UNIT-9: LEGAL ASPECTS OF

LAW OF CONTRACT

A contract is a written or expressed agreement between two parties to provide a product or

service. There are essentially six elements of a contract that make it a legal and binding
document. In order for a contract to be enforceable, it must contain:

a. An offer that specifically details exactly what will be provided

b. Acceptance, which is the agreement by the other party to the offer presented
c. Consideration, money or something of interest being exchanged between the parties
d. Capacity of the parties in terms of age and mental ability
e. The intent of both parties to carry out their promise
f. Legally enforceable terms and conditions, also called object of the contract

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In other words, a contract is enforceable when both parties agree to something, back the promise
up with money or something of value, both are in sound mind and intend to carry out their promise
and what they promise to do is within the law.

A contract is written and signed by the parties. However, there are several other types of contracts

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that are considered enforceable. There are even some that are not considered enforceable and serve
only as a way for a court to determine the obligation on the part of either party.

Express Contract
An express contract is the most common contract type. In this type of contract, all elements are
specifically stated. This can be written or done orally. Either way, offer, acceptance and
consideration must bind the parties together legally. And both parties must clearly understand
the terms and conditions each is agreeing to.
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An oral contract works the same way. In an oral contract, like negotiating the price of a new car, the
parties agree on a set price, a monthly payment schedule if applicable and any warranties or
guaranties included in the offer. Once acceptance is made and consideration is exchanged, the
contract for the vehicle is binding and enforceable. As long as both parties uphold their promise,
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the car cannot be returned at a later date, nor can the salesman request the car back from the new
owner.

Implied In-Fact Contract

Not every contract is as transparent as an expressed contract. An implied in-fact contract binds
parties together through a mutual agreement and intent, but there are no expressed terms of the
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agreement. The agreement holds mutual intention based on facts and

 circumstances and a reasonable assumption from the circumstances and relations between the parties. For an implied in-fact
contract to be enforceable, there are a few elements that must be present:
1. An unambiguous offer and acceptance
2. Mutuality of both parties to be bound to the contract

Consideration
The elements can be determined by the behaviors of the parties. For example, when a guest orders a steak at a restaurant, it is
assumed that the steak will be cooked and served to the guest's liking and the guest has every intention of paying for the meal.
Implied
In-Law Contract

An implied in-law contract, also known as a quasi-contract, works differently. In this type of contract, the elements are not
specifically written or expressed. In fact, this type of contract is used as a remedy in a situation when one party to the quasi-
agreement received unjust enrichment resulting from not paying for a product or service rendered. This sounds confusing but it
really boils down to this - if a product or service is rendered to a party without paying, it becomes inequitable for the rendering
party.

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Contract Act

The Indian Contract Act, 1872 defines the term “Contract” under its section 2 (h) as “An agreement enforceable by law”. In other
words, we can say that a contract is anything that is an agreement and enforceable by the law of the land.

Agreement
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This definition has two major elements in it i.e. – “agreement” and “enforceable by law”. So in order to understand a contract in
the light of The Indian Contract Act, 1872 we need to define and explain these two pivots in the definition of a contract.

The Indian Contract Act, 1872 defines what we mean by “Agreement”. In its section 2 (e), the Act defines the term agreement as
“every promise and every set of promises, forming the consideration for each other”. Now that we know how the Act defines the
term “agreement”, there may be some ambiguity in the definition of the term promise.
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Examples
1. Mohan and Rishabh decided to go for lunch on Sunday. Mohan did not come for lunch, and this resulted in the waste of
Rishabh’s time. Now Rishabh cannot compel Mohan for the damages as the decision to go for the lunch is not a contract
but a domestic agreement.
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2. Varun promises his younger brother Anuj to pay his debts, and the agreement was in writing as well as registered. This is
a valid agreement and can be enforceable.

Promise
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This ambiguity is removed by the Act itself in its section 2(b) which defines the term “promise” here as: “when the person to
whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. Proposal when accepted becomes a
promise”.

In other words, an agreement is an accepted promise, accepted by all the parties involved in the agreement or affected by it. This
definition thus introduces a flow chart or a sequence of steps that need to be triggered in order to establish or draft a contract. The
steps may be described as under:
The definition requires a person to whom a certain proposal is made.

The person (parties) in step one has to be in a position to fully understand all the aspects of a proposal. “Signifies his assent
thereto” – means that the person in point one accepts or agrees with the proposal after having fully understood it. Once the
“person” accepts the proposal, the status of the proposal changes to “accepted proposal”.

“Accepted proposal” becomes a promise. Note that the proposal is not a promise. For the proposal to become a promise, it has to
be accepted first.
Thus, in other words, an agreement is obtained from a proposal once the proposal, made by one or more of the participants
affected by the proposal, is accepted by all the parties addressed by the agreement. To sum up, we can represent the above
information below:
 Agreement = Offer + Acceptance.
Enforceable By Law

Thus we can say that for an agreement to change into a Contract as per the Act, it must give rise to or lead to legal obligations or
in other words must be within the scope of the law. Thus we can summarize it as Contract = Accepted Proposal (Agreement) +
Enforceable by law (defined within the law)

Difference between Agreement and Contract

1. Promises and commitments forming consideration for the parties to the same consent are known as an agreement. The
agreement, which is legally enforceable, is known as a contract.
2. The agreement is defined in section 2 (e) while a Contract is defined in section 2 (h) of the Indian Contract Act, 1872.
3. The major elements of an agreement are the offer and its acceptance by the same person to whom it is made, for adequate
consideration. Conversely, the major elements of an agreement are agreement and its enforceability by law.
4. Every agreement is not a contract, but every contract is an agreement.
5. An agreement needs not to be given in writing, but the contracts are normally written and registered.
6. The agreement does not legally bind any party for the performance. In the Contract, the people are legally bound to
perform their part.

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7. The scope of the agreement is wider than a contract because it covers all types of agreement as well as contract. On the
contrary, the scope of a contract is relatively narrower than an agreement because it covers only that agreement which have legal
enforceability.

Types of contracts

3. Bilateral - All parties exchange promises to perform.

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1. Legal validity Express - Parties state the terms of the agreement to which they will be found, usually in writing.
2. Implied - Terms of agreement can be reasonably inferred by acts of the parties, even if not expressed in writing or orally.

4. Unilateral - One party makes a promise in anticipation of some act. There is no reciprocal promise.
5. Executed - All parties have completed their promises.
6. Executory - Contract only partially performed or totally unperformed by the parties.
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LEGAL VALADITY
1. Valid and enforceable - All elements of legal and binding contract present.
2. Void - Contract without legal force or effect.
3. Voidable - Contact that can be annulled by either party after signing because it is legally defective or allows one party to
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rescind the contract.

4. Unenforceable - A contract that cannot be verified for legal enforcement or fails to meet certain
requirements. Intention to Contract
There is no provision in the Indian Contract Act requiring that an offer or its acceptance should be made with the intention of
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creating a legal relationship. But in English law it is a settled principle that “to create a contract there must be a common intention
of the parties to enter into legal obligations.”

Case law: Balfour v Balfour

The defendant and his wife were enjoying leave in England. When the defendant was due to return to Ceylon, where he was
employed, and his wife was advised, by reason of her health, to remain in England. The defendant agreed to send her an amount
of 30 pound a month for the probable expenses of maintenance. He did send the amount for some time, but afterwards differences
arose which resulted in their separation and the allowance fell into arrears. The wife’s action to recover the arrears was dismissed.
General Offers: Performance of the conditions of a proposal, or the acceptance of any consideration for a reciprocal promise
which may be offered with a proposal, is an acceptance of the proposal.

CASE: Carlil v Carbolic Smoke Ball Co

A company offered by advertisement to pay 100 pound to anyone “who contracts the increasing epidemic influenza, colds or any
disease caused by taking cold, after having used the ball according to printed directions.” It was added that 1000 pound is
deposited with the Alliance Bank showing our sincerity in the matter”. The plaintiff used the smoke balls according to the
directions but she nevertheless subsequently suffered from influenza. She was held entitled to recover the promised reward.

General offer of continuing nature

Where a general offer is of continuing nature, as it was, for example, in the Smoke Ball case, it will be open for acceptance to any
number of persons until it is retracted. But where an offer requires some information as to a missing thing, it is closed as soon as
 the first information comes in.

Offer and Invitation to Treat

An offer should be distinguished from an invitation to receive offers. When a man advertises that he has got a stock of books to
sell, or houses to let, there is no offer to be bound by any contract. “Such advertisements are offers to negotiate – offers to receive
offers – offers to chaffer”.

Essential Elements of a Contract

Essential Elements of a Contract as defined in Section 10 of the Indian Contract Act 1872
1. Agreement - Offer and Acceptance
2. Legal purpose
3. Lawful Consideration
4. Capacity to contract
5. Consent to contract
6. Lawful object
7. Certainty
8. Possibility of Performance
9. Not expressly declared void

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10. Legal formalities like Writing, Registration etc

Acceptance – Section 2(b)

Introduction of Acceptance – Sec. 2 (b)
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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Thus “acceptance” is the assent given to a proposal, and it has the effect of converting the proposal into promise.
This is another way of saying that an agreement is an accepted proposal. Every agreement, in its ultimate analysis, is the result of
a proposal from one side and its acceptance by the other.
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 There are three factors in Acceptance:
1. Communication to Offeror
2. Communication to Acceptor
3. When Communication is not
necessary

CASE: Brogden v Metropolitan Railway co.

B had been supplying coal to a railway company without any formal agreement. B suggested that a formal agreement should be
drawn up. The agents of both the parties met and drew up a draft agreement. It had some blanks when it was sent to B for his
approval. He filled up the blanks including the name of an arbitrator and then returned it to the company. The agent of the
company put the draft in his drawer and it remained there without final approval having been signified. B kept up his supply of
coals but on the new terms and also received payment on the new terms. A dispute having arisen B refused to be bound by the
agreement.

WHEN COMMUNICATION NOT NECESSARY

In certain cases, communication of acceptance is not necessary. The offeror may inform a particular mode of acceptance, then all

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that the acceptor as to do is to follow that particular mode.

Case law: Carlil v Carbolic Smoke Ball

BOWEN LJ observed as: “But there is this clear gloss to be made upon that doctrine, that as notification of acceptance is required

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for the benefit of the person who makes the offer, he may dispense with notice to himself… and there can be no doubt that where
the offeror expressly or impliedly intimates a particular mode of acceptance as sufficient to make the bargain binding it is only
necessary for the other person to follow the indicated method of acceptance; and if the person making the offer expressly or
impliedly intimates in his offer that it will be sufficient to act on the proposal without communicating acceptance of it to himself,
performance of the condition is a sufficient acceptance without notification”.

MODE OF COMMUNICATION
Acceptance should be made in prescribed manner. Acceptance has to be made in the manner prescribed or indicated by the
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offeror. An acceptance given in any other manner may not be effective. Particularly where the offeror clearly insists that the
acceptance shall be made in the prescribed manner. For example, A offered to buy flour from B requesting that acceptance should
be sent by the wagon which brought the offer. B sent his acceptance by post, thinking that this would reach the offeror more
speedily. But the letter arrived after the time of the wagon. A was held to be not bound by the acceptance.
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Absolute and Unqualified

Section 7: Acceptance Must Be Absolute
In order to convert a proposal into a promise, the acceptance must — (1) be absolute and unqualified, (2) be expressed in some
usual and reasonable manner, unless the proposal prescribes the manner in which it is to be accepted.
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EFFECT OF DEPARTURE FROM PRESCRIBED MANNER

A departure from that manner does not of itself invalidate the acceptance. A duty is cast on the offeror to reject such acceptance
within reasonable time. A minor departure from the prescribed mode of communication should not upset the fact of acceptance
provided that the communication is made in an equally expeditious way.

Where no manner prescribed: reasonable and usual manner

Where no mode of acceptance is prescribed, acceptance must “be expressed in some usual and reasonable manner”. As per Indian
Contract Law, post is a reasonable mode.

Counter proposals- An acceptance containing additions, limitations, or other modifications shall be rejection of the offer and shall
constitute a counter-offer. However, a reply to an offer which purports to be an acceptance but which contains additional or
different terms which do not materially alter the terms of the offer shall constitute an acceptance unless the offeror promptly
objects to the discrepancy; if he does not object, the terms of the contract shall be the terms of the offer with the modifications
contained in the acceptance.

If the proposal prescribes a manner in which it is to be accepted, and the acceptance is not made in such manner, the proposer
may, within a reasonable time after the acceptance is communicated to him, insist that his proposal shall be accepted in the
prescribed manner, and not otherwise; but if he fails to do so, he accepts the acceptance.
 PARTIAL ACCEPTANCE
Acceptance should be of the whole of the offer. The offeree cannot accept a part of its terms which are favorable to him and reject
the rest. Such an acceptance is another kind of counter proposal and does not bind the offeror.

INQUIRY INTO TERMS OF PROPOSAL

A mere inquiry into the terms of a proposal is not the same thing as a counter-proposal. On acceptance of the proposal, the
contract will be created on the basis of the terms and conditions of the original proposal including arbitration clause

ACCEPTANCE WITH CONDITION SUBSEQUENT

If an acceptance carries a condition subsequent, it may not have the effect of a counter-proposal. Thus, where an acceptance said:
“terms accepted, remit cash down Rs.25, 000 by February 5, otherwise acceptance subject to withdrawal, this was not a counter-
proposal, but an acceptance with a warning that if the money was not sent the contract would be deemed to have been broken.

ACCEPTANCE OF COUNTER PROPOSAL

Even “where the acceptance of a proposal is not absolute and unqualified the proposer may become bound, if, by his subsequent

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conduct, he indicates that he has accepted the qualifications set up”.
Hargopal v People’s Bank of Northern India-An application for shares was made conditional on an undertaking by the bank that
the applicant would be appointed a permanent director of the local branch. The shares were allotted to him without fulfilling the
condition. The applicant accepted the position as a shareholder by accepting dividends, filing a suit to recover it and by
pledging his shares.It was, therefore, held “that he could not content that the allotment was void on the ground of

Lapse of Offer
1. Notice of revocation
2. Lapse of Time
3. By failure to accept condition precedent
4. By death or insanity of offerer
5. Revocation of Acceptance
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non-fulfillment of the condition as he had by his conduct waived the conditions.
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Revocation of proposals and acceptances (Section-5)-A proposal may be revoked at any time before the communication of its
acceptance is complete as against the proposer, but not afterwards. An acceptance may be revoked at any time before the
communication of the acceptance is complete as against the acceptor, but not afterwards.
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NOTICE OF REVOCATION
Withdrawal before expiry of fixed period where an offeror gives the offeree an option to accept within a fixed period, he may
withdraw it even before the expiry of that period.

CASE LAW: Alfred Schonlank v. Muthunayna Chetti

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The defendant left an offer to sell a quantity of indigo at the plaintiff’s office allowing him eight days’ time to give his answer. On
the 4th day however the defendant revoked his proposal. The plaintiff accepted it on the 5th day. Holding the acceptance was
useless.

CASE LAW: Mount ford v Scott

Communication of Revocation should be from Offerer Himself. It is necessary that the communication of revocation should be
from the offeror or from his duly authorized agent. But it has been held in the case of Dickinson v. Dodds that it is not enough if
the offeree knows reliably that the offer has been withdrawn.

Revocation of General Offers-Where an offer of a general nature is published through newspapers, it can be withdrawn by the
same media and the revocation will be effective even if a particular person, subsequent to the withdrawal, happened to perform its
terms in ignorance of the withdrawal.

CASE LAW: Skarsm Ramanathan v NTC Ltd

Superseding proposals by Fresh Proposal Where before acceptance a proposal is renewed in some parts of it and not in its entirety
as proposed earlier and the letter purports it to supersede the earlier communication, such proposal is no longer available for
acceptance.

LAPSE OF TIME
An offer lapses on the expiry of the time, if any, fixed for acceptance. Where an offer says that it shall remain open for acceptance
 up to a certain date, it has to be accepted within that date. For example, where an offer was to last until the end of March and the
offeree sent a telegram accepting the offer on 28th March which was received by the offeror on 30th March, it was held that the
option was duly exercised.

FAILURE TO ACCEPT CONDITION PRECEDENT

Where the offer is subject to a condition precedent, it lapses if it is accepted without fulfilling the condition. Where a salt lake
was offered by way of lease on deposit of a sum of money within a specified period, and the intended lessee did not deposit the
amount for 3 long years, it was held that this entailed cancellation of the allotment.

DEATH OR INSANITY OF OFFEROR

An offer lapses on the death or insanity of the offeror, provided that the fact comes to the knowledge of the offeree before he
makes his acceptance. In the case of Dickinson v Dodds, it was held that an offer cannot be accepted after the death of the offeror.

SECTION 6: Revocation how made

A proposal is revoked —
1. By the communication of notice of revocation by the proposer to the other party;
2. By the lapse of the time prescribed in such proposal for its acceptance or, if no time is so prescribed, by the lapse of a
reasonable time, without communication of the acceptance;

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3. By the failure of the acceptor to fulfill a condition precedent to acceptance; or
4. By the death or insanity of the proposer, if the fact of his death or insanity comes to the knowledge of the acceptor
before acceptance.
5.
Revocation of Acceptance: An acceptor may cancel his acceptance by a speedier mode of communication which will reach earlier
than the acceptance itself. Section 5 is the relevant provision.

Consideration [SECTION 2 (d) and SECTION 25]

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Section 25 of the Indian Contract Act, 1872 starts with a declaration that “an agreement made without consideration is void”
Consideration is a price of the promise

Definitions
In the words of Pollock, “Consideration is the price for which the promise of the other is bought, and the promise thus given for
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value is enforceable.”

Section 2(d) of the Indian Contract Act defines consideration as: When, at the desire of the promisor, the promisee or any other
person has done or abstained from doing or does or abstains from doing, or promises to do or to abstain from doing, something,
such act or abstinence or promise is called a consideration for the promise.
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It means price for which the promise of the other is bought – a valuable considerations a price of the promise – some of value
received by the promisee as an inducement of the promise quid pro quo ( something in return) – may be of some benefit to the
plaintiff or some detriment to the defendant.
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Abdul Aziz Vs. Masum Ali

A promise to subscribe Rs.500 for re-building a mosque – not fulfilled – secretary of mosque committee filed a suit for
enforcement of promise – Held, the promise not enforceable as no consideration in the sense of benefit for the promisor – the
secretary of the committee suffered no detriment as nothing has been done to carry out the repairs – no contract.

Essential Elements of a Valid Consideration

1. It must move at the desire of promisor
2. It may move from promisee or any other person (Privity of consideration)
3. It must be real, not illusory
4. It need not be adequate
5. It may be past, present or future
6. It must not be illegal, immoral or opposed to public policy

PROMISSORY ESTOPPEL-The doctrine of promissory estoppels prevents one party from withdrawing a promise made to a
second party if the latter has reasonably relied on that promise.
Promissory estoppels require:
a. an unequivocal promise by words or conduct
b. evidence that there is a change in position of the promisee as a result of the promise (reliance but not necessarily to their
detriment)
c. inequity if the promisor were to go back on the promise
In general, estoppels is ‘a shield not a sword’ — it cannot be used as the basis of an action on its own. It also does not extinguish
rights.

ACTS DONE AT REQUEST:

An act done at the promisors desire furnishes a good consideration for his promise even though it is of no personal significance
or benefit to him.

PROMISES OF CHARITABLE NATURE

Doraswami Iyer v Arunachala Ayyar
Facts: The repair of a temple was in progress. As the work proceeded, more money was required and to raise this money
subscription were invited and a subscription list raised. The defendant put himself down on the list for Rs. 125 and it was to
recover this sum that the suit was filed. The plaint found the consideration for the promise as a reliance on the promise of the
subscriber that they have incurred liabilities in repairing the temple.

Judgment: The learned judge held that there was no evidence of any request by the subscriber to the plaintiff to do the temple
repairs. Since, the temple repairs were already in progress when the subscriptions were invited. The action was not induced by the
promise to subscribe but was rather independent of it. Hence, no recovery was allowed.

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UNILATERAL PROMISES
A unilateral promise is a promise from one side only and is intended to induce some action by the other party. The promisee is not
bound to act, for he gives no promise from his side. But if he carries out the act desired by the promisor, he can hold the promisor
to his promise. “An act done at the request of the offeror in response to his promise is consideration, and consideration in its
essence is nothing else but response to such a request.”

PROMISSORY ESTOPPEL AND GOVERNMENT AGENCIES

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In Pournami Oil Mills v State of Kerala, the Government was not permitted to go back on its earlier promise of wider exemption
from sales tax in pursuance of which certain industries were set up. A subsequent notification curtailing the exemption was held to
be applicable to industries established after the notification. A promise which is against public policy or in violation of a statutory
prohibition cannot be the foundation of estoppels.
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Privity of Contract and of Consideration

“PROMISEE OR ANY OTHER PERSON”

It means that as long as there is a consideration for a promise, it is immaterial who has furnished it. It may move from the
promisee, or, if the promisor has no objection, from any other person.
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Dutton v Poole
Facts: A person had a daughter to marry and in order to provide her a marriage portion, he intended to sell a wood of which he
was possessed at the time. His son (the defendant) promised that if “the father would forbear to sell at his request he would pay
the daughter £1000”. The father accordingly forbore but the defendant did not pay. The daughter and her husband sued the
defendant for the amount.
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Judgment: The court held that if a man should say, ‘Give me a horse, I will give your son £10’, the son may bring the action,
because the gift was upon the consideration of a profit to the son, and the father is obliged by natural affection to provide for his
children. There was such apparent consideration of affection from the father to his children, for whom nature obliges him to
provide, that the consideration and promise to the father may well extend to the children.

PRIVITY OF CONSIDERATION
According to Section 2(d), it is not necessary that consideration should be finished by the promisee. 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.

Chinnaya v Ramayya
An old lady, by deed of gift, made over certain landed property to the defendant, her daughter. By the terms of the deed, which
was registered, it was stipulated that an annuity of Rs.653 should be paid every year to the plaintiff, who was the sister of the old
woman. The defendant on the same day executed in plaintiff’s favour an agreement promising to give effect to the stipulation. The
annuity was however not paid and the plaintiff sued to recover it.

It was held that the deed of gift and the defendant’s promise to pay the annuity were executed simultaneously and, therefore, they
should be regarded as one transaction and there was sufficient consideration for that transaction.
EXECUTORY CONSIDERATION
“Such Act, Abstinence or Promise is called Consideration”

CONSIDERATION MUST BE OF SOME VALUE

Consideration as defined in the Act means some act, abstinence or promise on the part of the promisee or any other which has
been done at the desire of the promisor. E.g., A promises to give his new Rolls-Royce car to B, provided B will fetch it from the
garage. The act of fetching the car cannot by any stretch of imagination be called a consideration for the promise. Even though it
is the only act, the promisor desired the promisee to do. Such an act no doubt satisfies the words of the definition, but it does not
catch its spirit. It is for this reason that English common law insisted that “consideration must be of some value in the eyes of the
law.” It must be real and not illusory, whether adequate or not as long as the consideration is not unreal, it is sufficient if it be of
slight value only.

VALUE NEED NOT BE ADEQUATE (ADEQUACY OF CONSIDERATION)

It is not necessary that consideration should be adequate to the promise. The courts cannot assume the job of settling what should
be the appropriate consideration for a promise. It is up to the parties.

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INADEQUACY AS EVIDENCE OF IMPOSITION
The act in Explanation 2 to Section 25 states that “inadequacy of consideration may be taken into account by the court in
determining the question whether the consent of promisor was freely given. E.g.
A agrees to sell a horse worth Rs.1000 for Rs.10. A denies that his consent to the agreement was freely given. The inadequacy of
the consideration is a fact which the court should take into account in considering whether or not A’s consent was freely given.

FORBEARANCE TO SUE

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Forbearance to sue has always been regarded as valuable consideration. It means that the plaintiff has a certain right of action
against the defendant or any other person and on a promise by the defendant, he refrains from bring the action.

COMPROMISE GOOD IRRESPECTIVE OF MERITS

Compromise of a pending suit is a good consideration for the agreement of compromise. But the dispute should be bona fide. A
compromise is a good consideration “irrespective of merits of the claim of either side” and even where there is some doubt in the
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minds of the parties as to their respective rights.

Performance of Existing Duties

PERFORMANCE OF LEGAL OBLIGATIONS

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Consideration must be something more than what the promisee is already bound to do. Performance of a legal duty is no
consideration for a promise.

PERFORMANCE OF CONTRACTUAL OBLIGATIONS

A. Pre-existing Contract with Promisor: Compliance with legal obligation imposed by a contract with the promisor can
be no consideration for a promise.
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Promise to pay less than amount due: A promise to pay less than what is due under a contract cannot be regarded as a
consideration.

CONSIDERATION AND MOTIVE

Consideration should be distinguished from motive or a pious desire to fulfil an obligation. “Motive is not the same thing with
consideration.”

Thomas v Thomas
Facts: “A testator, on the death of his death, had verbally said in front of witnesses that he was desirous that his wife should enjoy
certain premises for her life. The executors, who were also the assignees, “in consideration of such desire and of the premises,”
agreed with the widow to convey the premises to her provided she would pay to the executors the sum of 1 pound yearly towards
the ground rent and keep the said house in repair.

Court Held: On the question of consideration for the agreement between the executors and the widow the court pointed out that
the motive for the agreement was, unquestionably, respect for the wishes of the testator. But that was no part of the legal
consideration for the agreement. Motive should not be confounded with consideration. The agreement was, however, held to be
binding as the undertaking to pay the ground rent was a sufficient consideration.

Exceptions to Consideration
 An agreement made without consideration is void unless –
(1) It is in writing and registered
(2) Or is a promise to compensate for something done
(3) Natural love and affection: A written and registered agreement based on natural love and affection between near relatives is enforceable
without consideration.
E.g., A family settlement between a man and his wife was made for providing maintenance to wife. This was held to be
enforceable because it was meant for deriving satisfaction and peace of mind from family harmony.

Past voluntary service: A promise to compensate wholly or in part, a person who has already voluntarily done something for the
promisor, is enforceable.

Time-barred debt: A promise to pay a time-barred debt is enforceable. The promise should be in writing. It should also be signed
by the promisor or by his agent generally or specially authorized in that behalf.

One of the most essential elements of a valid contract is the competence of the parties to make a contract. Section 11 of the Indian
Contract Act, 1872, defines the capacity to contract of a person to be dependent on three aspects; attaining the age of majority,
being of sound mind, and not disqualified from entering into a contract by any law that he is subject to. In this article, we will look

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at all aspects in a detailed manner.

Capacity to Contract

at all aspects in a detailed manner.

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One of the most essential elements of a valid contract is the competence of the parties to make a contract. Section 11 of the Indian
Contract Act, 1872, defines the capacity to contract of a person to be dependent on three aspects; attaining the age of majority,
being of sound mind, and not disqualified from entering into a contract by any law that he is subject to. In this article, we will look

According to Section 11, “Every person is competent to contract who is of the age of majority according to the law to which he is
subject, and who is of sound mind and is not disqualified from contracting by any law to which he is subject.”

The three main aspects:

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● Attaining the age of majority
● Being of sound mind
● Not disqualified from entering into a contract by any law that he is subject to

1] Attaining the Age of Majority

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According to the Indian Majority Act, 1875, the age of majority in India is defined as 18 years. For the purpose of entering into
a contract, even a day less than this age disqualifies the person from being a party to the contract. Any person, domiciled in
India, who has not attained the age of 18 years, is termed as a minor. Certain laws governing a minor’s agreement:

A Contract made with a Minor is Void

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Since any person less than 18 years of age does not have the capacity to contract, any agreement made with a minor is void
ab-initio (from the beginning).
Peter is 17 years and 6 months old. He needs some money to go for a vacation with his friends.

He approached a moneylender and borrows Rs 25,000. As security, he signs some papers mortgaging his laptop and motorcycle.
Six months later, when he attains the age of majority, he files a suit declaring that the mortgage executed by him when he was a
minor is void and should be canceled. The Court agrees and relieves Peter of all liability to repay the loan.

Also, if a minor enters into a contract, then he cannot ratify it even after he attains majority since the contract is void ab-initio.
And, a void agreement cannot be ratified.

A Minor can be a Beneficiary of a Contract

While a minor cannot enter a contract, he can be the beneficiary of one. Section 30 of the Indian Partnership Act, 1932, also
specifies that while a minor cannot become a partner in the partnership firm, the benefits of the firm can be extended to him.
Peter lends some money to his neighbor, John and asks him to mortgage his house as security. John agrees and the mortgage
deed is made favoring Peter’s 10-year-old son – Oliver. John fails to repay the loan and Peter, as the natural guardian of Oliver,
files a suit against John to recover his money. The Court holds the case since a minor an be a beneficiary of a contract.

A Minor is always given the Benefit of being a Minor

Even if a minor falsely represents himself as a major and takes a loan or enters into a contract, he can plead minority. The
 rule of estoppels cannot be applied against a minor. He can plea his minority in defense.

Contract by Guardian
Under certain circumstances, a guardian of a minor can enter into a valid contract on behalf of the minor. Such a contract, which
the guardian enters into, for the benefit of the minor, can also be enforced by the minor.

However, guardians cannot bind a minor by a contract for buying immovable property. But, a contract entered into by a
certified guardian of a minor, appointed by the Court, with an approval from the Court for the sale of a minor’s property
can be enforced

. Insolvency
A minor cannot be declared insolvent as he cannot avail debts. Also, if some dues are pending from the properties of the minor
and he is not personally liable for the same.

Joint contract by a Minor and an Adult

In case of a joint contract between an adult and a minor, executed by the guardian on behalf of the minor, the liability of the
contract falls on the adult.

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2] Person of Sound Mind
According to Section 12 of the Indian Contract Act, 1872, for the purpose of entering into a contract, a person is said to be of
sound mind if he is capable of understanding the contract and being able to assess its effects upon his interests. It is important
to note that a person, who is usually of an unsound mind, but occasionally of a sound mind, can enter a contract when he is of

3] Disqualified Persons
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sound mind. No person can enter a contract when he is of unsound mind, even if he is so temporarily. A contract made by a
person of an unsound mind is void.

Apart from minors and people with unsound minds, there are other people who cannot enter into a contract. i.e. do not have
the capacity to contract. The reasons for disqualification can include political status, legal status, etc. Some such persons
are foreign sovereigns and ambassadors, alien enemy, convicts, insolvents, etc.
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Disqualified Persons
Persons not eligible to enter into a contract: Apart from minors and persons of unsound mind, the following persons are not
eligible to enter into a contract in certain circumstances:
- Alien Enemies,
- Foreign Sovereigns,
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- Insolvents,
- Body Corporate,
- Convicts.

Agreements with Disqualified Persons

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1. Aliens: Alien means a person of a foreign country.

a. Alien friend: Contracts with alien friend (persons of a foreign country which is in peace with India) are valid subject
to some restrictions.

b. Alien enemy: Contracts with alien enemy (persons of a country which is in war with India) are void subject to following rules:
i. Contracts made during war period: During war period (i.e., after the war is declared), an alien enemy can neither
make a contract with an Indian, nor can sue in an Indian court, unless permitted by Central Government.
ii. Contracts made before war: Such contracts may be suspended (or dissolved if against public policy or it would
benefit the enemy country).

2. Foreign Sovereigns: Diplomatic staff may enter into contract and can sue. They enjoy some special privilege and
cannot be sued in Indian court unless they voluntarily submit to the court or when permitted by Central Government to be
sued.

3. Insolvents: Insolvent cannot enter into a contract. When a debtor is adjudged insolvent, his property is vested with the
official assignee, which only can then enter into contracts relating to the property of the insolvent.

4. Body Corporate: A Company or Body Corporate may enter into contract as permitted by its Memorandum of
Association & Articles of Association.
 5. Convicts: A convict undergoing imprisonment cannot enter into a contract unless permitted by Central Govt. He can
enter into a contract when he is lawfully at large, when he is pardoned or when his period of sentence expires. A contract already
entered with a person who undergoes imprisonment cannot be enforced until the conviction is completed, unless permission from
Central Government is obtained.

Free Consent

In the Indian Contract Act, the definition of Consent is given in Section 13, which states that “it is when two or more persons
agree upon the same thing and in the same sense”. So the two people must agree to something in the same sense as well. Let’s say
for example A agrees to sell his car to B. A owns three cars and wants to sell the Maruti. B thinks he is buying his Honda. Here A
and B have not agreed upon the same thing in the same sense. Hence there is no consent and subsequently no contract. Free
Consent has been defined in Section 14 of the Act. The section says that consent is considered free consent when it is not caused
or affected by the following,
⮚ Coercion

⮚ Undue Influence

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⮚ Fraud

⮚ Misrepresentation

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Mistake

Elements Vitiating Free Consent

The following are the essentials of Free Consent:

1] Coercion (Section 15): Coercion means using force to compel a person to enter into a contract. So force or threats are
used to obtain the consent of the party under coercion, i.e it is not free consent. Section 15 of the Act describes coercion as
⮚ committing or threatening to commit any act forbidden by the law in the IPC
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⮚ unlawfully detaining or threatening to detain any property with the intention of causing any person to enter into a
contract

For example, A threatens to hurt B if he does not sell his house to A for 5 lakh rupees. Here even if B sells the house to A, it will
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not be a valid contract since B’s consent was obtained by coercion. Now the effect of coercion is that it makes the contract
voidable. This means the contract is voidable at the option of the party whose consent was not free. So the aggravated party will
decide whether to perform the contract or to void the contract.
So in the above example, if B still wishes, the contract can go ahead. Also, if any monies have been paid or goods delivered
under coercion must be repaid or returned once the contract is void. And the burden of proof proving coercion will be on the
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party who wants to avoid the contract. So the aggravated party will have to prove the coercion, i.e. prove that his consent was not
freely given.

2] Undue Influence (Section 16)

Section 16 of the Act contains the definition of undue influence. It states that when the relations between the two parties are such
that one party is in a position to dominate the other party, and uses such influence to obtain an unfair advantage of the other party
it will be undue influence. The section also further describes how the person can abuse his authority in the following two ways,

⮚ When a person holds real or even apparent authority over the other person. Or if he is in a fiduciary relationship with the
other person
⮚ He makes a contract with a person whose mental capacity is affected by age, illness or distress. The unsoundness of
mind can be temporary or permanent

For example A sold his gold watch for only Rs 500/- to his teacher B after his teacher promised him good grades. Here the
consent of A (adult) is not freely given, he was under the influence of his teacher. Now undue influence to be evident the
dominant party must have the objective to take advantage of the other party. If influence is wielded to benefit the other party it
will not be undue influence. But if consent is not free due to undue influence, the contract becomes voidable at the option of the
aggravated party. And the burden of proof will be on the dominant party to prove the absence of influence.
3] Fraud (Section 17): Fraud means deceit by one of the parties, i.e. when one of the parties deliberately makes false
statements. So the misrepresentation is done with full knowledge that it is not true, or recklessly without checking for the
trueness, this is said to be fraudulent. It absolutely impairs free consent. According to Section 17, a fraud is when a party
convinces another to enter into an agreement by making statements that are
⮚ suggesting a fact that is not true, and he does not believe it to be true

⮚ active concealment of facts

⮚ a promise made without any intention of performing it

⮚ any other such act fitted to deceive

Example- A bought a horse from B. B claims the horse can be used on the farm. Turns out the horse are lame and A cannot use
him on his farm. Here B knowingly deceived A and this will amount to fraud.
One factor to consider is that the aggravated party should suffer from some actual loss due to the fraud. There is no fraud without
damages. Also, the false statement must be a fact, not an opinion. In the above example if B had said his horse is better than C’s

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this would be an opinion, not a fact. And it would not amount to fraud.

4] Misrepresentation (Section 18)

Misrepresentation is also when a party makes a representation which is false, inaccurate, incorrect etc. The difference here is the
misrepresentation is innocent, i.e. not intentional. The party making the statement believes it to be true. Misrepresentation can be
of three types

⮚
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A person makes a positive assertion believing it to be true

Any breach of duty gives the person committing it an advantage by misleading another. But the breach of duty is without
any intent to deceive
When one party causes the other party to make a mistake as to the subject matter of the contract. But this is done
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innocently and not intentionally.

5] Mistake
When one of the parties has given its consent to the contract under some kind of misunderstanding then the consent is said to be
have been given by mistake. If it wasn’t for the misunderstanding the party would not have entered into the agreement. Under
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contract law, a mistake can of two kinds: 1) Mistake of Law and 2) Mistake of Fact.

Mistake of Law
When the party has any misunderstanding with regards to the legal provisions, it is called Mistake of Law. Now, the party can be
confused regarding the law of the Homeland or law of a foreign land. If it is a mistake regarding the law of the homeland, the
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contract cannot be avoided. The party cannot take the plea of having no knowledge of laws of his homeland. But if it is a mistake
regarding the law of a foreign country, he can be excused.

Mistake of Fact
When the parties have any misunderstanding regarding the subject matter or terms of the contract, it is said to be a Mistake of fact.
The misunderstanding can be on the part of one party or both of them.

Bilateral Mistake – When both the parties are under any misunderstanding/mistake relating to a matter of fact essential to the
agreement, the agreement becomes void.

Unilateral Mistake – When the misunderstanding/mistake is on the part of one party to the contract, the agreement remains valid.
Only when the party is mistaken about the parties to agreement or nature of the transaction, the agreement becomes void.

Conclusion
Free Consent is absolutely essential to make an agreement a valid contract. The importance of free consent cannot be stressed
enough. Consent of the parties to the contract must be free and voluntarily. Consent to the contract has to be given without any
kind of pressure or delusions. It is important that the consent given by the parties is free as this can affect the validity of the
 contract. If the consent to the agreement was obtained or induced by coercion, undue influence, fraud, misrepresentation or
mistake, then it has the potential to make the agreement void.

Legality of Object

Legality of Object: Section 23 of the Indian Contract Act has specified certain considerations and objects as unlawful. The
consideration or objects of an agreement is lawful, unless-it is forbidden by law; is of such a nature that, if permitted, it would
defeat the provision of any law; or is fraudulent; or involves injury to the person or property of another; or the court regards it as
immoral or opposed to public policy.

In each of the above mentioned cases the consideration or object of an agreement is deemed to be unlawful. Every agreement in
which the object or consideration is unlawful is void.

Some examples

X promises to obtain for Y an employment in the public service, and Y promises to pay X Rs. 1000 for that. This agreement is
void as the consideration in this case is unlawful X agrees to let her daughter to hire to Y as a concubine. This agreement is void

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as it is immoral and as a result opposed to law.
The following agreements are considered to be against public policy:

1. Trade with the enemy:

2. An agreement between the citizens of two countries at war with each other is void and hence inoperative.
3.
4.

5.
6.
7.
8.
Agreement in interference with the course of justice:

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All agreements which interfere with the normal course of law and justice are deemed to be opposed to public policy and
hence are void.
Agreements which injure the public services are considered to be void.
Agreements infringing personal freedom
Agreements hindering parental duties.
Agreements hindering marital duties
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LEGALITY OF OBJECT AND CONSIDERATION

One of the essentials of a valid contract is that the consideration and the object should be lawful. Every agreement of
which the object or consideration is unlawful is void. Section 23 mentions the circumstances when the consideration or
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object of an agreement is not lawful.

Sec. 23The consideration or object of an agreement is unlawful unless. It is forbidden by law or 2.is of such nature that, if
permitted, it would defeat the provisions of law, or 3.is fraudulent4.involves or implies injury to the person or property of
another; or 5.the Court regards it as immoral or opposed to public policy.
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1. Forbidden by Law
When something is forbidden by law, an agreement to do that is unlawful. An agreement to do what has been prohibited
by the Indian Penal Code or by some other law cannot be enforced. A Contract to pay some money if a crime or a tort is
committed is not enforceable. If the law prohibits bigamy, a promise by a married man to marry another lady is unlawful.

Even if the promise says that a man would marry a woman after his wife’s death, such a promise is not enforceable
because such a promise tends to break up marriage, encourages immorality and often leads to commission of crimes.

If the agreement does not satisfy the clear and unequivocal requirements of a statute it is void. In Re Mahmoud and
Ispahani, (1921) during the war the sale of linseed oil without a license from the Food Controller had been forbidden.

The Plaintiff agreed to sell linseed oil to the defendant, on a false assurance from the defendant, that he had such a
license. Subsequently, when the oil was supplied the defendant refused to accept the same on the ground that he had such
a license. In an action against the defendant for damages for breach of contract it was held that he was not liable as there
was no valid contract between the parties.

Opposed to public policy

If the court regards an agreement as opposed to public policy, the agreement is void. Public Policy is not capable of any
precise definition. Public policy means the policy of the law at a stated time. An act which is injurious to the interest of
 the society is against public policy.

If an agreement is prejudicial to social or economic interest of the community, it will be against public policy to enforce
such an agreement. On the one hand a person’s right of contractual freedom should be maintained, on the other hand if
the contract is against public policy the law must not allow that to be enforced.

The following agreements have been held to be opposed to public policy Agreement to stifle prosecution Agreement of
maintenance and champerty trading agreement with an enemy Marriage brokage contract Agreement tending to injure the
public service.

i. Agreement to stifle prosecution

An agreement to stifle prosecution has been regarded as opposed to public policy. The purpose of criminal law is to
punish a guilty person and a compromise with a view to save a guilty person from liability would frustrate this object.

Some minor offences have been recognized as compoundable offences which permit of a compromise. Any
compromise excluding compoundable cases to frustrate an action against a criminal would be deemed to be unlawful.
By acceptance of some consideration to make a compromise in a criminal case, one is deemed to have accepted bribe. With regard

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to non compoundable offences, however, the position is clear that no court of law can allow a private party to take the
administration of law in its own hands and settle the question as to whether a particular offence has been committed or not, for itself
.If A promises B to drop a prosecution, which he has instituted against B for robbery, and B promises to restore the value of the
things taken, the agreement is void, as its object is unlawful.

ii. Agreement of maintenance and champerty

iii.

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Marriage brokage contract; Marriage brokage contracts means such contracts under which a person agrees to
procure a marriage between two persons on some consideration. Such agreements are opposed to public policy and are
void.

Public policy is that, suitable matrimonial unions should be made by a free and deliberate decision of the parties
themselves, and the same may not be possible if the marriage is arranged through intermediaries, who may procure
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marriages for the sake of themselves gaining some financial advantages. Such an agreement is void even though the
agreement is not to introduce any particular person of the opposite sex for marriage, but gives a choice of the number
of persons out of whom the selection is to be made.

Agreement tending to injure the public service.

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An agreement to buy, sell or procure a public office is against public policy. When there is a sale of public office, or
assignment of the salary of an office, it is unlawful. Such agreements tend to corrupt public life as they are likely to
interfere in the selection of properly qualified persons for an office, and are, therefore, void .

For example, A promises to obtain for B an employment in the public service, and B promises to pay 1,000 rupees to A.
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The agreement is void, as the consideration for it is unlawful. If a person procures the appointment as a Customs Officer
at a port with the help of another, and in return promises to share some benefits of the post with the later, the agreement is
void and unenforceable

PERFORMANCE AND DISCHARGE OF CONTRACT

Introduction
A contract places a legal obligation upon the contracting parties to perform their mutual promises, and it carries on until the
discharge or termination of the contract. The most natural and usual mode of discharging a contract is to perform it. A person who
performs a contract in accordance with its terms is discharged from any further obligations. As a rule, such performance entitles
him to receive the other party’s performance.

Exact and complete performance by both the parties puts an end to the contract. In expecting exact performance, the courts mean
that, performance must match contractual obligations. In requiring a contract to be complete, the law is merely saying that any
work undertaken must be carried out to the end of the obligations
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A contract should be performed at the time specified and at the place agreed upon. When this has been accomplished, the parties
are discharged automatically and the contract is discharged eventually.
 There are, however, many other ways in which a discharge may be brought about. For example, it may result from an excuse for
non-performance. In certain cases attempted performance may also operate as a substitute for actual performance, and can result
in complete discharge of the contract.

The term ‘Performance of contract‘means that both, the promisors, and the promisee have fulfilled their respective obligations,
which the contract placed upon them. For instance, A visits a stationery shop to buy a calculator. The shopkeeper delivers the
calculator and A pays the price.

The contract is said to have been discharged by mutual performance.

Section 27 of Indian contract Act says that

The parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed
with or excused under the provisions of this Act, or any other law.

Promises bind the representatives of the promisor in case of the death of the latter before performance, unless a contrary intention
appears in the contract.

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Thus, it is the primary duty of each contracting party to either perform or offer to perform its promise. For performance to be
effective, the courts expect it to be exact and complete, i.e., the same must match the contractual obligations.

However, where under the provisions of the Contract Act or any other law, the performance can be dispensed with or excused; a
party is absolved from such a responsibility.
Example

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A promise to deliver goods to B on a certain day on payment of Rs 1,000 A expires before the contracted date. A‘s representatives
are bound to deliver the goods to B, and B is bound to pay Rs 1,000 to A‘s representatives.

Types of Performance
Performance, as an action of the performing may be actual or attempted.

Actual Performance
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When a promisor to a contract has fulfilled his obligation in accordance with the terms of the contract, the promise is said to have
been actually performed. Actual performance gives a discharge to the contract and the liability of the promisor ceases to exist.

For example, A agrees to deliver10 bags of cement at B’s factory and B promises to pay the price on delivery. A delivers the
cement on the due date and B makes the payment. This is actual performance. Actual performance can further be subdivided into
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substantial performance, and partial Performance.

Substantial Performance
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 This is where the work agreed upon is almost finished. The court then orders that the money must be paid, but deducts the amount
needed to correct minor existing defect.

Substantial performance is applicable only if the contract is not an entire contract and is severable. The rationale behind creating
the doctrine of substantial performance is to avoid the possibility of one party evading his liabilities by claiming that the contract
has not been completely performed. However, what is deemed to be substantial performance is a question of fact to be decided in
both the case. It will largely depend on what remains undone and its value in comparison to the contract as a whole.

Partial Performance
This is where one of the parties has performed the contract, but not completely, and the other side has shown willingness to accept
the part performed. Partial performance may occur where there is shortfall on delivery of goods or where a service is not fully
carried out.

There is a thin line of difference between substantial and partial performance. The two following points would help in
distinguishing the two types of performance. Partial performance must be accepted by the other party. In other words, the party
who is at the receiving end of the partial performance has a genuine choice whether to accept or reject. Substantial performance,

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on the other hand, is legally enforceable against the other party.

Payment is made on a different basis from that for substantial performance. It is made on quantum meruit, which literally means
as much as is deserved.

provided that the contract is not an entire contract.

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So, for example, if half of the work has been completed, half of the negotiated money would be payable. In case of substantial
performance, the party that has performed can recover the amount appropriate to what has been done under the contract,

The price is thus, often payable in such circumstances, and the sum deducted represents the cost of repairing defective
workmanship.
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Attempted Performance
When the performance has become due, it is sometimes sufficient if the promisor offers to perform his obligation under the
contract. This offer is known as attempted performance or more commonly as tender. Thus, tender is an offer of performance,
which of course, complies with the terms of the contract. If goods are tendered by the seller but refused by the buyer, the seller is
discharged from further liability, given that the goods are in accordance with the contract as to quantity and quality, and he may
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sue the buyer for. Breach of contract if he so desires. The rationale being that when a person offers to perform, he is ready, willing
and capable to perform. Accordingly, a tender of performance may operate as a substitute for actual performance, and can affect a
complete discharge.

In this regard, Section 38 of Indian Contract Act says:

‘Where a promisor has made an offer of performance to the promisee, and the offer has not been accepted, the promisor is not
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responsible for non-performance, or does he thereby lose his rights under the contract. For example, A contracts to deliver to B,
100 tons of basmati rice at his warehouse, on 6 December 2015.

A takes the goods to B‘s place on the due date during business hours, but B, without assigning any good reason, refuses to take
the delivery. Here, A has performed what he was required to perform under the contract. It is a case of attempted performance
and A is not responsible for non-performance of B, nor does he thereby lose his rights under the contract.’

Discharge of Contract by Performance

When the parties to a contract perform their respective promises, the contract is said to have been performed. This is the normal
and natural mode of discharging a contract. When performance is proper and complete on either side, the parties become free from
any further liability.

If only one party performs what he promised, he alone gets a valid discharge, and he acquires a right of action against the other
for non-performance.

Discharge of Contract - Discharge of Contract – Discharge by performance

Performance may be.
Actual performance, or
 Offer to perform or tender.
1. Actual Performance: The contract is said to have been performed, if both the parties to the contract have
performed their respective promises.

2. Offer to Perform or Tender: Tender is an offer to perform the obligation under the contract. When one party offers to
perform its part of the promise and the other party refuses to accept the performance, the first party is discharged from its
obligation provided the offer or tender to perform the contract was valid.

Discharge of Contract by Mutual Agreement

Discharge of Contract - Discharge by Mutual Agreement: Discharge of Contract – Discharge by Mutual Agreement
If both the parties to the contract, expressly or impliedly, agree to terminate the contract, the contract is said to have been
discharged by mutual consent. Example: A buys a scooter from B with the condition that if it’s working is not found satisfactory,
he will return it within 10 days. A is not satisfied with the performance of the scooter and returns it to B within 10 days. The
contract is discharged by mutual consent.

Ways Mutual discharge of contract takes place

Mutual discharge of a contract may take place in any of the following ways:

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Novation: Novation means substitution of a new contract in place of the old one. It creates a new contract in exchange of the old contract.
It discharges the old i.e., the original contract. New contract here may be either between the same parties or between different parties, the
consideration being mutually the discharge of the old contract.

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1. Alteration: Alteration of a contract means change in one or more of the terms of a contract. Alteration is valid, if it is
done with the consent of all the parties to the contract. In such a case, the old contract is discharged.

2. Remission: Remission means the acceptance of less than what was contracted for.

3. Rescission: Rescission means cancellation of all or some of the terms of a contract. It may occur under various
circumstances such as
⮚ By mutual consent of the parties, or
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⮚ Where a party to a contract fails to perform his obligations, the other party can rescind the contract without prejudice to
his rights to receive compensation for breach of contract.
In case of a voidable contract, one of the parties has the option to rescind it.
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4. Waiver: Waiver means “Abandoning” the rights. When a party to the contract abandons or waives his rights, the
contract is discharged. Here, both the parties mutually agree that they shall no longer be bound by the contract. It amounts to
a release of parties from their contractual obligations.

5. Merger: Merger denotes coinciding and meeting of an inferior and superior right in one and the same person. In such
a case, inferior right available to a party under an agreement will vanish automatically.
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Remedies for Breach of Contract

When a promise or agreement is broken by any of the parties we call it a breach of contract. So when either of the parties does
not keep their end of the agreement or does not fulfill their obligation as per the terms of the contract, it is a breach of contract.
 Rescission of the Contract

When one party to the contract breaches the contract, the other party need not perform his part of the obligations. The aggrieved party may
rescind the contract. In such cases, the injured / aggrieved party can either rescind the contract of file a suit for damages. In general,
rescission of the contract is accompanied by a suit for damages.

Suit for damages

The aggrieved party of the contract is entitled for monetary compensation when the contract is breached. The objective of Suit for
damages is to put the aggrieved / injured party in a position in which he would have been had there been performance and not
breach. The aggrieved / injured party must be able to prove the actual loss or no damages will be awarded. Damages can be of
four kinds.
1. Ordinary or General Damages
2. Special Damages
3. Exemplary or Punitive Damages
4. Nominal
Damages Suit for Quantum

Merit

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The term "Quantum Merit" is derived from Latin which means "what one has earned". The injured party can file a suit upon
quantum merit and may claim payment in proportion to work done or goods supplied. Sections 65 to 70 deal with the provisions
relating to suit for Quantum Merit.

Suit for Specific Performance

⮚
Lack of standard for ascertaining the damages
Where compensation is not adequate relief

Substantial work done by the plaintiff.

Ja
The suit for Specific Performance is regulated by the Specific Relief Act, 1963. Specific Performance means the actual carrying
out of the contract as agreed. The Court may grant for specific performance where it is just and equitable to do. Specific
Performance may be granted under the following grounds.
⮚
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The Court cannot grant the remedy of specific performance in the following situations.
⮚ Where monetary compensation is an adequate relief

⮚ Where the Court cannot supervise the actual execution of the work
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⮚ Where the Contract is for personal services

⮚Where the Contract is not enforceable by either party against the other.
Suit for Injunctions
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Injunction is an order of the Court restraining a person from doing a particular act. Where the defendant is doing something which
he is promised not to do, then the injured party will get a right to file a suit for injunction.

Contract of Indemnity and Law of Guarantee

The term Indemnity literally means “Security against loss”. In a contract of indemnity one party – i.e. the indemnifier promise to
compensate the other party i.e. the indemnified against the loss suffered by the other.

The definition of a contract of indemnity as laid down in Section 124 – “A contract by which one party promises to save the other
from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a contract of
indemnity.

Nature of Contract of Indemnity –

A contract of indemnity may be express or implied depending upon the circumstances of the case, though Section 124 of the
Indian Contract Act does not seem to cover the case of implied indemnity.
The Indian Contract Act also deals with special cases of implied indemnity –

1. U/s 69 if a person who is interested in payment of money which another is bound by law to pay and therefore pays
it, he is entitled to be indemnified. For instance – if a tenant pays certain electricity bill to be paid by the owner, he is
entitled to be indemnified by the owner.
2. Section 145 provides for right of a surety to claim indemnity from the principal debtor for all sums which he has
rightfully paid towards the guarantee.

3. Section 222 provides for liability of the principal to indemnify the agent in respect of all amounts paid by him during the
lawful exercise of his authority.

Validity of Indemnity Agreement; A contract of indemnity is one of the species of contracts. The principles applicable to contracts
in general are also applicable to such contracts so much so that the rules such as free consent, legality of object, etc., are equally
applicable.

Where the consent to an agreement is caused by coercion, fraud, misrepresentation, the agreement is voidable at the option of the
party whose consent was so caused. As per the requirement of the Contract Act, the object of the agreement must be lawful. An
agreement, the object of which is opposed to the law or against the public policy, is either unlawful or void depending upon the
provision of the law to which it is subject
.
Right of the indemnity holder – (Section 125)
An indemnity holder (i.e. indemnified) acting within the scope of his authority is entitled to the following rights – Right to recover

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damages – he is entitled to recover all damages which he might have been compelled to pay in any suit in respect of any matter covered by
the contract.

1. Right to recover costs – He is entitled to recover all costs incidental to the institution and defending of the suit.

2.

3. Ja
Right to recover sums paid under compromise – he is entitled to recover all amounts which he had paid under the terms
of the compromise of such suit. However, the compensation must not be against the directions of the indemnifier. It must be
prudent and authorized by the indemnifier.

Right to sue for specific performance – he is entitled to sue for specific performance if he has incurred absolute liability
and the contract covers such liability. The promisee in a contract of indemnity, acting within the scope of his authority, is entitled
to recover from the promisor-
(1) All damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies
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(2) all costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the
orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if
the promisor authorized him to bring or defend the suit ;
(3) All sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not
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Right of Indemnifier –
Section 125 of the Act only lays down the rights of the indemnified and is quite silent of the rights of indemnifier as if the
indemnifier has no rights but only liability towards the indemnified. In the logical state of things if we read Section 141 which
deals with the rights of surety, we can easily conclude that the indemnifier’s right would also be same as that of surety.

Where one person has agreed to indemnify the other, he will, on making good the indemnity, be entitled to succeed to all the ways
Aa

and means by which the person indemnified might have protected himself against or reimbursed himself for the loss. [Simpson v
Thomson]

Principle of Subrogation is applicable because it is an essential part of law of indemnity and is based on equity and the Contract
Act contains no provision in contravention with [Maharaja Shri Jarvat Singhji v Secretary of State for India]
Contract of guarantee, surety, principal debtor and creditor:-

A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default.
The person who gives the guarantee is called the” surety”;

The person in respect of whose default the guarantee is given is called the” principal debtor “, and the person to whom the
guarantee is given is called the” creditor “. A guarantee may be either oral or written.
Consideration for guarantee.-Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient
consideration to the surety for giving the guarantee.

(a) B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee the payment of the
price of the goods. C promises to guarantee the payment in consideration of
As promise to deliver the goods. This is a sufficient consideration for Cs promise.
(b) A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a year, and promises that, if
he does so, C will pay for them in default of payment by B. A agrees to forbear as requested. This is a sufficient consideration for
Cs promise.
(c) A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default of B. The
agreement is void.
Surety’s liability:-The liability of the surety is coextensive with that of the principal debtor, unless it is otherwise provided by the
contract. A guarantee to B the payment of a bill of exchange by C, the acceptor. The bill is dishonored by C. A is liable not only
for the amount of the bill but also for any interest and charges which may have become due on it.

Continuing guarantee.-A guarantee which extends to a series of transactions is called a “continuing guarantee”.
(a) A, in consideration that B will employ C in collecting the rent of Bs zamindari, promises B to be responsible, to the amount
of 5,000 rupees, for the due collection and payment by C of those rents.
This is a continuing guarantee.
(b) A guarantees payment to B of the price of five sacks of flour to be delivered by B to C and to be paid for in a month. B
delivers five sacks to C. C pays for them. Afterwards B delivers four sacks to C, which C does riot pay for. The guarantee given
by A was not a continuing guarantee, and accordingly he is not liable for the price of the four sacks.
Revocation of continuing guarantee.-A continuing guarantee may at any time be revoked by the surety, as to future transactions,
by notice to the creditor.

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(a) A, in consideration of Bs discounting, at As request, bills of exchange for C, guarantees to B, for twelve months, the due
payment of all such bills to the extent of 5,000 rupees. B discounts bills for C to the extent of 2,000 rupees. Afterwards, at the end
of three months, A revokes the guarantee. This revocation discharges A from all liability to B for any subsequent discount. But
A is liable to B for the 2,000 rupees, on default of C.
Revocation of continuing guarantee by surety’s death.-The death of the surety operates, in the absence of any contract to the

Ja
contrary, as a revocation of a continuing guarantee, so far as regards future transactions.

Discharge of surety by variance in terms of contract.

Any variance, made without the surety’s consent, in the terms of the contract between the principal 1[debtor] and the creditor,
discharges the surety as to transactions subsequent to the variance.
(a) A becomes surety to C for Bs conduct as a manager in Cs bank. Afterwards B and C contract, without as consent, that Bs
salary shall be raised, and that he shall become liable for one-fourth of the losses on overdrafts. B allows a customer to overdraw,
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and the bank loses a sum of money. A is discharged from his surety ship by the variance made without his consent, and is not
liable to make good this loss.

(b) A guarantees C against the misconduct of B in an office to which B is appointed by C, and of which the duties are
defined by an
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By a subsequent Act, the nature of the office is materially altered. Afterwards, B misconducts himself. A is discharged by the
change from future liability under his guarantee, though the misconduct of B is in respect, of a duty not affected by the later Act.

(c) C contracts to lend B 5,000 rupees on the 1st March. A guarantees repayment. C pays the 5,000 rupees to B on the 1st
January. A is discharged from his liability, as the contract has been varied, inasmuch as C might sue B for the money before the
Aa

1st of March.

Discharge of surety by release or discharge of principal debtor:-

The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released or
by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor. (a) A contracts with
B to grow a crop of indigo an As land and to deliver it to B at a fixed rate, and C guarantees As performance of this contract. B
diverts a stream of water which is necessary for irrigation of As land and thereby prevents him from raising the indigo. C is no
longer liable on his guarantee.

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

Surety not discharged when agreement made with third person to give time to principal debtor. Where a contract to give time to
the principal debtor is made by the creditor with a third person, and not with the principal debtor, the surety is not discharged.

(a) C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B, contracts with M to give time to
B. A is not discharged.
Release of one co-surety does not discharge others.-
Where there are co-sureties, a release by the creditor of one of them does not discharge the others; neither does it free the surety so
released from his responsibility to the other sureties. Discharge of surety by creditors act or omission impairing surety’s eventual
remedy.

Guarantee obtained by misrepresentation invalid.

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

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

Co-sureties liable to contribute equally

Where two or more persons are CO-sureties for the same debt or duty, either jointly or severally, and whether under the same or
different contracts, and whether with or without the knowledge of each other, the co-sureties, in the absence of any contract to the
contrary, are liable, as between themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid
by the principal debtor1*.

(a) A, B and C are sureties to D for the sum of 3,000 rupees lent to E. E makes default in payment. A, la and C are liable,

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as between themselves, to pay 1,000 rupees each

(b) A, B and C are sureties to D for the sum of 1,000 rupees lent to E, and there is a contract between A, B and C that A
is to be responsible to the extent of one-quarter, B to the extent of one-quarter, and C to the extent of one-half. E makes default
in payment. As between the sureties, A is liable to pay 250 rupees, B 250 rupees, and C 500 rupees.

Liability of co-sureties bound in different sums.-

Ja
Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit.

(a)A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in the penalty of 10,000
rupees, B in that of 20,000 rupees, C in that of 40,000 rupees, conditioned for Ds duly accounting to E. D makes default to the
extent of 30,000 rupees. A, B and C are liable to pay 10,000 rupees
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(b) A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in the penalty of
10,000 rupees, B in that of 20,000 rupees, C in that of 40,000 rupees, conditioned for Ds duly accounting to E. D makes
default to the extent of 70,000 rupees. A, B and C have to pay each the full penalty of his bond
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Difference between Indemnity and Guarantee:-

1. In a contract of indemnity there are two parties i.e. indemnifier and indemnified. A contract of guarantee involves three
parties i.e. creditor, principal debtor and surety.
2. An indemnity is for reimbursement of a loss, while a guarantee is for security of the creditor.
3. In a contract of indemnity the liability of the indemnifier is primary and arises when the contingent event occurs. In case
of contract of guarantee the liability of surety is secondary and arises when the principal debtor defaults.
Aa

4. The indemnifier after performing his part of the promise has no rights against the third party and he can sue the third
party only if there is an assignment in his favor. Whereas in a contract of guarantee, the surety steps into the shoes of the
creditor on discharge of his liability, and may sue the principal debtor.

LAW OF AGENCY
Agent: The Indian Contract Act, 1872 defines an ‘Agent’ in Section 182 as a person employed to do any act for another or to
represent another in dealing with third persons.

Principal: According to Section 182, the person for whom such act is done, or who is so represented, is called the “principal”.
Therefore, the person who has delegated his authority will be the principal.
EXAMPLES: 1.A, a businessman, delegates B to buy some goods on his behalf. Here, A is the principal and B is the agent, and
the person from whom the goods are bought is the ‘Third Person’.
2. Joe appoints Mary to deal with his bank transactions. In this case, Joe is the Principal, Mary is the Agent and the
Bank is the Third Party.

Who can appoint an Agent?

According to Section 183, any person who has attained the age of majority and has a sound mind can appoint an agent. In other
words, any person capable of contracting can legally appoint an agent. Minors and persons of unsound mind cannot appoint an
agent.
Who may be an Agent?: In the same fashion, according to Section 184, the person who has attained the age of majority and has a
sound mind can become an agent. A sound mind and a mature age is a necessity because an agent has to be answerable to the
Principal.

Creation of Agency
An agency can be created by:
Direct (express) appointment– The standard form of creating an agency is by direct appointment. When a person, in writing or
speech appoints another person as his agent, an agency is created between the two.
Implication– When an agent is not directly appointed but his appointment can be inferred from the circumstances, an agency by
implication is created.
Necessity– In a situation of necessity, one person can act on behalf of another to save the person from any loss or damage, without
expressly being appointed as an agent. This creates an agency out of necessity.
Estoppels– An agency can also be created by estoppels. In a situation where one person behaves in such a manner in front of a
third person, as to make someone believe he is an authorized agent on behalf of someone, an agency by estoppels is created.
Ratification– When an act of a person, who acted as another person’s agent (on his behalf) without his knowledge is later ratified
by that person, this creates an agency by ratification between the two.

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Types of Agents
1. Special Agent- Agent appointed to do a singular specific act.
2. General Agent- Agent appointed to do all acts relating to a specific job.
3. Sub-Agent-An agent appointed by an agent.
4. Co-Agent- Agents together appointed to do an act jointly.

Ja
5. Factor- An agent who is remunerated by a commission (one who looks like the apparent owner of the things concerned)
6. Broker- An agent whose job is to create a contractual relationship between two parties.
7. Auctioneer- An agent who acts a seller for the Principal in an auction.
8. Commission Agent- An appointed to buy and sell goods (make the best purchase) for his Principal
9. Del Credere- An agent who acts as a salesperson, broker and guarantor for the Principal. He guarantees the credit

10.
extended to the buyer.

Authority of an Agent: Authority of an agent can be both express and implied.

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Express authority: According to Section 187, the authority is said to be express when it is given by words spoken or written.

Implied authority: According to Section 187, authority is said to be implied when it is to be inferred from the facts and
circumstances of the case. In carrying out the work of the Principal, the agent can take any legal action. That is, the agent can do
any lawful thing necessary to carry out the work of the Principal.
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Implied authority is of four main types

1. Incidental authority- doing something that is incidental to the due performance of express authority
2. Usual authority- doing that which is usually done by persons occupying the same position
3. Customary authority- doing something according to the pre-established customs of a place where the agent acts
4. Circumstantial authority- doing something according to the circumstances of the case
Aa

Case
Chairman L.I.C v. Rajiv Kumar
In this case, as per the salary saving scheme of L.I.C, the employer was supposed to deduct the premium from the employee’s
salary and deposit it with L.I.C. Upon the death of the employee, it was found by his heirs that the employer has defaulted in
doing so, causing the policy to lapse. A clause in the acceptance letter was referred to, in which the employer had said that he
would act as the agent of the employee and not as that of L.I.C. It was held that the employer was acting as the agent of the
company, thereby making the company (L.I.C) responsible as a Principal due to the fault of the Agent (the employer).
Sub-Agent: An agent may sometimes delegate the duty that has been delegated to him by the Principal to somebody else. Section
191 of the Indian Contract Act, 1872 defines a sub-agent to be a person employed by and acting under the control of the original
agent in the business of the agency.
Difference between sub-agent and substituted agent
The difference between sub-agent and the substituted agent is very fundamental. When a person, in the capacity of an agent, is
asked to name someone for a certain task, the person who is named does not become a sub-agent to the Principal, but a substituted
agent.

Illustration
Sarah asks her solicitor to appoint an auctioneer to sell her antique merchandise. Her solicitor appoints Naaz as an auctioneer. In
this case, Naaz is not a sub-agent but is, in fact, a substituted agent for this sale.
Agency by Ratification
A principal may subsequently ratify an act done by a person who acted on his behalf without his permission or knowledge. If
the act is ratified, a relationship of the agency will come into existence and it will be as if he had previously authorized the
person to act his agent. Ratification may be express (by speech or writing) or implied (by act or conduct).
Illustration: Steve bought apples on behalf of Mark, without his permission or knowledge. Mark later sold those apples to another
person. This act of mark impliedly ratifies the purchase made by Steve.

Ratification is not allowed in the following cases

1. When the person’s knowledge of the facts of the case is defective. That is, he only half knows things that he is ratifying
to.

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2. An act done on behalf of another person who would have the effect of injuring or harming the person or violating any
of his rights if the act was done with his authority.

Termination of Agency
An agency can be terminated or is terminated in 5 different ways:
1. When the agent’s authority is revoked by the Principal
2. When the agent renounces the business of the agency
3. When the business of the agency is completed

Ja
4. When either of the parties dies or becomes mentally disabled
5. When the Principal is adjudicated an insolvent

Revocation of Agent’s authority

There are certain rules regarding the revocation of an agent’s authority.
1. It can be revoked any time before the authority has been exercised.
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2. If according to the terms of the contract between the two, the agency has to continue upto a certain time, any prior
revocation by the Principal shall be compensated for, to the agent.
3. The termination does not take effect before it has been communicated to the agent.
4. Termination of the authority of an agent terminates the authority of all the sub-agents under him.
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Agent’s duties to Principal

An agent has 6 duties towards his Principal:
1. He has to conduct the business of the Principal according to the directions of the Principal.
2. An agent is bound to conduct the business he is supposed to conduct with as much skill as a person on his position
ordinarily holds.
Aa

3. An agent is supposed to show the relevant accounts to the Principal as and when the Principal demands.
4. An agent has the duty to communicate any difficulty whatsoever he may come across while doing the Principal’s
business. He is supposed to perform due diligence in this regard.
5. If any material fact has been concealed or the business is not carried out in the manner that the Principal directed, the
Principal can repudiate the contract between them.
6. If the agent carries out the business in the manner he wanted to perform it, rather than on the directions of the Principal,
the Principal may claim from the agent any benefit he may have achieved through doing so.

Illustration: Hala directs her agent Saima to buy a certain house for her. Saima does not buy the house, and tells Hala that it cannot
be bought due to certain reasons, but ends up buying the house herself. In this case, Hala has the right to claim the house from
Saima at the price which Saima bought it for herself.

Principal’s duties to Agent

The Principal has 4 duties towards the Agent:
1. The Principal is bound to indemnify the agent against any lawful acts done by him in the exercise of his authority as an
agent.
2. The Principal is bound to indemnify the agent against any act done by him in good faith, even if it ended up violating the
rights of third parties.
3. The Principal is not liable to the agent if the act that is delegated is criminal in nature. The agent will also in no
circumstances be indemnified against criminal acts.
 4. The Principal must make compensation to his agent if he causes any injury to him because of his own competence or lack
of skill.

Liability of Principal for Agent’s Fraud or Misrepresentation

According to Section 238, The Principal is liable for any fraud or misrepresentation made by his agent during the course of his
business, as if the fraud or misrepresentation was done by the Principal himself.

Rights of an Agent
An agent has the following 5 rights:
1. Right of retainer– An agent has the right to retain any remuneration or expenses incurred by him while conducting the
Principal’s business.
2. Right to remuneration– An agent, when he has wholly carried out the business of the agency has the right to be
remunerated of any expenses suffered by him while conducting the business.
3. Right of Lien on Principal’s property- The agent has the right to hold (keep with himself) any movable or immovable
property of the Principal until his due remuneration is paid to him by the Principal.
4. Right to be Indemnified– The agent has the right to be indemnified against all the lawful acts done by him during the
course of conducting the Principal’s business.

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5. Right to Compensation– the Agent has the right to be compensated for any injury or loss suffered by him due to the
lack of skill and competency of the Principal.

Conclusion
Contracts establishing a relationship of the agency are very common in business law. These can be express or implied. An agency

credere agents, etc.

Ja
is created when a person delegates his authority to another person, that is, appoints them to do some specific job or a number of
them in specified areas of work. Establishment of a Principal-Agent relationship confers rights and duties upon both the parties.
There are various examples of such a relationship: Insurance agency, advertising agency, travel agency, factors, brokers, del

MERCANTILE AGENTS
“Mercantile Agent today plays a vital role in the transfer of goods from the producer to the ultimate consumer”.
There are a number of persons who help in taking the goods from producers to consumers. A producer may not be in a position to
reach a consumer so he needs the help of various persons. This transfer process is highly organized and a formal one, with the
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goods passing from the manufacturer to the wholesaler and onto the retailer and then finally to the ultimate consumer.

It is important to note that this sequence of operations must be carefully followed in order to ensure quick, safe and timely supply
of goods to the consumers. Thus in order to study the organization of Home Trade, we must highlight the Middlemen who
perform a vital role in moving the goods from their place of manufacture to their place of consumption.
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Meaning; A mercantile agent is a person who is appointed by those in business to act on their behalf or to represent them in
dealing with other persons. The person on whose behalf he acts as an agent is known as the ‘Principal’.

A mercantile agent possesses the following characteristics:

(a) He has the authority to buy and sell goods on behalf of his principal or to consign them for the purpose of sale;
Aa

(b) He does not do business for himself, but he only represents his principal in all business dealings;
(c) He is a link between the principal and the third parties in so far as the business transactions are concerned;
(d) He is a business intermediary between the manufacturer and the ultimate consumer who helps in the transfer of goods
without actually acquiring the ownership of the same;
(e) He is entitled to a commission from his principal, as a monetary consideration for his services.

Importance of Appointing a Mercantile Agent:

With the rapid development in the field of business activities, the business of today is not confined to a village or a town or a state.
It is fast expanding and reaching far and wide, even to the remotest corners of the globe. Today, a businessman of one country can
easily develop trade links with a businessman in another country.

Such a person today is known as a Mercantile or Commercial Agent and has become indispensable for modern business. Thus we
see that Mercantile Agent today plays a vital role in the transfer of goods from the producer to the ultimate consumer.

Duties of an Agent:
(i) Performance of duties: An agent is bound by his agreement with his principal, to perform all the duties entrusted to him
by the latter, to the best of his capability.

(ii) Maintenance of skill, care and diligence: The agent should act with reasonable skill, care and diligence while
discharging his duties. He is expected to execute his work on behalf of his principal with the same efficiency with which he
performs his own work.
(iii) Render proper accounts: The agent is expected to render true, correct and proper statement of accounts to his
principal. He should not mix up the accounts of the agency with personal accounts and should intimate the principal from time
to time on the financial position of the agency.
(iv) Return money received: Since the agent is the trustee of the wealth of the agency, he is bound to return all sums of
money earned from the business to his principal.
(v) Delegation of authority: The agent cannot delegate his authority to others without the prior consent of the principal. If
the principal agrees, then an agent may appoint a sub-agent to help him and the sub-agent so appointed would be liable to the
agent and not the principal.

Rights of an Agent:
(i) Right to receive remuneration on the completion of the agency function.
(ii) Right to meet necessary expenditure and get it reimbursed from the principal.
(iii) Right to hold agency or property.
(iv) Right of lien on goods for payment of his remuneration.
(v) Right to get losses indemnified by the principal.
(vi) Right to detain goods in transit.

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Kinds of Mercantile Agents:
Mercantile agents may be classified:
(a) On the basis of rights, and
(b) On the basis of
functions.

On the basis of rights:

(i)
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General Mercantile Agents, i.e. an agent who has full authority to perform all functions relating to the business on behalf
of his principal. All such acts shall be binding on the principal. Examples of general mercantile agents are factors, commission
agents, branch managers, etc.

(ii) Special/Particular Mercantile Agent, i.e., an agent appointed to perform a special or a particular job for his principal.
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As soon as the particular work is done, he ceases to be an agent.

On the basis of functions:

(A) Factor:
In the words of Storey, “A factor has been defined as an agent employed to sell goods or merchandise consigned or delivered to
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him by his principal for compensation.” Thus a factor is a general agent who sells the goods delivered to him in his own name on
a commission basis.
He has the following powers:
(a) To sell goods in his own name;
(b) To sell goods on credit at a place and at such time which he thinks best;
(c) To receive payment for the goods;
Aa

(d) To maintain a lien on goods for charges due to him.

(B) Commission Agent:

A commission agent is one who acts on behalf of his principal in buying and selling of goods in return for a commission. He
makes purchases and sells in his own name, but does not bear the trade risks. He has expert knowledge about the goods in which
he is dealing and also knows the market trends in the particular commodity.

A commission agent performs the following duties:

(a) To buy goods at the most reasonable rates and to sell the same at maximum profit;
(b) To obtain orders from buyers and arrange for the goods from suppliers in his own name;
(c) To arrange for packing, transport and delivery of goods;
(d) To extend credit and collect payments;
(e) To claim from the principal his commission and incidental expenses.

(C) Del Credere Agent: A Del credere agent guarantees his principal for the payment for all the goods he sells irrespective
of the payment received by him or not and for his additional risk which he bears, he is entitled to an additional commission over
and above his normal commission. The extra commission paid for such a guarantee is called “del credere commission.” Thus
the principal of a Del credere agent is guaranteed the payment of the sale proceeds of the goods in full.
(D) Broker: In the words of Storey, a broker has been defined as, “an agent employed to make bargains and contracts in
matters of trade, commerce or navigation, between two parties for compensation, commonly called brokerage.” He is a person
whose main job is to arrange a buyer for a seller and vice versa, that is to say, the work of a broker is finished the moment a deal
materializes between an intending buyer and a protective seller. Usually, a broker does not take possession of title to goods, but
only negotiates for their use.

His chief characteristics are:

(a) He has only to establish a deal in context of purchase and sale by arranging a buyer for an intending seller and vice versa;
(b) He neither takes delivery or possession of goods which he is selling;
(c) He re-pares the BOUGHT NOTE and SOLD NOTE when a deal is complete and sends them to the buyer and
seller respectively.
(d) He usually operates in the market for manufactured goods, real estate dealings, shares, securities and other types of
investment dealings;
(e) He usually specializes in a particular field like stock brokers, ship brokers, insurance brokers etc.;
(f) He is entitled to a commission for his services, which is known as brokerage;
(g) He may work for one of the several principals.

(E) Auctioneers:

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An auctioneer is a special mercantile agent who sells the goods of his principal by auction. He gets the possession of the goods
and gives prior publicity to the time and place of auction through daily newspapers, pamphlets and catalogues.
The goods to be sold by auction are displayed at the place of auction for the benefit of the intending buyers. The seller usually
quotes the minimum price from where the auctioneer starts his sale. The lowest price is known as “UPSET PRICE”.

Ja
Auction sale may be “WITH RESERVE” and “WITHOUT RESERVE”. In case of auction “with reserve”, no sale can take place
below the minimum price fixed by the seller which is known as “Reserve Price”. In case of auction “without reserve”, the
auctioneer is bound to sell the product to the highest bidder.

The price for which the bid is accepted is called ‘Knocked down price”, since the acceptance of a bid by auctioneer is indicated by
striking a hammer on the desk by the latter. After the highest bid is accepted, the auctioneer becomes the agent for both seller and
buyer. For his services, the auctioneer is entitled to a commission, which is a certain percentage of the sale proceeds, usually fixed
between him and the seller, prior to the auction.
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(A) Underwriters: Underwriters are persons who guarantee a company that in case the public does not subscribe to the
entire shares offered by it, they shall subscribe and pay for the balance of shares specified in the underwriting agreement.
Thus underwriters remove the fear of non-subscription of shares of a company by the general public since they undertake to buy
the shares which the public does not buy. The underwriters are entitled to an underwriting commission, which is not to exceed 5%
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in case of shares and in case of debentures it is 2.5% (the maximum rates fixed by the Indian Companies Act, 1956)

(B) Forwarding Agents: Such agents dispatch goods to foreign countries on behalf of their principals and play an important
part in the international trade transactions. They take possession of goods in the home country and then arrange for its shipping
and insurance before dispatching them abroad.
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(C) Clearing Agents: They assist their principals in importing goods from abroad. They take delivery of goods when they
arrive at the port of destination and after paying the import and custom duties along with port dues, arranged for their
transportations to their principal’s warehouses.

(D) Warehouse: A warehouse keeper is an agent who keeps the goods of his principal in storage in his godown, in return for
storage charges, to be delivered to the person directed by the principal. He can exercise his right of lien on goods in his
possession in case his charges are unpaid by the principal.

UNIT-II
SALE OF GOODS ACT, 1930
The Sale of Goods Act, 1930 governs the contracts relating to sale of goods. It applies to the whole of India except the State of
Jammu & Kashmir. The contacts for sale of goods are subject to the general principles of the law relating to contracts i.e. the
Indian Contact Act. A contract for sale of goods has, however, certain peculiar features such as, transfer of ownership of the
goods, delivery of goods rights and duties of the buyer and seller, remedies for breach of contract, conditions and warranties
implied under a contract for sale of goods, etc. These peculiarities are the subject matter of the provisions of the Sale of Goods
Act, 1930.
FORMATION OF CONTRACT OF SALE
CONTRACT OF SALE OF GOODS; A contract of goods is a contract whereby the seller transfers or agrees to transfer the
property to goods to the buyer for a price. There may be a contract of sale between one part-owner and another [Sec. 4(1)]. A
contract of sale may be absolute or conditional [Sec 4(2)].
The term ‘contract of sale’ is a generic term and includes both a sale and an agreement to sell.

Sale and agreement to sell: when under a contract of sale, the property in the goods is transferred from the seller to the buyer, the
contract is called a ‘sale’, but where the transfer of the property in the goods is to take place at a future time or subject to some
conditions thereafter to be fulfilled, the contract is called an ‘agreement to sell’ [Sec. 4(3)]. An agreement to sell becomes a sale
when time elapses or the conditions, subject to which the property in the goods is to be transferred, are fulfilled [Sec. 4(4)].

ESSENTIAL ELEMENTS OF A CONTRACT OF SALE

Two parties: there must be 2 distinct parties i.e. a buyer and a seller, to affect a contract of sale and they must be competent to
contract. ‘Buyer’ means a person who buys or agrees to buy goods [Sec. 2(1)]. ‘Seller’ means a person who sells or agrees to
sell goods [Sec. (13)].

Goods: there must be some goods the property in which is or is to be transferred from the seller to the buyer. The goods which
form the subject-matter of the contract of sale must be movable. Transfer of immovable property is not regulated by the Sale of

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Goods Act.

Price: Price is an essential ingredient for all transactions of sale and in the absence of the price or the consideration, the transfer is
not regarded as a sale. The transfer by way of sale must be in exchange for a price. It has been held that price normally means
money. The price can be paid fully in cash or it can be partly paid and partly promised to be paid in future. The price can be fixed

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by the agreement between the parties before the conveyance of the property
Transfer of general property: There must be a transfer of general property as distinguishes from special property in goods from the
seller to the buyer. For e.g. if A owns certain goods he has general property in the goods. If he pledges them with B, B has special
property in the goods.

Essential elements of a valid contract: All essential elements of a valid contract must be present in the contract of sale.

EFFECT OF DESTRUCTION OF GOODS:

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Goods perishing before making of contract (Sec 7): A contract for the sale of specific goods is void if at the time when the
contract was made, the goods have, without the knowledge of the seller, perished. The same would be the case where the goods
become so damaged as no longer to answer to their description in the contract.

Goods perishing after the agreement to sell but before the sale is effected (Sec.8): An agreement to sell specific goods becomes
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void if subsequently the goods, without any fault on the part of the seller or the buyer, perish or become so damaged as no longer
to answer to their description in the agreement before the risk passes to the buyer, ‘Fault’ means wrongful act or default [Sec 2(5)]

The Sale of Goods Act came into effect on 1st July 1930 and deals with the contracts or agreements related to sale/purchase of
goods. The contract of sale of goods, whereby a seller transfers or agrees to transfer the property in the goods to the buyer for a
specific consideration, i.e. price, has following main essentials for its validity:
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Two consenting parties

Buyer – A person who buys or agrees to buy goods.
Seller – A person who sells or agrees to sell goods.
Goods- Form the subject-matter for the contract of sale.

Transfer of the property- may or may not involve physical delivery of the goods.
Price - The consideration for the goods.
All the essentials of a valid contract (1)

GOODS: Section 2(7) of the Sale of Goods Act, 1930 defines Goods as any kind of moveable property (which is not an actionable
claim or money) or land (including stock and shares, growing crops, grass, and things that are attached to or form a part of the
land) which is agreed to be sold, under the contract of sale.
Goods form the subject-matter for the contract of sale against which the buyer pays a consideration (price for the good) at the time
of completion of the contract. Goods can be classified into 3 types on the basis of their quality:

⮚ Existing goods- The goods that are agreed to be the subject matter of the contract by the parties and are under the
possession of the seller at the time of formation of the contract are referred to as existing goods. These can further be
 divided into two categories:
⮚ Ascertained or Specific Goods- The goods that are specifically a part of, are identified and agreed upon at the time
when a contract of sale is made, are ascertained goods .For example, when a customer selects a particular
painting/artwork to buy from the seller at the time of formation of the contract, the painting/artwork is an ‘ascertained
good’ since the customer contracted to purchase that specific painting/artwork only.
⮚ Unascertained Goods- The goods that are not explicitly identified among similar goods at the time of formation of the
contract are unascertained goods.For example, A contracts to buy one sack of rice from B. Here, the subject-matter of the
contract, i.e. rice is not identified specifically by the buyer at the time of formation of contract but is under the
possession of the seller.
⮚ Future goods- The goods that are not present with the seller or are not under his possession at the time of formation of
the contact but promises to produce, manufacture or acquire the same in order to fulfil the contract (4). When the seller
has produced/manufactured/ acquired the goods, as agreed upon during the formation of the contract and are suitable
to be transferred to the buyer, the goods are said to be in a deliverable state (5), and the buyer is bound to take delivery
of the goods, so produced. For example, A contracts to buy a car from B after it is manufactured by B.
⮚ Contingent goods- Section 31 of the Indian Contract Act 1872 defines contingent contract as, ‘a contract to do or not to

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do something, if some event collateral to such contract, does or does not happen’ which means such contracts which are
dependent on some other event or contract. A contingent good in a similar sense means, a good, the acquisition of which
by the seller depends upon a contingency which may or may not happen (6). For example, A agrees to deliver a T.V. set
to B when he receives the same from the vendor upon fulfilment of his contract with the vendor (between the seller and
the vendor).

Deliverable State
Ja
The central concept of condition and warranty with respect to the subject matter of the contract of sale, i.e. goods is explained in
section 12 of the Sale of Goods Act, 1930 as a ‘stipulation’ in the contract of sale which may be a condition or warranty.

Section 20 and 21 of the Sale of Goods Act 1930 elaborate on the concept of ‘Specific goods in a deliverable state’ and
‘Specific goods to be put into a deliverable state’ respectively

‘Deliverable state’ refers to the condition of the goods such that the buyer under the contract is bound to accept the goods
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delivered to him by the seller according to the contract. ‘Where there is an unconditional contract for the sale of specific goods in
a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time
of payment of the price or the time of delivery of the goods, or both, is postponed’ (7) whereas for the ascertained goods that are
not in their deliverable state at the time of formation of the contract, and the seller needs to do something in order to put the good
in a deliverable state, the possession of the good in deliverable state passes to the buyer as soon as he receives the notice of the
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same.

Condition
‘A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the
contract as repudiated’.
A condition is referred to as, an essential element attached to the subject matter of an agreement which is mentioned by the buyer
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to the seller and is either expressed or implied while entering into the contract. The buyer can refuse to accept the goods delivered
by the seller, in case of non-compliance with the condition mentioned by the seller in the contract. The condition may be express
or implied.
If while entering into a contract, the buyer mentions (in words or writing) that the goods are to be delivered to him before a given
date, the date is taken as a condition to the contract since the buyer expressed it. Whereas, if a buyer contracts to buy a red-colored
saree for her ‘wedding’ which is to be held on a date mentioned to the seller, then the time is the implied condition for the
contract. Even if the buyer doesn’t mention the date of delivery (but has mentioned the date of the wedding or occasion), it is
implied on the part of the seller that the garment is to be delivered before the mentioned date of the wedding. In this case, the
seller is bound to deliver the garment before the date of the wedding as the delivery of the garment after the said date of the
wedding is of no use to the buyer and the buyer can refuse to accept the same since the condition to the contract is not fulfilled.

Warranty
‘A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages
but not to a right to reject the goods and treat the contract as repudiated’9.
A warranty is referred to as extra information given with respect to the desired good or its condition. The warranty is of secondary
importance to the contract for its fulfillment. Non-compliance of the seller to the warranty of the contract does not render the
contract repudiated and hence, the buyer cannot refuse to buy the good but can only claim compensation from the buyer.

CONDITION/ WARRANTY
⮚ A condition is of primary importance. A warranty is of secondary importance.

⮚ Breach of condition leads to termination of the contract. In case of a breach of warranty, the injured party is liable to be
compensated.

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⮚ The injured party can refuse to accept the goods as well as claim damages in case of breach of condition. The
Injured party can only claim damages in case of breach of warranty.
⮚ The injured party can refuse to accept goods not fulfilling the condition of the contract. The Injured party cannot refuse
to accept the goods not fulfilling the warranty.

Ja
⮚A condition can be treated as a warranty on the wish of the buyer. A warranty cannot be treated as a condition.
Implied Conditions and Warranties under the Sale of Goods Act
Section 14-17 of the Sale of Goods Act, 1930 deal with the implied conditions and warranties attached to the subject matter for
the sale of a good which may or may not be mentioned in the contract.

Implied Condition
Condition as to Title [Section 14(a)]
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Section 14(a) of the Sale of Goods Act 1930 explains the implied condition as to title as ‘in the case of a sale, he has a right to sell
the goods and that, in the case of an agreement to sell, he will have a right to sell the goods at the time when the property is to
pass’.

This means that the seller has the right to sell a good only if he is the true owner and holds the title of the goods or is an agent of
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the title holder. When a good is sold the implied condition for the good is its title, i.e. the ownership of the good. If the seller does
not own the title of the said good himself and sells it to the buyer, it is a breach of condition. In such a situation the buyer can
return the goods to the seller and claim his money back or refuse to accept the good before delivery or whenever he learns about
the false title of the seller.
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CASE LAW: Rowland v Divall, 192210 – The plaintiff had purchased a car from the defendant and was compelled to return it to
the true owner after having used it for a while. The plaintiff then sued the defendant for the purchase money, since the defendant
didn’t receive the consideration as per the condition of the title of ownership.

Sale by Description (Section 15)

Section 15 of the Sale of Goods Act, 1930 explains that when a buyer intends to buy goods by description, the goods must
correspond with the description given by the buyer at the time of formation of the contract, failure in which the buyer can refuse to
accept the goods.

Sale by Sample (Section 17)

When the goods are to be supplied on the basis of a sample provided to the seller by the buyer while the formation of a contract
the following conditions are implied:

Bulk supplied should correspond with the sample in quality

Buyer shall have a reasonable opportunity to compare the goods with the sample
The good shall be free from any apparent defect on reasonable examination by the buyer.

Sale by sample as well as Description (Section 15);When the sale of goods is by a sample as well as a description the bulk of the
goods should correspond with both, i.e. description and sample provided to the seller in the contract and not only sample or
description.
Condition as to Quality or Fitness (Section 16)
The doctrine of Caveat Emptor is applicable in the case of sale/purchase of goods, which means ‘Buyer Beware’. The maxim
means that the buyer must take care of the quality and fitness of the goods he intends to buy and cannot blame the seller for his
wrong choice. However, section 16 of the Sale of Goods Act 1930 provides a few conditions which are considered as an implied
condition in terms of quality and fitness of the good:

When the buyer specifies the purpose for the purchase of the good to the seller, he relied on the sound judgment and expertise of
the seller for the purchase there is an implied condition that the goods shall comply with the description of the purpose of
purchase.

When the goods are bought on a description from a person who sells goods of that description (even if he doesn’t manufacture the
good), there is an implied condition that the goods shall correspond with the description. However, in case of an easily observable
defect that is missed by the buyer while examining the good is not considered as an implied condition.

Implied Warrant
Section 14(b) of the Act mentions ‘an implied warranty that the buyer shall have and enjoy quiet possession of the goods’ which means a

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buyer is entitled to the quiet possession of the goods purchased as an implied warranty which means the buyer after receiving the title of
ownership from the true owner should not be disturbed either by the seller or any other person claiming superior title of the goods. In such
a case, the buyer is entitled to claim compensation and damages from the seller as a breach of implied warranty.Goods are free from any
charge or encumbrance in favour of any third party [Section 14(c)]

Conclusion
Ja
Any charge or encumbrance pending in favour of the third party which was not declared to the buyer while entering into a contract
shall be considered as a breach of warranty, and the buyer is be entitled to compensation and claim damages from the seller for the
same.

The provision of implied conditions and warranties are provided in the Sale of Goods Act in order to protect the buyers in case of
any fraud by the seller. However, it is seller’s duty in the first place to look for the obvious defects and enquire about the quality
of the product before entering into a contract of sale of goods since a seller cannot be held guilty for a customer’s wrong choice.
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In order to ensure purchase of an appropriate good by the seller, it is suggested that the buyer conveys the purpose and gives a
reasonable description of the goods so desired

Ownership
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The idea of ownership follows the idea of possession.

⮚ The ownership is the de jure recognition of the right over the property.
⮚ Ownership is the subjective and objective. It signifies the externally and internally.
⮚ The right of alienation is an essential characteristic feature of ownership.
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⮚ The concept of ownership is used in widest meaning. The owner has the right to consume, destroy and alienate with his
free will.
⮚ The residuary power is vested in the owner.

⮚ Ownership is the guarantee of the law.

⮚ Ownership without possession is right, unaccompanied by that environment of fact in which it normally realizes itself.

⮚ Ownership strives to realize itself in possession.

⮚ The ownership is left to seek “proprietary remedies”.

⮚ The law of prescription determines the process by which, through the influence of time, ownership without
possession withers away and dies.
⮚ Transfer: the ownership generally can be transferred by the way of convincing and registration in case of immovable
properties and by way of delivery in case of movable properties.
⮚
 A right in rem can be owned and possessed. But a right in personam can only be owned.
“Ownership is a matter of multiple rights”. Salmond says: “Whereas ownership is strictly a legal concept…..

Possession
⮚ First the idea of possession came into existence in the human civilization.

⮚ Possession is the de facto exercise of a claim over the property.

⮚ Possession is the objective realization of ownership. It is the external significance of ownership.

⮚ This right is not seen in possession.

⮚ The concept of possession is narrower in this sense. The possession has limited rights to consume, destroy and alienate.

⮚ The residuary power is not given to possessor.

⮚ Possession is the guarantee of the facts.

⮚ Possession without ownership is the body of fact, uniformed by the spirit of right which usually accompanies it.

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⮚ Possession to Endeavour’s to justify itself as ownership.

⮚ The possessor is left with “possessory remedies”.

legal and a non-legal or pre-legal concept”.

PERFORMANCE OF CONTRACT OF SALES

Delivery of Goods
Ja
The law of prescription determines the process by which, through the influence of time, possession without title ripens into
ownership. Transfer: the possession, comparatively, can easily be transferred. It does not require conveyancing.A right in
personam can only be owned, and it cannot be possessed. “Whereas possession in singular, but stronger”. “Possession is both a

Delivery of Goods in the Sale of Goods Act is defined as a voluntary transfer of possession from one person to another. Thus, to
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effect a valid delivery, goods from one person to another must be transferred willingly and not by means of fraud, theft, or force,
etc. Mere possession of goods does not amount to delivery of goods.

Modes of Delivery of goods

Delivery of goods may be made in any of the following three ways:
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1. Actual Delivery: Also known as physical delivery, actual delivery takes place when the goods are physically handed over
by the seller or his/her authorized agent to the buyer or his/her agent authorized to take possession of the goods. For example, A,
the seller of a car hands it over to B, the buyer; it is a case of actual delivery of the goods.

Symbolic Delivery: Where the goods are bulky and heavy and it is not possible to physically hand them over to the buyer, delivery
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thereof may be made by indicating or giving a symbol. Here the goods itself are not delivered, but the means of obtaining
possession of goods is delivered.

Delivery of Goods | Meaning | Modes of delivery

What is Delivery of Goods?
Delivery of Goods in the Sale of Goods Act is defined as a voluntary transfer of possession from one person to another. Thus, to
effect a valid delivery, goods from one person to another must be transferred willingly and not by means of fraud, theft, or force,
etc. Mere possession of goods does not amount to delivery of goods.

Modes of Delivery of goods

Delivery of goods may be made in any of the following three ways:
1. Actual Delivery: Also known as physical delivery, actual delivery takes place when the goods are physically handed over
by the seller or his/her authorized agent to the buyer or his/her agent authorized to take possession of the goods. For example, A,
the seller of a car hands it over to B, the buyer; it is a case of actual delivery of the goods.

2. Symbolic Delivery: Where the goods are bulky and heavy and it is not possible to physically hand them over to the
buyer, delivery thereof may be made by indicating or giving a symbol. Here the goods itself are not delivered, but the means of
obtaining possession of goods is delivered. For example, delivering the keys of the warehouse where the goods are stored, or the
keys of a purchased car to its buyer, bill of lading which will entitle the holder to receive the goods on arrival of the ship.
3. Constructive Delivery: In this case neither physical nor symbolic delivery is made. In constructive delivery the
individual possessing the products recognizes that he holds the merchandise for the benefit of, and at the disposal of the
purchaser. Constructive delivery is also called atonement. Constructive delivery may be affected in the following three
ways.
⮚ Where the seller, after having sold the goods, agrees to hold them as bailee for the buyer

⮚ Where the buyer, who is already in possession of the goods as bailee of the seller, holds them as his own, after the sale,
and
⮚ Where a third party, for example, a carrier/transporter, who holds the goods, as bailee for the seller, agrees and
acknowledges holding them for the buyer

Following are the important rules regarding the delivery of good.

1. Delivery Ways:-When goods are sold then delivery can be made by symbolic, actual or constructive way. It depends
upon the parties that which way they adopt.
2. Time of Delivery:-The seller should deliver the goods on a specified date. If the time is not fixed then delivery should be

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within a reasonable time.
3. Payment and Delivery:-Both the actions should be at the same time. The buyer should make the payment and seller
should deliver the goods in exchange of payment at the same time, just like the cash sale on the customer of a super stores.
4. Place of Delivery:-A delivery of goods should be at a specified place mentioned in the contract. Example: - "X"
agrees with "Y" to supply furniture on 38-Tipu Road Ahmadabad. "X" is bound to supply the goods on the same place, where
parties made contract.
5.

7.
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Delivery Expenses:-The expenses of putting the goods into deliverable state must be born by the seller, otherwise as the
parties agree. Example: - "X" sells the T.V to "Y". The expenses of packing the T.V will be borne by the seller.
6. Delivery to Carrier:-When seller is required to send the goods to the buyer, the delivery to carrier is considered
delivery to the buyer. Example: - "X" sells computer to "Y". "X" handed over the computer to the carrier to be delivered to "Y".
It means delivery has been made.
Defective Delivery:-A buyer can reject or accept the defective and wrong delivery. In case of rejection buyer is not
bound to return it to the seller. Example: - Mr. Imik buys 1000 books of Economics from Khan Publishers. Publishers send 500
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books. Mr. Imik may reject the whole or accept 500 and ask for the rest.
8. Good in the Custody of Third Party:-If the sellers goods are in the custody of the third party, the delivery is not possible
until the third party agrees to handed over the sold goods to the buyer on behalf of the seller. Example: - "M" has his cycle in the
store of "Y". "M" sells the cycle to "B" and gives him letter to take from "Y". "Y" agrees to deliver the cycle to "B".
9. Delivery in Installments:-The buyer is not bound to receive the goods in installments but if the buyer and seller are
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agreed then the delivery of goods may be made in installments.

10. Buyer Should Apply for Delivery:-It is the duty of the buyer that he should apply for the delivery of goods. The seller
is not bound to supply the goods without the demand of the buyer. If seller fails to supply the goods on demand then he will be
held responsible.
11. Partial Delivery Effect:-If some portion of the goods has been made with the intention of delivering the rest of goods
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then the ownership of the whole goods is deemed to pass to the buyer as some portion is delivered. Example: - "X" sold 10 bikes
to "Y". "Y" received 5 and paid their price. "Y" refused to accept the rest 5 bikes. It was a partial delivery.
12. Refusal of Buyers Liability:-When seller is ready to sell the goods. While buyer is not ready to accept the delivery, then
buyer will be liable to the seller for the loss arising due to his refusal. Example: - "X" agrees to sell out ten bags of apples to "B".
"B" refuses to take delivery. Apples destroy and "X" suffers a loss. "X" is entitled to claim damages from "B".
13. Acceptance of Buyer:-The buyer’s acceptance can be judged by the following facts:
1. Buyer himself can intimate the seller that he has accepted the goods.
2. By his any action related to the goods like resale or by pledge.
3. When he retains for a reasonable time, it means he has accepted the goods.
NEGOTIABLE INSTRUMENTS ACT, 1881
Negotiable instruments recognized by Negotiable Instruments Act 1881 are:
(i) Promissory notes (ii) Bills of exchange (iii) Cheques.

A negotiable instrument is a piece of paper which entitles a person to a sum of money and which is transferable from one person
to another by mere delivery or by endorsement and delivery.

There were total 142 Sections in the Negotiable Instruments Act 1881 when came into force. The act was amended and
amendment Act inserts five new sections from 143 to 147 touching various limbs of the parent Act and Cheque truncation through
digitally were also included and the amendment Act has been recently brought into force on Feb. 6, 2003.

Section 4 of the Negotiable Instruments Act 1881 defines the promissory note, “A promissory note is an instrument in writing
(note being a bank-note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of
money to or to the order of a certain person, or to the bearer of the instruments.”

Section 5 of the Act defines the bill of exchange, “A bill of exchange is an instrument in writing containing an unconditional

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order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or
to the bearer of the instrument”.

Section 6 of the Act defines the cheque “A cheque is a bill of exchange drawn on a specified banker, and not expressed to be
payable otherwise than on demand”.

All cheque is bill of exchange, but all bills are not cheque.
Liabilities of Parties

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The main aim of this project would essentially be to look in to the liability of parties to a Negotiable Instruments. But before
moving on to the liabilities, a brief on the parties and their capacity to capacity of parties to contract is required. The parties to a
negotiable instrument, namely, the maker, drawer, drawee and the payee, enter in to a contract among themselves. It is therefore
very essential that they should have a capacity to enter in to valid contracts.

Section 26 of the Negotiable Instrument Act, states that

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“Every person capable of contracting , according to the law to which he is subject, may bind himself and be bound by the making,
drawing, acceptance, endorsement, delivery and negotiations of a promissory note, bill of exchange or a cheque”.

S.11 of the Indian Contract Act, states the requirements of parties to contract. Thus as per this section, any person who is of a
sound mind, above the age of majority and not disqualified from entering in to contract by any Act, is competent to enter in to
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valid contract.

Liability of drawer of bill or a cheque

Essentially the liability of the parties to a ‘negotiable instrument’ has it statutory provisions under Sections 30, 32 and 35 of the
Negotiable Instruments Act 1881.
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The first section in this aspect to be analyzed would be S.30 of the Act, which provides for the Liability of the drawer of the bill or
a cheque.
The ‘drawer’ of the cheque, essentially, as defined by S.7 of the Act, is “The maker of a bill of exchange or Cheque”

Thus Section 30 of the Act goes on to define the liability of the drawer of a bill or cheque
“The drawer of a bill of exchange or cheque is bound in case of dishonor by the drawee or acceptor thereof, to compensate the
holder, provided due notice of dishonor has been give to, or received by, the drawer as hereinafter provided”

The important thing to be noted here is that the liability of the drawer here arises only in case of dishonor of the cheque or a bill
of exchange and nothing prior to it. A bill of exchange it is seen is dishonored by non-acceptance or by non-payment, but on the
other hand, a cheque, is dishonored by non-payment only.

Section 31 of the Act that deals with the liability of the drawee of the cheque As per this section, “The drawee of a cheque having
sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly
required so to do, and, in default of such payment, must compensate the drawer for any loss or damage caused by such default.”

Section 32 of the Act, deals with the liability of the maker of the note and the acceptor of the bill As per this section, “In the
absence of contract to the contrary, the maker of a promissory note and the acceptor before maturity of a bill of exchange are
bound to pay the amount thereof at maturity according to the apparent tenor of the note or acceptance respectively, and the
acceptor of a bill of exchange at or after maturity is bound to pay the amount thereof to the holder on demand.

Liability of the endorser

This is provided for under Section 35 of the Act, which states that
“In the absence of a contract to the contrary, whoever indorses and delivers a negotiable instrument before maturity, without in
such endorsement, expressly excluding or making conditional his own liability, is bound thereby to every subsequent holder, in
case of dishonor by the drawee, acceptor or maker, to compensate such holder for any loss or damage caused to him by such
dishonor, provided due notice of dishonor has been given to, or received by, such endorser as hereinafter provided.

Every endorser after dishonor is liable as upon an instrument payable on demand.”Before moving on further, it is pertinent to
study Section 15 of the Act in relevance to the term ‘endorsement’ and also to define an ‘endorser’.

“When the marker or holder of an negotiable instrument signs the same, otherwise than as such maker, for the purpose of
negotiation, one the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper
intended to be completed as a negotiable instrument, he is said to indorse the same, and is called the endorser.”

Section 40 of the act also needs to be looked in to, which states that “Where the holder of a negotiable instrument, without the
consent of the endorser, destroys or impairs the endorser’s remedy against a prior party, the endorser is discharged from

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liability to the holder to the same extent as if the instrument had been paid at maturity.”

Parties to a bill of exchange

1. The Drawer: The person who draws a bill of exchange is called the drawer.
2. The Drawee: The party on whom such bill of exchange is drawn and who is directed to pay is called the drawee.
3.

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The Acceptor: The person who accepts the bill is known as the acceptor. Normally the drawee is the acceptor. But a
stranger can also accept a bill on behalf of the drawee.
4. The Payee: The person to whom the amount of the bill is payable is called the payee.
5. The Endorser: When the holder transfers or endorses the instrument to any other person the holder becomes the Endorser.
6. The Endorsee: The person to whom the bill is endorsed is called the endorsee.
7. The Holder: Holder of bill of exchange means any person who is legally entitled to the possession of it and to receive or
recover the amount due thereon form the parties. He is either the payee or the endorsee. The finder of a lost bill payable to bearer
or a person in wrongful possession of such instrument is not a holder.
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8. Drawee in case of need: The drawer of a bill or even an endorser may write in the instrument the name of a person
directing the holder to resort to such person in case of need. Such a person is called a drawee in case of need. He is merely in the
position of a drawee who has not accepted the bill. The bill cannot be presented to him for acceptance but only for payment.
Where a drawee in case of need is mentioned in the bill such a bill is not dishonored until it has been dishonored by such a drawee
in case of need. The effect of this provision is to make the presentment to the drawee in case of need obligatory on the part of the
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holder.
9. Acceptor for Honor: Any person may voluntarily become a party to a bill as an acceptor by accepting it for the honor of
the drawer or of any person. When the original drawee refuses to accept or refuses to furnish better security when demanded by a
notary, any person may step in to safeguard the honor of the drawer or any endorser and bind himself by an acceptance. The effect
of such acceptance is that the bill is treated as alive and is not considered to be dishonored till it is dishonored by the acceptor for
honor.
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Parties to a promissory note

1. The Maker: He is the person who promises to pay the amount stated in the promissory note.
2. The Payee: The person named in the promissory note to whom the money is payable.
3. The Holder: He may be either the payee or someone else to whom the promissory note has been endorsed.
4. The Endorser: When the holder transfers or endorses the instrument to any other person the holder becomes the Endorser.
5. The Endorsee: The person to whom the bill is endorsed is called the
endorsee. Parties to a cheque
1. The Drawee: He is the person who draws the cheque.
2. The Drawee: The banker on whom the cheque is drawn.
3. The Payee: The person to whom the amount of the bill is payable is called the payee.
4. The Holder: Holder of bill of exchange means any person who is legally entitled to the possession of it and to receive or
recover the amount due thereon form the parties. He is either the payee or the endorsee. The finder of a lost bill payable to bearer
or a person in wrongful possession of such instrument is not a holder.
5. The Endorser: When the holder transfers or endorses the instrument to any other person the holder becomes the Endorser.
6.
7. The Endorsee: The person to whom the bill is endorsed is called the
endorsee.
Section 6(a) defines ‘a cheque in the electronic form’
Section 6(b) defines ‘a truncated cheque’
Section 7 of the Act gives definition of ‘drawer’ and ‘drawee’. The maker of the bill of exchange or cheque is called “drawer” and
the person thereby directed to pay is called the “drawee”
Section 13 of the Act states that a negotiable instrument is a promissory note, bill of exchange or a cheque payable either to order
or to bearer.
Section 18. Where amount is stated differently in figures and words: If the amount undertaken or ordered to be paid is stated
differently in figures and in words, the amount stated in words shall be the amount undertaken or ordered to be paid.

Section 19. Instruments payable on demand: A promissory note or bill of exchange, in which no time for payment is specified, and
a cheque, are payable on demand.

Section 22. “Maturity”. The maturity of a promissory note or bill of exchange is the date at which it falls due. The section also
defines days of grace.

Section 25. When day of maturity is a holiday: When the day on which a promissory note or bill of exchange is at maturity is a
public holiday, the instrument shall be deemed to be due on the next preceding business day.

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Section 45. Holder’s right to duplicate of lost bill.
Section 58. A promissory note, bill of exchange or cheque payable to bearer is negotiable by endorsement and delivery thereof.
Section 78. To whom payment should be made: Payment of the amount due on a promissory note, bill of exchange or cheque
must, in order to discharge the maker or acceptor, be made to the holder of the instrument.

DISHONOUR OF A NEGOTIABLE INSTRUMENT

Ja
When a negotiable instrument is dishonored, the holder must give a notice of dishonor to all the previous parties in order to make them
liable. A negotiable instrument can be dishonored either by no acceptance or by non-payment. A cheque and a promissory note can only be
dishonored by non-payment but a bill of exchange can be dishonored either by non-acceptance or by non- payment.
Section 91: Dishonour by non-acceptance
Section 92: Dishonour by non-payment
Section 138: Dishonour of cheque for insufficiency, etc., of funds in the account
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NEGOTIATION OF NEGOTIABLE INSTRUMENTS
Sec. 30. What constitutes negotiation? - An instrument is negotiated when it is transferred from one person to another in
such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to
order, it is negotiated by the endorsement of the holder and completed by delivery.
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METHOD OF TRANSFER
1. By assignment
2. By operation of law

By negotiation,
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• Method of transferring a non-negotiable instrument whereby the assignee is merely placed in the position of the
assignor and acquires the instrument subject to all defenses that might have been setup against the original payee
•
MODE OF ASSIGNMENT
• Differs in no respect from that of any other contract
• Although some sort of written instrument is customarily employed, it may be written either on the instrument itself or
on a separate piece of paper

EFFECT OF ASSIGNMENT OF A NON-NEGOTIABLE INSTRUMENT

• The effect of the assignment is that the party holding the right drops out of the contract and another takes his place
• The assignee is substituted in place of the assignor
• The assignee and every subsequent person to whom the instrument comes by assignment may be considered as the
person who made the instrument in the first instance and as having said and done everything in making the instrument which
the original assignor did or said.
• Each assignee takes his chance as to the exact position in which any party making an assignment of it stands
• And as it is called in law, the assignee takes the contract subject to equities, that is, to defenses to the contract which
would avail in favor of the original party up to the time the notice of the assignment is given to the person against whom the
contract is sought to be enforced
 ASSIGNMENT OF A NEGOTIABLE INSTRUMENT
• A person taking a negotiable instrument by assignment in a separate piece of paper takes it subject to the rules
applying to assignment
• And where the holder of a bill payable to order transfers it without endorsement, it operates an equitable assignment

TRANSFER BY OPERATION OF LAW

1. By the death of his holder where the title vests in his personal representative, or
2. By the bankruptcy of the holder, where title vests in his assignee or trustee
3. Upon the death of a joint payee or endorsee in which case the general rule is that the title vests at once in the surviving
payee or trustee

NEGOTIATION
• Transfer of the instrument from one person to another in such a manner as to constitute the transferee the holder
thereof
• May either be by endorsement completed by delivery or by mere delivery

IS DELIVERY TO PAYEE A NEGOTIATION?

• First view: no because negotiation refers to an existing negotiable instrument and before delivery to the payee, the

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instrument is incomplete.
• Second or better view: under this section and section 191, an instrument is negotiated when it is delivered to the payee
or to an endorsee

Dishonor of negotiable instruments

Dishonor by non-acceptance:
Ja
Dishonor of negotiable instrument means loss of honor or respect for the instrument in question on the part of the maker, drawee,
or acceptor, as the case may be, which eventually results in non-realization of payment due on the instrument.

Any type of negotiable instruments, i.e., bill of exchange, promissory note, or cheque may be dishonored by non-payment by the
drawee/acceptor thereof. But a bill may also be dishonored by non-acceptance because bill of exchange is the only negotiable
instrument which requires its presentment for acceptance and non-acceptance thereof, can amount to dishonor.
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When is a bill said to be dishonored by Non-Acceptance?
A bill is said to be dishonored by non-acceptance in the following circumstances.

When the drawee or one of the several drawee, not being partners, commit default in acceptance upon being duly required to
accept the bill. In this regard Section 63 expressly provides that the holder must, if so required by the drawee of a bill of exchange
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presented to for acceptance, allow the drawee forty-eight hours (exclusive of public holidays) to consider whether he will accept
it.
⮚ Where presentment is required and the bill remains unrepresented.

⮚ Where the drawee is incompetent to enter into a valid contract.

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⮚ Where the bill is given a qualified acceptance.

⮚ If the drawee is a fictitious person.

⮚ If the drawee cannot be found even after reasonable search.

Where the drawee has either become insolvent or is dead and the holder does not present the bill to the assignee or legal
representative of the insolvent or deceased drawee.

It is relevant to note that where a drawee-in-case-of-need is named in a bill of exchange or in any endorsement thereon, the bill is
not dishonored until it has been dishonored by such drawee.

Dishonor of negotiable instrument by Non-payment:

A promissory note, bill of exchange, or cheque is said to be dishonored by non-payment when the maker of the note, acceptor of
the bill, or drawee of the cheque commit default in payment upon being duly required to pay the same.

Also the holder of a bill or pro-note may treat it as dishonored, without placing for payment when presentment for payment is
excused expressly by the maker of the pro-note, or acceptor of the bill and the note or bill when overdue remains unpaid.
Dishonor by non-acceptance vs. Dishonor by non-payment:
If a bill is dishonored either by non-acceptance or by non-payment, the drawer and all the endorsers of the bill are liable to the
holder, provided notice of such dishonor is given to them. The drawee, on the other hand, shall be liable to the holder only in the
event of dishonor by non-payment.

Dishonor of Cheque for insufficient of funds in the account:

A cheque drawn by a person on an account maintained by him with a bank for payment of any amount of money to another person
can be returned unpaid for lack of enough funds in the said account. This is called dishonor of cheques for insufficiency of funds
(in the drawer’s account). In such cases, the drawer is also criminally liable for this offense and may be punished with
imprisonment for a term, which may extend to one year, or with fine that may extend to twice the amount of the cheque, or with
both.

Dishonor of cheque vs. promissory note:

A cheque being drawn on specified bank and not expressed to be payable otherwise than on demand is never presented to the
drawee bank for acceptance and same is the case of a promissory note. However, a pro-note made payable at a certain period after
sight is required to be presented for sight, but it is never subject to presentment for acceptance.

How is a party to a negotiable instrument discharged?

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A party to a negotiable instrument is discharged in the following ways
1. By cancellation of the name of a party to the instruments
2. by release of any party to the instruments
3. by payments
4. by allowing drawee more than 48 hours to accept
5. by delay in presenting a cheque for payment
6. by payment in due course of a cheque (payable to order)
7. by taking qualified acceptance
8. by non-presentment for acceptance of a bill of exchange
9. by operation of law
10. by material alteration

DISHONOUR AND DISCHARGE OF NEGOTIABLE INSTRUMENT

Ja
A NEGOTIABLE INSTRUMENT MAY BE DISHONOURED BY (I) NON-ACCEPTANCE (II) NON-PAYMENT
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Dishonor by non-acceptance
A bill of exchange is said to be dishonored, by non-acceptance in the following cases: -
1. When the drawee or one of the several drawee (not being partners) makes default in acceptance upon being required
to accept the bill (48 hours required).
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2. Where the presentment for acceptance is excused and the bill is not accepted.
3. Where the drawee is incompetent to contract.
4. Where the drawee makes the acceptance qualified.
5. If the drawee is fictitious person or after reasonable search cannot be
found.
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Dishonor by Non-payment
A promissory note, bill of exchange or cheque is said to be dishonored by non-payment when the maker, acceptor of the bill or
drawee of the cheque makes default in payment upon being duly required to pay the same. (Sec 92)
Also, a promissory note or bill of exchange is dishonored by non-payment when presentment for payment is excused expressly by
the maker of the note or acceptor of the bill and PN or BE remains unpaid.

Effect of Dishonor
 As soon as a negotiable instrument is dishonored (either by non-acceptance or by non-payment) the holder becomes entitled to
sue the parties liable to pay thereon.
The holder MUST, however, give notice of dishonor to all the parties against whom he intends to proceed.
Notice of Dishonor; Notice of dishonor means formal communication of the fact of dishonor.
·Such a notice also serves the purpose of enabling the person so notified to protest himself against the prior parties.
Notice by Whom
· Notice of dishonor must be given by the holder or
by some party to the instrument who remain liable
thereon;
· Any party receiving the notice of dishonor must
also transmit the same to all prior parties in order
to make them liable to him.
· No suit can be filed against the prior party if he has not
Notice to Whom transmitted the fact of dishonor of instrument.
· One person can give the notice only.
· Duly authorized person can also give notice.

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· Notice of dishonor must be given to all parties
(other than the maker of note, acceptor of a bill or
drawee of a cheque) to whom the holder seeks to
make liable or other duly authorized agents.
· In case of death of a person, notice must be given to

Ja
his legal representative and were he has been
1
declared insolvent to his Official Assignee.
· In case after dispatch of notice and before it receipt
the person dies, it will be treated as if the notice has
been served. (Not knowing the fact).
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Aarchi Jain - 9315427472
Mode of Giving Notice
It may be oral or in writing. If it is in writing it must be sent by post
It should be given in reasonable time. Reasonable time is the
consideration is to be given: -
1. Nature of the instrument
2. The usual course of dealing with respect to similar instruments
3. Distance between the parties
4. While calculating public holidays shall be excluded.
5. In case a party received the notice of dishonor is to transmit the same to his prior parties, the transmission should be
done in reasonable time.

When Notice of Dishonor is Unnecessary

1. Where the endorsee while signing in that capacity adds the words ‘notice of dishonor waived’.
2. Where the drawer of a cheque countermanded payment.
3. Where the party charged could not suffer damage for want of notice such as bank account closed or in case
of accommodation bill.
4. Where the party to whom the notice is to be given not traceable or the party who has to give notice is unable to give
notice like death, accident or serious illness.

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5. When the drawer also happens to be acceptor.
6. In case the Promissory Note which is not negotiable
7. When the party entitled to receive notice promise to pay unconditionally the amount as due after due date.
Consequences of not giving notice of dishonor
Any party to negotiable instrument (other than maker of a note, acceptor of a bill or drawer of cheque) is discharged from his

Noting

Protest
·

· Ja
obligation under the instrument unless circumstances are such where no notice is required to be sent.

In case a promissory note or bill of exchange has been dishonored by non-acceptance or non-payment
notice, the holder may cause such dishonor to be noted by Notary Public.
Noting must be made within reasonable time after dishonor and must specify (i) the date of dishonor
(ii) the reason assigned for dishonor and (iii) the notary’s charges.

“Protest” is a formal certificate issued by the notary public to the holder of the bill or note on his demand (noting is merely a
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record of dishonor on the instrument).
Contents of Protest
1. The instrument itself or a literal transcript of the instrument and of everything written or printed thereon,
2. The name of the person for whom and against whom the instrument has been protested.
3. The fact and reason for dishonor
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4. The place and time of dishonor

5. The signature of notary public

In case of acceptance for honor or payment for honor, the names of the persons by whom and for whom it is accepted or paid.
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Discharge of the Instrument

· A negotiable instrument is said to be discharged when it becomes completely useless.
· In the following cases the instrument is deemed to be discharged: -
1. When the party liable to make payment on the instrument makes the in due course to the holder.
2. When the acceptor in his own right at or after maturity, holds the bill of exchange, which has been negotiated,, the
instrument is discharged.
3. When the party primarily becomes insolvent.
4. When the holder cancels the instrument with an intention to release the party primarily liable thereon from liability.

Discharge of One or More Parties.

· A party is said to be discharged from his liability when his liability on the instrument comes to an
end.
· Discharge of one or more party does not discharge the instrument and rights under it can be enforced
against those parties who continue to be liable thereon.

One or more parties to a negotiable instrument is/are discharged from liability in the following ways:-
1. By cancellation-When the holder of a negotiable instrument deliberately cancels the name of any of the party liable on
the instrument with intent to discharge him from liability.
2. By release – If the holder of a negotiable instrument releases any party to the instrument by any method other than
 cancellation of names.
3. By payment
4. By allowing drawee more than 48 hours to accept
5. By taking qualified acceptance
6. By not giving notice of dishonor
7. By non-presentment for acceptance of bill
8. By delay in presenting cheque
9. By material alternation like:
I. Any alteration of the date, the sum payable, the time of payment and place of payment
II. Alteration by the addition of a new party.
III. Alteration of the rate of interest.
IV. Tearing off the material part of the instrument

Alteration not vitiating the instrument

1. Alteration made for the purpose of correcting a mistake or clerical error
2. Alteration made to carry out the common intention of the original parties
3. Alteration made before the instrument is issued
4. Alteration made with the consent of the parties liable on the instrument

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5. Conversion of bearer cheque into order
6. Filling blanks in the case of inchoate or incomplete instrument
7. Conversion of blank endorsement into an endorsement in full.
8. Making qualified acceptance
9. Alteration which result of the accident.

CHEQUES

Ja
According to Section 6 of the Negotiable Instruments Act, 1881. A “cheque” is a bill of exchange drawn on a specified banker
and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and cheque
in the electronic form.

In other words, a cheque contains a mandate of the drawer to his banker to pay a specified sum of money to the bearer or the
person mentioned therein or to his order.
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DIFFERENT TYPES OF CHEQUE:
I. BEARER CHEQUE-A person holding the cheque can withdraw the amount (only if it is signed). Such type of cheques is
very risky and in case misplaced can lead to loss of the amount mentioned on the cheque.
II. CROSSED CHEQUE-A bearer cheque becomes a crossed cheque by crossing it twice with two parallel lines on the left-
hand top corner. Only person name written on it can get the amount transferred to his account.
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III. SELF CHEQUE-As the name suggests the account holders name is written on it to encash money in physical form from
the branch where he holds his account.
IV. POST DATED CHEQUE-Post-dated Cheques are cheques issued with a future date on it. Once a cheque is issued it will
be valid for three months. It is used for business purposes or the making of payment in a future date.
V. BANKER’S CHEQUE-Such cheques are issued by the bank itself and guarantee a payment.
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VI. TRAVELER’S CHEQUE-Such cheques can be used for withdrawal of money while travelling. It is equal to carrying
cash but one can travel safely without carrying huge amount. They can be encashed abroad where foreign currency is
normally acceptable.

Dishonor is of 2 kinds:

Dishonor of bill of exchange by non-acceptance

Dishonor of promissory note, bill of exchange or cheque by non-payment-When presentment for payment is made and the maker,
acceptor or drawee, as the case may be, makes default in making the payment, there is dishonor of the instrument. And also if
there are certain circumstances when presentment for payment is excused and the instrument is deemed to be dishonored even
without presentment. Thus when the maker, acceptor or drawee intentionally prevents the presentment of the instrument is
deemed to be dishonored even without presentment.

NOTICE OF DISHONOUR
Notice of dishonor means information about the fact that the instrument has been dishonored. Notice of dishonor is given to the
party sought to be made liable and, therefore it serves as a warning to the person to whom the notice is given that he could now be
made liable. Enormous delay in giving notice of dishonor may put an end to the plaintiff’s right in respect of the dishonored
instrument.
NOTICE OF DISHONOUR BY WHOM?
Notice of dishonor is to be given by a person who wants to make some prior party of his liable on the instrument. Therefore, such
a notice may be given:
Either by the holder
A party to the instrument who remain liable for it

DISHONOUR OF CHEQUE
A person suffers a lot if a cheque issued in his favor is dishonored due to the insufficiency of funds in the account of the drawer of
the cheque. To discourage such dishonor, it has been made an offence by an amendment of the Negotiable Instrument Act by the
Banking, Public Financial Institution and Negotiable Instrument Laws (Amendment) Act, 1988.
Section 138 makes the dishonor of cheque an offence. The payee or holder in due course can have recourse against the drawer,
who may be held liable for the offence.

Under Section 138 –

Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to
another person from out of that account for the discharge, in whole or part, of any debt or other liability, is returned by the bank
unpaid, either because of the amount of money standing to the credit of that account is insufficient to honor the cheque or that it
exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to

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have committed an offence and shall, without prejudice to any other provision of this Act be punished with imprisonment [a term
may be extended to 2 years], or with fine which may extend to twice the amount of the cheque, or with both.

ESSENTIAL FOR AN ACTION UNDER SECTION 138

There should be dishonor of cheque

Payment in discharge of debtor liability Ja

Section 138 makes dishonor of cheque in certain cases an offence. Cheque is the most common mode of making the payment. In
order to duly protect the interest of its payee, holder in due course, there is an attempt to discourage dishonor of a cheque by
making it an offence. These provisions do not cover the dishonor of other negotiable instruments.

The cheque should have been drawn by a person on an account with a banker for payment of money to another person for the
discharge, in whole or part, of any debt or other liability. The debt or other liability in such a case means a legally enforceable
debt or other liability.
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If the payment by way of cheque is made as gift or charity, it is not the payment for legally enforceable debt or liability. The
dishonor of such cheque does not attract the provisions of Section 138 of the Negotiable Instrument Act.

Presentment of the cheque within the period of its validity

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It is further necessary that the cheque has been presented before it became stale and invalid. It means that the cheque has
been presented within a period of 6 months from the date on which it is drawn or within the period of validity, whichever is
earlier.

Dishonor due to insufficient fund

It is also necessary that the cheque should be returned by the bank unpaid.
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Dishonor may be because of 2 reasons:

Either the amount of money present in the account is insufficient

Or the amount to be paid has exceeded the amount to be paid from that account as in the agreement made with that bank.
It has been generally held in various cases that dishonor due to the insufficiency of funds has to be interpreted liberally. Dishonor
due to the remarks like “Account closed”, “Refer to the drawer” or “Stop payment” of the cheque may be deemed to be covered
by the provision contained in Section 138 of the Act.
Notice and demand from the drawer and drawer’s failure to pay
Within 15 days of receipt of information from the bank about the dishonor of the cheque, the payee or holder in due course of the
negotiable instrument, as the case may be, must make a demand of the said amount from the drawer by giving a notice in writing.

CIRCUMSTANCES IN WHICH A BANKER IS JUSTIFIED IN DISHONOURING CUSTOMER’S CHEQUE

PAYMENT COUNTERMANDED BY THE DRAWER

When the cheque drawer of the cheque countermands the payment that is it issues the instruction to the bank not to make the
payment. On receipt of a valid stop payment order, the cheque must be returned unpaid with the remark “payment countermanded
by drawer“

NOTICE OF DRAWER’S DEATH On receipt of the confirmed news of death of account holder, cheques signed by him should be returned
unpaid with the remark “Drawer deceased”.

NOTICE OF CUSTOMER’S INSANITY

Where the account holder is certified as insane by a recognized medical practitioner then the cheques signed by him should be
signed by him should be returned unpaid.

NOTICE OF CUSTOMER’S INSOLVENCY

Where a customer is adjudged insolvent, the banker must refuse to pay cheques drawn by the customer.

LIQUIDATION OF COMPANY
When a bank receives notice from the liquidator in accordance with the provisions of Companies Act, requiring to pay the balance
to liquidator’s account , all the cheques by the companies should be returned unpaid.

OFFENCE BY COMPANY
A juristic person like incorporated companies and partnership firms are also made liable for the offence of dishonor of cheque
described under section 138.

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Under Section 141 –
If the person committing an offence under section 138 is a company , every person who, at the time the offence was committed,
was in charge of, and was responsible to the company for the conduct of the business of the company ,as well as the company,
shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

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Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was
committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence
Provided further that where a person is nominated as a .Director of a Company by virtue of his holding any office or
employment in the central Government or State Government or a financial corporation owned or controlled by the Central
Government as the case may be, he shall not be liable for prosecution under this chapter.

Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it
is proved that the offence has been committed with the consent or connivance of or is attributable to, any neglect on the part of,
any director, manager, secretary, or other officer and shall also be deemed to be guilty of that offence and shall be liable to be
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proceeded against and punished accordingly.

Explanation- For the purpose of this section –

“Company” means anybody corporate and includes a firm or other association of individuals; and
“Director” in relation to a firm, means a partner in the firm
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Section 141 covers 3 categories of person liable for offence under Section 138-The company as principal offender
Persons who were in charge and were responsible for the business of company
Any other person who is director or a manager or secretary or officer of the company
There must be a specific accusation against each of the persons alleged as accused that such person was in charge of and
responsible for the conduct of the business of the company or the firm at the relevant time when the alleged offence was
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committed by the company or the firm.

CONDITION ESSENTIAL FOR COGNIZANCE

For initiating proceedings against the drawer of dishonored cheque drawee has to fulfill following conditions –
The payee or the holder in due course has to file a written complaint.

The complaint is to be made within one month of the date on which the cause of action arose under clause
(c) of the proviso to Section 138
Only the court of Metropolitan Magistrate or a Judicial Magistrate of First Class is empowered to try the offence defined under the
provision of Section 138.

LIABILITY OF A DRAWER OF A DISHONOURED CHEQUE

Civil liability
Where a cheque is dishonored, the legal position of the drawer of the cheque becomes that of a principal debtor to the holder. The
holder can bring civil suit just like any creditor to recover the amount from the drawer making him liable as principal debtor.

Criminal liability
A drawer of a cheque is deemed to have committed a criminal offence when the cheque drawn by him is dishonored by the
drawee on account of insufficiency of funds.
The criminal liability of a drawer in case of dishonor of cheque is dealt in section 138 to Section 142 of Negotiable Instrument Act
1881.

MAXIMUM PUNISHMENT
The maximum punishment for such an offence is imprisonment upto 2 years or fine upto twice the amount of cheque or both.
Where the cheque is drawn by a company, a firm, or association of individuals, the punishment can be awarded to every person
who was in-charge of and was responsible for its conduct of business and also to the company.

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 UNIT-III
THE COMPANIES ACT, 2013
The Indian Companies Act 2013 replaced the Indian Companies Act, 1956. The Companies Act 2013 makes comprehensive
provisions to govern all listed and unlisted companies in the country. The Companies Act 2013 implemented many new sections
and repealed the relevant corresponding sections of the Companies Act 1956. This is landmark legislation with far-reaching
consequences on all companies incorporated in India.

Comparison of Companies Act 1956 and Companies Act 2013

Indian Companies Act 2013 has fewer sections (470) than Companies Act 1956 (658). The new act empowers shareholders and
gives high value for Corporate Governance.
Details 1956 Act 2013 Act

Parts 13 NA

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Chapters 26 29

Sections 658 470

Schedules
Key Highlights of Indian Companies Act 2013

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● The maximum number of members (shareholders) permitted for a Private Limited Company is increased to 200 from 50.
● One-Person company.
● Section 135 of the Act which deals with Corporate Social Responsibility.
● Company Law Tribunal and Company Law Appellate Tribunal.
Salient features of the Companies Act 2013
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1. Class action suits for Shareholders: The Companies Act 2013 has introduced new concept of class action suits with
a view of making shareholders and other stakeholders, more informed and knowledgeable about their rights.
2. More power for Shareholders: The Companies Act 2013 provides for approvals from shareholders on various significant
transactions.
3. Women empowerment in the corporate sector: The Companies Act 2013 stipulates appointment of at least one woman
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Director on the Board (for certain class of companies).

4. Corporate Social Responsibility: The Companies Act 2013 stipulates certain class of Companies to spend a certain
amount of money every year on activities/initiatives reflecting Corporate Social Responsibility.
5. National Company Law Tribunal: The Companies Act 2013 introduced National Company Law Tribunal and the
National Company Law Appellate Tribunal to replace the Company Law Board and Board for Industrial and Financial
Reconstruction. They would relieve the Courts of their burden while simultaneously providing specialized justice.
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6. Fast Track Mergers: The Companies Act 2013 proposes a fast track and simplified procedure for mergers and
amalgamations of certain class of companies such as holding and subsidiary, and small companies after obtaining approval
of the Indian government.
7. Cross Border Mergers: The Companies Act 2013 permits cross border mergers, both ways; a foreign company merging
with an India Company and vice versa but with prior permission of RBI.
8. Prohibition on forward dealings and insider trading: The Companies Act 2013 prohibits directors and key managerial
personnel from purchasing call and put options of shares of the company, if such person is reasonably expected to have
access to price-sensitive information.
9. Increase in number of Shareholders: The Companies Act 2013 increased the number of maximum shareholders in a
private company from 50 to 200.
10. Limit on Maximum Partners: The maximum number of persons/partners in any association/partnership may be upto
such number as may be prescribed but not exceeding one hundred. This restriction will not apply to an association or
partnership, constituted by professionals like lawyer, chartered accountants, company secretaries, etc. who are governed
by their special laws. Under the Companies Act 1956, there was a limit of maximum 20 persons/partners and there was no
exemption granted to the professionals.
11. One Person Company: The Companies Act 2013 provides new form of private company, i.e., one Person Company.
It may have only one director and one shareholder. The Companies Act 1956 requires minimum two shareholders and two
directors in case of a private company.
 12. Entrenchment in Articles of Association: The Companies Act 2013 provides for entrenchment (apply extra legal
safeguards) of articles of association have been introduced.
13. Electronic Mode: The Companies Act 2013 proposed E-Governance for various company processes like maintenance
and inspection of documents in electronic form, option of keeping of books of accounts in electronic form, financial
statements to be placed on company’s website, etc.
14. Indian Resident as Director: Every company shall have at least one director who has stayed in India for a total period of
not less than 182 days in the previous calendar year.
15. Independent Directors: The Companies Act 2013 provides that all listed companies should have at least one-third of the
Board as independent directors. Such other class or classes of public companies as may be prescribed by the Central
Government shall also be required to appoint independent directors. No independent director shall hold office for more
than two consecutive terms of five years.
16. Serving Notice of Board Meeting: The Companies Act 2013 requires at least seven days’ notice to call a board
meeting. The notice may be sent by electronic means to every director at his address registered with the company.
17. Duties of Director defined: Under the Companies Act 1956, a director had fiduciary (legal or ethical relationship of
trust) duties towards a company. However, the Companies Act 2013 has defined the duties of a director.
18. Liability on Directors and Officers: The Companies Act 2013 does not restrict an Indian company from
indemnifying (compensate for harm or loss) its directors and officers like the Companies Act 1956.

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19. Rotation of Auditors: The Companies Act 2013 provides for rotation of auditors and audit firms in case of publicly
traded companies.
20. Prohibits Auditors from performing Non-Audit Services: The Companies Act 2013 prohibits Auditors from
performing non-audit services to the company where they are auditor to ensure independence and accountability of
auditor.

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21. Rehabilitation and Liquidation Process: The entire rehabilitation and liquidation process of the companies in financial
crisis has been made time bound under Companies Act 2013.

TYPES OF COMPANIES
The Companies Act, 2013 provides for the kinds of companies that can be promoted and registered under the Act. The three
basic types of companies which may be registered under the Act are:
​ Private Companies;

​ Public Companies; and

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​ One Person Company (to be formed as Private Limited).
Section 3 (1) of the Companies Act 2013 states that a company may be formed for any lawful purpose by
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​ seven or more persons, where the company to be formed is to be a public company;

​ two or more persons, where the company to be formed is to be a private company; or

​ one person, where the company to be formed is to be One Person Company, that is to say, a private company, by
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subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of
registration
(2) A company formed under sub-section (1) may be either—
● a company limited by shares; or
● a company limited by guarantee; or
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● An unlimited company.

Classification of Companies
Classification on the basis of
Incorporation
There are three ways in which companies may be incorporated.
(a) Statutory Companies: These are constituted by a special Act of Parliament or State Legislature. The provisions of the
Companies Act, 2013 do not apply to them. Examples of these types of companies are Reserve Bank of India, Life Insurance
Corporation of India, etc.
(b) Registered Companies: The companies which are incorporated under the Companies Act, 2013 or under any previous
company law, with ROC fall under this category.
Classification on the basis of Liability
Under this category there are three types of companies:
(a) Unlimited Liability Companies: In this type of company, the members are liable for the company’s debts in proportion
to their respective interests in the company and their liability is unlimited. Such companies may or may not have share capital.
They may be either a public company or a private company.
(b) Companies limited by guarantee: A company that has the liability of its members limited to such amount as the
members may respectively undertake, by the memorandum, to contribute to the assets of the company in the event of its being
wound-up, is known as a company limited by guarantee. The members of a guarantee company are, in effect, placed in the
position of guarantors of the company’s debts up to the agreed amount.
(c) Companies limited by shares: A company that has the liability of its members limited by the memorandum to the
amount, if any, unpaid on the shares respectively held by them is termed as a company limited by shares. For example, a
shareholder who has paid `75 on a share of face value ` 100 can be called upon to pay the balance of `25 only. Companies limited
by shares are by far the most common and may be either public or private.

Other Forms of Companies

(a) Associations not for profit having a license under Section 8 of the Companies Act, 2013 or under any previous company law;
(b) Government Companies;
(c) Foreign Companies;
(d) Holding and Subsidiary Companies;
(e) Associate Companies/Joint Venture Companies
(f) Investment Companies
(g) Producer Companies.
(h) Dormant Companies

PRIVATE COMPANY
As per Section 2(68) of the Companies Act, 2013, “private company” means a company having a minimum paid-up share capital
of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles,—

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● restricts the right to transfer its shares;
● except in the case of One Person Company, limits the number of its members to two hundred:

Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this
definition, be treated as a single member:

(A) Persons who are in the employment of the company; and

(B)
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Provided further that the following persons shall not be included in the number of members;—

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, and
(iii) prohibits any invitation to the public to subscribe for any securities of the company; It must be noted that it is only the
number of members that is limited to two hundred. A private company may issue debentures to any number of persons, the only
condition being that an invitation to the public to subscribe for debentures is prohibited.
The aforesaid definition of private limited company specifies the restrictions, limitations and prohibitions, which must be
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expressly provided in the articles of association of a private limited company.
As per proviso to Section 14 (1), if a company being a private company alters its articles in such a manner that they no longer
include the restrictions and limitations which are required to be included in the articles of a private company under this Act, such
company shall, as from the date of such alteration, cease to be a private company. A private company can only accept deposit
from its members in accordance with section 73 of the Companies Act, 2013.
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The words ‘Private Limited’ must be added at the end of its name by a private limited company. As per section 3 (1), a private
company may be formed for any lawful purpose by two or more persons, by subscribing their names to a memorandum and
complying with the requirements of this Act in respect of registration. Section 149(1) further lays down that a private company
shall have a minimum number of two directors. The only two members may also be the two directors of the private company.
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ONE PERSON COMPANY (OPC)

Background of OPC
With the implementation of the Companies Act, 2013, a single person could constitute a Company, under the One Person
Company (OPC) concept.
The new Companies Act, 2013 has done away with redundant provisions of the previous Companies Act, 1956, and provides for a
new entity in the form of one person company (OPC), while empowering the Central Government to provide a simpler compliance
regime for small companies.
The introduction of OPC in the legal system is a move that would encourage the corporatization of micro businesses and
entrepreneurship.
In India, in the year 2005, the JJ Irani Expert Committee recommended the formation of OPC. It had suggested that such an entity
may be provided with a simpler legal regime through exemptions so that the small entrepreneur is not compelled to devote
considerable time, energy and resources on complex legal compliance. OPC is a one shareholder corporate entity, where legal and
financial liability is limited to the company only.

Difference between a Sole Proprietorship and an OPC

The fundamental difference between a sole proprietorship and an OPC is the way liability is treated in the latter.
A one-person company is different from a sole proprietorship because it is a separate legal entity that distinguishes between the
promoter and the company.
The promoter’s liability is limited in an OPC in the event of a default or legal issues. On the other hand, in sole proprietorships,
the liability is not restricted and extends to the individual and his or her entire assets.

Position of OPC in India under the Companies Act, 2013

The Companies Act, 2013 classifies companies on the basis of their number of members into One Person Company, private
company and public company. As stated above, a private company requires a minimum of 2 members. In other words, a One
Person Company is a kind of private company having only one member.
As per section 2(62) of the Companies Act, 2013, “One Person Company” means a company which has only one person as a
member.

Section 3(1)(c) lays down that a company may be formed for any lawful purpose by one person, where the company to be formed
is to be One Person Company that is to say, a private company. In other words, one person company is a kind of private company.
One person company shall have a minimum of one director. Therefore, a One Person Company will be registered as a private
company with one member and one director.
By virtue of section 3(2), an OPC may be formed either as a company limited by shares or a company limited by guarantee; or an
unlimited liability company.

Contract by One Person Company

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Section 193 (1) provides that where One Person Company limited by shares or by guarantee enters into a contract with the sole
member of the company who is also the director of the company, the company shall, unless the contract is in writing, ensure that
the terms of the contract or offer are recorded in a memorandum or are recorded in the minutes of the first meeting of the Board of
Directors of the company held next after entering into contract.
However, above said provision shall not apply to contracts entered into by the one person company in the ordinary course of its
business.

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As per section 193 (2), the company shall inform the Registrar about every contract entered into by the company and recorded in
the minutes of the meeting of its Board of Directors under sub-section (1) within a period of fifteen days of the date of approval by
the Board of Directors.

As per section 152 (1), in case of a One Person Company, an individual being its member shall be deemed to be its first director
until a director or directors are duly appointed by the member in accordance with the provisions of that section.
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Benefits of One Person Company
The concept of One Person Company is quite revolutionary. It gives the individual entrepreneurs all the benefits of a company,
which means they will get credit, bank loans, access to the market, limited liability, and legal protection available to companies.
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Prior to the new Companies Act, 2013 coming into effect, at least two shareholders were required to start a company. But now the
concept of One Person Company (OPC) would provide tremendous opportunities for small businessmen and traders, including
those working in areas like handloom, handicrafts and pottery.

Earlier they were working as artisans and weavers on their own, so they did not have a legal entity of a company. But now the
OPC would help them do business as an enterprise and give them an opportunity to start their own ventures with a formal business
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structure
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Further, the amount of compliance by a one-person company is much lesser in terms of filing returns, balance sheets, audit etc.
Also, rather than the middlemen usurping profits, the one person company will have direct access to the market and the wholesale
retailers. The new concept would also boost the confidence of small entrepreneurs.

SMALL COMPANY
As recommended by the Dr JJ Irani Committee, the concept of small companies has been introduced in the Companies, Act, 2013.
The recommendation of the Irani committee in this regard was as under:
“The Committee sees no reason why small companies should suffer the consequences of regulation that may be designed to ensure
balancing of interests of stakeholders of large, widely held corporates. Company law should enable simplified decision- making
procedures by relieving such companies from select statutory internal administrative procedures. Such companies should also be
subjected to reduced financial reporting and audit requirements and simplified capital maintenance regimes. Essentially the regime
for small companies should enable them to achieve transparency at a low cost through simplified requirements. Such a framework
may be applied to small companies through exemptions, consolidated in the form of a Schedule to the Act.”

A small company is a new form of a private company under the Companies Act, 2013. A classification of a private company into
a small company is based on its size i.e. paid-up capital and turnover. In other words, such companies are small sized private
companies.

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; or
(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 definition shall apply to—
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act;

PUBLIC COMPANY
By virtue of Section 2(71), a public company means a company which:
(a) is not a private company;
(b) Has a minimum paid-up share capital of five lakh rupees or such higher paid-up capital, as may be prescribed.
Provided that a company which is a subsidiary of a company, not being a private company, shall 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

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As per section 3 (1) (a), a public company may be formed for any lawful purpose by seven or more persons, by subscribing their
names or his name to a memorandum and complying with the requirements of this Act in respect of registration.

A public company may be said to be an association consisting of not less than 7 members, which is registered under the Act. In
principle, any member of the public who is willing to pay the price may acquire shares in or debentures of it. The securities of a

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public company may be quoted on a Stock Exchange. The number of members is not limited to two hundred. It may be noted that
in the case of a public company, the articles do not contain the restrictions provided in Sections 2(68) of the Act.

As per section 58(2), the securities or other interest of any member in a public company shall be freely transferable. However, any
contract or arrangement between two or more persons in respect of the transfer of securities shall be enforceable as a contract.

The concept of free transferability of shares in public and private companies is very succinctly discussed in the case of Western
Maharashtra Development Corpn. Ltd. V. Bajaj Auto Ltd [2010] 154 Com Cases 593 (Bom). It was held that the Companies Act,
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makes a clear distinction in regard to the transferability of shares relating to private and public companies. By definition, a
“private company” is a company which restricts the right to transfer its shares. In the case of a public company, the Act provides
that the shares or debentures and any interest therein, of a company, shall be freely transferable.

The provision contained in the law for the free transferability of shares in a public company is founded on the principle that
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members of the public must have the freedom to purchase and, every shareholder the freedom to transfer. The incorporation of a
company in the public, as distinguished from the private, realm leads to specific consequences and the imposition of obligations
envisaged in law. Those who promote and manage public companies assume those obligations. Corresponding to those obligations
are rights, which the law recognizes as inherent in the members of the public who subscribe to shares.
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LIMITED COMPANY
As per section 3(2), a company formed under this Act may be either (a) a company limited by shares; or (b) a company limited by
guarantee or (c) an unlimited company.

The term ‘Limited Company’ means a company limited by shares or by guarantee.

The liability of the members, in the case of a limited company, may be limited with reference to the nominal value of the shares,
respectively held by them or to the amount which they have respectively guaranteed to contribute in the event of winding up of the
company. Accordingly, a limited company can be further classified into: (a) Company limited by shares, and (b) Company limited
by guarantee.

Companies Limited by Shares

As per section 2(22), “company limited by shares” means a company having the liability of its members limited by the
memorandum to the amount, if any, unpaid on the shares respectively held by them.
Accordingly, no member of a company limited by shares, can be called upon to pay more than the nominal value of the shares
held by him. If his shares are fully paid-up, he has nothing more to pay. But in the case of partly-paid shares, the unpaid portion is
payable at any time during the existence of the company on a call being made, whether the company is a going concern or is being
wound up. This is the essence of a company limited by shares and is the most common form in existence.

Companies Limited by Guarantee

As per section 2(21) “company limited by guarantee” means a company having the liability of its members limited by the
memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event
of its being wound up. Clubs, trade associations and societies for promoting different objects are examples of such a company. It
should be noted that 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.
A guarantee company may or may not have a share capital.
As regards the funds, a guarantee company without share capital obtains working capital from other sources, e.g. fees or grants.
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, etc.

The Memorandum of Association of every guarantee company must state that every member of the company undertakes to
contribute to assets of the company in the event of its being wound up while he is a member for the payment of the debts and
liabilities of the company contracted before he ceases to be a member, and of the charges, costs and expenses of winding up, and
for adjustment of the rights of the contributories among themselves, such amount as may be required, not exceeding a specified
amount.

The Memorandum of a company limited by guarantee must state the amount of guarantee. It may be of different denominations. In

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case of a guarantee company having share capital the shareholders have two-fold liability: to pay the amount which remains
unpaid on their shares, 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 share capital is determined by the shareholding
and not by the guarantee.

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A guarantee company must include the word ‘limited” or the words “private limited” as part of its name, and must register its
articles, and it shall adopt the provisions of the Table ‘G’ and ‘H’ of Schedule I. It must also state the number of members with
which it proposes to be registered, although the number can be increased by means of a resolution.

Section 4(7) states that any provision in the memorandum of articles, in the case of company limited by guarantee and not having
a share capital, purporting to give any person a right to participate in the divisible profits of the company otherwise than as a
member shall be void.
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UNLIMITED COMPANY
As per section 2(92), “unlimited company” means a company not having any limit on the liability of its members. Thus, the
maximum liability of the member of such a company, in the event of its being wound up, might stretch up to the full extent of their
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assets to meet the obligations of the company by contributing to its assets. However, the members of an unlimited company are
not liable directly to the creditors of the company, as in the case of partners of a firm. The liability of the members is only towards
the company and in the event of its being wound up only the Liquidator can ask the members to contribute to the assets of the
company which will be used in the discharge of the debts of the company.
An unlimited company may or may not have share capital. Under Section 18, a company registered as an unlimited company may
subsequently re-register itself as a limited company, by altering its memorandum and articles of the company in accordance with
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the provisions of Chapter II of the Companies Act subject to the provision that any debts, liabilities, obligations or contracts
incurred or entered into, by or on behalf of the unlimited company before such conversion are not affected by such changed
registration.

GOVERNMENT COMPANIES
Section 2(45) defines a “Government Company” as any company in which not less than fifty one per cent. Of the paid-up share
capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and
partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government
company.

Notwithstanding all the pervasive control of the Government, the Government company is neither a Government department nor a
Government establishment [Hindustan Steel Works Construction Co. Ltd. v. State of Kerala (1998) 2 CLJ 383].

Since employees of Government companies are not Government servants, they have no legal right to claim that the Government
should pay their salary or that the additional expenditure incurred on account of revision of their pay scales should be met by the
Government. It is the responsibility of the company to pay them the salaries [A.K. Bindal v. Union of India (2003) 114 Com Cases
590 (SC)].
When the Government engages itself in trading ventures, particularly as Government companies under the company law, it does
not do so as a State but it does so in essence as a company. A Government company is not a department of the Government.

FOREIGN COMPANIES
As per section 2(42), “foreign company” means any company or body corporate incorporated outside India which—
(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
(b) conducts any business activity in India in any other manner
Sections 379 to 393 of the Act deal with such companies. Section 380 of the Act lays down that every foreign company which
establishes a place of business in India must, within 30 days of the establishment of such place of business, file with the

Registrar of Companies for registration:

(a) a certified copy of the charter, statutes or memorandum and articles, of the company or other instrument constituting or
defining the constitution of the company and, if the instrument is not in the English language, a certified translation thereof in the
English language;
(b) the full address of the registered or principal office of the company;
(c) a list of the directors and secretary of the company containing such particulars as may be prescribed;
(d) the name and address or the names and addresses of one or more persons resident in India authorised to accept on behalf

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of the company service of process and any notices or other documents required to be served on the company;
(e) the full address of the office of the company in India which is deemed to be its principal place of business in India;
(f) Particulars of opening and closing of a place of business in India on earlier occasion or occasions;
(g) declaration that none of the directors of the company or the authorized representative in India has ever been convicted or
debarred from formation of companies and management in India or abroad; and
(h) Any other information as may be prescribed.

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Every foreign company has to ensure that the name of the company, the country of incorporation, the fact of limited liability of
members is exhibited in the specified places or documents as required under Section 382.
Section 381 requires a Foreign Company to maintain books of Account and file a copy of the balance sheet and profit and loss
account in the prescribed form with ROC every calendar year. These accounts should be accompanied by a list of place of
business established by the foreign company in India.
Section 376 of the Companies Act, 2013 provides further that when a foreign company, which has been carrying on business in
India, ceases to carry on such business in India, it may be wound up as an unregistered company under Sections 375 to 378 of the
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Act, even though the company has been dissolved or ceased to exist under the laws of the country in which it was incorporated.

HOLDING, SUBSIDIARY COMPANIES AND ASSOCIATE COMPANIES

On the basis of control, companies can be classified into holding, subsidiary and associate companies.
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Holding company
As per Section 2 (46), holding company, in relation to one or more other companies, means a company of which such companies
are subsidiary companies.

Subsidiary company
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Section 2 (87) provides that subsidiary company or subsidiary, in relation to any other company (that is to say the holding
company), means a company in which the holding company—
(i) Controls the composition of the Board of Directors; or
(ii) Exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary
companies:
Provided that such class or classes of holding companies, shall not have layers of subsidiaries beyond the prescribed limit.
(Proviso to be notified)
For the above purpose,— A company shall be deemed to be a subsidiary company of the holding company even if the control referred to in
sub-clause

(i) or sub-clause (ii) is of another subsidiary company of the holding company;

(a) the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other
company by the exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;
(b) The expression “company” includes anybody corporate;

Associate company
As per Section 2(6), “Associate Company”, in relation to another company, means a company in which that other company has a
significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture
company.
Explanation to section 2(6) provides that “significant influence” means control of at least twenty per cent. Of total share capital, or
of business decisions under an agreement
To add more governance and transparency in the working of the company, the concept of the associate company has been
introduced. It will provide a more rational and objective framework of the associated relationship between the companies.
Further, as per section 2 (76), Related party includes ‘Associate Company’. Hence, contract with Associate Company will require
disclosure/approval/entry in the statutory register as is applicable to contract with a related party.

INVESTMENT COMPANIES
As per explanation (a) to section 186, “Investment Company” means a company whose principal business is the acquisition of
shares, debentures or other securities.
An investment company is a company, the principal business of which consists in acquiring, holding and dealing in shares and
securities. The word ‘investment’, no doubt, suggests only the acquisition and holding of shares and securities and thereby earning
income by way of interest or dividend etc. But investment companies in actual practice earn their income not only through the
acquisition and holding but also by dealing in shares and securities i.e. to buy with a view to sell later on at higher prices and to
sell with a view to buying later on at lower prices.
If a company is engaged in any other business to an appreciable extent, it will not be treated as an investment company. The
following two sets of legal opinions are quoted below as to the meaning of an investment company:

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(i) According to one set of legal opinion, an “investment company” means a company which acquires and holds shares and
securities with intent to earn income only from them by holding them. On the other hand, another school of legal opinion holds
that “an Investment Company means a company, which acquires shares and securities for earning income by holding them as well
as by dealing in such shares and other securities”.
(ii) According to Section 2(10A) of the Insurance Act, 1938, an investment company means a company whose principal

PRODUCER COMPANIES
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business is the acquisition of shares, stocks, debentures or other securities.

Section 465(1) of the Companies Act, 2013 provides that the Companies Act, 1956 and the Registration of
Companies (Sikkim) Act, 1961 (hereafter in this section referred to as the repealed enactments) shall stand repealed.
However, the proviso to section 465(1) provides that the provisions of Part IX-A of the Companies Act, 1956 shall be
applicable mutatis mutandis to a Producer Company in a manner as if the Companies Act, 1956 has not been repealed
until a special Act is enacted for Producer Companies.
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In view of the above provision, Producer Companies are still governed by the Companies Act, 1956. Companies (Amendment)
Act, 2002 had added a new Part IXA to the main Companies Act, 1956 consisting of 46 new Sections from 581A to 581ZT.
According to the provisions as prescribed under Section 581A(l) of the Companies Act, 1956, a producer company is a body
corporate having objects or activities specified in Section 581B and which is registered as such under the provisions of the Act.
The membership of producer companies is open to such people who themselves are the primary producers, which is an activity by
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which some agricultural produce is produced by such primary producers.

Objects of Producer Companies

In terms of Section 581B (1) of the Companies Act, 1956, the objects of a producer company registered under this Act may be all
or any of the following matters:
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● Production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of primary produce of the
members or import of goods or services for their benefit.
● Processing including preserving, drying, distilling, brewing, venting, canning and packaging of the produce of its
members.
● Manufacturing, sale or supply of machinery, equipment or consumables mainly to its members.
● Providing education on the mutual assistance principles to its members and others.
● Rendering technical services, consultancy services, training, research and development and all other activities for the
promotion of the interests of its members.
● Generation, transmission and distribution of power, revitalization of land and water resources, their use, conservation and
communications relatable to primary produce.
● Insurance of producers or their primary produce.
● Promoting techniques of mutuality and mutual assistance.
● Welfare measures or facilities for the benefit of the members as may be decided by the Board.
● Any other activity, ancillary or incidental to any of the activities referred to in clauses (a) to (i) above or other activities which
may promote the principles of mutuality and mutual assistance amongst the members in any other manner.
● financing of procurement, processing, marketing or other activities specified in clauses (a) to (j) above, which include
extending of credit facilities or any other financial services to its members. Further, under Section 581B (2) it has also
been clarified that every producer company shall deal primarily with the production of its active members for carrying
out any of its objects specified above.
 DORMANT COMPANIES
The Companies Act, 2013 has recognized a new set of companies called as dormant companies.
As per section 455 (1) 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.
Explanation appended to section 455(1) says that for the purposes of this section,—
(i) “inactive company” means a company which has not been carrying on any business or operation, or has not made any
significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns
during the last two financial years;
(ii) “Significant accounting transaction” means any transaction other than—
(a) Payment of fees by a company to the Registrar;
(b) Payments made by it to fulfill the requirements of this Act or any other law;
(c) Allotment of shares to fulfill the requirements of this Act; and
(d) Payments for maintenance of its office and records.
As per section 455(2), the Registrar on consideration of the application shall allow the status of a dormant company to the
applicant and issue a certificate in such form as may be prescribed to that effect.
Section 455(3) provides that the Registrar shall maintain a register of dormant companies in such form as may be prescribed.
According to section 455(4), in case of a company which has not filed financial statements or annual returns for two financial

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years consecutively, the Registrar shall issue a notice to that company and enter the name of such company in the register
maintained for dormant companies.
Further, a dormant company shall have such minimum number of directors, file such documents and pay such annual fee as may
be prescribed to the Registrar to retain its dormant status in the register and may become an active company on an application
made in this behalf accompanied by such documents and fee as may be prescribed. [Section 455(5)]

INCORPORATION OF A COMPANY Ja
Incorporation of a company refers to the legal process that is used to form a corporate entity or a company. An incorporated
company is a separate legal entity on its own, recognized by the law. These corporations can be identified with terms like ‘Inc’ or
‘Limited’ in their names. It becomes a corporate legal entity completely separate from its owners.
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Steps in Incorporation of a Company
A group of seven or more people can come together so as to form a public company whereas, only two are needed to form a
private company. The following steps are involved in the incorporation of a company.
1. Ascertaining Availability of Name
The first step in the incorporation of any company is to choose an appropriate name. A company is identified through the name it
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registers. The name of the company is stated in the memorandum of association of the company. The company’s name must end
with ‘Limited’ if it’s a public company and ‘Private Limited’ if it’s a private company.

2. Preparation of Memorandum of Association and Articles of Association

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The memorandum of association of a company can be referred to as its constitution or rulebook. The memorandum states the
field in which the company will do business, objectives of the company, as well as the type of business the company plans to
undertake. It is further divided into five clauses
● Name Clause
● Registered Office Clause
● Objects Clause
● Liability Clause
● Capital Clause
Articles of Association are basically a document that states rules which the internal management of the company will follow. The
article creates a contract between the company and its members. The article mentions the rights, duties, and liabilities of the
members. It is equally binding on all the members of the company.

3. Printing, Signing and Stamping, Vetting of Memorandum and Articles

 The Registrar of Companies often helps promoters to draw up and draft the memorandum and articles of association. Once
these have been vetted by the Registrar of Companies, then the memorandum of association and articles of association can be
printed. The memorandum and articles are consequently divided into paragraphs and arranged chronologically.

The articles have to be individually signed by each subscriber or their representative in the presence of a witness; otherwise, it will
not be valid.

4. Power of Attorney
To fulfill the legal and complex documentation formalities of incorporation of a company, the promoter may then employ an
attorney who will have the authority to act on behalf of the company and its promoters. The attorney will have the authority to
make changes in the memorandum and articles and moreover, other documents that have been filed with the registrar.

5. Other Documents to be filed with the Registrar of Companies

⮚ The First – e-Form No.32 – Consent of directors

⮚ The Second – e-Form No.18 – Notice of Registered Address

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The Third – e-Form No.32. – Particulars of Directors

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6. Statutory Declaration in e-Form No.1
This declaration, furthermore states that ‘All the requirements of the Companies Act and the rules there under have been compiled

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with respect of and matters precedent and incidental thereto.’

7. Payment of Registration Fees

A prescribed fee is to be paid to the Registrar of Companies during the course of incorporation. It depends on the nominal capital
of the companies which also have share capital.

8. Certificate of Incorporation
If the Registrar is completely satisfied that all requirements have been fulfilled by the company that is being incorporated, then he
will register the company and issue a certificate of incorporation. As a result, the incorporation certificate provided by the
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Registrar is definite proof that all requirements of the Act have been met.

Memorandum and Articles of Association

Introduction: Memorandum of association is the charter of the company and defines the scope of its activities. An article of
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association of the company is a document which regulates the internal management of the company. Memorandum of association
defines the relation of the company with the rights of the members of the company interest and also establishes the relationship of
the company with the members.
Definition- Memorandum: As per Section 2(56) of the Companies Act,2013 “memorandum” means the memorandum of
association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this
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Act.

Memorandum of Association
Section 4 of the Companies Act, 2013 deals with MOA The Memorandum of a company shall contain the following;
1. Name Clause: 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.
2. Situation Clause: The State in which the registered office of the company is to be situated.
3. Object Clause: The objects for which the company is proposed to be incorporated and any matter considered
necessary in furtherance thereof.
4. Liability Clause: The liability of members of the company, whether limited or unlimited, and also state,—
(i) In the case of a company limited by shares– liability of its members is limited to the amount unpaid, if any, on the
shares held by them; and
(ii) In the case of a company limited by guarantee-the amount up to which each member undertakes to contribute—
(A) 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 may be; and
(B) To the costs, charges and expenses of winding-up and for adjustment of the rights of the contributories among themselves;
5. Capital Clause: (i) the amount of share capital with which the company is to be registered and the division thereof into
shares of a fixed amount and the number of shares which the subscribers to the memorandum agree to subscribe which shall not
be less than one share; and
(ii) The number of shares each subscriber to the memorandum intends to take, indicated opposite his name;
In the case of One Person Company, the name of the person who, in the event of death of the subscriber, shall become the member
of the company
Identical/undesirable names;
The name stated in the memorandum shall not—
(a) be identical with or resemble too nearly to the name of an existing company registered under this Act or any previous
company law; or
(b) Be such that its use by the company—
(i) Will constitute an offence under any law for the time being in force; or
(ii) is undesirable in the opinion of the Central Government

(iii) A company shall not be registered with a name which contains—

(a) any word or expression which is likely to give the impression that the company is in any way connected with, or having the
patronage of, the Central Government, any State Government, or any local authority, corporation or body constituted by the
Central Government or any State Government under any law for the time being in force; or

Reservation of name: A person may make an application in Form No. INC.1 along with the fee as provided in the Companies

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(Registration offices and fees) Rules, 2014 to the registrar for the reservation of a name set out in the application as-
(a) The name of the proposed company; or
(b) The name to which the company proposes to change its name
The Registrar may, on the basis of information and documents furnished along with the application, reserve the name for a period
of sixty days from the date of the application.

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Penalty: If the company has not been incorporated, the reserved name shall be cancelled and the person making application shall
be liable to a penalty which may extend to Rs.1, 00,000/-
Action: If the company has been incorporated, the Registrar may, after giving the company an opportunity of being heard—
● either direct the company to change its name within a period of three months, after passing an ordinary resolution;
take action for striking off the name of the company from the register of companies; or
● Make a petition for winding up of the
company. Form of Memorandum:
S.No Table Form
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1 Table A MOA of a company limited by shares

2 Table B MOA of a company limited by guarantee and not having share capital
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3 Table C MOA of a company limited by guarantee and having share capital

4 Table D MOA of an unlimited company and not having share capital

5 Table E MOA of an unlimited company and having share capital

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Any provision in the memorandum or articles, in the case of a company limited by guarantee and not having a share capital,
purporting to give any person a right to participate in the divisible profits of the company otherwise than as a member, shall be
void

MOA- CA2013 Vs CA1956:

S.No CA,2013 CA,1956

1 It requires classification of objects as (i) The objects of the company should be

Objects for which the company is proposed classified in the memorandum as(i) main
to be incorporated and (ii) Any other matter objects(ii) Incidental or ancillary objects
considered necessary in furtherance thereof. (iii) Other objects

2 It requires that the memorandum shall state The unlimited companies were not required
liability of members of the company whether to state in the memorandum that liability of
unlimited or limited the members of the company is unlimited.
 3 A company shall not be registered with a There is no such provision
name which contains any word or expression
which is likely to give the impression that the
company is in any way connected with, or
having the patronage of, the Central
Government, any State Government, or any
local authority, corporation or body

4 It incorporates the procedural aspects of There is no such provision

application for availability of name of
proposed company or proposed new name
for existing company

5 It provides that the MOA of a company shall It provides that the MOA of a company shall
be in respective forms specified in Tables be in a one of the forms in Table B, C, D, E
A,B,C,D,E of Schedule I of the 2013 Act as of Schedule I of the 1956 Act as may be
may be applicable to the company. It does applicable to the case or in a Form as near

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not allow the memorandum to be in a form as thereto as the circumstances admit.
near to the applicable Forms in Schedule I as
the circumstances admit

Articles of Association

Section 5 of the Companies Act, 2013 deals with AOA Ja

Definition –Articles: As per Section 2(5) of the Companies Act, 2013 “articles” means the articles of association of a company as
originally framed or as altered from time to time or applied in pursuance of any previous company law or of this Act.

The articles of a company shall contain the regulations for management of the company. The articles shall also contain such
matters, as may be prescribed. It shall be not prevent a company from including such additional matters in its articles as may be
considered necessary for its management.
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Provisions for Retrenchment:
The articles may contain provisions for entrenchment 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.
The provisions for entrenchment shall only be made by
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Private Company on formation of a company, or

by an amendment in the articles agreed to by all
the members of the company

Public company By a special resolution

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Notice to Registrar:
Where the articles contain the provisions for entrenchment, the company shall give notice to the Registrar of such provisions in
Form No.INC.2 or Form No.INC.7, as the case may be, along with the fee as provided in the Companies (Registration offices
and fees) Rules, 2014 at the time of incorporation of the company or in case of existing companies, the same shall be filed in
Form No.MGT.14 within thirty days from the date of entrenchment of the articles, as the case may be, along with the fee as
provided in the Companies (Registration offices and fees) Rules, 2014
Form of Article:
The articles of a company shall be in respective forms as outlined below;
S.No Table Form

1 Table F AOA of a company limited by shares

2 Table G AOA of a company limited by guarantee and having share capital

3 Table H AOA of a company limited by guarantee and not having share capital

4 Table I AOA of an unlimited company and having share capital

 5 Table J AOA of an unlimited company and not having share capital
A company may adopt all or any of the regulations contained in the model articles applicable to such company.
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.
Nothing in this section shall apply to the articles of a company registered under any previous company law unless amended
under this Act

Prospectus
Section 2(70) of the Companies Act, 2013 defines a prospectus as ““A prospectus means Any documents described or issued as a
prospectus and includes any notices, circular, advertisement, or other documents inviting deposit fro the public or documents
inviting offer from the public for the subscription of shares or debentures in a company.” A prospectus also includes shelf
prospectus and red herring prospectus. A prospectus is not merely an advertisement.
A document shall be called a prospectus if it satisfy two things:
1. It invites subscription to shares or debentures or invites deposits.
2. The aforesaid invitation is made to the public.

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Contents of a prospectus:
1. Address of the registered office of the company.
2. Name and address of company secretary, auditors, bankers, underwriters etc.
3. Dates of the opening and closing of the issue.

5.

6. Details about underwriting of the issue.

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4. Declaration about the issue of allotment letters and refunds within the prescribed time.
A statement by the board of directors about the separate bank account where all monies received out of shares issued
are to be transferred.

7. Consent of directors, auditors, bankers to the issue, expert’s opinion if any.

8. The authority for the issue and the details of the resolution passed therefore.
9. Procedure and time schedule for allotment and issue of securities.
10. Capital structure of the company.
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11. Main objects and present business of the company and its location.
12. Main object of public offer and terms of the present issue.
13. Minimum subscription, amount payable by way of premium, issue of shares otherwise than on cash.
14. Details of directors including their appointment and remuneration.
15. Disclosure about sources of promoter’s contribution.
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16. Particulars relation to management perception of risk factors specific to the project, gestation period of the project,
extent of progress made in the project and deadlines for completion of the project.

Various Categories of Prospectus

Statement in lieu of Prospectus: A public company, which does not raise its capital by public issue, need not issue a prospectus. In such a
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case a statement in lieu of prospectus must be filed with the Registrar 3 days before the allotment of shares or debentures is made. It should
be dated and signed by each director or proposed director and should contain the same particulars as are required in case of prospectus
proper.
1. Deemed Prospectus: Section 25 of the companies Act, 2013 provides that all documents containing offer of shares or
debentures for sale shall be included within the definition of the term prospectus and shall be deemed as prospectus by implication
of law.
Unless the contrary is proved an allotment of or an agreement to allot shares or debentures shall be deemed to have been made
with a view to the shares or debentures being offered for sale to the public if it is shown
a. That the offer of the shares or debentures of or any of them for sale to the public was made within 6 month after the
allotment or agreement to allot; or
b. That at the date when the offer was made the whole consideration to be received by the company in respect of the
shares or debentures had not been received by it.
All enactments and rules of law as to the contents of prospectus shall apply to deemed prospectus.
2. Abridged Prospectus [Sec. 2(1)]: Abridged prospectus means a memorandum containing such salient features of a
prospectus as may be specified by the SEBI by making regulations in this behalf. No form of application for the purchase of any
of the securities of a company shall be issued unless such form is accompanied by an abridged prospectus. A copy of the
prospectus shall, on a request being made by any person before the closing of the subscription list and the offer, be furnished to
him.
Legal requirement regarding issue of prospectus: (Sec. 26 of the Companies Act, 2013)
The Companies Act has defined some legal requirements about the issue and registration of a prospectus. The issue of the
prospectus would be deemed to be legal only if the requirements are met.
1. Issue after the incorporation: As a rule, the prospectus of a company can only be issued after its incorporation. A
prospectus issued by, or on behalf of a company, or in relation to an intended company, shall be dated, and that date shall be taken
as the date of publication of the prospectus.
2. Registration of prospectus: it is mandatory to get the prospectus registered with the Registrar of Companies before it is
issued to the public. The procedure of getting the prospectus registered is as under:
A. A copy of the prospectus, duly signed by every person who is named therein as a director or a proposed director
of the company must be filed with Registrar of Companies before the prospectus is issued to the public.
B. The following document must be attached thereto:
i) Consent to the issue of the prospectus required under any person as an expert confirming his written consent to the issue
thereof, and that he has not withdrawn his consent as aforesaid appears in the prospectus.
ii) Copies of all contracts entered into with respect to the appointment of the managing director, directors and other officers
of the company must also be filed with Registrar.
iii) If the auditor or accountant of the company has made any adjustments in the company’s account, the said adjustments
and the reasons thereof must be filed with the documents.

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iv) There must be a copy of the application which is to be filled for the issue of the company’s shares and debentures
attached with the prospectus.
v) The prospectus must have the written consent of all the persons who have been named as auditors, solicitors, bankers,
brokers, etc.
C. Every prospectus must have, on the face of it, a statement that:

E.
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i) A copy of the prospectus has been delivered to the Registrar for registration.
ii) Specifies that any documents required to be endorsed by this section have been delivered to the Registrar.
D. A copy of the prospectus must be filed with the Registrar of Companies.
According to the Section 26, no prospectus shall be issued more than ninety days after the date on which a copy
thereof is delivered for registration.
If a prospectus issued in contravention of the above –stated provisions, then the company and every person who knows a party to
the issue of the prospectus shall be punishable with a fine.
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Misleading Prospectus or Mis-statement in prospectus:
A prospectus is said to be misleading or untrue in two following cases:
1. A statement included in a prospectus shall be deemed to be untrue, if the statement is misleading in the form and
context in which it is included.
2. Omission from prospectus of any matter to mislead the investors.
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CRIMINAL LIABILITY FOR MIS-STATEMENT IN PROSPECTUS (SECTION 34):

Where a prospectus, issued, circulated or distributed:
1. Includes any statement which is untrue or misleading in form or context in which it is included; or
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2. Where any inclusion or omission of any matter is likely to mislead;

Every person who authorizes the issue of such prospectus shall be liable under section 447 i.e. fraud.
Defenses available in this section are:
1. Person proves that statement or omission was immaterial;
2. Person has reasonable ground to believe and did believe that statement was true; or
3. Person has reasonable ground to believe and did believe that the inclusion or omission was necessary.
CIVIL LIABILITY FOR MIS-STATEMENTS IN PROSPECTUS (SECTION 35):
Where a person has subscribed for securities of a company acting upon any misleading statement, inclusion or omission and has
sustained any loss or damage as its consequence, the company and every person who:
1. is a director at the time of the issue of prospectus;
2. Has named as director or as proposed director with his consent;
3. is a promoter of the company;
4. Has authorized the issue of the prospectus; and
5. is an expert;
Shall be liable to pay compensation to effected person This civil liability shall be in addition to the criminal liability under section
36. Where it is proved that a prospectus has been issued with intent to defraud the applicants for the securities of a company or
any other person or for any fraudulent purpose, every person shall be personally responsible, without any limitation of liability, for
all or any of the losses or damages that may have been incurred by any person who subscribed to the securities on the basis of
such prospectus.
Defenses under this section are:
1. He has withdrawn his consent or never give his consent;
2. The prospectus was issued without his knowledge or consent and when he become aware, gave a reasonable public
notice that prospectus was issued without his knowledge or consent

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DIRECTORS
Definition:- As per Section 2(34) of Companies Act 2013 Director means a director appointed to the Board of a Company.
II. Responsibility:- The board of directors of a company is primarily responsible for:
⮚
⮚

⮚
appointing senior management;
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determining the company’s strategic objectives and policies;
monitoring progress towards achieving the objectives and policies;

Accounting for the company’s activities to relevant parties, e.g. shareholders.

III. Minimum Directors Required in Company:-
i. One Person Company: - One Director.
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ii. Private Limited Company: - Two Directors.
iii. Public Limited Company: - Three Directors.
Maximum 15 directors can be appointed in any format of Company (OPC, Public, Private). Bypassing Special Resolution
Company can increase the number of Directors beyond 15. Out of appointed directors one director should be resident in India for
more than 182 days in previous calendar year.
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IV. Types of Directors:-

1. Residential Director:- As per Section 149(3) of Companies Act,2013 every company shall at one director who has
stayed in India for a total Period of not less than 182 days in the Previous calendar year.
2. Independent Director:- As per section 149(6) an independent director in relation to a company, means a director other
than a Managing Director, Whole Time Director Or Nominee Director. Companies which have to appoint Independent Director:-
As per Rule 4 of Companies (Appointment and Qualification of Directors) Rules,2013 the following class of companies have to
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appoint atleast two independent directors:-

A} Public Companies having Paidup Share Capital-Rs.10 Crores or More;
B} Public Compnies having Turnover- Rs.100 Crores or More;
C} Public Companies have total outstanding loans, debenture and deposits of Rs. 50 Crores or More.

Person Qualified for Independent Directorship:-

A) Who, in the opinion of the Board, is a person of integrity and possesses relevant expertise & experience;
B) i) Who is or was not a promoter of the Company or its Holding, Subsidiary or Associate Company(HSA Companies);
ii) Who is not related to Promoters or directors in the company, its HSA companies?
C) Who has or had no Pecuniary (relating to Money) relationship with Company and its HSA Company or their
promoters, directors during the 2 immediately preceding financial years or during the current financial year;
D) none of whose relatives has or had pecuniary relationship with company, its HSA company or their Promoters,
directors - amounting to 2% or more of its gross turnover or total income; -or fifty lakhs or such higher amount as may be
prescribed, whichever is lower. During the 2 immediately preceding financial years or during current financial year.
E) Who neither himself nor any of his relative-
1. holds or has held the position of KMP or has been employee of the Company or its HSA companies in any of the 3
financial years;
2. he or his relative has an employee or proprietor or a partner in any of the three financial years immediately
 preceding the financial year in which he is proposed to be appointed- as a auditor firm, Company Secretary in practice, Cost
Auditor, Legal Consultant of the company or its HSA companies;
3. Holds with relatives 2% or more of the total voting power of the Company;
4. he or his has not be Chief Executive or Director of any Non Profit Organization that receive 25% of its receipt
from the Company or HSA Companies or its Promoters or directors or that NGO holds 2% or more of the total voting
power of the Company.
5. Who possesses such other qualification as may be prescribed. Tenure of Director:- an independent director hold
office for a term up to 5 consecutive years, -Also eligible for reappointment by passing Special Resolution and also
require its reappointment in Boards Report. -He shall not hold office for more than 2 Consecutive terms, but shall not be
eligible to appoint after expiration of 3 Years of ceasing to become an independent director. Remuneration to Independent
Director:- An independent director shall not be eligible for any stock option as per section 149(9) of Act. But they may
receive remuneration by way of fee provided under section 197(5) of the Act. Sitting fees for Board meeting and other
committee meeting shall not be exceed Rs. 1,00,000 per meeting.
3.

Small Shareholders Directors:- A listed Company may have one director elected by small shareholders. May appoint upon notice
of not less than 1000 Shareholders or 1/10th of the total shareholders, whichever is lower have a small shareholder director which
elected form small shareholder.

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4. Women Director:- As per Section 149 (1) (a) second proviso requires certain categories of companies to have At
Least One Woman director on the board. Such companies are any listed company, and any public company having-
Paid Up Capital of Rs. 100 crore or more, or
Turnover of Rs. 300 crore or more

5.

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Additional Directors: Any Individual can be appointed as Additional Directors by a company under section 161(1) of
the New Act.

Alternate Directors:- As per Section 161(2) A company May appoint, if the articles confer such power on
company or a resolution is passed (if an Director is absent from India for atleast three months).
An alternate Director cannot hold the office longer than the term of the Director in whose place he has been appointed.
Additionally, he will have to vacate the office, if and when the original Director returns to India.
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Any alteration in the term of office made during the absence of the original Director will apply to the original Director and not to
the Alternate Director.

7. Shadow Director:- A person, who is not appointed to the Board, but on whose directions the Board is accustomed
to act, is liable as a Director of the company, unless he or she is giving advice in his or her professional capacity.
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8. Nominee Directors:- They can be appointed by certain shareholders, third parties through contracts, lending public
financial institutions or banks, or by the Central Government in case of oppression or mismanagement.

9. Difference Between Executive and Non-Executive Director:- An Executive Director can be either a Whole-time
Director of the company (i.e., one who devotes his whole time of working hours to the company and has a significant personal
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interest in the company as his source of income), or a Managing Director (i.e., one who is employed by the company as such and
has substantial powers of management over the affairs of the company subject to the superintendence, direction and control of the
Board). In contrast, a non-executive Director is a Director who is neither a Whole-time Director nor a Managing Director.