must be conditional:
The performance of a contingent contract must depend upon the happening or
non-happening of some future event.
3. The event must be uncertain:
The future event, upon which the performance of a contract depends,
must be an uncertain event. If the event is certain, i.e., the event is
bound to happen, then the contract is not a contingent contract.
4. The uncertain event must be collateral to the contract:
The uncertain event, upon which the performance of the contract is dependent,
must not form a part of the consideration of the contract. In other words, the
event must be independent or ancillary to the contract.
• RULES REGARDING ENFORCEMENT OF CONTINGENT CONTRACTS

The rules regarding the enforcement of contingent contracts are contained in
Sections 32 to 36 of the Indian Contract Act, which may be discussed under the
following heads:
1. Contingent Contracts Dependent on the ‘Happening’ of
Future Uncertain Event
A contingent contract dependent on the ‘happening’ of a future uncertain
event can be enforced only when that uncertain event has happened
[Section 32].
Example:
A offered to sell his horse to B for Rs. 4,000. Subsequently, A entered into a
contract with C to sell the same horse to him for Rs. 3,500 if B refused to buy it.
The contract between A and C is contingent and can be enforced by law only
when B refuses to buy the horse from A.
However, if the event becomes impossible then such contract becomes
void, and thus cannot be enforced by law.
2. Contingent Contracts Dependent on the ‘Non-Happening’ of Future
Uncertain Event
A contingent contract dependent on the ‘non-happening’ of future uncertain
event can be enforced only when the happening of that event becomes
impossible as then that event cannot happen [Section 33].
: 35 :
Example:
A agreed to pay B Rs. 500 if a certain ship did not return. The ship was sunk. It
is a contingent contract and can be enforced by law when the ship sinks.
Because when the ship sinks, the event becomes impossible as the ship can
never return.
However, if the event happens or does not become impossible, then
such contracts become void and cannot be enforced by law e.g.,
suppose in the above example, the ship returns, then the contract
becomes void.
3. Contingent Contracts Dependent on future conduct of a living

person.
A contingent contract dependent on the future conduct of living person is valid if
person acts accordingly otherwise it becomes void.
4. Contingent Contracts Dependent on the Happening or Non-

Happening of Specified Uncertain Event Within Fixed Time
A contingent contract dependent on the ‘happening’ of a specified uncertain
event within fixed time, can be enforced if that event happens within the fixed
time.
Example :
A agreed to pay Rs. 1,000 to B if a certain ship returned within a year. It is a
contingent contract and can be enforced by law if the ship returns within a year.
In this case also, if the event does not happen within the fixed time or if it
becomes impossible before the expiry of the fixed time, then such contracts
become void and cannot be enforced by law [Section 35]
5. Contingent Contracts Dependent on Impossible Events

A contingent contract dependent on the happening of impossible event is
void and cannot be enforced by law [Section 36].
Example: A agreed to pay Rs. 500 to B if he proved that two straight lines can
intersect. This is a void agreement as two straight lines can never’ enclose a
space
• DISTINCTION BETWEEN WAGERING AGREEMENT AND CONTINGENT

CONTRACT
Wagering Agreement Contingent Contract
1. Meaning: A wagering agreement is a 1. Meaning: A contingent contract is a
promise to give money or money's contract to do or not to do something
worth upon the determination or if some event, collateral to such
ascertainment of an uncertain event. contract does or does not happen.
2. Reciprocal promises: A wagering 2. Reciprocal promises: A contingent

agreement consists of reciprocal contract may not contain reciprocal
promises promises.
3. Uncertain event: The uncertain event 3. Uncertain event: The uncertain event
is the main event. is the collateral event.
4. All wagering agreements are 4. All contingent contracts are not
contingent. wagering.
5. A wagering agreement is void 5. A contingent contract is valid.
6. A wagering agreement is a game of 6. A contingent contract is not a
chance. game.
: 36 :
QUASI CONTRACTS
• DEFINITION
The term ‘quasi contract’ may be defined as ‘a relation which resembles that created
by a contract.
There is no real contract. The parties under such relations are put in the same
position as if there was a contract between them.
It is based on the principle of “Prevention of unjust enrichment at the expense of
other”.
• CIRCUMSTANCES (OR CASES) OF QUASI CONTRACTS

Following are the circumstances in which the quasi contractual obligations arise.
These are contained in Sections 68 to 72 of the Indian Contract Act :
1. Supply of necessaries to persons who are incompetent to contract
(Section 68)
2. Payment by an interested person (Section 69)
3. Non-gratuitous acts (Section 70)
4. Finder of goods (Section 71)
5. Payment of money or deliver of goods by mistake or under coercion
(Section 72)
1. Supply of Necessaries to Persons Incompetent to Contract:
Sometimes, a person supplies the necessaries to a person who is not
competent to contract (i.e., minor, persons of unsound mind such as lunatics,
etc.), or to another person to whom the incompetent person is bound to support.
In such cases, the person supplying the necessaries is entitled to recover the
cost of necessaries from the property of such incompetent person even if there
is no valid contract between them.
Example:
A supplied necessaries of life to B, a minor, in this case, A is entitled to claim
back from B’s property.
2. Payment by a Person Having Some Interest in Payment:

Sometimes, a person makes the payment which is the legal duty of
another person. In such cases, the person who has made the payment
can recover such money from the person who is legally bound to pay.
Following conditions must be satisfied for the recovery of payment by an
interested person:
(a) The person making the payment must have some interest in paying the
amount.
(b) The person making the payment must not be bound by law to pay the
amount.
(c) The other person from whom the money is to be recovered must be legally
bound to pay the money.
Example:
A held land in Bengal on a lease granted by B, a Zamindar. The revenue
payable by B fell in arrears. As such, his land was advertised for sale by
the government. Under the Revenue Law, the consequences of such
sale was the cancellation of A’s lease. In order to prevent the consequent
annulment of his lease, A paid to the government the amount due from
B. In this case, A is entitled to recover the amount from B. And B is bound
to pay the same to A.
: 37 :
3. Non-Gratuitous Acts:
The ‘non-gratuitous- acts’ means the acts which are not done free. A
person who does some non-gratuitous acts for another, is entitled
to recover compensation for such acts if the other person enjoys the
benefits of such acts.
Example:
A, a tradesman, gave certain goods to B to store at B’s warehouse by paying
rent. B sold A’s goods to C for ` 100,000 without A’s permission. A can claim
` 100,000 from B.
Following conditions must be satisfied for recovery of compensation for non-
gratuitous act :
(a) The person must lawfully do something for another person or deliver
something to him.
(b) The person doing some act or delivering something must not
intend to act gratuitously.
(c) The other person must voluntarily accept the acts or goods and he must
have enjoyed their benefits.
4. Finder of Goods:
Sometimes, a person finds certain goods, belonging to some other person.
In such cases, the goods not become the property of the finder.
The law imposes certain obligations on the finder of goods. Under the law,
the responsibility of finder of goods is the same as that of a bailee.
A ‘bailee’ is a person to whom the goods have been delivered for some
specific purpose upon a condition that on the fulfillment of the purpose, the
goods shall be returned to the actual owner.
Thus, it becomes the duty of the finder to keep the goods with care and take
some steps to trace the true owner and return the goods to him. He is bound
to take as much care of the goods as a man of ordinary prudence would take
for his own goods under the similar circumstances.
He also gets some rights in respect of the goods in certain circumstances,
when the true owner cannot be found, he can sell the goods which are of
perishing nature.
5. Payment of Money or Delivery of Goods by Mistake or Under Coercion
Sometimes, a certain amount of money is paid or something is delivered to a
person by mistake or under coercion. In such cases, the person receiving the
money or goods must repay or return the same to the person who has paid or
delivered by a mistake or under coercion.
Example:
A and B jointly owed Rs. 1000 to C. A alone paid the amount to C. And B not
knowing this fact, also paid Rs.1000 to C. In this case, C is bound to repay
the amount to B who has paid it by mistake.
: 38 :
SUMMARY
• INTRODUCTION
It received its assent on 25th April, 1872 and was introduced on 1st
September, 1872.
It is applicable to whole of India except Jammu and Kashmir.
Contract = Agreement + Enforceable by law
Agreement = Offer + Acceptance
Therefore, all contracts are agreements BUT all agreements are NOT
contracts
• OFFER
DEFINITION CHARACTERISTICS TYPES LAPSE OF OFFER
• ACCEPTANCE
DEFINITION CHARACTERISTICS
• COMMUNICATION OF OFFER & ACCEPTANCE AND REVOCATION OF

OFFER & ACCEPTANCE
• TYPES OF CONTRACTS
• TYPES OF CONTRACT S AS PER ENGLISH LAW
• ESSENTIAL ELEMENTS OF A VALID CONTRACT
UNIT 2: CONSIDERATION
Definition Characteristics Doctrine of Privity of Contract No Consideration-
No Contract
UNIT 3: OTHER ESSENTIAL ELEMENTS OF A VALID CONTRACT

• CAPACITY OF PARTIES
1. Minor
2. Person of unsound mind
3. Persons disqualified by law
• CONSENSUS-AD- IDEM
• FREE CONSENT
Consent is said to be free if it is not induced by:
1. Coercion,
2. Undue influence,
3. Fraud,
4. Misrepresentation,
5. Mistake
: 39 :
• UNLAWFUL OBJECT & UNLAWFUL CONSIDERATION
• AGREEMENTS EXPRESSLY DECLARED AS VOID

Agreement in restraint of marriage is void
Agreement in restraint of trade is void
Agreement in restraint of legal proceedings
Agreement the meaning of which is uncertain is void
wagering agreements
• CONTRACT WILL BE PERFORMED BY:

1. Promisor himself
2. Legal Representative
However, if the contract involves personal skills and if the promisor dies, the
contract becomes void.
3. Agent
4. Third persons, if promise permits
• REQUISITES OF A VALID PERFORMANCE

• EFFECT OF REFUSAL OF A PARTY TO PERFORM
• DISTINCTION BETWEEN SUCCESSION AND ASSIGNMENT
• LIABILITY OF JOINT PROMISORS
• RIGHTS OF JOINT PROMISEES
• TIME AND PLACE FOR PERFORMANCE
• RECIPROCAL PROMISES
• EFFECTS OF FAILURE TO PERFORM AT A TIME FIXED IN A CONTRACT
IN WHICH TIME IS ESSENTIAL
• IMPOSSIBILITY OF PERFORMANCE
• APPROPRIATION OF PAYMENTS
• CONTRACTS WHICH NEED NOT BE PERFORMED-Novation,
Alteration, Rescission, Remission
• QUANTUM MERUIT
• EFFECTS OF NEGLECT OF PROMISEE
• BREACH OF CONTRACT
Anticipatory Breach Actual Breach

• DAMAGES FOR BREACH OF CONTRACT
1) Ordinary/ Usual damages
2) Liquidated damages
3) Special damages
4) Exemplary/ Vindictive/ Punitive damages
5) Nominal damages
6) Damages for deterioration caused by delay
7) Remote or indirect damages.
• LIQUIDATED DAMAGES AND PENALTY
• DISCHARGE OF CONTRACT
• ADDITIONAL REMEDIES AVAILABLE IN CASE OF BREACH OF CONTRACT
: 40 :
UNIT 6: CONTINGENT AND QUASI CONTRACTS
• CONTINGENT CONTRACTS
Meaning Rules of enforcement of Essentials of

contingent contract contingent contract
1. Contingent Contracts Dependent on the 1. There must be a valid

‘Happening’ of Future Uncertain Event contract.
2. Contingent Contracts Dependent on the 2. The performance of the
‘Non-Happening’ of Future Uncertain Event contract must be
3. Contingent Contracts Dependent on future conditional
conduct of a living person. 3. The event must be
4. Contingent Contracts Dependent on the uncertain
Happening or Non-Happening of Specified 4. The uncertain event must
Uncertain Event Within Fixed Time be collateral to the
5. Contingent Contracts Dependent on contract
Impossible Event is void
• QUASI CONTRACTS
1. Supply of necessaries to persons who are incompetent to contract
2. Payment by a Person Having Some Interest in Payment Conditions:
3. Claim for any benefit received under a non-gratuitous act
4. Finder of goods
5. Payment of Money or Delivery of Goods by Mistake or Under Coercion
: 41 :
QUESTIONS
1. All contracts are agreements, but all agreements are not contracts". Comment
2. Define the term "Acceptance. Discuss the legal provisions relating to communication
of acceptance.
3. Distinction between Void and Illegal Agreements.
4. Define consideration. State the characteristics of a valid consideration.
5. "No consideration, no contract" Comment
6. "To form a valid contract, consideration must be adequate". Comment.
7. "Mere silence does not amount to fraud". Discuss.
8. "Though a minor is not competent to contract, nothing in the Contract Act prevents
him from making the other party bound to the minor". Discuss.
9. "An agreement, the meaning of which is not certain, is void". Discuss.
10. Who are disqualified persons to do the contract?
11. "The basic rule is that the promisor must perform exactly what he has promised to
perform." Explain stating the obligation of parties to contracts.
12. Discuss the effect of accepting performance from third person.
13. "When a party to a contract has refused to perform, or disabled himself from
performing his promise in its entirety, the promisee may put an end to the contract".
Explain.
14. "An anticipatory breach of contract is a breach of contract occurring before the time
fixed for performance has arrived". Discuss stating also the effect of anticipatory
breach on contracts
15. "When a contract has been broken, the party who suffers by such a breach is entitled
to receive compensation for any loss or damage caused to him". Discuss.
16. "Liquidated damage is a genuine pre-estimate of compensation of damages for
certain anticipated breach of contract whereas Penalty on the other hand is an
extravagant amount stipulated and is clearly unconscionable and has no comparison
to the loss suffered by the parties". Explain.
17. Explain the meaning of 'Contingent Contracts' and state the rules relating to such
contracts.
18. Explain the-term 'Quasi Contracts' and state their characteristics.
: 42 :
J K SHAH CLASSES C.A. FOUNDATION - LAW
ADDITIONAL CASE LAW BASED QUESTIONS:
Q.1. Father promised to pay his son a sum of' one lakh if the son passed C.A.
examination in the first attempt. The son passed the examination in the first
attempt, but father failed to pay the amount as promised. Son files a suit for
recovery of the amount. State along with reasons whether son can recover the
amount under the Indian Contract Act, 1872.
Q.2. Shambhu Dayal started "self-service" system in his shop. Smt. Prakash entered
the shop, took a basket and after taking articles of her choice into the basket
reached the cashier for payments. The cashier refuses to accept the price. Can
Shambhu Dayal be compelled to sell the said articles to Smt. Prakash? Decide.
Q.3. Ramaswami proposed to sell his house to Ramanathan. Ramanathan sent his
acceptance by post. Next day, Ramanathan sends a telegram withdrawing his
acceptance. Examine the validity of the acceptance in the light of the following:
(i) The telegram of revocation of acceptance was received by Ramaswami
before the letter of acceptance.
(ii) The telegram of revocation and letter of acceptance both reached
together.
Q.4. X's brother runs away from the house. Y who is an employee of X offers to
search for the brother and goes out for the purpose. In the absence of Y, X
offers a reward of ` 500 to anyone who can either find out the brother or give
clues enabling X to find him out. Y gets the brother back to X in ignorance of
the offer for reward. Can Y now claim the reward?
UNIT 2 : CONSIDERATION
Q.1. Mr. Singh, an old man, by a registered deed of gift .granted certain landed
property to A, his daughter. By the terms of the deed, it was stipulated that an
annuity of ` 2,000 should be paid every year to B, who was the brother of Mr.
Singh. On the same day A made a promise to B and executed in his favor an
agreement to give effect to the stipulation. A failed to pay the stipulated sum. In
an action against her by B, as he contended that since B had not furnished any
consideration, he has no right of action.
Examining the provisions to the Indian ContractAct,1872, decide, whether the
contention of A is valid?
UNIT 3: ESSENTIAL ELEMENTS OF A VALID CONTRACT
Q.1. Ramesh, aged 16 years, was studying in an engineering college. On 1 March,

2011 he took a loan of' 1 lakh from Suresh for the payment of his college fee
and agreed to pay by 30th May, 2012. Ramesh possesses assets worth ` 10
lakhs. On due date, Ramesh fails to pay back the loan to Suresh. Suresh now
wants to recover the loan from Ramesh out of his assets. Whether Suresh
would succeed? Decide, referring to the provisions of the Indian Contract Act,
1872.
: 43 :
Q.2. Sohan induced Suraj to buy his motorcycle saying that it was in a very good
condition. After taking the motorcycle, Suraj complained that there were many
defects in the motorcycle. Sohan proposed to get it repaired and promised to
pay 40% cost of repairs. After a few days, the motorcycle did not work at all.
Now Suraj wants to rescind the contract. Decide giving reasons.
Q.3. X agreed to become an assistant for 5 years to 'Y' who was a Doctor practicing
at Ludhiana. It was also agreed that during the term of agreement X will not
practice on his own account in Ludhiana. At the end of one year, X left the
assistantship of 'Y and began to practice on his own account. Referring to the
provisions of the Indian Contract Act, 1872, decide whether X could be
restrained from doing so?
Q.4. M promised to pay N for his services at his (M) sole discretion found to be fair
and reasonable. However, N dissatisfied with the payment made by M and
wanted to sue him. Decide whether N can sue M under the provisions of the
Indian Contract Act, 1872?
Q.5. A applies to banker for a loan at a time when there is stringency in the money
market. The banker declines to make the loan except at an unusually high rate
of interest. A accepts the loan on these terms. Is the contract induced by undue
influence?
Q.1. 'A, 'B' and 'C are partners in a firm. They jointly promise to pay ` 1,50,000 to 'P'.
C became insolvent and his private assets are sufficient to pay only 1/5th of his
share of debts. A is compelled to pay the whole amount to P. Examining the
provisions of the Indian Contract Act, 1872, decide the extent to which A can
recover the amount from B.
Q.2. Akhilesh entered into an agreement with Shekhar to deliver him (Shekhar)
5,000 bags to be manufactured in his factory. The bags could not be
manufactured because of strike by the workers and Akhilesh failed to supply
the said bags to Shekhar. Decide whether Akhilesh can be exempted from
liability under the provisions of the Indian Contract Act, 1872.
Q.3. Suppose, time is of the essence of the contract but yet promisor does not
perform the promise within the stipulated time. But five days after the expiry of
the stipulated time, the promisor offers to perform his promise. Can the
promisee accept such performance and at the same time claim compensation
from the promisor for the delay?
Q.4. A owes B ` 1,000 under a contract, B owes C ` 1,000. B orders A to credit C

with ` 1,000 in his books, but C does not assent to the arrangement. Does B
still owe C ` 1,000?
Q.5. A agrees to sell land to B for ` 40,000. B pays to A ` 4,000 as a deposit at the
time of the contract, the amount to be forfeited to A if B does not complete the
sale within a specified period. B fails to complete the sale within the specified
period, nor is the ready and willing to complete the sale within a reasonable
time after the expiry of that period. Can A rescind the contract and at the same
time retain the deposit?
: 44 :
Q.1. A, an Indian, contracts to marry B. A is already married - a - fact of which B was

unaware. A breaks his promise in course of time. Thereupon B brings a suit
against A for a breach of contract. A pleads that his promise is impossible of
being performed as the law of the country does not permit polygamy. Can A get
away with plea?
Q.2. Mr. Ramaswamy of Chennai placed an order with Mr. Shah of Ahmedabad for
supply of Urid Dhall on 10.11.2006 at a contracted price of ` 40 per kg. The
order was for the supply of 10 tonnes within a month's time viz. before
09.12.2006. On 04.12.2006 Mr. Shah wrote a letter to Mr. Ramaswamy stating
that the price of Urid Dhall was sky rocketing to ` 50 Per. Kg. and he would not
be able to supply as per original contract. The price of Urid Dhall rose to ` 53
on 09.12.06 Advise Mr. Ramaswamy citing the legal position.
UNIT 6 : CONTINGENT & QUASI CONTRACTS
Q.1. Y holds agricultural land in Gujarat on a lease granted by X, the owner. The
land revenue payable by X to the Government being in arrear, his land is
advertised for sale by the Government. Under the Revenue law, the
consequence of such sale will be termination of Y's lease. Y, in order to prevent
the sale and the consequent termination of his own lease, pays the
Government, the sum due from X. Referring to the provisions of the Indian
Contract Act, 1872 decide whether X is liable to make good to Y, the amount so
paid?
Q.2. 'A' under a mistaken impression gives some money into B's hand believing him
to 'C’.Can he obtains the return of money?
: 45 :
ANSWERS
Ans.1. As per Section 2(h) of Indian Contract Act, 1872 Contract is an agreement
which is enforceable by law. Social agreements are not enforceable by law.
As per case law Balfour v. Balfour, a husband promised to pay maintenance
allowance every month to his wife, so long as they remain separate. When
he failed to perform this promise, she brought an action to enforce it. As it is
an agreement of domestic nature, it was held that it does not contemplate to
create any legal obligation.
Father promised to pay his son a sum of' one lakh if the son passed C.A.
examination in the first attempt. The son passed the examination in the first
attempt, but father failed to pay the amount as promised. This a social
agreement which is not enforceable by law. Accordingly, applying the above
provisions and the case decision, in this case son cannot recover the
amount of' 1 lakh from father for the reasons explained above.
Ans.2. As per provisions of Indian Contract Act 1872, the offer should be
distinguished from an invitation to offer. An offer is the final expression of
willingness by the offer or to be bound by his offer should the party chooses
to accept it. Where a party, without expressing his final willingness, proposes
certain terms on which he is willing to negotiate, he does not make an offer,
but invites only the other party to make an offer on those terms. This is the
basic distinction between offer and invitation to offer.
In the given question, the display of articles with a price in it in a self-service
shop is merely an invitation to offer. It is in no sense an offer for sale, the
acceptance of which constitutes a contract. In this case, Smt. Prakash by
selecting some articles and approaching the cashier for payment simply
made an offer to buy the articles selected by her. Therefore, if the cashier
does not accept the price, the interested buyer cannot compel him to sell.
Ans.3. The problem is related with the communication and time of acceptance and
its revocation. As per Section 4 of the Indian Contract Act, 1872, the
communication of an acceptance is a complete as against the acceptor
when it comes to the knowledge of the proposer.
An acceptance may be revoked at any time before the communication of the
acceptance is complete as against the acceptor, but not afterwards.
Referring to the above provisions
(i) Yes, the revocation of acceptance by Ramanathan (the acceptor) is
valid.
(ii) If Ramaswami opens the telegram first (and this would be normally so
in case of a rational person) and reads it, the acceptance stands
revoked. If he opens the letter first and reads it, revocation of
acceptance is not possible as the contract has already been concluded.
: 46 :
Ans.4. As per the provisions of the Indian Contract Act, 1872, a person cannot
accept an offer so long as he is unaware of its existence. Unless an offer is
properly communicated, there can be no acceptance of it. An acceptance of
an offer in ignorance of the offer, is a nullity, and does not create any legal
right or obligation. As per case law Lalman Shukla vs Gauri Dutt, Gauri
announced a reward for anyone who found his nephew. Lalman found the
nephew in ignorance of reward. Held that, he is not entitled to reward as a
person cannot accept an offer so long as he is unaware of its existence.
In the given question, Y gets the brother back in ignorance of the offer for
reward. Hence, based on provisions and the above case law, Y cannot claim
the reward.
UNIT 2 : CONSIDERATION
Ans.1. As per Section 2(d) of the Indian Contract Act, 1872, consideration is
defined as "When at the desire of the promisor, the promisee or any other
person did or abstained from doing, or does or abstains from doing, or
promises to do or abstain from doing something, such act or abstinence is
called a consideration for the promise".
It is not necessary that consideration should be furnished by the promisee
only. A promise is enforceable if there is some consideration for it and it is
quite immaterial whether it moves from the promisee or any other person.
The leading authority in the decision of the Chinnaya Vs. Ramayya, held that
the consideration can legitimately move from a third party and it is an
accepted principle of law in India. In the given problem, Mr. Singh has
entered into a contract with A, but Mr. B has not given any consideration to A
but the consideration did flow from Mr. Singh to A and such consideration
from third party is sufficient to the enforce the promise of A, the daughter, to
pay an annuity to B. Further the deed of gift and the promise made by A to B
to pay the annuity were executed simultaneously and therefore they should
be regarded as one transaction and there was sufficient consideration for it.
Thus, a stranger to the contract cannot enforce the contract but a stranger to
the consideration may enforce it.
UNIT 3 : ESSENTIAL ELEMENTS OF A VALID CONTRACT

Ans.1. According to Section 11 of the Indian Contract Act, 1872, a person who is of
the age of majority to the law to which he is subject is competent to enter
into any contract. A person who has completed the age of 18 years is a
major and otherwise he will be treated as minor. Thus Ramesh who is a
minor is incompetent to contract and any agreement with him is void [Mohori
Bibi Vs Dharmodas Ghose]. Section 68 of the Indian Contract Act, 1872
however, prescribes the liability of a minor for the supply of the things which
are the necessaries of life to him. It says that though minor is not personally
liable to pay the price of necessaries supplied to him or money lent for the
purpose, the supplier or lender will be entitled to claim the money/ price of
goods or services which are necessaries suited to his condition of life
provided that the minor has a property. The liability of minor is only to the
extent of the minor's property. This type of contract is called a Quasi-contract
and the right of the supplier/lender is based on the principle of equity.
Thus, according to the above provision, Suresh will be entitled to recover the
amount of loan given to Ramesh for payment of the college fees from the
property of the minor.
: 47 :
Ans.2. According to Section 18 of the Indian Contract Act, 1872, misrepresentation
is present:
1. When a person positively asserts that a fact is true when his
information does not warrant it to be so, though he believes it to be
true.
2. When there is any breach of duty by a person, which brings an
advantage to the person committing it by misleading another to his
prejudice.
3. When a party causes, however, innocently, the other party to the
agreement to make a mistake as to the substance of the thing which is
the subject of the agreement.
The aggrieved party, in case of misrepresentation by the other party, can
avoid or rescind the contract [Section 19, Indian Contract Act, 1872]. The
aggrieved party loses the right to rescind the contract if he, after becoming
aware of the misrepresentation, takes a benefit under the contract or in
some way affirms it. Accordingly in the given case, Suraj could not rescind
the contract, as his acceptance to the offer of Sohan to bear 40% of the cost
of repairs impliedly amounts to final acceptance of the sale.
Ans.3. An agreement in restraint of trade/business/profession is void under Section

27 of the Indian Contract Act, 1872. But an agreement of service by which a
person binds himself during the term of the agreement not to take service
with anyone else directly or indirectly to promote any business in direct
competition with that of his employer is not in restraint of trade.
In the given question, X agreed to become an assistant for 5 years to 'Y' who
was a Doctor practicing at Ludhiana. It was also agreed that during the term
of agreement X will not practice on his own account in Ludhiana. Such
agreement is not in restraint of trade and hence it is valid.
Therefore X can be restrained by an injunction from practicing on his own
account in Ludhiana.
Ans.4. As per section 29 of the Indian Contract Act, 1872 - agreements, the
meaning of which is not certain, or capable of being made certain, are void.
In the given question, M promised to pay N for his services at his (M) sole
discretion found to be fair and reasonable. Here the agreement is uncertain
in terms of amount of salary.
Therefore, N's suit will not be valid because the performance of a promise is
contingent upon the mere will and pleasure of the promisor; hence, there is
no contract.
Ans.5. As per Section 16 of Indian Contract Act, 1872, A contract is said to be

induced by "undue influence" where the relations subsisting between the
parties are such that one of the parties is in a position to dominate the will of
the other and uses that position to obtain an unfair advantage of the other A
person is deemed to be in a position to dominate the will of the other, when
he holds authority, real or apparent over the other, or when he stands in a
fiduciary relation to other.
In the given problem, A applies to the banker for a loan at a time when there
is stringency in the money market. The banker declines to make the loan
except at an unusually high rate of interest. A accepts the loan on these
terms. This is a transaction in the ordinary course of business, and the
: 48 :
contract is not induced by undue influence. As between parties on an equal
footing, the court will not hold a bargain to be unconscionable merely on the
ground of high interest. Only where the lender is in a position to dominate
the will of the borrower, the relief is granted on the ground of undue
influence.
But this is not the situation in this problem, and therefore, there is no undue
influence.
UNIT 4 : PERFORMANCE OF CONTRACT
Ans.1. As per Section 43 of the Indian Contract Act, 1872, when two or more
persons make a joint promise, the promisee may in the absence of express
agreement to the contrary, compel anyone or more of such joint promisors to
perform the whole of the promise. In such a situation the performing
promisor can enforce contribution from other joint promisors . If anyone or
more joint promisors make default in such contribution, the remaining joint
promisors must bear the loss arising from such default in equal share. Hence
in the instant case, A is entitled to receive (a) from C's assets -
` 10,000 (1/5th of ` 50,000) and (` 50,000 is the amount to be contributed
by C being 1/3rd of ` 1, 50,000), (b) from B - ` 70,000 (` 50,000 being his
own share + 1/2 (50,000-10,000) i.e. ` 20,000 being one half share of total
loss of ` 40,000 due to C's insolvency). A can recover ` 70,000 from B.
Ans.2. According to Section 56 of the Indian Contract Act, 1872 when the
performance of a contract becomes impossible or unlawful subsequent to its
formation, the contract becomes void, this is termed as 'supervening
impossibility' (i.e. impossibility which does not exist at the time of making the
contract, but which arises subsequently). But impossibility of performance is,
as a rule, not an excuse from performance. It means that when a person has
promised to do something, he must perform his promise unless the
performance becomes absolutely impossible. Whether a promise becomes
absolutely impossible depends upon the facts of each case.
The performance does not become absolutely impossible on account of
strikes, lockout and civil disturbances and the contract in such a case is not
discharged unless otherwise agreed by the parties to the contract.
In this case Mr. Akhilesh could not deliver the bags as promised because of
strike by the workers. This difficulty in performance cannot be considered as
impossible of performance attracting Section 56 and hence Mr. Akhilesh is
liable to Mr. Shekhar for non-performance of contract.
Ans.3. As per Section 55 of Indian Contract Act, 1872, where the intention of the
parties is that the time should be of the essence of the contract the contract
must be performed within the fixed time. And if the party, who is bound to
perform his promise within the fixed time, fails to do so then the contract
becomes voidable at the option of the other party. Thus, the innocent party
may put an end to the contract if he so chooses and he can also claim
damages.
In the given question, time is of the essence of the contract but yet promisor
does not perform the promise within the stipulated time. But five days after
the expiry of the stipulated time, the promisor offers to perform his promise.
With respect to above provisions, promisee can accept such performance
and at the same time claim compensation from the promisor for the delay.
: 49 :
Ans. 4. As per Section 62 of Indian Contract Act, 1872, the term 'novation' means
the substitution of existing contract for a new contract. In other words, when
the parties to a contract agree to substitute the existing contract by a new
contract, it is known as novation. The novation must be with the mutual
consent of all the parties.
In the given question, A owes B ` 1,000 under a contract, B owes C` ,000. B
orders A to credit C with ` 1,000 in his books, but C does not assent to the
arrangement. Hence, there is no valid novation. Therefore, B still owes C `
1,000.
Ans.5. As per Section 54 of Indian Contract Act, 1872, if the promises are
conditional and dependent, the performance of the promise by one party
depends on the prior performance of the promise by the other party. In such
promises if the party who is bound to perform his promise first, fails to
perform it, then he cannot claim performance from the other party. Moreover,
the defaulting party becomes liable to pay the compensation to the other
party for the loss suffered by the other on account of the non- performing of
the contract.
In the given question, A agrees to sell land to B for ` 40,000. B pays to A `
4,000 as a deposit at the time of the contract, the amount to be forfeited to A
if B does not complete the sale within a specified period. B fails to complete
the sale within the specified period, nor is the ready and willing to complete
the sale within a reasonable time after the expiry of that period.
Therefore, A can rescind the contract and at the same time retain the deposit
UNIT 5 : BREACH OF CONTRACT
Ans.1. As per Section 73 of Indian Contract Act, 1872, the vindictive damages are
claim with the intention of punishing the party in default. As a general rule,
the exemplary damaged are not awarded for the breach of contract as they
are punitive in nature. However, in following case, the court may award
exemplary damages:
Where there is a breach of a promise to marry: In such cases, the damages
will include compensation for loss to the feelings and reputation of the
aggrieved party.
In the given question, A, an Indian, contracts to marry B. A is already
married - a -fact of which B was unware. A breaks his promise in course of
time. Thereupon B brings a suit against A for a breach of contract. A pleads
that his promise is impossible of being performed as the law of the country
does not permit poligamy.
A can get away with the plea as the marriage cannot be forced upon.
However, he is liable to vindictive damages as stated above.
Ans.2. The stated problem falls under the head 'anticipatory breach of contract' as
per The Indian Contract Act, 1872. Anticipatory breach of contract occurs
when the promisor refuses altogether to perform his promise and signifies
his unwillingness even before the time for performance has arrived. In such
a situation the promisee can claim compensation by way of loss or damage
caused to him by the refusal of the promisor. For this, the promisee need not
wait till the time stipulated in the contract for fulfillment of the promise by the
promisor is over. As per details in the problem, price as contracted ` 40 per
: 50 :
kg on 10.11. 2006 rose to ` 50 per kg as on 4.12.2006 and finally to ` 53 per
kg, on 09.12.2006. The answer to the problem is that
1. Mr. Ramaswamy can repudiate the contract on 04.12.2006 and can
claim damages of ` 10 per kg viz. ` 1, 00,000.
2. He could wait till 09.12.2006 and claim ` 130,000 i.e. ` 13 per kg.
3. If the Government, in the interim period i.e. between 04.12.2006 and
09.12. 2006 imposes a ban on the movement of the commodity to
arrest rise of prices, the contract becomes void and Mr. Ramaswamy
will not be able to recover any damages whatsoever.
UNIT 6: CONTINGENT & QUASI CONTRACTS
Ans.1. Section 69 of the Indian Contract Act, 1872, provides that "A person who is
interested in the payment of money which another is bound by law to pay,
and who therefore pays it, is entitled to be reimbursed by the other. In the
given case Y, in order to prevent the sale and the consequent termination of
his own lease, pays the Government, the sum due from X. That means Y
has made the payment of lawful dues of X in which Y had an interest.
Therefore, Y is entitled to get the reimbursement from X. Hence, X is bound
to make good to Y the amount so paid.
Ans.2. As per Section 72 of Indian Contract Act, 1872, a certain amount of money is
paid or something is delivered to a person by mistake or under coercion. In
such cases, the person receiving the money or goods must repay or return
the same to the person who has paid or delivered by a mistake or under
coercion.
In the given question, A under a mistaken impression gives some money into
B's hand believing him to 'C. He can obtain the return of money
: 51 :
CHAPTER 2 - THE SALE OF GOODS ACT, 1930
UNIT 1: FORMATION OF CONTRACTOF SALE
• INTRODUCTION :
It came into force on the 1st of July, 1930.
It is applicable to whole of India except Jammu & Kashmir.
The Law relating to this statute was contained in the Chapter VII of the
Indian Contract Act, 1872.
Where the Sale of Goods Act is silent on any point, the general principles of
the law of contract apply.
• CONTRACT OF SALE
Sale Agreement to sell

(Executed) (Executory)
The term ‘contract of sale’ is defined in Section 4 (1) of the Sale of Goods Act, as under :
“A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer
the property in the goods to the buyer for a price. “
• DEFINITIONS
1. Buyer :
“Buyer means a person who buys or agrees to buy goods.” [Sec. 2(1)]
2. Seller :
“Seller means person who sells or agrees to sell goods.” [Sec. 2(13)]
3. Goods :
“Goods” means every kind of movable property
other than actionable claims and money; and
includes stocks and shares,
growing crops, grass and things attached to or forming part of the land
which are agreed to the severed before sale or under the contract of sale.
[Sec. 2 (7)].
An actionable claim is a claim to any debt. For example: a money
debt, book debts, etc.
Money here means legal tender of money, i.e. the
recognised circulation in the country; but not old rare coins.
Things attached to the earth are not movables, but trees,
growing crops which can be easily severed from the earth
before sale. Fruits, vegetablesand flowers which can be
separated from the trees, are included in ‘goods’.
Livestock i.e. cows, buffaloes, cats etc are ‘goods’.
Patents, copyrights, goodwill, trade-marks, are all
considered goods which can be the subject matter of a
contract.
A ship has also been considered to come within the
definition of the word “goods”. Similarly water, gas and
electricity are included in the definition, though some writers
doubt if they can be classed among “goods”.
: 52 :
As per English law, “shares and stock” are not treated as

“goods”.
To conclude, everything movable is goods, except the
following:-
1. Money
2. Actionable Claims
3. Immovable assets
4. Services
Classification of Goods:
Existing Goods Future Goods Contingent Goods
Goods which are Goods which are yet Acquisition of such

already in existence to be manufactured goods depends upon a
at the time of in future. contingency which may
contract of sale or may not happen.
Example:A contracts
to sell to B all the Example:A agrees to sell
apples which will be to B a certain car
produced in his garden provided he is able to
next year
purchase it from its
present owner.
Specific/Ascertained General /Unascertained

Goods Goods
Goods which are Goods which are not

identified and agreed specifically identified but
upon at the time of a indicated by description at
contract the time of the Contract
Example:A particular Example: Any 1 pen out of

painting 50 pens
4. Price
“Price’ means the money consideration for a sale of goods.” [Sec. 2 (10)].
No sale can take place without a price.
Therefore,
a. Exchange of goods for goods will not be considered as sale
b. Gift of goods will not be considered as sale
c. Exchange of goods for goods along with price will be considered as
sale
5. Property:
General property Special property

(ownership) (interest)
: 53 :
But in Sale Of Goods Act, ‘property’ means the general property in goods and not merely
a special property
Example: A who owns the goods pledges them to B, then A has the general property in
the goods, while B has a special property or interest in them.
6. Documents showing Title to Goods/ Documents of Title to Goods
It is a document which It is a document which is used as

shows the ownership of proof of the possession or control of
goods. goods.
It includes share It includes a Bill of lading, Dock-

certificate, RC book of warrant, Warehouse keeper’s
car, etc Certificate, Wharfinger Certificate,
Railway Receipt
7. Mercantile Agent:
“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.” [Section 2(9)].
If a person is not carrying on business as such agent, he would not fall under this
definition. Thus, a contractor, a warehouseman, a carrier or a servant and a friend
would be excluded.
8. Delivery:
“Delivery’ means voluntary transfer of possession from one person to another”
[Sec. 2 (2)].Therefore, in case of theft, there is no delivery, though there is a
transfer of possession.
Actual delivery Symbolic delivery Constructive delivery:
When the goods are When there is a When it is affected

actually physically delivery of a thing in without any change in
delivered to the token of a transfer of the custody or actual
buyer. something else possession.
Example: Handing Example: Where a

over car keys, handing warehouseman holding
over documents of title the goods of A agrees
to goods to hold them on behalf
of B, at A’s request.
: 54 :
• ESSENTIAL ELEMENTS OF A VALID CONTRACT OF SALE

Following are the essential elements of a valid contract of sale:
1. All the requirements of a valid contract must be fulfilled:
A contract of sale must fulfil all the requirements of a valid contract, e.g.,
free consent, consideration, competency of the parties, lawful object and
consideration. If any of the essential elements of a valid contract is missing
then the contract of sale will not be valid.
2. There must be two parties to the contract of sale:
There must be two parties, one seller and the other buyer. The reason for
the same is that in a contract of sale, the ownership of the goods has to
pass from one person to another.
3. There must be some goods as a subject-matter:
The ‘goods’ as defined in Section 2 (7) of the Sale of Goods Act.
4. The property in the goods must be transferred to the buyer:
The term ‘property’ in the goods means the ownership of the goods. In
every contract of sale, the ownership of the goods must be transferred by
the seller to the buyer, or there should be an agreement by the seller to
transfer the ownership to the buyer. The term ‘property’ here means the
general property, i.e., all ownership rights of the goods, and not merely a
special property, i.e., limited rights such as right of a Pawnee.
5. There must be some price for the goods:
The goods must be sold for some price. The term ‘price’ is defined in
Section 2 (10)
6. A contract of sale can be absolute or conditional [Section 4(2)].
• DISTINGUISH BETWEEN
1. SALE AND AGREEMENT TO SELL
SALE AGREEMENT TO SELL

1.Transfer of property: the 1.Transfer of property: In
property in goods passes from agreement to sell, the ownership of
the seller to the buyer the property will pass from the seller
immediately to the buyer at some future time or
on fulfilment of some conditions.
2.Nature of contract: A sale is 2.Nature of contract: An agreement
an executed contract to sell is an executory contract
3. Consequences of Breach by 3. Consequences of Breach by buyer :

buyer : In a sale, if the buyer fails to In an agreement to sell, the seller can
pay for the goods, the seller can: only sue for damages for breach of
i. Sue him for recovery of price contract
ii. Claim damages
4. Consequences of Breach by 4. Consequences of Breach by

seller :In a sale, if the seller defaults, seller:In the case of an agreement to sell,
i.e. commits a breach, the buyer can: if the seller commits a breach, the buyer
1. Claim delivery of the goods from can only claim damages.
third party
2. Sue for damages
: 55 :
5. Transfer of risk:In a sale, if the 5. Transfer of risk: In an agreement to

goods are destroyed, the loss falls on sell, if the goods are destroyed, the loss
the buyer even though they are in the falls on the seller, even though they are in
possession of the seller. the possession of the buyer.
6. Subsequent destruction: A 6. Subsequent destruction: Such loss

subsequent loss or destruction of the or destruction is the liability of the seller.
goods is the liability of the buyer.
2. SALE AND HIRE- PURCHASE
SALE HIRE-PURCHASE
1. Property in the goods is 1. The property in goods passes to the
transferred tothe buyer immediately hirerupon payment of the last instalment.
at the time ofContract.
2. The position of the buyer is that of 2. The position of the hirer is that of a
anOwner of the goods. baileetill he pays the last instalment.
3. The buyer cannot terminate the 3. The hirer may, if he so likes, terminate
contractand is bound to pay the price the contract by returning the goods to its
of thegoods. owner without any liability to pay the
remaining instalments.
4. The seller takes the risk of any 4. The owner takes no such risk, for if the
lossresulting from the insolvency of hirer fails to pay an instalment the
the buyer. ownerhas right to take back the goods.
5. The buyer can resell the goods. 5. The hirer cannot resell the goodstill the
last instalment.
6. Tax is levied at the time of the 6. Tax is not leviable until it eventually
contract. ripens into a sale.
3. SALE AND BAILMENT
SALE BAILMENT
1. The property in goods is 1. There is only transfer of possession of
transferred fromthe seller to the goods from the bailor to the bailee for
buyer. anyof the reasons like safe custody,
carriage,etc.
2. The return of goods in contract of 2. The bailee must return the goods to
sale isnot possible. thebailor on the accomplishment of
thepurpose for which the bailment
wasmade.
3. The consideration is the price in 3. The consideration may be gratuitous
terms ofmoney. ornon-gratuitous.
: 56 :
• BARTER AND EXCHANGE

Barter:
Where goods are transferred for goods, the transaction is one of a ‘barter’ and not
sale, i.e. wheat is given in exchange of rice.
Exchange :
Where money is exchanged for money, the transaction is one of ‘exchange’ and
not sale, i.e. 100 rupee note is exchanged for 2 notes of Rs. 50.
• SALE AND CONTRACT FOR WORK AND LABOUR

A contract of sale has to be distinguished from a contract for work and labour. The
contract of sale contemplates the delivery of goods, whereas in contract for work
and labour or materials, the contract is for the exercise of the skill and labour, and
delivery of goods is only subsidiary.
Example:G commissioned R, an artist to paint a portrait and supplied the canvas
and the paint. Held, it is a contract for work and labour and not one for the sale of
goods.
• FORMATION AND MODES OF A CONTRACT OF SALE

A contract of sale is made by an offer to buy or sell by one person, and the
acceptance of such offer by another person. And it may be made in anyone of the
following modes [Section 5 (1)]:
1. There may be immediate delivery of goods, but the price to be paid at some
future date.
2. There may be immediate payment of price, but the delivery to be made at
some future date.
3. There may be immediate payment of price and the immediate delivery of
goods.
4. The price and delivery of the goods may be postponed.
5. The price and delivery of the goods may be agreed to be made in
instalments.
It may be noted that no particular form is necessary for the making of

a contract of sale.
It may be in any form, e.g., a contract of sale may be made
(a) In writing, or
(b) By words of mouth, or
(c) Partly in writing and partly by words of mouth, or
(d) May be implied from the conduct of the parties.
However, if any particular mode is prescribed by any law, then the contract
of sale must be made in that particular mode [Section 5 (2)].
: 57 :
• EFFECT OF DESTRUCTION OF GOODS
Goods are destroyed Goods are destroyed Goods are destroyed

before the contract of after agreement to after the contract of sale
sale sell but before sale
Contract is already
Agreement is void Contract becomes executed
(Risk of goods is with void (Risk if goods is with the
the seller) (Risk if goods is with buyer)
the seller)
*Aggrieved party can
claim damages
• PRICE AND MODES OF FIXING THE PRICE

The price means the money consideration for the sale of goods [Section 2 (10)].
Price may be fixed in any of the following modes provided in Section 9:
1. The fixation of price by the contract of sale [Section 9 (1)]:
The price may be expressly fixed the contract of sale. The parties may fix
any price they like.
2. The fixation of price in a manner provided in the contract of sale
[Section 9 (1)]:
The contract of sale may provide for some manner in which ‘price is to, be
fixed. In such cases, the price may be fixed in a manner provided in the
contract.
3. The fixation of price by course of dealings [Section 9 (1)]:
Sometimes, the customs or usage of trade provides certain principles for the
determination of the price. In such cases, the price may be determined from
the course of dealings between the parties.
4. The fixation of a reasonable price [Section 9 (2)]:
Sometimes, none of the above principles is applicable. In such cases, the
buyer shall pay to the seller a reasonable price. The term ‘reasonable’ price
is a question of fact which depends on the circumstances of each particular
case.
: 58 :
5. The fixation of price by third party [Section 10]:

The parties may agree to sell and buy goods on the terms that the
price shall be fixed by the valuation of a third party.
However, if such third party fails to make the valuation, the contract
becomes void. But if the buyer has received the goods and has
appropriated them, he becomes bound to pay reasonable price to the
seller.
Sometime, the third party is influenced or prevented by the buyer or
the seller from fixing the price. In such cases, the innocent party may
recover damages from the defaulting party.
Example:
A agreed to sell his 100 bags of rice to B at a price to be fixed by C. But C
failed to fix the price. In this case, the agreement becomes void on C’s
failure to fix the price.
Example:
A agreed to sell his 100 quintals of wheat to B at a price to be fixed by C. C
is willing to value wheat and fix the price. But, A by his wrongful acts,
prevents C from making the valuation of the goods. In this case, B can claim
damages from A.
: 59 :
UNIT 2: CONDITIONS AND WARRANTIES
• INTRODUCTION :
In every contract of sale of goods there are certain stipulations made with
reference to goods which are the subject-matter thereof. Such stipulations differ in
character and importance. The clause divides stipulations into conditions and
warranties.
Condition:
“A condition is a stipulation essential to the main purpose of the contract, that
breach of which gives a right to treat the contract as repudiated.”
Warranty:
“A warranty is a stipulation collateral to the main purpose of the contract, the
breach of which gives rise to a claim for damages but not a right to reject the
goods and treat the contract as repudiated”.
CONDITION WARRANTY
1.A condition is essential to the 1. It is only collateral to the main

mainpurpose of the contract. purposeof the contract.
2. In case of breach of condition, 2. In case of breach of warranty,
aggrieved party can: aggrieved party can only claim
i. Rescind the contract, return the damages.
goods and claim refund.
ii. Claim damages
3. A breach of condition may be 3. A breach of warranty cannot be
treated asa breach of warranty treated as a breach of condition.
4. Example: 4. Example:
• WHEN A CONDITION CAN BE TREATED AS A WARRANTY :
1. Voluntary waiver of condition:

Where a contract of sale is subject to any condition to be fulfilled by the
seller, the buyer may waive the condition or elect to treat the breach of the
condition as a breach of warranty and not as a ground for treating the
contract as repudiated.
2. Where the buyer elects to treat the breach of the conditions, as one of
a warranty. That is tosay, he may claim only damages instead of
repudiating the contract
3. Compulsory waiver of a condition:

Where a contract of a sale is not severable and the buyer has accepted the
goods or part thereof, the breach of any condition to be fulfilled by the seller
: 60 :
can only be treated as a breach of warranty and not as a ground for

rejecting the goods and treating the contract as repudiated, unless there is a
terms of the contract, express or implied, to that effect
Example:
B agrees to buy from A 20 bales of cotton by sample. The cotton is
delivered to B who makes payment of its price. B upon examination of
cotton finds them not equal to sample but uses 2 bales and sells 3. At this
point he cannot rescind the contract and recover the price. But A is bound to
compensate for the loss caused to B by breach of warranty.
4. Impossibility:
Nothing in this section shall affect the case of any condition or warranty,
fulfilment of which is excused by reason of impossibility or otherwise.
• CONDITIONS :
EXPRESS CONDITIONS IMPLIED CONDITIONS
Express conditions: Express conditions are those, which are agreed upon
between the parties at the time of contract and are expressly provided in the
contract.
Implied Conditions:
It is a condition, which the law implies into the contract of sale. The law
presumes that the parties have incorporated it into their contract.
The implied conditions are read into every contract of sale unless they are
expressly excluded by the parties.
In case of conflict between the express and implied conditions, the express
term shall prevail and the implied terms shall not be considered.
Following are the implied conditions which are contained in the Sale of
Goods Act :
1. Conditions as to title:
According to this condition, it is presumed that the seller has a
valid title to the goods, i.e., he has the right to sell the goods. If
later on, the buyer comes to know that the seller had no valid
right to sell the goods, then he may reject the goods and claim
the refund of the price, if already paid.
This implied condition may be analysed as under:
(i) In case of sale, the implied condition is that the seller
has the right to sell the goods, and
(ii) In case of an agreement to sell, the implied condition is
that the seller will have the right to sell the goods at the
time when the ownership is to pass from the seller to
the buyer.
Example:
: 61 :
2. Condition as to description:
Sometimes, the goods are sold by description. In such cases,
the implied condition is that the goods shall correspond with
the description.
The term ‘correspondence with description’ means that the
goods purchased by the buyer must be the same which were
described by the seller.
If subsequently, it is discovered that the goods do not
correspond with the description, the buyer may reject the
goods and claim the refund of the price, if already paid.
Example:
3. Condition as to sample:
In case of sale of goods by showing the sample to the buyer,
there are following three implied conditions,
(i) That the goods delivered shall correspond with the
quality of the sample
(ii) That the buyer shall have a reasonable opportunity of
comparing the bulk with the sample.
(iii) That the goods shall be free from latent defects (i.e.,
the defects which are not discoverable on reasonable
examination of sample)
4. Condition as to sample as well as description:

Sometimes, the seller shows sample of the goods to the buyer
and also gives him their description. In such cases, the implied
condition is that the goods shall correspond with both, the
sample as well as description.
5. Condition as to quality or fitness for buyer’s purpose:

Ordinarily, there is no implied condition that the goods shall be
fit for the particular purpose of the buyer.
Seller is not responsible:
(i) To know the particular purpose of buyer.
(ii) If buyer chooses the goods negligently.
However in following exceptions, there is an implied condition
that the goods shall be fit for the buyer’s specific purpose.
In following cases seller is responsible to the buyer:
(i) If the buyer makes his purpose clear to the seller.
(ii) If the buyer buys the goods ‘relying upon his skill and
judgment’.
Example:
: 62 :
6. Condition as to merchantability:
The term ‘merchantability’ has not been defined in the Sale of Goods
Act. However, it has been interpreted by the courts, and basically it
means the two things, namely:If goods are purchased for
Self use Resale
Then they should be reasonably Then they should be immediately re-

fit for the purpose for which they saleable in the market under their
are generally used. description.
Example: Example:
7. Condition as to wholesomeness:
This condition is a part of the condition as to merchantability. It is
applicable in cases of eatables, i.e., foodstuffs and other goods which
are used for human consumption. As per this condition, goods sold
must be fit for human consumption.
Example:
• WARRANTIES :
EXPRESS WARRANTIES IMPLIED WARRANTIES
Implied Warranties:
It is a warranty, which the law implies into the contract of sale. The law
presumes that the parties have incorporated it into their contract.
The implied warranties are read into every contract of sale unless they are
expressly excluded by the parties.
In case of conflict between the express and implied warranties, the express term
shall prevail and the implied terms shall not be considered.
Following are the implied warranties which are contained in the Sale of Goods Act :
1. Warranty as to quiet possession:
Where the buyer has obtained the possession of the goods, he has a
right to enjoy them in a way he likes, i.e., no one should interfere with
the quiet enjoyment of the buyer.
If buyer’s right of possession and enjoyment is disturbed by anyone,
then the buyer can recover damages from the seller.
Example:
: 63 :
2. Warranty as to free from encumbrance:

In every contract of sale there is an implied warranty that the goods
sold shall be free from any charge.
If the possession of the buyer is disturbed due to such charge in
favour of third party, he can claim damages from the seller.
Example:
3. Disclosure of dangerous nature of goods:

There is another implied warranty on the part of the seller that in case
the goods are inherently dangerous or they are likely to be
dangerous to the buyer and the buyer is ignorant of the danger, the
seller must warn the buyer of the probable danger.
If there is breach of this warranty, the seller will be liable in damages.
4. Warranties implied by customs:

Like implied conditions, implied warranties are also attached by
custom or usage of trade. This is so because the parties enter into an
agreement subject to the known customs or usages of trade.
• THE DOCTRINE OF CAVEAT EMPTOR

(BUYER BEWARE) :
‘Caveat Emptor’ is a Latin expression which means “let the buyer beware”.
The Doctrine states generally seller is not responsible for bad goods.
This Doctrine takes the side of the seller.
As per the ruler, seller is not responsible in following cases:-
(i) To know the particular purpose of buyer.
(ii) If buyer chooses the goods negligently
(iii) If the goods are defective and the defect is patent (i.e. defect which can be
discovered by mere inspection)
Exceptions : The exceptions to the doctrine of Caveat Emptor; which are

mentioned below (i.e in the following seller is responsible) :
1. Where the buyer specifies the particular purpose for which the goods are
required to the seller.
2. Where buyer relies on the seller’s skill or judgment.
3. Where there is contract of sale by sample, the rule of caveat emptor will not
apply if the goods do not correspond with sample
4. Where goods are bought by description, the goods shall correspond with the
description.
5. If the goods are bought both by sample as well as by description this rule
will not apply if goods do not correspond with both sample and description.
6. There is an implied condition that the goods shall be of merchantable quality
7. When the seller actively conceals some defect in the goods so that the
same could not be discovered by the buyer on a reasonable examination,
then the rule of Caveat Emptor will not apply.
8. When the goods are purchased under some brand name.
: 64 :
UNIT 3: TRANSFER OF OWNERSHIP AND DELIVERY OF GOODS
Transfer of property: Delivery of Goods: Acceptance

of Goods
1. Meaning 1. Meaning
2. Rules 2. Rules
• TRANSFER OF PROPERTY (OWNERSHIP) :
A. Meaning:
The term ‘property in the goods’ may be defined as the legal
ownership of the goods.
Transfer of Ownership means transfer of Risk, Rights and Returns
pertaining to the goods.
The term ‘property in the goods’ must be distinguished from the term
‘possession of the goods’. The term ‘property in the goods’ means
the ownership’ of the goods, whereas the term ‘possession of goods’
simply means the custody or physical control over the goods.
B. Rules:
1. The ownership is transferred at the time of making the contract
if the following conditions’ are fulfilled:
(a) The sale must be of specific goods:
These are the goods which are identified and agreed upon at
the time of contract.
(b) The goods must be in a deliverable state:
The goods are said to be in a deliverable state when they are
in such a state that the buyer would, under the contract, be
bound to take delivery of them.
(c) The contract of sale must be unconditional:
A contract is unconditional in which no condition is imposed
regarding the transfer of ownership of the goods.
2. Transfer of ownership in case of sale of unascertained goods.
The unascertained goods are the goods which are not specifically
identified at the time of making the contract of sale.
In case of sale of unascertained goods, the ownership is transferred
to the buyer on the fulfilment of both the following conditions:
(i) Ascertainment of goods:
It is the process by which the goods to be delivered under the
contract are identified and set apart. It is a unilateral act of the
seller alone to identify and set apart the goods.
(ii) Appropriation of goods:
It is the process by which the goods to be delivered under the
contract are identified and set apart with the mutual consent of
the seller as well as buyer. It is a bilateral act of the seller and
the buyer to identify and set apart the goods.
: 65 :
Example:
3. Where the specific goods are to be put in a deliverable state by

the seller: The ownership is transferred as soon as the seller has put
the goods in a deliverable state and the buyer comes to know about
the act of the seller.
4. Where the specific goods in a deliverable state are to be

weighed or measured by the seller to ascertain the price, the
ownership is transferred to the buyer as soon as the seller has done
the act of ascertaining the price and the buyer comes to know about
this act of the seller.
Example:
5. However, parties may decide to pass the ownership as per the

contract.
6. Transfer of ownership in case of sale on approval

The ownership of goods is with seller and the possession of
goods is with buyer
The buyer has an option to return the goods.
The ownership is transferred to the buyer in any of the
following three ways:
(i) When the buyer accepts the goods:
The acceptance by the buyer may be express or
implied.
(ii) When the buyer adopts the transaction:
The buyer may adopt the goods by doing some act
which shows that he has accepted the goods e.g.,
where he further sells or pledges the goods.
(iii) Where the buyer fails to return the goods within
fixed or reasonable time
7. Reservation of right of disposal

The seller may like to retain the ownership of the goods until
some later date, e.g., until the price is paid or some conditions
are fulfilled. The seller may do so by reserving his right of
disposal.
Where the seller has reserved his right of disposal, the
ownership of the goods is not transferred to the buyer even if
the goods are delivered to the buyer or some carrier for the
purpose of transmission to the buyer. The ownership is
: 66 :
transferred to the buyer only when the conditions imposed by

the seller are fulfilled
In the following two circumstances the seller is presumed to
have reserved the right of disposal :
1. By taking the documents showing title in his own name
or his agent’s name
2. By sending the bill of exchange for the price, to the
buyer, along with the documents of title
Example:
8. Transfer of risk
The risk and the ownership of the goods go together.
In other words, the goods are at the risk of the party who has
the ownership of the goods. This means that in case of loss of
the goods, the loss shall be borne by the party who has the
ownership of the goods at the time of loss.
Exceptions:
In these exceptional circumstances, the goods may be at the
risk of one party and their ownership may be with the other:
1. Agreement between the parties:
The terms of agreement between the parties may
provide as to when the ownership shall be transferred
and who shall suffer the loss.
2. Goods are at the risk of the party in default:
Sometimes, the delivery of the goods is delayed due to
the fault of either seller or buyer. In such cases, the
goods shall be at the risk of the party in default though
their ownership is with the other party.
3. Trade customs :
The risk and the ownership may also be separated by
the trade customs e.g., the trade custom may provide
that the goods shall be at the risk of the buyer whether
or not the ownership has been transferred to him.
9. Transfer of title by non-owners

“Nemodat quod non-habet”: This means that ‘no one can
transfer a better title than he himself has’. Thus, the buyer
cannot get a better title than that of the seller. If the seller’s
own title is defective, the buyer’s title will also be defective.
Example:
: 67 :
Exceptions:
In the following exceptional circumstances a non-owner can
transfer a valid title to a bonafide buyer:
1) Sale by a mercantile agent
A ‘mercantile agent’ is an agent who deals in the buying
and selling of the goods on behalf of his principal, e.g.,
an auctioneer. Where a mercantile agent sells goods in
the ordinary course of his business, the buyer who buys
in good faith, gets a valid title to the goods even if he
(the mercantile agent) is not the owner of the goods.
2) Sale by a joint owner: When the joint owner is in the
sole possession of the goods, and he sells them to a
person who buys in a good faith, the buyer gets a valid
title to the goods.
Example:
3) Sale by estoppel: When the owner of goods, by his

conduct or by statement, wilfully leads the buyer to
believe that the seller has the authority to sell, then he
is estopped (i.e., prevented) from denying the seller’s
authority to sell
Example:
4) Sale by unpaid seller: To be done in Unit 4

5) Sale by a seller in possession of goods after their
sale: If the seller continues to have the possession of
the goods even after their sale and if he resells the
same goods to a new buyer then in such cases, the
second buyer gets a valid title to the goods if he buys
them in a good faith.
Example:
6) Sale by a buyer in possession of goods after their

sale: If the buyer obtains the possession of the goods
which he has bought or agreed to buy from the seller
and the seller still has some lien or other rights over the
goods. If the buyer resells the same goods to a new
person. In such cases, the second buyer gets a valid
title free.
: 68 :
Example:
7) Sale by a finder of goods:
If the goods are perishable If the goods are non-perishable
If the expenses on the goods ≥ 2/3rd of Market Value
8) Sale by a person in possession under a voidable

contract: The buyer gets a valid title only if the
following conditions are satisfied:-
a. A person must obtain the possession of the
goods by coercion, undue influence, fraud or
misrepresentation.
b. The seller must have obtained the possession of
the goods under a voidable contract and not
under a void contract.
c. The contract must not have been rescinded (i.e.,
put to an end) at the time of sale
d. The buyer must act in a good faith.
Example:
9) Sale Under the Provision of Other Acts :

a. Sale by an Official Receiver or Liquidator of the
Company will give a valid title to the purchaser.
b. Sale by a pawnee/pledgee under default of
pawnor in repayment of debt will give valid title to
the purchaser.
In case of hire-purchase, hirer cannot pass a

good title even to a bonafide buyer.
• DELIVERY OF GOODS
A. Meaning:
“Delivery” means a voluntary transfer of possession from one person to
another”.
Delivery of goods may be actual, symbolic or constructive
B. Rules:
1. Buyer in position to access the goods:
The delivery of the goods may be made in any of the modes, but it must
have the effect of putting the goods in the possession of the buyer or his
agent.
: 69 :
2. Demand for delivery of goods:

It is seller’s duty to put the goods in deliverable state and inform the buyer
regarding same. It is buyer’s duty to make a demand for the delivery of the
goods.
3. Goods in the possession of a third person:
Sometimes, at the time of sale, the goods are in the possession of a third
person. In such cases, the effective delivery takes place when such person
acknowledges to (i.e., inform) the buyer, that he holds the goods on his
(buyer’s) behalf.
4. Delivery to a carrier or wharfinger:
Where the sold goods are delivered to a carrier/wharfinger for the purpose
of transmission to the buyer or safe custody, the delivery of goods to the
carrier/wharfinger is treated as a delivery to the buyer
5. Place for the delivery of goods:
Specified in the Not specified in the contract

contract
In case of sale- Place of Sale
The goods must In case of an agreement to sell- Place of
be delivered at agreement to sell
such place If at the time of agreement to sell, the
goods are not in existence- Place of
manufacture
6. Time for the delivery of goods:
Specified in the Not specified in the contract

contract
The delivery of goods must be
The goods must be made within a reasonable time
delivered at such during business hours on a
specified time working day.
7. Time for demand or tender of delivery:

The demand of delivery by the buyer must be made within reasonable time
during business hours and on a working day.
8. Expenses for the delivery of goods:

The expenses of putting the goods into a deliverable state are borne by the
seller. And the expenses of receiving the goods are borne by the buyer.
However, the seller and the buyer may also agree otherwise
9. Deterioration of goods during transit:

The buyer shall bear the loss of deterioration of goods which is incidental
i.e. natural in transit unless otherwise agreed.
: 70 :
10. Delivery of goods by instalments:

As a rule, the delivery of goods by instalments is not considered as a good
delivery and the buyer is not bound to accept the goods delivered to him by
instalments, unless otherwise agreed.
11. Part delivery of goods:
Where the part delivery is Where the part delivery is made

made in progress of the with the intention of separating it
whole delivery from the whole
Then it is treated as a Then it is not treated as a delivery

delivery of the whole and the of the whole and the ownership of
ownership of the whole the whole quantity is not
quantity is transferred to the transferred to the buyer.
buyer.
12. Delivery of wrong quantity:
Short delivery Excess delivery Mixed delivery
or or or or
Accept Reject Accept all Accept Reject Accept Reject
the the the the the the the
Goods Goods Goods quantity Goods Goods Goods
ordered
He shall have
to pay at the The buyer rejects the whole quantity the contract is
contract price not treated as cancelled, it is valid and subsisting.
for the goods The seller still has the right to tender again the
actually contract quantity of goods, and the buyer can
delivered to claim damages for delay.
him
• ACCEPTANCE OF DELIVERY OF GOODS

Acceptance is deemed to take place when the buyer-
(a) Intimates to the seller that he had accepted the goods; or
(b) Does any act to the goods, which is inconsistent with the ownership of the
seller; or
(c) Retains the goods after the lapse of a reasonable time, without intimating to
the seller that he has rejected them.
: 71 :
UNIT 4 : UNPAID SELLER
• MEANING OF UNPAID SELLER:

A seller will be called ‘unpaid’ if the following conditions are fulfilled:
(1) The whole or part of the price has not been paid or tendered and that the
seller has immediate right of action for the price.
(2) A bill of exchange or other negotiable instrument has been received but the
same has been dishonoured.
• RIGHTS OF UNPAID SELLER
Against Goods Against Buyer

1. Suit for recovery of
When property in When property in price
goods is transferred goods is not transferred
2. Rescind the contract
1. Right of Lien 1. Right of 3. Suit for damages

withholding
2. Right of 4. Suit for interest
delivery
stoppage in
transit 2. Any other
right
3. Right of resale
(A) Rights against the Goods:

1. Where the ownership of the goods has transferred to the buyer: In this
case, the unpaid seller has the following rights:
(a) Right of lien
The right of lien is the right to retain possession of the goods.
This right can be exercised only when the possession of
goods is with the seller.
The unpaid seller of goods can retain his possession of goods
until payment of the price in following cases:
a) Where the goods are not sold on credit.
b) Where the goods have been sold on credit, but the term
of credit has expired
c) Where the buyer becomes insolvent.
The unpaid seller can retain the goods only for the payment of
the price of the goods: He cannot retain the goods for any
other charges, e.g., maintenance, charges for storage of
goods during the exercise of lien etc.
The right of lien is indivisible in nature.
Termination of Lien:
a) By delivery of goods to the carrier
b) By delivery of goods to the buyer
c) By waiver of the lien
d) By payment of price by the buyer
: 72 :
Example:
(b) Right of stoppage in transit

The right of stoppage in transit is the right to regain
possession of the goods.
This right can be exercised only when,
(i) Seller should have parted with the possession
(ii) Possession should be with a carrier, &
(iii) Buyer has not acquired the possession.
The right of stoppage in transit can be exercised only if the
buyer has become insolvent.
The unpaid seller can stop the goods in transit only for the
payment of the price of the goods.
Distinction between Right of Lien and Right of Stoppage in
transit
Right of Lien Right of stoppage in transit

1. The essence of a right of lien is 1. The essence of stoppage in
to retain possession transit is to regain possession
2. Seller should be in possession 2. In stoppage in transit,
of goods under lien (i) seller should have parted with
the possession
(ii) possession should be with a
carrier, & (iii) buyer has not
acquired the possession.
3. Right of lien can be exercised 3. Right of stoppage in transit can
even when the buyer is not be exercised only when buyer
insolvent. becomes insolvent
4. Right of lien precedes right of 4. Right of stoppage in transit
stoppage in transit. begins when the right of lien ends
Example:
: 73 :
(c) Right of Resale
The unpaid seller has the direct In any other case, the unpaid seller has theright to
right to resell the goods in the resell the goods by following the procedure:
following circumstances:
1. Unpaid seller should give a notice to the buyer
1. Where the goods are of of his intention to resell the goods
perishable nature (+)
2. Where the unpaid seller has Additional time for payment
expressly reserved his right of 2. If the buyer does not pay the price within a
resale. reasonable time, the seller may resell the goods
If the notice of resale is given then in case of
loss on resale, it can be recovered and in case
of profit on resale, it can be retained.
However the notice of resale is not given, the
seller cannot recover the loss suffered on
resale. Moreover, if there is any profit on
resale he must return it to the original buyer
2. Where the ownership of the goods has not been transferred to the
buyer:
(a) Right of Withholding Delivery
When the ownership of the goods sold is not transferred to the buyer,
if the buyer fails to pay the price, the unpaid seller may refuse to
deliver the goods to the buyer. Such right is known as right of
withholding the delivery of the goods.
(b) Any other right
Since ownership and possession of goods is with the seller, seller
can use, gift, resell the goods, etc.
(B) Rights against the Buyer

1. Suit for recovery of price
Where the buyer takes the ownership as well as possession of goods and
the buyer fails to pay the price of the goods, the seller can file a suit against
the buyer for recovery of the price.
2. Suit for damages for repudiation of the contract before the due date of
delivery of goods :
Where the buyer repudiates (i.e., puts an end to) the contract before the due
date of delivery of the goods, the seller has the following options:
(i) He may not immediately take any action against the buyer, and treat
the contract as subsisting and wait till the date of delivery of goods.
(ii) He may immediately treat the contract as repudiated and bring a
legal action against the buyer for the recovery of damages. Thus, the
option of bringing the action lies with the seller. He may either wait till
the date of delivery of goods arrives, or bring an immediate action for
damages.
: 74 :
3. Suit for damages

Where the seller is ready and willing to deliver the goods to the buyer, but
the buyer wrongfully neglects or refuses to accept the goods and pay for
them, then the seller may bring a legal action against the buyer for the
recovery of damages suffered due to non-acceptance of the goods.
4. Suit for interest
The court may award the interest from the date of tender of the goods or
from the date when the price is payable. The rate of interest to be awarded
is at the discretion of the court.
• EFFECTS OF SUB-SALE OR PLEDGE BY BUYER

The right of lien or stoppage in transit is not affected by the buyer selling or
pledging the goods unless the seller has assented to it.
Exceptions:
(a) When the seller has assented to the sale, mortgage or other
disposition of the goods made by the buyer.
(b) When a document showing title to goods has been transferred to the
buyer and the buyer transfers the documents to a person who has
bought goods in good faith and for value.
Example:
• RIGHTS OF PARTIES IN BREACH OF CONTRACT
Rights of Seller against Buyer Rights of Buyer against Seller
1. Rescind the contract 1. Damages for non-delivery

2. Suit for recovery of price 2. Suit for specific performance
3. Suit for damages 3. Suit for breach of warranty
4. Suit for interest 4. Suit for breach of condition
5. Rescind the Contract
6. Suit for interest
• AUCTION SALES
An auction sale is a sale at which the auctioneer, as agent for the seller,
invites persons present to bid for goods sold.
Auctioneer acts in a dual capacity
He acts as an agent Subsequently, he

of the seller till the acts as an agent of
article is ‘knocked the buyer.
down’ to the bidder.
: 75 :
Rules regarding Auction Sales:

1. Where goods are put up for sale in lots, they are deemed to be sold
in lots.
2. The sale is complete and ownership is transferred when the
auctioneer announces its completion by the fall of the hammer or in
any other customary manner.
3. Bidder may retract his bid anytime before auction sale is complete.
4. The sale may be notified to be subject to a ‘reserve price’ or ‘upset
price.’ When the sale is notified to be subject to a ‘reserve price’, the
bidding and knocking down of the article to the highest bidder are all
subject to the condition that the ‘reserve price’ should be reached.
5. If the seller makes use of pretended bidding to raise the price, the
sale is voidable at the option of the buyer.
6. A right to bid may be ‘reserved’ expressly by or on behalf of the seller
and, where such right is expressly so reserved, but not otherwise, the
seller or any other person on his behalf, may bid at the auction.
7. Implied warranties in auction sale: In an auction sale, the auctioneer
warrants the following :
1. that he has an authority to sell;
2. that he is not aware of any defect in the title of the principal;
3. that he undertakes to handover the quite possession of the
goods as soon as the price is paid to him.
: 76 :
SUMMARY
UNIT 1:Formation of contract of sale
• INTRODUCTION
It came into force on the 1st of July, 1930.
The Law relating to this statute was contained in Indian Contract Act, 1872.
Where the Sale of Goods Act is silent on any point, the general principles of
the law of contract apply.
• CONTRACT OF SALE
Sale Agreement to sell

(Executed) (Executory)
• DEFINITIONS
1. Buyer
2. Seller
3. Goods
4. Price
5. Property
6. Documents showing Title to Goods/ Documents of Title to Goods
7. Mercantile Agent
8. Delivery
• ESSENTIAL ELEMENTS OF A VALID CONTRACT OF SALE
• DISTINGUISH BETWEEN
1. Sale and agreement to sell
2. Sale and hire- purchase
3. Sale and bailment
4. Sale and contract for work and labour
• FORMATION AND MODES OF A CONTRACT OF SALE

• EFFECT OF DESTRUCTION OF GOODS
• PRICE AND MODES OF FIXING THE PRICE
UNIT 2: CONDITIONS AND WARRANTIES
• CONDITION
“A condition is a stipulation essential to the main purpose of the contract
• WARRANTY
“A warranty is a stipulation collateral to the main purpose of the contract
• WHEN A CONDITION CAN BE TREATED AS A WARRANTY
: 77 :
• CONDITIONS
EXPRESS CONDITIONS IMPLIED CONDITIONS
• WARRANTIES :
EXPRESS WARRANTIES IMPLIED WARRANTIES
• THE DOCTRINE OF CAVEAT EMPTOR

(BUYER BEWARE)
UNIT 3: TRANSFER OF OWNERSHIP AND DELIVERY OF GOODS
Transfer of property: Delivery of Goods: Acceptance

of Goods
1. Meaning 1. Meaning
2. Rules 2. Rules
UNIT 4 : UNPAID SELLER
• MEANING OF UNPAID SELLER
• RIGHTS OF UNPAID SELLER
Against Goods Against Buyer

1. Suit for recovery of
price
When property in When property in
goods is transferred goods is not transferred 2. Rescind the contract
3. Suit for damages

1. Right of
1. Right of Lien
withholding 4. Suit for interest
2. Right of delivery
stoppage in
2. Any other
transit
right
3. Right of resale
• EFFECTS OF SUB-SALE OR PLEDGE BY BUYER
• RIGHTS OF PARTIES IN BREACH OF CONTRACT
• AUCTION SALES
: 78 :
QUESTIONS
1. What are the consequences of "destruction of goods" under the Sale of Goods
Act,1930, where the goods have been destroyed after the agreement to sell but
beforethe sale is affected.
2. In what ways does a "Sale" differ from "Hire-Purchase"?
3. State briefly the essential element of a contract of sale under the Sale of Goods
Act,1930. Examine whether there should be an agreement between the parties in
orderto constitute a sale under the said Act.
4. What do you understand by "Caveat-Emptor" under the Sale of Goods Act, 1930?
What are the exceptions to this rule?
5. What are the implied conditions in a contract of 'Sale by sample' under the Sale
ofGoods Act, 1930? State also the implied warranties operatives under the said Act.
6. "There is no implied warranty or condition as to quality or fitness for any
particularpurpose of goods supplied under a contract of sale" Discuss the
significance andState exceptions, if any.
7. Distinguish between a 'Condition' and a 'Warranty' in a contract of sale. When shall
a'breach of condition' be treated as 'breach of warranty' under the provisions of
theSale of Goods Act, 1930? Explain.
8. "NemoDat Quod Non Habet" - "None can give or transfer goods what he does
nothimself own." Explain the rule and state the cases in which the rule does not
applyunder the provisions of the Sale of Goods Act, 1930.
9. What are the rules related to Acceptance of Delivery of Goods?
10. Explain the provisions of law relating to unpaid seller's 'right of lien' and distinguish
itfrom the "right of stoppage the goods in transit".
11. What do you understand by the term "unpaid seller" under the Sale of Goods
Act,1930? When can an unpaid seller exercise the right of stoppage of goods in
transit?
12. When can an unpaid seller of goods exercise his right of lien over the goods
underthe Sale of Goods Act? Can he exercise his right of lien even if the property in
goodshas passed to the buyer? When such a right is terminated? Can he exercise
his righteven after he has obtained a decree for the price of goods from the court?
: 79 :
UNIT -1: FORMATION OF THE CONTRACT OF SALE
Q. 1. Ms Prachi Dutt has hired 100 laptops for her office @Rs30000 per laptop
(Rs3000000) for a monthly rent of Rs1 lakh. The stipulation is that if Ms Prachi
pays the rent regularly for 20 months, she is entitled to either exercise the
option of purchasing all the laptops or return the laptops immediately after 20
months. However, if purchase option is exercised, the installment facility would
continue. She decides to exercise the purchase option. Is this a valid contract?
Q. 2. Mr Jigar Dhuvad agrees to sell his second hand Maruti Omni Van to Mr Katta
for a price to be determined by Mr Dutta. Mr Katta took delivery of the Vehicle.
Mr Dutta refuses to fix the price. Mr Jigar Dhuvad wants the vehicle back. What
is the position?
Q.3. Mr Pruthvi Raj Chavan of Bangalore entered into contract for selling 10000 kgs
of grapes in his garden in Kolar with Mr Menezes of Goa, a fruit merchant. The
grapes were destroyed before the date of the agreement though Mr Pruthvi Raj
Chavan was not aware of the same. The grapes could, however, be used for
preparing wine. Mr Pruthvi Raj Chavan compels Mr Menezes to purchase the
same. Is the contract valid?
UNIT - 2: CONDITIONS & WARRANTIES
Q.1. Mr A sold a tin of cleaning acid to Mrs B. Mr A knew that it was likely to be
dangerous to Mrs B if she does not exercise caution and special care while
opening the lid. Mrs B opened the tin in the normal course and her face was
defaced by sprinkles of acid. Can she file a case against Mr A?
Q.2. Ms Pooja goes to a beauty salon. She asks for a facial and a hairdo. She does
not disclose any allergies to the beautician. The beautician applied some hair
dye without asking anything about the possible allergies. Ms Pooja developed
dermatitis. Is the beautician liable?
Q.3. X agrees to supply to Y a certain quantity of timber of half-inch thickness. The

timber actually supplied varies in thickness from one third inch to five-eight
inch. The timber is merchantable and commercially fit for the purpose for which
it was ordered. Y rejects the timber. Is his action justified?
UNIT - 3: TRANSFER OF OWNERSHIP AND DELIVERY OF GOODS
Q.1. Mr A, a farmer, sold his 4 cows to Mr B. In a period of 2 years, cows had given
birth to 2 calves. Now Mr.A demands the calves back as he claims that he has
just sold the cows and not the calves. State whether Mr. B is required to return
the calves?
Q.2. A contracts to sell to B all the oil to be produced from groundnut harvested from
A's farm. The crops having been harvested and oil made there from, A fills the
oil in cans supplied by B. However, A hasn’t yet informed B. Does the property
in oil pass to B?
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Q.3. P brought a musical instrument from a musical shop on a condition that he will
purchase it, if he likes that instrument. After a week he has informed the shop
owner that he has agreed to purchase the musical instrument. When doesnthe
ownership get transferred?
Q.4. During ICL matches, P buys a TV set from R. R agrees to deliver the same to
P after some days. In meanwhile R sells the same to S, at a higher price, who
buys in good faith and without knowledge about the previous sale. Will S get a
good title?
UNIT - 4: UNPAID SELLER
Q.1. A bids for an antique painting at a sale by auction. After the bid, when the
auctioneer struck his hammer to signify acceptance of the bid, he hit the
antique which gets damaged. Who shall bear the loss? What will be your
answer if the antique gets damaged after the hammer was struck on table?
Q.2. A entered into a contract to sell cartons in possession of a whar finger to B and
agreed with B that the price will be paid to A from the sale proceeds recovered
from his customers. Now B sold goods to C and C duly paid to B. But anyhow B
failed to make the payment to A. A wanted to exercise his right of lien and
ordered the whar finger not to make delivery to C. Can he do so?
: 81 :
J K SHAH CLASSES
C.A. FOUNDATION - LAW
ANSWERS
UNIT -1: FORMATION OF THE CONTRACT OF SALE
Ans.1. Contract of sale resembles with contracts of hire purchase very closely, and
the real object of a contract of hire purchase is the sale of the goods
ultimately.
Hire purchase agreements are governed by the Hire-purchase Act, 1972.
Term "hire- purchase agreement" means an agreement under which goods
are let on hire and under which the hirer has an option to purchase them in
accordance with the terms of the agreement and includes an agreement
under which—
(a) Possession of goods is delivered by the owner thereof to a person on
condition that such person pays the agreed amount in periodical
installments, and
(b) The property in the goods is to pass to such person on the payment of
the last of such instalments, and
(c) Such person has a right to terminate the agreement at any time before
the property so passes; None the less a sale has to be distinguished
from a hire purchase as their legal incidents are quite different.
In the given question, it is a hire purchase contract. It is a valid contract.
Ans.2. Section 10 of The Sale o provides for the determination of price by a third
party. Where there is an agreement to sell goods on the terms that price has
to be fixed by the third party and he either does not or cannot make such
valuation, the agreement will be void. In case the third party is prevented by
the default of either party from fixing the price, the party at fault will be liable
to the damages to the other party who is not at fault. However, a buyer who
has received and appropriated the goods must pay a reasonable price for
them in any eventuality. In the given question, Mr Jigar Dhuvad agrees to
sell his second hand Maruti Omni Van to Mr Katta for a price to be
determined by Mr Dutta. Mr Katta took delivery of the Vehicle. Mr Dutta
refuses to fix the price. Mr Jigar Dhuvad caanot get the vehicle back. Mr
Jigar has to accept a reasonable amount and Mr Katta has to pay a
reasonable amount. Mr Jigar cannot call back the goods.
Ans.3. As per section 7 of Sale of Goods Act,1930, where there is a contract for the
sale of specific goods, the agreement 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
contract. In the given question, Mr Pruthvi Raj Chavan of Bangalore entered
into contract for selling 10000 kgs of grapes in his garden in Kolar with Mr
Menezes of Goa, a fruit merchant. The grapes were destroyed before the
date of the agreement though Mr Pruthvi Raj Chavan was not aware of the
same.
Since the goods no longer answered the description of fruits, the agreement
is void.
: 82 :
J K SHAH CLASSES
C.A. FOUNDATION - LAW
UNIT - 2: CONDITIONS & WARRANTIES
Ans.1. As per section 16 of Sale of Goods Act,1930, where the goods are
dangerous in nature and the buyer is ignorant of the danger, the seller must
warn the buyer of the probable danger. If there is a breach of warranty, the
seller may be liable in damages.
In the given question, Mr A sold a tin of cleaning acid to Mrs B. Mr A knew
that it was likely to be dangerous to Mrs B if she does not exercise caution
and special care while opening the lid. Mrs B opened the tin in the normal
course and her face was defaced by sprinkles of acid. For all dangerous
goods, the seller is bound to inform the buyers all the dangers inherent and
the precautions to be taken.
Therefore, Mr A is liable for the damages.
Ans.2. As per section 16 of Sale of Goods Act, 1930, where the goods are
dangerous in nature and the buyer is ignorant of the danger, the seller must
warn the buyer of the probable danger. If there is a breach of warranty, the
seller may be liable in damages.
In the given question, Ms Pooja goes to a beauty sale on. She asks for a
facial and a hairdo. She does not disclose any allergies to the beautician.
The beautician applied some hair dye without asking anything about the
possible allergies. Ms Pooja developed dermatitis. Fitness of the dye to
extends to that of a normal person. If a client has specific allergies, the client
is bound to disclose the same. Therefore, the beautician is not liable.
Ans.3. As per section 15 of Sale of Goods Act, 1930, where there is a contract of
sale of goods by description, there is an implied condition that the goods
shall correspond with the description. The buyer is not bound to accept and
pay for the goods which are not in accordance with the description of goods.
In the given question, X agrees to supply to Y a certain quantity of timber of
half-inch thickness. The timber actually supplied varies in thickness from one
third inch to five- eight inch. Even though the timber is merchantable and
commercially fit for the purpose for which it was ordered, Y can reject the
same as it does correspond with the description. Therefore, Y’s action is
justified.
UNIT - 3: TRANSFER OF OWNERSHIP AND DELIVERY OF GOODS

Ans.1. As per provisions of Sale of Goods Act 1930, the term ‘property in the goods’
is defined as the legal ownership of the goods. Transfer of Ownership means
transfer of risk, rights and Returns pertaining to the goods.
In the given question, A, already sold his 4 cows to Mr B. So the calves of
the cows also belong to Mr. B.
Therefore, Mr. B is not required to return calves to Mr.A.
Ans.2. As per provisions of Sale of Goods Act 1930, The ownership is transferred
as soon as the seller has put the goods in a deliverable state and the buyer
comes to know about the act of the seller.
In the given question, A contracts to sell to B all the oil to be produced from
groundnut harvested from A's farm. The crops having been harvested and oil
made there from, A fills the oil in cans supplied by B. However, A hasn’t yet
informed B. Since B doesn’t know about deliverable state, the property in oil
does not pass to B.
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J K SHAH CLASSES
Downloaded From www.castudynotes.comC.A. FOUNDATION - LAW
Ans.3. As per section 24 of Sale of Goods Act,1930, when goods are delivered to
the buyer on approval or "on sale or return" or other similar terms, the
property therein passes to the buyer-
(a) when he signifies his approval or acceptance to the seller or does any
other act adopting the transaction;
(b) if he does not signify his approval or acceptance to the seller but
retains the goods without giving notice of rejection, then, if a time has
been fixed for the return of the goods, on the expiration of such time,
and, if no time has been fixed, on the expiration of a reasonable time;
or
(c) he does something to the good which is equivalent to accepting the
goods e.g.
The pledges or sells the goods.
In the given question, P brought a musical instrument from a musical shop
on a condition that he will purchase it, if he likes that instrument. After a
week he has informed the shop owner that he has agreed to purchase the
musical instrument.
Therefore, the ownership is transferred when he has decided to purchase
the instrument as his own.
Ans.4. As per section 27 of Sale of Goods Act, 1930, where goods are sold by a
person who is not the owner thereof and who does not sell them under the
authority or with the consent of the owner, the buyer acquires no better title
to the goods than the seller had. However, if a person has sold goods but
continues to be in possession of them, he may sell them to a third person,
and if such person obtains the delivery thereof in good faith and without
notice of the previous sale, he would have good title to them, although the
property in the goods had passed to the first buyer earlier.
In the given question, P buys a TV set from R. R agrees to deliver the same
to P after some days. In meanwhile R sells the same to S, at a higher price,
who buys in good faith and without knowledge about the previous sale.
Hence, S will get a good title.
UNIT - 4: UNPAID SELLER
Ans.1. Under Section 26 of the Sale of Goods Act, unless otherwise agreed, the
goods remain at the seller's risk until property therein has passed to the
buyer. After that event they are at the buyer's risk, whether delivery has been
made or not.
In the given question, A bids for an antique painting at a sale by auction.
After the bid, when the auctioneer struck his hammer to signify acceptance
of the bid, he hit the antique which gets damaged. Since, the ownership was
not transferred, the loss will be borne by seller.
But, if the antique gets damaged after the hammer was struck on table, the
loss will be borne by buyer.
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J K SHAH CLASSES
Downloaded From www.castudynotes.com C.A. FOUNDATION - LAW
Ans.2. As per section 53 of Sale of Goods Act 1930, the right of lien or stoppage in
transit is not affected by the buyer selling or pledging the goods unless the
seller has assented to it. This is based on the principle that a second buyer
cannot stand in a better position than his seller. However, when the seller
has assented to the sale, mortgage or other disposition of the goods made
by the buyer, his right of lien or stoppage in transit is defeated. In the given
question, A entered into a contract to sell cartons in possession of a what
finger to B and agreed with B that the price will be paid to A from the sale
proceeds recovered from his customers. Now if B failed to make payment,
the seller cannot exercise his right of lien as he had assented to the resale of
the goods by the buyer to the sub-buyers. Therefore, he cannot exercise his
right of lien.
: 85 :
CHAPTER 3 - THE PARTNERSHIP ACT, 1932

UNIT 1:GENERAL NATURE OF PARTNERSHIP
• INTRODUCTION :
It came into force on 1st October, 1932.
Prior to the passing of the Act, the law of partnership was included in Charter
XI of the Indian Contract Act.
Where the Partnership Act is silent on any point, the general principles of the
law of contract apply. The partnership is a specialized branch of the Contract
Act.
• DEFINITION OF PARTNERSHIP
Section 4 of the Partnership Act defines partnership as under:
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.
• PARTNERSHIP
Partnership is the relation between two or more persons who have agreed to share
profits of a business carried on by all or any of them acting for all.
• PARTNER& FIRM
Persons who have entered into partnership with one another are called individually
“partners” and collectively “a firm”, and the name under which their business is
carried on is called the ‘firm name”.
• ESSENTIAL ELEMENTS OF PARTNERSHIP

Therefore, the essential elements of the relationship of partnership may be stated
as follows:
(1) There must be an association of two or more persons.
(2) There must be an agreement.
(3) There must be a business
(4) There must be an agreement to share the profits of a business, and
(5) There must be an element of ‘agency’ i.e. the business must be carried on by
all or any of them acting for all.
Thus, essential elements of relationship of partnership are:
(1) There must be two or more persons :

There must be at least two persons to form a partnership. Maximum
number of partners, partnership act is silent. But Section 464 0f The
Companies Act 2013 specifies it as 50. If number of partners fall
below it ceases to be partnership. If it goes beyond 50, it will become
an illegal association.
The persons can be natural or artificial. Hence 2 companies can be
partners. But a firm cannot enter into a contract for partnership though
their partners can become partners.
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86 :
All such persons must be competent to contract. According to Indian
Contract Act every person except the following:
(i) Minor
(ii) Person of unsound mind
(iii) Person disqualified by any law to which they are subject (alien,
insolvents etc)
(2) There must be an agreement:

A partnership arises only as a result of an agreement. Such an
agreement may be express or implied. Implied in the sense that it may
be a voluntary act by the persons. Agreement can be oral or in writing
but partnership deed must be in writing
Partnership is thus created by contract; it does not arise by operation
of law or from status
Agreement must be valid
Partnership agreement like any other contract, so it must satisfy all the
essentials of a valid contract. In other words, the parties must be
‘competent’, i.e. capable of entering into an agreement, their consent
must be free and there should be a lawful consideration and object.
(3) There must be a business:

The existence of a business is essential in a partnership. “Business”
includes every trade, occupation and profession. If two or more
persons join together to form a ‘dramatic club’ it is not a partnership
because there is no business in this case. Similarly, if A and Bare co-
owners of a building and let it to a tenant for rent and divide the net
rents between themselves. A and B are not partners because letting a
house is not a business. But if A and B agree to convert the building
into a hotel and to share the profits equally, there is a “business” here
and hence A and B are partners in respect of such business.
The business must be lawful.
The business may consist of a single adventure or a single
undertaking. Section 8 of the Indian Partnership Act provides:
“A person may become a partner with another person in particular
adventures or undertakings.” e.g. Two solicitors are engaged for a
single case and they agree to share the profits. They would be
partners.
(4) Sharing of profits:

The element draws out the most essential feature and basis of
partnership. The object of partnership undoubtedly is to earn “profit”.
Sharing of losses :
The agreement to share profit is essential, but it should be noted that
an agreement to share the losses is not essential. Where nothing is
said as to the sharing of losses, it is implied in a partnership deed.
It may, however, be agreed that as between the partners anyone or
more of them shall not be liable for losses. But the reverse is not just
possible. So where persons agree to share the profits of a money-
lending business, they become partners, but where one of them, so
called partner is not to receive profits, he is not a partner. E.g. A and B
agree to work together as carpenters, but that A shall receive all
profits and shall pay wages to B, A and B are not partners. When

87 :
profit is made, it must be distributed (in absence of any agreement)
equally, or in the agreed ratio.
A person, who receives the profits of a business, is not necessarily a
partner. The persons who receive the profits but are not the partners
are referred as under:
1. Retired partner
After retirement if the settlement of accounts is not done then
the retired partner may get share in profits. But he is not treated
as partner.
2. Money-lenders receiving profits:
A money-lender is a person who lends money on interest.
Sometimes, a money-lender receives, in addition to or in place
of his interest, a portion of the profits of a business. In such
cases, he cannot be said to be a partner only on the ground
that he receives the profits of the business.
3. Employee or agent receiving profits:
Sometimes, an employee or an agent of a business agrees to
receive, in addition to or in place of his regular remuneration, a
portion of the profits of the business. In such cases, he cannot
be said to be a partner only on the ground that he receives the
profits of the business.
4. Widow or child of a deceased partner:
Sometimes, the widow or a child of deceased partner receives
a portion of profits as annuity. In such cases, they cannot be
said to be the partners of the firm only on the ground that they
receive the profits of the business.
5. Seller of goodwill:
Sometimes, a person who sells his business along with its
goodwill, is given a share in the profits of the business he has
sold. In such cases, that person does not become a partner in
the business only on the ground that he receives the profits of
the business.
6. Minor:
Minor receives share in profits but is not considered as partner.
Just because a person is sharing profits, he is not a partner. But if a

person is a partner, he will definitely get share in profits.
(5) Agency:
Again this last element is most crucial of partnership. The business of
a firm is ‘carried on by all or by anyone of them acting for all’. The
underlying and fundamental principle herein which constitutes
partnership is the idea of ‘agency’. The other partners are bound by
the acts of one of them only on the principle of agency. This is the
cardinal principle of partnership law.
It means every partner is a
Agent of the firm Principal for other partners acts

88 :
That is to say, each partner is an agent binding the other partners who
are his principals and each partner is again a principal, who in turn, is
bound by the acts of the other partners. An act of one partner in the
course of business of the firm is in fact an act of all partners.
Example :
A, Band C are partners in a business. D an outsider, deals with the
firm through A. As between A and D, A is the principal. But as
between A, Band C, A is the agent of Band C. As such A, B and C can
all sue D. D can also sue A, Band C. Furthermore, A is accountable to
Band C because he is, in this transaction, an agent of Band C.
• PARTNERSHIP DISTINGUISHED
A) PARTNERSHIP AND JOINT HINDU FAMILY FIRM (HINDU UNDIVIDED

FAMILY):
Partnership HUF
1. It arises from agreement 1. It arises by status.
2. Governed by Indian Partnership Act, 2. It is governed by Hindu Law.

1932.
3. Maximum partners can be 50. 3. No such limit is applicable here.
4. A person can be admitted by the 4. A male person becomes a member
consent of the other existing partners. merely by his birth.
5. A minor can be admitted only to the 5. A male minor becomes a member
benefits of the firm. merely by his birth.
6. Each partner is implied authority to 6. Only Karta has such authority.
bind the firm for the actions done by
him in the daily course of business.
7. Unlimited liability. 7. Karta’s liability is unlimited and the
coparcener’s liability is limited to their
share in the family property
8. Each partner has the right to ask for 8. The coparceners have no such right
the books of accounts and also for the
profits and losses.
9. In case of death of a partner, 9. HUF continues to operate even after
partnership is dissolved unless death of a coparcener.
otherwise agreed.

89 :
B) PARTNERSHIP AND CO-OWNERSHIP:
Co-ownership means joint ‘ownership X and Y jointly purchase a plot. They are co-
owners but not necessarily partners. The distinction between the two is as under:
Partnership Co-ownership
1. It arises from an agreement. 1. It may arise from agreement or
operation of law.
2. It is formed to carry on business. 2. It may or may not involve carrying on
a business.
3. It involves profit or loss. 3. It may or may not involve profit or
loss
4. Partners have a mutual agency 4. Co-owners do not have a mutual
relationship. agency agreement.
6. A partner cannot transfer his share to 6. A co-owner can transfer his share to
a stranger without the consent of any a stranger without the consent of
other business. other owners.
7. A partner has no right to claim partition 7. A co-owner has the right to claim
of property. partition of property.
C) PARTNERSHIP AND JOINT STOCK COMPANY:
Partnership Company
1. A firm does not enjoy separate legal 1. It has a separate legal existence.
entity i.e. separate legal existence.
2. The liability of the partner is unlimited. 2. Limited to the value of shares held
by the members.
3. It does not enjoy a long lease of life 3. It enjoys a perpetual existence.
because of dissolution due to different
reasons.
4. Maximum partners can be 50. 4. In case of private limited company,
Minimum members-2, maximum
members -200
In case of public limited company,
Minimum members -7, maximum
members - no limit
In case of One person Company
(OPC)- only 1.
Partnership Company
5. A partner cannot transfer his share 5. A member can transfer his share
without the consent of other partners. as and when he wishes to.
6.There is mutual agency amongst the 6. There is no mutual agency

partners amongst the members

90 :
7. Distribution of profits is compulsory as 7. No such compulsion of distributing
per the partnership deed the profits.
8. The ownership & management lies 8. Ownership is with shareholders
with all the partners. and the management is with
board of directors
9. Property of the firm is the joint property 9. The property of company is not the
of all the partners. joint property of the members.
10. The creditors of the firm can proceed 10. The creditors of a company can
against the partners jointly and proceed only against the
severally. company.
11. No compulsory Audit 11. Its compulsory
D) A PARTNERSHIP AND CLUB:

A club is an ‘association of persons’ formed for social purpose and not for the
purpose of any ‘gain’ or ‘profit’. It differs from the partnership in the following
respects:
Partnership Club
1. Business oriented objects 1. Not aimed at making profits entirely.
3. Does not enjoy long lease of life 3. Enjoys a long lease of life
4.There is mutual agency amongst the 4. There is no mutual agency amongst
partners the members
• CLASSES OR TYPES OF PARTNERS :

Partners can be classified as shown below:
1. Active/Actual Partner :
A partner who is actively engaged in the conduct of the business of
the partnership is known as ‘active partner’.
When an active partner retires from the firm, he has to give a public
notice. Otherwise, he will be liable on the principle of ‘holding out’.
He is liable for acts of firm
2. Sleeping or Dormant Partner :

A ‘Sleeping partner’ is one who does not take any active part in the
business.
Such partner joins the firm by agreement and invests capital and
shares in the profit of the business like the other partners.
A sleeping partner need not give public notice of his retirement from
the firm.
He is liable for acts of firm

91 :
3. Nominal Partner :
A partner, who simply lends his name to the firm, without having any
real interest in it, is called a nominal partner.
He neither invests nor shares in the profits or takes part in the
management of the business.
He, along with other partners, is liable to outsiders for all the debts of
the firm.
Difference between sleeping and nominal partner: A nominal partner
is known to the outside world as a partner of the firm but in reality
does not share in the profit of the firm. A dormant partner on the other
land, even though not known as a partner to the world at large but in
fact shares in the profits of the business.
4. Partner for profits only :

Partners may agree that a particular partner shall get a share of the
profits only but he will not be called upon to contribute towards the
losses. Such a partner is known as ‘partner for profits only’.
This is simply an, inter-se agreement binding the partners only.
Hence,he continues to be liable to third parties for all acts of the firm.
5. Sub-Partner :
When a partner agrees to share his profits divided from the firm with a
third person, that third person is known as ‘sub-partner’.Such a sub-
partner is in no way connected with the firm.
He cannot represent the firm and bind the firm by his acts. He has no
right against the firm nor is he liable for the acts of the firm.
6. Partner by Holding Out or by Estoppel :

To hold a person liable as a partner by holding out, it is necessary to
establish the following :
1. He represented himself or knowingly permitted himself to be
represented as a partner.
2. Such representation occurred by words spoken or written or by
conduct.
3. The other party on the faith of that representation gave credit to
the firm.
Once he poses himself as a partner, though he is not a partner, he is
estopped from saying that he is not a partner in a firm.
Example:
X carried on business as RS. & Co. employed a person named RS. to
act as manager of the business. It was held that RS. is a partner by
the principal of estoppel.
7. Incoming Partner:
A person who is admitted as a partner into an already existing firm with the
consent of all the existing partners is called as “incoming partner”.
8. Outgoing Partner:
A partner who leaves a firm in which the rest of the partners continue to carry
on business is called an outgoing partner.

92 :
• CLASSES OF PARTNERSHIP :
Partnership can be classified as under:
1. Particular Partnership :
When a partnership is started for a particular purpose or period, it
ends only when the purpose or period is completed.
If the partnership is carried even after the completion of the target
then it is deemed to be partnership at will.
2. Partnership at will:
When no provision is made by contract between the partners for the
duration of their partnership, or for the determination (termination) of
their partnership, the partnership is “Partnership at will”.
Where the partnership is at will, the firm may be dissolved by any
partner giving notice in writing to all the other partners of his intention
to dissolve the firm.
The firm is dissolved as from the date mentioned in the notice as the
date of dissolution or if no date is mentioned, then from the date of the
communication of the notice. The notice must be served on all other
partners. The notice once given cannot be withdrawn unless all the
other partners consent. The fact that one of the partners receiving the
notice is of unsound mind does not affect the validity of the notice.
• REGISTRATION OF FIRM
The registration of a firm is not compulsory. It is optional for the firm either
to get itself registered or not. There is no penalty for non-registration of a
firm. The registration can be done anytime, either in the beginning or during
the continuance of business.
Procedure:
1. Step 1- Obtain a statement in the form from the office of the Registrar.
2. Step 2- State the following information:
• Name of the firm
• Principal place of the firm
• Name of the other places where the firm carries its business
• Date when each partner joined
• Name in full and permanent address of each partner
• Duration of the firm.
3. Step 3- Get the statement of duly verified and signed by all the
partners or their agents.
4. Step4- File the statement along with prescribed fees
5. Step 5- Obtain a certificate or registration from the Registrar.
The registration becomes effective from date of filing of duly signed and
verified documents and not from the date of issue since the act of the
Registrar in recording an entry of the statement in the firm is only a clerical
act.

93 :
Consequences of non-registration:
1. The partners cannot file a suit against the firm or other partners:
A partner of an unregistered firm cannot file a suit against the firm or
his other present or past partners, for the enforcement of any right
arising from a contract or conferred by the Indian Partnership Act.
However, this disability may be removed by getting the firm registered
before filing the suit.
2. The firm cannot file a suit against third parties:
An unregistered firm cannot file a suit against any third party for the
enforcement of any right arising from some contract.
This disability of an unregistered firm can be removed by getting the
firm registered before filing the suit.
3. The partner of the firm cannot claim a set-off:
The term ‘set-off’ means the adjustment of debts by one party due to
him from the other party who files a suit against him. The partners of
an unregistered firm or the firm itself cannot claim a set-off, in a suit
filed against them or the firm. But the right of set-off is not affected if
the claim for setoff does not exceed Rs 100 in value.
Following are not the disabilities of an unregistered firm:

1. The third party can file a suit against the firm whether the firm is
registered or not. And the firm cannot take the plea of its non-
registration.
2. The partners of an unregistered firm can file a suit for the enforcement
of the three things, namely,
(a) for the dissolution of the firm,
(b) for the accounts of the dissolved firm, and
(c) forrealization of the property of the dissolved firm.
3. The right of an unregistered firm to enforce a right which arises
otherwise than out of a contract. As a matter of fact, firm’s disability is
to enforce the contractual rights, and not the others.
• MINOR’S POSITION IN PARTNERSHIP FIRM

A minor cannot become a partner in a firm because partnership is founded
on a contract and contract with a minor is void-ab-initio. Though a minor
cannot be a partner in a firm, he can be admitted to the benefits of
partnership with the consent of all the partners.

94 :
The rights and liabilities of such a partner are as follows:
Rights:
Liabilities
i. A minor partner
has a right to his
agreed share of Before attaining After attainingmajority
the profits and majority
property of the
firm. i. Minor has no
er attaining majo
ii. He can have personal liability When he elects When he elects
access to, inspect for the debts of to become a not to become a
and copy the the firm incurred partner
accounts of the partner
during his
firm. minority. i. He becomes His share shall
iii. He can sue the ii. The liability of personally not be liable for
partners for the minor is
accounts or for liable to third any acts of the
confined only to parties for all
payment of his firm done after
the extent of his
share but only acts of the firm the date of the
share in the
when severing profits and the since he was public notice.
his connection property of the admitted to the
with the firm, and firm. benefits.
not otherwise. iii. Minor cannot be ii. His share in the
iv. Right to become declared property and
a partner within 6 insolvent, but if
profits remains
months from the the firm is
declared the same as
date of attaining
insolvent his decided.
majority or when
he comes to share in the firm
vests in the
know whichever
Official
is later. Receiver/
Assignee.

95 :
UNIT 2: RELATION OF PARTNERS
• RIGHTS OF PARTNERS:
The mutual rights of partners depend upon the provisions of the partnership
agreement. However, subject to an agreement between the partners; the law
confers the following rights upon all the partners:
1. Right to take part in business:
It is the right of every partner to take part in the management of the business.
This right is available to all the partners. This is, however, subject to contract
between the partners i.e., the partners may provide, by a contract, that this
right shall not be available to some partners.
2. Right to be consulted:
It is also the right of every partner to be consulted in all matters
affecting the business of the firm. Moreover, every partner also has
the right to express his opinion before any decision is taken by the
other partners.
In case of difference of opinion, matter will be settled in following way:
In case of an ordinary matter In case of fundamental matter
To be settled by a majority To be settled by consent of all

of partners the partners
i.e. unanimous consent
3. Right to have access to books:

Every partner has the right to examine all the records, books and accounts of
the firm. Moreover, he can also have the copy of such accounts etc. This
right is, however, subject to a contract between the partners i.e., the partner
may agree, by a contract that this right shall not be available to some of the
partners.
4. Right to share profits:

Every partner has the right to have equal share in the profits of the firm.
However, the partners may also agree to share the profits in different
proportions.No agreement between the partners can restrict this right.
5. Right to interest on capital and on advance:

Right to interest on capital: Ordinarily, the partners have no right to receive
any interest on their contribution towards the capital. However, the
partnership agreement may provide that the partners shall be entitled to
interest on capital at a certain rate. It may, however, be noted that where
such interest is to be paid, it shall be paid only out of profit.
Right to interest on advances: Where in addition to the contribution
towards the capital, a partner also advances a sum of money for
the purpose of the business of the firm; he is entitled to interest on
such advance at the rate of 6% per annum. Such interest on
advance is payable even if the firm suffers loss.

96 :
6. Right to indemnity:
The partner of a firm has a right to be indemnified i.e., the right to recover
expenses incurred and payments made by him in the following two
circumstances.
(a) Expenses incurred in the ordinary course of business:
A partner has a right to recover from the firm any expenses incurred
by him ‘in the ordinary course of partnership business’.
(b) Expenses incurred in an emergency:
A partner has a right to recover from the firm any expenses incurred
by him in order to protect the property of the firm from a loss
threatened by an emergency.
No agreement between the partners can restrict this right.
7. Right to use the partnership property:

It is the right of every partner to use the partnership property. It may,
however, be noted that the partnership property should be used exclusively
for the purpose of the partnership business.
8. Right to be consulted at the time of admission of a new partner :

It is the right of every partner to be consulted at the time of admitting a new
partner in the firm.
9. Right to retire from the firm :

It is the right of every partner to retire from firm, if he finds it difficult adjust
with the other partners.
10. Rights of retiring partner:

To be covered later
11. Right not to be expelled:

Every partner has the right to continue in the firm and he cannot be expelled
from it by the other partners. However, the partners may enter into a contract
providing for the expulsion of a partner by majority of the partners. But the
power of expulsion must be exercised in good faith:
12. Right to remuneration:

Generally, the partners are not entitled to receive any remuneration for taking
part in the conduct of the business of the firm. However, the partnership
agreement may expressly provide for the payment of remuneration to
working partners.
Note:
The payment of remuneration to a working partner does not make partner an
employee of the firm. The reason being that the firm and its partners are one
and the same thing, and the firm is not a separate legal entity.
13. Right to dissolve the firm:

A partner has the right to dissolve the partnershipwith the consent of all
partners. But where the partnership is at will the firm may be dissolved
by any partner giving notice in writing to all other partners of his intention to
dissolvethe firm.

97 :
• DUTIES OF PARTNERS
Following are the duties of partners towards one another.
1. Duty of good faith:
It is the foremost and important general duty of the partners. Every partner
should act in good faith, and he should be just and faithful in his dealings
with the other partners. Good faith requires that a partner should not deceive
the other partners by concealment of material facts e.g. a partner should not
try to make secret profits, for himself, at the expense of the firm.
2. Duty to carry on the firm business to the greatest common advantage:
Every partner is bound to carry on the business of the firm to the greatest
common advantage. He must use his knowledge and skill for the common
benefit of the firm. And he should not make any personal or private profits.
3. Duty to render trueaccounts:
It is another duty of every partner that he should keep proper accounts, and
render correct and true accounts of partnership.
4. Duty to give full information:
It is also the duty of every partner that he should give full information of all
things affecting the firm, to his co-partners. Thus, if a partner is in possession
of more information about the affairs and assets of the firm, he should not
conceal that from the other partners.
5. Duty to indemnify for loss caused by fraud :
It is the duty of every partner to make good the loss suffered by the firm due
to his fraud. Thus, if some loss is caused to the firm due to the fraud of a
particular partner, the firm has the right to recover the loss from the same
partner. It is an absolute duty and cannot be excluded by an agreement to
the contrary.
However, the firm shall remain liable to the third parties for fraud of its
partners.
6. Duty to attend diligently:
It is the duty of every partner that he should diligently (i.e., carefully) attend to
the affairs of the business of the firm. If a partner does not attend diligently
the business of the firm, and the firm suffers a loss due to his ‘willful neglect’,
then he is bound to make compensation to the firm.
7. Duty to share losses:
It is the duty of every partner to share equally the losses suffered by the firm.
However, this duty is subject to an agreement to the contrary i.e., the
partners may agree to share the losses in different proportions. However this
duty might be restricted by way of an agreement.
8. Duty to account for personal profits:
This duty is based on the principle of good faith, which requires that a partner
shall not make personal profits at the expense of the firm. If a partner makes
personal profits in any of the following ways, he must give account of those
profits and pay back the same to the firm:
(a) Personal profits from any transaction of the firm.

98 :
(b) Personal profits from the use of the property of the firm.
(c) Personal profits from the business connection of the firm.
(d) Personal profits from the use of the name of the firm.
However, the above duty is subject to a contract between the partners

i.e., by a contract, the partners may allow/all or any of them to earn
personal profits by using firm name, property etc.
However, the above duty is subject to a contract between the partners

i.e., by a contract, the partners may allow all or any of them to carry
on any business whether or not competing with the business of the
firm.
10. Duty to use firm property exclusively for firm:
It is the duty of every partner to use the partnership property exclusively for
the business of the firm. Thus, the partners should use the partnership
property for the firm’s business only. This duty is also subject to an
agreement to the contrary.
11. Duty to act within authority:
It is the duty of every partner that he should act within the scope of actual or
implied authority.
• PROPERTY OF THE FIRM :

Definition:
Section 14 of the Partnership Act provides:
Subject to contract between the partners, the property of the firm
includes:
(1) All property and rights and interest in property
Originally brought into the stock of the firm, or

Acquired, by purchase or otherwise, by or for the firm,
Or for the purposes and in the course of the business of the
firm, and
(2) Includes also the goodwill of the business.
• THE AUTHORITY OF A PARTNER:

Partner to be agent of the firm:
“Subject to the provisions of this Act, a partner is the agent of the firm for the
purposes of the business of the firm.”

99 :
Authority : Authority means the right of a partner to bind the firm by his own
acts.The authority of a partner to act on behalf of the firm can be divided into
two categories:
Authority
Implied authority
Express authority
Authority arising by implication of law
The authority which is The act of a partner binds the firm which is done
expressly given to a (i) To carry on in the usual way,
(ii) The act must relate to a matter which is within the
partner by the
scope of the business of the firm,
agreement of (iii) And the act is in the name of the firm,
partnership is called (iv) Or in any manner expressing or implying an intention
“Express authority”. to bind the firm, and
(v) Done by him in his capacity as partner.
The firm is bound by all
acts done by a partner If the partnership be of a general commercial nature,
by virtue of any express following acts are within implied authority:
authority given to him. (i) Buy or sell or pledge goods on account of the
partnership
(ii) Incur normal expenses.
(iii) Borrow money and pay debts on account of the
partnership
(iv) Drawing, making, signing, endorsing, accepting,
transferring, discounting any negotiable instruments.
Examples:
(1) A, a partner of a firm of textile goods, purchases cloth
on credit, in the firm’s name. The firm is bound to pay
for the cloth.
(2) A, a partner of a firm of textile goods, purchases a
race-horse on credit in the firm’s name. The firm is not
bound to pay for the horse.
Limitations of Partner’s Implied Authority :

In the absence of any usage or custom of trade to the contrary, the implied
authority of a partner does not empower him to
(a) Submit a dispute relating to the business of the firm to arbitration,
(b) Open a banking account on behalf of the firm in his own name,
(c) Compromise or relinquish any claim or portion of a claim by the firm,
(d) Withdraw a suit or proceeding filed on behalf of the firm,
(e) Admit any liability in a suit or proceeding against the firm,
(f) Acquire immovable property on behalf of the firm.
(g) Transfer immovable property belonging to the firm, or
(h) Enter into partnership on behalf the firm.
Alteration of Authority :
The partners in a firm may, by contract between the partners, extend or
restrict the implied authority of any partner.
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Authority in an emergency:
A partner has authority, in an emergency, to do all such acts for the purpose
of protecting the firm from loss as would be done by a person of ordinary
prudence, in his own case, acting under similar circumstances, and such acts
bind the firm.
Admission/Representation by a partner :
An admission or representation made by a partner concerning the affairs of
the firm is evidence against the firm, if it is made in the ordinary of course of
business.
Notice to the Acting Partner :

Notice to a partner who habitually acts in the business of the firm of any
matter relating to the affairs of the firm operates as notice to the firm, except
in the case of a fraud on the firm committed by or with the consent, of that
partner.
LIABILITY OF A FIRM AND ITS PARTNERS TO A THIRD PARTY

This liability may be discussed under the following heads:
Contractual Liability for Wrongful Acts Liability for Misapplication of Money or

liability of a Partner Property by a Partner
For the acts of

the Wrongful Wrongful Wrongful Where Where
firm (i.e. acts of Act Act of Act of money or
money or
partners) Of partner partner is partner is property is property is
within his
beyond his beyond his received by a received by
authority
Firm is liable authority authority partner and the firm and
(i.e. partners are and other then them
jointly and partner misapplied misapplied
severally
liable) have ratified by the same by any of the
it. partner partners
Firm is always
liable for all the
acts of
partners which Firm is liable Partner is Personally liable
are within their
authority Firm is liable
• RECONSTITUTION OF A FIRM
The reconstitution of a firm means a change in the constitution i.e., composition of
the firm and it takes place in the following cases:
(1) Admission of a new partner.
(2) Retirement of a partner.
(3) Expulsion of a partner.
(4) Insolvency of a partner.

(5) Death of a partner.
(6) Transfer of a partner’s interest
(7) Revocation of continuing guarantee
(1) Admission of a Partner
A newly admitted partner is known as ‘incoming partner’.
A new partner can be admitted into an existing firm in any of the following
ways :
(a) With the consent of all the partners.
(b) In accordance with a contract already entered into between the
partners for the admission of a new partner.
The liability of an incoming partner may be discussed as under :
1. Liability for the acts of the firm done before admission:
An incoming partner is not liable for the acts of the firm done before
his admission into the firm. Thus, he is not liable for the past debts of
the firm.
2. Liability for the acts of the firm done after admission:
As a matter of fact, the liability of an incoming partner starts from the
date of his admission into the firm. Thus, he is liable for all the acts of
the firm done after he became a partner in the firm.
3. If the incoming partner agrees to bear the past liabilities, then for past
liabilities he shall not be liable to third parties as he is a stranger to
contract but he shall be liable to other partners.
(2) Retirement of a Partner

A partner may also retire from an existing firm. The partner who retires
from an existing firm is known as a ‘retiring partner’ or an ‘outgoing
partner’.
A partner may retire from the firm in anyone of the following three modes :
(a) By consent. A partner may retire, at any time with the consent of all
other partners.
(b) By agreement. The partners may enter into an express agreement
about the retirement of a partner. In such cases, a partner may retire
according to the terms of the agreement.
(c) By notice. In case of partnership at will, a partner may retire by given
a written notice of retirement to all other partners.
The liability of a retiring partner may be discuss as under :

1. Liability for the acts of the firm done before retirement:
A retiring partner continues to be liable to third parties for the acts of
the firm done before his retirement.
2. Liability for the acts of the firm done after retirement:
A retiring partner also continues to be liable to third parties for the
acts of the firm done even after his retirement until a public notice of
his retirement is given This liability of a retiring partner is based on
the principle of ‘holding out’.

(3) Expulsion of a Partner
A partner cannot be ordinarily expelled from the firm.
However, in certain exceptional cases, he can be expelled by following a
prescribed procedure.
He can be expelled only if the following conditions are satisfied:
(a) The power of expulsion should be given to the partners by an
express contract between them.
(b) The power of expulsion should be exercised by majority of partners.
(c) The power of expulsion should be exercised in absolute good faith.
The test of good faith includes three things :
(1) That the expulsion must be in the interest of the partnership
(2) That the partner to be expelled is given a notice to that effect
(3) That he was given an opportunity of being heard.
It these conditions are not fulfilled the expulsion is null and voidand the
expelled partner can demand re-instatement in the firm
An expelledpartner continues to be liable to third parties for the acts of the
firm done even after his retirement until a public notice of hisretirement is
given.
The public notice can be given either by the expelled partner himself or by
the firm.
RIGHTS OF AN OUTGOING PARTNER:

The rights of an outgoing partner are as follows:
1) To carry on competing business :
An outgoing partner may carry on a business, but it can be restricted by an
agreement (below mentioned).
However he cannot:
(a) Use the firm name.
(b) Represent himself as carrying on the business of the firm, or
(c) Solicit the customers of the old firm.
Restraint of tradeagreement:
A partner may make an agreement with his partners that on ceasing to be a
partner he will not carry on any business similar to that of the firm within a
specified period or within specified local limits, such agreement shall be valid if
the restrictions imposed are reasonable (Section 27 of the Indian Contract Act,
1872).
2) To share subsequent profits:

If settlement of accounts is not yet done, then,
OR
Right of outgoing partner to share Right to claim interest @ 6%
subsequent profits

(3) Insolvency of a Partner
The partner declared an insolvent, ceases to be a partner on the date on
which the order of adjudication is made.
The firm is dissolved on the date of the order of insolvency unless there is
a contract to the contrary.
The estate of the insolvent is not liable for any act of the firm after the
(date of the order of insolvency.
The firm cannot be held liable for any acts of the insolvent partner after the
date of the order of insolvency.
(4) Death of a Partner

The firm is automatically dissolved on the death of a partner. However, the
partners may specifically provide in their agreement that the firm shall not
be dissolved, and the remaining partners shall continue the firm’s
business.
Where the firm is not dissolved by the death of a partner, the estate of a
deceased partner is not liable for any acts of the firm which are done after
his death
(5) Transfer of Partner’s Interest:

A partner can transfer his share only with the consent of other partners.
The transferee thereby does not become a partner of the firm,
A transferee of a partner’s interest cannot do the following, during the
continuance of the partnership
(i) Interfere in the conduct of the business; or
(ii) Inspect or take a copy of accounts
On the dissolution of the firm, the transferee will be entitled,
(i) To receive the share of the assets of the firm to which the
transferring partner was entitled, and
(ii) For the purpose of ascertaining the share, he is entitled to an
account as from the date of the dissolution.
(7) Revocation of continuing guarantee:

A continuing guarantee given to a firm, or to a third party in respect of the
transaction of a firm, is in the absence of agreement to the contrary, revoked as
to future transactions from the date of any change in the constitution of the firm.

UNIT 3 : DISSOLUTION OF FIRM
• DISSOLUTION OF PARTNERSHIP
The term ‘dissolution of partnership’ may be defined as a change in the
relations of partners, and not the extinction of relationship. In this case,
the firm as a whole is not closed down. But only the relations between
some of the partners come to an end, and the remaining partners continue
to carry on the business of the firm. Thus, the ‘dissolution of firm’ is
different from ‘dissolution of partnership.’
Example :
A, B and C were partners in a firm. A retires. Only the partnership between
A, B and C is dissolved and a new partnership between B and C comes
into existence. The new firm is called the ‘reconstituted firm’. Thus, only
the relations between the partners are changed on A’s retirement.
• DISSOLUTION OF FIRM
When the firm as a whole is closed down, it is called the dissolution of the
firm. Thus, in case of dissolution of the firm, the business of the firm is
stopped and the relations between all the partners come to an end.
Dissolution of Firm
Without court’s intervention With court’s intervention
Compulsory Optional A partner may file a suit for

dissolution of the firm on
1. If all or all 1. By agreement anyone of the following
except one grounds, and the court may
partner are 2. By giving notice in dissolve the firm if it is
partnership at will
declared satisfied about the same:
insolvent or 3. On happening of
die. 1) Insanity of a partner
certain contingencies:
2) Permanent incapacity of
(a)Expiry of term
2. If entire (b) Completion of a partner
business venture 3) Misconduct of a partner
becomes (c) Death of a partner 4) Persistent breach of
unlawful (d) Insolvency of a agreement
partner 5) Transfer of interest
6) Perpetual losses in
business
7) Any other just and
equitable grounds

(A) DISSOLUTION WITHOUT THE INTERVENTION OF COURT
A firm may be dissolved without the intervention of the court i.e., without going to the
Court of Law. The dissolution without the intervention of the court may take place in
any of the following ways:
1. Compulsory dissolution:
In the following cases, the firm is compulsorily dissolved even if there is a
contrary contract between the partners i.e., even if the partners agree that the
firm shall not be dissolved in such cases.
(a) Insolvency/death of all the partners:
Where all the partners of the firm become insolvent/death, the
firm is dissolved. The firm is also dissolved when all the partners
except one have become insolvent/died. The reason for the same
is that when a partner is declared as insolvent by the court, he
ceases to be a partner from the date of the order of insolvency.
(b) Business of the firm becoming unlawful :
Where an event happens which makes the business of the firm unlawful,
the firm is also dissolved. This includes the cases where the business of
the firm is rendered unlawful by the outbreak of war, or where the object
for which the firm was formed becomes unlawful or illegal, or where the
business remains lawful but it is forbidden to be carried on in partnership.
2. Optional dissolution:
(a) Dissolution by agreementbetween the partners:
A firm may also be dissolved in accordance with a contract between the
partners in the same way as a firm is formed with the contract between the
partners. There may be a separate contract for the dissolution of the firm,
or it may also be contained in the partnership deed itself.
(b) Dissolution by notice:
A firm can also be dissolved by any partner by giving a notice of
dissolution to the other partnerswhere the partnership firm is ‘at
will ‘.
(c) Dissolution on the happening of certain contingencies:
On the happening of anyone of the following contingencies (i.e.,
events), the firm is automatically dissolved.
(i) Expiry of fixed term:
Where the firm is constituted for a fixed term, the firm is
dissolved on the expiry of that term. This is, however,
subject to a contract to the contrary i.e., if the contract
provides that the firm shall not be dissolved, then it will not
be dissolved.
(ii) Completion of the adventure or undertaking:
Where the firm is constituted to carry out one or more
adventure or undertaking, the firm is dissolved on the
completion of such adventure or undertaking. This is also
subject to a contract to the contrary.
(iii) Death of a partner:
Sometimes, one of the partners of a firm dies during the
continuance of the firm. In such cases, the firm is dissolved
on the death of the partner. This is subject to a contract to
the contrary.

(iv) Insolvency of a partner:
Sometimes, one of the partners of a firm is declared as
insolvent by the court. In such cases the firm is dissolved
from the date of the order of insolvency. This is also subject
to a contract to the contrary.
.
(B) DISSOLUTION WITH THE INTERVENTION OF COURT
Sometimes, a partner wants that the firm should be dissolved. But the
other partners may not agree to the dissolution. In such cases, he can go
to Court ‘of Law, and file a suit for dissolution of the firm. A partner may
like to have the firm dissolved for various reasons. It may, however, be
noted that the court has the discretion to pass an order of dissolution i.e.,
the court mayor may not allow the dissolution of the firm. A partner may
file a suit for dissolution of the firm on anyone of the following grounds,
and the court may dissolve the firm if it is satisfied about the same:
1. Insanity of a partner:
Sometimes, a partner becomes insane i.e., of unsound mind. In
such cases, the court may allow the dissolution of the firm. The suit
for dissolution of the firm may be filed by anyone of the partners
other than the partner who has become insane. The suit may also
be filed by the next friend (i.e., legal representative) of the insane
partner.
2. Permanent incapacity of a partner:
Sometimes, a partner becomes permanently incapable of performing his
duties. In such cases also, the court may allow the dissolution of the firm.
The suit for dissolution of the firm may be filed by anyone of the partners
other than the partner who has become incapable.
3. Misconduct of a partner:
Where a partner is guilty of misconduct, the court may allow the
dissolution of the firm. The suit for dissolution of the firm may be
filed by anyone of the partners other than the partner who is guilty
of misconduct.
4. Persistent breach of agreement:
Sometimes, a partner willfully or persistently (i.e., frequently)
commits a breach of agreements relating to the management of the
affairs of the firm, or conducts the partnership business in such a
way that the other partners find it difficult to carry on the
partnership business with him. In such cases, the court may allow
the dissolution of the firm. The suit for dissolution of the firm may
be filed by anyone of the partners other than the partner who
commits the breach of agreements. Keeping erroneous accounts
and not entering receipts, continuing quarrelling between the
partners, refusal to meet on matters of business, taking away
books of the firm, and misappropriations of income etc., are held to
be sufficient ground for dissolution of a firm.
5. Transfer of interest:
Where a partner transfers the whole of his interest or share to a
third party, the court may allow the dissolution of the firm. The
court may also allow the dissolution when the entire share of a
partner is attached or sold by an order of the court. The suit for
dissolution of the firm may be filed by anyone of the partners other
than the partner who has transferred his interest or share.

6. Perpetual losses in business:
Where the business of a firm cannot be carried on, except at a
loss, the court may allow the dissolution of the firm. The suit for
dissolution of the firm may be filed by anyone of the partner. When
the court is satisfied that the business of a firm cannot be carried
on, except at a loss, it may pass an order of dissolution of the firm.
7. Other just and equitable grounds:
A firm may also be dissolved by the court on any ‘other just and
equitable ground. A ‘just and equitable ground’, is a ground which
is fair and reasonable according to the opinion of the court.
• CONSEQUENCES OF DISSOLUTION
1. Liabilities for the acts done after dissolution:
On the dissolution of a firm, partners have to give a public notice of
the dissolution. If it is not given, the partners shall remain liable to
the third party for their acts done even after the dissolution of the
firm
2. Continuing Authority for Winding Up:

On the dissolution of a firm, the authority of each partner to bind
the firm continues for the following purpose:
(a) If it is necessary to wind up the affairs of the firm, and
(b) If it is necessary to complete the transactions started but not
completed at the time of dissolution.
3. Partner’s Right for Utilisation of Assets

On the dissolution of the firm, each partner is entitled to the
following rights:
(a) He is entitled to have the property of the firm utilised in
payment of its debts and liabilities.
(b) He is entitled to have the surplus distributed among all the
partners according to their rights.
The surplus here means the surplus amount left after the payment of all the
debts and liabilities of the firm.
4. Mode of Settlement of Accounts :
After the dissolution of a firm, the accounts of the firm are settled
according to the terms of partnership. If there is no specific
agreement, then the accounts are settled according to the following
fundamental rules contained in the Indian Partnership Act.
A. Payment of losses:
The losses of the firm, including the deficiencies of capitals
shall be paid in the following manner and order:
(a) First of all, the losses shall be paid out of the profits.
(b) If the profits, are not sufficient to pay the losses, then
the balance of loss shall be paid out of capital, and
(c) If still some balance of losses remains, it shall be paid
by the partners individually in the proportion in which
they were entitled to share profits.

B. Utilization of assets:
The assets of the firm, including any sums contributed by the
partners to make up deficiencies of capital, shall be utilised
in the following manner and order:
(a) First of all, the assets shall be utilized in paying the
debts of the firm to the third parties.
(b) If there is any surplus, the same shall be utilized in
paying each partner the amount of loan advanced to
the firm other than the capital. This is done in
proportion to the advances made by the partners.
(c) If there is still any surplus, the same shall be utilized in
paying each partner towards the amount of his
capital. This is done in proportion to the amount of
capital contributed by the partners.
(d) If there is still any surplus, the same shall be divided
among all the partners in proportion to their share in
the profits of firm.
5. Payment of firm’s debts and Partner’s Private Debts:

1) Firm’s property shall be applied first in payment of firm’s
debts then the surplus, if any, shall be applied for payment of
partner’s private debts to the extent in which the concerned
partner is entitled to the surplus.
2) Partner’s private property shall be applied first in the
payment of his debts and the surplus, if any, shall be used in
payment of firm’s debts.
6. Return on premium of partnership’s premature dissolution:

In the case of dissolution of partnership earlier than the
period fixed for it, the partner paying the premium is entitled
to the return of the premium of such part thereof as may be
reasonable except when the partnership is dissolved:
(i) By the death of one of the partners;
(ii) When the dissolution is mainly due to the misconduct of
the partner who paid the premium
(iii) The dissolution is according to an agreement which had
no provision for the return of premium or any part
thereof.
7. Treatment of Loss Arising due to Insolvency of a Partner:

Unless otherwise agreed it requires that:
1) The solvent partners should bring in cash equal to their
shares of the loss on realization
2) The solvent partners should bear the loss arising due to the
insolvency of a partner in the ration of their Last Agreed
Capitals.

8. Rights of a partner in case of Dissolution on Account of Fraud
and Misrepresentation:
1) He has a right of lien on the surplus assets after the payment
of firm’s debts, for any sum paid by him for purchase of a
share in the firm
2) He is entitled to rank as a creditor of the firm in respect of
any payment made by him towards firm’s debts
3) He is entitled to be indemnified by the partner guilty of fraud
or misrepresentation against all the debts of the firm
• MODE OF GIVING PUBLIC NOTICE

Firm
or
Registered Unregistered
By giving a publication in By giving a publication

the Official Gazette and in in the Official Gazette
at least one vernacular and in at least one
newspaper circulating in vernacular newspaper
the district where the firm circulating in the district
is located where the firm is located
Notice is to be served on
the Registrar of Firms
When public notice is required to be given

a) On retirement or expulsion of a partner
b) On the dissolution of the firm
c) On the election to become or not to become a partner by a
minor on attaining his majority.
When a public notice is not required

a) On the death of a partner
b) On the insolvency of partner

SUMMARY
UNIT 1: NATURE OF PARTNERSHIP
• INTRODUCTION
It came into force on 1st October, 1932.
Prior to the passing of the Act, the law of partnership was included in Charter
XI of the Indian Contract Act.
Where the Partnership Act is silent on any point, the general principles of the
law of contract apply. The partnership is a specialized branch of the Contract
Act.
• PARTNERSHIP
• PARTNER& FIRM
• ESSENTIAL ELEMENTS OF PARTNERSHIP
1. It is an association of two or more persons
2. There must be an agreement
3. There must be business.
4. Sharing of Profits:
5. Mutual Agency
• DISTINCTION BETWEEN
1. Partnership and HUF
2. Partnership and Co-ownership
3. Partnership and Company
4. Partnership and Club
• TYPES OF PARTNERS
1. Active/Actual Partner
2. Sleeping or Dormant Partner
3. Nominal Partner
4. Partner for profits only
5. Sub-Partner
6. Partner by Holding Out or by Estoppel
7. Incoming Partner
8. Outgoing Partner
• TYPES OF PARTNERSHIP
1. Particular Partnership
2. Partnership at will
• REGISTRATION OF FIRM
• MINOR’S POSITION IN PARTNERSHIP FIRM
UNIT 2: Relation Of Partners
• RIGHTS OF PARTNERS
• DUTIES OF PARTNERS

• PROPERTY OF THE FIRM

• AUTHORITY OF A PARTNER
• LIABILITY OF A FIRM AND ITS PARTNERS TO A THIRD PARTY
• RECONSTITUTION OF A FIRM
(1) Admission of a new partner

(2) Retirement of a partner
(3) Expulsion of a partner
(4) Insolvency of a partner
(5) Death of a partner
(6) Transfer of a partner’s interest
(7) Revocation of continuing guarantee
UNIT 3: DISSOLUTION OF FIRM
• DISSOLUTION OF PARTNERSHIP
• DISSOLUTION OF FIRM
• CONSEQUENCES OF DISSOLUTION
• MODE OF GIVING PUBLIC NOTICE

QUESTIONS
1. Explain the provisions of the Indian Partnership Act, 1932 relating to

thecreation of Partnership by holding out.
2. What is the true test of partnership?
3. Enumerate the differences between Partnership and Joint Stock
Company.
4. What do you mean by "implied authority" of the partners in a firm?
5. State the rules of admission of partner.
6. What are the rights of outgoing partner.
7. Whether a minor may be admitted in the business of a partnership firm?
Explain the rights of a minor in the partnership firm.
8. What is the procedure of registration of a partnership firm under the
IndianPartnership Act, 1932? What are the consequences of non-
registration?
9. When does dissolution of a partnership firm take place under the
provisions ofthe Indian Partnership Act, 1932? Explain.

UNIT 1: GENERAL NATURE OF PARTNERSHIP

Q.1. X and Y are partners in a partnership firm. X introduced A, a manager, as his
partner to Z. A remained silent. Z, a trader believing A as partner supplied 100
T.V sets to the firm on credit. After expiry of credit period, Z did not get amount
of T.V sets sold to the partnership firm. Z filed a suit against X and A for the
recovery of price. Will he succeed?
Q.2. A partnership firm consisting of A, Band C as partners was formed and it

commenced its business before getting itself registered. The firm filled a suit
against X for a claim of Rs.5000 for goods supplied to him and immediately
after filling the suit, the firm was registered. Will court consider the suit?
UNIT - 2: RELATIONS OF PARTNERS
Q.1. A, B, C & D established partnership business for refining sugar. A, who was
himself a wholesale grocer, was entrusted with the work of selection and
purchase of sugar. As a wholesale grocer, A was well aware of the variations in
the sugar market and had the suitable sense of propriety as regards purchases
of sugar. He had already in stock sugar purchased at a low price which he sold
to the firm when it was in need of some, without informing the partners that the
sugar sold had belonged to him. Was A bound to account to the firm for the
profit so made by him?
Q.2. A, B and C are partners in a Partnership firm. They were carrying their business
successfully for the past several years. Spouses of A and B fought in ladies
club on their personal issue and A's wife was hurt badly. A got angry on the
incident and he convinced C to expel B from their partnership firm. B was
expelled from partnership without any notice from A and C. Considering the
provisions of Indian Partnership Act, 1932 state whether they can expel a
partner from the firm?
Q.3. A, B and C are partners in a manufacture of machinery. A is entitled to three-

eighths of the partnership property and profits. A becomes bankrupt whereas B
and C continue the business without paying out A's share of the partnership
assets or settling accounts with his estate. Can A’s official receiver demand any
share?
UNIT - 3: DISSOLUTION OF FIRM
Q. 1. X and Y who carried on business in partnership for several years, executed on

December 1, a deed dissolving the partnership from the date, but failed to give
a public notice of the dissolution. On December 20, X borrowed in the firm's
name a certain sum of money from R, who was ignorant of the dissolution. In
such a case, who is liable to R?
: 114 :
ANSWERS
UNIT 1: GENERAL NATURE OF PARTNERSHIP
Ans.1. As per section 28 of Indian Partnership act, 1932, partnership by holding

out/estoppel is where a man holds himself out as a partner, or allows others
to do it, he is then stopped from denying the character he has assumed and
upon the faith of which creditors may be presumed to have acted. A person
may himself, by his words or conduct might have induced others to believe
that he is a partner or he may have allowed others to represent him as a
partner. The result in both the cases is identical.
In the given question, X and Y are partners in a partnership firm. X
introduced A, a manager, as his partner to Z. A remained silent. Z, a trader
believing A as partner supplied 100 T.V sets to the firm on credit. The
Manager is also liable for the price because he becomes a partner by
holding out.
Therefore, Z will succeed.
Ans.2. Section 69 of The Indian Partnership Act,1932 specifies that an unregistered

firm cannot file a suit against any third party to enforce a right arising from a
contract. This clause does not prohibit an unregistered firm to enter into
contract with third parties; the bar is only against taking action against third
parties. However, the third parties are free to take action against
unregistered partnership.
In the given question, partnership firm consisting of A, Band C as partners
was formed and it commenced its business before getting itself registered.
The firm filled a suit against X for a claim of Rs.5000 for goods supplied to
him and immediately after filling the suit, the firm was registered.
When the firm filed a suit, it was unregistered, so subsequent registration will
not make any difference.
Therefore, court will not consider the suit.
UNIT - 2: RELATIONS OF PARTNERS
Ans.1. According to section 16 of Indian Partnership Act, 1932, subject to contract

between the partners,-
(a) If a partner derives any profit for himself from any transaction of the
firm, or from the use of the property or business connection of the firm
or the firm name, he shall account for that profit and pay it to the firm;
(b) If a partner carries on any business of the same nature as and
competing with that of the firm, he shall account for and pay to the firm
all profits made by him in that business.
In the given question, A, B, C & D established partnership business for
refining sugar. A, who was himself a wholesale grocer, was entrusted with
the work of selection and purchase of sugar. As a wholesale grocer, A was
well aware of the variations in the sugar market and had the suitable sense
of propriety as regards purchases of sugar. He had already in stock sugar
purchased at a low price which he sold to the firm when it was in need of
some, without informing the partners that the sugar sold had belonged to
him. A has made personal profit.
Therefore, A is bound to account to the firm for the profit so made by him
: 115 :
Ans.2. According to section 33 of Indian Partnership Act, 1932, a partner may not
be expelled from a firm by a majority of partners except in exercise, in good
faith, of powers conferred by contract between the partners. It is, thus,
essential that:
(i) The power of expulsion must have existed in a contract between the
partners;
(ii) The power has been exercised by a majority of the partners; and
(iii) It has been exercised in good faith.
If all these conditions are not present, the expulsion is not deemed to be in
bonafide interest of the business of the firm.
In the given question, spouses of A and B fought in ladies club on their
personal issue and A's wife was hurt badly. A got angry on the incident and
he convinced C to expel B from their partnership firm. B was expelled from
partnership without any notice from A and C.
Thus, according to the test of good faith as required under Section 33,
expulsion of Partner B is not valid.
Ans.3. According to section 37 of Indian Partnership Act,1932,where any member

of a firm has died or otherwise ceased to be partner, and the surviving or
continuing partners carry on the business of the firm with the property of the
firm without any final settlement of accounts as between them and the
outgoing partner or his estate, then, in the absence of a contract to the
contrary, the outgoing partner or his estate is entitled at the option of himself
or his representatives to such share of the profits made since he ceased to
be a partner as may be attributable to the use of his share of the property of
the firm or to interest at the rate of six per cent per annum on the amount of
his share in the property of the firm.
In the given question, A is entitled to three-eighths of the partnership
property and profits. A becomes bankrupt whereas B and C continue the
business without paying out A's share of the partnership assets or settling
accounts with his estate.
Therefore, A’s official receiver is entitled to three-eighths of the profits made
in the business, from the date of his bankruptcy until the final liquidation of
the partnership affairs.
UNIT - 3: DISSOLUTION OF FIRM
Ans.1. As per provisions of Indian Partnership Act, 1932,on dissolution of a firm, the
partners continue to be liable as such to third parties for any act done by any
of them which would have been an act of the firm if done before the
dissolution, until public notice is given of the dissolution.
In the given question, and Y who carried on business in partnership for
several years, executed on December 1, a deed dissolving the partnership
from the date, but failed to give a public notice of the dissolution. On
December 20, X borrowed in the firm's name a certain sum of money from R,
who was ignorant of the dissolution.
Therefore, X & Y both shall be liable for the amount because no public notice
was given.
: 116 :
CHAPTER 4 - THE LIMITED LIABILITY

PARTNERSHIP ACT, 2008
• BACKGROUND AND AIM OF THE ACT

The Parliament passed the Limited Liability Partnership Bill on 12th December,
2008 and the President of India has assented the Bill on 7th January, 2009 and
called as the Limited Liability Partnership Act, 2008, and many of its sections
got enforced from 31st March 2009.
This Act have been enacted to make provisions for the formation and regulation
of Limited Liability Partnerships and for matters connected there with or
incidental thereto.
The LLP Act, 2008 has 81 sections and 4 schedules.
The First Schedule deals with mutual rights and duties of partners, as well
limited liability partnership and its partners where there is absence of formal
agreement with respect to them.
The Second Schedule deals with conversion of a firm into LLP.
The Third Schedule deals with conversion of a private company into LLP.
The Fourth Schedule deals with conversion of unlisted public company
into LLP.
The Ministry of Corporate Affairs (MCA) and the Registrar of Companies (ROC)
are entrusted with the task of administrating the LLP Act, 2008. The Central
Government has the authority to frame the Rules with regard to the LLP Act,
2008, and can amend them by notifications in the Official Gazette, from time to
time.
It is also to be noted that 'The Indian Partnership Act, 1932 is not applicable
to LLPs.
Need of new form of Limited Liability Partnership:
A need has been felt for a new corporate form that would provide an alternative
to the traditional partnership with unlimited personal liability on the one hand
and the statute-based governance structure of the limited liability company on
the other hand, in order to enable professional expertise and entrepreneurial
initiative to combine, organize and operate in flexible, innovative and efficient
manner.
It provides the benefits of limited liability but allows its members the flexibility of
organizing their internal structure as a partnership based on a mutually arrived
agreement. The LLP form enables entrepreneurs, professionals and enterprises
providing services of any kind or engaged in scientific and technical disciplines,
to form commercially efficient vehicles suited to their requirements.
• MEANING OF LLP
A LLP is a new form of legal business entity with limited liability.
The LLP is a separate legal entity and, while the LLP itself will be liable for the
full extent of its assets, the liability of the partners will be limited.
Since LLP contains elements of both 'a corporate structure' as well as 'a
partnership firm structure' LLP is called a hybrid between a company and a
partnership.
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CHARACTERISTICS OF LLP
Following are the characteristics of a LLP:
1. LLP is a body corporate: Section 3 of LLP Act provides that a LLP is a body
corporate formed and incorporated under this Act and is a legal entity separate
from that of its partners.
2. Perpetual Succession: The LLP can continue its existence irrespective of

changes in partners. Death, insanity, retirement or insolvency of partners has
no impact on the existence of LLP. It is capable of entering into contracts and
holding property in its own name.
3. Separate Legal Entity: The LLP is a separate legal entity, is liable to the full
extent of its assets but liability of the partners is limited to their agreed
contribution in the LLP. In other words, creditors of LLP shall be the creditors of
LLP alone.
4. Mutual Agency: Further, no partner is liable on account of the independent or

un-authorized actions of other partners, thus individual partners are shielded
from joint liability created by another partner's wrongful business decisions or
misconduct. In other words, all partners will be the agents of the LLP alone. No
one partner can bind the other partner by his acts.
5. LLP Agreement: Mutual rights and duties of the partners within a LLP are
governed by an agreement between the partners. The LLP Act, 2008 provides
flexibility to partner to devise the agreement as per their choice. In the absence
of any such agreement, the mutual rights and duties shall be governed by the
provisions of the LLP Act, 2008.
6. Artificial Legal Person: A LLP is an artificial legal person because it is created

by a legal process and is clothed with all rights of an individual. It can do
everything which any natural person can do, except of course that, it cannot be
sent to jail, cannot take an oath, cannot marry or get divorce nor can it practice
a learned profession like CA or Medicine. A LLP is invisible, intangible, immortal
(it can be dissolved by law alone) but not fictitious because it really exists.
7. Common Seal: A LLP being an artificial person can act through its partners
and designated partners. LLP may have a common seal, if it decides to have
one [Section 14(c)]. Thus, it is not mandatory for a LLP to have a common seal.
It shall remain under the custody of some responsible official and it shall be
affixed in the presence of at least 2 designated partners of the LLP.
8. Limited Liability: Every partner of a LLP is, for the purpose of the business of
LLP, the agent of the LLP, but not of other partners (Section. 26). The liability of
the partners will be limited to their agreed contribution in the LLP.
9. Management of Business: The partners in the LLP are entitled to manage the
business of LLP. But only the designated partners are responsible for legal
compliances.
10. Minimum and Maximum number of Partners: Every LLP shall have least two
partners and shall also have at least 2 individuals as designated partners, of
whom at least one shall be resident in India. There is no maximum limit on the
partners in LLP.
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11. Business for Profit Only: The essential requirement for forming LLP is
carrying on a lawful business with a view to earn profit. Thus LLP cannot be
formed for charitable or non-economic
12. Investigation: The Central Government shall have powers to investigate the
affairs of an LLP by appointment of competence authority for the purpose.
13. Compromise or Arrangement: Any compromise or arrangement including

merger and amalgamation of LLPs shall be in accordance with the provisions of
the LLP Act, 2008.
14. Conversion into LLP: A firm, private company or an unlisted public company
would be allowed to be converted into LLP in accordance with the provisions of
LLP Act, 2008.
15. E-Filling of Documents: Every form or application of document required to be

filed or delivered under the act and rules made thereunder, shall be filed in
computer readable electronic form on its website www.mca.gov.in and
authenticated by a partner or designated partner of LLP by the use of electronic
or digital signature.
16. Foreign LLPs: Section 2(1)(m) defines foreign limited liability partnership "as a
limited liability partnership formed, incorporated, or registered outside India
which established a place of business within India". Foreign LLP can become a
partner in an Indian LLP.
INCORPORATION OF LLP
Essential elements to incorporate LLP - Under the LLP Act, 2008, the following
elements are very essential to form a LLP in India:
(i) To complete and submit incorporation document in the form prescribed
with the Registrar electronically;
(ii) To have at least two partners for incorporation of LLP [Individual or body
corporate];
(iii) To have registered office in India to which all communications will be made
and received;
(iv) To appoint minimum two individuals as designated partners who will be

responsible for number of duties including doing of all acts, matters and
things as are required to be done by the LLP. At least one of them should
be resident in India.
(v) A person or nominee of body corporate intending to be appointed as

designated partner of LLP should hold a Designated Partner Identification
Number (DPIN) allotted by MCA.
(vi) To execute a partnership agreement between the partners inter se or

between the LLP and its partners. In the absence of any agreement the
provisions as set out in First Schedule of LLP Act, 2008 will be applied.
(vii) LLP Name.
: 119 :
Limited Liability Partnerships are bodies corporate and must be registered with
the Registrar of LLP after following the provisions specified in the LLP Act, in a
similar way of setting up a company with distinct name. The LLP cannot have
the same name with any other LLP, Partnership Firm or Company.
To create a LLP proper formation documents must be filed with the registrar
along with the necessary filing fees.
Process:
Deciding partners and designated partners
Obtaining DPIN and Digital Signature Certificate (DSC)
Checking the availability of names
The applicant has to file e-Form1, for ascertaining availability and reservation of
the name of a LLP business (upto 6 choices can be indicated)
Drafting of LLP Agreement
Contents of LLP Agreements:
1. Name of LLP
2. Name & address of Partners & Designated Partners.
3. Form of contribution & interest on contribution
4. Profit sharing ratio
5. Remuneration of Partners
6. Rights & Duties of Partners
7. Proposed Business
8. Rules for governing LLP.
Electronic filing of some documents

After reserving a name, user has to file e-Form2 for incorporating a new LLP. e-
Form2 contains the details of LLP proposed to be incorporated, partners and
designated partners details and consent of the partners and designated partners
to act as and designated partners
Issuing Certificate of Incorporation along with LLPIN (Limited Liability

Partnership Identification Number)Execution of LLP Agreement is mandatory
as per Section 23 of the Act. LLP Agreement is required to be filed with the
registrar in e-Form3 within 30 days of incorporation of LLP
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• DIFFERENCES WITH OTHER FORMS OF ORGANISATION
• Distinction between LLP and Partnership Firm: The points of distinction
between a limited liability partnership and partnership firm are tabulated as
follows:
Basis LLP Partnership firm

1. Regulating Act The Limited Liability The Indian Partnership Act,
Partnership Act, 2008. 1932.
2. Body corporate It is a body corporate. It is not a body corporate.
3. Separate legal It is a legal entity separate It is a group of persons with
entity from its members. no separate legal entity.
4. Creation It is created by a legal It is created by an agreement
process called registration between the partners.
under the LLP Act, 2008.
5. Registration Registration is mandatory. Registration is voluntary.
LLP can sue and be sued in Only the registered
its own name. partnership firm can sue the
6. Perpetual The death, insanity, The death, insanity
succession Retirement or insolvency of retirement or insolvency of
the partner(s) does not the partner(s) may affect its
affect its existence of LLP. existence. It has no perpetual
Members may join or leave succession.
But its existence continues
7. Name Name of the LLP to contain No guidelines. The partners
the word limited liability can have any name as per
partners (LLP) as suffix. their choice.
8. Liability Liability of each partner Liability of each partner is
limited to the extent to unlimited. It can be extended
agreed contribution except upto the personal assets of
in case of willful fraud. the partners.
9. Mutual agency Each partner can bind the Each partner can bind the
LLP by his own acts but not firm as well as other partners
the other partners. by his own acts.
10. Designated At least two designated There is no provision for
partners partners and atleast one of such partners under the
them shall be resident in Indian partnership Act, 1932.
11. Common seal It may have its common seal There is no such concept in
as its official signatures. partnership
12. Legal Only designated partners All partners are responsible
compliances are responsible for all the for all the compliances and
compliances and penalties penalties under the Act.
under this Act.
13. Annual filing LLP is required to file: Partnership firm is not
documents (a) Annual statement of required to file any annual
accounts document with the registrar
(b) Statement of solvency of firms.
(c) Annual return with the
registration of LLP every
year.
14. Foreign Foreign nationals can Foreign nationals cannot
partnership become a partner in a LLP. become a partner in a
15. Minor as partner Minor cannot be admitted to Minor can be admitted to the
the benefits of LLP. Benefits of the partnership
with the prior consent of the
existing partners.
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Distinction between LLP and Limited Liability Company (LLC)
Basis LLP LLC

1. Regulating Act The LLP Act, 2008. The Companies Act, 2013.
2. Members / The persons who contribute The persons who invest the
Partners to LLP are known as money in the shares are
partners of the LLP. known as members of the
company.
3. Internal The internal governance The internal governance
governance structure of a LLP is structure of a company is
structure governed by agreement regulated by statute
between the partners. (i.e., Companies Act, 2013).
4. Name Name of the LLP to contain Name of the public company
the word "Limited to contain the word "limited"
liability partnership" or and Private company to
"LLP"as suffix. contain the word "Private
5. Number of Minimum - 2 members Private company:

members/ Maximum - No such limit on Minimum - 2 members
partners the members in the Act. The Maximum - 200 members
members of the LLP can be Public company:
individuals/or body Minimum - 7 members
corporate through the Maximum - No such limit on
nominees. the members.
6. Liability of Liability of a partners is Liability of a member is
members/ limited to the extent of limited to the amount unpaid
partners agreed contribution except on the shares held by them.
in case of willful fraud.
7. Management The business of the The affairs of the company
company managed by the are managed by board of
partners including the directors elected
designated partners shareholders.
authorized in the
agreement.
8. Minimum number Minimum 2 partners. Private Co. - 2 directors
of directors/ Public Co. - 3 directors
partners
• QUESTIONS
1. Examine the concept of LLP.
2. Enumerate the various characteristics of the LLP.
3. State the necessities required for incorporation of the LLP.
4. Distinguish between LLP and Partnership
5. Explain the process of incorporation of LLP.
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J.K. SHAH CLASSES CA FOUNDATION - LAW
CHAPTER 5 - THE COMPANIES ACT, 2013

• BACKGROUND AND AIM OF THE ACT
It came into existence at once from the date of notification in the Official Gazette
i.e., from 30th August, 2013, however, the remaining provisions of the Act shall
come into force on such date as the Central Government may, by notification in
the Official Gazette, appoint and different dates may be appointed for different
provisions of this Act.
It extends to the whole of India.
Structure of the Act: The Companies Act, 2013 has 470 Sections (covered in 29
Chapters) and 7 Schedules as against 658 Sections (covered in 13 Parts) and 15
Schedules of the Companies Act, 1956.
a. To promote the development of the economy by encouraging
entrepreneurship and enterprise efficiency and creating flexibility and
simplicity in the formation and maintenance of companies;
b. To encourage transparency, accountability and high standards of corporate
governance;
c. To recognize various new concepts and procedures facilitating convenience
of doing business while protecting interests of all the stakeholders;
d. To enforce stricter action against fraud and gross non-compliance with
company law provisions;
Purpose/ Objective of the Act :
e. To set up institutional structure in the form of variousauthorities, bodies and
panels as well as by including recognition of various roles for professionals
and other experts; and
f. To cater to the need for more effective and time bound approvals and
compliance requirements relevant in the present context.
• MEANING OF COMPANY
The word 'company' is derived from the Latin words (com= with or together; and
panis = bread or meal); and originally referred to an association of persons who took
their meals together.
• DEFINITION OF COMPANY
The term 'company' has been defined under Section 2(20) of the Companies Act, 2013.
As per this, 'company' means a company incorporated under Companies Act, 2013
or under any of the previous laws relating to companies.
It may be noted the term 'Company' shall be used in the sense as defined above for the
entire Companies Act, 2013, unless the context otherwise requires.

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• ACT APPLICABLE TO:

The provisions of this Act shall apply to-
1. Companies incorporated under this Act or under any previous company law.
2. Insurance companies, except in so far as the said provisions are inconsistent with
the provisions of the Insurance Act, 1938 or the Insurance Regulatory and
Development Authority Act, 1999;
3. Banking companies, except in so far as the said provisions are inconsistent with
the provisions of the Banking Regulation Act, 1949;
4. Companies engaged in the generation or supply of electricity, except in so far as
the said provisions are inconsistent with the provisions of the Electricity Act, 2003;
5. Any other company governed by any special Act for the time being in force, except
in so far as the said provisions are inconsistent with the provisions of such special
Act , and
6. Such body corporate, incorporated by any Act for the time being in force, as the
Central Government may, by notification, specify in this behalf, subject to such
exceptions, modifications or adaptation, as may be specified in the notification.
Example: Food Corporation of India (FCI), National Highway Authority of India
(NHAI) etc.
For example: ABC Ltd. was incorporated on 1.1.1912 under the Indian Companies Act,
1882. So, the Companies Act, 2013 shall also be applicable on ABC Ltd.
• CHARACTERISTICS OF COMPANY
Following are the characteristics of a company:
1. Separate legal entity: A company is an artificial person having a personality
which is distinct from the members constituting it. Thus, a company has got an
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entity which is separate from its members. And since this separate entity concept
is conferred by law, it is said that a company has got a separate legal entity.
1. Salomon v. Salomon & Co. Ltd.
Salomon had, for some years, carried on a prosperous business as a leather merchant
and boot manufacturer. He formed a limited company consisting of himself, his wife
and a daughter, and his 4 sons as the shareholders, all of whom subscribed for one
share of 1 pound each. Salomon was the managing director and two of his sons were
other directors.
Salomon sold his business (which was perfectly solvent at that time) to the Company
for the sum of 38,782 £. He got the following consideration:-
10,000 Secured Debentures of 1£ each
20,000 Fully - paid Shares of 1 £ each
8,782 Cash
The company soon ran into difficulties and the debenture holders appointed a receiver
and the company went into liquidation. The total assets of the company amounted to
6,050£, its liabilities were 10,000£ secured debentures and 8,000£ owing to unsecured
trade creditors. The unsecured trade creditors claimed the whole of the company's
assets, viz. 6,050 £ on the ground that as the company was a mere agent for Salomon
and thus they were entitled to payment of their debts in priority to debentures.
The House of Lords rejected these contentions and held that a company, on
registration, has its own existence or personality separate and distinct from its
members and, as a result, a shareholder cannot be equated with a company, even if
he holds virtually the entire share capital of the company.
2. Limited liability: A company limited by shares is a registered company having the

liability of its members limited to the amount, if any, unpaid on the shares respectively
held by them. If his shares are fully paid - up, he has nothing more to pay.
(i) Thus, in the case of a limited liability company, the debts of thecompany in totality
do not become the debts of the shareholders. Theliability of the members of the
company is limited to the extent of thenominal value of shares held by them. In no
case can the shareholders beasked to pay anything more than the unpaid value of
their shares.
(ii) In the case of a company limited by guarantee, the members are liableonly to the
extent of the amount guaranteed by them and that too onlywhen the company
goes into liquidation.
(iii) However, if it is an unlimited company, the liability of its members isunlimited as
well.
3. Perpetual Succession: An incorporated company never dies. Perpetual succession,

therefore, means that the membership of a company may keep changing from time to
time but does not affect its continuity. Members may come and go but the company will
continue forever.
4. Separate Property: No member can claim himself to be the owner of the company's
properties either during its existence or in its winding up. A member does not even have
an insurable interest in the property of the company.

: 125 :
Macaura vs. Northern Assurance Co. Ltd.
M was the holder of nearly all the shares except one of a timber company. He was also a
substantial creditor of the company. He insured the company's timber in his own name.
The timber was destroyed by fire & M claimed the loss from Insurance Company.
Held that: The Insurance Company was not liable to him.A shareholder cannot insure the
company's property in his own name even if he is the owner of all or most of the
company's shares.
5. Transferability of Shares: The capital of a company is divided into parts called shares.
The shares are said to be movable property and subject to certain conditions, freely
transferable for that. No shareholder is permanently or necessarily wedded to a
company. It may be noted that this right of shareholder is restricted in the case of a
private company.
6. Common Seal: Since a company has no physical existence, it must act through its
agents. All the important documents of a company must be under the seal of the
company. The common seal, thus, acts as the official signature of a company.
The Companies (Amendment) Act, 2015 has made the common seal optionalby
omitting the words "and a common seal" from Section 9 so as to provide analternative
mode of authorization for companies who opt not to have a commonseal. Rational for
this amendment is that common seal is seen as a relic ofmedieval times. This
amendment provides that the documents which needto be authenticated by a
common seal will be required to be so done, onlyif the company opts to have a
common seal. In case a company does nothave a common seal, the authorization
shall be made by two directors or by a director and the Company Secretary,
wherever the company has appointed a Company Secretary.
7. Capacity to sue and be sued: A company, being a body corporate, can sue and be
sued in its own name.
8. Separate Management: The members of a company may derive profits without being
burdened with the management of the company. The company is administered and
managed by its own managerial personnel.
9. Voluntary Association for Profit: A company is a voluntary association for profit. It is

formed for the accomplishment of some public goals and whatsoever profit is gained is
divided among its shareholders.
• IS COMPANY A CITIZEN?
Although, a company is regarded as a legal person (though artificial), it is not a citizen
either under the Constitution of India or the Citizenship Act, 1955.
• HAS COMPANY A NATIONALITY AND RESIDENCE?

It is established through judicial decisions that a company cannot be a citizen, yet it has
nationality, domicile and residence.

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• LIFTING OR PIERCING THE CORPORATE VEIL
Corporate veil: It refers to a separate legal existence enjoyed by the company

which is distinct from people who own & manage it.
It is an artificial curtain created by law which separates the company from the
people who own and manage it.
Effect of corporate veil: Only company is liable for the acts/defaults done in name
of company, even though directors/employees acted on behalf of company.
Lifting of corporate veil: It means looking behind the company as a legal person,
i.e., disregarding the corporate entity and paying regard, instead, to the realities
behind the legal facade. Where the Courts ignore the company and concern
themselves directly with the members or managers, the corporate veil may be said
to have been lifted. Only in appropriate circumstances, the Courts shall lift the
corporate veil.
The following are the cases where company law disregards the principle of
corporate personality or the principle that the company is a legal entity distinct and
separate from its shareholders or members:
1. Where the device of incorporation is adopted for some illegal or improper
purpose,e.g., to defeat or circumvent law, to defraud creditors or to avoid legal
obligations.
Gilford Motor Co. v. Home

In, a former employee of a company covenanted not to solicit its customers. He
formed a company to carry on his business and it undertook the solicitation. An
injunction was granted against him and the company to restrain them.
2. For determining residence and character : The Courts also look behind the facade of
the company and its place of registration in order to determine its residence for the
purposes of taxation or the character of the company, for example whether it is enemy.
Daimler Co. Ltd. vs. Continental Tyre & Rubber Co.
C company was floated in London for marketing tyres manufactured in Germany.
The majority of the C’s shares were held by German nationals residing inGermany.
During World War I, C company filed a suit against D company for the
recovery of trade debt. The D company contented that C company was an
alienenemy company (Germany being at war with England at that time) and that
thepayment of the debt would be trading with the enemy. The court agreed with the
contention of the defendants.
3. Formation of Companies to divide income and avoid tax or avoid any welfare
laws:
1. Sir DinshawManeckjee Petit
D was a rich man having dividend and interest income. He wanted to avoid income-
tax. For this purpose, he formed four private companies, in all of which he was the
majority share holder. The companies made investments and whenever interest and
dividend income were received by the companies, D applied to the companies for
loans, which were immediately granted and he never repaid. In a legal proceeding the
corporate veil of all the companies were lifted and the income of the companies
treated as if they were of ‘D’.

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2. Workmen employed in Associated Rubber Industries Ltd v. Associated Rubber

Industries Ltd
A subsidiary company was formed wholly by the holding company with no assets of its
own except those transferred to it by the holding company, with no business or income
of its own except receiving dividend from shares transferred to it by the holding
company.Court held that the new company was formed as a device to reduce the
profitsof the holding company and thereby reduce the bonus to workmen.
4. Where companies form other companies as their subsidiaries to act as their

agent.
Merchandise Transport Limited vs. British Transport Commission (1982)

Transport Company wanted to obtain licences for its vehicles, but could not do
so if applied in its own name. It, therefore, formed a subsidiary company, and
the application for licence was made in the name of the subsidiary. Thevehicles were
to be transferred to the subsidiary company. Held, the parentand the subsidiary were
one commercial unit and the application for licenceswas rejected.
CLASSIFICATION OF COMPANY
A. BASED ON LIABILTY
1. Company limited by shares: As per Section 2(22),A company limited by shares
is a registered company having the liability of its members limited to the amount, if
any, unpaid on the shares respectively held by them. If his shares are fully paid -
up, he has nothing more to pay.
2. Company limited by guarantee:

As per Section 2(21), a company limited by guarantee or a "guarantee
company" is a company having the liability of its members limited to such an
: 128 :
amount as the members may respectively thereby undertake, by the

memorandum of association of the company, to contribute to the assets of
the company.
A special feature of this type of company is that the liability of members to
pay their guaranteed amounts arises only when the company has gone into
liquidation and not when it is a going concern.
Clubs, trade associations and societies for promoting different objects are
examples of companies limited by guarantee.
A guarantee company without share capital does not obtain its initial and
working funds, from its members, but from some other source or sources e.g.
grants, endowments, fees, subscriptions and the like.
But a guarantee company having a share capital raises its initial capital
from its members, while the normal working funds would be provided from
other sources, such as fees, charges, subscriptions.
If a guarantee company has share capital, the shareholders have two-fold liability;
to pay the amount which remains unpaid on their share whenever called upon to
pay, and secondly, to pay the amount payable under the guarantee when the
company goes into liquidation. The voting power of a guarantee company having a
share capital is determined by the shareholding and not by the guarantee.
3. Unlimited Company:
As per Section 2(92), unlimited company is a company not having any limit
on the liability of its members. In such a company the liability of a member
ceases when he ceases to be a member.
Thus, the maximum liability of the members of such a company could extend
to their entire personal property to meet the debts and obligations of the
company.
The members of an unlimited company are not liable directly to the creditors
of the company, unlike in the case of partners of a firm. The liability of the
members is only towards the company, so long it is a going concern; and in
the event of its being wound up, only the Liquidator can ask the members to
contribute to the assets of the company.
B. BASED ON MEMBERS
1. Private Company:
As per Section 2(68), private company is a company which by its articles,—
(i) restricts the right to transfer its shares;
(ii) limits the number of its members to two hundred (except in case of One
Person Company):
The clause provides that where two or more persons hold one or more
shares in a company jointly, they shall be treated as a single member:
However following shall not be included in the number of members:
♦ persons who are in the employment of the company; and

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♦ persons who, having been formerly in the employment of the

company, were members of the company while in that
employment and have continued to be members after the
employment ceased.
(iii) prohibits any invitation to the public to subscribe for any securities of the
company.
There should be at least two persons to form a private company i.e., the
minimum no. of members in a private company is two. A private company
should have at least two directors. The name of a private limited company
must end with the words "Private Limited".
2. Public Company:
As per Section 2(71),public company is a company which-
is not a private company
Seven or more members are required to form the company.
a private company which is a subsidiary of a public company shall also
be deemed to be a public company for the purposes of this Act, even
where such subsidiary company continues to be a private company in
its articles (three restrictions).
There should be at least seven persons to form a public company i.e., the
minimum no. of members in a public company is seven. A public company
should have at least three directors. The name of a public limited company
must end with the word "Limited".
3. One Person Company:
Definition:As per Section 2(62),one person company is a company which-
One Person Company' means a company which has only one person as a
member.
It is basically a private company with some unique features.
As regards the name of a One Person Company, the Act provides that the
words "One Person Company" or 'OPC' shall be mentioned in brackets below
the name of such Company, wherever its name is printed, affixed or
engraved.
In the case of India, if you wish to set up a private company, minimum
twoshareholders are required. In many cases, because of this legal
requirement a second shareholder is forcefully roped in. This second
shareholder at times takes advantage of his position. Having recognized this
problem the concept of OPC has been introduced.
Important points:
♦ Only one person as member.
♦ Minimum paid up capital - no limit prescribed.
♦ The memorandum of OPC shall indicate the name of the otherperson,
who shall, in the event of the subscriber's death or hisincapacity to
contract, become the member of the company.
♦ The other person whose name is given in the memorandum shallgive
his prior written consent in prescribed form and the same shallbe filed
with Registrar of companies at the time of incorporation.
♦ Such other person may be given the right to withdraw his consent.

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♦ The member of OPC may at any time change the name of such
otherperson by giving notice to the company and the company
shallintimate the same to the Registrar.
♦ Any such change in the name of the person shall not be deemed tobe
an alteration of the memorandum.
♦ Only a natural person who is an Indian citizen and resident in
India(person who has stayed in India for a period of not less than
182days during the immediately preceding one calendar year)-
• shall be eligible to incorporate a OPC;
• shall be a nominee for the sole member of a OPC.
♦ No person shall be eligible to incorporate more than one OPC or
become nominee in more than one such company.
♦ No minor shall become member or nominee of the OPC or can hold
share with beneficial interest.
♦ Such Company cannot be incorporated or converted into a company
under section 8 of the Act. Though it may be converted to private or
public companies in certain cases.
♦ Such Company cannot carry out Non-Banking Financial Investment
activities including investment in securities of anybody corporate.
♦ OPC cannot convert voluntarily into any kind of company unless two
years have expired from the date of incorporation, except where the
paid up share capital is increased beyond fifty lakh rupees or its
average annual turnover during the relevant period exceeds two crore
rupees.
♦ If One Person Company or any officer of such company contravenes
the provisions, they shall be punishable with fine which may extend to
ten thousand rupees and with a further fine which may extend to one
thousand rupees for every day after the first during which such
contravention continues.
Basis of difference Private company OPC
Incorporation Requires 2 or more persons 1 person alone
Number of members 2 members 1 member only
4. Small Company:
Definition:As per Section 2(85),small company means a company, other
than a public company,-
(i) paid-up share capital of which does not exceed fifty lakh rupees or
such higher amount as may be prescribed which shall not be more than
five crore rupees;
and
(ii) turnover of which as per its last profit and loss account does not
exceed two crore rupees or such higher amount as may be prescribed
which shall not be more than twenty crore rupees:
Provided that nothing in this clause shall apply to--
(i) a holding company or a subsidiary company;
(ii) a company registered under section 8; or
(iii) a company or body corporate governed by any special Act.
It is basically a private company meeting prescribed threshold.
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C. BASED ON CONTROL
1. Holding & Subsidiary Company
A company is a holding company in relation to one or more other
companies,means a company of which such companies are subsidiary
companies.
[Section 2(46)]
Whereas section 2(87) defines "subsidiary company" in relation to any
othercompany (tat is to say the holding company), means a company in which the
holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total share capital either atits
own or together with one or more of its subsidiary companies:
For the purposes of this section —
(I) a company shall be deemed to be a subsidiary company of the
holdingcompany even if the control referred to in sub-clause (i) or sub-clause
(ii)is of another subsidiary company of the holding company;
(II) the composition of a company's Board of Directors shall be deemed to
becontrolled by another company if that other company by exercise of
somepower exercisable by it at its discretion can appoint or remove all or
amajority of the directors;
(III) the expression "company" includes anybody corporate;
(IV) "layer" in relation to a holding company means its subsidiary orsubsidiaries.
2. Associate company
As per Section 2(6), In relation to another company, means a company in
which that other company has a significant influence, but which is not a
subsidiary company of the company having such influence and includes a
joint venture company.
The term “significant influence” means control of at least 20% of total share
capital, or of business decisions under an agreement
The term “Total Share Capital”, means the aggregate of the - paid-up equity
share capital; and convertible preference share capital.
This is a new definition inserted in the 2013 Act.
D. BASED ON CAPITAL
1. Listed company:
As per the definition given in the section 2(52), it is a company which has any of its
securities listed on any recognised stock exchange.
2. Unlisted company:Means a company other than listed company.
E. OTHER COMPANIES
1. Government Company
As per Section 2(45), government company means any company in which
not less than fifty- one per cent. of the paid-up share capital is held by-
(i) the Central Government, or
(ii) by any State Government or Governments, or
(iii) partly by the Central Government and partly by one or more State
Governments,
And the section includes a company which is a subsidiary company of such a
Government company;

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2. Foreign Company
As per Section 2(42), foreign company means any company or body corporate
incorporated outside India which-
(i) has a place of business in India whether by itself or through an agent,
physically or through electronic mode; and
(ii) conducts any business activity in India in any other manner
3. Company not for profit/Non-Profit companies

Section 8 of the Companies Act, 2013 deals with the formation of companies
which are formed to promote the charitable objects of commerce, art,
science, sports, education, research, social welfare, religion, charity,
protection of environment etc. Such company intends to apply its profit in
promoting its objects and prohibiting the payment of any dividend to its
members.
Examples of section 8 companies are FICCI, ASSOCHAM, National Sports
Club of India, CII etc.
Power of Central government to issue the license-
Section 8 allows the Central Government to register such person or
association of persons as a company with limited liability without the addition
of words 'Limited' or 'Private limited' to its name, by issuing licence on such
conditions as it deems fit. The registrar shall on application register such
person or association of persons as a company under this section.
On registration the company shall enjoy same privileges and obligations as of
a limited company.
Revocation of license: The Central Government may by order revoke the
licence of the company where the company contravenes any of the
requirements or the conditions of this sections subject to which a licence is
issued or where the affairs of the company are conducted fraudulently, or
violative of the objects of the company or prejudicial to public interest, and on
revocation the Registrar shall put 'Limited' or 'Private Limited' against the
company's name in the register. But before such revocation, the Central
Government must give it a written notice of its intention to revoke thelicence
and opportunity to be heard in the matter.
Order of the Central Government: Where a licence is revoked there the
Central Government may, in the Section 8 of the Companies Act, 2013 deals
with the formation of companies which are formed to promote the charitable
objects of commerce, art, science, sports, education, research, social
welfare, religion, charity, protection of environment etc. Such company
intends to apply its profit in promoting its objects and prohibiting the payment
of any dividend to its members.
Examples of section 8 companies are FICCI, ASSOCHAM, National Sports
Club of India, CII etc.
Power of Central government to issue the license-
Section 8 allows the Central Government to register such person or
association of persons as a company with limited liability without the addition
of words 'Limited' or 'Private limited' to its name, by issuing licence on such
conditions as it deems fit.
The registrar shall on application register such person or association of

persons as a company under this section.
On registration the company shall enjoy same privileges and obligations as
of a limited company.

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Revocation of license: The Central Government may by order revoke the

licence of the company where the company contravenes any of the
requirements or the conditions of this sections subject to which a licence is
issued or where the affairs of the company are conducted fraudulently, or
violative of the objects of the company or prejudicial to public interest, and on
revocation the Registrar shall put 'Limited' or 'Private Limited' against the
company's name in the register. But before such revocation, the Central
Government must give it a written notice of its intention to revoke the licence
and opportunity to be heard in the matter.
Order of the Central Government: Where a licence is revoked there the

Central Government may, in the public interest order that the company
registered under this section should be amalgamated with another company
registered under this section having similar objects, to form a single company
with such constitution, properties, powers, rights, interest, authorities and
privileges and with such liabilities, duties and obligations as may be specified
in the order, or the company be wound up.
Penalty/punishment in contravention: If a company makes any default in

complying with any of the requirements laid down in this section, the
company shall, be punishable with fine varying from ten lakh rupees to one
crore rupees and the directors and every officer of the company who is in
default shall be punishable with imprisonment for a term which may extend to
three years or with fine varying from twenty- five thousand rupees to twenty-
five lakh rupees, or with both and where it is proved that the affairs of the
company were conducted fraudulently, every officer in default shall be liable
for action under section 447 which deals with Fraud.
4. Dormant company:
Where a company is formed and registered under this Act for a future project
or to hold an asset or intellectual property and has no significant accounting
transaction, such a company or an inactive company may make an
application to the Registrar in such manner as may be prescribed for
obtaining the status of a dormant company.
"Significant accounting transaction" means any transaction other than—
(i) payment of fees by a company to the Registrar;
(ii) payments made by it to fulfil the requirements of this Act or any other
law;
(iii) allotment of shares to fulfil the requirements of this Act; and
(iv) payments for maintenance of its office and records.
5. Nidhi company:
As per Section 406, a company which has been incorporated as a nidhi with the
object of cultivating the habit of thrift (cost cutting) and savings amongst its
members, receiving deposits from, and lending to, its members only, for their
mutual benefits and which complies with such rules as are prescribed by the
Central Government for regulation of such class of companies.

: 134 :
6. Public financial institutions

As per Section 2(72), following institutions are to be regarded as public financial
institutions.
(i) the Life Insurance Corporation of India, established under the Life Insurance
CorporationAct, 1956;
(ii) the Infrastructure Development Finance Company Limited,
(iii) specified company referred to in the Unit Trust of India (Transfer of
Undertaking andRepeal) Act, 2002;
(iv) institutions notified by the Central Government under section 4A(2) of the
CompaniesAct, 1956 so repealed under section 465 of this Act;
(v) such other institution as may be notified by the Central Government in
consultation withthe Reserve Bank of India:
Provided that no institution shall be so notified unless—
(A) it has been established or constituted by or under any Central or State Act; or
(B) not less than fifty-one per cent of the paid-up share capital is held or
controlled by theCentral Government or by any State Government or
Governments or partly by theCentral Government and partly by one or more
State Governments.
• MODE OF REGISTRATION/ INCORPORATION OF COMPANY

PROMOTERS: Persons who form the company are known as promoters. It is theywho
conceive the idea of forming the company. They take all necessary steps for
itsregistration. It should, however, be noted that persons acting only in a
professionalcapacity e.g., the solicitor, banker, accountant etc. are not regarded as
promoters.
The Companies Act, 2013 defines the term "Promoter" under section 2(69) whichmeans
a person—
(a) who has been named as such in a prospectus or is identified by the company inthe
annual return referred to in section 92; or
(b) who has control over the affairs of the company, directly or indirectly whether asa
shareholder, director or otherwise; or
(c) in accordance with whose advice, directions or instructions the Board ofDirectors
of the company is accustomed to act.
• INCORPORATION OF COMPANIES
[SECTION 7 READ WITH COMPANIES (INCORPORATION) RULES, 2014]
Following is the procedure, in brief, for the incorporation of a company:-

I. Selection of the type of company:The promoters of a company may however
select the type of a company as they wish to form themselves into viz, One person
company, private company, public company, non-profit company, etc.
II. Preliminary Requirements:

All the directors of the proposed company must ensure that they are having
Director’s Identification Number (DIN). Out of all the directors of the proposed
company, atleast one director should have digital signature to digitally sign the
incorporation and other related documents.

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III. Reservation of Name:

Any of the promoters should apply to the Registrar of Companies (ROC) regarding
the reservation of name.
IV. Preparation of the Memorandum of Association and Articles of Association:

Drafting of the MOA and AOA is generally a step subsequent to the reservation of
name made by the Registrar. MOA and AOA shall be in the respective forms as
specified in Schedule -1. It should be noted that the main objects must be matched
with the objects shown in e-Form INC.1. These two documents are basically the
charter and internal rules and regulations of the company. Therefore, it must be
drafted with utmost care and with the advice of the experts and the ancillary clause
for attainment of the main object clause should be drafted in a very broader sense.
V. Filing of the documents with the Registrar of Companies:

An application shall be filed, with the Registrar of Companies within whose jurisdiction
the registered office of the company is proposed to be situated, in Form No. INC.2
(for One Person Company) and Form no. INC.7 (other than One Person
Company) along with the following documents, along with the fee as provided in
the Companies (Registration offices and fees) Rules, 2014 for registration of a
company, within 20 days from the date of intimation regarding the reservation of name
:-
The memorandum and articles of the company duly signed by all the subscribers to
the memorandum in such manner as prescribed under the Companies (Incorporation)
Rules, 2014;
(b) a declaration in the prescribed Form INC.8 by an advocate or chartered
accountant or cost accountant or company secretary in practice, who is engaged
in the formation of the company, and by a person named in the articles as a
director, manager or secretary of the company, that all the requirements of this
Act and the rules made thereunder in respect of registration and matters
precedent or incidental thereto have been complied with;
(c) an declaration in Form INC-9 by each of the subscribers to the memorandum and
by all the persons named as the first directors, if any, in the articles that they are not
convicted of any offence in connection with the promotion, formation or
management of any company, or that they has not been found guilty of any fraud or
misfeasance or of any breach of duty to any company under this Act or any previous
company law during the preceding five years and that all the documents filed with
the Registrar for registration of the company contain information that is correct and
complete and true to the best of their knowledge and belief;
(d) The address for correspondence till its registered office is established;
(e) Certain prescribed particulars of every subscriber to the memorandum along
with proof of identity;
(g) The particulars of the interests of the persons mentioned in the articles as the
first directors of the company in other firms
(h) Verification of the location of the registered office.
VI. Certificate of Incorporation and allotment of Corporate Identity Number:If the

Registrar of Companies is satisfied that everything has been complied with in
regard to incorporation of companies, he shall issue a certificate of incorporation in
Form No. INC.11, normally within 7 days of the receipt of documents, to the
company signed & dated under his hand.
The date of registration of a company is the date mentioned in the certificate and
not that date on which the signature of the Registrar was written.

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VII. Effect of Registration [Sec. 9]:

Section 9 provides that from the date of incorporation, the subscribers become the
members of the company. The company shall be a body corporate with a name,
capable of exercising all the functions of an incorporated company under this Act
and shall have perpetual succession with power to acquire, hold and dispose of
property, to contract, to sue and be sued, by the said name.
VIII. Commencement of Business [Sec. 11]:

A company (both public and private) having a share capital shall not commence
any business or exercise any borrowing powers, unless the following documents
are filed with the ROC:
(i) a declaration by a director in the prescribed from that every subscriber to the
memorandum has paid the value of shares taken by him (minimum five lakh
rupees for public company and minimum one lakh rupees for private
company); and
(ii) The verification of its registered office.
Where no declaration has been filed with the Registrar within a period of 180 days
of the date of incorporation of the company and the Registrar has reasonable
cause to believe that the company is not carrying on business or operations, he
may remove the name of the company from the register of companies.
Order of the Tribunal :

Where a company has been got incorporated by furnishing false or incorrectinformation
or representation or by suppressing any material fact or information inany of the
documents or declaration filed or made for incorporating such company orby any
fraudulent action, the Tribunal may, on an application made to it, on beingsatisfied that
the situation so warrants,—
(a) pass such orders, as it may think fit, for regulation of the management of
thecompany including changes, if any, in its memorandum and articles, in
publicinterest or in the interest of the company and its members and creditors; or
(b) direct that liability of the members shall be unlimited; or
(c) direct removal of the name of the company from the register of companies; or
(d) pass an order for the winding up of the company; or
(e) pass such other orders as it may deem fit:
Provided that before making any order,—
♦ the company shall be given a reasonable opportunity of being heard in thematter;
and
♦ the Tribunal shall take into consideration the transactions entered into by
thecompany, including the obligations, if any, contracted or payment of any
liability.
• SIMPLIFIED PROFORMA FOR INCORPORATING COMPANY ELECTRONICALLY

(SPICe)
The Ministry of Corporate Affairs has taken various initiatives for ease of business. MCA
has simplified the process of filing of forms of incorporation of company through
Simplified ProformaFor Incorporating Company ELECTRONICALLY (SPICe)

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• MEMORANDUM OF ASSOCIATION
“Fundamental Document”
Memorandum of Association is the fundamental condition upon which alone is
allowed to incorporate.
T
Definition and Meaning of "memorandum" means memorandum
h
Memorandum: of association of a company as
e
Section 2(56) of the Companies Act, originally framed or as altered from
2013. time to time in pursuance of any
m
previous companies law or of this Act.
e
Memorandum of association is a document, which contains the fundamental
provisions of the company's constitution. It defines as well as confines the powers
of the company. It not only shows the objects of formation but also determines the
utmost possible scope of its operations beyond which its action cannot go.
Purpose of The purpose of memorandum is two-fold.

Memorandum: 1. The Prospective shareholder who contemplates the
investment of his savings, should know the field in, or the
purpose for which it is going to be used and what risk he is
taking in making the investment.
2. Outsiders or Creditors dealing with the company will know
without reasonable doubt whether the contractual relation
into which he contemplates entering with the company is one
relating to a matter within its corporate objects.
Form of • Table A is applicable to companies limited by shares;

Memorandum • Table B is applicable to companies limited by guarantee
[Section 4]: and not having a share capital;
• Table C is applicable to the companies limited by guarantee
and having a share capital;
• Table D is applicable to unlimited companies and not
having a share capital;
• Table E is applicable to unlimited companies and having a
share capital.
The memorandum must be printed, divided into paragraphs, numbered consecutively,

and signed by at least seven persons (two in the case of a private company and one in
the case of One Person Company) in the presence of at least one witness, who will
attest the signatures.
The particulars about the signatories to the memorandum as well as the witness, as to
their address, description, occupation etc., must also be entered.
It is to be noted that a company being a legal person can through its agent, subscribe
to the memorandum. However, a minor cannot be a signatory to the memorandum as
he is not competent to contract. The guardian of a minor, who subscribes to the
memorandum on his behalf, will be deemed to have subscribed in his personal capacity.
The Memorandum of Association of a company cannot contain anything contrary to the
provisions of the Companies Act. If it does, the same shall be devoid of any legal effect.
Similarly, all other documents of the company must comply with the provisions of the
Memorandum.

: 138 :
Contents of Memorandum: Section 4 of the Companies Act provides that the

memorandum of association of every company must contain the following clauses:-
1. Name clause • The first clause in the memorandum must state the name by
which a company is known.
• The name of the company with the last word "Limited" in the
case of a public limited company, or the last words "Private
Limited" in the case of a private limited company.
This clause is not applicable on the companies formed under
section 8 of the Act.
• The name including phrase 'Electoral Trust' may be allowed
for Registration of companies to be formed under section 8 of
the Act, in accordance with the Electoral Trusts Scheme,
2013 notified by the Central Board of Direct Taxes (CBDT).
For the Companies under section 8 of the Act, the name shall
include the words foundation, Forum, Association,
Federation, Chambers, Confederation, council, Electoral trust
and will constitute an offence under any law.
2. Situation or • The name of the State in which the registered office of the
registered company is to be situated must be given in the memorandum.
office clause But the exact address of the registered office is not required
to be stated therein.
3. Object clause • The objects for which the company is proposed to be
incorporated and any matter considered necessary in
furtherance thereof;
• If any company has changed its activities which are not
reflected in its name, it shall change its name in line with its
activities within a period of six months from the change of
activities after complying with all the provisions as applicable
to change of name.
4.LiabilityClause: The liability of members of the company, whether limited or
unlimited, and also state,—
• in the case of a company limited by shares, that the liability of
its members is limited to the amount unpaid, if any, on the
shares held by them; and
• in the case of a company limited by guarantee, the amount
up to which each member undertakes to contribute—
to the assets of the company in the event of its being
wound-up while he is a member or within one year after
he ceases to be a member, for payment of the debts and
liabilities of the company or of such debts and liabilities
as may have been contracted before he ceases to be a
member, as the case maybe; and
to the costs, charges and expenses of winding-up and for
adjustment of the rights of the contributories among
themselves;
5. Capital The amount of authorized capital divided into share of fixed
Clause (only in amounts and the number of shares with the subscribers to the
the case of a memorandum have agreed to take, indicated opposite their
names, which shall not be less than one share. A company
company
not having share capital need not have this clause.
having a share
capital):
: 139 :
6. Association In this clause, the persons (includes a body corporate)subscribing

Clause and to the memorandum declare their desire to be formed into a
Subscription: company and agree to take the shares indicated opposite their
respective names.
Following are the statutory requirements regarding subscription of
memorandum:-
(i) The memorandum must be signed by each subscriber in the
presence of at least one witness who must attest the
signatures;
(ii) Each subscriber must take at least one share; if any and
(iii) Each subscriber must write opposite his name the number of
shares (if any) which he agrees to take.
7. Succession • This clause shall state the name of the person who, in the
Clause (only in event of the death of the subscriber, shall become the
the case of member of the company.
OPC): • The above clauses are compulsory and are designated by
the Companies Act as "conditions", on the basis of which
alone a company is incorporated.
The above clauses of the Memorandum are called compulsory clauses, or "Conditions".
In addition to these a memorandum may contain other provisions, for example rights
attached to various classes of shares.
• ARTICLES OF ASSOCIATION
Definition and Meaning of Articles 'articles' means the articles of association
Section 2(5) of the Companies Act, of a company as originally framed or as
2013 altered from time to time in pursuance of
any previous companies law or of this Act.
The articles of a company are its bye — laws or rules and regulations that govern the
management of its internal affairs and the conduct of its business. The articles of a
company are sub—ordinate to and are controlled by the memorandum of association.
The memorandum lays down the scope and powers of the company and the articles
govern the ways in which the objects of the company are to be carried out. It may be
noted that Companies Act, 2013 makes it compulsory for every company to have its
own articles and file the same with ROC for registration.
Section 5 of the Companies Act, 2013 seeks to provide the contents and model of
articles of association. The section lays the following law-
(1) Contains regulations: The articles of a company shall contain the regulations for
management of the company.
(2) Inclusion of matters: The articles shall also contain such matters, as are
prescribed under the rules. However, a company may also include such additional
matters in its articles as may be considered necessary for its management.
(3) Contain provisions for entrenchment: The articles may contain provisions for
entrenchment (to protect something) to the effect that specified provisions of the
articles may be altered only if conditions or procedures as that are more restrictive
than those applicable in the case of a special resolution, are met or complied with.
(4) Manner of inclusion of the entrenchment provision: The provisions for
entrenchment shall only be made either on formation of a company, or by an
amendment in the articles agreed to by all the members of the company in the
case of a private company and by a special resolution in the case of a public
company.
: 140 :
(5) Notice to the registrar of the entrenchment provision: Where the articles
contain provisions for entrenchment, whether made on formation or by
amendment, the company shall give notice to the Registrar of such provisions in
such form and manner as may be prescribed.
(6) Forms of articles: The articles of a company shall be in respective forms
specified in Tables, F, G, H, I and J in Schedule I as may be applicable to such
company.
(7) Model articles: A company may adopt all or any of the regulations contained in
the model articles applicable to such company.
(8) Company registered after the commencement of this Act: In case of any
company, which is registered after the commencement of this Act, in so far as the
registered articles of such company do not exclude or modify the regulations
contained in the model articles applicable to such company, those regulations
shall, so far as applicable, be the regulations of that company in the same manner
and to the extent as if they were contained in the duly registered articles of the
company.
The following are the key differences between the Memorandum of Association
vs.Articles of Association:
1. Objectives: Memorandum of Association defines and delimits the objectives of
thecompany whereas the Articles of association lays down the rules and
regulations forthe internal management of the company. Articles determine how
the objectives ofthe company are to be achieved.
2. Relationship: Memorandum defines the relationship of the company with the
outsideworld and Articles define the relationship between the company and its
members.
3. Alteration: Memorandum of association can be altered only under
certaincircumstances and in the manner provided for in the Act. In most cases
permission ofthe Regional Director, or the Tribunal is required. The articles can be
altered simplyby passing a special resolution.
4. Ultra Vires: Acts done by the company beyond the scope of the memorandum
areultra-vires and void. These cannot be ratified even by the unanimous consent
of allthe shareholders. The acts ultra-vires the articles can be ratified by a
specialresolution of the shareholders, provided they are not beyond the provisions
of thememorandum.
• EFFECT OF MEMORANDUM AND ARTICLES:

As per section 10 of the Companies Act, 2013, where the memorandum and
articleswhen registered, shall bind the company and the members thereof to the
sameextent as if they respectively had been signed by the company and by each
member,and an agreement to observe all the provisions of the memorandum and of
thearticles. All monies payable by any member to the company under the memorandum
or articles shall be a debt due from him to the company.
• DOCTRINE OF ULTRA VIRES

The meaning of the term 'ultra vires' is 'beyond the powers of. Anything which
isoutside the specified objects and powers or not reasonably incidental to
ornecessary for the attainment of objects of the company is ultra vires thecompany
and therefore is void.
No rights and liabilities, on the part of the company, arise out of suchtransactions
and it remains nullity even if every member assents to it.
Consequently, an act, which is ultra vires the company, does not bind thecompany
and neither the company nor the other contracting party can sue on it.

: 141 :
An act which is ultra vires the company being void, cannot be ratified by the
shareholders of the company. Sometimes, act which is ultra vires can be
regularised by ratifying it subsequently. For instance, if the act is ultra vires the
power of the directors, the shareholders can ratify it; if it is ultra vires the articles of
the company, the company can alter the articles; if the act is within the power of
the company but is done irregularly, shareholder can validate it.
Ashbury Railway Carriage and Iron Company Limited v. Riche-(1875).

The facts of the case are:
The main objects of a company were:
(a) To make, sell or lend on hire, railway carriages and wagons;
(b) To carry on the business of mechanical engineers and general contractors.
(c) To purchase, lease, sell and work mines.
(d) To purchase and sell as merchants or agents, coal, timber, metals etc.
The directors of the company entered into a contract with Riche, for financing the
construction of a railway line in Belgium, and the company further ratified this act
of the directors by passing a special resolution. The company however,
repudiated the contract as being ultra-vires. And Riche brought an action for
damages for breach of contract. His contention was that the contract was well
within the meaning of the word general contractors and hence within its powers.
Moreover it had been ratified by a majority of shareholders.
However, it was held by the Court that the contract was null and void. It said that
the terms general contractors was associated with mechanical engineers, i.e. it
had to be read in connection with the company's main business. If, the term
general contractor's was not so interpreted, it would authorize the making of
contracts of any kind.
• DOCTRINE OF CONSTRUCTIVE NOTICE

When the memorandum and articles of association of a company are registered,
they become public documents and are open to inspection by anyone on payment
of nominal fee. Hence, every person dealing with the company is under an
obligation to know the contents of these documents.
Whether a person reads the documents or not, he is presumed to have knowledge
of the contents of the documents. He is not only presumed to have read the
documents but also understood them in their true perspective, Thus, if a person
enters into a contract which is beyond the powers of the company as defined in
the memorandum, or outside the authority of directors as per memorandum or
articles, he cannot acquire any rights under the contract against the company.
• DOCTRINE OF INDOOR MANAGEMENT

While persons dealing with a company are presumed to have read the public
documents and understood their contents and ascertain that the transaction is not
inconsistent therewith, they are entitled to assume that the PROVISIONS of the
articles have been observed by the officers of the company. It is no part of the duty
of an outsider to see how the company carries out its own internal proceedings or
indoor management. He can assume that all is being done regularly.
The doctrine of indoor management, thus, imposes an important restriction on the
scope of doctrine of constructive "notice. While the doctrine of “constructive notice”
seeks to protect the company against the outsiders, the principle of indoor
management operates to protect the outsiders against the company.

: 142 :
The Royal British Bank vs. Turquand
Mr.Turquand was the official manager (liquidator) of the insolvent Cameron's
Coalbrook Steam, Coal and Swansea and Loughor Railway Company. It was
Incorporated under the Joint Stock Companies Act, 1844. The company had
given a bond for £ 2,000 to the Royal British Bank, which secured the
company's drawings onits current account. The bond was under the company's
seal, signed by two directors and the secretary. When the company was sued, it
alleged that under its registered deed of settlement (the articles of association),
directors only had power to borrow up to an amount authorized by a company
resolution. A resolution had been passed but not specifying how much the
directors could borrow.
Held, it was decided that the bond was valid, so the Royal British Bank could
enforce the terms. He said the bank was deemed to be aware that the directors
could borrow only up to the amount resolutions allowed. Articles of association
were registered with Companies House, so there was constructive notice. But
the bank could not be deemed to know which ordinary resolutions passed,
because these were notregistrable. The bond was valid because there was no
requirement to look into the company’s internal workings. This is the indoor
Exceptions: The doctrine of indoor management is Sl1l)j6Ct to the following exceptions

or limitations:-
1. Actual or constructive knowledge of irregularity: The rule does not protect any
person when the person dealing with the company has notice, whether actual or
constructive, of the irregularity.
In Howard vs. Patent Ivory Manufacturing Co. where the directors could not
defend the issue of debentures to themselves because they should have known
that the extent to which they were lending money to the company required the
assent of the general meeting which they had not obtained.
Likewise, in Morris v Kansseen, a director could not defend an allotment of
shares to him as he participated in the meeting, which made the allotment. His
appointment as a director also fell through because none of the directors
appointed him was validly in office.
2. Suspicion of Irregularity: Where the person dealing with the company is put
upon an inquiry, for example, where the transaction is unusual or nothing the
ordinary course of business, it is the duty of the outsider to make the necessary
enquiry.
The protection of the "Turquand Rule" is also not available where the
circumstances surrounding the contract are suspicious and therefore invite inquiry.
Suspicion should arise, for example, from the fact that an officer is purporting to
act in matter, which is apparently outside the scope of his authority.
In AnandBihariLal vs. Dinshaw& Co. the plaintiff accepted a transferor a
company's property from its accountant, the transfer was held void.
The plaintiff could not have supposed, in absence of a power of attorney that the
accountant had authority to effect transfer of the company’s property.
Similarly, in Haughton & Co. v. Nothard, Lowe & Wills Ltd. where a person
holding directorship in two companies agreed to apply the money of one company
in payment of the debt to other, the court said that it was something so unusual
"that the plaintiff were put upon inquiry to ascertain whether the persons making
the contract had any authority in fact to make it" Any other rule would "place
limited companies without any sufficient reasons for so doing, at the mercy of any
servant or agent who should purport to contract on their behalf"

: 143 :
3. Forgery: The doctrine of indoor management applies only to irregularities which

might otherwise affect a transaction but it cannot apply to forgery which must be
regarded as nullity.
Forgery may in circumstances exclude the 'Turquand Rule'.
In Ruben v Great Fingall Consolidated, the plaintiff was the transferee of a
share certificate issued under the seal of the defendant's company.
The company's secretary, who had affixed the seal of the company and forged the
signature of the two directors, issued the certificate.
The plaintiff contended that whether the signature were genuine or forgedwas
apart of the internal management, and therefore, the company shouldbe estopped
from denying genuineness of the document. But it was held,that the rule has never
been extended to cover such a complete forgery.
• SHARE
Definition and Meaning of Share: Section 2(84) of the Companies Act, 2013
defines the term "share". As per this, share means a share in the share capitalof a
company and includes stock.
By its nature, a share is not a sum of money but a bundle of rights and
liabilities. A share is a right to participate in the profits of a company, while it is a
going concern and declares dividend; and a right to participate in the assetsof the
company, when it is wound up.
The shares or debentures or other interests of any member in a company shall be
movable property transferable in the manner provided by the articles of the
company [Section 44 of the Companies Act, 2013]. Every share in a company
having a share capital, shall be distinguished by its distinctive number [Section
45]. This shall not apply to a share held by a person whose name is entered
asholder of beneficial interest in such share in the records of a depository.
• CLASSIFICATION OF SHARE CAPITAL
The share capital of a company can be classified as :
Nominal, Authorised or Registered Capital
Issued Capital
Subscribed Capital
Called Up Capital Uncalled Capital
Paid-up Capital Unpaid Capital
According to Section 2(8) “authorised capital” or “nominal capital” means such capital as is
authorised by the memorandum of a company to be the maximum amount of share capital of
the company.
Whereas Section 2(86) “subscribed capital” means such part of the capital which is for the
time being subscribed by the members of a company.
As per Section 2(15) “Called-up capital” means such part of the capital, which has been
called for payment.

: 144 :
Section 2(64) defines “paid-up share capital” or “share capital paid-up” means such
aggregate amount of money credited as paid-up as is equivalent to the amount received as
paid-up in respect of shares issued and also includes any amount credited as paid-up in
respect of shares of the company, but does not include any other amount received in respect
of such shares, by whatever name called.
• KINDS OF SHARE CAPITAL
Preference Share Equity Share
With voting rights With differential rights as to

dividend, voting or otherwise
(A) PREFERENCE SHARE

A preference share is a share which fulfils the following two conditions:
It carries preferential right in respect of payment of dividend; andIt also carries
preferential right in regard to repayment of capital.
In simple terms, preference share capital must have priority both regards to
dividendas well as capital.
(B) EQUITY SHARE

''Equity share capital'' with reference to any company limited by shares,means
all share capital which is not preference share capital;
Equity share capital —
(1) with voting rights; or
(2) with differential rights as to dividend, voting or otherwise in accordancewith
prescribed rules;
Example: It is to be noted that, Tata Motors in 2008 introduced equityshares
with differential voting rights called 'A' equity shares in its rights issue. Inthe
issue, every 10 'A' equity shares carried only one voting right but would get
5percentage points more dividend than that declared on each of the ordinary
shares.
Since 'A' equity share did not carry the similar voting rights, it was being traded at
discount to other common shares having full voting. Other companies which have
issued equity shares with differential voting rights (popularly called DVRs)
areFutureRetail, Jain Irrigationamong others.

: 145 :
QUESTIONS
Theory questions
1. What is meant by a Guarantee Company? State the similarities and dissimilarities

between a Guarantee Company and a Company having Share Capital.
2. Can a non-profit organization be registered as a company under the Companies
Act,2013? If so, what procedure does it have to adopt?
3. Briefly explain the doctrine of "ultravires" under the Companies Act, 2013. What are the
consequences of ultravires acts of the company?
4. Explain clearly the doctrine of 'Indoor Management' as applicable in cases of companies
registered under the Companies Act, 2013. Explain the circumstances inwhich an
outsider dealing with the company cannot claim any relief on the ground of'Indoor
Management'.
5. Short note on Aritcles of Association
PRACTICAL/CASE LAW BASED QUESTIONS:
1. F, an assessee, was a wealthy man earning huge income by way of dividend and
interest. He formed three Private Companies and agreed with each to hold a bloc of
investment as an agent for them. The dividend and interest income received by the
companies was handed back to F as a pretended loan. This way, F divided his income
into three parts in a bid to reduce his tax liability.
Decide, for what purpose the three companies were established? Whether the legal
personality of all the three companies may be disregarded?
2. The paid-up Share Capital of AVS Private Limited is ` 1 crore, consisting of 8 lacsEquity
Shares of ` 10 each, fully paid-up and 2 lacs Cumulative Preference Shares of'10 each,
fully paid-up. XYZ Private Limited and BCL Private Limited are holding 3lacs Equity
Shares and 150,000 Equity Shares respectively in AVS Private Limited.XYZ Private
Limited and BCL Private Limited are the subsidiaries of TSR Private Limited.
With reference to the provisions of the Companies Act, 2013, examine whether
AVSPrivate Limited is a subsidiary of TSR Private Limited?
3. The object clause of the Memorandum of Association of LSR Private Ltd,

Lucknowauthorized it to do trading in fruits and vegetables. The company, however,
entered into a Partnership with Mr. J and traded in steel and incurred liabilities to Mr. J.
The Company, subsequently, refused to admit the liability to J on the ground that the
deal was ‘Ultra Vires’ the company. Examine the validity of the company’s refusal to
admit the liability to J. Give reasons in support of your answer.

: 146 :
ANSWERS FOR PRACTICAL/CASE LAW BASED QUESTION
1. As per provisions of The Companies Act, 2013, courts can lift the corporate veil if
companies are formed to divide income and avoid tax or avoid any welfare laws. As per
the case of Sir Dinshaw Maneckjee Petit, he had formed four private companies, in all
of which he was the majority shareholder. The companies made investments and
whenever interest and dividend income were received by the companies, D applied to
the companies for loans, which were immediately granted and he never repaid. In a
legal proceeding the corporate veil of all the companies were lifted and the income of
the companies treated as if they were of ‘D’.
(a) The problem asked in the question is based upon the aforesaid facts. The three
companies were formed by the assessee purely and simply as a means of
avoiding tax and the companies were nothing more than the fagade of the
assessee himself. Therefore, the whole idea of Mr. F was simply to split his
income into three parts with a view to evade tax. No other business was done by
the company.
(b) The legal personality of the three private companies may be disregarded because
the companies were formed only to avoid tax liability. It carried on no other
business, but was created simply as a legal entity to ostensibly receive the
dividend and interest and to hand them over to the assessee as pretended loans.
2. As per Section 2(87) provides that a company shall be a subsidiary of another, if any of
the following conditions are satisfied :-
(a) that other controls the composition of its Board of Directors;
(b) that other exercises or-controls more than one-half of the total share capital either
at its own or together with one or more of its subsidiary companies; or
(c) the first-mentioned company is a subsidiary of any company which is that other's
subsidiary
In this case XYZ Pvt Ltd. and BCL Pvt Ltd. together hold a majority of equity shares in
AVS Pvt Ltd. and both these companies are subsidiaries of TSR Pvt Ltd it will have a
majority stake in the composition of the Board of Directors of AVS Pvt Ltd. Hence, TSR
Pvt, Ltd will be treated as the holding company of AVS Pvt Ltd.
3. In terms of section 4(1)(c) of the Companies Act, 2013, the powers of the company are
limited to:
(a) Powers expressly given in the "Objects Clause" of the Memorandum (which is
popularly known as ‘express' power), or conferred by the Companies Act, or by
any other statute and
(b) powers reasonably incidental or necessary to the company's main objects(termed
as "Implied' powers).
The Act further provides that the acts beyond the powers of a company are ultra vires
and void and cannot be ratified even though every member of the company may give
his consent [Ashbury Railway Carriage Company Vs Richie]
The objects clause enables the shareholders, creditors or others to know what its
powers are and what the range of its activities is. The objects clause therefore is of
fundamental importance to the shareholders, creditors and every other person who
deals with the company in any manner what so ever. A company being an artificial legal
person can act only within the ambit of the powers conferred upon it by the
Memorandum through the "Objects Clause".

: 147 :
Every person who enters into a contractual relationship with a company on any matter is
presumed to be aware of its objects and is supposed to have examined the
Memorandum of Articles of the company to ensure proper contractual agreement. If a
person fails to do so, it is entirely at his own peril.
It is also pertinent to note that the objects of a company may be changed by following
the provisions for the change of Memorandum as laid out in section 13 of the said Act.
M/s LSR Pvt. Ltd is authorised to trade directly on fruits and vegetables. It has no power
to enter into a partnership for Iron and steel with Mr. J. Such act cannot be treated as
being within either the ‘express' or ‘implied' powers of the company. Mr J who entered
into partnership is deemed to be aware of the lack of powers of M/s LSR(Pvt) Ltd. In the
light of the above, Mr, J cannot enforce the agreement or liability against M/s LSR Pvt.
Ltd under the Companies Act. Mr. J should be advised accordingly.
However, under the Indian Contract Act, 1872 where a person derives any benefit either
in the absence of a contract or under a void agreement will be liable to make are
reasonable payment for the value of such benefit.

: 148 :
MAY 2018 PAPER
Roll No:
Total No. of Printed Pages : 2

Total no. of Questions : Time allowed : 3 Hours
Maximum Marks : 100 (Section A – 60 & Section B – 40 marks)
IMPORTANT INSTRUCTIONS TO CANDIDATES

Questions is Section A are to be answered in the medium opted by the candidate. If a
candidate has not opted for Hindi medium, his/her answers in Hindi, will not be
evaluated.
Questions in Section B, are to be answered in English only, by all the candidates,
including those who have opted for Hindi medium.
Answers to both the sections are to be written in the same answer book.
Section A – (60 marks)
Question No. 1 is compulsory.
Answer any FOUR questions from the remaining FIVE questions.
Those any candidate answers extra question(s) sub – question (s) over and above the
required number, then only the requisite number of questions first answered in the book shall
be valued and subsequent extra question(s) answered shall be ignored.
1. (a) X, Y and Z are partners in a firm. They jointly promised to pay Rs. 3,00,000 to D. Y
become insolvent and his private assets are sufficient to pay 1/5 of his share of
debts. X is compelled to pay the whole amount to D. Examining the provisions of
the Indian Contract Act, 1872, decide the extent to which X can recover the amount
from Z. (4 marks)
(b) Ravi Private Limited has borrowed Rs. 5 crores from Mudra Finance Ltd. This debt
is ultra vires to the company. Examine, whether the company is liable to pay this
debt state the remedy if any available to Mudra Finance Ltd.? (4 marks)
(c) What is meant by delivery of goods under the Sale of Goods Act, 19330; State
various modes of delivery. (4 marks)
2. (a) State the exception to the rule “An agreement without consideration is void”.
(5 marks)
(b) What are the essential elements to from a LLP in India as per that LLP Act, 2008?
(5 marks)
(c) (i) Distinguish between wagering agreement and contract of insurance.

(2 marks)
OR
(ii) Examine with reason that the given statement is correct or incorrect “Minor is
liable to pay for the necessaries supplied to him”. (2 marks)
: 149 :
3. (a) Distinguish between dissolution of firm and dissolution of partnership. (2 marks)
(b) What are the consequences of Non – Registration of a partnership Firm? Discuss.
(4 marks)
(c) M Ltd., contract with Shanti Traders to make and deliver certain machinery to them
by 30.6.2017 for Rs. 11.50 lakhs. Due to labour strike, M Ltd. could not manufacture
and delivery the machinery to Shanti Traders. Later, Shanti Traders procured the
machinery from another manufacturer for Rs. 12.75 lakhs. Due to this Shanti
Traders was also prevented from performing a contract which it had made with
Zenith Traders at the time of their contract with M Ltd and were compelled to pay
compensation which it can claim from M Ltd., referring to the legal provisions of the
Indian Contract Act, 1872. (6 marks)
4. (a) What is appropriation of goods under the Sale of Goods Act, 1930? State the
essentials regarding appropriation of unascertained goods. (6 marks)
(b) X, Y and Z are partners in a Partnership firm. They were carrying their business
successfully for the past several years. Spouses of X and Y fought in ladies club on
their personal issue and X’s wife was hurt badly. X got angry on the incident and he
convinced Z to expel Y from their partnership firm. Y was expelled from partnership
without any notice from X and Z. Considering the provisions of the Indian
Partnership Act, 1932, state whether they can expel a partner from the firm. What
are the criteria for test of good faith in such circumstance? (6 marks)
5. (a) Mr. D sold some goods to Mr. E for Rs. 5,00,000 on 15 days credit. Mr. D delivered
the goods. On due date Mr. E refused to pay for it. State the position and rights of
Mr. D as per The Sale of Goods Act, 1930.
(6 marks)
(b) Define OPC (One Person Company) and state the rules regarding its membership.
Can it be converted into a non – profit company under Section 8 or a private
company? (6 marks)
6. (a) Define Fraud whether “mere silence will amount to fraud” as per the Indian contract
Act, 1872? (5 marks)
(b) What is the conclusive evidence of partnership? State the circumstances when
partnership is not considered between two or more parties. (4 marks)
(c) State the limitations of the doctrine of indoor management under the Companies
Act, 2013. (3 marks)
: 150 :
NOV 18 PAPER
Roll No: Total No. of Printed Pages :3

Total no. of Questions : 11 Time allowed : 3 Hours
Maximum Marks : 100 (Section A – 60 & Section B – 40 marks)
Questions in Section A are to be answered in the medium opted by the candidate has
not opted for Hindi medium, his/her answers in Hindi, will not be checked.
Questions in Section B. are to be answered in English only, by all the including those
who have opted for Hindi medium.
Answers to both the Sections are to be written in the same answer book.
SECTION - A
Question No. 1 is compulsory.
Answer any four questions from the remaining five questions.
1. (a) Mr. X and Mr. Y entered into a contract on 1st August. 2018. by winch Mr. X had to
supply 50 tons of sugar to Mr. Y at a certain price strictly within a period of 10 days
of the contract Mr. Y also paid an amount of ` 50,000 towards advance as per the
terms of the above contact
The mode of transportation available between their places is roadways only. Severe
flood came on 2nd August, 2018 and the only road connecting their places was
damaged and could not be repaired within fifteen days. Mr. X offered to supply
sugar on 20th August. 2018 for which Mr Y did not agree. On 1st September, 2018.
Mr. X claimed compensation of 1 10,000 from Mr. Y for refusing to accept the
supply of sugar, which was not there within the purview of die contract On the other
hand, Mr.Y claimed for refund of t 50,000. which he had paid as advance in terms of
the contract. Analyse the above situation in terms of the provisions of the Indian
Contract Act, 1872 and decide on Y’s corneal. (4 Marks)
(b) A company registered under Section 8 of the Companies Act. 2013, financial year
ended on 31st March, earned huge profits during the financial year ended on 31st
March, 2018 due to some favourable policies declared by the Government of India
and implemented by the company.
Considering the development, some members of the company wanted the company
to distribute dividends to the members of the company. They approached you to
advise them about the maximum amount of dividend that can be declared by the
company as per the provisions of the Companies Act, 2013. Examine the relevant
provisions of the Companies Act, 2013 and advise the members accordingly.
(4 Marks)
(c) Differentiate between Ascertained and Unascertained Goods with example.

(4 Marks)
: 151 :
2. (a) What is Contingent Contract ? Discuss the essentials of Contingent Contract as per
the Indian Contract Act, 1872. (7 Marks)
(b) Explain the essential elements to incorporate a Limited Liability Partnership and the
steps involved therein under the LLP Act, 2008. (5 Marks)
3. (a) Though a minor cannot be a partner U, a firm, he can nonetheless be admitted to

the benefits of partnership."
(I) Referring to the provisions of the Indian Partnership Act, 1932, state the right
which can be enjoyed by a minor partner. (4 Marks)
(II) A. State the liabilities of a minor partner both : (2 Marks)
(i) Before attaining majority .
(ii) After attaining majority.
OR
B. State the legal position of a minor partner after attaining majority:
(2 Marks)
(i) When he opts to become a partner of the same firm.
(ii) When he decide not to become a partner.
(b) (i) Mr. Ramesh promised to pay ` 50,000 to his wife Mrs. Lali so that she can
spend the sum on her 30th birthday. Mrs. Lali insisted he husband to make a
written agreement if he really loved her. Mr. Ramesh mage a written
agreement and the agreement was registered under the law. Mr. Ramesh
failed to pat the specified amount to his wife Mr. Lali . Mrs. Lali wants to file a
suit against Mr. Ramesh and recover the promised amount. Referring to the
applicable provisions of the Contract Act, 1872, advise whether Mrs. Lali will
succeed. (3 Marks)
(ii) A shop keeper displayed a pair of dress in the show room and a price tag of
` 2,000 was attached to the dress. Mrs. Lovely, looked at the tag and rushed
to the cash counter. Then she asked the shop-keeper to received the payment
and pack up the dress. The shop-keeper refused to hand – over the dress to
Mrs. Lovely in consideration of the price stated in the price tag attached to the
dress. Mrs. Lovely seeks your advice whether she can sue the shop-keeper
for the above cause under the Indian Contract Act, 1872. (3 Marks)
4. (a) What is the Doctrine of “Caveat Emptor”? What are the exceptions to the Doctrine
of “Caveat Emptor”? (6 Marks)
(b) (i) Mr. A, Mr. B and Mr. C were partners in a partnership firm ABC & Co., which is
engaged in the business of trading of branded furniture. The name of the
partners was clearly written along with the firm name in front of the head office
of the firm as well as on letter-head of the firm. On 1st October, 2018, Mr. C
passed away. His name was neither removed from the list of partners as
stated in front of the head office nor from the letterheads of the firm. As per the
terms of partnership, the firm continued its operations with Mr. A and Mr. B as
partners. The accounts of the firm were settled and the amount due to the
legal heirs of Mr. C was also determined on 10th October, 2018. But the same
was not paid to the legal heirs of Mr. C. On 16th October, 2018, Mr. X, a
supplier supplied furniture worth ? 20,00,000 to M/s ABC & Co. M/s ABC &
Co. could not repay the amount due to heavy losses. Mr. X wants to recover
the amount not only from M/s ABC & Co., but also from the legal heirs of Mr.
C.
: 152 :
Analyse the above situation in terms of the provisions of the Indian Partnership
Act, 1932 and decide whether the legal heirs of Mr, C can also be held liable
for the dues towards Mr X. (3 Marks)
(ii) Mr. M, Mr. N and Mr. P were partners in a firm, which was dealing in
refrigerators. On 1M October, 2018, Mr. P retired from partnership, but failed
to give public notice of his retirement.
After his retirement, Mr. M, Mr. N and Mr. P visited a trade fair and enquired
about some refrigerators with latest techniques. Mr. X, who was exhibiting his
refrigerators with the new techniques was impressed with the interactions of
Mr. P and requested for the visiting card of the firm. The visiting card also
included the name of Mi. P as a partner even though he had already retired.
Mr. X supplied some refrigerators to the firm and could not recover his dues
from the firm. Now, Mr. X wants to recover the dues not only from the firm, but
also from Mr. P.
Analyse the above case in terms of the provisions of me Indian Partnership
Act, 1932 and decide whether Mr. P is liable in this situation. (3 Marks)
5. (a) Mr. G sold some goods to Mr. H for certain price by issue of an invoice, but
payment in respect of the same was not received on that day. The goods were
packed and lying in the godown of Mr. G. The goods were inspected by H's agent
and were found to be in order. Later on, the dues of the goods were settled in cash.
Just after receiving cash, Mr. G asked Mr. H that goods should be taken away from
his godown to enable him to store other goods purchased by him. After one day,
since Mr. H did not take delivery of the goods, Mr. G kept the goods out of the
godown in an open space. Due to rain, some goods were damaged.
Referring to the provisions of the Sale of Goods Act, 1930, analyse the above
situation and decide who will be held responsible for the above damage. Will your
answer be different, if the dues were not settled in cash and are still pending?
(6 Marks)
(b) There are cases where company law disregards the principle of corporate
personality or the principle that the company is a legal entity distinct from its
shareholders or members. Elucidate. (6 Marks)
6. (a) Explain the modes of revocation of an offer as per the Indian Contract Act, 1872.
(5 Marks)
(b) State any four grounds on which Court may dissolve a partnership firm in case any
partner files a suit for the same. (4 Marks)
(c) Mr. X had purchased some goods from M/s ABC Limited on credit. A credit period
of one month was allowed to Mr. X Before the due date. Mr. X went to the company
and wanted to repay the amount due from him. He found only Mr. Z there, who was
the factory supervisor of the company. Mr. Z told Mr. X that the accountant and the
cashier were on leave, he is in-charge of receiving money and he may pay the
amount to him. Mr. Z issued a money receipt under his signature. After two months
M/s ABC Limited issued a notice to Mr. X for non - payment of the dues within the
stipulated period. Mr. X informed the company that he had already cleared the dues
and he is no more responsible for the same. He also contended that Mr. Z is an
employee of the company to whom he had made the payment and being and
outsider, he trusted the words of Mr. Z as duty distribution is a job of the internal
management of the company.
Analyse the situation and decide whether Mr. X is free from his liability.(3 Marks)
: 153 :


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Chapter No. Topics Page No.

1. THE INDIAN CONTRACT ACT, 1872 1 - 51

2. SALE OF GOODS ACT, 1930 52 - 85

3. THE INDIAN PARTNERSHIP ACT, 1932 86 - 116

4. THE LIMITED LIABILITY PARTNERSHIP ACT, 2008 117 - 122

5. THE COMPANIES ACT, 2013 123 - 148

6. Questions paper - May 2018 149 - 150

7. Questions paper - Nov 2018 151 - 153

Downloaded From www.castudynotes.com

CHAPTER 1 - THE INDIAN CONTRACT ACT, 1872

Basis of Agreement Contract

DEFINITION CHARACTERISTICS TYPES LAPSE OF OFFER

Difference between offer & Invitation to offer

Case law: Harvey vs. Facie [1893]

6. Acceptance should be via prescribed mode of communication.

Accepted in prescribed mode Not accepted in prescribed mode

Valid Offeror does not object Offeror objects

Valid Notice by offeror to

Offeree accepts in Offeror does not

COMMUNICATION OF OFFER AND ACCEPTANCE AND REVOCATION OF

As against Offeror As against Offeree

When offeree puts the When the acceptance

3. Revocation of offer is valid before offeree puts the acceptance in course of

S. Basis Void Contract Voidable Contract

4. Illegal Agreement: It is a contract which the law forbids to be made.

Basis of difference Void agreement Illegal agreement

5. Unenforceable contract: W here a contract is good in substance but

• ESSENTIAL ELEMENTS OF A VALID CONTRACT

2. It may move from the promisee or any other person :

3. Consideration can be past, present or future:

4. Consideration need not be adequate:

5. It must be real and not illusory :

8. It can be negative or positive.

9. Consideration for an act which a person a legally bound to perform is not

• DOCTRINE OF PRIVITY OF CONTRACTS

(1) Beneficiaries in the case of trust:

(2) Written family settlements:

(3) Partition of Hindu Undivided Family:

(5) Acknowledgement of Debts:

(6) Covenants with land:

(7) Contracts made by the agent:

(2) Compensation paid for past voluntary services:

(3) Promise to pay debts barred by limitation:

(4) Creation of Agency:

(5) In case of completed gifts, no consideration is necessary.

2. Person of unsound mind :

Idiot Usually sound but occasionally unsound

Void If contract is entered during

Lucid Intervals Lunatic intervals Valid Void

3. Persons disqualified by law

4. Corporation and a company:

DIFFERENCE BETWEEN COERCION AND UNDUE INFLUENCE:

Indian Law Foreign Law Bilateral Mistake Unilateral

Excusable Excusable at mistake) mistake)

Valid Void Void Valid

• UNLAWFUL OBJECT AND UNLAWFUL CONSIDERATION

b) Trafficking in public offices :