Indian Contract Act - Ii

LAW OF CONTRACTS - II
Difference between contract of

indemnity and contract of
guarantee
Introduction
Contract of guarantee and contract of indemnity perform similar commercial
functions in providing compensation to the creditor for failure of a third party
to perform their obligation. However, there are some major differences
between the two. In this article, the author will talk about the differences
between the contract of indemnity and contract of guarantee along with
relevant legal provisions of the Indian Contract Act, 1872.
Meaning
Indemnity
The dictionary meaning of the term ‘indemnity’ is protection against future
loss. Indemnity is the protection against loss in the form of a promise to pay
for loss of money, goods, etc. It is security against or compensation for loss
incurred.
According to Halsbury, indemnity refers to an express or implied contract

that protects a person who has entered or is going to enter into a contract or
incur any other duty from loss, irrespective of the default incurred by a third
person.
As per the Oxford Dictionary of Law, indemnity is an agreement by one

person to pay to another, a sum that is owed or which may be owed, to him
by a third person. It is not conditional on the third person defaulting on the
payment.
Guarantee
Guarantee enables a person to get a loan, to get goods on credit, etc.
Guarantee means to give surety or assume responsibility. It is an agreement
to answer for the debt of another in case he makes default.
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The Oxford Dictionary of Law defines guarantee as a secondary agreement in
which a person (guarantor) is liable for a debt or default of another (principal
debtor) who is the party primarily liable for the debt. A guarantor who has
paid out on his guarantee has a right to be indemnified by the principal
debtor.
Contract of Indemnity
Chapter VIII of the Indian Contract Act, 1872 contains the legal provisions
governing a contract of indemnity and a contract of guarantee in India.
Section 124 : Contract of indemnity

Section 124 of the Act defines a contract of indemnity as a contract wherein
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.
A contract of indemnity can provide protection against loss caused—
1. By the conduct of promisor, or

2. By the conduct of any other person.
Under Indian law, a contract of indemnity can only provide for losses caused
by human agency whereas in England, it includes a promise to save the
other person from loss caused whether by acts of promisor or of any other
person or any other event like fire, accident, etc.
Indemnifier
The person who makes a promise to indemnify against the loss or to make
good the loss (promisor) is called an indemnifier.
Indemnity-holder
The person in whose favour such a promise to indemnify is made (promisee)
is called indemnity-holder.
For example, Anil enters into a contract with Swapnil to indemnify him
against the consequences of any proceedings which Mrinal may initiate
against Swapnil in respect of a certain sum of Rs. 2000/-. In this contract,
Anil is the indemnifier and Swapnil is the indemnity-holder.
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Main features
1. It involves two parties i.e. promisor being the indemnifier and
promisee being the indemnity holder.
2. Object of the contract of indemnity is to protect from a loss.
3. As per the Indian Contract Act, the contract of indemnity must be to
indemnify against a loss caused by any act or conduct of the
promisor himself or by the conduct of any other person.
4. It is not contingent on the default of some third person.
What are the rights of an indemnity holder

Section 125 of the Act covers ‘Rights of indemnity-holder when sued’. This
Section provides for the right of the indemnity holder to recover the damages
and costs that he may have been compelled to pay in a suit filed against him,
in a case where the indemnity-holder has promised such indemnity, i.e.,
where a contract of indemnity to that effect exists. The rights of the
indemnity holder are-
1. Right to recover from the promisor, the damages that he may be

compelled to pay in any suit in respect of any matter to which the
promise to indemnify applies.
2. Right to recover from the promisor all the costs that he may be
compelled to pay in any suit, provided—
1. that he did not contravene any of the orders of the promisor in filing
or defending such suit, and
2. that he acted in a manner as would have been prudent for him to
act in the absence of any such contract of indemnity, or
3. that the promisor had authorised him to file or defend such a suit.
4. Right to recover from the promisor all such sums that he paid under
the terms of any compromise of any such suit, provided-
1. the compromise was not contrary to orders of the promisor, and

2. such compromise is one as the promisee would have made while
acting in a prudent manner even if such contract of indemnity did
not exist, or
3. that the promisor had authorised the promisee to compromise the
suit.
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When liability commences
A pertinent question that arises with regard to a contract of indemnity is,
‘when does the liability to indemnify commence/arise’. Originally, under
English law, the rule was that the indemnity holder cannot recover the
amount unless he had suffered actual loss i.e. ‘you must be damnified before
you can claim to be indemnified’. However, this position of the law changed.
In Richardson Re, Ex parte the Governors of St. Thomas’s Hospital (1911), it
was held that indemnity is not necessarily given by repayment after
payment, but it requires that the party to be indemnified shall never have to
pay. This principle was followed by the Calcutta High Court in Osman Jamal &
Sons Ltd. v. Gopal Purshottam (1928).
As far as Indian position is concerned, the Bombay High Court in Gajanan

Moreshwar v. Moreshwar Madan (1942), held that the equitable principle
applicable in England shall be applicable in India too and therefore, where
the indemnity holder has incurred a liability and that liability is absolute, he
is entitled to call upon the indemnifier to save him from that liability and pay
it off.
Contract of guarantee
Section 126 of the Indian Contract Act defines the term contract of
guarantee, surety, principal debtor and creditor. The purpose behind a
contract of guarantee is to give additional security to the creditor that his
money will be paid back by the surety if the debtor makes a default.
Contract of guarantee : Section 126

A contract of guarantee is a contract to perform the promise or discharge the
liability of a third person in case of his default.
The contract of guarantee has three parties involved, namely, the principal
debtor, the creditor, and the surety.
Surety
The person who gives the guarantee is called the Surety. The liability of the
surety is secondary, i.e., he has to pay only if the principal debtor fails to
discharge his obligation to pay.
Principal debtor
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The person in respect of whose default the guarantee is given is the Principal
debtor. The principal debtor has the primary liability to pay.
Creditor
The person to whom the guarantee is given is called the creditor.
For example, Anil orders certain goods of the value of Rs. 2000/- from
Swapnil on credit. Mrinal guarantees that, if Anil will not pay for the goods,
she will. This is a contract of guarantee. Here, Rs. 2000 is the principal debt,
Anil is the principal debtor, Mrinal is surety and Swapnil is the creditor.
Main features
1. A contract of guarantee may be oral or written: According to Section
126, a contract of guarantee may be oral or in writing. However,
under English law, for a contract of guarantee to be valid, it has to
be in writing and signed.
2. There must be a principal debt: The existence of a principal debt is
necessary for a contract of guarantee. If there is no principal debt,
then there is no existing obligation to pay. As a result of the
absence of such obligation to pay, there cannot be any
promise/guarantee. If there is a promise to pay for compensating
some loss without there being any principal debt, such a contract
will become a contract of indemnity.
3. Contract of guarantee is tripartite in nature: There being three
parties involved in a contract of guarantee, three contracts take
place in a contract of guarantee-
 The principal debtor promises to make payment to the creditor.

 Surety undertakes to pay the creditor in event of default of payment
by the principal debtor.
 An implied promise by the principal debtor in favour of surety to
indemnify him in case he discharges the liability of the principal
debtor.
4. There is a promise to pay upon default of payment by the debtor: In

a contract of guarantee, the surety’s promise to pay is dependent
on the default of the debtor i.e. surety pays only when the debtor
defaults.
5. The consideration is the benefit to the debtor: As per Section 127,
anything done or promise made for the benefit of the principal
debtor may be a sufficient consideration to the surety for giving the
guarantee. For example, Anil sells and delivers certain goods worth
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Rs. 5000 to Swapnil. Mrinal afterward requests Anil to refrain from
suing Swapnil for a year and promises that if he does so, she will
pay for the goods in default of payment by Swapnil. Anil agrees. The
forbearance by Anil to sue is of benefit to Swapnil (the debtor) and
that constitutes sufficient consideration for Mrinal (surety) for giving
the guarantee.
6. The consent of the surety should not have been obtained by
misrepresentation or concealment of material facts: Section 142 of
the ICA, 1872 provides that a guarantee obtained using
misrepresentation made by the creditor or with his knowledge or
assent, concerning a material part of the transaction is invalid.
Section 143 provides that a guarantee obtained by the creditor by keeping
silent as to some material circumstance is also invalid.
Difference between contract of indemnity and

contract of guarantee
BASIS OF
CONTRACT OF INDEMNITY CONTRACT OF GUARANTEE
DISTINCTION
There are two parties in a contract of There are three parties in a contract of
Parties indemnity, namely the indemnifier and the guarantee, namely the principal
indemnity holder. debtor, the creditor, and the surety.
It consists of three contracts-A

contract between principal debtor and
creditor wherein the debtor promises
to perform his obligation/make
payment. The contract between surety
It consists of only one contract between and creditor wherein the surety
the indemnifier and the indemnity holder. promises to perform the aforesaid
No. of contracts The indemnifier promises to indemnify the obligation/make the payment if the
indemnified/indemnity holder in event of a principal debtor makes a default. An
certain loss. implied contract between the surety
and the principal debtor. The
principal debtor bounds himself to
indemnify the surety for the sum that
he has paid under the guarantee
undertaken by him.
The liability of the indemnifier is The liability of the surety is a

3. Nature of primary. The liability in a contract of secondary one, i.e., his obligation to
liability indemnity is contingent in the sense that it pay arises only when the principal
may or may not arise. debtor defaults. Liability in a contract
of guarantee is continuing in the
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sense that once the guarantee has
been acted upon, the liability of the
surety automatically arises. However,
the said liability remains in suspended
animation until the debtor makes
default.
The liability of an indemnifier is not Liability of surety is conditional on

conditional on the default of somebody the default of the principal debtor. For
else. For example, Mrinal promises the example, Anil buys goods from a
Default of third shopkeeper to pay, by telling him that, seller and Mrinal tells the seller that if
person “Let Anil have the goods, I will be your Anil doesn’t pay you, I will. This is a
paymaster”. This is a contract of contract of guarantee. Thus, the
indemnity as the promise to pay by Mrinal liability of Mrinal is conditional on
is not conditional on default by Anil. non-payment by Anil.
Principal debt is necessary. (refer to

Principal debt No requirement of the principal debt.
the previous example)
After the surety has made the

Whether Once the indemnifier indemnifies the
payment, he steps into the shoes of
subsequent indemnity holder, he cannot recover that
the creditor and can recover the sums
recovery is possible amount from anybody else.
paid by him from the principal debtor.
Whether a contract
has to be in writing In India, contracts of indemnity may be In India, a contract of guarantee may
or can be oral as either oral or written. be either oral or written.
well
Conclusion
Both the contract of indemnity and contract of guarantee are similar in the
sense that they provide protection against loss. However, as mentioned
above, there is an important distinction between the two. Whether a contract
is a contract of indemnity or a contract of guarantee is a question of
construction in each case. One of the ways to identify such a contract might
be the description of the agreement as to whether it is named as a contract
of guarantee or indemnity and if those terms are mentioned in the contract a
few times or more. However, that cannot be considered conclusive enough.
Another way might be to see if under the contract, the liability of a person
exists irrespective of the default of the principal debtor or where such liability
is for a greater amount than the amount payable by principal debtor. In that
case, the contract may be construed as a contract of indemnity. Thus, it will
depend on a case to case basis and while analysing the facts/agreement, one
must keep in mind the relevant points of distinction between the two
concepts.
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Rights and Duties of Indemnifier and
Discharge
Rights and Duties of Indemnifier and Discharge: – The rights of the indemnity-
holder are the duties of indemnifier, and duties of the indemnity-holder are the
rights of the indemnifier. Discharge of contract means the termination of
a contractual relationship between parties. The indemnity contract essentially involves
one party promising to make good for the loss of the other. These losses may arise
either due to the conduct of the other party or due to someone else and the discharge of
a contract means the termination of contractual obligations.
Parties to the contract of Indemnity

The contract of indemnity consists of two parties: –
1. Promisor or Indemnifier: – The person who promises to bear the loss. For eg:
‘P’ is the indemnifier or promisor because he promises to bear the loss of ‘Q’.
2. Promisee or Indemnity holder: – The person whose loss is covered or who are
compensated. For example: – ‘Q’ is the promisee or indemnity or indemnity-
holder because his loss is covered by ‘P’.
Essentials of Contract of Indemnity
Essentials of contract of indemnity are as follows: –
1. Parties to a contract: – There should be two parties, namely, promisor or
indemnifior and promisee or indemnity or indemnity holder.
2. Loss Prevention: – A contract of indemnity is entered into for the purpose of
protecting against damage. Damage may be caused by the conduct of the
promisor or any other person.
3. Express or implied: – A contract of indemnity may be expressed (i.e. made by
spoken or written words) or implied (i.e. from the conduct of the parties or
circumstances of a particular case).
4. Essentials of a valid contract: – A contract of indemnity is a special type of
contract. The principles of common law of contract contained in Sections 1 to 75
of the Indian Contract Act, 1872 apply to them. Therefore, it must have all the
essentials of a valid contract.
5. Number of contracts: – In a contract of indemnity, there is only one contract
which is between the Indemnifier and indemnified.
RIGHTS AND DUTIES OF INDEMNIFIER
Rights of the Indemnity holder
1. Right to recover damages paid in a suit [Section 125 (1)]: – An indemnity
holder has the right to recover from the indemnifier which he may be obliged to
pay in any suit in respect of the contract of Indemnity applies.
2. Right to recover cost incurred in defending a suit [Section 125(2)]: – An
Indemnity holder has the right to recover the cost incurred by him in defending a
law suit in the court of law.
3. Right to recover amount paid under compromise [Section 125(3)]: – An
Indemnity holder has the right to recover the amount paid by him in any
compromise under the suit from the Indemnifier.
Rights of Indemnifier
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It is a well-known principle of law that where one person has agreed to compensate
another, he will agree to do well for his losses, so Indemnifier has right to protect or
reimburse himself in any way or means from the losses.
Duties of Indemnifier
The duties of an indemnifier arise in the following circumstances: –
1. There must be a loss in accordance with the contract to make the indemnifier
liable.
2. There must be an occurrence of the anticipated event. Without any occurrence of
the prescribed event, there is no indemnity by the indemnifier.
3. Where the right of indemnity is used by the indemnity-holder prudently and the
instruction of the indemnifier is not contravened or when there is no breach of
contract.
4. If the costs demanded by the indemnifier are not caused by negligence,
haphazard behaviour.
Duties of Indemnity holder = Rights of Indemnifier
Except as otherwise stated in the contract, the indemnifier shall not be liable for
damages under the following circumstances. He is also called the duty of indemnity-
holder.
1. Duty to Act Prudently: – Except as otherwise stated in the contract, the

indemnifier shall not be indemnified for the loss caused by the negligence of the
indemnity holder. In other words, it is the duty of the indemnity-holder to act
prudently.
2. Duty not to cause any harm or loss: – If the indemnity-holder acts with the
intention of causing any loss or damage, the indemnifier shall not be liable for
such loss. In other words, it is the duty of the indemnity or holder not to cause
harm or harm.
3. Duty to comply with the intentions of the Indemnifier: – If the indemnity-
holder acts against the instruction of the other party or the promisor, the
indemnifier shall not be liable for such damages as the Indemnity holder goes
beyond the instructions given by the Indemnifier. In other words, it is the duty of
the indemnity-holder to follow the intent of the promoter.
Case laws of Rights and Duties of Indemnifier and
Discharge
1. Bihal Chandra vs. Chattur Sen (AIR 1976 ALL 506): – In this case, the seller
had promised the other person to pay against the fees. Court held that the
indemnification clause will only include the existing fees and not that
subsequently imposed, retrospectively.
2. Jaswant Singh vs. Section of State 14 BOM 299: – It has been decided that the
rights of the indemnifier are similar to the security under section 141 where it is
the right to benefit from all the securities that the creditor has against the
principal debtor, whether or not he has been aware of them.
3. Osman Jamal & sons ltd. vs. Gopal Purushottam (1928 ILR 56 Cal 262):
– Repayment after the payment is not necessary to cover by the held Indemnity.
Compensation requires that the compensated party is never called upon to pay.
What is Discharge of Contract?
Meaning of Discharge of Contract: – Discharge of contract means the termination of
a contractual relationship between parties. A person is liable to perform contractual
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duties until he or she is discharged. If the person fails to act without being discharged,
responsibility for the loss will arise. The contract may be discharged from full compliance
or non-performance of the contractual obligation. Each contract contains an “implied
covenant of goodwill” that the parties will act impartially, keep their promises, and not
frustrate the other party’s reasonable expectations as to what has been given and what
has been received.
A contract is said to be discharged when the object or obligations is fulfilled, the liability
of either party under the contract comes to an end.
Types of Discharge
1. Discharge by Full Performance: – A contract can be discharged when the
parties to the contract fulfill their obligations or duties according to the terms of
the contract. However, the obligations and duties must be performed within the
prescribed time and in the prescribed manner. For example: – Ali enters into the
contract with Akram for the sale of watch for 1000 rupees. Akram receives the
watch and Ali get his consideration in return. Here, both the parties did their part
after this they will be discharged from the contract. Discharge of full performance
is of two types: –
A. Actual Performance: – When the contracting parties perform what
they have mentioned in the contract, it is called the actual
performance.
B. Attempt to Perform: – A promise made is when one side of the
contract attempts to fulfill its promise, but the other party refuses to
accept it.
2. Discharge of Contract by Time Lapse: – The Limitation Act, 1963 provides for a
specific period for the performance of a contract. If the party to the contract does
not perform its duties or obligation within a specified period and if the aggrieved
party fails to take any action within the specified time, then this lapse of time will
lead to the discharge of the contract. For example: – Shashank gives his house on
rent to Kanan on a condition that Kanan will pay her rent to him every month. He
went to US and forget about the rent then he came back India after 10 years. Then
he asked for the rent from Kanan, she refused. He filed the suit in the court
against Kanan for the recovery of rent. The court dismissed the plea as he crossed
the time limit for the recovery of rent.
3. Discharge of Contract from Impossibility of Performance: – The contract can
be discharged from the impossibility of performance where it is almost
impossible for the parties to fulfill their obligations or duties as per the contract.
Usually the non-performance of the contract is due to circumstances beyond the
control of the parties i.e. natural calamities, unforeseen circumstances,
government policies, wars/riots, destruction of content, etc. If a contract is
impossible from the beginning, it is void-ab-initio. For example: – Akram enters
into a contract with Keshav for the supply of 10kg rice for 30,000rs. But the crops
gets destroyed due to heavy rain and the Keshav is unable to perform his
obligation. Here, in this case, the impossibility of performance leads to discharge
of contract.
4. Discharge of Contract by Mutual Agreement: – The contract is said to be
discharged by the mutual agreement, when the parties to the replace the contract
with the new one. For example: – Karan enters into agreemen with Shikha for the
sale of his black car worth rupees 5lacs. Later Karan changed his mind and
decided to sell his white car to Shikha. Here the old contract of black car was
replaced by the new contract of the sale of white car.
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5. Discharge of Contract by Operation of Law: – A contract can be discharged
from the operation of the contract. When the parties’ obligations to the contract
cease due to interference with the law, it is said that the contract is discharged
from the operation of the law. Discharge of contract from operation of law
includes death, insolvency / bankruptcy, merger, court decision, unauthorized
change of terms of a written agreement and the rights and obligations vested in
the same person. For example: – Anand enters into the contract for the sale of his
house with Reena. Anand dies before the parties could perform their obligations.
Here, in this case the contract will be discharged by the operation of laws.
6. Discharge of Contract by the Breach of Contract: – A contract is said to be
discharged from breach of contract when the parties to the contract fail to fulfill
their obligations and duties at the scheduled time and in the manner specified in
the contract. For example: – Shikha give his house on rent to Shurti on a condition
that she will not further rent the house to any other person for the monetary
benefits. But Shikha further rent the house to the third person. This is amount to
discharge of contract by the breach of contract as Shikha did not comply with the
terms of the contract. There can be two types of breach of contract: –
A. Actual Breach: – Actual breech refers to when the contracting party
refuses to perform its contractual duties and obligations on the due
date.
B. Anticipatory Breach: – Anticipatory breech refers to when the
contracting party refuses to perform its duties and obligations before
the due date of performance.
7. Discharge of Contract by Remission: – A contract is discharged by a waiver
when the parties are waive or remit the performance of the contract completely
or partially. For example: – John and Raman enters into a contract for the sale of
watch, where the Raman has to pay the price of watch in installments. Raman
paid two installments on time so John later free him from the payment of final
installment. This is called the discharge by remission where the John waive his
right to get the final installment
8. Discharge of Contract by Merger of Rights: – A contract can be discharged
when an inferior right available to one party merges with a superior available to
the same party under another contract. This is called discharge of contract by
merger of rights. For example: – Aakash gives his house to Nandan on rent for 8
months. Later Nandan gave offer to buy the same house and Aakash accepted the
offer. Here, there are two contract between them one is of lease and another is of
sale. The contract of sale (superior contractt) will merge with the contract to
lease (inferior contract) and this will lead to discharge of contract.
9. Discharge of Contract by the Non-Provisioning of Facilities: – Sometimes, the
party/parties to the contract (promise) agrees to give the promisor appropriate
facilities for the performance of the contract. If the promisee fails to fulfill, the
promisor will be discharged from all liabilities arising due to non-performance of
the contract. For example: – Sam agrees to fix Adam’s watch provided he leaves
his watch at Sam’s shop for a week. Adam refused to leave his watch at the shop
for a week, despite constantly asking him to do so. Sam fails to give Adam proper
facilities. In this circumstance, Sam will be discharged of all obligations arising
due to non-performance of the contract.
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Nature and extent of liability of
surety
Introduction
According to Black’s law dictionary, the word “guarantee is used, as a noun,
to denote the contract of guarantee or the obligation of a guarantor, and, as
a verb, to denote the action of assuming the responsibilities of a guarantor.”
A contract of guarantee enables an individual to get a loan or buy goods on

credit or acquire means of livelihood. A contract of guarantee is a tripartite
agreement, that is, it concerns three parties- the principal debtor, the
creditor, and the surety.
There must be a principal debtor who has taken debt from the creditor. The
surety comes into the picture and pays the debt on behalf of the principal
debtor. For example, A, an individual comes up and tells the supplier of
certain goods B, that he will pay for the goods bought by C, in case C fails to
do so. A promises to guarantee the payment in consideration of B’s promise
to deliver the goods. This is sufficient consideration for C’s promise.
Contract of guarantee
A contract of guarantee is precisely stated under Section 126 of the Indian
Contract Act, 1872. According to this section, a contract of guarantee can be
understood as a contract that requires an individual or a group of individuals
to perform a promise made or to discharge their liability under the contract
when the third party to the contract failed to fulfill their part of the promise.
This guarantee can be oral or written.
A contract of guarantee requires three parties: the principal debtor, the

creditor, and the surety. The individual on whose non-payment the
guarantee has to be given is the principal debtor or the borrower, the
creditor is the individual who is given the guarantee and the surety is the
individual who gives the guarantee.
Surety makes a promise to the creditor that on the principal debtor’s default,
they will discharge the third party’s liability or fulfill the promise which was
made by the principal debtor. Therefore, the surety gives assurance to the
creditor for the principal debtor’s act.
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It can be interpreted that the liability of the surety acts as collateral to the
principal debtor’s liability. In case the principal debtor defaults, the surety is
bound by a conditional promise to be held liable.
There are three essential features of a contract of guarantee:
1. Consideration- It is an essential element of a contract of

guarantee. The consideration can be monetary, a future act,
personal property, etc. that largely benefits the principal debtor.
2. Not made in good faith- A contract of guarantee is not
an uberrimae fides contract, that is, a contract made in good faith.
But there is an obligation to disclose all the material facts to the
surety so he can make an informed decision. Therefore, a guarantee
obtained by concealment or misrepresentation is invalid.
3. Either oral or written- The contract can either be oral or written
according to Section 126 of the Indian Contract Act, 1872.
The Act seeks to protect the interest of all the three parties that are involved
in a contract of guarantee with emphasis on the interests of the surety.
Nature of liability of surety

As laid down in Section 128 of the Indian Contract Act, 1872, the liability of
the surety is coextensive. It has the same extent as that of the principal
debtor. It emphasizes the maximum degree as well as the scope of the
surety’s liability.
Coextensive
‘Coextensive’ is an attribute to the word extent and refers to the amount or
the quantum of the principal debt. This particular section only explains the
ambit of the extent of surety’s obligation when no limit has been stipulated
against the validity of the principal debtor’s obligation.
The Section further explains how the surety may, however, in the agreement
impose certain limits to the extent of his liability entering into a special
contract. They can make a declaration and impose a certain limit or
restriction to their liability.
Unless it is expressly mentioned in the terms of the contract, neither can the
surety be held liable by the creditor nor can he sue him, till the principal
debtor makes a default. Therefore, the surety’s liability is secondary or
peripheral in nature.
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It is encouraging to take note of the fact that even before the Indian
Contract Act, 1872 was enacted the Indian courts perceived the principle of
co-extensiveness. In the case of Lachman Joharimal v. Bapu Khandu and
Another (1869), the Bombay High Court explained how it is not binding on
the creditor to extinguish his remedies before suing the principal debtor. On
obtaining a decree against the surety, it may be upheld in a similar way as a
pronouncement or a decree for any obligation of the party or any debt which
has not been repaid.
Condition precedent to the surety’s liability

Where there is a condition precedent to the surety’s liability, he will not be
liable unless that condition is first fulfilled. Section 144 is based on this
principle to an extent. For example, when an individual gives a guarantee to
undertake a task unless another individual joins as a co-surety, the
guarantee will be invalid if another co-surety does not join the contract.
In National Provincial Bank of England v. Brackenbury (1906), a guarantee

was signed by the defendant. The defendant signed the contract on the
condition that three more individuals would also sign the contract, as part of
a joint and several guarantee. However, one of the three individuals did not
sign the contract of guarantee. The Court held that no agreement took place
since there was a condition to the contract that was not fulfilled. Hence, the
defendant was held not liable.
The extent of liability of surety

It is still a critical issue to measure the maximum extent of surety’s liability
and to what extent it is being invoked presently. Herein the question is at
what time the surety’s liability comes under scrutiny- when the debtor has
not fulfilled their part of the promise of all the remedies that have been
availed by the creditor against the debtor.
Is creditor bound to exhaust his remedies before suing

the surety
The surety’s liability is not removed in case of the omission of the creditor in
suing the borrower. The creditor does have to necessarily exhaust his
remedies against the principal debtor before they sue the surety. They can
still maintain a suit if no proceedings have been initiated beforehand against
the borrower. However, the surety cannot be held liable until the contingency
takes place.
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Difficulties arise in interpreting the principle of co-extensiveness when the
surety has guaranteed performing a contractual liability to make payments
by way of installments to the creditor.
Prominent case laws

The reference point for these difficulties was brought to light and elucidated
in Lep Air v. Moschi (1973). In this particular case, the debtor did not make
the payment in installments to the creditor who had performed their end of
the contract. The contract was repudiated by the creditor. The issue here was
whether the creditor could initiate proceedings against the surety at the time
of repudiation for the amount entitled to the creditor under the contract,
regardless of the fact that when the repudiation was accepted the debtor
now had a secondary and not a primary obligation to pay damages.
The surety had an obligation to observe the debtor’s performance of his

contractual obligations, so on his default, the surety was obligated to make a
payment to the creditor for the loss incurred to him. However, it was
visualized in this case that the obligation of the surety and the debtor would
be coextensive and no pronouncement could breach this basic principle.
The principle of co extensiveness was further enforced in the following cases

of Bank of Bihar Ltd v. Damodar Prasad and Another (1968) wherein the
Supreme Court explained how the sole condition required was to demand the
payment pertaining to the principal debtor’s liability for the implementation
of the bond. On the fulfillment of the condition and despite constant
demands, both the principal debtor and the surety did not fulfill their end of
the contract.
The liability being co-extensive and immediate in nature made the surety
liable to pay the whole sum in question. There was no delay and no
anticipation for the remedies to be extinguished by the creditor against the
principal debtor.
A similar judgment was held in State Bank of India v. Indexport Registered

(1992), wherein the Supreme Court explained how the surety solely because
of the creditor’s omission in initiating proceedings against the surety does
not become free from their liability to pay the debt. It was reinstated that the
creditor is not confined to having his remedies and a suit is still maintainable
before suing the principal debtor.
The Supreme Court explained how prima facie there can be proceedings
against the surety despite the absence of demand and without proceeding
against the principal debtor first. They explained the lack of any such
prerequisite for the creditor to request payment from the principal debtor or
sue him for not fulfilling his part of the promise and they can directly initiate
15
proceedings against the surety unless it has been expressly stipulated in the
contract.
In the case of Hukumchand Insurance Co Ltd v. Bank of Baroda (1977), the

Karnataka High Court observed the nature and the incidents that occurred
are the two main factors which decide the liability, the extent, and manner of
the enforcement. Although the principal debtor and the surety’s liability
arising from the same bargain, the two liabilities are not alike. These
principles laid down were further reinforced in a number of cases.
It is the choice of the creditor which remedy they find fit to pursue and
neither the defaulter nor the surety can compel the creditor in any manner
and advise them to take recourse to a particular remedy. It falls in the
exclusive domain of the creditor.
In the case of State Bank of India v. G.J. Herman and others (1998), the
Kerala High Court observed that the surety’s liability being joint and several,
would not bind the creditor to initiate proceedings against the principal
debtor or the other sureties in the contract. If such a direction would be
binding, it would be a direct violation of the principle of co extensiveness.
They are to be liable till the extent to which they stood guarantee and can
face proceedings by the creditor. It is solely the discretion and the decision of
the creditor against whom he wants to initiate the proceedings- the principal
debtors or any of the sureties.
A suit against principal debtor alone

The creditor can initiate a suit against the principal debtor alone without
initiating any proceedings against the surety. In Union Bank of India v. Noor
Dairy Farms (1996), it was held that such a suit would be maintainable. The
liability of the surety in a contract of guarantee is not absolved on the
dismissal of a suit against the principal debtor.
A suit against surety alone

A suit against the surety without initiating proceedings against the principal
debtor has been held to be maintainable. In N.Narasimhaiah v. Karnataka
State Financial Corporation (2004), the creditor showed sufficient reasons for
not proceeding against the principal debt in his affidavit. A contract of
guarantee was made enforceable by the terms stipulated against the
guarantors severally and jointly with that of the principal debtor’s company.
The Court held that the creditor has the option to sue the company and the
surety as co-defendants or the surety alone.
16
Proceedings against surety’s mortgaged property
A financial corporation cannot take possession of the surety’s mortgaged
property of the guarantor without prior notice. The corporation also cannot
issue any public notice to sell the property without informing the surety. This
is because the surety’s liability is secondary in nature and would arise only
when the principal debtor fails to repay the amount.
The property of the surety which has been offered as a security can be
proceeded against without exhausting the available remedies against the
principal debtor.
Death of principal debtor

In case of the death of the principal debtor, any suit against him would
be void ab initio. However, the surety would not be discharged of his liability
to pay the amount.
In Orissa Agro Industries Corpn Ltd v. Sarbeswar Guru,(1985), it was held

that the dismissal of the suit against the principal debtor, under Order
1 of Code of Civil Procedure, 1908 would not automatically absolve the
surety of its liability.
Surety’s right to limit his liability or make it

conditional
The surety may put a restriction on the extent of his liability in the
agreement. He can expressly declare his guarantee to a fixed amount and in
such a case the surety cannot be liable for any amount beyond the fixed
amount.
The principal debtor owes a greater amount but it is not the responsibility of
the surety to be responsible for even a single rupee more than what was
stated in the agreement. For example, in Hobson v Bass (1871) the surety
expressly declared that “my liability under this guarantee shall not at any
time exceed the sum of £250“.
Conclusion
The principle of co-extensiveness cannot be classified as a rigid principle. The
exact degree and extent of the surety’s liability would be governed by the
17
provisions mentioned in the guarantee on the actual constructed document
and the parties have the freedom to impose certain restrictions towards the
surety’s liability without deviating from the actual nature of the contract of
guarantee.
The exact and precise extent will always be under the governance of the
provisions of guarantee on how the document has been drafted and the
parties enjoy the freedom to add restraints if any to the surety’s liability.
There have been conflicting issues regarding the issue of initiating

proceedings, without extinguishing the remedies available in opposition to
the principal debtor. The Supreme Court had the same stance in
the Damodar Prasad case that the surety can be sued before other remedies
are used. The Judiciary has restated this basic principle in many judgments
and over the years have and continue to remove the pertinent ambiguities
and issues regarding the scope of the surety’s liability.
Each case has clarified the interpretation of the principle however, there is
still a wide scope of improvement. The courts will continue to ponder and
expound on the validity of the principle with respect to the nuances of the
period.
Rights of a surety
Introduction
An agreement which is enforceable by law is called a contract. A contract is
an agreement where certain terms and conditions are agreed by the parties
in exchange of consideration and a guarantee means an assurance which is
being given by a party to someone in respect to an act. Hence, the contract
of guarantee is a contract between three parties in respect to any default
done by a person then another party assures to recover that loss.
In this article you will further read about the contract of guarantee between
the specific parties of the contract of guarantee. How the contract of
guarantee is different from other forms of contract and provisions under
which they are enforced with judicial interpretations.
What is a contract of guarantee

Section 126 of the Indian Contract Act, 1872 has defined the contract of
guarantee. The word contract of guarantee in simplified form means a
contract which is an agreement forcible in the eye of law and guarantee
which means the assurance.
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The Contract of Guarantee is a contract where there are 3 people involved.
In a sense, a person lends money who is said to be a creditor to another
person who is in need of money, called the principal debtor along with a
person who gives the guarantee that the money will be repaid to the creditor
either by the principal debtor or if he makes a default in paying then the
guarantor or surety will make the payment.
Essentials of a contract of guarantee

Parties to be involved in a contract
In a contract of guarantee there must be a contract between three parties.
The three parties include the creditor, the principal debtor and the surety. In
respect to a loan which is taken by the principal debtor from a creditor
having a surety.
Role of surety
The surety is bought in the contract just as a person who gives a guarantee
that the principal debtor will pay the amount but if in any circumstances the
principal debtor fails to pay the amount the creditor may ask the surety to
pay the debt amount. The important point to be noted here is that only if the
principal debtor does not pay the debt then only the creditor can ask the
surety to clear his debt.
Consideration involved
It is the established principle of contract law that a contract is valid only
when the contract involves any kind of consideration in it. Section 127 of the
Indian Contract Act, 1872 clarified in respect to the consideration as part of
surety it says that if any benefit is being received by the principal debtor the
same can be regarded to be for the surety to give the guarantee.
Essentials for making a contract valid

There are certain points to be kept in mind while making a contract valid.
There must be an offer, with a lawful consideration between the parties to
enter into a contract and the age must be of at least 18 years, giving free
consent to enter into a contract.
All the facts must be communicated
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All the facts to the surety should be communicated in respect to the contract
which is being executed. The creditor or the principal debtor cannot conceal
any facts in relation to the contract of guarantee.
There must be a debt

It is important that there must be any kind of debt in the contract. If the
debt is not there then there cannot be a contract of guarantee. A promise for
the repayment of the dues must be there on part of the principal debtor or
the surety.
Parties to a contract of guarantee

In the contract of guarantee there are three parties involved. The parties in
contract of guarantee are the following :
1. Creditor – The creditor is the person who lends money to the

principal debtor and is entitled to receive the loan back as the
specified time period expires.
2. Principal debtor – The principal debtor is the person who receives
the loan from the creditor and it is the primary liability of the
principal debtor to return the money back.
3. Surety – The surety is a person who takes the guarantee that the
principal debtor will return the money back. The surety is also called
a guarantor. If the principal debtor fails to pay the loan amount then
the creditor can ask the surety to repay the loan.
Rights of a surety
Rights against the creditor
i) Right to securities with the creditor

Section 141 of the Indian Contract Act,1872 has mentioned the right of
surety to get a share in the security which has been kept while entering into
the contract of guarantee. The place of surety is the same as the place of the
creditor in terms of security. It is a compulsion on a creditor to share the
security with the surety; it is irrelevant whether the surety was aware of the
security or not. If the principal debtor defaults in the payment and the surety
has cleared the dues, it makes the surety entitled for a share.
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ii) Loss of securities without creditor’s negligence
Under this circumstance the creditor takes the security of the principal debtor
in case of default of payment. The surety has the right to set-off the claim in
respect to the value of security from the debt of the principal debtor.
Illustration– A being the creditor gave a loan to B of Rs 2,00,000 on the

surety of C. While B has kept his house on security in respect to the loan
borrowed from A. B was in default to pay the loan of A. If A files a case
against C for the repayment of the due amount, then C can claim discharge
of the amount from the security which was recovered.
Rights against the principal debtor
i) Rights of subrogation
Section 140 of the Indian Contract Act, 1872 has stated the right of
subrogation. The right of subrogation means forming a new contract to
recover the debt from the parties. As the surety has paid the amount due in
respect to default made by the principal debtor. Now the surety takes the
place of the creditor and the principal debtor is entitled to pay the repaid
loan amount which was paid on behalf of him to the creditor in the original
contract of guarantee.
ii) Rights of indemnity against the principal debtor

Under Section 145 of the Indian Contract Act, 1872 it is mentioned to
indemnify the surety. ‘To indemnify’ means that a party will pay the damages
which are caused to the party in respect of fulfilment of the act of the
promisor. Under the Contract of Guarantee the principal debtor is obliged to
indemnify the surety in respect to the default of payment at the time of
discharging the loan amount. It is not compulsory that the indemnity clauses
should be mentioned in the contract; it is an implied duty of the principal
debtor in respect to default of payment.
iii) Securities received by the creditor after the contract of guarantee

Section 141 of the Indian Contract Act, 1872 has mentioned the right of
surety in the security which is mentioned in the contract of guarantee. If the
principal debtor makes a default in payment of the loan amount and the
payment is made by surety then in this case the surety can avail the benefit
of security. If the amount is being deducted from security then in this case
the surety can be discharged.
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Surety’s rights against the co-sureties
i) Co-sureties right to get release from the contract

Section 138 of the Indian Contract Act, 1872 has stated that if one surety is
discharged from his liability it will not mean that all the sureties are also
discharged from his obligation. Co-sureties here means that when more than
one surety gives the guarantee or takes the obligation to pay the debt of the
principal debtor. As per Section 138 when the principal debtor fails to pay the
debt and if the creditor asks only one surety to fulfil his duty. In this case
that surety can ask the other co-sureties to fulfil their responsibility.
2.Co-sureties are entitled to contribute equally

Section 146 of the Indian Contract Act, 1872 has mentioned that the
liabilities of co-securities are joint. If the contract does not mention the
liability of co-securities as joint, it must be implied that all the co-securities
will share equally the debt not paid by the principal debtor.
3.Co-sureties entitled to pay the amount as promised

As per Section 147 if the co-securities have promised a particular amount to
pay in the sum of debt then they are obligated to pay that sum if the
principal debtor causes default in payment of the loan.
Illustrations: Ram, Shyam and Mohan are co-securities to Ramesh. Ramesh

took a loan of Rs 9,000. If three of them have decided to pay Rs 3,000 each
in case of default of payment of the loan by Ramesh. Then they are entitled
to pay Rs 3,000 only
Conditions under which the surety can be

discharged from his liability
There are majorly three circumstances when a surety can be discharged from
his liability. The circumstances are :-
1. Revocation of contract of guarantee;

2. Conduct of the creditor; and
3. Invalidating contract of guarantee.
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i) Revocation of contract of guarantee
By way of notice
According to Section 130 of the Indian Contract Act, 1872 the surety can
revoke the contract of guarantee by way of notice to the creditor in
advance. The surety is exempted from any responsibility after the surety
gives notice to the creditor. It means that prior to the notice all contracts will
be valid.
Death of surety
According to Section 131 of the Indian Contract Act, 1872 the death of the
surety will cause a revocation of the contract of guarantee. But the legal
heirs of surety will be obliged to perform the contract on behalf of surety.
ii) Conduct of the creditor
Terms of contract being changed

According to Section 133 of the Indian Contract Act, 1872 if the creditor
makes any changes in the terms of contract with the consent of the principal
debtor without the knowledge of the surety. The surety will be discharged
from the contract of guarantee. The reason being the surety will be liable for
the conduct only which he would have promised to do and not further.
Performance of contract of guarantee

According to Section 134 of the Indian Contract Act, 1872 the surety will be
discharged from his promise if the principal debtor fulfils his promise or pays
the loan and the contract of guarantee is executed.
Mere compromise
According to Section 135 of Indian Contract Act, 1872 the creditor gives
extra time to the principal debtor for the payment of the loan amount and
promises that he may not sue the debtor for this; in this case the surety is
discharged from the contract.
iii) Invalidating the contract of guarantee
23
Contracts executed through misrepresentation
According to Section 142 of the Indian Contract Act,1872 if the contract is
made by a creditor by concealing material facts from the parties or he has
misrepresented the terms of the contract, then the contract is not valid. It
will not be enforced under law.
Contract entered through concealing facts

According to Section 143 of the Indian Contract Act,1872 if the contract was
entered through concealing a material fact from the parties then the contract
will not be valid.
Unless co-sureties consent to a contract

According to Section 144 of the Indian Contract Act,1872 the contract will
not be forceable unless the other co-sureties enter into a contract of
guarantee.
Surety’s liability
Section 128 of the Indian Contract Act, 1872 has stated the liability of
surety. The liability of surety will be co-extensive which means that the
extent to which the principal debtor is liable is the same as the surety is
liable. The surety cannot be made liable to the extent in which the principal
debtor is not. The contract of guarantee is primarily with the principal debtor
and then with the surety.
Case laws with respect to contract of

guarantee
State of Madhya Pradesh v. Kaluram 1967 SCR (1)

266 (1966)
Facts of the case

The auction was held by the forest officer in Madhya Pradesh for the sale of
felled trees. The auction was in favour of Jagatram. The contract was
executed between Jagtram and Government of Madhya Pradesh where the
payments were decided to be made in instalments where Nathuram and
24
Kaluram were made the surety if Jagatram made any default in payment of
the dues. After the payment of the first instalment, Jagatram failed to pay
the due amount from the second instalment and cleared all the trees. In
respect to the non-payment of the due amount, the surety was asked to fulfil
the promise.
Issue involved in the case

Whether the co-sureties are liable to pay the debt ?
Judgement of the Court

The Hon’ble Supreme Court relied his judgement on Section 141 of Indian
Contract Act the department should not have allowed the Jagatram to clear
the forest without the due payment of loan and it can be seen that the fault
was on part of creditor hence, the surety cannot be made liable to pay the
loan amount as this act made him discharge from his liability.
Rajappan v. Associated Industries Private Ltd. (1990)
Facts of the case

The agreement of guarantee was drafted by the plaintiff on the account of
surety given by the second defendant in respect to a loan of Rs 10,000 to the
first defendant. In this case the plaintiff was the creditor, the principal debtor
was the first defendant and the surety was the second defendant.
The terms were already reciated to both the parties and both of them agreed
to the terms. After relying on the terms the draft was made for the
agreement but at the time of execution of signature, the second defendant
contended to the Plaintiff that he was in hurry and would sign the agreement
later due to some urgent work and left the place. Now when the time came
to fulfil the promise of being a guarantor he refused the said terms and said
that he had never signed the agreement, hence he is not entitled to pay the
due amount.

Whether the second defendant is entitled to pay the amount because he
promised to be a guarantor?
25
The Hon’ble Kerala High Court mentioned there was certain evidence in
favour of the second defendant which was produced by the plaintiff in respect
to performance of the agreement. The Hon’ble Court established that, as the
second defendant on just the basis of not signing the agreement cannot be
discharged from his duties. Hence, the contract of guarantee is an agreement
where three parties are involved: the creditor, principal debtor and the
surety. It should not be necessary that only the signature will be considered
as entering into an agreement but implied acts can also be deemed as a
consent.
Radha Kanta Pal v. United Bank of India Ltd. (1954)
Facts of the case

The case was in respect to the agreement. Rajanikant Pal (Deceased) came
under a bond dated 8 August 1944 with Comilia Banking Corporation Limited
(at the time of executing the bond) now known as United Bank of India after
amalgamation in respect to appointing Nishikanta Pal as a cashier in the
bank. The consideration of the bond was Rs 10,000.
When Nishikanta Pal was appointed as a cashier in the bank, the

misrepresentation in cash of the bank was found twice. The bank instead of
taking any disciplinary action against Nishikanata deducted the amount from
Rajanikant promissory note without any prior consent or information given to
the parties in view of adjusting their claims.

The Court stated that the creditor was in the employer’s position. He must
have checked in regard to the work being done and he could have taken any
action against the employee. The Hon’ble Court stated that Section 139 of
the Indian Contract cannot be brought in this case.
Ansal Engineering Projects Limited v. Tehri Hydro

Development Corporation Limited and Another
(1966)
Facts of the case
26
The petitioner entered into a contract with the respondent dated 30 March,
1991 in respect to the construction of a residential quarter in Tehri. The
residential quarters were not completed within the time period. The
respondent terminated the contract on his part and went to United
Commercial Bank Ltd. (UCO) to collect the amount. As part of the conflict the
plaintiff appointed an arbitrator for the resolution of the said dispute.

The Hon’ble Court stated that the respondent was not entitled to receive the
amount from the bank guarantee. This will be regarded as revocation of
contract through illegal means and will be termed as fraud on the part of the
respondent.
Difference between contract of indemnity and

contract of guarantee
Basis Contract of Indemnity Contract of Guarantee
Provision under Section 124 of Indian Contract

Section 126 of Indian Contract Act defines
Indian Contract Act defines Contract of
Contract of Guarantee
Act Indemnity
It is a contract of promise to
It is a contract of a guarantee that the principal
save the person from loss
Definition debtor will not make a default in payment of due by
which is caused by another
the surety.
person.
There are two parties involved

Parties to a There are three parties involved in a contract,
indemnifier and indemnity
Contract creditor, principal debtor and surety
holder
In this contract the promisor In this contract the primary liability will be on the
Liability of third
has primary liability in case of principal debtor if he is at default then it is the
party
default surety.
There is only one contract. There are three contracts.Firstly, between Creditor
Number of
That is between the and Principal Debtor. Secondly with the Principal
agreement
indemnifier and the indemnity Debtor and Surety. Thirdly, between Creditor and
between parties
holder. Surety.
Conclusion
27
The contract of guarantee is different from the other forms of contract. In the
contract of guarantee there are three parties involved instead of two parties
and more specifically this contract is executed to protect the creditor from
the default of the principal debtor, unusual to other contracts. In common
forms of contract there must be a consideration in exchange for fulfilment of
the act but here there is no major consideration involved; it is a promise to
recover the loss caused to the creditor by the default of the principal debtor.
FAQs
The extent of liability of the surety under the contract

of guarantee?
The surety’s liability is coextensive in the contract of guarantee; it means
that the surety can only be made liable to the extent with which the principal
debtor is liable.
Can a contract of guarantee be enforceable only if it is

in writing ?
No, the contract of guarantee can be either in oral or in writing to be
enforced in India.
Can a surety be entitled to fulfil his promise even after

the principal debtor paid the dues?
The agreement is said to be over on the date at which the principal debtor
pays the loan amount and the creditor cannot enforce the surety to pay the
amount promised; it is promised only if the principal debtor causes a default
in payment to the creditor.
Bailment- Meaning and

Introduction
28
Introduction
There are many cases of bailment in our day to day life. For example, in the
case of laundry, we give our clothes for getting washed. Once they are washed,
they are to be returned back to us. We place the other person in temporary
possession of our clothes for a specific purpose and there is an express or
implied understanding between the two to return the good once the purpose
has been fulfilled.
Meaning
The word ‘bailment’, is derived from ‘bailler’, a french word which means ‘to
deliver’. Bailment has been defined under the Section 148 of the Indian
Contract Act, 1872, according to which Bailment involves the delivery of goods
from one person to another for a specific purpose and upon a contract, when
the purpose is fulfilled, the good has to be returned or dealt with on the
direction of the person who has delivered the goods.
How is Bailment different from the sale of the good?

Sales involve the transfer of the ownership of the good in exchange for
something of value while on the other hand, Bailment involves the transfer of
the possession of the good, not the ownership.
What goods can be bailed?

Only the goods that are of movable nature can be bailed. However, current
money or legal tender cannot be bailed and deposition of money will not be
counted as bailment as money is not a good and the same money will not be
delivered back to the client.
Essential Features
Delivery of Possession
There must be a delivery of goods, which means, delivery of possession of the
goods by the bailer to the bailee to fulfill the purpose of bailment. Possession
refers to exercising control over the good and excluding any other person to
do the same.
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Section 149 of the Indian Contract Act, 1872 talks about the same. The
delivery of possession can either be actual or constructive. It means that either
the good can directly be put in the actual physical possession of the bailee or
put the bailee in a position of power over such goods that can be physically
possessed later, if possible. In constructive delivery, the bailor gives the bailee
means of accessing the custody of the good and not its actual delivery.
For example, C has a rare coin locked safe deposit box. As the delivery of a
safe deposit box is impossible, when C, bailor, gives the key of the deposit box
for the bailment of the coin to A, bailee, it would be considered as constructive
delivery.
It is important to note that mere custody of goods is not equivalent to the

possession of goods. In Reaves v. Capper, it was held that a servant can be in
the custody of the goods because of the nature of his job but that does not
mean he is in possession of the goods. For example, a servant holding his
master’s umbrella is not a bailee.
Delivery upon Contract

There must be a contract between the bailor and the bailee for such transfer
or good and its return. If there is no contract, there cannot be bailment.
Moreover, the contract can either be expressed or implied.
Exception: If the good is lost, the finder of good will be seen as the bailee
even if there was no contract of Bailment or delivery of goods under a contract.
A finder of goods is a person who found a lost good belonging to someone else
and keeps it under his possession until the owner of the good is found. This
leads to an involuntary form of Bailment contract between them. The finder
has all rights and duties that of a bailee.
Delivery must be for some purpose

It is essential that there must be a purpose for which the delivery of the goods
takes place. If after the completion of the purpose of bailment the good is not
accounted for, then bailment cannot arise. This is an important feature as it
separates it from other relations like agency, etc..
Return of goods
After the completion of the purpose, the good must be delivered to the bailor
or dealt with as per his instructions. If he/she is not bound to return the good
30
then there is no bailment. Even if there is an agreement to return an equivalent
and not the same good, it will not amount to bailment.
For example, a tailor receives a saree for stitching as he is the bailee. After
the saree has been stitched, the tailor is supposed to return it to the bailor.
Moreover, it is necessary for the bailee to follow the instruction given by the
bailor for the purpose of the return of the good if any.
In Secy of state v. Sheo Singh Rai, a man, for the purpose of cancelling and
consolidating nine government promissory notes into a single note of Rs.
48000, went to a Treasury Officer. Later, the notes were misappropriated by
a servant at the treasury and the man filed a suit against the State to hold it
responsible as a bailee. He failed as there is no Bailment without delivery of
good and a promise to return the same and the government was not bound to
return the same notes or deal with them in accordance with the wishes of the
man.
Classification of Bailment
Bailment can be broadly categorized into two types:
On the basis of Remuneration
Gratuitous Bailment
When a bailment is made without any consideration of benefit to the bailor or
to the bailee, it is referred to as gratuitous bailment. In simple terms, it is a
bailment without any consideration.
For example, when one lends a book to a friend free of cost.
Non-Gratuitous Bailment
When generally there is a consideration for bailment between the bailor and
the bailee then it is referred to as non-gratuitous bailment.
For example, when someone gets a book issued from a library in exchange for
a fee.
On the basis of benefits to the parties
31
For the exclusive benefit of the bailor
In this case, the bailor delivers his/her good to the bailee for safe custody.
There is no benefit/benefit for the bailee.
For example, leaving a pet with a neighbour when going out.
For the exclusive benefit of the bailee

In this case, the bailor delivers a good for the benefit of the bailee. For
example, a friend borrowing our car for a week.
For the mutual benefit of them both

In this case, the bailor deliver his good to the bailee for consideration and both
the parties get benefit out of bailment,
For example, giving a bike for repair to a mechanic, for which the mechanic
gets paid.
Duties/Rights of Bailor and bailee
Duties of Bailor
Disclose known faults

It does not matter whether the goods are gratuitously or non-gratuitously
bailed, the bailor has a duty to disclose all the known faults about that good
that is being bailed to the bailee. Failing to do so would make the bailor liable
to indemnify the bailee for all the damages caused to him directly from this
fault. However, it is important to note that in the case of non-gratuitous
bailment, the bailor is responsible even for those faults from which he/she is
not aware.
Examples:
1. A lends his bike to B. A is aware of the fact that the bike’s brakes are
not working properly and fails to inform the same to B. B met with an
accident and is severely injured. A is liable to pay B for the damages
sustained.
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2. Raj hires a racing car from Shyam to participate in a racing
competition. During the race, the car caught fire. Raj was unable to
extinguish it as the fire-fighting equipment was out of order, due to
which he sustained injuries. Therefore, Shyam is responsible to pay
Raj even if he was not aware of the fact that fire-fighting equipment
was out of order.
Bear expenses of bailment
In case of Non-Gratuitous Bailment

Bailor is expected to bear all the extraordinary expenses but the bailee is
bound to bear all the ordinary and reasonable expenses of the bailment.
Example: A leaves his dog with B, a professional dog trainer, for a week as he
is going out of town. B is being paid for the same so A is not required to bear
the ordinary expenses. However, the dog suffered from high fever and B had
to call a doctor. A has to repay all the medical expenses born by B.
In case of Gratuitous Bailment

The bailor is required to pay all the necessary expenses incurred by the bailee
for the purpose of bailment for the delivered goods.
Example: A lends his dog to B, a close friend, for a week as he is going out of
town. A is not paying anything to B to take care of his dog so he needs to pay
him for all the ordinary expenses born by B to feed the dog for a week.
However, if the dog gets sick and suffers from high fever, A has to pay B for
all the additional medical expenses incurred by him.
Indemnify Bailee
According to Section 159, in case of gratuitous bailment, the bailor can
terminate bailment at any time even if the bailment was for a specific time or
purpose. However, the bailor is required to indemnify the bailee if the losses
incurred by him due to the premature termination exceed the benefits he
derived out of the bailment.
Example: A lends his car to B, a friend for a week as B has to go out of town
for a family gathering. As B has not paid any charges for bailment, he fills 30
litres of petrol in the car for the drive. Suddenly after 4 days, A calls B to give
his car back. So, B can demand from A value of petrol remaining in the car
after 4 days.
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Indemnify the bailee when he suffers due to the title of bailor to the
goods being defective
According to Section 164, the bailor has to indemnify the bailee if even after
knowing that he is not entitled to the good and makes bailment due to which,
the bailee suffers losses.
Example: A lends his car to B, a customer for a week as B has to go out of

town for a family gathering. B has already paid an advance of Rs 5000 to A.
However, after 4 days, the police seized the car from B as it was stolen and
belonged to C. B had to arrange a new car for the same purpose and has to
pay a higher rent. B can claim from the amount he has already paid and also
the higher rent he had to pay for the new car.
Receive back the goods

After the expiration of the term of the bailment or when the purpose is fulfilled,
the bailor has a duty to receive the goods back from the bailee. However, if
the bailor refuses to do the same, he will be entitled to pay the bailee
compensation for the necessary expenses of custody and care.
Example: A bailed his dog to B for one week at the daily charge of Rs. 100. A
visited B to receive his dog after 25 days. He has to pay the additional charges
for 18 pays. However, if this had been a gratuitous bailment, A would have
been required to pay the ordinary and extraordinary expenses for 18 extra
days.
Duties of the Bailee
Take Reasonable Care of the Goods Bailed

As per Section 151, irrespective of the fact that the bailment is gratuitous or
non-gratuitous, the bailee has a duty to take reasonable care of the goods
bailed similar to a man of ordinary prudence would. However, according to
Section 152, if even after reasonable care the goods are damaged or
destroyed, the bailee is not liable for the loss of the bailed goods.
Example: A bailed his dog to B for a week at a daily charge of Rs. 100. As A
came to B to reserve the dog after a week, he finds out the dog was stolen
from B. If it is proved by B that he took reasonable care of the dog but still the
dog was stolen, then he will not be held responsible, but, if however, A proves
that B didn’t take reasonable care, say left the dog unchained, B would be
responsible for the same.
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No Unauthorized use of goods
As per the Section 154, if due to the fact that the bailee uses the good bailed
in a manner inconsistent with the terms of the contract then he will be held
liable in case there is any damage to the good, even if he was not negligent or
the damage resulted from an unforeseeable accident.
Example: A lends his car to B for him to drive only. B allows C, her cousin to
drive the car. C rides the car with care but still ends up in an accident,
damaging the car. B is liable to compensate A for the damages caused to the
car.
Not mix goods bailed with own goods

The bailee must not mix the bailed goods with his own goods and must keep
them separately. If however, he mixes the bailed goods with his own then:
1. According to Section 155, if mixed with the consent of the bailor, both
of them will have a proportionate interest in the mixture produced.
2. As per Section 156, if mixed without the consent of the bailor, and if
it can be mixed/divided, the bailor has to bear all the expenses for
the same and damages caused due to the mixture.
3. According to Section 157, if mixed without the consent of the bailor,
and if the mixture is beyond separation, the bailee is required to
compensate the bailor for the loss of the goods.
Return any Accretion to the goods

In the absence of any contract for the same, any profit which may have
accrued from the goods bailed, the same must be delivered to the bailor.
Example: A bailed his cow to B for a week. The cow gave birth to a calf during
this period. The bailee must deliver the calf along with the cow to A at the time
of delivery.
Return the goods

After the time for which the good has bailed is expired, or the purpose has
been fulfilled, the bailee must return it to the bailor as per his direction.
Rights of the Bailor
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Enforcement of rights
The bailer, by suit, can enforce all the liabilities or duties of the bailee.
Avoidance of Contract
According to Section 153, if the bailee does anything which is inconsistent with
the terms of bailment, then, the bailor can terminate the bailment.
Example: A bailed his horse to B for his own riding only. B allowed C to ride
the horse, violating the terms of bailment. A can terminate bailment.
Return of goods lent gratuitously

In case the goods are lent gratuitously, the bailor has the right to demand
their return whenever he sees fit, even though they were lent for a specific
period of time or purpose. However, he needs to indemnify the bailee in case
the losses exceed the benefit derived from the use of such a good due to
premature termination of bailment.
Compensation from a wrong-doer

If the bailee is wrongfully deprived by any third party of the use or possession
of goods bailed and does them any injury, the bailor or the bailee has the right
to bring a suit against the third person for the injury.
Rights of the Bailee
Delivery of goods to bailor without title

According to Section 166, if the bailor has no title to the goods bailed, then
the bailee, in good faith, can deliver them back to the bailor according to his
directions, if any, the bailee will not be responsible for such delivery.
Can apply to a court to stop delivery

According to Section 167, if there is a situation in which a third person claims
the goods bailed to the bailee, then the bailee can stop the delivery of such
goods to the bailor by applying to the court and decide the title of the goods.
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Right against trespass
According to Section 180, if the bailee is deprived of the use of the goods bailed
by any third party, the bailee has the right to bring an action against the third
party.
Bailee’s lien
When the bailee is not paid charges with respect to the goods bailed he has
the right to retain the goods. This right is referred to as ‘particular lien’.
Conclusion
Contract of bailment involves the transfer of possession of the good from the
bailor to the bailee for the specific purpose and both, the bailor and the bailee,
have been confronted with some rights and duties which are necessary for
them to follow whenever seem suitable. Also, for the contract of bailment to
be valid, all the essential features need to be fulfilled. Moreover, bailment of
goods is different from the sale of goods as bailment is involved with the
transfer of possession while the sale is involved with the transfer of ownership.
Critical analysis of the

Importance of Lien and its kinds
Introduction
Lien is the right to retain the possession of the property of another till the other
person meets the demands of the person in possession. The demand could be
any- performing a duty or paying a due sum of money. During the
developments of trade and commerce, the common law considered lien as a
“Self Help” practice. It was named as “self-help” as it did not require any
intervention of the courts. When there was further progress in trade and
commerce, the Court recognized that leaving such primitive remedies freely
can lead to every person recklessly holding on whatever he had. And
ultimately, it can hamper trade and commerce.
Lien was in the nature of the remedy and it was recognized as a right. The
basis of the contract of lien was that it was not between the parties and the
party had its rights because it was imposed law by the common law courts.
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The Honorable Supreme Court explained the nature of the Right of Lien by
stating that “Lien in its elementary sense is a right of a person to retain the
possession of goods until the demands of the possessor are satisfied.
Therefore, the Right of Lien is a right granted by law and is merely not granted
by a contract”.
The following are the cases where the rights of Lien have been recognized:
 An unpaid seller had a Lien over the goods in possession.

 The agent had a lien on the property of the principal for unpaid
remuneration.
 A bailee had a lien on the property in his possession.
The major difference between a pledge and a Lien is that in a lien the person
in possession only reserves a right to retain the possession of the goods. He
reserves no right to sell the property that is in his possession. Lien is a right
while the pledge is a contract between the parties. But, it is implicit that the
contracting parties are free to create a lien by contract and waive the right of
lien. An important aspect of the pledge is that the person has been given
voluntary possession of goods while the lien is the performance of duty for
paying a due sum of money.
In the Judgment of Diplock in Tappenden V. Artus, the nature of Lien is

described. (artificer means skilled manual worker) It reads as the common law
lien of an artificer is very ancient in nature as well as its origin, it is dated in
the time where remedies by action upon the contract were still considered as
an imperfect stage of development. Pertinently, Lien arises because of the
consequence of the contract. It is very tempting for the lawyer who belongs to
a 20th-century lawyer to think of a common-law lien as possessing the
characteristics of a contractual right, express or implied which has been
created by a mutual agreement between parties to a contract. But it would be
a mistake in legal nature as, like a right of action for damages, it is a remedy
for breach of contract which actually is conferred by the common law to an
artificer to whom the possession of the goods has been lawfully given for the
purpose of doing his work in return of money as its consideration. A common
law lien, however, is not enforceable by action and thus it affords as a defence
to an action for recovering the possession of the goods, but for the lien, he
would be entitled to immediate possession.
Right of Lien is one of the rights available to the Bailee. The Indian Contract
Act, 1872 classifies the Right of Lien into two types: Particular Lien and General
Lien. Section 170 of the aforesaid Act gives the exact definition of Particular
Lien which states that the Bailee is free to hold control of a precise property
with position to the charge which is due. For Example, A gives a piece of cloth
to B, a tailor, to stitch it into a pant as soon as it is over and to give a three
months’ credit for the price. Therefore, according to this instance, B is not
entitled to return the pants until he is paid.
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The Indian Contract Act, 1872 specifies that the Right of particular Lien is
available to the Bailee, subject to certain conditions. The most important
condition among the other conditions is the exercise of skill or labour which is
regarding the goods bailed. Further, it has been very often highlighted that the
skill or labour exercised by the Bailee must be of such a nature that the mayor
will improve the quality of the goods.
Importance of Lien
person meets the demands of the person in possession. Lien was in possession
of the remedy and it was recognized as a right. The basis of the contract of
lien was that it was not between the parties, and the party had its rights
because it was imposed law by the common law courts. Therefore, here are
the importance of lien.
Protects the Buyer

The existence of lien is very important as it protects the rights of the lenders
when there is non-payment of the dues. The loans with collateral, as it is
implicit, are less risky for the lender as they can lead to lower interest rates
for the borrowers. For example- when a person is purchasing a particular
vehicle, it is important for him that he checks all the liens which are there
against that vehicle. Moreover, if there is a debt that is an outstanding debt
on that particular vehicle, the buyer would run the risk of having it repossessed
by the lender.
It allows the seller or an agent to recover the amount

person meets the demands of the person in possession. The demand could be
any- performing a duty or paying a due sum of money. In case the principal
or the buyer fails to pay the amount to the agent or a sailor, the agent can
recover the amount by selling the security and such right came into existence
because of the lien.
Importance of lien when buying a business

It is advisable that when one person is buying a particular business, he should
make sure that the business assets which are there are not encumbered by
liens and this could hamper the growth and progress of the business.
Therefore, one can actually protect themselves when negotiating the business.
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Recovering the necessary and extra orbit expenses
The importance of lien comes into existence when it comes to recovering the
necessary and extra orbit expenses which the seller or the agent reserves to
have. In the case of Gopaldas v. Thakurdas, the High court reviewed the
provision of the agent’s lien. The agent was the firm for the commission of
agents who brought some goods for the principals who were under them. Even
the principal supplied the money for buying the goods. But at some other
times, the agent spent the money from his own pocket.
Therefore, the agent sold the goods of the principal to recover his due amount.
It was observed by the court that the agent selling the goods of the principal
may not be justified since he didn’t have any authority over the goods of the
principal. However, the agent spent some amount from his own pocket and he
is in apposition as a tacit pledgee reserves a right to recover the amount as
much of his outlay as possible by selling the goods which belong to his custody.
Types of Lien
The two types of Lien which are recognized by the common law courts are:
 Particular lien
 General lien
In Particular lien, the person reserves the right to retain the possession of the
goods until the charges due in respect of the property are paid.
A general lien is a right to retain the possession for the payment of the sum
which is owed and even if the payment is not connected with the property in
possession.
Section 170 of the Indian Contract Act, 1872 deals with a particular lien
while Section 171 deals with General Lien.
Particular lien
Bailee’s particular lien, which is specified under section 170, states that where
the Bailee has in accordance with the purpose of Bailment, rendered any
service which involves activity such as the exercise of Labor skill in respect of
the goods which are bailed, he has in absence of the contract to the contrary,
a right in order to retain such type of goods until he receives due remuneration
for the services he has rendered in respect of them.
Illustrations
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(a) A delivers a watch to B, a shopkeeper, to repair his watch and which is to
be done accordingly. B is entitled to retain the watch till he is paid for the
services that he has rendered.
(b) A gives a piece of cloth to B who is a tailor in order to make a shirt. B

promises A to deliver the shirt as soon it is finished, and to give three months
credit for the price. Therefore, B is not entitled to retain the court until he is
paid.
(c) A gives a machine to B who is running a transport business to transport

the carrier from one location to another.
Let us analyze this particular principle with the help of the court Judgments-
In the case of Hatton V. Car Maintenance Company, Limited, the owner of the
car and the company entered into an agreement where the condition was
supposed to maintain the car, repair it and supply adequate petrol. The owner
was supposed to pay Rs. 8000 to the owner of the company, but the company
was not paid the above-stated amount. Then, the company exercised the lien
over the car.
The learned Judge Sargeant J noted that whenever a particular article is

repaired, the repairer is bound to get a lien on the article for the number of
his charges. However, he said that he certainly can’t find the authorities which
are cited which will depict if the contractor does not improve the article but
just to maintain its former condition, that whether he gets lien for the amount
spent for the maintenance.
Thus, it can be concluded that a lien is not available in each and every case
where the services have been rendered, and it is only available when the actual
skill and labour i.e. manpower is applied to the goods, which ultimately results
in the improvement of the goods. In the above-stated case law, it was just for
the maintenance of the good but not for the improvement of the condition of
the goods.
Pennycuick J, in the case of In Re Southern Livestock Producers Ltd, held that

it is perfectly clear enough that unless and until, bailee establishes the scope
of improvement he will have no lien, he even narrated an example which stated
that it will be quite illogical that a Kennel keeper should have a lien for stripping
off a dog, but not for boarding it. The stated that it would be impossible for
him to introduce a complex modification into a well-established principle.
Thus, it has been noted that in common law, lien has been limited to cases
where the scope of improvement is necessary where there is the exercise of
labour and skill. However, there are no substantial case laws available in Indian
Courts.
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This lien involves:
Exercise of Labor or Skill

The right is highly subjected to the scope of improvement and conditions. The
first and foremost thing in the case is that the Bailee must have rendered some
service that involves the improvement of the goods. In accordance with the
judgment which is mentioned in Hatton v. Car Maintenance Company, Ltd, it
can be proved that scope of improvement is necessary for the exercise of
labour and skill.
In Accordance with Contract

The second most important element is that the skill and labour, both, must be
exercised in accordance with the terms of the contract as well as the purpose
of the bailment.
Goods on which Labor or Skill Bestowed

The third element is that only such goods can be considered for the retention
on which the bailee had actually faced trouble and expense. And, he reserves
no right to retain the goods which belong to the Bailor and are in his custody.
Possessory Right
Lastly, this particular right also depends upon the possession and also is lost
as soon as possession of the goods is lost. Pertinently, after repairs, the
delivery of possession which is affected puts an end to the lien which the
repairer has for the charges of repairs and it cannot be revived because the
repairer had undertaken further repairs which are merely out of grace and they
are not a matter of a fresh Contract.
In the case of Kalloomal Tapeshwari Prasad and Co., M/s v. M/s R.C. and F.
Ltd, it was observed that the activities of a stockist under the contract include
unloading, loading, stacking as well as storing. The court in this particular case
upheld the decision that the above-stated services do not lead to an
improvement in the condition of the goods.
General Lien [ Section 171 ]

A general lien is defined under Section 171 of the Indian Contract Act, 1872.
Section 171 talks about the General Lien of bankers, factors, wharfinger,
attorneys and policy brokers, in absence of a contract to the contrary, retain,
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as a security for the general balance of the account, and any goods which are
to be bailed to them unless there is an express contract to that effect.
Generally, the service providers are given the privilege of general lien. These
identity service providers reserve a right to retain the goods which are bailed
to them for the sake of a general balance of sum which is due to their
customer. This particular Section is quite anxious to limit the use of general
liens by telling that no person reserves a right to claim a general lien unless
the parties have provided for it in their contract in express terms. Lien is
considered as a ‘primitive remedy’ and common law does not encourage it but
just took a note of it. A general lien could particularly impede trade and
commerce because everybody can hold onto goods of one and another.
In a particular case of Rushforth v. Hadfield, particular carrier goods made an

attempt to claim a general lien on the ground for its usage of practice for trade
and commerce. He carefully noted that there is a disadvantage in the case of
general lien when there is a case of insolvency. In this particular case, it was
also noted that general lien causes a great deal of inconvenience when it comes
to the generality of the traders because they give plenty of advantages to
certain individuals, a special privilege who claim to have the special privilege
against the body of the creditors instead of coming with them for the sake of
insolvent of the state.
Therefore, in accordance with this particular Section, parties which are entitled
and reserve a right of General lien are as follows:
 Bankers
 Factors
 Wharfingers
 Attorneys of High Court
 Policy-brokers
Click Above
Bankers
The general lien of the bankers is considered to be as judicially recognized and
it mainly deals with the goods and securities deposited by the customers in
the bank accounts of the customers, provided by a condition that there is no
contract which is implied, inconsistent with such type of lien. When a certain
type of gold ornaments was pledged with a particular Bank as a bailee because
the lien extends on the borrower and the borrower then paid back the loan
amount.
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The same bank kept something for the security because the loan of another
type was taken by the same borrower. In this case, the bank reserves a right
to be held entitled to do so that they are having satisfaction for the other loan
also.
There is also a relevant case where the Bank provided some financial
assistance to the sugar factory which was against the pledge of its entire stock
and it was stored in seven godowns of that factory owner as security. The
stock was seized for the sake of payment. In this case, the Court held that the
commissioner of sugar could not prevail over the rights which are reserved for
the Bank. The bank was held to be entitled to the rights of godown and
subsequently, it was sold at the public auction.
Factors
Factor means that an agent was entrusted with the possession of the goods
and the purpose of selling them was for the principal. When the person is given
the possession of the goods in the ordinary course in the business for the
purpose of sale. Then he will be having the general lien on such types of goods.
The term “factor” means an agent assigned with the possession of the goods
for the only purpose of selling it to the principal. For the purpose of sale, he is
free to hold the ownership of goods in the ordinary course of commerce. He is
also entitled to the Right of general lien for the amount due. For Example, if a
Bicycle was delivered to an agent, he was entitled to detain the possession of
the Bicycle until his charges are paid. It is important to note that in order to
avail the Right of Lien, the goods must or should be delivered to the factor in
the course of commerce.
Wharfingers
The word Wharf means a place that is contiguous with water and it is used for
the purpose of loading and unloading of the goods. It as a general lien means
that goods are bailed to him until the Wharfingers that is the charge due for
the Wharf is paid.
Attorney of the High Court

The attorney or a solicitor also reserves a right of general lien when it comes
to his payment of fees for the services which he has rendered. The Supreme
Court in the landmark case of R.D Saxena v Balram clearly pointed out that
the advocate papers over the lien will have no right over the fee which is said
to be unpaid.
Policy brokers
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The insurance agent also holds a right with respect to general lien. His rights
extend to the clients who have taken the insurance policy and also the amount
which is due to him which the client is supposed to pay.
Lien of a finder of goods

The Sale of Goods Act, 1930 grants certain rights to an unpaid seller in the
case when the goods have already been transferred to the buyer but the buyer
fails to pay the price of the said goods to the seller. One such right is the right
of Lien.
Lien means the seller’s right to keep the certain property of the buyer until the
buyer pays the debt of the goods that were sold to him. The rights of the
unpaid seller are explained in Sections 46, 47, and 49 of this particular act.
The unpaid seller can exercise this right by retaining the goods of the buyer or
by refusing to deliver the goods of the buyer until the amount which is due to
the buyer is paid to the seller. In the case of transfer of the ownership the
seller can still refuse the payment to the buyer until the amount due is paid by
the buyer.
This contract of sale will not be void ab initio if the unpaid seller exercises this
right against the goods bought by the buyer. The right of lien is to retain the
possession of goods. Therefore, it is necessary that the goods have to be in
possession of the seller even after the sale agreement. This right is not affected
by the transfer of title to the buyer. In fact, right of lien is a right which can
be Section 47 of the aforementioned Act states the situations in which this
right can be exercised in case the amount due to buyer is not paid to the seller.
Where the goods are sold without any stipulation as to

credit
Under this provision, which is specified by the Sales of Goods act, 1830 if
the buyer agrees to pay the price of the goods, then the seller cannot refuse
to deliver such goods to the buyer. This provision is for cash sale. The paying
of price and goods delivery are concurrent conditions unless otherwise
specified according to the agreement.
In other words, if the seller does not sell his goods on credit, he expects the
buyer to pay the amount for the goods immediately. And, if the buyer refuses
to pay or expresses his unwillingness to pay the price, the seller can exercise
the right of lien and retain with himself the goods until the buyer pays the
whole amount.
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In Miles v. Gorton, it was held that in a contract where there are no
specifications about the payment or delivery of the goods, then the seller can
retain the goods of the buyer until the latter pays the price of the goods.
Meanwhile the risk of such goods will be the responsibility of the seller under
his possession.
When there is a credit sale on goods

The right of lien can be exercised by the unpaid seller when there is the expiry
of the credit period. In the case where the seller has sold the goods on a
credit basis, then the seller can retain the goods with himself if the buyer is
not willing to pay the amount after the expiration of the time period of credit.
If the buyer becomes insolvent before the goods are delivered to him
The seller can exercise the right of Lien. If the seller sells the goods on credit
and the time period of credit is not expired yet, and the buyer becomes
insolvent during the period, then, the seller can exercise his right of lien
towards the buyer. Section 2(8)of Sale of Goods Act, 1930 defines the
term ‘insolvent’ as, any person who has ceased to pay or is not in a position
to pay the debts which have become due irrespective of the commission of an
act of insolvency or not.
Lien of a finder of goods

Under Section 221, the agent is given lien property, for recovering the dues
from the principal. The section states that in the absence of any contract, an
agent is bound and entitled to retain the goods, papers and property which
can either be movable or immovable, of the principal amount which was
received by him, until the particular amount due to himself for the commission,
disbursements and the services which have been rendered in respect of the
same which have been paid or had accounted to him.
Therefore, the principal can come to owe the money in two ways, that the
agent should have incurred expenses for the agency or it could be for his
commission or remuneration.
In the case of Gopaldas v. Thakurdas, the High court reviewed the provision
of the agent’s lien. The agent was the firm for the commission of agents who
brought some goods for the principals who were under them. Even the
principal supplied the money for buying the goods. But at some other times,
the agent spent the money from his own pocket. Therefore, the agent sold the
goods of the principal to recover his due amount.
46
It was observed by the Court that the agent selling the goods of the principal
may not be justified since he didn’t have any authority over the goods of the
principal. However, the agent spent some amount from his own pocket and he
is in opposition as a tacit pledgee to reserve a right to recover as much of his
outlay as possible by selling the goods which belong to his custody.
This particular Section gives the right to the agent so that he can retain the
goods, that would not be a part of the possession until the dues are paid.
However, this doesn’t mean that the agent has a right to sell the goods. If the
principal pledges the goods, then the principal becomes a pawnee. And the
lien of such goods is not governed by Section 221 of the Indian Contract Act,
1872 but under the provisions of the Bailment and Pledge.
A lien reserves a right only to retain the possession in the property of the
principal. If there is a condition that the rights of the principal are considered
to be limited, as the agents are the third parties to the agreement, then the
lien will be also limited. A lien is lost when the agent actually losses possession.
The agent is successful in delivering the property to the agent, through any of
the means, the lien is lost.
Conclusion
Lien is one of the rights available to a person to retain possession of goods
owned by another person until the assertion of the person having the control
is satisfied. Under the Indian Contract Act, 1872 the Bailee is free to employ
or operate the Right of Lien in a Contract of Bailment.
The Honorable Supreme Court explains the nature of the Right of Lien by
stating that “Lien in its elementary sense is a right of a person to retain the
possession of goods until the demands of the possessor are satisfied. Lien can
be considered as a person of great value. A bailee who is handling several
hundred TEU’s (twenty-foot equivalent units) a day, especially where none of
those containers are subject to outstanding debt.
In my opinion, General Lien is a much more effective tool in securing the

outstanding debt. But it is subjected to its own limitations and risks,
particularly from a potential liability point of view. Basically, if there is a
general operator who is seeking to exercise a lien and then resolve to see the
matter through something which is potentially difficult as a matter of
commercial negotiations to a successful conclusion.
A lien can be subjected to a large number of risks, but despite risks liens
actually continue huge assistance and support to operators. A well-drafted Lien
clause can be considered to be huge assistance and support to the operators.
In the terminals of Lien worldwide, the group and subsidiary of a particular
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company, and with respect to the matter of debt and liabilities ranging from
far wider than traditional terminal services.
Contract of bailment and pledge

What is a contract of bailment
Bailment is defined in Section 148 of the Indian Contract Act, 1872 as, “A
‘bailment’ is the delivery of goods by one person to another for some
purpose, upon a contract that they shall, when the purpose is accomplished,
be returned or otherwise disposed of according to the directions of the
person delivering them.” The person who delivers the goods is called the
‘Bailor’ and the person who receives the goods for the specific purpose is
called the ‘Bailee’. It is a special type of contract which is covered under
Chapter IX(Sections 148-171) of the Indian Contract Act, 1872.
Essentials features of a contract of bailment
A valid contract
As mentioned above, bailment is a special type of contract. Hence, all the
essential elements of a valid contract must be present in it. The essential
elements such as offer, consideration, contractual capacity, intention, etc.
must be a part of the bailment. Without the presence of these essential
elements , the contract cannot be enforceable in a court of law. However, out
of these, a contract of bailment can be valid without consideration.
There are two types of bailment.
 Gratuitous Bailment: Bailment without any consideration.

 Non-Gratuitous Bailment: Bailment with consideration.
Delivery of possession
If you read the definition of bailment, you will understand that the most
essential element of a contract of bailment is the delivery of goods from one
person to another. As per Section 149 of the Act, “the delivery to the bailee
may be made by doing anything which has the effect of putting the goods in
the possession of the intended bailee or of any person authorised to hold
them on his behalf.” The delivery of the goods can be actual as well as
constructive. Actual delivery means the goods are physically delivered by the
bailor in the possession of bailee. Constructive delivery means that the goods
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are not expressly delivered but a few actions imply that the bailee is given
the possession of the goods. It is important to note that the actual transfer of
possession is necessary for bailment. Only giving the custody of the goods to
a person does not make him the bailee.
Delivery upon contract

As mentioned above, the delivery of the goods from the bailor to the bailee
must be after a contract is created between both the parties. The contract
should have the details of the transfer of the goods and its return. However,
the contract can either be “expressly signed by the parties” or “implied by
the parties.
Exception: Lost goods found

When lost goods are found by a third party, they act as the bailee of such
goods.
Duties of the finder:
1. To keep the goods safe.

2. Not use these goods for personal use.
3. Take adequate efforts to find the real owner of the goods.
4. Make sure that the goods are delivered to its real owner once found.
Rights of the finder:
1. To be compensated for the expenses and trouble taken to keep the

goods safe and find the owner. (Section 168)
2. To sell the goods if:
1. The goods are of perishing nature.

2. The owner could not be found.
However, the proceeds from the sale must be transferred to the owner/bailor
of the goods. (Section 169)
Purpose
There must be a specific purpose for which the goods are transferred from
the bailor to the bailee. As per Section 153 & 154, the contract of bailment
might be terminated if the bailee acts inconsistently or makes unauthorised
use of the goods. Specific purpose is very important and the parties should
abide by the contract.
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Return of goods
After the purpose for which the goods were bailed is complete, the bailee will
have to return the goods to the bailor. The method and the way of return will
be as per the contract or bailor’s wish. As mentioned in Section 160, “It is
the duty of the bailee to return, or deliver according to the bailor’s directions,
the goods bailed, without demand, as soon as the time for which they were
bailed has expired, or the purpose for which they were bailed has been
accomplished.”
Duties of the bailor and the bailee
Duties of the bailor:

1. To disclose faults in goods
It is the bailor’s responsibility to inform the bailee of all the faults in the
goods. If the bailor fails to do so, he is liable to the bailee for any loss caused
by that fault.
For example: ‘X’ took a car from ‘Y’ to go for a vacation. ‘Y’ was aware that
the brakes weren’t working properly. However, he didn’t inform ‘X’ about it.
‘X’ is involved in an accident due to the failure of brakes. ‘Y’ will be liable for
all the losses ‘X’ faced in this accident.
2. To cover necessary and extraordinary expenses

The bailor has to pay the bailee all the necessary and extraordinary expenses
incurred by the bailee to safeguard the goods bailed.
For example: ‘A’ gave his cat to his friend ‘B’ when he had to travel for work.
‘A’ will have to pay the expenses incurred in the cat’s daily necessities such
as food, shelter, etc. ‘A’ will also have to pay any extraordinary expense like
doctor’s bill, daycare, etc. if it was necessary to keep the cat safe.
3. To indemnify the bailee of all the losses

The bailor has to indemnify any loss incurred by the bailee if the bailor asks
for his goods before the agreed time in the contract as per Section 159 of the
Indian Contract Act. As per Section 164, the bailee can also claim losses from
the bailor if the bailor intentionally bails goods with a defective title.
4. To collect the bailed goods

The bailor must collect his goods once the time for which the goods were
bailed is expired. If the bailor fails to collect the goods on the expiry of the
bailment period, he will be liable to pay for any losses incurred by the bailee.
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For example: ‘X’ bailed his dog with ‘Y’ for a week, and returned after 10
days to get his dog back. ‘X’ will be liable to pay ‘Y’, the expenses incurred
for the safekeeping of the dog for those 3 extra days.
Duties of the bailee:
To take proper care of the goods

As per Section 151 of the Indian Contract Act, 1872, “In all cases of bailment
the bailee is bound to take as much care of the goods bailed to him as a man
of ordinary prudence would, under similar circumstances, take of his goods of
the same bulk, quantity and value as the goods bailed.” However, in Section
152, it is stated that “The bailee, in the absence of any special contract, is
not responsible for the loss, destruction or deterioration of the thing bailed, if
he has taken the amount of care of it described in Section 151.”
For example: ‘A’ bailed his vehicle with ‘B’ for one week. If due to negligence
of ‘B’, ‘A’s vehicle is damaged, ‘B’ will be liable to compensate for the same.
However, if the vehicle is damaged due to some act of god such as an
earthquake or a flood, ‘B’ will not be liable for such loss.
To use the goods for authorised purpose only

It is the bailee’s responsibility to use the goods only for the authorised
purpose under a contract. If it is found that the goods are used for
unauthorised purposes, the entire contract can be declared void by the
bailor. As per Section 154, “If the bailee makes any use of the goods bailed
which is not according to the conditions of the bailment, he is liable to make
compensation to the bailor for any damage arising to the goods from or
during such use of them.”
Some examples:
(a) ‘A’ lends a horse to ‘B’ for his own riding only. ‘B’ allows ‘C’, a member of
his family, to ride the horse. ‘C’ rides with care, but the horse accidentally
falls and is injured. ‘B’ is liable to make compensation to ‘A’ for the injury
caused to the horse.
(b) ‘A’ hires a horse in Calcutta from ‘B’ expressly to march to Banaras. A
rides with due care, but marches to Cuttack instead. The horse accidentally
falls and is injured. ‘A’ is liable to make compensation to ‘B’ for the injury
caused to the horse.
To keep the bailed goods separate
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All the goods bailed should be kept separately and safely by the bailee as it
ensures the safe return of the goods. However, there are a few provisions
related to the mixing of bailed goods.
1. Section 155: If the bailee, with the consent of the bailor, mixes the
goods of the bailor with his own goods, the bailor and the bailee
shall have an interest, in proportion to their respective shares, in
the mixture thus produced.
2. Section 156: If the bailee, without the consent of the bailor, mixes
the goods of the bailor with his own goods, and the goods can be
separated or divided, the property in the goods remains in the
parties respectively; but the bailee is bound to bear the expense of
separation or division, and any damage arising from the mixture.
3. Section 157: If the bailee, without the consent of the bailor, mixes
the goods of the bailor with his own goods in such a manner that it
is impossible to separate the goods bailed from the other goods and
deliver them back, the bailor is entitled to be compensated by the
bailee for the loss of the goods.
To return any profits arised from the goods

If during the course of bailment, any profit has arisen from the bailed goods,
the same should be transferred to the bailor by the bailee.
Example: ‘A’ bails his cow with ‘B’ for a period of 7 days. The cow gives milk
daily. ‘B’ sold this milk during the period of bailment. The profit earned by ‘B’
during the sale of milk must be returned to ‘A’ while returning the goods.
To return the goods

The bailee must return the goods to the bailor once the purpose of the
bailment is accomplished or the term of the contract expires. This return
must be as per the bailor’s discretion.
Rights of the bailor and the bailee
Rights of the bailor:
To be compensated against unauthorised use

If the bailee uses the goods for a purpose that isn’t authorised under the
contract, he should be liable for any damage that arises from such use.
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For example: ‘X’ bailed his vehicle to ‘Y’ for one month. In the contract, it
was agreed that ‘Y’ can use the vehicle for his personal use. However, ‘Y’ let
his brother ‘Z’ drive the vehicle, and ‘Z’ crashed the vehicle. Now, ‘Y’ will be
liable for the damage done to the vehicle.
To terminate the contract

As per Section 153 of the Act, “A contract of bailment is voidable at the
option of the bailor, if the bailee does any act with regard to the goods
bailed, inconsistent with the conditions of the bailment.”
Illustration: ‘A’ lets ‘B’, for hire, a horse for his own riding. ‘B’ drives the
horse in his carriage. This is, at the option of ‘A’, a termination of the
bailment.
To receive any profits arised from the goods

The bailor is entitled to any profit that arises from the goods when they are
bailed. If the bailee refuses to pay such profits to the bailor, he may take
appropriate action against the bailee to recover such an amount.
To get the goods returned on expiry of contract

The bailor has a right to receive the bailed goods upon expiry of contract.
However, in case of a gratuitous bailment, the bailor can redeem the goods
before the expiry of the contract. In any such situation, if the bailee incurs
loss due to early return of the goods, the bailor is liable for the same.
Rights of the bailee:
To receive compensation
The bailee is entitled to receive compensation for losses suffered due to any
defect in the goods. In case of gratuitous bailment, if the bailor asks for the
goods to be returned before the expiry of contract and the bailee suffers loss
because of this return, he can claim for compensation against those losses
from the bailor.
To receive expenses incurred

The bailor has to pay the bailee all the expenses incurred for the caretaking
of the goods bailed. The bailee is also entitled to receive any extraordinary
expenses spent by him during the term of bailment of the goods.
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To stop delivery of goods
The bailee is given the right to stop the delivery of goods if the bailee is of
the knowledge that the bailor doesn’t have a title over the goods. The bailee
can also stop the same if any third party claims their title over the goods.
To lien the bailed goods

A lien is a legal right against the assets that are used as collateral to satisfy
the debt. The bailee has been given the right to lien the bailed goods if the
bailor has withheld any compensation or payment that he is liable to do.
Different types of lien are:
Particular lien:
As per Section 170 of the Indian Contract Act, 1872, “Where the bailee has,
in accordance with the purpose of the bailment, rendered any service
involving the exercise of labour or skill in respect of the goods bailed, he has,
in the absence of a contract to the contrary, a right to retain such goods until
he receives due remuneration for the services he has rendered in respect of
them.”
For example: “A”delivers a rough diamond to “B”, a jeweller, to be cut and

polished, which is accordingly done. “B” is entitled to retain the stone till he
is paid for the services he has rendered.
General lien:
As per Section 171 of the Indian Contract Act, 1872, “Bankers, factors,
wharfingers, attorneys of a High Court and policy-brokers may, in the
absence of a contract to the contrary, retain as a security for a general
balance of account, any goods bailed to them; but no other persons have a
right to retain, as a security for such balance, goods bailed to them, unless
there is an express contract to that effect.”
For example: “A” borrows Rs. 1000 from the bank without security. Later he
takes one more loan of Rs 5000 from the same bank against a security of
gold. “A” pays back Rs. 5000 but yet has not paid Rs 1000. So the bank can
retain gold (general balance of the account) for the previous loan.
Relevant case laws
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Kaliaperumal Pillai v. Visalakshmi, AIR 1937 Mad 32
Facts of the case

In this case, the plaintiff hired the defendant to make new jewellery for her.
Her old jewels had to be melted and the gold obtained from that was to be
used to make this new jewellery. Every evening, the defendant would return
the half-made jewellery to the plaintiff. Plaintiff would lock that jewellery in
her box and leave it in the defendant’s room. However, the Plaintiff took the
key to that box. One night, the jewels were stolen. The defendant was held
liable by the plaintiff as he was the bailor of the goods.
Issues involved in the case

If the delivery was legally valid as bailment under Section 149 of the Indian
Contract Act, 1872?

It was held that the respondent was not liable as he did not have legal
possession of the goods while they were stolen. The relationship was of
bailment between both the parties but it ended as soon as the plaintiff locked
the goods in the box and took the keys with herself. Merely leaving the box
at the defendant’s house does not constitute bailment.
Atul Mehra v. Bank of Maharashtra, 2002
Facts of the case

In this case, the plaintiff had hired a locker in the respondent’s Bank on 15th
January, 1986. The strong room in the bank was broken into by miscreants
and the contents of the locker were stolen. The plaintiff claimed that
jewellery worth Rs. 4,26,160 was deposited in the locker. On 9th January,
1989, an FIR was filled. The plaintiff pointed out that this loss was due to
negligence and misconduct of the respondent. Also, it was alleged that the
strong room was not made of adequate material and could be easily broken
into.
1. Whether the loss suffered was due to misconduct and negligence of

the respondent?
2. Whether the respondent has a contractual liability to repay the
losses?
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3. Would the relationship between the plaintiff and the respondent fall
within the purview of bailment as defined in Section 148 of the
Indian Contract Act, 1872?

It was held that exclusive possession of the goods is sine qua non(extremely
essential) in the case of bailment. Therefore, mere hiring of a locker would
not constitute bailment. It was also stated that reasonable care and damages
come into question when the bailee is made aware of the contents of the
locker and exclusive possession of the same is given to the bailee. Here,
neither was done, and hence, the judgement was in the favour of the
respondent(bank).
Taj Mahal Hotel v. United India Insurance Ltd., 2019
Facts of the case

In this case, on 01st August, 1998, a Maruti Suzuki Zen was parked in the
respondent’s hotel and the owner gave his car for the valet parking service.
When the owner returned to get his car back, he learned that his car was
stolen. A complaint against the thief was lodged but the car was nowhere to
be found. Respondent hotel’s valet parking service had stated that ‘parking
of vehicles was at the owner’s own risk inside and outside the hotel premises
and in case of theft, loss or damage the hotel will not be liable.’ The plaintiff
company paid a sum of Rs 2,80,000 to the car owner in order to settle the
insurance claimed by him. The plaintiff company sued the respondent hotel
for negligence.
1. Whether this was a case of bailment?

2. Was the hotel liable for negligence under the law of bailment?
3. Was the car owner eligible for compensation due to the absence of
consideration between both parties?

It was held by the supreme court that the theft of the car was a result of the
respondent’s negligence and the respondent would be liable. The supreme
court stated that the respondent cannot exclude its liability for negligence
towards the vehicle parked in the respondent’s parking. The consideration, in
this case, would be free parking to the customer for using the respondent’s
services. It can be inferred that if the general rule of bailment is applied, the
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bailee(hotel) will be liable if there is a loss of goods(vehicle) due to its
negligence.
New India Assurance Co. Ltd v. The Delhi Development Authority,

1991
Facts of the case

In this case, the defendant owns and runs a truck parking centre known as
Idle Truck Parking Centre in Delhi. The owner of a truck had parked his truck
at Idle Truck Parking Centre on 8th June, 1987. A receipt was issued for Rs 3
for the safekeeping of the truck for 24 hours. The truck owner had insured
his truck with the plaintiff in this case. On the night of 8th June, the truck
was stolen from the parking centre. The owner raised a claim with the
plaintiff which was settled for Rs 2,91,500. The plaintiff now sued the
defendant to recover that amount as the loss of the truck was due to
negligence of the owner. The defendant claimed that they were not liable as
the possession was not transferred to them as the driver of the truck slept
inside the truck that night.
1. Was the vehicle’s possession transferred to the defendant?

2. Is the defendant liable for the loss of the plaintiff?

It was held that the defendant was liable to pay the plaintiff. The essential
element here was the transfer of possession. The possession was said to be
transferred when the plaintiff issued a receipt for safe-keeping of the vehicle
for the said night. For the contracted period, the defendant should have
shown reasonable care towards the vehicle which failed to do so.
Tilendra Nath Mahanta v. United Bank Of India And Ors., 2001
Facts of the case

In this case, the petitioner was a retired school teacher. He had opened a
Savings A/C at Naharkatia Branch of the United Bank of India(respondent)
and had a few Fixed Deposits in that bank. His son was a clerk at the same
bank. The petitioner also had a joint account with his son in the bank. It was
found that the son was involved in a few fraudulent transactions. To recover
the losses, the respondent froze the joint account. Along with that, the
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respondent also froze the petitioner’s savings A/C and stopped the returns on
the FDRs. The respondent claimed that as per Section 171 of the Indian
Contract Act, 1872 the respondent had a lien over the petitioner’s savings
A/C and his deposits in the bank.

Whether the Respondent has a lien over the FDR’s and the accounts of the
person whose joint account is under investigation?

It was held that the respondent could not freeze the accounts of the
petitioner and hold his FDRs as a lien. It was stated that the money
deposited in the banks is a loan to the bank by the depositors. The money
returned to the depositor is never the same. Also, it was held that ‘money’
does not account as a good under bailment.
Contract of pledge
Contract of pledge is a subset of a contract of bailment. Here, the goods
bailed are kept as a security for a debt or a performance of a promise. Pledge
is defined in Section 172 of the Indian Contract Act,1872 as “The bailment of
goods as security for payment of a debt or performance of a promise is called
‘pledge’. The bailor is in this case called the ‘pawnor’. The bailee is called
‘pawnee’.” It is covered under Chapter IX (Section 172- Section 181) of the
Indian Contract Act, 1872.
Essential features of a contract of pledge
A valid contract
Similar to the contract of bailment, all the basic essentials of a valid contract
should be present in a contract of pledge. Without these elements, the
contract will be void and won’t be enforceable in a court of law.
Delivery of possession
It is necessary that the possession of goods be delivered from the pawnor to
the pawnee. As mentioned in the definition, pledge is a bailment and this is
an essential element of bailment. The delivery can be either actual or
constructive. However, there might be exceptions where the possession
remains with the pawnor.
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Ownership cannot be transferred
In the case of pledge, mere possession of the goods is transferred to the
pawnee. The pawnor of the goods is still the owner. The pawnee has
possession of the goods but has limited interest in the goods.
Security against debt

The goods must be pledged as security against an outstanding debt of the
pawnor. This outstanding debt can also be a promise for specific
performance.
Return of goods on repayment

Once the debtor the specific performance against which goods are pledged as
security is repaid or completed, the goods must be returned to the pawnor in
the manner specified by him.
Duties of the pawnor and the pawnee
Duties of the pawnor:
To compensate expenses
The pawnor has the responsibility to compensate the pawnee for all the
ordinary and extraordinary expenses made by the pawnee in order to ensure
the well-being of the pledged goods.
To repay the entire amount due along with interest

The pawnor has to repay the amount which is due to the pawnee. This
amount is the total of the principal amount as well as any interest accrued on
that amount during the course of the contract.
To disclose all the faults in the goods

The pawnor before entering into a contract has to disclose all the faults in the
goods to the pawnee. If the pawnee incurs any loss later due to those faults,
the pawnor will be liable for those.
Duties of the pawnee:
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To take reasonable care of the goods
It is the pawnee’s responsibility to take care of the goods that are pledged.
The care taken by the pawnee must be just, fair and reasonable. It should be
as the pawnee took care of his personal belongings. If due to negligence of
the pawnee, the goods are damaged, he will be liable to compensate the
pawnor.
For example: If ‘A’ pledges his watch with ‘B’ for a sum of Rs. 100. Then ‘B’
must take reasonable care of A’s watch as if it is B’s own watch. The
condition of the watch should not deteriorate or be worse than at the time
when it was pledged.
To use the goods only for authorised purpose

The pawnee can use the goods pledged if only it is authorised by the pawnor.
If the goods are used for any purpose that is not authorised, the pawnee will
have to compensate the pawnor against the same.
For example: ‘A’ pledges his car with ‘B’. ‘A’ authorises ‘B’ to use the car for
his personal use. ‘B’ allows his cousin ‘C’ to drive the car and the car then
gets damaged. ‘B’ will have to compensate ‘A’ for the damages
To return the goods

As per the contract, once the amount against which the goods are pledged is
repaid, the goods must be returned to the pawnor. This return must be as
mentioned in the contract or as per the pawnor’s directions.
To return any profits arised from the goods

If at any time during the contract, the pawnee earns profit from the pledged
goods, the same shall be returned to the pawnor during the termination of
the contract.
Example: ‘X’ pledged his property with ‘Y’. The property was given on rent to
‘Z’. The rent received on the property must be returned to ‘X’.
To keep the goods separate

It is the pawnee’s duty to keep the pledged goods separate from his own
goods. If he mixes the pledged goods, all expenses to separate them will be
borne by the pawnee. If separating is not possible, the pawnee will be liable
for all the damages.
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Rights of the pawnor and the pawnee
Rights of the pawnor:
To redeem the goods

As per Section 177 of the Act, ”If a time is stipulated for the payment of the
debt, or performance of the promise, for which the pledge is made, and the
pawnor makes default in payment of the debt or performance of the promise
at the stipulated time, he may redeem the goods pledged at any subsequent
time before the actual sale of them, but he must, in that case, pay, in
addition, any expenses which have arisen from his default.”
For example: ‘A’ gave his watch to ‘B’ as a security against INR 800 that is
due. They agreed that the amount should be repaid within 1 month. If ‘A’
fails to do so, he can redeem his watch even after the expiry of the contract
given that ‘B’ has not yet sold the watch. However, if ‘B’ had to incur any
expenses to safekeep that watch, the same will have to be paid by ‘A’.
To get the goods back
Once the pawnor pays back the amount due along with the interest to the
pawnee, he has the right to get the goods back. After clearing the entire due
against which the goods were held as security, the pawnee cannot retain the
pledged goods.
Rights of the pawnee:
To retain the goods

The pawnee has the right to retain the goods until the amount owed by the
pawnor is paid in full or the promise is completely performed. This amount
includes the expenses incurred by the pawnee as well as any interest accrued
on that amount. This is mentioned in Section 173 of the Act.
For example: ‘A’ pledged his house with a bank for a loan of INR 2,50,000.
The interest on the same was INR 10,000. The bank can retain the pledged
house until ‘A’ repays the entire amount along with the interest i.e. INR
2,60,000.
As per Section 174,”The pawnee shall not, in the absence of a contract to

that effect, retain the goods pledged for any debt or promise other than the
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debt or promise for which they are pledged; but such contract, in the
absence of anything to the contrary, shall be presumed in regard to
subsequent advances made by the pawnee.’”
To get compensation for extraordinary expenses

It is implied that the pawnor will be liable to pay for all the necessary
expenses needed for the safekeeping of the goods. As per Section 175, if any
extraordinary expenses arise, the pawnor will only be liable for the same as
well. However, the pawnee cannot retain the goods for non-payment of such
expenses.
To sell the goods

As mentioned in Section 176, “If the pawnor makes default in payment of the
debt, or performance; at the stipulated time or the promise, in respect of
which the goods were pledged, the pawnee may bring a suit against the
pawnor upon the debt or promise, and retain the goods pledged as a
collateral security; or he may sell the thing pledged, on giving the pawnor
reasonable notice of the sale.” It is important to note that the pawnor must
be given proper and enough notice before selling the goods. It is further
mentioned, “If the proceeds of such sale are less than the amount due in
respect of the debt or promise, the pawnor is still liable to pay the balance. If
the proceeds of the sale are greater than the amount so due, the pawnee
shall pay over the surplus to the pawnor.”
For example: ‘X’ pledged his watch with ‘Y’ as security against INR 10,000.
‘X’ defaulted the payment even after enough notices. ‘Y’ went to sell his
watch. If the watch is sold above INR 10,000, the surplus amount must be
returned to ‘Y’. However, if the watch is sold for less, ‘X’ will still be liable for
the difference.
Relevant case laws
Lallan Prasad v. Rahmat Ali and Anr., 1996
Facts of the case

In this case, the plaintiff advanced INR 20,000 to the defendant against a
promissory note and a receipt. An agreement was signed by both the parties
where the defendant agreed to pledge his aeroscapes as collateral against his
debt. As per their agreement, the defendant had to deliver the aeroscapes to
the appellant and the goods would remain in his custody.
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The plaintiff filed a lawsuit claiming that the above-mentioned goods were
never delivered to be in his custody and therefore, this agreement cannot be
considered as a contract of pledge. He claimed that he was entitled to
recover the amount loaned by him.
1. Whether pledged goods were delivered in the plaintiff’s custody?

2. Was the plaintiff entitled to any compensation as he claimed that
there was no contract of pledge since the goods were not delivered?

The judgement was in the favour of the defendant. It was held by the
Supreme Court that the pledged goods were delivered to the plaintiff. This
meant that this agreement did ripen into a contract of pledge. The Court also
stated that the plaintiff was not entitled to any compensation on his stance
that the goods were never pledged to him.
The Morvi Mercantile Bank Ltd. And Anr. v. Union of India, 1965
Facts of the case

In this case, a firm operating in Mumbai entrusted their goods worth INR
35,500 to Railways for its delivery to Delhi. The firm got their receipt for
these goods from the Railways. In order to get an advance of INR 20,000
from the plaintiff, the firm pledged these receipts as collateral for the same.
The goods were lost by the railways and they offered to compensate with
certain parcels to the plaintiff. The plaintiff rejected this and claimed that
those weren’t the goods that were pledged to them. The plaintiff, hence,
sued the railways to recover INR 35,500 against the value of goods pledged
to them including the damages.
1. Whether railway receipts can be considered as valid goods under

contract of pledge?
2. Whether the plaintiff was the pawnee of the goods or the documents
of the good’s title?
3. Whether the plaintiff could sue for the entire value of the goods or
only what was advanced by him?
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The Supreme Court of India ruled in favour of the plaintiff. It was held that
railway receipts can be valid as goods under a contract of pledge. It was also
held that the plaintiff was the pawnee of the goods and not merely its
documents of title. It was stated that since the pawnee in a contract of
pledge has the authority as the owner of the goods, the plaintiff will be
allowed to sue for the entire value of the goods and not just the amount he
has advanced.
K. M. Hidayathulla v. the Bank of India, 2001
Facts of the case

In this case, on 10th December, 1993, the petitioner pledged certain gold
jewels with the respondent. These jewels were pledged against a certain
amount. The petitioner failed to repay the amount within the agreed time.
The bank held an auction for the jewels on 20th May, 1997 to recover the
debt. The petitioner claimed that as per Section 176, the bank had the right
to either file a suit against him for recovery or sell the jewels via an auction
after giving reasonable notice to the petitioner, however, it must have taken
place within the prescribed time for filing the suit.
1. Whether any such condition was mentioned in Section 176 of the

Act?
2. Whether the pawnee could auction the goods after the prescribed
period?

The judgement passed by the Madras High Court was in the favour of the
bank. It was held that the bank had two remedies; either to file a suit for
recovering the debt or selling the goods after reasonable notices to the
pawnor. It was found that there was no connection between the two
remedies. Merely because the period for filing a suit had passed, it did not
mean that the other alternatives could not be used. It was held that if the
pawnee resorted to any alternate course of sale, the prescribed period should
be extended for the same.
Difference between a contract of bailment and

pledge
64
Contracts of bailment and pledge are special types of contracts that are
regulated under the Indian Contract Act, 1872.
Point of
Contract of Bailment Contract of Pledge
difference
When certain goods are transferred

When certain goods are transferred from one
from one party to another for a
party to another as a security against a debt, it
specific purpose, it is called a contract Meaning
is called a contract of pledge.
of bailment.
It is covered under Sections 148-171 It is covered under Sections 172-179 of the

Provisions
of the Indian Contract Act, 1872. Indian Contract Act, 1872.
The sole purpose for bailing the goods

The sole purpose to enter into a contract of
is for the safe custody of the goods or
Purpose pledge is for security against a debt.
repairs, at most times.
The party which bails the goods is The party which pledges their goods is known
known as the ‘bailor’ and the party as the ‘pawnor’ or the ‘pledger’ and the party
with whom the goods are bailed is Parties which receives the goods is known as the
known as the ‘bailee’. ‘pawnee’ or the ‘pledgee’.
The presence of consideration in a The presence of consideration in a contract of

Consideration
contract of bailment is mandatory. pledge is mandatory.
The goods cannot be sold by the bailee The goods may be sold by the pawnee or the
Right to sell
in such contracts. pledgee.
The goods can be used by the bailee

The goods cannot be used by the pawnee or
only for specific purposes known to
Right to use the pledgee.
both the parties or not otherwise.
Conclusion
It is true that we don’t even realise that we enter into these contracts in our
life. Contracts of bailment is a field which has been entered by arguably the
most number of people unknowingly. Even when we simply give our product
to be serviced, we enter into a Contract of bailment with the other party.
After analysing and understanding the essentials and differences between

contracts of bailment and contracts of pledge, I can conclude that the scope
of bailment contracts is very wide. However, contracts of pledge are very
limited in nature. After looking at the similarities between both, we can
65
deduce that all the contracts of pledge are contracts of bailment but not all
contracts of bailment are contracts of pledge.
Law of Agency : what is

Principal- Agent relationship?
Introduction: What is Agency?
When one party delegates some authority to another party whereby the latter
performs his actions in a more or less independent fashion, on behalf of the
first party, the relationship between them is called an agency. Agency can
be express or implied. Chapter X of the Indian Contract Act, 1872 deals with
the laws relating to Agency. It is important to know the law relating to agency
because nearly all business transactions worldwide are carried out through
agency. All corporations, big or small, carry their work out through agency.
Therefore, laws relating to the agency are an important area of Business Law.
Relationships relating to principal and agent involve three main parties: The
Principal, the Agent, and a Third Party.
Who is an 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.
Who is a 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.
Illustrations
 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’.
 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.
 Lavanya lives in Mumbai, but owns a shop in Delhi. She appoints a
person Susan to take care of the dealings of the shop. In this case,
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Lavanya has delegated her authority to Susan, and she becomes a
Principal while Susan becomes an agent.
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.
Estoppel– An agency can also be created by estoppel. 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 estoppel 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.
Types of Agents
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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.
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 extended to the
buyer.
Authority of an Agent
Authority of an agent can be both express or implied.
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.
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
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4. Circumstantial authority- doing something according to the
circumstances of the case
Illustration
 Ali owns a shop in Bihar but lives in Mumbai. His shop is managed by
a person named John. John takes care of the deals regarding the shop
and buys goods from a person named Ram, with Ali’s knowledge. In
this case, John has implied authority from Ali to buy these goods.
 Soham employed Abhay, who is a shipbuilder to build ships for him.
In doing so, Abhay may legally buy all the material necessary to build
the ships.
Case
Chairman L.I.C v. Rajiv Kumar Bhaskar
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).
Agency between Husband and Wife

Generally, there exists no agency between a husband and wife, except in cases
where it has expressly or impliedly been sanctioned that either of them would
do certain acts or transactions as the agent of the other. That is, a relationship
of agency can come into existence between the two through contract,
appointment, or ratification. A husband is responsible for necessaries to his
wife when they are living apart due to the husband’s fault. This results in an
agency of necessity where the wife can use her husband’s credit for what is
necessary for her to live. But in cases where they are separated because of
the wife’s own whims or faults, for no just reason, the husband is not liable
for the wife’s necessaries.
Sub-Agent
Who is a sub-agent?
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An agent may sometimes delegate the duty that has been delegated to him by
the Principal to somebody else. Ordinarily, an agent cannot delegate the duty
he is supposed to perform himself to another person (delegatus non potest
delegare- discussed below), except in particular circumstances where he must,
out of necessity, do so. 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.
Delegatus non potest delegare

An agent cannot in ordinary circumstances delegate the duty that was
delegated to him. The principle is based upon the idea that when a Principal
appoints an agent, he does so by placing his confidence and trust in the agent
and might not have similar trust in the work of another person.
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.
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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.
2. An act done on behalf of another person which 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
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.
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.
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.
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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.
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
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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.
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 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 credere
agents, etc.
All you need to know about

termination of an agency
73
agreement and assessing
compensation on termination
Introduction
An Agency Agreement is defined on the basis of a legal relationship between
the Principal and the Agent, whereby the agent is allowed to operate on his
behalf under some cases by the Principal and to pay for the service. This
suggests that the principal has control over the agent. An Agency Agreement
is considered an Agency Contract and it defines the roles for the principal
that the Agent needs to do. As in India, the law relating to the Agency and
most other jurisdictions is characterised as a relationship in which one party,
namely an agent, has the right to act on behalf of another person, namely
the principal, in order to maintain legal relations between the latter and third
parties.
In the Indian Contract Act, 1872, which includes the legislative rules
regulating the privileges and duties of both the principal and the agent, the
basis of the Law of Agency in India was coded.
An agent is a person hired and permitted to do some act for another and to
represent the other person in relations with third parties, formerly under the
Act. Whereas the “principal” is called the one who hires and authorises the
agent to perform certain actions. The essence of the agency between the agent
and the principal will explain the substance of the arrangement.
Who can be termed as agent?

However, it should be noted that not every individual acting on behalf of
another can be designated as an agent. As an example, an employee is
legally a representative of the employer, but may not be allowed to operate
on the employer’s behalf. The provisions of the employment contract define
the limitations under which an employee conducts and retains control in the
company in which he is working.
It is possible to decide whether a person is an agent by deciding whether he

is working for himself or on behalf of the principal. A contract in which a
party agrees to be directly responsible is not an agency contract.
The Indian Contract Law stipulates that because the conditions and the
actions of the parties are the same, it is not mandatory to provide a formal
written agreement in order to establish an agency contract. There might be
an entity and it will be legitimate even without respect, which is an exception
74
to the law that deals are invalid without consideration. In addition, any
person who is a major and is of a sound mind can be employed as an entity
under Section 183 of the Indian Contract Act.
Important clauses in an agency agreement-in

brief
Powers of the agent

Not only is the power of the agent restricted to actions expressly given under
the Agency Arrangement, but the agent still has the implicit authority to
carry out all acts which are incidental to the main act. The Act also specifies
that in all emergencies, the agent has the powers to perform all the things to
protect the principal, as a person of prudence might do to protect himself in
the case of an emergency.
Duties of the agent

The responsibilities of the Agent include the following:
1. Conducting the principal’s business according to the instructions

given by the principal.
2. Run the agency’s business competently and to punish the principal
for loss of competence or incompetence in the case of his own
negligence.
3. Rendering the principal with proper and accurate accounts.
4. In contact with the principal and trying to receive his orders, using
all due diligence.
5. To pay to the principal, all amounts received in the course of the
company and without the prior permission of the principal from any
work performed on the account of the latter.
Rights of the agent

1. The agent has the right to demand any expenditure incurred in the
course of the agency’s company by the principal.
2. For the dues owed by the principal, the agent has a lien on the
products.
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3. The agent will change his commission against the principal’s balance
payable.
Duties, Powers and Rights of the Principal

1. Indemnification by the Principal of the agent against the effects of
all lawful actions carried out by the agent in the exercise of the
control imposed on him by the agent.
2. Compensation to be paid by the Principal to the agent in lieu of the
harm rendered to the agent by the negligence or lack of ability of
the principal.
3. The principal is entitled to collect all amounts that have been void or
illegitimate in the contracts entered into by the agent on behalf of
the principal.
4. Principal will lose the remuneration of the agent when the agent is
accused of wrongdoing.
5. The Principal shall provide the agent with all the valid instructions as
are required to be performed while performing the given duties.
Compensation
1. The Principal is liable for the compensation as agreed between the
agent for the services provided by the agent
2. The Principal shall pay for other statutory payments as required
under the law for the agent.
Termination of the agency agreement

1. A clear instance of the termination either voluntarily or on
occurrence of an incident shall be duly mentioned in the agreement.
2. Compensation on death of the agent and the nominee to receive
such payment
3. The confidentiality of the services and liability of the same post
termination should be duly mentioned
4. Liability of the agent post termination of the agreement for the acts
conducted during the agreement.
Restricted Activities
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1. The agent will not perform any kind of those activities that are
restricted by the Principal
2. The agent will undertake any liability on behalf of the principal
unless strictly restricted for the same.
3. In the case of any dispute between the parties, the agent will not
undertake any legal proceeding against the party other than the
consent provided by the Principal
4. The agent will not transfer any kind of benefits under this
agreement to anyone other than the principal
Modes of termination of agency

According to Section 201 of the Indian Contract Act, 1872, Termination
of agency takes place in the following circumstances:
1. By revocation of authority by the principal.

2. By renunciation of his authority by the agent.
3. On the performance of the contract of the agency.
4. On the death of either principal or agent.
5. By insanity of either principal or agent.
6. With the expiration of the time period fixed for the contract of the
agency.
7. By an agreement made between the principal and his agent.
8. With the insolvency of principal or agent (in few cases).
9. When the principal and his agent is an incorporated company, by
its dissolution
10. With the destruction of the subject matter. (section 56)
An agency arrangement is a form of general contract. As such, except where
the agency is irrevocable, an agency can terminate in the same way as a
contract is discharged. Only the act or consent of the parties to the agency or
the enforcement of the law may terminate the relationship between the
principal and the agent. “In the absence of anything to prove its termination,
an agency, when proven to have existed, will be presumed to have
continued, unless such a length of time has elapsed as destroys the
presumption.” When an entity is dissolved, the obligation of the agent to
work on behalf of the principal comes to an end. A government law or
instrument may stipulate the timeline for the termination of an entity.
In such a case, if the instrument states in clear and unambiguous terms that
after the expiry of the time stated in the instrument, an agency shall
terminate without intervention on the part of the principal or administrator,
the agency shall, in effect, terminate. If the parties maintain their
77
partnership as principal and agent after the expiry of the duration given for
in the contract, a substantiated assumption is posed that their relationship is
regulated by the original contract and that the contract is extended for a
similar term. For example, where the parties entered into a contract for a
year and proceeded to behave after one year under the contractual
conditions, the court would conclude that the parties genuinely wanted to
hold the contract alive for a period of time.
On the other hand, if no reasonable deadline has been set by the parties for
the expiration of the contract, the contract is assumed to have been
terminated after a reasonable period of time. “The nature of the act
specifically authorised, the formality of the authorisation, the likelihood of
changes in the purposes of the principal and other factors shall determine
what constitutes a reasonable period of time during which the authority
continues.” In comparison, the burden of proving an agency’s termination or
revocation lies with the agency.
“Parol evidence cannot be accepted in order to add another term to an

agreement even if there is nothing in the writing relating to the specific
provision to which the parol evidence is addressed.” Therefore, when
deciding the length of an agency contract where the written contract is
treated as combined, or unambiguous, or both, courts would not admit parol
proof. An agency that lasts for a fair amount of time can be terminated by
one party only after giving the other party ample warning.
Case laws
R. Sayani v. Bright Bros (P) Ltd, AIR 1980 Mad 162

Where an organisation has been formed for a defined amount of time,
liability for its premature termination will have to be compensated if the
termination did not have appropriate justification. There was no fair warning
given for the premature decision of the department. The agent received Rs.
4000 a month. The court was of the opinion that there should have been at
least three months’ warning. Correspondingly, a reward of Rs. 12,000 was
allowed.
Carter v. White, (1883) 2 Ch D 666: (1881-85) All ER

Rep 921
A principal owed his agent a sum of money and gave him an agreed
exchange bill with the authority to fill in the name of the drawer. Before the
78
agent could finish the bill, the principal died. His power to fill in the name of
the drawer was not considered to be terminated.
Sukhdev v. Commr of Endowments, (1998) 1 BC 403

(AP)
Through the expiry of the name, an agency comes to an automatic end.
Where a gas pump was to be regulated by the agency for a certain time, it
was held that the agent was obligated to vacate the premises at the end of
the period. There was no extension provision, nor was there an actual
renewal clause.
Trueman v. Loder (1840) 11 Ad & El 589

A was dealing here as B’s agent. With the authority of B, all parties with
which A entered into contracts in that undertaking is held to have the right to
hold B accountable until B notifies the world that the authority of A is
removed and it makes no sense whether the agent intended to retain the
contract on his own account in a specific situation. The court dismissed the
claim that it was quite unfair to ask the principal to tell the whole world that
he had revoked his agent’s attorney’s power and that it should not be
expected that he would contact someone with whom the agent was willing to
enter into a deal and inform him of the termination.
Effect of termination of agent’s authority

Sometimes former agents continue to act on their ex-principal’s’ behalf even
though the agency has ended. Once an agency terminates by any of the
means just described, the agent’s actual authority (expressed and implied)
ends as well. Nonetheless, such “ex-agents” may retain apparent authority to
bind their former principals.
Third parties who are unaware of the termination can fairly feel that there is
still authority for an ex-agent. The obvious authority of an agent also
remains after termination to protect third parties who rely on such a fair
appearance of authority. Thus, even if the organisation has stopped, a
former agent might be able to tie the principal under his obvious jurisdiction.
Notice to third parties

Apparent authority ceases only after an effective notice of termination is
issued by a third party, that is to say, when it is no longer fair for a third
79
party to assume that the agent has legitimate authority. Such notification
can provide any ground for termination by operation of law (such as modified
circumstances).
The obvious authority of an agent will continue even after the death or lack
of ability of the principal. After the principal’s death or lack of capacity, an
agent can act with apparent authority because the basis of apparent
authority is the manifestation of a principal to third parties combined with the
rational assumption of a third party that the agent acts with real authority
They should fairly assume that the agent is approved because third parties
have not seen that the principal has died or lost capacity. The rule that the
death of the principal should not immediately terminate the obvious authority
is in keeping with the interest of shielding third parties who are acting
without notice of the death or lack of ability of the principal.
Prudent principals may, however, want to alert third parties themselves in

order to defend themselves from unintended liability. The kind of notice
needed varies with the third party in question.
Actual notice is mandatory for third parties who have recently worked with
the agent or who have started to work with the agent. This can be done by—
(1) a direct personal comment to the third party; or a direct personal

statement to the third party;
(2) letter sent privately to a third party, to his place of business.
Constructive notification for the other parties These other parties are
generally aware of the firm, but have not entered into any business with the
agent. Constructive notice would usually be obtained by announcing the
closure of the agency in a general circulation newspaper at the location
where the agency’s business was routinely done. If no sufficient publication
occurs, disclosure is fairly likely to notify third parties through some means,
such as posting a note in public locations or on a website.
Claim for damages

The principal can also seek damages/losses incurred due to the agent’s
acts/non-acts, aside from the revocation of the agency. It is therefore well
known that the person who has broken the contract and has shown the
characteristics of abandoning or renouncing the duties under the contract
through his actions would not be able to seek damages from the other side.
In this case, the single sale agent, having displayed uncooperative attitude
and actions and practically sabotaging the principal’s enterprise, regardless
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of his specific duties under both the arrangement and the Contract Act,
would have no excuse to go before the court and demand damages or
compensation-on the contrary, the principal would be well justified in seeking
damages and costs/compensation. In view of the ‘necessity doctrine,’ it
would be justified and fair to dispense with notification prior to six months,
otherwise waiting for six months and playing in the hands of an
untrustworthy agent would only experience the utter annihilation of the
company of the principal.
Compensation on termination of the agency

agreement
A compensation shall be provided to the agent only if he adheres to the
principles laid down in the agreement and it is pertinent to note here that
compensation shall be provided only if the agent agrees to such clause. In
Indian Law and in English law (read along with common law), there is no
maximum limit to which a compensation shall be appended to the agent.
The English courts originally took the opinion that liability for breach of
contract had to be limited to the equivalent of damages. Now, the
compensation may differ based on the well being of the principal. Let’s say
for an example- It is clear that in the case of a principal in a strong financial
and commercial role who clearly needs to restructure his business, for
instance by adjusting the target market, the valuation of the agency business
and therefore the rewards will be substantial. Similarly, if the work of the
agent is not good but the deal would not authorise the principal to cancel the
violation contract, termination will allow the agent to assert the benefit of the
company of the client.
There has not been any substantial changes in the compensation provided to
the agents while the termination, but there has been a brighter outlook at
the rights of the agents to provide compensation while terminating the
agreement. As discussed earlier, it is upon the parties to decide the
compensation and more importantly, the amount to be discussed along with
the mode of termination and their set of compensation.
Conclusion
An agency agreement is a form of general contract. As such, except where
the agency is irrevocable, an agency can terminate in the same way as a
contract is discharged. Only the act or consent of the parties to the agency or
the enforcement of the law may terminate the relationship between the
principal and the agent.
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“An agency shall be believed to have continued, if confirmed to have
occurred, in the absence of evidence of its termination, until such a period of
time has expired in order to destroy the assumption that the agency can be
terminated either through the act of the parties or through the action of the
rule.”
Subsequent incidents can result in the business being terminated. These may
be physical, as if the subject matter is lost, for instance, or the principal or
agent dies or gets insane. Alternatively, they can be lawful, as if the principal
or agent becomes bankrupt, or the partnership becomes unlawful (for
instance, if the principal becomes an alien enemy). The consequences of
termination are that as long as the principal and the agent are concerned,
the rights conferred at the time of termination can continue, although no new
rights can be established, at least until the agent has obtained notice of
termination. It would be determinable in the same manner if the entity has
been formed by consensus. A continuing entity can also be defined by
offering, or in the absence of a fair warning for the duration of notice as
stated in that arrangement.
Finally, if a party behaves in a fashion that is compatible with the agency’s

continuity, it may, of course, be dismissed, although this could well give rise
to grounds of redress for violation of contract. As far as termination by
operation by law is concerned, if the organisation is for a specific contract,
the partnership shall end at the conclusion of that transaction. It will cease at
the end of that period if it is for a specified period.
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THE INDIAN PARTNERSHIP
ACT,1932
Nature and Essentials of

Partnership
The term “Partnership” has been defined under section 4 of the Indian
Partnership Act, 1932. It was in the year 1932 when a separate law of
Partnership was passed, before that all the matters about the Indian
Partnership were dealt with by a chapter in the Indian Contract Act, 1872.
Contract Act was not able to suit the needs of the business community;
therefore it became essential to come up with a new exhaustive amendment
in the form of Indian Partnership Act which may suit the needs of the business
generation at that point of time.
Nature of Partnership
Whenever at least two people hold hands to set up a business and offer its
benefits and misfortunes, it is called Partnership. Section 4 of the Indian
Partnership Act 1932 characterises partnership as the ‘connection between
people who have consented to share the benefits of a business carried on by
all or any of them representing all’.
Partners are the people who have gone into partnership independently with
each other. Partners all in all are called ‘firm’. The key highlights of the
partnership are as per the following.
Two or More Persons

There ought to be, at any rate, two people meeting up to frame the partnership
for a shared objective. As it were, the base number of partners in a partnership
firm can be two. Indian Partnership Act, 1932 has put no constraints on
most extreme quantities of partners in a firm. Be that as it may, nonetheless,
the Indian Companies Act, 2013 puts a point of confinement on some of the
partners in a firm as pursuing.
For Banking Business, Partners must be not exactly or equivalent to 10.
For Any Other Business, Partners must be not exactly or equivalent to 20.
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On the off chance when the number of partners surpasses the limits, the
partnership ends up unlawful.
Partnership Deed
Agreement to carry on business between the partners, the partnership
appears. The partnership agreement can be either oral or composed. The
Partnership Act does not necessitate that the agreement must be recorded as
a hard copy. Be that as it may, when the agreement is in composed structure,
it is called ‘Partnership Deed’. Partnership deed ought to be appropriately
marked by the partners, stepped and enlisted.
Partnership deed, for the most part, contains the accompanying subtleties.
 Names and Addresses of the firm and its primary business;

 Names and Addresses everything being equal;
 A commitment of the measure of capital by each accomplice;
 The bookkeeping time of the firm;
 The date of initiation of partnership;
 Principles concerning a task of Bank Accounts;
 Benefit and misfortune sharing proportion;
 The rate of enthusiasm on capital, credit, illustrations, and so on;
 Method of reviewer’s arrangement, assuming any;
 Pay rates, commission, and so on, if payable to any accomplice;
 The rights, obligations, and liabilities of each accomplice;
 Treatment of misfortune emerging out of indebtedness of at least one
partners;
 Settlement of records on the disintegration of the firm;
 The mode for a settlement of disputes among the partners;
 Guidelines to be followed in the event of confirmation, retirement, the
demise of a Partners; and
Some other issue identifying with the lead of business. Ordinarily, every one
of the problems influencing the relationship of partners among themselves is
canvassed in the partnership deed.
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Defining Partnership
The term partnership has been explicitly established under section 4 of the
Indian Partnership Act as follows.
 The partnership is the agreement between persons.

 Organised to carry on business activities.
 To share profits and losses.
 Mutual Agency.
Thus the four grounds determining the valid and binding partnership between
the persons are as follows:
Agreement
Section 5 of the Indian Partnership clearly rules out that relation of
partnership from the contract must be a result of a valid agreement which
must be mutually agreed by all the partners. In various judicial
pronouncements, it has been ruled that if there is no agreement, then the
arrangement will not be considered as an agreement.
It is to be noted that Partnership must not be created by any status. E.g. The
members of HUF will not be considered as the partners, also if husband and
wife are carrying on any business, then they will also be not considered as
partners unless there is an agreement governing them. The requirements of
the same have been specified by the Supreme Court in CST vs K.
Kelukutty(1). It has been clarified by the courts’, section 4 itself uses the
word “Who have agreed”. Therefore families carrying on business will not be
governed by Partnership provisions. The interests of partners in the firm are
governed by the rules of Contract for which they have entered.
The partnership between Family Members can be termed as a partnership only

after they agree to draft an agreement and contract, then only they will be
governed under the provisions of the Indian Partnership Act. Only if the
business was governed by an agreement and contract, then a partnership shall
be recognised as a valid partnership, which was held in Lakshmiah v Official
Assignee of Madras wherein Court ruled that if there is any specific
agreement which governs the partnership principles then it doesn’t matter
whether it is made between a joint family or it is the collaboration of family
members.
Therefore the above ground must be fully satisfied to register a firm or

partnership under the provisions of the act.
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Business
A motive of partnership firm and partnership as a whole must be to do
business. This should not be judged with a strict interpretation. In some of the
judicial pronouncements, it has been ruled by the judiciary that the term
business is the activity which results in accruing more and more profits by a
particular organisation. However, it is not necessary that a business must have
long chains and ventures. A partnership may even exist in a single venture
business. It is the carrying on business in a particular way, which constitutes
a valid partnership. The court in Khan vs Miah(2) has ruled as to what will
qualify as a business entity in case of a partnership.
Sharing of profits
The word partnership per se means to part and which means division. The
division of profits between two or more members is a prerequisite to constitute
a valid partnership as a whole. It has been ruled that any man who has earned
out of the activity of the partnership must share the same with the other
partners. In 1860 when there were no acts pertaining to the governance of
partnership provisions then sharing of profits was regarded as the most
important test in determining the validity of a partnership which was also ruled
in Cox vs Hickman(3).
Sharing of Losses
To establish a partnership it is not essential that the partners ought to consent
to share the losses (Raghunandan vs Harmasjee). It is available to at least
one partner to consent to hold up under every one of the losses of the business.
The Act, accordingly, does not try to make consent to share losses, a test of
the presence of partnership.
Section 13(6), nonetheless, gives that the partners are qualified for offer
similarly in the benefits earned, and will contribute likewise to the misfortunes
continued by the firm, except if generally concurred. In this manner sharing of
mishaps might be viewed as noteworthy upon the sharing of profits and where
nothing is said with regards to the sharing of losses, consent to share profits
suggests a consent to share mishaps too. It must be noticed that even though
an accomplice may not partake in the misfortunes of the business, yet his risk
versus outcasts will be boundless because there can’t be ‘constrained
partnerships’ in our nation under the Partnership Act.
Mutual Agency
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The fifth component in the meaning of a partnership gives that the business
must be carried on by every one of the partners or any (at least one) of them
representing all, that is, there must be a mutual agency. In this manner each
partner is both an agent and principal for himself and different partners, for
example, he can tie by his demonstrations different partners and can be bound
by the illustrations of various partners in the standard course of business.
To test whether an individual is a partner or not, it ought to be seen, in addition

to other things, regardless of whether the component of agency exists, i.e.
irrespective of whether the business is led for his benefit. It is based on this
test a widow of a perished partner or a chief having an offer in the profits isn’t
an accomplice since business is not carried for his or her sake. On the off
chance that he/she accomplishes something, the firm isn’t legitimately bound
by that.
The significance of the component of mutual agency lies in the way that it
empowers each accomplice to carry on the business in the interest of others.
Partners may concur among themselves that somebody of them will not go
into any agreements for the benefit of the firm, however by prudence of the
guideline of mutual agency, such accomplice can tie the firm opposite outsiders
without notice in contracts made by the customary use of the exchange.
Obviously, he can be caused subject by other accomplice’s to entomb for

surpassing his power. Actually, the law of partnership overseeing relations of
the accomplice’s between and with the outside world is an augmentation of
the law of partnership. Where at least two people are locked in as partners in
a standard exchange, every one of them has a suggested expert from the
others to tie all by contracts went into as per the ordinary course of business
in that exchange. The authority regarding the principle has been mentioned
separately in Cox vs Hickman(3).
Thus as per the provisions of Indian Partnership, a partnership cannot be

created in a nightmare. There are some grounds on which it could be checked
whether the partnership is justiciable or legally binding. A sort of business
association where at least two people pool cash, abilities, and different assets,
and offer benefit and misfortune as per terms of the partnership agreement.
Without such agreement, a partnership is accepted to leave, where the

members in a venture consent to share the related dangers and rewards
proportionately. There are three relatively common partnership types: general
partnership (GP), limited partnership (LP) and limited liability partnership
(LLP).
A fourth, the limited liability partnership (LLP), is not recognised in all states.
The partnership could be divided into four forms.
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Partnership at will- which means while framing a partnership if there is no
statement about the lapse of such a partnership, we consider it a partnership
freely. As indicated by Section 7 of the Indian Partnership Act 1932, there are
two conditions to be satisfied for a partnership to be a partnership freely. The
conditions are when there is no agreement about a fixed period for the
presence of a partnership and No arrangement concerning the assurance of
partnership.
Partnership for Fixed Term- which means, Presently amid the production of
a partnership, the partners may concur on the term of this course of action.
This would mean the partnership was made for a fixed term of time.
Subsequently, such a partnership won’t be a partnership voluntarily; it will be
a partnership for a fixed term. After the termination of such a span, the
partnership will likewise end.
Particular Partnership- A partnership can be framed for carrying on

consistent business, or it tends to be shaped for one specific endeavour or
undertaking. On the off chance that the partnership is framed distinctly to do
one business venture or to finish one endeavour, such a partnership is known
as a specific partnership.
General Partnership- At the point when the reason for the development of
the partnership is to do the business, in general, it is said to be a general
partnership.
To check the validity of partnership, the above essentials and grounds must
be compiled, in order to form a partnership and get it registered under the
provisions of the Indian Partnership Act
Relation of Partners inter se-

Rights and Duties
Introduction
There are two fundamental principles which govern the relation of partners to
one another. The first principle provides that all the partners in a partnership
firm are free to form an agreement with regard to their mutual rights and
duties. However, there are certain duties mentioned in The Indian Partnership
Act, 1932 which can not be altered by entering into an agreement to the
contrary. Section 11 of the Act gives statutory recognition to this principle.
The second principle is of fundamental nature. It provides that the relation of

partners to one another is of the utmost good faith. It provides that every
88
partner is an agent of each other, therefore, the contract entered by one of
the partners will bind all the partners. Thus, the relation of partners to one
another is based on mutual trust and confidence. The principle is recognised
by Section 9 of the Partnership Act.
Duties of Partners
All the duties of partners emerge from the second principle i.e. the relation of
partners to one another is of utmost good faith.
Following are the duties of partners:
1. Duty to act in good faith

2. Duty not to compete
3. Duty to be diligent
4. Duty to indemnify for fraud
5. Duty to render true accounts
6. Duty to properly use the property of the firm
7. Duty not to earn personal profits
Duty to act in good faith

 Section 9 of the act provides that it is the duty of partners to act
for the greatest common advantage of the firm. Therefore, the
partner should work to secure maximum profits for the firm. A
partner should not secure secret profits at the expense of the firm.
 In Bentley v. Craven,[1] there was a partnership in a sugar refinery
firm. One of the partners was skilled in buying and selling sugar.
Therefore, he was entrusted with the task of buying and selling sugar.
However, the partner sold the sugar from his own stock and thus,
gained profit. When the partners discovered this fact, they brought
an action to recover profits earned by the partner. It was held by the
court that the partner can not make secret profits and therefore, the
firm was held entitled for profits earned by the partner.
 The duty continues to exist even after the partnership has ceased to
exist. The partners owe the duty to legal representatives of the
partner as well as the former partner.
Duty not to compete
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 Section 16(b) of the act provides that if the partner makes a profit
by engaging in a business which is similar to or competing with the
firm, then the partner should account for such profits.
 In Pullin Bihari Roy v. Mahendra Chandra Ghosal,[2] there was a
partnership for buying and selling of the salt. One of the partners
while buying the salt for the firm, bought some quantity of salt for
himself and then gained profit by selling it on his personal account.
He was held to be liable to account to his co-partners for the profits
earned.
 However, a partner can carry on any business which is outside the
scope of the business of the firm.
 The duty can be altered by the partnership deed. The partners may
enter into an agreement which allows a partner to carry the
business competing with the business or can restrict the partner
from carrying any business other than that of the firm. Section
11 provides that such an agreement will be valid and can not be
considered as a restraint in trade.
 If a person breaches such agreement and carries on a personal
business which not competing to the business of the firm then such a
partner will not be liable to account for the profits, but his co-partners
can apply for dissolution of the partnership.
Duty to be Diligent
 Section 12(b) provides that a partner is bound to diligently attend his
duties. Section 13(f) states that a person should indemnify the firm
for any loss caused to the firm because of his wilful neglect
 A partner cannot be made liable for mere errors of judgment or acts
done in good faith.
 In Cragg v. Ford,[3] there was a partnership between the plaintiff and
the defendant. The defendant was the managing director of the firm
and therefore, the conduct of dissolution was left on him. Plaintiff
advised the defendant to dispose of certain bales of cotton. However,
the defendant said that the same would only be done after the
dissolution. Meanwhile, the prices of cotton fell and very less amount
was realised by selling the cotton as compared to which could have
been otherwise realised.
 An action for indemnity under this head can be brought only by the
firm or partners on behalf of the firm. A partner can not bring an
action for indemnity in his personal capacity.
Duty to indemnify for fraud
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 Section 10 of the Indian Partnership Act, 1932, provides that if a loss
is caused to the business of the firm because of the act of the partner
then he shall indemnify his co-partners for such loss.
 The purpose of this section is to induce partners to deal fairly and

honestly with the customers.
 Illustration: A, B, C, and D entered into a partnership for the
banking business. A committed fraud of ₹30,000 against one of the
customers. As a result, all the co-partners i.e. B, C, and D were held
liable. Here, A is bound to indemnify the firm for the loss caused to
the firm because of fraud committed by him.
 The liability to indemnify for fraud cannot be excluded by entering
into an agreement to the contrary. Because entering into any such
agreement is opposed to public policy.
Duty to render true accounts

 Section 9 of the Act, provides that the partners are bound to disclose
and provide full information about the things that affect the firm to
any partner or his legal representatives. This means that a partner
should not conceal things from other co-partners in relation to the
business of the firm.
 Every partner has the right to access the accounts of the firm.
 In Law v. Law,[4] it was held by the court that if a partner is in

possession of some extra information then he is bound to deliver it to
the co-partners. If the partner enters into a contract with other co-
partners without furnishing them the material details which is known
to him but not his co-partners then such a contract is voidable.
Duty to properly use the property of the

firm
 Section 15 of the act, provides that property of the firm should be
held and used by the firm only for the business of the firm.
 A partner can not make use of the property for his personal purpose
and if does so, then he will be accountable to all the co-partners. He
could be made liable for the losses caused because of any such use.
 This duty can be avoided by entering into an agreement to the

contrary.
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Duty to account for personal profits
 Section 16 of the Partnership Act, provides that:
 If a partner makes the use of the property of the firm and earns
profit out of it, then he should account for the property. This duty
arises because of the fiduciary relationship between the partners.
 Illustration: A, B, and C were partners in a firm. Goods were
supplied to a person D. D paid some extra commission to A, for using
his influence to deliver the goods to D. Here, A has the duty towards
the co-partners to account for the commission.
 If a partner enters into a business which is competing with the
business of the firm then the partner should account for the profit
earned from any such business.
 Illustration: A, B, and C were partners in the business of sale of
bottles. B started to carry on the same business and started to
influence the customers to buy the bottle from him rather than the
firm. Here, B has a duty to account for the profits earned from the
business.
 However, a competing business can be carried out after the
dissolution of the partnership. The firm has the right to put reasonable
restrictions on carrying the competing business by the ex-partners
such as, any reasonable time for which the ex-partners can’t carry
the competing business or the geographical limits where he can’t
carry the business.
 This is not a compulsory duty and thus, can be avoided by entering
into an agreement to the contrary
Rights of Partners
Mutual Rights of the partners generally depend upon the provisions of the
agreement. But subject to their agreement, the law confers following rights on
partners:
1. Right to take part in the conduct of the business

2. Right to be consulted
3. Right to access and inspect books
4. Right to indemnity
5. Right to share profits
6. Right to Interest
7. Right to remuneration
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Right to take part in the conduct of the
business
 Section 12(a) of the act, provides that every partner has a right to
take part in the conduct to the business of the firm.
 This right can be curtailed by the provisions of the agreement. Thus,

allowing only a few partners to actively participate in the functioning
of the business.
 This right should be used by the partners for promoting the business
of the firm and not for damaging the business.
 In Suresh Kumar Sanghi v. Amrit Kumar Sanghi,[5] a partner in order
to undermine the position of the managing partner wrote to the
principals to not supply motor vehicles to the firm and to the banker’s
to not to honour the cheques of the firm.
 The Delhi High Court provided an injunction against the partner
saying that the partner’s act was to damage the business of the firm.
Right to be consulted
 Section 12(c) provides for resolving disputes relating to the ordinary
course of business between the partners by the majority. It states
that every partner shall have the right to express an opinion before
the matter is decided.
 If for example, there is a difference in opinion among the partners for
introducing the son of one of the partners for the purpose of
learning business then the majority decision will prevail.
 However, if the dispute is related to the Fundamental matter of the
business i.e. the nature of the business then the consent of every
partner is required.
 For Example: If a minor is to be included as a beneficiary in a
partnership then the consent of all the partners is required.
Right to access, inspect and copy books

 Section 12(d) of the act, provides the right to partners to access,
inspect and copy account books.
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 A partner can exercise this right by himself or by his agent but none
of them is authorised to use the gained information against the
interest of the firm.
 Example: If a dormant partner wants to sell his shares to a co-
partner and appoints an expert to inspect the account and his share
in the firm then, co-partners can not object to same.
 For raising an objection the co-partners should provide reasonable
grounds such as protection of trade.
Right to be Indemnified
 Section 13(e) provides the right to be indemnified to the partners.
This section provides the right to indemnity under two
circumstances:
 A partner is entitled to recover for any expenses incurred by him in
the ordinary and proper conduct of the business.
 Illustration: There was a partnership between A, B, C, and D. The
firm has incurred a debt of ₹2,00,000 from the bank. A paid the debt
in the name of the firm. In this case, B is entitled to be indemnified
from his co-partners.
 When a partner has incurred expenses in an emergency in order to
protect the firm from loss; provided that the partner must have
acted in a reasonable manner.
 The right to be Indemnified is not lost with the dissolution of the
firm. Settlement of accounts is also not important to indemnify the
partner.
 The rationale behind this right is that the burden of expenses of
helping partnership should not be borne by a single partner.
Right to share profits

 Section 13(b) of the Indian Partnership Act, provides that the
partners are entitled to share the profits and losses equally.
 Right to share profits is not affected by the fact that the partners have
contributed unequally in the firm, possess different skills, have
laboured unequally in the firm.
 In Mansha Ram v. Tej Bhan, [6] where there was no satisfactory
evidence to show that in what proportion the partners were to divide
the remuneration. It was held by the Punjab and Haryana High Court
that the partners were entitled to share equal profits irrespective of
94
the fact that they had been paid separately and had done unequal
work.
 However, the right to share profits equally can be altered by the
partners by entering into an agreement to the contrary. Thus, the
partners can fix the share of profits or agree to be paid by way of
salary rather than profits.
Right to Interest
 Interest on Capital: Section 13(c) provides that a partner is
generally not entitled to claim on the capital. But if there is an express
agreement between partners that allows interest on capital then, such
an interest will be paid only out of the profits of the firm. Interest is
not provided to the partner on capital except when there is an express
agreement or a usage to the effect, because a partner is deemed to
be an adventurer rather than the creditor.
 Interest on Advances: Section 13(d) states that a partner is entitled
to the interest of six percent per annum for the advances made by
him to the firm beyond the capital he had agreed to subscribe.
 Illustration: A person X, invests ₹50,000 in a partnership firm and
provides ₹60,000 to the firm as advance. In this case, X will receive
interest from the profits of the firm for ₹50,000 which he had invested
in the firm and will get 6% interest on the advances made by him to
the firm.
 It must be noted that the interest in capital ceases after the
dissolution of the firm, but the interest on advances exist until it is
paid. Thus, the dissolution of a firm has no impact on the Interest on
Advances.
Right to remuneration
 Section 13(a) provides that no partner in a firm is entitled to claim
remuneration for taking part in the conduct of business. However, the
remuneration can be provided to certain partners along with the share
in profits if they have entered into an agreement to that effect or
when such remuneration is payable under the continued usage of the
firm.
 For Example, there is a firm consisting of Active and Dormant
partners. In such a case, the partners can form an agreement
entitling the active partners to receive a particular sum as
remuneration.
What is Partnership Property?
95
It becomes important to determine the property of the firm as opposed to the
personal property of partners. For example, when the partnership is dissolved
then the debts are first paid out of the property of the firm. Again, the
partnership property should be used only for the business purpose and not for
personal purposes.
Concept and Nature of Partnership Property

A partnership is not a legal person and is, therefore, incapable of holding any
personal property. Partnership property is nothing but the joint property of all
the partners, however, none of the partners can personally claim the property.
Thus, when one of the partners brings his personal property for the purpose
of the partnership, he loses his personal rights over it. He will only get the
share of profits which may be agreed by the partners.
What constitutes the Partnership Property?

Generally, it is an agreement between the partners which specifies what shall
constitute a partnership property.
Section 14 of the Act, provides what shall constitute the partnership property.
It must be noted that this is subject to the agreement, and the partners can
explicitly mention in the contract that what will be the partnership property.
Hence, Section 14 will apply only in the cases when there was no agreement
between the partners stating that what would be the partnership property.
The property originally brought in

The property of the firm includes all property, rights, and interests which were
originally brought into the stock of the firm by the partners at the
commencement of the business.
In Boda Narayana Murthy and sons v. Valluri Venkata Suguna,[7] there were
five people who purchased a land jointly and subsequently constructed a
cinema hall with the joint money. Then all the five persons entered into a
partnership to form firm to exhibit the film there. It was held by the Andhra
Pradesh High Court that the land and the hall was not the property of the firm
but subject to co-ownership, as there was no intention could be inferred to
convert the property into the firm’s property.
 Goodwill of the firm
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Goodwill of the firm is treated as the property of the firm. Goodwill is nothing
but the reputation of the firm. When a partner buys the firm then he is
entitled to the goodwill as well. say, for example, there were two partners in
a firm, A and B, B sold his partnership shares to A, A will be entitled to the
goodwill of the firm as well i.e. B cannot use the name of the firm when he
opens the business and cannot represent himself as a partner of the firm.
If a person dies or retires, then he or his legal representatives will be entitled

to claim for the goodwill. This is because the goodwill of the firm is the result
of his joint efforts along with other partners.
Property subsequently acquired

When a property is subsequently brought for the purposes of the firm or in the
ordinary course of the business, then it would constitute the property of the
firm. Any property bought by the firm’s money will be the property of the firm,
In Mohan Lal Bahri v. K.L. Bahri,[8] a chief working partner bought property
by the firm’s money in his own name without the consent of other partners. It
was held by the court that, the fact that the property is not included in the
assets for income tax purposes is immaterial and hence, the property belonged
to the firm and not to the partner.
Partner’s property in the firm’s use

Sometimes, the personal property of the partner may be used in a firm. If such
property constitutes the property of the firm or not will depend upon the
agreement of the partnership and intention of the partners.
The mere use of a partner’s personal property does not mean that it is the
firm’s property and the owner of the property does not lose his rights over that
property.
In Jai Narayan Mishra v. Hashmathunnisa Begum,[9] one of the partners had

contributed the land for the use of business and the other had constructed the
cinema hall on land. There was no provision in the agreement stating that the
property would be treated as the property of the firm. It was held by the court
that the properties were the personal property of the partners and not the
firm’s property.
Conversion of the joint into separate

property
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Where the property is bought by the partner from the partnership money but
for the sole benefit of the partner, then, in that case, a partner will become
the debtor of the firm and the property would be the partner would be the sole
owner of any such property bought by him.
Change in the firm

When a partnership is created for a fixed period or for a particular adventure
then such a partnership automatically comes to an end after the expiry of such
period or adventure. However, sometimes the partners continue the
partnership beyond the expired term. Section 17 of the Act provides that such
a change in the firm will not affect the mutual rights and duties of the partners
unless the agreement alters it. The change in the firm can be understood under
three broad heads:
Change in Constitution
When there is a change in the constitution of the firm i.e. if a partner retires
or a new partner is added, the mutual rights and duties will remain the same
as they were before the change.
After the expiry of the term

When the partnership is for a fixed term but the partners carry it on beyond
such term then such partnership will become the partnership at will and the
mutual rights and duties remain the same.
When additional undertakings are carried

out
Where the partnership was formed to carry out the specific adventures but
carries out other adventures or undertakings, then the partnership becomes
the partnership at will and the rights and duties are not affected by any such
change.
Conclusion
In a partnership, the partners are free to form an agreement and decide the
mutual rights and duties. Relation of partners in the partnership is of utmost
good faith, therefore, it is the duty of every partner to work for the greatest
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common advantage of the firm and to work diligently in order to avoid any
loses to the firm.
Mutual rights of the firm generally depend upon the provisions of the
agreement but, there are certain rights which are conferred by the act in the
case when there is no explicit agreement between the partners, these rights
can be abrogated by entering into an agreement to the contrary.
While deciding the shares of the partners in a firm it becomes highly important
to determine the partnership property. Theoretically speaking, the partnership
property is nothing but the joint property of all the partners.
If there is any change in the constitution of the firm or if the partnership

continues after the expiry of the term or undertaking for which it was
constituted then it does not affect the mutual rights and duties of the partners.
Incoming Partners and Outgoing

Partners
Who are Incoming Partners?
Meaning of Incoming Partners: – Incoming Partners are the partners who are joining
the partnership firm by contract or is added to the firm. The ‘incoming partners’ are
the partner who are joining the partnership firm by contract or added to the firm.
Incoming Partners are the new partners who get admitted to the firm. Such
admission is subject to any procedure that the firm at its will and understanding
adopts to include new members.
New partners can be introduced into a firm in the following ways: –

 With the consent of all existing partners: – The relationship between the
partners is based upon mutual confidence and trust. For the harmonious
working of a partnership, it becomes necessary that a new partner should not
be introduced without the consent of all the partners. This section, therefore,
provides the general rule that no person shall be introduced as a partner into
the firm without the consent of all the existing partners.
 According to a contract between the partners: – If a contract between the
partners permits the introduction of a new partner even without the consent
of all the existing partners, that can possibly be done. For example, the
contract provides the majority of the partners shall be competent to admit a
new partner or anyone of them may nominate a partner or appoint his
successor, a new partner could be introduced accordingly. In such cases, even
if some of the partners are unwilling to the introduction of some particular
person, they will be bound by their contract and the introduction will be valid.
 A minor admitted to the benefits of partnership becoming a partner: – A
minor admitted to the benefits of partnership can become a partner according
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to the procedure mentioned in section 30 (5). When a minor was admitted to
the benefits of partnership, he may make an election, within 6 months of his
attaining the majority or obtaining knowledge that he had been admitted to
the benefits of partnership, whichever date is later, and give a public notice
whether he became a partner or not. If he opts to become a partner by such
notice, he becomes a partner of the firm. If he fails to give such notice within
the abovestated time, then on the expiry of such time, he automatically
becomes a partner. It may be noted that in case of such a minor becoming a
partner, the consent of other partners is not required.
Liability of an Incoming Partner
Each partner is responsible for all the acts of the firm performed while being a
partner. It is clear that as a general rule, the responsibility of incoming partners starts
from the date of his/her joining.
Nothing can, however, prevent a partner from agreeing to be liable for the acts done
before his admission. If he makes such an agreement with his co-partners, the same
will be binding only between him and the co-partners and the third parties cannot
take advantage of such an agreement. The creditors can make him liable if they can
show that the incoming partner had agreed with them, expressly or impliedly, for
being liable towards them for the acts done before his admission. The basis of
liability for the past acts in such a case will be the agreement rather than the fact of
his admission as a partner.
This partner makes such an agreement with its co-affiliates, the creditors may make
them liable if they can show that the incoming partner had agreed with them
expressly or, implicitly, towards them for the acts done before his joining.
Related Case: – Central Bank of India vs. Tarseema Compress Wood

Manufacturing Co.
Who is outgoing partner?
Meaning of Outgoing Partner: – ‘Outgoing partner’ is the partner who is leaving the
partnership firm. When the partner leaves the firm either due to the retirement or due
to the death, it is called as the outgoing partner. Outgoing partner is a partner who is
going to leave a particular firm purposely or to he/she might be died or expelled by a
firm. There are various criteria to leave the partnership firm which are given in the
Indian Partnership Act,1932.
Therefore whenever any partner leaves that firm, he has rights in relation to the
profits earned by him during the period of being a partner of that firm. Section
32 to 38 of the Indian Partnership Act deals with the different ways in which a partner
may become an outgoing partner with their rights and liabilities.
What is the procedure of removal of the partner?
A partner can stop being a partner in the following ways: –
1. By Retirement (Section 32): – Voluntary withdrawal of a partner from the
firm. It states that a partner may retire under certain circumstances: –
o With the consent of all other partners.
o With the partners express agreement.
o If it is a partnership at will, then a partner may retire by giving
notice of retirement to all other partners.
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o A retiring partner may be free from any liability to any third party
for the acts of the firm by an agreement made by the outgoing
partner with a third-party done before his retirement and such
agreement being implied during the dealing.
o The retiring partner and the other partners will continue to be
liable for any act done by them which would have been an act of
the firm. It simply means that the retired partner is not liable to
any third party who deals with the firm without knowing that he
was a partner of the firm.
2. By Expulsion (Section 33): – Generally, expulsion of a partner is not possible
except in the following situations: –
o It is necessary to remove the partner for the interest of the
partnership.
o Notice has been given for the removed partner.
o Opportunity to listen to the expelled partner.
o And if these conditions are not met, such removal will be
considered null and void.
3. By the insolvency of the partner (Section 34): – Insolvent is not allowed to
continue as a partner. Hence the person who is declared insolvent ceases to
be a partner on the date on which the adjudication order is made. On the
partner’s insolvency, whether to dissolve the firm or not it depends on a
contract between the partners.
4. Death of a partner (Section 35): – Generally, a partnership terminates on
the death of a partner, but if there is a contract between the partners to
continue the partnership even after the death of the partner and the firm’s
business can be continued with the remaining partners.
Liabilities of an Outgoing Partner
A retired partner continues to be liable to the third party for acts of the firm till such
time that he or other members of the firm give a public notice of his retirement.
However, if the third party deals with the firm without knowing that he was a partner
in the firm, then he will not be liable to the third party.
The retired partner, however, continues to be liable for acts of the firm done before
such retirement of a partner. This liability holds good unless there is an agreement
between him, the concerned third party, and partners of the reconstituted firm. Such
an agreement can also be implied by the course of dealings between the third party
and the reconstituted firm post announcement of the retirement of a partner.
If the partnership is at will, then it can relieve a partner without giving a public notice.
To do so, the partnership needs to give a written notice to all the partners of his
intention to retire.
Rights of an outgoing partner

Following are the rights of an outgoing partner: –
1. Rights of outgoing partners to carry on competing for business: – Section
36 (1) of the Indian Partnership Act deals with the rights of the outgoing
partner. Section 36 (2) of the Indian Partnership Act deals with the agreement
in restraint of business. According to this section, an outgoing partner may
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enter into an agreement with his partners that, when he ceases to be a partner
of the firm, he will not conduct related to the business within the specific
limits or the limited period. This imposes some restrictions, but allows an
outgoing partner to compete with this business but with some restrictions
which are imposed for the same: –
o Cannot use firm name.
o Cannot represent yourself as member of partner.
o Cannot solicit with the customs of the person, who was dealing
with the firm before he ceased to be a partner.
2. Right of the outgoing partner in some cases to share future profits:
– Section 37 deals with the rights of an outgoing partner in some cases to
share future profits. It states that if a member of the firm dies or ceases to be a
partner of the firm and another partner takes over the business if there is no
final settlement between the partners; then the outgoing partner will entitle
to the profit of his share, until he ceased to be a partner. The outgoing partner
or his representative is entitled to use his share in the firm’s assets or interest
at the rate of six percent per annum on the amount of the outgoing partner’s
share in the firm. The other option for the remaining partner is to buy the
stake of the deceased or outgoing partner. If the remaining partner chooses to
buy a share of the outgoing partner than the outgoing partner, then the
outgoing partner is no more entitled to receive a share of its profit.
Case laws under Incoming Partners and Outgoing
Partners
1. Addanki Narayanappa and Ors. vs. Bhaskara Krishtappa and Ors
The Hon’ble Supreme Court upheld the sharing of benefits under Section 37 to the
representatives of the deceased partner. However, if sharing this profit is subject to any
contract to the contrary. Therefore, in cases where the firm purchases the remaining
assets of the outgoing partner in the firm, then in such cases the outgoing partner are
not entitled to any further profit sharing.
2. ‘Mohd. Laiquiddin and Ors. vs. Kamala Devi Misra (Dead) by L.Rs. and Ors
The court determined that the death of a partner automatically dissolved the firm of two
members. In addition, after the death of a partner, his assets are liable to the extent of
the acts performed in the firm during the life of the partner. Acts done by the firm after
the death of the partner have no obligation to be borne by the estate of the deceased.
What is the position of a Minor Partner?

Section 30 of the Indian Partnership Act 1932 contains legal provisions regarding
a minor in a partnership. We now know that the Indian Contract Act 1857 clearly
states that no person is under 18 years of age, that is, minors may be parties to a
contract. Therefore, in any partnership firm a minor cannot be a partner.
However, according to the Partnership Act, a minor can be admitted for partnership
benefits. Although a minor cannot become a partner but he/she can enjoy the
benefits of the firm. All the partners of the firm must be in agreement for giving the
benefits to the minor in the partnership.
Rights of a minor partner
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Once a minor is given an advantage in a partnership, there are certain rights that he or
she enjoys. Let’s have a look at the rights of a Minor Partner: –
1. A minor partner would clearly have a right to his share of the profits of the
firm. But the minor partner is not liable for any loss beyond his interests in
the firm. Therefore the liquidation of the personal assets of a minor partner
cannot be used to pay the liabilities of the companies.
2. He can also inspect the books of the firm like other partners of the firm. He
can ask for the copy of the books as well.
3. If necessary, he can sue any or all other partners for his share of profits or
profits.
4. Upon attaining majority, a minor partner has the right to become a partner of
the firm. He has six months from obtaining a majority to decide to execute this
right. Whether he decides to become a partner or not, he should give public
notice about the same.
What are the liabilities of a Minor Partner?
Liabilities of a Minor Partner are as follows: –
1. A minor cannot be held personally liable for the loss of the firm. And if the
firm declares bankruptcy, the minor’s share is kept with the official receiver.
2. After attaining the age of majority or 18, the minor has to choose that whether
he wants to become a partner or not. But he can choose not to be a partner. In
this case, the minor partner must provide a public notice regarding this
decision. And notice has to be given within 6 months of securing majority. If
no such notice is given even after 6 months, the minor partner will become
liable for all acts done by the other partners by the date of such notice.
3. If the minor partner become a partner, he will be liable to all third parties for
the acts performed by any and all partners as he/she was admitted for the
benefits of the partnership.
4. If he becomes a full-time partner, he will be considered a normal partner and
will have all his liabilities. His share in the firm’s profits and assets would
remain the same as when he was a minor partner.
Case laws under position of a Minor Partner
1. S.C. Mandal vs. Krishnadhan: – Section 30 of the Indian Partnership Act 1932
contains legal provisions regarding a minor in a partnership. We now know that the
Indian Contract Act 1857 clearly states that no person is under 18 years of age, that
is, minors may be parties to a contract. And a partnership is a contract between
partners. Therefore, a minor cannot be a partner in any partnership firm. However,
according to the Partnership Act, a minor can be admitted for partnership benefits.
So, if a minor cannot become a partner but he can enjoy all the benefits of the
partner. All the partners of the firm must be in agreement for giving the benefits to
the minor in the partnership.
2. CIT vs. Dwarkadas & Co: – The Supreme Court held that a minor cannot become a
full partner in an existing firm. Section 30 only allows the minor to get benefits from
the firm. The Honorable Judge then continued to observe: – “Section 30 of the Indian
Partnership Act clearly states that a minor cannot become a partner, however, with
the consent of the adult partners, he/she can be admitted for partnership benefits.
Any document that goes beyond this section cannot be considered valid for the
purpose of registration.”
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Dissolution of a Partnership
Introduction
Sometimes a situation arises where the owners and partners of a firm have to
put an end to the partnership firm either on their own or due to the external
forces, the process when the partnership comes to an end is called dissolution
of the partnership.
From the legal point of view, the partnership firm is not a separate legal entity
from its partners. Partners and their business are not separate from one
another.
Let us first discuss some of the terms which are important regarding this:
1. Partners: The people who have entered into a partnership with one
another on an individual capacity.
2. Partnership: It is an arrangement of two or more people to perform
a business activity and share profit and loss. In a partnership firm,
the minimum members can be two and maximum can be 20.
3. Firm: When all the partners enter into a partnership and work
collectively under an organization, it is called a Firm.
Dissolution of partnership means a process by which the relationship between
the partners is terminated and comes to an end and all the assets, shares,
accounts and liabilities are disposed of and settled.
Section 39 of the Indian Partnership Act, 1932 defines the dissolution of the
firm.
The Indian Partnership Act, 1932

The Indian partnership act,1932, tells about the terms and conditions under
which one can enter into a partnership or how the partnership can be dissolved.
There are certain provision regarding the Indian partnership act, some of them
are:
 Section 30– If all the partners agree, a minor may be admitted for the
benefits of a partnership.
 Section 32– Partners can retire from the firm either with the consent of all
partners or in accordance with agreement among the partners.
 Section 31– Partners can be admitted either with the consent of all partners or
in accordance with agreement among the partners.
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 Section 59– Registration of the firm is optional.
 Section 42– If agreed by the partners in the partnership deed, a firm is
dissolved on the death of the partner.
Types of Partners
There are different kinds of partners in a firm:
1. Working partner: The partner who contributes his capital and

actively participates in the business activities.
2. Sleeping partner: The partner who contributes his capital but does
not take part in business activities. It is also known as a dormant
partner.
3. Nominal partner: The partner who neither contributes his capital
nor takes part in the business activities of the firm. His contribution
is limited but allows other partners to make use of his name.
4. Partner by estoppel: The person is not a partner in the firm but by
his action and conduct with outsiders, he makes them believe that he
is also a partner of the firm. This happens when the partner is retired
but people don’t know about it.
5. Secret partner: The person who is a partner of the firm but his
partnership is kept a secret from the public.
6. Partner by holding out: The partner who is actually not a partner
in the firm but allows the firm to show to others that he is a partner
of the firm
Kinds of Partnership
1. Partnership at will: It means that such a partnership depends upon
the will of the partners and any partner can bring the partnership to
an end by giving a notice. Such a partnership is done for a particular
lawful business.
2. Particular partnership: It means such a partnership is done for a
continuous business or for a particular venture.
3. Partnership for a fixed period: It means when a partnership is
done for a particular time period either for 2 years or for 5 years as
soon as the period expires the partnership automatically dissolves.
4. General partnership: It means when the partnership is done
generally to carry out a business and in which the liability of each
partner is unlimited.
Dissolution of a Partnership
105
Before the dissolution of the partnership, let us understand the difference
between the ‘dissolution of the partnership’ and the ‘dissolution of the
partnership firm’. Dissolution of partnership means the end of the partnership
business and dissolution of partnership firm means the end of partnership
business along with the firm.
The dissolution of a partnership firm means termination of every contractual

relationship between the partners and that all the operations which are being
performed in a company are suspended and all the assets and liabilities are
settled and disposed off.
Now the question arises when the partnership is going to be dissolved? There
can be different reasons for the dissolution of a partnership as when a new
partner is added or when a partner is dead or leaves the partnership, etc and
the remaining partners can continue their business. And when there is a
change in the partners so the prior partnership comes to an end and the new
partnership takes place with the liability and assets of the old one.
The partnership may be dissolved due to the following reasons:
1. Due to the death of the partner.

2. Due to the admission of a new partner.
3. Due to the retirement of a partner.
4. Due to the bankruptcy of a partner.
5. Due to the expiry of the partnership period, if the partnership is for a
particular period.
Modes of Dissolution
There are some modes by which a partnership can be dissolved and those are:
1. By an act of partners: when a partner agrees to dissolve a partnership

at a particular time. Partners can come into an agreement regarding
a particular time period maybe five years. In which partners can end
the agreement at the end of the five years. Sometimes partners can
dissolve it in the middle of the time period under specific conditions.
2. By operation of law: a partnership is the consequence of an
agreement which is governed by law. Therefore if any unlawful
activity is performed so it will be dissolved. You can make a valid
partnership for illegal work.
3. By the court’s decree: a partnership can be dissolved by the court
and the court will only allow under these conditions:
a. If the partner is incapable to work;
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b. If the partner is mentally unstable;
c. If the partner misbehaves which creates a bad impact on the
partnership;
d. If there is a breach of the agreement by a partner.
4. Statement of dissolution: dissolution can be done by filing the
statement to the state’s secretary. The form must contain the
information regarding the partnership name, date and reason of
dissolution.
Statutory provisions regarding the Dissolution

There are certain provisions which are mentioned in the Indian Partnership
Act regarding the dissolution are:
Section 4 defines the meaning of partnership.
Section 6 defines the modes of the existence of the partnership.
Section 45 defines the liabilities of the partner after the dissolution of a partnership.
Section 46 defines the rights of the partner regarding the business after dissolution.
Section 48 defines the modes of the settlement of the account of partners after
dissolution.
Rights after Dissolution

Section 46 of the Indian Partnership Act, 1932 deals with the rights of partners
after dissolution. After the dissolution of the partnership, partners have certain
rights regarding the same:
1. Right to an equitable lien: on the dissolution of the firm, every partner

is entitled to certain rights like the right to have the property of the
firm used in payments of debts and liabilities and rights to have
surplus distributed among all the partners.
2. Right to return of premium: at the time of the partnership, partners
pay an amount in the form of premium when the partnership
dissolves. Partners get that premium according to the agreement.
3. Rights where partnership contract is revoked for fraud or for other
reasons: if a partner agrees to join a firm by fraud or
by misrepresentation by the other partners, or if he finds so he has
the right to put an end to the partnership agreement.
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4. Right to restrain the use of the firm’s name or property: after the
dissolution of the partnership, the partner has a right to stop other
partners from using the same name of the firm.
5. The right to earn personal profit by using the firm’s name: if on the
dissolution, the partner has a right to use the name of the firm as he
buys goodwill of the firm and can earn profit from it.
Liabilities after Dissolution

Section 45 of the Indian Partnership Act, 1932 deals with the liability for acts
of partners done after the dissolution. Liabilities are:
 The partners continue to be liable to the third party until the public
notice of the dissolution is given, it will not be applied to the partner
who is dead or the partner who is insolvent or to the sleeping partner
or to the retired partner.
 After the dissolution of the partnership, the partner is liable to pay his
debt and to wind up the affairs regarding the partnership.
 After the dissolution, partners are liable to share the profit which they
have decided in agreement or accordingly.
Case Laws
 Narendra Bahadur Singh vs Chief Inspector Of Stamps, U.P. (1971)
In this case, the partnership was dissolved and with that, the third party
(Narendra Bahadur Singh) was given with all the assets (stocks) liabilities
including all the debts as per the account and he was entitled to use the old
name of the firm and can carry out the business with all profit and losses.
The other three parties were not entitled to any profit, losses or any other
liability. The capital, profit, and loss of the other 3 people has agreed to receive
and Narendra Bahadur Singh has agreed to pay the mentioned amount.
As to settle the amount securely, he hypothecated and charged certain

property but it was said by the court that the property of the firm is vested to
all partners equally as you are not the only owner of the firm and the
settlement will be done according to the mode of settlement under Section
48 of Indian Partnership Act.
 Santdas Moolchand Jhangiani And … vs Sheodayal Gurudasmal

Massand (1970)
In this case, there were two plaintiffs and one defendant who entered into a
partnership and carried on partnership business afterward they decided to
dissolve it and settle the accounts of partnership. The plaintiff to whom a
certain amount was payable, filed a suit for damage and when the issues were
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observed by the judge said that it was not only the deed of dissolution but also
a bond.
He impounded the document and asked the plaintiff to pay the deficit stamp
duty. In the end, it was said that the deed of dissolution in this matter is not
liable to be stamped as a bond and that it’s having been stamped as a deed
for dissolution is sufficient.
 B.K. Kapoor & Anr. vs Mrs. Tajinder Kapoor & Anr. (2008)
In this case, the plaintiff-respondent filed a suit for the dissolution of the
partnership and claimed that as per the terms of the agreement the plaintiff
was entitled to 18% of the profit in the first Rs.75,000, 12% in the next
Rs.75,000 of book profit and 8% in the balance amount of book profit.
As the relation was not well mentioned in the plaint due to which it was difficult
to continue the partnership. So a notice of suit issued to the petitioners who
moved an application under Section 8 of the Act claiming that the suit raised
is covered under the arbitrary agreement.
But in the end, it was held that the petitioners are seeking the dissolution on
the just and equitable ground covered under Section 44 of the arbitrary act
and not as the term of the partnership deed and therefore the matter could
not be referred to the arbitration under section 8.
 N. Guruva Reddy vs The District Registrar (1976)

In this case, Guruva Reddy, son of Chenchu Rami Reddy and other six persons
and legal heirs of Smt. P. Sri Devamma was carrying a partnership business.
The legal representative and five other partners show their desire to retire
from the partnership.
A dissolution of the partnership was executed. The dissolution was executed

on the stamp paper. In the end, it was said that a charge was created in favour
of the partners in the respective amount, which are payable under the deed of
the dissolution.
Conclusion
It can be derived from the above explanation of dissolution of the partnership
that with the dissolution of the relationship between the partners they have
certain rights and responsibilities which they need to fulfil and one can claim
for it with the help of the Indian Partnership Act, 1932 as it gives certain
provision regarding the same.
The act clearly provides grounds for dissolution of the partnership, so that
nobody can take advantage of the same and it also helps to maintain a good
environment in the firm.
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Consequences of dissolution of
partnership firms
Introduction
Before we discuss the consequences of dissolution of a partnership firm, let’s
first understand the meaning of the dissolution of the firm.t means when the
partnership between all the partners dissolved, then it is called dissolution of
the partnership firm. After the dissolution of the firm, the partners have certain
rights and liabilities as per the Indian Partnership Act, 1932, which provides
the consequences of the dissolution of the firm. In a partnership firm, there
are more than two partners. This process includes the disposing of all the
assets and settlement of all the accounts and liabilities of all the partners.
Section 4 of the Indian Partnership Act,1932 defines partnership. As it is the

relation between the partners who entered into a business and share all the
profit and losses. Under the partnership deed, all the profit and losses are
shared accordingly. Partnership deed is an agreement between the partners in
which all the terms and conditions are outlined.
Advantages and Disadvantages of partnership

firm
There are always advantages and disadvantages of everything. The
partnership firm has also certain advantages and disadvantages, which are:
Advantages
1. Partnership firms are easy to start in most of the cases as there is
only a requirement of partnership deed.
2. Decision making is one of the most difficult problems in any
organization but in the partnership firm one can make decisions easily
and the partners can enjoy a wide range of powers.
3. As compared to other firms, a partnership firm can easily raise funds.
As by the contribution of the multiple partners raising funds to
become more convenient.
4. There are fewer chances of risk in partnership firms as risk is shared
by all the partners in the firm.
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Disadvantages
1. There is unlimited liability. As a partner is liable personally for all the
losses of the partnership firm.
2. It is necessary that all the partners have to work with unity if one
partner has some trust issues other than it can lead to a difficult
situation for the partnership firm.
3. The maximum number of partners can only be 20. In the case of
limited liability partnership (LLP), there is no restriction regarding the
number of members.
4. A partnership can be dissolved due to the death of a partner or
insolvency of the partner.
Dissolution of firms
Section 39 of the Indian Partnership Act, 1932 defines the dissolution of
partnership firms. The dissolution of the firm means to stop all the business
activities with the firm. There is a difference between the dissolution of the
firm and the dissolution of the partnership.
When all the activities regarding business stops and all the profit and loss is
settled among the partners is called dissolution of the firm and when the
partner takes the retirement from the firm even though the firm continues to
perform its activity with another partner is called dissolution of a partnership.
The Indian Partnership Act, 1932 defines dissolution in different ways:
Ways of dissolution
Section 40 defines dissolution by agreement.
Section 41 defines compulsory dissolution.
Section 42 defines dissolution on the happening of certain events.
Section 43 defines dissolution by notice of partnership at will.
Section 44 defines dissolution by court.
Let us understand these sections in-depth:
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Section 40- Dissolution by agreement: it means a firm can be dissolved with
the agreement in which the consent of all the partners are mentioned and by
the mutual consents of all the partners to dissolve the firm. Without the
interruption of the court, one can dissolve it simply.
Section 41- Compulsory dissolution: compulsory dissolution can be because of

many reasons.
 If all the partners become insolvent or if all the partners except one
become insolvent then the firm will be dissolved.
 If partners are carrying out a business of unlawful activities like drugs,
selling illegal products, etc then it will be dissolved.
Section 42- Dissolution on the happening of a certain event: under these
events a firm can dissolve.
 If the partnership is done for a particular period of time and when

that period expires then the firm dissolves.
 Dissolution can also take place due to the death of the partner but if
other partners want to continue they can.
 If the partners of the firm are insolvent or one partner then the
dissolution takes place.
 If the partnership is created for a specific adventure or undertaking
and if that objective is done then the firm will dissolve.
Section 43- Dissolution by notice of partnership at will: the firm can be
dissolved by any partner by giving notice in writing to all the other partners
and that notice must be well communicated to all the partners by which the
firm can dissolve.
Section 44- Dissolution by court- the dissolution can be done in a formal

manner by suing the other partners and the grounds on which court can
dissolve the firm are:
 When one of the partners becomes unsound in that case the other
partners can file a suit and bring the case to the court to dissolve the
firm.
 When the partner is unable to perform his duties permanently due to
which the other partners file a case and dissolve the firm. The reason
for the incapability of work can be imprisonment for a longer time.
 If the partner commits such an act that brings guilt and affects the
reputation of the firm due to which firm faced losses then in that case
court may order to dissolve the firm.
 If the partner breaches the agreement of the firm then the court may
order for the dissolution of the firm. As it is the most important
document of any firm.
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 If the partner transfers his full interest to the third party and allowed
his share to be charged under the provision of rule 49 of Order XXI of
the First Schedule to the Code of Civil Procedure, 1908 (5 of 1908)
and allow it to be sold in the recovery area of land revenue because
of the partner than the court can order for dissolution of the firm.
 If the firm is facing a continuous loss, then the court can order for the
dissolution of the firm.
Judgements regarding dissolution of firm

Prakash Chand vs Bhanwar Lal & Anr (2009)
In this case, the petitioner has submitted the application under section11 of
the Arbitration act. A partnership deed was duly executed on 13.8.1975 and
the partnership is a registered partnership firm under the provisions
of Partnership Act. A lease deed was executed and as per the petitioner, in
favour of both the partners constituting partnership firm M/s B.P. Textiles.
According to the petitioner, this lease deed is subsisting till today. According
to the petitioner himself, he separated from the business of the firm on
16.4.1978, however, the accounts books, as well as properties, remained in
possession of respondent-Bhanwar Lal. So, in this case, the court held that
there is no live dispute between the parties which can be referred to the
Arbitrator and in the result the petition filed by the petitioner is dismissed.
Mohinder Nath & Ors. vs Sh. Narender Nath & Ors. (1998)
In this case, the appellant and respondent (1) are the real brothers and were
partners in a partnership firm. Each one of the said parties had a 15% share
in the firm and the remaining 40% was held by their mother. The
plaintiff/respondent no.1 filed the suit for dissolution of the firm and for
rendition of accounts.
The mother of the parties holding 40% share was not made a party in the suit
and on objection having been taken by the respondent that the suit was not
maintainable, the plaintiff made an application before the Judge for impeding
the mother as one of the defendants. The judge said that the partnership was
at will and the same stood dissolved from the date of service of notice of the
suit on the defendants.
The Court also held that the entitlement of the plaintiff to the 15% share in
the firm was not disputed and the Court was, therefore, satisfied that the
plaintiff was entitled to the appointment of the receiver and consequently an
Advocate was appointed the receiver to take charge of the business and all the
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assets of the firm and at last court said that the parties will bear their own
costs.
Consequences of dissolution of partnership

firm
Rights after dissolution

Section 46 of the Indian Partnership Act, 1932 provides the rights of partners
to have business wound up after the dissolution of the firm. It says that after
the dissolution of the firm, all the partners or his representative are entitled to
the property of the firm as applied in the payment of debts and liabilities of
the firm and the surplus to be distributed among all the partners of the firm.
Liabilities after dissolution

Section 45 of the Indian Partnership Act, 1932 provides liabilities for an act of
the partners after the dissolution of the firm. According to this section, the
partners of the firm are liable to the third party for any act done by any of
them unless they give public notice of the dissolution of the firm.
It also states that the partner who dies, retries, becomes insolvent or that of
a person who the third party is not aware of being the partner of the firm, is
not liable under this section.
In simple words, it protects the third party who doesn’t know about the
dissolution of the firm.
There is a difference between the firm’s debt and private debt.
Basis Firm’s debt Private debt
It means the debt owed by a

It means the debt owed by the
Meaning partner in his personal capacity to
firm by outsiders.
another person.
All the partners are jointly The concerned partner is

Liability liable and severally for the particularly liable for his private
firm’s debt. debt.
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Share of the partner in excess of
Application of
Firm’s property is applied first the firm’s property over a firm’s
the firm’s
to settling the firm’s debt. debts can be applied for private
property
debts.
The excess of the partner’s

Application of private property over his debts Private property is first applied for
private property can be applied for the firm’s private debts.
debt.
Settlement of accounts after the dissolution of the firm

Section 48 of the Indian Partnership Act defines the ways of settling the
accounts of the firm. The firm will pay all the losses including the deficiency of
the capital out of the profit and then from the partner’s capital and by the
partners individually in their profit sharing ratio.
The firm applies its assets including any contribution to make up the deficiency
for paying to the third party and then for paying any loan or advances by the
partner and lastly for paying back their capitals and if any surplus left after all
this then it will be divided between the partners in their profit sharing ratio.
Return of premium after dissolution

Section 51 of the Indian Partnership Act defines the return of premium after
dissolution. At the time of entering into a partnership firm, the partner has to
pay an amount as premium. So when the firm dissolves before the time period
due to any reason, then he is entitled to the repayment of premium.
The term upon which he becomes a partner and to the length of the time
during which he was a partner such part will be repaid unless the dissolution
is mainly due to his own misconduct or the dissolution is in pursuance of an
agreement containing no provision for the return of the premium or any part.
Agreements in restraint of trade

Section 54 of the Indian Partnership Act defines the agreement in restraint of
trade. Let us understand the meaning first, it means that when one party
agrees with the other party to restrict his liberty to carry on the specific trade
even in the present or in the future. This section defines that partners in
anticipation of the dissolution of the firm make an agreement that some or all
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the partners will not carry any business similar to that of the firm even for a
specific period or within specific local limits.
Sale of goodwill after dissolution

Section 55 of the Indian Partnership Act deals with the sale of goodwill after
dissolution. There are certain ways for sale of goodwill:
1. When the accounts of the firm are settled after the dissolution, the
goodwill shall be subject to the contract between the partners be
included in the assets or it will be sold separately or along with the
other property of the firm.
2. Rights of the buyers and sellers of goodwill:
 When the goodwill of the firm is sold after the dissolution, a partner
may be competing with that of the buyer but the subject to the
agreement between them, he may not use the firm’s name, he may
not present himself on carrying on the business firm or he may not
ask the customs of persons carrying the firm before dissolution.
 Any partner upon the sale of goodwill makes an agreement with the
buyer that such partners may not carry on such business similar to
that of the firm within a specified period or within a specified local
time.
Conclusion
The conclusion of this article is that the Indian Partnership Act, 1932 provides
provisions regarding the dissolution of the firm. This act helps the people who
want to dissolve the firm so that no one can take the wrong advantage for the
same.
With the dissolution of the firm, you have certain consequences regarding the
same as you have to close the books of account, all the liabilities must be
settled by the partners and the profit and losses will be shared by the partners
as per the terms of the agreement.
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THE SALE OF GOODS ACT,1930
Sale and Agreement to Sell: An

Analysis of Statutory Provisions
Introduction
The basis of Indian society is a contract. The very foundation of Indian
society was based on the Social Contract Theory. Thus, contracts are the
roots of the law which deals with business, transactions of the Indian
economy as well as the society. The mother law being the Indian Contract
Act 1872, we had derived the Sale of Goods Act 1930. Thus it helps to
enhance, encourage and promote business transactions where the seller
transfers or agrees to transfer the title in the goods to the buyer for
consideration.
Statutory Provision that draws the difference

between Sale & Agreement To Sell
One of the foundation concepts in the Sale of Goods Act 1930, is the sale and
an agreement to sell. Section 4 of the Sale of Goods Act 1930 specifically
deals with sale and agreement to sell. It explicitly manages and deals with
sale and agreement to sell.
It expresses that:
 Firstly, an agreement to sell products is an agreement whereby the

merchant moves or consents to move the property in merchandise
to the purchaser at a cost. There might be an agreement of offer
between one section proprietor and another.
 Secondly, an agreement to sell might be total or restrictive.
 Thirdly, where under an agreement to sell the property in the
merchandise is moved from the seller to the buyer, the agreement
is known as a sale, yet where the exchange of the property in the
products is to happen at a future time or subject to some condition
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from that point to be satisfied, the agreement is called an
agreement to sell.
 Lastly, an agreement to sell turns into a sale when the time slips by
or the conditions are satisfied depending upon which the property in
the merchandise is to be moved.
Essentials of Contract of Sale

The essential of the contract of sale are as follows:
1. There ought to be at least two parties.

2. The basis of the contract ought to be products.
3. Price.
4. Transfer of Property in Goods.
5. Absolute or Conditional.
6. All other essential constituents of a valid contract.
Sale: Concept And Definition

Section 4(1) defines sale as a contract whereby, the seller transfers or
agrees to transfer the property in goods to the buyer for a price. Thus, it
happens in the present. Such an event of sale is fixed, conditional and
binding upon both the parties. A contract of sale is made by an idea to
purchase or sell merchandise at a cost and the affirmation of such an offer.
The agreement may oblige the speedy movement of the product or prompt
instalment of the cost or both, or for the transport or instalment by portions,
or that the transport or instalment or both will be delayed. It is further being
subjected to the arrangements of any law until further notice in power, a
contract of sale might be made or recorded in writing or by word of mouth,
or partly in writing or partly orally or can be implied from the conduct of the
parties. Thus the process of forming a contract of sale had been explained
in section 5 of the concerned Act.
The existing goods mostly from the subject of the contract of sale.
However, the goods could also be owned or possessed by the seller or future
goods.
Agreement to Sell
An agreement to sell can be defined as the transfer of property in goods that
is to take place in future time or the transfer might take place depending on
the fulfilment of certain conditions. The same had been defined in section
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4(3). An agreement to sell also becomes a sale when the given time elapses
or the conditions that are needed for the transfer to happen gets fulfilled.
Thus, an agreement to sell establishes the terms and conditions of the offer
of a property by the seller to the buyer.
These terms and conditions incorporate the sum at which it is to be sold and
the future date of payment. The concept of contingent contract as per section
31 of the Indian Contract Act 1872, can also be brought into it. Thus an
agreement to sell is a contract, to do or not to do something if some event
collateral to such contract, does or does not happen.
All the terms and conditions remembered for the understanding of sale must
be done all together by both the parties and obeyed all through the deal
procedure until the time the sale deed is made or completed. Thus, an
agreement to sell is a basic document on which the sale deed is drafted. In
other words, agreement to sell can be called a confirmation of the future
event which may take place depending on the fulfilment of the terms and
conditions placed forth in the present.
Difference Between Sale And Agreement To

Sell
As already described above, the sale takes place immediately, while an
agreement to sell takes place in the future depending upon the fulfilment of
certain terms and conditions. Thus at the time of the sale, an actual transfer
takes place whereas at the time of the agreement to sell future transfer
takes place. Risks are transferred immediately in sale whereas in the
agreement of sale risks are attached to the seller till the goods are being
transferred in the future. The sale is an executed contract whereas
agreement to sell is an executory contract.
As per section 6(1) the sale deed mostly comprises of the existing goods
owned or possessed by the seller or future goods. Whereas in the agreement
to sell, the seller indicates to impact a present offer of future merchandise,
thus it entirely depends upon the contingency of the event which may or may
not happen.
However, section 8 of the said act, deals with the goods perishing before the
sale but after the agreement to sell, thus this section again highlights the
goods which damage or perishes without any fault of the seller or the buyer.
Thus this also happens to be an instance of an agreement to sell.
Further, section 9 deals with the ascertainment of the price of the goods.
Hence, when a sale is made, immediately a transfer takes place, and
therefore the price is certain and fixed, whereas in specific conditions the
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price is determined, depending upon the circumstances of a certain particular
case, thus an agreement to sell is completed but the sale is not.
Therefore the price of the goods itself falls and thereby the risk being
attached to the seller, he suffers the loss. However, if the goods or a part
thereof is delivered and appropriated by the buyer, the buyer is bound to pay
a reasonable price to the seller. Thus it could be concluded that one is an
instant action while other is a future action.
In the sale and agreement to sell the condition and warranty as being
defined under section 12 of the act which also plays an important
role. Section 12(2), defines the condition as a stipulation essential to the
main purpose of the contract. While section 12 (3) defines warranty as
stipulation collateral to the main purpose of the contract and a breach of it
may give rise to claim for damages but not to right to reject the goods and to
treat the contract as denied.
Thus the term “condition” could be related more to the immediate sale,
whereas the term “warranty” could be more associated with the agreement
to sell. Subsequently, we also find that section 13 of the said act is also
inclined towards the agreement to sell as it states that when a condition
could be treated as a warranty.
When an immediate sale happens, all the rights which are attached to the
goods to the seller are impliedly transferred immediately to the buyer,
whereas, in the agreement to sell, this is not the case. In certain cases the
sale also happens as per the descriptions hence it is applicable to both to
sale and agreement to sell as per section 15 of the Sale of Goods Act, 1930.
Chart Showing The Differences Between Sale

And Agreement To Sell
SALE AGREEMENT TO SELL
In the agreement to sell the parties agree to

In the contract of sale, the exchange of goods takes exchange the goods for a price depending on the
place immediately. fulfilment of certain conditions at a future specified
date.
The nature in the sale is absolute. The nature of the agreement to sell is conditional.
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It is an executed contract. It is an executory contract.
Transfer of risk doesn’t take place, until and unless

Transfer of risk takes place immediately.
the goods are transferred.
The right to sell remains with the buyer The right to sell remains with the seller.
Here the seller has the right to sue for the price. Here the seller has the right to sue for damages.
It creates a right in rem. It creates a right in personam.
The seller has the right to resell the same goods if

The seller has no right to resell.
the conditions are not fulfilled.
On the off chance that the products are annihilated,

the misfortune is borne by the buyer despite the The loss falls on the seller despite the fact that the
fact that the merchandise is in the ownership of the merchandise is in the ownership of the buyer.
seller.
Case Analysis
In the case of Cehave N.V. v. Bremer Handelsgesellschaft mbH; the
Hansa Nord ( 1976) Q.B.44, the facts stated that a written contract to sell
fruit pellets contained the express stipulation, “ shipment to be made in good
condition.” In fact, some of the pellets were not in good condition when
shipped. However, they were, on arrival, still fit to be used for the purpose
the buyer intended and although they were worth less than they should have
been, they could have been re-sold at a reduced cost.
The question of law which arose:
1. Firstly was whether there is a breach of the condition?

2. Secondly, whether the buyer is entitled to repudiate the contract
and reject the goods?
Thus it was held in this case there was no breach of condition and the buyer
was not entitled to repudiate the contract and to reject the goods. But the
buyer is entitled to the damages.
The reasoning behind the judgment was the seller was not in breach of the
implied conditions as to the fitness and merchantable quality. The express
stipulation in the contract was not a condition and the seller’s breach of it
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had not been serious enough to go to the root of the contract. Therefore the
buyer is entitled only to the damages.
Similarly in the case of Rowland v. Divall (1923) 2 K.B. 500., the facts
stated that Rowland bought a motor vehicle from Divall and used it for four
months. Divall had no title to the car, and consequently, Rowland had to
surrender it to the true owner. Rowland sued to recover the total purchase
price that he had paid to Divall.
Thus the main question of law,
1. Firstly was whether there was a breach of the condition?

2. Secondly, whether the buyer is entitled to recover the total
purchase price.
However, it was held in this case that there is a breach of the implied
condition as to the title on which the sale and agreement to sell were based.
Therefore the buyer is entitled to recover the purchase price in full,
notwithstanding that he had used the car for four months. The rationale
behind the judgment was the consideration on the part of the seller had
totally failed as there was a breach of condition.
Thus, the use of the car that he had, was no part of the consideration, that
he had contracted for, which was the property in and lawful possession of the
car, whereas what he got was an unlawful possession which exposed him to
the risk of an action at the suit of the true owner.
Conclusion
Sale and Agreement to sell, as effectively expressed, appears to be under a
similar nonexclusive name yet at the same time it is to be treated under
various classifications. Along these lines so as to set up a deal there must be
an understanding communicated or inferred relating to the idea of items and
satisfaction of the condition would result in going off the title in the very
products contracted to be sold. These two ideas of offer and consent to deal
is itself a powerful idea.
It doesn’t limit itself to the Indian Contract Act 1872 and Sale of Goods Act,
1930, just, however, it additionally extends to Transfer of Property Act 1882
and Motor Vehicles Act 1988 also. Anyway so as to comprise a substantial
agreement to sell under this Act, there must be consistent and persuading
proof regarding understanding between the able competent parties, the cost
for the products and the passing of the properties of the products.
Consequently without the genuine exchange of possession in the
merchandise, by the seller to the buyer, there can be no deal by any stretch
of the imagination.
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Concept of Condition and
Warranty under the Sale of Goods
Act
Overview
The contract of sale of goods is a special type of contract and has a huge
application in the business world. These contracts are governed by the Sale of
Goods Act 1930, which was earlier part of the Indian Contract Act, 1872.
Because of the wide use of the contract of sale of goods, a special enactment
was necessary but despite the separate legislation, the law has its root in
the Indian Contract Act, 1872. Both the laws are complementary to each
other, thus the basic provisions of the Indian Contract Act are applicable to
the contracts of sale.
Whenever we buy any goods like electronic gadgets etc, we are concerned
about the warranty periods. We ask the seller about the warranty to make sure
that even if the product is found to be faulty after purchase we can easily get
the product replaced or repaired. The terms “Condition” and “Warranty” are
set out in the contract of sale in order to determine remedies the parties can
claim in case of the breach by either of the parties. Here in this article, we will
see the manner how these terms are defined, their differences and their
legality in the light of Sale of Goods Act, 1930.
Definition
Certain provisions need to be fulfilled as demanded in the contract of sale or
any other contract. The condition is a fundamental precondition on the basis
of which the whole contract is based upon, on the other hand, warranty is the
written guarantee wherein the seller commits to repair or replace the product
in case of any fault in the product. Section 11 to 17 of the Sale of Goods Act
enlightens the provisions relating to Conditions and Warranties.
Section 12 of the Act draws a demarcation between a condition and a

warranty. The determination of condition or warranty depends upon the
interpretation of the stipulation. The interpretation should be based on its
function rather than the form of the word used.
Condition
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In the context of the Sale of Goods Act, 1930, a condition is a foundation of
the entire contract and integral part for performing the contract. The breach
of the conditions gives the right to the aggrieved party to treat the contract as
repudiated. In other words, if the seller fails to fulfil a condition, the buyer has
the option to repudiate the contract or refuse to accept the goods. If the buyer
has already paid, he can recover the prices and also claim the damages for the
breach of the contract.
For example, Sohan wants to purchase a horse from Ravi, which can run at a
speed of 50 km per hour. Ravi shows a horse and says that this horse is well
suited for you. Sohan buys the horse. Later on, he finds that the horse can run
only at a speed of 30 km/hour. This is the breach of condition as the
requirement of the buyer is not fulfilled. The conditions can be further classified
as follows.
Kinds of conditions
Expressed Condition
The dictionary meaning of the term is defined as a statement in a legal
agreement that says something must be done or exist in the contract. The
conditions which are imperative to the functioning of the contract and are
inserted into the contract at the will of both the parties are said to be expressed
conditions.
Implied Condition
There are several implied conditions which are assumed by the parties in
different kinds of contracts of sale. Say for example the assumption during
sale by description or sale by sample. Implied conditions are described
in Section 14 to 17 of the Sale of Goods Act, 1930. Unless otherwise agreed,
these implied conditions are assumed by the parties as if it is incorporated in
the contract itself. Let’s study these conditions briefly:
 Implied condition as to title

In every contract of sale, the basic yet essential implied conditions on the part
of the seller are that-
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1. Firstly, he has the title to sell the goods.
2. Secondly, in case of an agreement to sell, he will have the right to
sell the goods at the time of performing the contract.
Consequently, if the seller has no title to sell the given goods, the buyer may
refuse or reject those goods. He is also entitled to recover the full price paid
by him.
In Rowland v. Divall (1923), the party bought a second-hand motor car from
the former and paid for the same. After six months, he was deprived of it as
the seller had no title to sell the car. It was held that the aggrieved party is
entitled to recover the money.
 Implied condition as to the description

Moving to Section 15 of the Act, In the contract of sale, there is an implied
condition that the goods should be in conformity with the description. The
buyer has the option to either accept or reject the goods which do not conform
with the description of the good. Say for example: Where Ram buys a new car
which he thinks to be new from “B” and the car is not new. Ram’ can reject
the car.
Referring to Section 16(2) of the given Act, goods must be of merchantable

quality. In other words, the goods are of such quality that would be accepted
by a reasonable person. For eg: A purchased sugar sack from B which was
damaged by ants. The condition of merchantability is broken here and it is
unfit for use. It must be noted from this section that the buyer has the right
to examine the goods before accepting it. But a mere opportunity without an
actual examination would not suffice to deprive the buyer of his rights. If
however, the examination does not reveal the defect but within a reasonable
time period the goods are found to be defective, He may repudiate the contract
even if he approves the goods.
The implied conditions especially in case of eatables must be wholesome and

sound and reasonably fit for the purpose for which they are purchased. For eg:
Amit purchases milk that contains typhoid germs and because of its
consumption he dies. His wife can claim damages.
 Implied condition as to sale by sample

In the light of Section 17 of the Act, in a contract of sale by sample, there may
be following implied conditions:
1. That the actual products would correspond with the sample with
respect to the quality, size, colour etc.
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2. That the buyer gets a reasonable opportunity to compare the goods
with the sample.
3. Further, the goods are free from any defect rendering them
unmerchantable.
For example, A company sold certain shoes made of a special kind of sole by
sample sale for the French Army. Later when the bulk was delivered it was
found that they were not made from the same sole. The buyer was entitled to
the refund of the price and damages.
 Implied condition as to Sale by sample as well as a description

Referring to Section 15 of the Sale of Goods Act, 1930, in a sale by sample as
well as description, the goods supplied must be in accordance with both the
sample as well as the description. In Nichol v. Godis(1854), there was a
sale of foreign refined rape-oil. The delivered oil was the same as the sample
but it was having a mixture of other oil too. It was held in this case that the
seller was liable to refund the amount paid.
Warranty
Warranty is the additional stipulation and a written guarantee that is collateral
to the main purpose of the contract. The effect of a breach of a warranty is
that the aggrieved party cannot repudiate the whole contract however, can
claim for the damages. Unlike in the case of breach of condition, in the breach
of warranty, the buyer cannot treat the goods as repudiated.
Kinds of Warranty
Expressed Warranty
The warranties which are generally agreed by both the parties and are inserted
in the contract, it is said to be expressed warranties.
Implied Warranty
Implied warranties are those warranties which the parties assumed to have
been incorporated in the contract of sale despite the fact that the parties have
not specifically included them in the contract. Subject to the contract, the
following are the implied warranties in the contract of sale:
 Warranty as to undisturbed possession
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Section 14(2) of the given Act provides that there is an implied warranty that
the buyer shall enjoy the uninterrupted possession of goods. As a matter of
fact, if the buyer having got possession of the goods, is later disturbed at any
point, he can sue the seller for the breach of warranty.
For eg: ‘X’ purchased a second-hand bike from ‘Y’. Unknown to the fact that
the bike was a stolen one, he used the bike. Later, he was compelled to return
the same. X is entitled to sue Y for the breach of warranty.
 Warranty as to freedom from Encumbrances

In Section 14(3), there is an implied warranty that the goods shall be free
from any charge or encumbrances that are in favour of any third party not
known to the buyer. But if it is proved that the buyer is known to the fact at
the time of entering into the contract, he will not be entitled to any claim.
For eg: A pledges his goods with C for a loan of Rs. 20000 and promises him
to give the possession. Later on, A sells those goods to B. B is entitled to claim
the damages if he suffers any.
 Implied warranty to disclose Dangerous nature of the goods sold

If the goods sold are inherently dangerous or likely to be dangerous and the
buyer is not aware of the fact, it is the duty of the seller to warn the buyer for
the probable danger. If there would be a breach of this warranty, the seller
will be liable.
For eg: A purchases a horse from B if the horse is violent and then It is the
duty of the seller to inform A about the probable danger. While riding the
horse, A was inflicted with serious injuries. A is entitled to claim damages from
B.
Difference between Condition and Warranty

BASIS FOR
CONDITION WARRANTY
COMPARISON
It is a stipulation which It is additional stipulation

Meaning forms the very basis of the complementary to the main
contract. purpose of the contract.
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Section 12(2) of the Sale Section 12(3) of the Sale of
Provision of Goods Act, 1930 defines Goods Act, 1930 defines
Condition. Condition.
Condition is basic for the

It is a written guarantee for
Purpose formulation of the
assuring the party.
contract.
Result of Breach of The whole contract may Only damages can be claimed in
Contract be treated as repudiated. case of a breach.
Remedies available
Repudiation, as well as
to the aggrieved Only damages can be claimed.
damages, can be claimed.
party
When does Condition sink to the level of

Warranty?
Section 13 of the Act specifies the cases wherein a breach of Condition sink to
the level of breach of Warranty. In the first two following points, it depends
upon the will of the buyer, but the last one is compulsory and acts as estoppel
against him:
1. When the buyer waives the condition, the condition is considered a

warranty.
2. A condition would sink to the level of warranty where the buyer on
his own will treat the breach of condition as a breach of warranty.
3. Wherein the contract is indivisible and the buyer has accepted the
whole or part of goods, the condition is treated as a warranty.
Consequently, the contract cannot be repudiated. However, the
damages can be claimed.
Conclusion
At the time of selling or purchasing goods, both the buyer and seller put forth
some preconditions with regards to the mode of payment, delivery, quality,
quantity and other things necessary. These stipulations are either considered
as condition or warranty differing from case to case. These concepts are
necessary to be understood as it protects the rights of parties in case of breach
of the contract.
Passing of Property – Part 1
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A sale of goods or property implies a transfer or passing
of ownership to the buyer. The passing of property is an important
aspect to help determine the liabilities and rights of both the buyer
and the seller. Once a property is passed to the buyer, then the risk in
the goods sold is that of the buyer and not the seller. This is true even
if the goods are in the possession of the seller. Let us learn more
about the passing of property in the Sale of Goods Act.
Passing of Property
There are four primary rules that govern the passing of property:
 Specific or Ascertained Goods

 Passing of Unascertained Goods
 Goods sent on approval or “on sale or return”
 Transfer of property in case of reservation of the right to
disposal
In this article, we will be looking at the first two rules.
Passing of Ascertained Goods

Section 19
This is the first rule of the passing of property. It deals with the
passing of specified goods and states that –Specific or ascertained
goods pass when intended to pass. Section 19 of The Sale of
Goods Act, 1930, has three sub-sections as follows:
 Sub-section (1): Imagine a contract for the sale of specific or

ascertained goods with a clear mention of the time when the
parties to the contract intend to transfer the property. In such
cases, the property is transferred at the time mentioned in the
contract.
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 Sub-section (2): To understand the intention of the parties,
the terms of the contract, the conduct of the parties, and the
circumstances of the case are considered.
 Sub-section (3): Sections 20 to 24 of The Sale of Goods Act,
1930, contain rules to ascertain the intention of the parties.
This intention is about the time at which the property in the
goods will pass to the buyer. Let’s look at these sections
Section 20
Section 20 relates to Specific goods in a deliverable state. It states

that if the contract is unconditional for the sale of specific goods in a
deliverable state, then the property in the goods passes to the buyer
the moment the contract is made. This rule holds true even if the time
of payment of price or delivery of the goods or both is postponed.
Example: Peter goes to an electronics store and buys a television set.

He asks the shopkeeper to deliver it to his house. The shopkeeper
agrees. The television immediately becomes the property of Peter.
Section 21
Specific goods to be put into a deliverable state (Section 21) –

Imagine a contract for the sale of goods where the seller has to do
something before the goods are ready for delivery. In such cases, the
passing of property happens only after the seller does the things and
informs the buyer.
Example: Peter buys a laptop from an electronics store and asks for a
home delivery. The shopkeeper agrees to it. However, the laptop does
not have a Windows operating system installed. The shopkeeper
promises to install it and call Peter before making the delivery. In this
case, the property transfers to Peter only after the shopkeeper has
installed the OS making the laptop ready for delivery.
Section 22
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Specific goods are in a deliverable state but the seller has to do
something to ascertain the price – Imagine a contract of sale of goods
which are in a deliverable state but the seller has to do something
like weight, measure, test, or perform any other act on the goods to
ascertain the price. In such cases, the property does not pass until the
seller does the act and informs the seller.
Example: Peter sells a carpet to John and agrees to lay it in John’s

house as a part of the contract. He delivers the carpet and informs
John that he will lay it the next day. That night the carpet gets stolen
from John’s premises. In this case, John is not liable for the loss since
the property had not passed to him. According to the terms of the
contract, the carpet would be in a deliverable state only after it is laid.
Passing of Unascertained Goods
If there is a contract for the sale of unascertained goods, then the

passing of the property of the goods to the buyer cannot happen
unless the goods are ascertained. This is specified under Section 18 of
The Sale of Goods Act, 1930.
Section 23
Further Section 23 lists two important rules for the passing of

property of unascertained goods:
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 Sale of unascertained goods by description: Imagine a
contract for the sale of unascertained or future goods by
description. If any goods of that description are appropriated
to the contract either by the buyer or the seller with the
consent of the other party, then the property of the goods
passes to the buyer. The consent can be express or implied
and given before or after the appropriation is made.
 Delivery to the carrier: If the seller delivers the goods to the
buyer or a carrier or a bailee (whether named by the buyer or
not) for the purpose of transmission to the buyer, but does not
reserve the right of disposal, then he is deemed to have
unconditionally appropriated the goods to the contract.
Some Points to Remember about the Appropriation of Goods:
If goods are selected with the intention of using them in performing

the contract, with the mutual consent of the buyer and the seller, then
it is called appropriation of goods. Here are some essentials:
 A contract for the sale of unascertained or future goods exists

 The goods conform to the quality and description stated in
the contract
 They are in a deliverable state
 The goods are unconditionally appropriated to the contract
either by delivery to the buyer of his agent or the carrier.
 The appropriation is made by the buyer with the assent of the
seller or the seller with the assent of the buyer.
 The assent can be express or implied
 The assent can be given before or after the appropriation.
Passing of Property – Part 2
132
In our previous article, we learned about the first two rules
governing passing of property to the buyer. Understanding all the
rules is important since they help determine the rights and liabilities
of both the seller and the buyer. In this article, we will look at the
remaining two rules: ‘Goods sent on approval” and ‘Transfer of
property in case of reservation of the right to disposal’.
Passing of Property
(Source: Pixabay)
Goods Sent on Approval
When a seller sends good to a buyer on approval basis or on terms

similar to ‘on sale or return’, the property passes to the buyer only
when:
 The buyer communicates his approval to the seller or does an

act which signifies acceptance of the transaction.
 He does not give his approval or acceptance to the seller but
accepts the goods without giving notice of rejection. There
are two possibilities here:
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o A time has been fixed for the return of goods – In
this case, if the approved time has elapsed, then the
property is passed to the buyer.
o A time has not been fixed for the return of goods –
In this case, the property is passed to the buyer once
a reasonable time has elapsed.
 The buyer does something to the goods which signifies
acceptance of goods. For example, he sells the goods or
pledges it.
Let us see an example. Peter is a jeweller. John visits his shop to buy
a necklace for his wife Olivia. However, he is not sure if Olivia will
like the necklace he has chosen. Peter agrees to deliver the necklace
to John’s house on a sale or return basis.
If Olivia does not like the necklace, then John can return it to Peter
without having to pay for it. When Peter reaches John’s house,
another man called Chris is also present in the house. Olivia or John
don’t express their approval to Peter but John pledges the necklace
with Chris for a certain amount.
In this case, the ownership of the necklace transfers to John since his
act of pledging the necklace shows his unequivocal intention to buy
it. Peter can recover the price of the necklace from John.
Cash Only or Return
In some cases, the terms of sale can be cash or return. This means
that the seller will deliver the goods to the buyer under the condition
that the goods continue to remain the property of the seller unless the
buyer pays cash for it. In such cases, the buyer needs to pay cash in
order to transfer the property in his name.
In example 1 above, if Peter agrees to deliver the necklace to John

under a cash only or return basis and John pledges the necklace with
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Chris before paying cash for it, the pledge is deemed invalid
by law and Peter can recover the necklace from Chris.
Reservation of the Right to Disposal
Section 25 of The Sale of Goods Act, 1930 deals with the conditional
appropriation of goods. It has three sub-sections as follows:
Sub-section 1
In case of a contract for the sale of specific goods or where goods are
appropriated to the contract subsequently, then the seller can reserve
the right of disposal of goods till certain conditions are met. These
conditions must be specified in the contract or appropriation. Even if
the goods are delivered to the buyer or a carrier or a bailee for
transmission to the buyer, the property in the goods does not pass to
the buyer until the conditions are met.
Let us take an example. Peter sends furniture to John’s company by a

truck. He instructs the driver not to deliver the furniture until he
confirms receipt of payment from the company. The truck reaches
John’s company and the furniture is unloaded. However, the property
passes to the company only upon receipt of the payment.
Sub-section 2
If the goods are shipped or delivered to the railway administration for

carriage by railway and are deliverable to the order of the seller or his
agent by the bill of lading or railway receipts, then the seller is
deemed to have reserved the right of disposal.
Sub-section 3
A seller can draw on the buyer for the price and transmit a bill of
exchange along with the bill of lading/ railway receipt, to secure
acceptance or payment of the bill of exchange. If the buyer does not
honour the bill of exchange, then he is liable to return the bill of
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lading/ railway receipt. Even if he wrongfully retains it, the property
in the goods does not pass to him.
Rights of an Unpaid Seller

Introduction
In every contract of sale, a seller is under an obligation to deliver the goods
sold and buyer is under an obligation to pay the requisite amount set or quid
pro quo i.e. something in return, under the contract of sale, by them. This is
known as reciprocal promise as per Section 2(f) of the Indian Contract Act. In
other words, any set of promises made which forms the consideration or part
of the consideration for each other are called reciprocal promises and every
contract of sale of goods consists of reciprocal promises.
In certain cases, when a buyer refuses or fails to pay the requisite amount to
the seller, the seller becomes an unpaid seller and can exercise certain rights
against the buyer. These rights are considered as seller’s remedies in case
there is a breach of contract by the buyer. These remedies can be against:
1. Buyer
2. Goods
According to Section 45(1) of Sale of Goods Act, 1930, the seller is
considered as an unpaid seller when:
a- When the whole price has not been paid and the seller has an immediate
right of action for the price.
b- When Bills of Exchange or other negotiable instrument has been received

as conditional payment, and the pre-requisite condition has not been fulfilled
by reason of the dishonour of the instrument or otherwise. For instance, X
sold some goods to Y for $50 and received a cheque. On presentment, the
cheque was dishonoured by the bank. X is an unpaid seller.
Seller also includes a person who is in a position of a seller i.e agent, consignor
who had himself paid or is responsible for the price.
Rights against buyer
1- Suit for the price
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When any goods are passed on to the buyer and the buyer has wrongfully
neglected or refused to pay as per the terms and conditions of the contract,
the seller may sue him as per the Section 55(1) because once the property
has been passed the buyer is bound to pay the price.
But in the case due date of payment has been passed and goods had not been
delivered yet, the seller can sue the buyer for the wrongful neglect or refusal
on his part according to clause 2 of Section 55.
In case the price is due in foreign currency the damages must be calculated at
the rate of exchange prevailing at the time when the price was due not on the
judgement date.
2- Suit for damages

In case there is a wrongful refusal on the part of buyer for acceptance of goods
and payment of money, the seller can sue him for damages of non-acceptance
as per Section 56. For calculating the quantum of damages Section 73 and 74
of the Indian Contract Act applies.
In case the goods have a ready market, the seller has to resell the goods and
buyer have to pay the losses if incurred. If the seller does not resell the goods
the difference between contract and market price at the day of breach is taken
as a measure for damages. If the difference between them is nil seller gets
nominal value.
There is a duty of mitigation on the part of the seller, which means that injured
has to make reasonable efforts to minimise the loss from that breach. For
instance, if the seller can resale the goods, the difference in price in contract
and resale price is given to the seller but if the seller deliberately refuses to
resale the goods and its market value reduces then the buyer will not be liable
for the exaggerated loss.
The nature of the duty of mitigation has been explained by the supreme court
in case of M. Lachia Shetty V Coffee Board, where, a dealer who bid at an
auction of coffee had been accepted, refused to carry out the contract,
consequently, coffee was reauctioned at next best bidding price and dealer
who refused the bid have to give the difference in the amount of loss to the
board.
3- Suit for interest

As stated under Section 61, where there is a specific agreement between buyer
and seller with regards to interest on the price of goods from the date on which
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payment becomes due, the seller may recover interest from a buyer. But if
there were no such agreement the seller may charge interest from the day he
notifies the buyer.
If there is no contract to the contrary, the court of law may award interest to
the seller at such rate as it thinks fit on the amount of the price from the date
on which amount is payable.
4- Repudiation of the contract before the due date

According to Section 60, the rule of anticipatory breach contract applies,
wherein, if buyer repudiates the contract before the date of delivery the seller
can consider the contract as rescinded and can sue for damages of the breach.
According to this Section, if one party repudiates before due date other has
two courses of action. Either he may immediately accept the breach and bring
the action of damages the contract is rescinded and damages will be assessed
according to the prices then prevailing or he can wait for the date of delivery.
In the second case, the contract is open at risk and will be a benefit to both
parties. May be the party changes is mind and agree to perform and damages
will be assessed according to prices on the day of delivery.
Rights against goods
a- Lien
Lien is a right which seller of goods can exercise when a buyer has not paid
the price of goods, under this right seller can retain the possession of goods
as an agent or bailee for the buyer. The seller can retain his possession as
per Section 47 under the following circumstances:
1- In case the buyer is insolvent.
2- When the term of goods sold on credit is expired.
3- Goods sold without any stipulation as to credit.
When the goods are sold on credit the right to lien is suspended during the
term of credit and lien exist only for the price of goods, not any additional
charges.
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According to Section 48 if the seller has delivered a part of unpaid goods he
can exercise his right of lien on rest. In Grice V Richardson, the sellers had
delivered a part of the three parcels of tea comprised in the sales, and they
had not been paid for the part which remained with them. They were allowed
to keep it till the payment of the price. Where, however, a part of goods
delivered which show an agreement to waive the lien, the seller cannot the
remainder.
Termination of lien takes place when the seller losses the possession of goods.
As per Section 49, under following circumstances right of lien is terminated-
1- Waiver of lien-
The right of lien is an implied right attached by law in every contract of sale,
the seller has the autonomy to waive this right, it may be expressed or implied
from the conduct of the seller.
2- When buyer or agent lawfully obtains possession of goods.
Once the buyer got the possession of goods from the seller, all the rights of
the seller in respect to goods are ceased even if the price is not paid. The seller
can recover the price as a normal debt because the acceptance of possession
gives absolute, unqualified and indefeasible right of goods to the buyer. When
the goods are given again to the seller for repair he can not access the right
of lien.
3- When the seller delivers goods to a carrier or other bailee for the purpose
of transmission to the buyer without reserving the right of disposal of the
goods.
When the seller has delivered goods to the carrier for transmission, his right
of lien is ceased but the right to stoppage in transit is still accessible by him.
In case seller regains possession of goods in transit by stoppage his right to
lien is revived.
Like in Valpy V Gibson, the goods were delivered to the buyer’s shipping
agent, who had put them on board a ship. But the goods were returned to the
seller for repacking, while they were still with the sellers the buyer became
insolvent and seller being unpaid seller claimed to retain the goods in the
exercise of their lien. It was held that they have lost their lien by delivery to
the shipping agent. On the contrary, when the seller has reserved the rights
of disposal his right of lien continues till the end of the transit. And the seller
cannot lose his right to lien just because he has obtained a decree for the price
of goods.
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b- Stoppage
When the goods have been transferred to carrier or bailee for the purpose of
transmission to the buyer, who has become insolvent, the seller has the right
to stop the goods in transit in order to protect himself against the loss that
may arise due to insolvency. As per Section 50, there are four essential
requirements for stopping the goods in transit:
1. Unpaid seller.
2. Buyer insolvent.
3. Property should have passed to the buyer.
4. Property should be in course of transit.
The course of transit depends upon the capacity of middleman to hold the
goods. Middleman should be an intervening person between the seller who has
parted with the goods and the buyer who has not yet received the goods as
held in the case of Schotsmans v Lancashire & Yorkshire Rly co.
Section 5 lays down the rules and regulations related to commencement and
end of the transit, this Section is divided into seven sub-Sections which solve
all the issues related to commencement and end of transit:
1- Delivery to the buyer- Goods are considered to be in transit from the time
when they are delivered to the carrier or other bailee for the purpose of
transmission to the buyer, till the goods are received by the buyer himself or
his agent takes delivery of them.
For example, in the case of Great Indian Peninsula v Hanmandas, the

seller consigned the goods with the GIP Ry Co for transportation to the buyer.
On the arrival at the destination, the company had delivered the goods to the
buyer who had loaded them on his cart, but the cart had not yet left the railway
compound when a telegram was received by the company to stop the goods.
The company did not do so and were sued by the seller in damages. It was
held that the transit had ended as soon as the goods were handed over to the
buyer.
But when the buyer denies accepting the delivery even when it has been
landed at the place of destination, the transit does not end. This happened in
the case of James v Griffin where on arrival of goods at the port of
destination in the river Thames, the buyer sent his son to have goods landed,
but told him that on account of his insolvency he did not intend to receive the
goods and would like the seller to have them. When goods were so lying the
seller’s instruction to stop them was received. The buyer’s trustee in
bankruptcy claimed the goods. It was held that the goods were still in transit.
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2- Interception by the buyer- When the buyer or the agent takes the delivery
of the goods from the carrier, the transit ends even before their arrival at the
appointed destination.
In case the carrier delivers the goods before the arrival of the buyer, although
it is wrongful and the carrier may be held liable for the damages but the transit
ends here.
In the case of Lyons v. Honffnung, the buyer takes his seat as a passenger
in a ship which was carrying the goods. The court said that this does not
amount to delivery to the buyer before their arrival at the appointed
destination.
3- Acknowledgement to the buyer- The transit is considered to come to an

end when the goods arrive at the appointed destination and the carrier
acknowledges to the buyer or his agent that he is now holding the goods on
his behalf. It is immaterial if the gods are still in the carrier or the buyer has
indicated another destination. In order to put an end to the original contract
of carriage, a very clear acknowledgement is required.
In the case of Whitehead v. Anderson, a quantity of timber was consigned

on board. When the ship arrived at the destination, the buyer went bankrupt.
The buyer’s agent came to the board and told that he has come to take
possession. The captain said that he will deliver only when the freight is paid.
Before this could be done, the seller sent a notice to stop and asked to send
the goods to be delivered to the agent of the seller. The court said that since
the transit has not ended, the carrier was within his rights in returning the
goods to the seller. The captain agreed to deliver the goods on a condition and
if the condition is not fulfilled, the buyer does not acquire the constructive
possession of goods.
4- Rejection by the buyer– When the buyer rejects the goods and the carrier
or other bailee continues to possess them, the goods are held to be still in
transit. This will also include the case when the seller himself refuses to take
back goods.
5- Delivery to ship charted by the buyer- It is a question of fact whether the

carrier is acting independently or as an agent of the buyer at the time when
the goods are delivered to a ship charted by buyer. As soon as the goods are
loaded on the ship, the transit ends if the carrier is acting as an agent of the
buyer.
Thus, for instance, Rosewear china clay co ltd, re, the contract was for
the sale of china clay at FOB Fowey. The buyer chartered a ship and instructed
the seller to load to the goods at Fowey, which was accordingly done. The
destination of the ship was not told to the seller nor any bill of lading signed.
The seller gave notice stopping the goods.
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6- Wrongful refusal to delivery- When the carrier wrongfully denies delivering
the goods to the buyer or his agent the transit is at the end. It is obvious that
goods should have arrived at their destination because otherwise, the carrier
has the right to refuse to deliver them.
In the case of Bird v. Brown, the court discussed as to when it is wrongful to

refuse the delivery of goods. In this case, the goods arrived at the destination
but the buyer has become insolvent. A merchant was acting for the seller who
gave stop notice to the seller without authority.
Subsequently, the trustee of the buyer demanded the goods as the buyer was
insolvent. The carrier refused to deliver the goods and handed them to the
merchant. The court said that after the formal demand for goods by the
trustee, there could be no valid stoppage in transit.
7- Part delivery- in the case when the goods have been delivered partly, the
seller has a right to stop the delivery of the rest of the goods unless the part
delivery shows an agreement to the possession of the whole. For instance, A
sells to B 20kg of wheat, 10kg has been transferred to B but rest 10kg is still
in transit, in case B fails to pay A has a right to stop the goods in transit.
c- Resale
Exercising the right of lien or stoppage does not rescind the agreement but
reselling of goods does and without this right, the other two rights of lien and
stoppage would not be of much usage because he can only retain goods under
these right till the buyer pays back the money.
The unpaid seller can exercise his right under following conditions and
circumstances-
1- Seller before reselling the goods needs to send a notice to the buyer except
in the case of perishable goods, giving him last chance to pay the price and
take back the goods within a reasonable time. If the buyer does not pay the
money back seller has the right to resell the goods. If the seller fails to give
notice of his intention to resell, he cannot claim damages from the buyer and
he has to give any profit.
2- If there is any loss in the resale of goods he can claim the loss from the
buyer, on the contrary, if there is profit buyer cannot claim it.
3- Seller gives rightful ownership to buyer after the resale it does not matter
notice of resale is given or not to defaulted buyer.
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4- Sometimes the seller reserves exclusive right to resale the goods if the
buyer makes a default in payment, in such cases the buyer cannot ask for
profit on resale if no notice is served and seller has the exclusive right to resale.
For instance, R V Ward V Bignall, there was a contract of sale of two cars,
vanguard and zodiac for 850$. The buyer deposited 25$ but afterwards did not
pay the price despite a reasonable notice. The seller then tried to resell but
could be sold only a vanguard for 359$. he then claimed damages for 475$
representing the balance of price and 22$ as advertising expenses. Court held
that once the seller resells the goods the contract is rescinded and he cannot
claim the money but he can ask for advertising expenses and a shortfall in the
price of the vanguard.
Rights against seller
1- Damages for non-delivery

Section 57 states that, whenever any seller or refuses to deliver the goods to
the buyer, the buyer may sue for non-delivery of goods. If the buyer has paid
any amount he is entitled to recover it. Quantum of damages is decided
through market forces, contract and market price on the day of the breach is
considered as damages. If the buyer wants to claim that damages he must
prove it in the court of law, otherwise, he cannot get a penny more than refund
i.e the amount he has already paid. Buyer must try to keep the loss at a
minimum by purchasing the goods from other sources instead of waiting for
the market to fluctuate.
2- Suit for specific performance

Acc to Section 58 when goods are specific or ascertained and there is a breach
of contract committed on the part of the seller then the buyer can appeal to
the court of law for specific performance. The seller has to perform the contract
and he does not have any option of retaining the goods by paying damages.
The power of the court to order specific performance is subject to the
provisions of chapter II of Specific Relief Act, 1963.
Thus on the sale of ship buyer was allowed to recover the ship specifically in
the case of Behnke V Bede Shopping, there was a ship named the city which
holds a unique value to the plaintiff but she was a cheap vessel being old but
her engines were new and as to satisfy the German regulations and hence
plaintiff could as a German shipowner have her at once put on the German
register. A very experienced ship-valuer has said that he knew only one other
comparable ship, but that may not be sold. Thus, on sale of a ship buyer was
allowed to specifically recover the ship.
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3- Suit for breach of warranty
As stated under Section 59, the buyer cannot reject the goods solely on the
basis of breach of warranty on the part of the seller or when a buyer is forced
to treat a breach of condition as a breach of warranty. But he may sue the
seller for damages or set up against the seller the breach of the warranty in
the extinction of the price.
The measure of damages is directly and naturally occurring loss in ordinary

events from breach of warranty. Mason V Burningham, the buyer of a second-
hand typewriter spends some money on getting it overhauled. Afterwards, the
typewriter was seized from her as stolen property. this was a breach on the
part of the seller of warranty of quiet possession. She was held entitled to
recover damages including the cost of repair. She did a natural thing in having
the typewriter repaired and the amount she had spent was a loss directly and
naturally resulting from the breach.
4- Suit for anticipatory breach

According to Section 60, the rule of anticipatory breach contract applies,
wherein, if any party repudiates the contract before the date of delivery the
other party can consider the contract as rescinded and can sue for damages
of the breach.
According to this Section, if one party repudiates before due date other has
two courses of action. Either he may immediately accept the breach and bring
the action of damages the contract is rescinded and damages will be assessed
according to the prices then prevailing or he can wait for the date of delivery.
In the second case, the contract is open at risk and will be a benefit to both
parties. Maybe the party changes is mind and agree to perform and damages
will be assessed according to prices on the day of delivery.
Conclusion
The seller becomes an unpaid seller when either he had not been paid in full
or the buyer has failed to meet the maturity of bills of exchange or any other
negotiable instrument accepted by seller as a condition precedent. Under this
situation, the seller can resell the goods if he had exercised the right of lien or
stoppage in transit, after giving notice to the buyer and the new buyer will
have good title over the goods. In this case, the seller has the right to sue the
buyer for failure to pay the required amount as well as a lien. On the contrary,
if the seller fails to deliver goods to the buyer, he may sue the seller for non-
performance and can claim damages or specific performance.
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Remedies for Breach under Sale
of Goods Act
Until the year 1930, the law on Sale of goods was governed by Section 76
to 123 of the Indian Contract Act, 1872. But the legislature realized that
this was insufficient, and a separate Act was needed to govern the sale of
goods. The Sale of Goods Act was introduced in the year 1930, and it was
modeled after the English Statute of Sale of Goods, 1893. Three kinds of
remedies are mentioned under the Sale of Goods Act, relating to the breach
of contract.
 Seller’s Remedies against Buyer

 Buyer’s Remedies against Seller
 Remedies available to both Buyer and Seller
Seller’s Remedies against Buyer

There are two types of remedies which the seller has against the buyer. They
are:
 Suit for Price: Section 55[1] of the Sale of Goods Act states two
conditions. The first is that when any goods are passed to the buyer
under the contract to a sale, and the buyer intentionally neglects
payment or refuses to pay for the goods according to the terms
stated in the contract, the seller may sue the buyer for the payment
of the price of the goods. The second provision states that when
payment is due on a particular day, irrespective of whether or not it
has been delivered or not, and the buyer is neglecting the payment
or refusing to pay for the good, the seller may sue the buyer to
recover the price of the goods. In the case the buyer is required to
pay the seller partly in kind and partly in cash, if either of the
payment is not given to the seller, then he has the right to sue the
buyer.
 Damage for Non-Acceptance: Section 56 of the Act states that
when the buyer is intentionally and wrongfully refusing to accept the
goods and pay for the same, the seller may sue the buyer for non-
acceptance of goods. The damage is to be calculated on the basis of
the principle which has been given under Section 73 and 74 of
the Indian Contract Act, 1872.[2] Section 73 of the Contracts
Act states that when any breach of contract happens, the party who
suffers any loss can recover the amount from the person who
breached the contract. The damage which can be recovered is the
loss which would have occurred in the usual course and about which
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the parties knew when the agreed to enter into a contract. When
the loss is calculated, the means which existed to remedy the
breach will also be considered. The market price of the goods
regarding which breach has been done will be ascertained on the
basis of the date on which the good was to be delivered. For
instance, X and Y entered into a contract for the sale of wheat. X
had to deliver 100 bags of wheat to Y on 15 th of the month. Y
refused to take delivery on 15thand on that day the price of one bag
was Rs 5, 000. A suit was filed by X for non-acceptance on 20th of
the month and on that day the market price for a bag of wheat was
Rs 4,500. For the purpose of the suit, the market price will be
considered as Rs 5,000. Following the principle enshrined
in Section 55 and Section 63 of the Contracts Act. When a date
or time is fixed for the performance of the contract, but due to any
reason, some other date is set, that substituted date will be
considered for calculating the damage caused. When the seller is
required to deliver the goods in installments, and the buyer rejects
any one of the installments, the date on which the installment was
to be delivered will be considered for determining the damage.
Buyer’s Remedies against the Seller

The buyer has three remedies against the seller for breach of contract under
the Sale of Goods Act. These are:
1. Damages for Non-Delivery: Section 57 of the Act states that if

the seller is intentionally or wrongfully neglecting the delivery of the
goods to the customer, the customer can sue the seller for damages
for non-delivery. In the case where the property in the goods has
been passed to the buyer, and the buyers have the right to
immediate possession, he gets all the remedies an owner of the
goods will get against anyone whose activities are inconsistent with
his rights. When the amount of damage is to be calculated, it’ll be
done on the basis of the difference between the contract price and
the market price on which the damage occurred. In the case where
the buyer had paid the money in advance, the date which is to be
considered for measuring the damages will be the day on which the
payment was made. The buyer can also claim the amount which
was used to find an alternate remedy for the breach.
2. Remedy for Breach of Warranty: Section 59 of the Act states

that when there is a breach of warranty on the part of the seller, the
buyer is not entitled to reject the goods on that basis, but he may
sue the seller breach of warranty in diminution or extinction of the
price. The seller may also sue the buyer for breach of warranty in
the diminution or extinction of the price. Definition of warranty is
given under Section 12 (3) [3]of the Act. Section 13 states that
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if any condition is to be fulfilled by the seller, the buyer may
consider the breach of condition as a breach of warranty. In this
case also, the buyer does not have the right to reject the goods.
This section does not deal with the cases of fraudulent
misrepresentation on the part of the seller, which will give the buyer
to set aside the contract. This sections also does not deal with cases
where the buyer can set aside a contract under the terms expressly
provided by the contract on breach of warranty. The buyer cannot
invoke this section in cases where the buyer has lawfully rejected
the goods. The buyer can proceed under Section 57 or Section
61[4] of the Act to recover the purchase price along with the
interest. In a case where the warranty is given by the seller with
regards to the quality of the product, and the warranty has been
breached, the amount of the damages will be determined on the
basis of worth of goods at the time of delivery, and what should
have been its actual worth according to the contract.[5] For a
breach of warranty, it is required that the buyer relied upon the
warranty given by the seller, and had acted reasonably to minimize
the damage caused.
3. Specific Performance: Section 57 of the Act states that subject

to provisions mentioned under Specific Relief Act, 1877,[6] in a
case of breach of contract, the Court may, on an application by the
plaintiff direct the defendant that the contract should be performed
specifically. The decree passed by the court may be unconditional,
or s to terms and conditions as to price, amount of damages, etc. As
stated above, previously the provision which related to the sale of
goods were governed by the Contracts Act. The Contracts Act did
not provide for this kind of remedy. The Specific Relief Act was
introduced in 1877 so that equitable remedy could be made
available to the aggrieved party. This section provides a solution
only to the buyer. The seller cannot file an application
under Section 58 to enforce a specific performance, because this
section provides no rights to the seller, and only on request of the
buyer can specific relief be provided.
Remedies available to both Seller and Buyer

The buyer and seller have two remedies while dealing with goods under the
Sale of Goods Act. These are:
1. Suit for Repudiation of Contract before the Date or

Anticipatory Breach: Section 60 of the Act states that if any
party renounces the contract before the delivery of the goods, the
other party may wait till the date of delivery of the goods or may
treat the contract as annulled and claim for damages. This provision
is not a part of the English Law on which the Indian Law is
based. The party not in default can choose to keep the contract alive
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by not accepting the repudiation of the defaulting party. In such a
scenario, if at the time of performance of the contract, he refuses to
perform his part or is unable to perform his part, the defaulter party
would be discharged, and the position will be as it would have been
as if there was no repudiation of the contract before the date of the
contract. For example, P is a seller and Q is a buyer. Q repudiates
the contract before date, but P does not accept the repudiation and
keeps the contract alive. On the date of performance, P delivers the
products. But these are not according to the specification of Q. in
this case Q may reject the goods. P will not be able to avail any
remedy. Or Q may accept the goods and treat the breach of
condition as a breach of warranty and recover damages from P.
2. Interest by way of Damages and Special Damages:Section

62 of the Act states that the buyer or seller can recover special
damages where by law special damages or interest may be
recoverable. There is a limitation to this remedy. The parties should
have contemplated that a particular loss may occur if the contract is
breached in any manner. And also, the particular loss must have
taken place after the violation of the contract. The Interest
Act,[7] which was introduced in 1839, states that interest also shall
be paid by way of damages in certain cases. The point which is to be
noted here that the seller can only claim interest when he is entitled
to recover the price. When the seller is suing only for damages for
breach of contract, he cannot claim any interest. The same principle
applies in the case of the buyer also. He cannot claim an interest if
he is suing the buyer for breach of warranty.
THE NEGOTIABLE
INSTRUMENTS ACT,1881
Introduction
A negotiable instrument is a piece of paper that guarantees the payment of a
certain sum of money, either immediately upon demand or at any
predetermined period, and whose payer is typically identified. It is a
document that is envisioned by or made up of a contract that guarantees the
unconditional payment of money and may be paid now or at a later time.
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The term has several meanings based on how it is employed in the
implementation of various laws, as well as depending on the nation and
environment in which it is used. Promissory notes, bills of exchange, and
cheques are the three types of instruments covered by the Negotiable
Instruments Act of 1881. Terminology in oriental languages for financial
instruments like hundies is not included in this Act’s provisions.
Technology led to the recognition of two additional payment

methods, NEFT (National Electronic Fund Transfer) and RTGS (Real Time
Gross Settlement). It is the Payment and Settlement Systems Act of 2007,
which contains provisions for the law governing these electronic transfer
methods.
The Negotiable Instruments Act of 1881 came into force on 1st March 1881,
and it extends to the whole of India. This article discusses the different
aspects of the legislation while also pointing out the pressing challenges that
surround the Act in current times.
All you need to know about negotiable

instrument
The word “instrument” refers to a written document by virtue of which a right
is created in favour of some individual. The word “negotiable” indicates
transferable from one person to another in exchange for payment. Therefore,
any document that confers ownership over a quantity of money and that can
be transferred (like currency) by delivery is considered to be a “negotiable
instrument.” Consequently, a document that can be delivered is a negotiable
instrument. The Negotiable Instruments Act of 1881 does not define the
phrase “negotiable instrument” as such; at most, Section 13 of that
legislation indicates that “negotiable instrument” refers to a promissory note,
bill of exchange, or cheque payable to order or to the bearer.
The main distinction between a negotiable instrument and other documents

(or a chattel) is that, in the case of a negotiable instrument, the transferee
acquires a good title in good faith and for consideration even though the
transferor’s title may have a flaw; in contrast, in the case of other
documents, the transferee receives a similar title (or, to put it another way,
no better title) than the transferor.
Common traits of negotiable instruments

1. Negotiable instruments are transferable by nature: A
negotiable instrument may be freely transferred as many times as
necessary until it reaches maturity. Delivering the instrument is
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sufficient if it is “payable to the bearer.” However, if it is “payable to
order,” it is accepted upon delivery and endorsement. In addition to
becoming entitled to the money transferred with a negotiable
instrument, the transferee also gains the ability to transfer the
instrument again.
2. Having an independent title: When it comes to negotiable
instruments, the usual rule that states that no one can grant a
superior title than he or she possesses does not apply. If the
transferor had gained a negotiable instrument by fraud but the
transferee had acquired it in good faith (bona fide) for value, the
transferee would have a good title with regard to that instrument.
As a result, the title of the transferee in relation to a negotiable
instrument is separate from the title of the transferor. Additionally,
in circumstances involving negotiable instruments, the principle
of nemo dat quod non habet, according to which no one can grant a
higher title than he himself has, does not apply.
3. Application of presumptions: All negotiable instruments are
subject to certain presumptions, such as those outlined in Sections
118 and 119 of the Negotiable Instruments Act of 1881.
4. Having the right to sue: A negotiable instrument’s transferee
(payee) is not required to notify the party (drawer) responsible for
making or honouring the payment under the negotiable instrument
of the transfer. In the event of dishonour, the transferee may bring
a claim against a negotiable instrument in its own name without
notifying the original debtor of the transfer, i.e., without telling the
original debtor that the transferee has taken possession of the
negotiable instrument.
5. Being certain: A carrier with no bags is a negotiable instrument. A
negotiable instrument must be written in the fewest number of
words possible and in such a way as to make the contract as clear-
cut and certain as possible. A negotiable instrument needs to be
devoid of any constraints that would significantly hinder its
circulation. A negotiable instrument must also include the payment
of a specific (fixed or defined) amount of money (money only and
on a specific time period).
Key features of negotiable instruments in the

Negotiable Instruments Act of 1881
The key features of the Act of 1881 can be understood by discussing various
negotiable instruments covered under this Act. The same has been provided
hereunder.
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Promissory Note (Section 4 of the Negotiable Instruments Act,
1881)
1. Regardless of whether it is negotiable or not, an instrument that
complies with the definition in Section 4 of the Negotiable
Instruments Act, of 1881 must be regarded as a promissory note.
2. According to Section 4 of the Negotiable Instruments Act of 1881, a
written instrument (not a banknote or currency note) that contains
an unconditional undertaking, signed by the maker with the
promisor with the promise to pay a specific amount of money only
to, or at the direction of, a specific person, or to the bearer of the
instrument, qualifies as a negotiable instrument.
3. It must be signed, sealed, and written down;
4. There must be a commitment or undertaking to pay; The mere
admission of debt is insufficient;
5. There must be no conditions;
6. It must include a commitment to pay just money;
7. A promissory note’s maker and payee, or its parties, must be
certain;
8. It is repayable immediately or following a specific date; and
9. The amount owing must be certain.
Bill of Exchange (Section 5 of the Negotiable Instruments Act,

1881)
1. As per Section 5, a bill of exchange involves three parties: the
drawer, the drawee, and the payee;
2. It must be in writing, suitably stamped, and duly accepted by its
drawee;
3. There must be a payment order;
4. Unconditional promise or order to pay is required; and
5. Both the sum and the parties must be agreed upon and must be
certain.
Cheque (Section 6 of the Negotiable Instruments Act, 1881)

1. A cheque involves three parties: the drawer, the drawee bank, and
the payee;
2. It must be in writing and has the drawer’s signature;
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3. Payee is confident;
4. The payment is always due upon demand;
5. It must contain a date in order for the bank to honour it; otherwise,
it is invalid;
6. The sum must be expressly stated, both verbally and numerically. 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, according to Section
18 of the Negotiable Instruments Act, 1881;
7. When a cheque is truncated, it is scanned, an electronic image of
the cheque is created, and instead of a physical cheque being
communicated in a clearing cycle, the image is instantly used to
replace any further physical movement of the cheque; and
8. No one other than the Reserve Bank of India or the Central
Government may draw, accept, make, or issue any Bill of Exchange
or Promissory Note payable to bearer on demand, according
to Section 31 of the Reserve Bank of India Act, 1934 (RBI Act,
1934). Despite the provisions of the Negotiable Instruments Act of
1881, Section 31(2) of the RBI Act of 1934 stipulates the same.
In the case of Surendra Madhavrao Nighojakar v. Ashok Yeshwant
Badave (2001), the Supreme Court of India held the following:
1. A cheque is a bill of exchange written by the owner of an account

payable on demand to a bank.
2. A post-dated cheque becomes a cheque under Section 138 of the
Negotiable Instruments Act of 1881 on the date specified on the
face of the cheque, and the 6-month term must be calculated from
that date for purposes of Proviso (a) of Section 138 of the
Negotiable Instruments Act of 1881.
3. The cheque is not made payable in any other way than on demand
just because the payment date for it has been moved to a later
date.
4. Legal action may be brought against the banker (the drawee in the
case of a cheque) if it honours the cheque before the date stated on
the cheque’s face.
5. When a cheque is described as “payable on demand,” the payee of
the cheque is referring to “payable at once.”
Cheque and post-dated cheque

The Hon’ble Supreme Court of India explained the distinction between a
cheque and a post-dated cheque with reference to Sections 5 and 6 of the
Negotiable Instruments Act, 1881, in the case of Anil Kumar Sawhney v.
Gulshan Rai (1993). According to the Supreme Court’s ruling:
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1. A post-dated cheque is only a bill of exchange when it is written or
drawn; after it is due on demand, it is a cheque.
2. A post-dated cheque is not cashable before the date printed on the
document’s face. It remains a bill of exchange under Section 5 of
the Negotiable Instruments Act of 1881 until the date indicated on
it, at which point it becomes a cheque.
3. Since a post-dated cheque cannot be presented to the bank, the
issue of its return would not come up. The requirements of Section
138 of the Negotiable Instruments Act, 1881 only apply when the
post-dated cheque becomes a “cheque” with effect from the date
indicated on the face of the said cheque.
4. A postdated cheque is nevertheless valid as a bill of exchange until
the date printed on it. However, as of the date printed on the face of
the said cheque, it qualifies as a cheque under the Negotiable
Instruments Act of 1881, and in the event that it is dishonoured,
Section 138’s proviso (a) is triggered.
Different types of cheques

The various types of cheques have been discussed hereunder:
1. Open cheque: With such a cheque, it is possible to obtain cash

from the bank’s counter;
2. Bearer Cheque: It is somewhat comparable to an open cheque in
that any person carrying or bearing the bearer cheque may be paid
the amount specified in the cheque.
3. Crossed Cheque: A crossed cheque, which would only be credited
into the payee’s bank account, can be used to reduce the risk
associated with open cheques, which are often risky to write and
issue. The top left corner of a cheque can be crossed by drawing
two parallel lines across it, with or without writing “Account Payee”
or “Not Negotiable.”
4. Order Cheque: It is a cheque that can have the word “word
bearer” cut or cancelled and is made out to a specific person;
5. Electronic Cheque: It is a cheque that is generated in a secure
system, ensuring safety requirements through the use of digital
signatures, and it contains an exact mirror image of the original
cheque.
Difference between promissory note and bill-of-

exchange
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1. A bill of exchange contains an unconditional order to pay, but a
promissory note contains an unconditional promise to pay.
2. There are only two parties in a promissory note, the maker and the
payee, whereas there are three parties in a bill of exchange,
namely, the drawer, the drawee, and the payee.
3. In a promissory note, acceptance is not necessary; in a bill of
exchange, however, the drawee must accept.
4. In a bill of exchange, the obligation of the drawer is secondary and
contingent upon the drawee’s failure to pay; in a promissory note,
the liability of the drawer or the note’s manufacturer is main and
absolute.
Difference between cheque and bill-of-exchange

1. A bill of exchange can be drawn on anyone, including a banker,
unlike a cheque, which is drawn on a banker.
2. According to Section 19 of the Negotiable Instruments Act of 1881,
a cheque is always payable immediately; a bill of exchange,
however, is either payable immediately or after a certain amount of
time.
3. One can cross a cheque to make it non-negotiable, but one cannot
cross a bill of exchange.
4. Acceptance is not necessary for a cheque, but it is necessary for a
bill of exchange.
Difference between holder and holder in due course

1. Any individual with the legal right to possess a promissory note, bill
of exchange, or cheque in his or her own name, as well as to receive
or obtain payment from the parties thereto, is referred to as the
“holder” of that instrument. A holder who accepts the instrument in
good faith, with due care and prudence, for value (consideration),
and before maturity is referred to as a “holder in due course.” In the
event of a “holder,” payment is not essential, and they are also
permitted to purchase the instrument after it reaches maturity.
2. A “holder” does not have any particular rights, but a “holder in due
course” does have some specific rights. For instance, a holder in due
course cannot use the argument that the amount they filled out on
an instrument exceeded the authority granted. It was decided that
an endorsement was irregular and that the endorsee (AB and Co.)
was not a holder in due course, albeit it might be a holder for value,
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when a bill was prepared by X in favour of Z and Z further endorsed
the bill in favour of AB and Co.
3. The key point is that the holder must have legal custody of the
instrument in his own name. The possessor must be entitled to
obtain or recoup that sum. An endorsee, payee, or bearer are all
examples of holders. If someone has entitlement, it indicates that
even if they don’t use it, they are still entitled to it and it cannot be
taken away from them. In accordance with Section 8 of the
Negotiable Instruments Act of 1881, the holder of an instrument
must have a right to the instrument even if he does not possess it.
4. A “holder” does not receive a title superior to that of his transferor;
rather, a “holder in due process” receives a title superior to that of
his transferor. The status of a “holder” is less favourable than that
of a “holder in due course. ” The title of a “holder in due course”
becomes free from all equities, meaning that a “holder in due
course” cannot raise the defence that can be raised against the prior
parties. For instance, if a negotiable instrument is lost and then
found by someone through criminal activity (theft), the person who
received the instrument through criminal activity is not entitled to
any rights regarding any money owed in relation to that instrument.
However, if such a document is properly transferred to a person as
a holder, he will get a good title.
Structure of the Negotiable Instruments Act,

1881
An Act to define and amend the law relating to Promissory Notes, Bills of
Exchange and Cheques, the Negotiable Instruments Act, 1881 which came
into effect on 9th December, 1881 comprises a total 147 sections spread
over 17 chapters. The chapters alongside their contents have been provided
hereunder:
1. Chapter I (Sections 1 – 3): Preliminary

2. Chapter II (Sections 4 – 25): Notes, bills and cheques
3. Chapter III (Sections 26 – 45A): Parties to notes, bills and
cheques
4. Chapter IV (Sections 46 – 60): Negotiation
5. Chapter V (Sections 61 – 77): Presentment
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6. Chapter VI (Sections 78 – 81): Payment and interest
7. Chapter VII (Sections 82 – 90): Discharge from liability of notes,
bills and cheques
8. Chapter VIII (Sections 91 – 98): Notice of dishonour
9. Chapter IX (Sections 99 – 104A): Noting and protest
10. Chapter X (Sections 105 – 107): Reasonable time
11. Chapter XI (Sections 108 – 116): Acceptance and payment
for honour and reference in case of need.
12. Chapter XII (Section 117): Compensation
13. Chapter XIII (Sections 118 – 122): Special rules of evidence
14. Chapter XIV (Sections 123 – 131A): Crossed cheques
15. Chapter XV (Sections 132 – 133): Bill in sets
16. Chapter XVI (Sections 134 – 137): International law
17. Chapter XVII (Sections 138 – 147): Penalties in case of
dishonour of certain cheques for insufficiency of funds in the
accounts.
In the case of A.V. Murthy v. B.S. Nagabasavanna (2002), it was determined
that a negotiable instrument is presumptively drawn for consideration and
that a complaint of a dishonoured cheque at the threshold may be dismissed
on the grounds that money had been advanced four years prior, the debt is
not enforceable, and such a course of action is improper.
The Negotiable Instruments (Amendment) Act, 2017, which went into effect
on September 1, 2017, enables the court hearing a case involving a bounced
cheque to order the drawer to pay interim damages to the complainant not
to exceed 20% of the cheque’s value within 60 days of the trial court’s order
for such damages to be paid. When the drawer enters a not guilty plea to the
allegations in the complaint, either in a summary trial or a summons case or
upon the drafting of charges in any other matter, this interim compensation
may be awarded. The Amendment also gives the Appellate Court the
authority to order the appellant to deposit a minimum of 20% of the fine or
compensation granted, in addition to interim compensation, when hearing
appeals against convictions under Section 138.
Holder in due course

A person who has obtained a negotiable instrument in conformity with good
faith and for value is referred to as a “holder in due process.” Each
negotiable instrument holder is considered to be a “holder in due course.” It
is the responsibility of a party liable for repayment to prove that the person
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holding the negotiable instrument isn’t the rightful owner in the event of a
dispute.
In any case, the onus is on the holder to prove that he is a holder in due
course, for instance by proving that he obtained the negotiable instrument in
accordance with some good faith and for value, if the parties obligated for
repayment demonstrate that the negotiable instrument was obtained from its
legitimate proprietor by means of a crime or extortion. In law, the “burden of
proof” is the requirement to establish specific facts.
Fact of dishonour
A negotiable instrument may occasionally be dishonoured, which means the
party responsible for payment neglects to make the payment. After
submitting the proper notice of dishonour, the holder has the right to file a
lawsuit for the recovery of the sum. However, he is allowed to have a Notary
Public’s certification about the actuality of dishonour before he files the
lawsuit. A statement like that is referred to as “protest.” The court will
assume that there has been dishonour based on the verification of such a
dissent.
Presumption as to service of notice

It is assumed that a notice has been served if it has been sent by registered
mail to the right address of the cheque’s drawer. The drawer, however, has
the right to refute this assumption.
The Apex Court has ruled that a notice is considered to have been properly
served if it is delivered to the correct address and returned with the words
“refused,” “no one was home,” “house was locked,” or words to that effect.
Inchoate instruments
The rules pertaining to an inchoately stamped instrument were outlined
in Section 20 of the 1881 Act. According to the mentioned Section, only two
types of instruments, a promissory note and a bill of exchange are stamped
in the Act, which makes it clear which ones they are. The problem is that,
regardless of the fact that a cheque is not a stamped document or that there
are numerous differences between the documents recognised by Section 20
of the Act and a cheque, many judicial pronouncements (e.g., Magnum
Aviation (Pvt.) Ltd. v. State and Ors (2010)) recognise or regard a cheque as
an inchoate instrument if it lacks one or two essentials listed in the
characteristics of the negotiable instrument.
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Requirement of stamp
Despite the fact that the Act makes no reference of the stamp’s relevance or
requirement, every style of promissory note and bill of exchange must have
a stamp on it. The Indian Stamp Act of 1899 mentions a mandatory provision
for stamp affixation on such documents.
Liabilities under the Negotiable Instruments Act 1881

The various liabilities that are provided in the Act of 1881 have been laid out
hereunder:
1. Liability of agent signing (Section 28): A promissory note, bill of

exchange, or cheque that an agent signs without specifying that he
is acting as an agent or that he does not intend to assume personal
liability makes the agent personally liable for the instrument, with
the exception of those who persuaded him to sign under the
impression that only the principal would be held responsible.
2. Liability of legal representative signing (Section 29): A
promissory note, bill of exchange, or cheque that a legal
representative of a deceased person signs binds him personally
unless he expressly restricts his duty to the amount of assets he
received in that capacity.
3. Liability of drawer (Section 30): If the drawee or acceptor of a
bill of exchange or cheque dishonoured it, the drawer is obligated to
pay the holder compensation, provided that the drawer has received
or been given the proper notice of the dishonour as described
further below.
4. Liability of drawee of cheque (Section 31): The drawee of a
cheque must pay the cheque when required to do so and, in the
event that payment is not made as required, must reimburse the
drawer for any losses or damages resulting from the default. This is
true even if the drawee has sufficient funds in his possession that
are legally applicable to the payment of the cheque.
5. Liability of maker of note and acceptor of bill (Section
32): The maker of a promissory note and the acceptor of a bill of
exchange prior to maturity are obligated to pay the amount due at
maturity in accordance with the apparent tenor of the note or
acceptance, respectively, in the absence of a contract to the
contrary, and the acceptor of a bill of exchange at or after maturity
is obligated to pay the amount due to the holder upon demand. Any
party to the note or bill who is not paid as required by the note or
bill must be reimbursed by the maker or acceptor for any losses or
damages they suffer as a result of the default.
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6. Liability of indorser (Section 35): Without a contract to the
contrary, whoever indorses and delivers a negotiable instrument
before maturity without, in such indorsement, expressly excluding
or making conditional his own liability, is bound by such
indorsement to every subsequent holder, in case of dishonour by
the drawee, acceptor, or maker, to compensate such holder for any
loss or damage caused to him by such dishonour. Every indorser
who does dishonour is accountable as if they were a demand-
payable instrument.
Section 40 talks about the discharge of the indorser’s liability. The indorser is
released from responsibility to the holder to the same extent as if the
instrument had been paid in full when the holder of a negotiable instrument
destroys or weakens the indorser’s remedy against a preceding party without
the indorser’s consent.
7. Liability of prior parties to holder in due course (Section

36): Every prior party to a negotiable instrument is liable thereon to
a holder in due course until the instrument is duly satisfied.
Presumptions under Section 118 and Section 119 of

the Negotiable Instruments Act, 1881
According to Section 101 of the Indian Evidence Act, 1872, the plaintiff has
the initial burden of proving a prima facie case in his favour. Once the
plaintiff presents evidence to support a prima facie case in his favour, the
defendant is then required to present evidence to the court of law that
supports the plaintiff’s case. The burden of proof may return to the plaintiff
as the case develops. The following presumptions shall be made unless the
contrary is shown, according to Section 118 of the Negotiable Instruments
Act of 1881:
1. Consideration: When dealing with a negotiable instrument, the

complaint must establish prima facie that he did so in good faith and
without payment. Every negotiable document is deemed to have
been drawn for consideration, and every time one of these
instruments is accepted, inscribed, or transferred, it is assumed that
this was done for (or against) consideration. As a result, in the
event that the complainant files a complaint alleging dishonour of a
cheque (or other negotiable instruments), the accused person may
discharge his or her responsibility by demonstrating that there is no
sum due to be paid to the complainant by the accused person under
the terms of the instrument.
2. Date: It is assumed that a negotiable instrument was drawn on the
date that is specified on the instrument’s face in the case of a
negotiable instrument.
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3. Time of acceptance: When it comes to negotiable instruments, it is
assumed that they were accepted within a reasonable amount of
time following their execution date and prior to their maturity.
4. Time of transfer: Every transfer involving a negotiable instrument is
assumed to have taken place before the instrument’s maturity date.
5. Order of indorsements: The endorsements that appear on a
negotiable instrument are assumed to have been made in the order
or sequence that they do.
6. Holder in Due Course: A missing promissory note, bill of
exchange, or cheque is assumed to have been properly marked,
thereby, implying the concept of holder in due course.
7. Stamp: Every possessor of a negotiable instrument is deemed to
have obtained it voluntarily and in exchange for value. The accused
party must demonstrate that the negotiable instrument’s holder is
not a holder in good standing.
The Negotiable Instruments Act of 1881 mandates that when a promissory
note or bill of exchange has been dishonoured by non-acceptance or non-
payment, the holder of such instrument may cause such dishonour to be
noted by a notary public upon the instrument or upon a paper annexed (or
attached) thereto, or partly upon each of them, i.e., the instrument and the
paper annexed to the instrument. Additionally, according to Section 100 of
the Negotiable Instruments Act of 1881, the holder of an instrument may
have it protested by a notary public within a reasonable amount of time
regarding the dishonour of the instrument.
Following Chinnaswamy v. Perumal (1999), it was held that the assumption

under Section 118 of the Negotiable Instruments Act, 1881, had been
refuted on the facts in the case of Ayyakannu Gounder v. Virudhambal
Ammal (2004). In Bonala Raju v. Sreenivasulu (2006) it was decided that the
presumption as to consideration under Section 118 of the Negotiable
Instruments Act, 1881, applies when the fulfilment of a promissory note is
proven.
According to Section 119 of the Negotiable Instruments Act of 1881, the

presumption of proof of protest is discussed. It specifies that if a lawsuit is
filed over the nonpayment of a promissory note or a bill of exchange, the
court will presume that the nonpayment occurred unless and until the
acceptor of the promissory note or bill of exchange refutes (or refutes) the
claim.
The penal provisions of the Negotiable Instruments

Act, 1881
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The criminal penalties found in Sections 138 to 142 of the 1881 Act have
been put in place to make sure that contracts entered into using cheques as
a form of deferred payment are upheld. Conditions for filing a complaint for
cheque dishonour are outlined in Section 138 of the Act. The following are
the components needed to comply with Section 138:
1. Cheques are a common form of payment, and post-dated cheques

are regularly utilised in a variety of business operations. Cheques
that have been postdated are issued to the cheque’s drawer as a
convenience. As a result, it becomes important to make sure the
cheque’s drawer isn’t abusing the accommodations made for him.
2. The Negotiable Instruments Act, 1881 governs the use of negotiable
instruments, including cheques, bills of exchange, and promissory
notes. The purpose of Chapter XVII, which contains Sections 138 to
142, was to foster trust in the effectiveness of banking operations
and lend legitimacy to the negotiable instruments used in
commercial transactions.
3. A person must have drawn a cheque to pay money to someone else
to satisfy any debt or other obligation;
4. The bank has received that cheque during the last three months;
5. When a cheque is returned unpaid by the bank due to inadequate
funds or because it exceeds the amount specified in an agreement
established with the bank to be paid from that account;
6. Within 15 days of learning from the bank that the cheque was
returned as unpaid, the payee issues a written notice to the drawer
demanding payment of the money;
7. Within 15 days of receiving the notice, the drawer fails to pay the
payee.
An overview of Section 138 of the Negotiable

Instruments Act, 1881
The “Negotiable Instruments Act” was first developed in 1866, and it was
finally passed into law in 1881. Chapter XVII, which includes sections 138 to
142, was added to this statute in 1988, after than a century. Section 138 of
the Act essentially lays out the punishment for the crime of dishonouring a
cheque. “A negotiable document drawn on a designated banker and not
expressed to be payable otherwise on demand” is how one may define a
cheque under the Section. The word “cheque” is defined in Section 6 of
Chapter 2 of the Negotiable Instruments Act, 1881 to include “an electronic
image of a truncated cheque and a cheque in electronic form.” Before the
recent addition, criminal prosecution of the accused in cases of cheque
dishonour was not an option for the payee of the cheque; instead, only civil
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and alternative dispute resolution procedures were available. Now, the payee
of the cheque has access to both civil and criminal remedies.
The Hon’ble Court stated in Modi Cement Limited v. Kuchil Kumar

Nandi (1998), that the major goal of Section 138 of the Negotiable
Instrument Act, 1881 is to increase the effectiveness of banking operations
and to guarantee complete trust while conducting business using cheques.
The laws of the commercial world, which are specifically designed to simplify
trade and commerce by making provisions for giving sanctity to the
instruments of credit that would be deemed to be convertible into money and
easily transferable from one to another, are those that deal with negotiable
instruments.
In the most recent decision of P Mohanraj vs. M/S. Shah Brothers Ispat Pvt.
Ltd. (2021), a division bench composed of Rohinton Fali Nariman, and B.R.
Gavai rendered their decision that when discussing whether Section 14 of
the Insolvency and Bankruptcy Code, 2016 prohibits proceedings under
Section 138 of the Negotiable Instrument Act, 1881, against corporate
debtors, it was noted that the proceedings under Section 138 could be
described as “civil sheep” in “criminal wolf’s clothing.”
Conditions to commit an offence under Section 138 of

the Negotiable Instruments Act, 1881
The term “Negotiable Instrument” is defined as “a promissory note, bills of
exchange, or cheque payable either to order or to bearer” under Section
13 of the Negotiable Instrument Act, 1881. In other words, it basically says
that “it is a sort of instrument which promises the bearer a sum of money
that will be payable on demand or at any future date.” Section 138
essentially outlines the penalties for dishonouring a cheque as a criminal
provision.
The provision itself outlines specific conditions that render dishonouring a

cheque illegal, and the prerequisites are:
1. A cheque must first have been prepared by the person who will be
the drawer, and it must be for the payment of money to another
party to satisfy a debt.
2. The cheque should be handed to the drawee bank, and if there
aren’t enough funds or the amount is greater than “the amount
arranged to be paid from that account by an agreement established
with the bank,” the bank will return the cheque unpaid.
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3. The bank must receive the cheque no later than six months after
the day it was drawn or during the duration of its validity, whichever
comes first.
4. The bank promptly provides the payee with the “Cheque return
memo” if the cheque is dishonoured by the bank.
5. Following that, a demand notice for the return of the unpaid cheque
must be sent by the cheque holder, who is also the payee, to the
cheque drawer within 30 days of receiving the memo.
6. The drawer must make the payment within 15 days of receiving this
notice, and if it is not made within that time frame, the payee may
file a lawsuit within 30 days of the expiration of the 15-day period.
The court ruled in the case of Shankar Finance Investment vs. State of
Andhra Pradesh (2008) and others that “Section 142 of the Negotiable
Instrument Act makes it compulsory that the complaint must be filed by the
payee or holder in due course of the cheque where a Payee is a natural
person he can file a complaint and when the pay is a form of a company
registered person it must be represented by a natural person.”
Decriminalisation of Section 138 of the Negotiable

Instruments Act, 1881
The decriminalisation of minor offices was announced in a public notice
released by the Minister of Finance in the year 2020 with the goal of boosting
business confidence and streamlining the legal system. for gathering
feedback and proposals from interested parties about the decriminalisation of
a variety of offences, including the offence under Section 138 of the
Negotiable Instruments Act of 1881.
The primary goal of the government’s proposal is to streamline business

procedures and promote investment, but in a reasonable opinion, doing away
with Section 138’s criminal penalties will not achieve this goal. Instead, it can
be believed that this section was designed to have deterrent effects and to
prevent people from breaking their agreements by paying by cheque.
Another goal of this proposal was to decriminalise certain offences in order to

open up the legal system. However, this goal will not be achieved because
there are already a lot of pending cases in the magistrate courts, and they
are being resolved very slowly. Additionally, by decriminalising certain
offences, the burden that was previously placed on the criminal courts will be
transferred to the civil courts because the person who holds the cheque will
now bear that burden.
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Speedy disposal of negotiable instrument
cases in recent times
The Delhi High Court considered the issue of whether a criminally
compoundable offence under Section 138 might be resolved by mediation in
the case of Dayawati v. Yogesh Kumar Gosain (2017). The Court ruled that
even while the legislature did not clearly provide for such a provision, the
criminal court is still permitted to send both the complainant and the accused
to alternative conflict resolution procedures. Without mandating or limiting
the method by which it may be reached, the Code of Criminal Procedure,
1973, does permit and accept a settlement. Therefore, there is no prohibition
against using alternative dispute resolution procedures, such as arbitration,
mediation, and conciliation (recognised under Section 89 of the Civil
Procedure Code, 1908), to resolve disputes that are the focus of offences
covered by Section 320 of the Code of Criminal Procedure Code. Additionally,
it was argued that the proceedings under Section 138 of the 1881 Act are
unique from other criminal cases and really have more in common with a civil
wrong that has been given criminal undertones.
After considering the purpose of enacting Section 138 and other sections of
Chapter XVII of the Act, the Honourable Supreme Court stated in Meters and
Instruments (P) Ltd. v. Kanchan Mehta (2017) that an offence under Section
138 of the Act is principally a civil wrong. Section 139 places the burden of
proof on the accused, but the standard for such proof is “preponderance of
probabilities.” The case must typically be tried summarily in accordance with
the provisions of summary trial under the CrPC, with any modifications
necessary for proceedings under Chapter XVII of the Act.
As written, the Section 258 of the CrPC principle will be in effect, and the
Court may close the case and release the accused if it is satisfied that the
amount on the cheque, as well as any assessed costs and interest, have
been paid and if there is no justification for continuing with the punitive
element. Compounding at the initial stage must be encouraged but is not
prohibited at a later stage, subject to appropriate compensation as may be
found acceptable by the parties or the Court. The purpose of the provision
being primarily compensatory, the punitive element being primarily with the
object of enforcing the compensatory element.
Cases brought under Chapter XVII of the Act must typically be tried in a
summary manner. After taking into account the additional fact that, in
addition to the sentence of imprisonment, the Court has jurisdiction
under Section 357(3) CrPC to award suitable compensation with a default
sentence under Section 64 of the Indian Penal Code, 1860 and with further
recovery powers under Section 431 of the CrPC. The Magistrate may decide,
under the second proviso to Section 143 of the Indian Penal Code, 1860, that
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it was undesirable to try the case summarily because a sentence of more
than one year may need to be passed. With this strategy, a prison term of
more than a year may not be necessary in every circumstance.
The bank’s slip is prima facie proof of the dishonoured cheque, so the
Magistrate need not record any additional preliminary evidence. The
complaint’s evidence can be provided on affidavit, subject to the court’s
ruling and scrutinising the individual providing the affidavit. This type of
affidavit testimony is admissible at all stages of a trial or other action.
According to Section 264 of the CrPC, the affiant may be examined in a

particular way, except in cases where the second proviso to Section 143 of
the IPC must be used, a sentence of one year may need to be given, and
compensation under Section 357(3) of the CrPC is deemed insufficient due to
the amount of the cheque, the accused’s conduct, the accused’s financial
capacity, or any other circumstance. Thus, the plan is to proceed in a
summary manner.
Recommendation for better functioning of the

Negotiable Instruments Act, 1881
1. It is recommended to double the number of Magistrates designated
solely for instances involving cheque bounces. To deal with certain
cases, special courts can be established. The Government is
required to allocate the money required to cover the costs
associated with hiring more Magistrates, their support staff, and
other infrastructure. A judge shouldn’t have more than fifty cases
before them on any one day (25 people attended the morning
session and 25 people the afternoon session), presuming that the
number is a reasonable one.
2. The court’s judicial clerk should sit for an hour, take roll calls,
consider requests for adjournment by consent, and adjourn the
cases that, in his opinion, need adjournment before the court’s time,
which is before 11 AM. When the magistrate’s judicial attention or
time is needed, those matters can be detained for judicial review
until 11 AM with a note from the court clerk. The recording of the
evidence should take up the entire hour of court time beginning at
11 AM. The aforementioned will spare the court between one and
two hours per day. As he is not bringing a new financial claim,
victims of cheque-bounce instances are not required to pay court
costs.
3. According to Section 139 of the Act of 1881, it is presumed that the
holder of a cheque received a cheque of the kind mentioned in
Section 138 for the discharge, in whole or in part, of any debt or
other liability unless the contrary can be proven. The accused may
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disprove this presumption by presenting convincing evidence that
there was no debt or liability. The burden of proof then switches
back to the complainant when such rebuttal evidence has been
presented and accepted by the court.
4. Since it is a quasi-judicial proceeding, the Court should adopt a
creative strategy and avoid becoming bogged down in details.
Technicalities should be sought out and firmly rejected.
5. Magistrates must act on their own, and a four-hearing process must
be used. A non-bailable warrant must be issued if the accused does
not show up for the initial hearing. The accused must provide
justification and present a defence at the second hearing. Cross-
examination should be done during the third hearing. Arguments
should be made at the fourth hearing, and then a decision must be
made.
6. Credit is granted based on confidence and trust. To further simplify
conducting business in India, it is in the judicial system’s best
interest that these reforms are implemented as soon as practicable.
It is against the law for someone who borrows money on credit to
use Section 138 of the Act to put off making payments, and it is the
Court’s responsibility to make sure that it does not become a party
to such stalling measures.
Conclusion
According to the 213th Law Commission Report, the Indian judicial system is
dealing with a significant backlog of cases, and roughly 20% of the litigation-
related issues include cheque bounces. The lifeless sections of the Negotiable
Instruments Act of 1881 would thus be given some life by the recently
enacted provisions. Even though cases involving cheque bounces are penal in
nature and result in criminal offences, the procedures for summary
judgement are still on the books, and making the offence subject to bail has
made these cases practically identical to civil issues. In this approach, newly
introduced restrictions would in fact be a proactive measure to protect the
legitimacy of cheques. Once the accused individuals or the appellant, if there
is an appeal, deposit a sizable sum, they will begin to treat the situation
seriously. Even while it is moving in the right way, there is still work to be
done to make cheque bounce cases feasible, and summary trials must be
given their actual meaning. Otherwise, the entire point of making cheque
bounce a criminal offence would become less significant.
Holder and Holder in Due Course

Introduction to Holder and Holder in Due Course
The concept and definition of a holder and a holder in due course have been
discussed in Section 8 and Section 9 of The Negotiable Instruments Act, 1881
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respectively. Generally, the holder of a negotiable instrument is the one who
receives it by transfer.
The Negotiable Instruments Act, 1881 is a statute that regulates the working of
instruments on which amounts can be negotiated. It sets out the framework under
which these instruments operate and any violation in these rules has made been
punished.
For the purpose of understanding the working of negotiable instruments, it is

essential to understand the complexities of the parties involved in a transaction that
involves a negotiable instrument.
Who is a holder under negotiable instruments act?

Meaning of Holder: – A holder is a person who legally obtains the negotiable
instrument, with his name entitled on it, to receive the payment from the parties
liable. According to section 8 of the Negotiable Instruments Act, 1881, a holder is a
party who is entitled in his own name and has legally obtained the possession of
the negotiable instrument, i.e. bill, note or cheque, from a party who transferred it, by
delivery or endorsement, to recover the amount from the parties liable to meet it.
The party transferring the negotiable instrument must be legally competent. It does
not include the person who finds the lost instrument payable to the carrier and the
one who is in wrongful possession of the negotiable instrument.
Kinds of Holder under negotiable instruments act
The following are the materials to be satisfied to be eligible to be a holder under
negotiable instruments act: –
1. De jure: – The holder of the Negotiable Instrument as a matter of legal right.
o A person should have the right to have the instrument in his own
name. It is not necessary that the person has actual physical
possession of the instrument. The principle is that a right must be
acquired under a legal title.
o The name of the person should be in the instrument as payee or
indorsee. He can also be the bearer of the instrument if it is the
bearer instrument. In cases where the holder dies, the heir of such
holder becomes the holder even when he is not the recipient or the
insurer or the holder of the instrument.
2. De facto: – The holder of negotiable instrument by the virtue of possession
but not entitled on his own name.
o Where any person comes to hold a negotiable instrument and does
not have the right to hold or keep it, he shall not be called a holder.
A person who finds an instrument lying somewhere or he stole the
instrument, though may be in possession of such instrument, but
he has no right on that instrument. Therefore he cannot be called
holders.
o The person by means of the instrument shall be entitled to receive
the amount which the parties are liable to pay to the holder. So not
only possession but also the right to receive the amount is an
important aspect to be called as a holder. After receiving the
amount, the person who is liable to pay the amount get relief from
his/her liability.
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o In cases where a person finds the instrument lying somewhere or
where any person has stolen such equipment, he is not entitled to
receive the amount. Thus he is not called a holder.
What are the rights of a Holder under negotiable
instruments act?
Following are the rights of a Holder under negotiable instruments act: –
1. Section 8: – Holder has the legal right to possess the instrument and to
recover and receive the amount which due as per the instrument.
2. Section 14: – In Negotiation, a holder of a cheque has a right to negotiate to
another person. Moreover, in some cases, a holder has a power of negotiation
even though cheque has no title or faulty title.
3. Section 45A: – Holder has the right to get a duplicate of the instrument which
is lost. In case of misplacing of the cheque, the holder can ask to the drawer to
give him another cheque of the same tenor, but holder must give security to
the drawer to indemnify him for all the loses if the lost cheque has been found
again.
4. Section 50: – Holder has the right to Indorse the instrument which basically
means that holder has the right to countersign the instrument. The holder of a
cheque indorsed in blank may convert the blank endorsement, by writing
above the indorser’s signature which gives direction to pay the cheque to or
to the order of himself or any other person.
5. Section 61 and 64: – Holder has the right to present the instrument for
acceptance if it is a bill and receive payment if it is any other instrument. If a
cheque is an open cheque then the person can take it to the drawee bank and
request payment in cash; but in case of crossed cheques one cannot anticipate
drawee bank to pay in cash, and he should, therefore, present it to the drawee
bank for payment.
6. Section 125: – In Crossings of cheque after issue; where the cheque is not
crossed, the holder may cross it generally or specially. Where the cheque is
crossed generally, the holder may cross it specially. He also the option of
adding the words like “not negotiable” or “account payee”.
7. Section 138: – In Notice of Dishonour of cheque, a cheque holder presents
the cheque for payment and if it does not get paid then he may give notice of
dishonour outright to prior parties in order to hold back their liability to him.
Who is holder in due course under negotiable
instruments act?
Meaning of holder in due course: – Holder in Due Course is defined as a person
who acquires the negotiable instrument in good faith for consideration before it
becomes due for payment and without any idea of a defective title of the party who
transfers the instrument to him. A person who acquires the negotiable
instrument bonafide for some consideration, whose payment is still due, is called
holder in due course.
Section 9 of the Negotiable Instrument act, 1881, A holder in due course is a holder
itself, who accepts a negotiable instrument in a value-for-value exchange without
doubting its legitimacy so ultimately in a good faith. Now the person who took it for
value in good faith now becomes a real owner of the instrument and is known as
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“holder in due consideration”. Every holder in due course is a holder but every holder
in due course is not a holder.
If a negotiable instrument is acquired by a person for a price and he believes that

there is no defect in title whereby he took the instrument in good faith, then becomes
the true owner of the negotiable instrument and the holder in due course.
What are the essentials to be eligible to be a holder in

due course?
The following are the materials to be satisfied to be eligible to be a holder in due course:
–
 The person must hold the instrument for the valuable consideration;
 The person can become the holder of the instrument before its maturity;
 The negotiable instrument must be complete in all respects and
requirements;
 The holder must have received the instrument in good faith.
If a person acquires a negotiable instrument after its maturity, he does not become a
holder in due course.
What are the rights of Holder in due course under

negotiable instruments act?
Following are the rights of a Holder in due course under negotiable instruments act: –
1. Section 20: – The holder is due course gets a good title even though the
instruments were originally stamped but was an inchoate instrument. The
person who has signed and delivered an inchoate instrument cannot plead as
against the holder in due course that the instrument has not been filled in
accordance with the authority given by him. However, a holder who himself
completes the instrument is not a holder in due course.
2. Section 36: – Every prior party to the instruments is liable to a holder in due
course until the instrument is duly satisfied.
3. Section 42: – Acceptor cannot plead against a holder in due course that the
bill is drawn in a fictitious name. In Bank of England vs. Vagliano Bros (1891 –
Ac 107) it was held that the acceptor should consider whether the bill was
genuine or false before signing his acceptance in it.
4. Sections 46 and Section 47: – The liable parties cannot deny liability to a
holder who negotiates a bill of exchange or promissory note on the ground
that the delivery of the instrument was subject to the conditions or had a
specific purpose.
5. Section 53: – He gets a good title to the instrument even though the title of
the transferor or any price party to the instrument is defective. He can recover
the full amount unless he was a party to fraud; or if the instrument is
negotiated by means of a forged endorsement.
6. Section 58: – The holder in due course has a superior title to the transferor of
the instrument. In cases where the transferor’s title was defective, the holder
would get a good title in due course. However, if the title is forged, the holder
does not get the title in due course because there is no defect in the title, but
no title.
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7. Even if the negotiable instrument is made without consideration, if it get into
the hands of the holder in due course, he can recover the amount on it from
any of the prior parties thereto.
8. Section 118: – Every holder is deemed to be a holder in due course. Holder in
due course can file a suit in his own name against the parties liable to pay. He
is deemed prima facie to be holder in due course. The burden of proof is on
the other party to show that the person is not the holder in due course.
9. Section 120: – The validity of the instrument as originally made or dawn
cannot be denied by the maker of drawer of a negotiable instrument or by
acceptor of a bill of exchange for honor of the drawer
10. Section 121: – The maker of a promissory note, bill of exchange or a cheque
shall not deny the validity of the promissory note, bill of exchange or the
capacity of the recipient on the date of the bill of exchange, note, or cheque to
endorse (countersign) the same. Therefore, a holder is entitled to recover the
amount mentioned in the instrument in due course even though the payee has
no capacity to indorse the instrument.
11. Section 122: – Endorser is not permitted as against the holder in due course
to deny the signature or capacity to contract of any prior party to the
instrument.
Difference between holder and holder in due course
BASIS OF HOLDER HOLDER IN DUE COURSE
COMPARISON
Meaning A holder is a party who is A holder in due is a person who get the possession of the
entitled in his own name and negotiable instrument in a good faith before it becomes due for
has legally received the the payment and he has no idea of the defective title of the
negotiable instrument, i.e., bill, person who transfers the instrument to him.
note or cheque from a party
who is liable to transfer it to
recover the amount by delivery
or endorsement.
Section Section 8 of negotiable Section 9 of negotiable instrument act,1881

instrument act,1881
Consideration In this consideration is not In this consideration us necessary.

necessary.
Right to sue Holder does not have the right Holder-in-due course can sue all the prior parties.
to sue all prior parties.
Good faith In this instrument may or may In this the instrument must be in good faith.
not be in good faith.
Maturity A person can become a holder A person can become a holder in due course only before the
before or after the maturity of maturity of the negotiable instrument.
the negotiable instrument.
Case laws
1. Gemini vs. Chandran 2007 (1) KHC 698
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o Judgement of the case: – In this case, the court held that there is no
provision in the act by the holder in due can be presumed as holder
but section 118 states that holder is a holder in due in certain
cases. Therefore, holder and holder in due does not mean same.
2. Braja Kishore Dikshit vs. Purna Chandra Panda AIR 1957 Orissa 153
o Judgement of the case: – It was held that a suit for recovery of the
amount liable through a negotiable instrument can be filed only by
a person who is the holder in due course of the negotiable
instrument.
 First, he must have become the holder by way of a
consideration.
 Secondly, he must have got the right to the instrument
before it becomes overdue and, finally, he must be a
transferee in bonafide faith and he must have some
reason to believe that the title was the transferor’s fault.
3. S.V. Prasad vs. Suresh Kumar AIR 2005 AP 37
o Judgement of the case: – In this case, the court held that the holder
in due has the right to recover the amount from the holder of the
instrument. The endorsement can be done without the
involvement of the maker of the instrument. The holder gets the
same right in due course which was with the holder. He can neither
rectify nor modify the liability.
Material Alteration and Crossing of

Cheque
What is material alteration?
Meaning of Material alteration: – Material alteration means to make any change or alter
some material parts of the instrument and try to make it a valid created with the purpose
of the nature of that instrument. Any alteration in the original state of a cheque such as
date, amount, payee’s name, changing the word ‘order’ to bearer appearing after
payee’s name or in endorsement is called material alteration.
All material alteration must have drawer’s approval with his full signature (not initials)
where the alterations are made. Due to the effects of Material Alteration, the said
instrument become a void.
Material alteration is one aspect of a negotiable instrument. Material alteration may
change the character of the instrument or the rights and obligations of the parties. An
original instrument can be said to be an altered instrument after it has been altered.
Material alteration occurs when changes have occurred to the instrument without the
drawer’s knowledge, and changes made after the cheque has been issued. Where the
nature of the instrument has changed by alterations made in the instrument, it is
equivalent to a physical change. All physical changes must have the approval of the
drawer with his full signature where the changes are made. Without the permission and
consent of the drawer, a blank cheque cannot be enforced.
Instances of material change

 Alteration in instrument date
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 Alteration in Amount Payable
 Alteration in Time of Payment
 Alteration of Place of Payment
 Alteration in interest rate or any change in its favor, if any
 Tearing of the material part of the instrument
 Insertion of the place of payment where the bill is generally accepted
 Addition of a New Party to the instrument.
 Adding words to a blank endorsed bill of exchange so as to convert it into a
special endorsement.
For Example: – ‘A’ drew a cheque of Rs. 500 in favor of ‘B’, who changed the figure of
500 to 5,000 without the consent of the manufacturer. The cheque appears to have been
pulled from above for Rs. 5,000. On presenting the check for payment, the paying
banker paid Rs. 5,000 to ‘B’. The banker did so in accordance with the express term of
the instrument and in good faith. In this case, since the banker acted honestly and
without negligence, he is entitled to debit ‘A’ with Rs 5,000.
What are the alterations that do not constitute a
material alteration?
The alterations that do not constitute a material alteration are: –
1. Alterations that are made with the consent of the parties and changes that correct
errors in data or clerical errors. The change is not obvious and goes into the
hands of the instrument holder.
2. After a change is made to the instrument, the parties to the old instrument cannot
be held liable for the new instrument or the modified instrument for which they
never consented. The party that consents to the change or who changes the
instrument is not entitled to complain against such alteration.
3. A material alteration is one that changes the rights, liabilities or legal status of the
parties as ensured by the original instrument. Whether a change is biased or
beneficial to the parties, the liability of the parties to the material alteration is
avoided.
What are the effects of material alteration?
Following are the effects of material alteration: –
1. The main effect of a material instrument is that it makes the instrument void, and
that it frees the instrument itself against any person who was a party to such an
instrument at the time of the material alteration and has had not given his
approval.
2. All former parties to a negotiable instrument, which was subsequently changed
without their consent, shall also not be liable to the holder-in-course of having no
notice or knowledge of the material alteration.
3. It does not discriminate whether the change was for profit or to cause harm to
any party. Further, it also does not matter whether the holder himself changed
the instrument or a stranger changed it while the instrument was in the holder’s
custody because a party in whose condition the instrument is bound to protect
the instrument in its original condition.
4. However, it is worth noting that a material alteration does not make the
instrument completely void i.e., it cannot be applied against all parties.
5. It is void only against those who have not given their approval for the change, and
can be enforced against those who consented to the change or effected the
change. Such an instrument also works against those who become parties to the
instrument after the conversion. However, there is an exception to this rule.
172
6. On the other hand, section 89 of the Negotiable Instruments Act provides
protection to a party who pays a material altered bill of exchange or promissory
note or cheque provided that he does not know about the alteration and makes
such payment in good faith and without negligence on his part.
What is crossing the cheque?
Meaning of crossing the cheque: – To cross a cheque means to draw two parallel lines
on the face of the cheque. Crossing a cheque is an instruction given by the customer as
to how the payment is to be made and who can give it. Crossed cheque cannot be paid
over the counter, it can be endorsed to anyone, and the payment will be through the
bank.
A crossed cheque is a cheque that has been marked specifying an instruction on the
way it is to be redeemed. A common instruction is for the cheque to be deposited directly
to an account with a bank and not to be immediately cashed by the holder over the bank
counter.
Purpose: – The crossing is to warn the bank to not to make payment of crossed cheque
over the counter. The crossing serves as a caution to the paying banker.
What are the types of crossing cheque?
There are 3 types of crossing cheque: –
1. Normal crossing: – When there are two transverse lines on the face of a check
and there is a pair of words between those lines.
o Amount cannot be paid in cash
o The amount can only be credited to the bank account of the
designated recipient or endorser.
2. Special crossing: – When the banker’s name is written on the top of the cheque.
When the words “non-negotiable” are added to the check, the check loses its
negotiability.
o Amount cannot be paid in cash
o The amount can be deposited only in the bank account of the
mentioned bank.
3. Account payee crossing: – Where the drawer adds words like account payee, or
account payee only in general or special crossing, it gives instructions to the
banker to collect the cheque and credit the amount only to the payee’s account.
This crossing is not legally recognized.
Protection from liability to the paying banker in the
following cases
173
 Where the cheque is drawn by the payee with the order of the drawee, if such
payee is a fraud, or the banker is not held responsible for the forged signature of
the drawer, the banker is not held liable.
 Banker is not liable in cheques payable to bearer. In this case, it does not matter
whether the direct holder is the owner of the cheque.
 The banker must have acted in good faith and without any negligence.
 The banker had received the payment of the cross cheque.
 The collection was done by the bank on behalf of the customer.
Meaning of Double-crossing: – When there are two special crossings on a cheque, it is
called double-crossing. In this, the second bank acts as the agent of the first collecting
banker. This is done when the banker in whose favor the check is crossed does not
have a branch where the cheque is paid.
Meaning of Opening the crossing: – The checker can cancel the check by writing the
words “pay cash” on the check with his full signature. The law does not allow this but it
has been taken out of custom.
Case Laws under Material Alteration of cheque
1. In the case of Veera Exports vs. T. Kalavathy [2002(1) SCC 97] the supreme
court held that invalid cheque can be re-validated voluntarily by altering the
dates, so as to give fresh life to cheques for another 6 months. A cheque which has
become invalid because of the expiry of the stipulated period could be made valid
by alteration of dates. There is no provision in the Negotiable Instruments Act or
in any other law which stipulates that a drawer of a negotiable instrument cannot
re-validate it. It is always open to a drawer to voluntarily re-validate a negotiable
instrument, including a cheque.
Crossing Cheque under

Negotiable Instrument Act, 1881
Introduction
There are serious risks associated with payments to the wrong person. These
risks can be avoided by giving the paying banker a clear direction about the
person to whom the cheque is to be paid by specifying certain words on the
cheque itself. This is crossing of a cheque. “Crossing is an instruction given to
the paying banker to pay the amount of the cheque through a banker only and
not directly to the person presenting it at the counter.” The Negotiable
Instruments Act, 1881, sets out in Section 123 – 131 the provisions
concerning the crossing of cheques.
The term cheque is defined as “A bill of exchange drawn on a banker specified

and not expressed to be payable other than on request.” To understand this
definition clearly, however, it is important that we also consider how an
exchange bill was defined in accordance with the Act.
Section 5 of the Negotiable Instruments Act, 1881
174
“Bill of exchange is a written instrument containing an unconditional order
signed by the manufacturer that directs a certain person to pay a certain
amount of money only to, or to, a certain person or to the instrument holder.”
What is Crossing of Cheques?

 Cheque crossing is recognized in the Negotiable Instruments Act of
1881.
 Crossing a cheque means drawing two parallel transverse lines
between the lines on the cheque with or without additional words such
as “& CO.” or “Account Payee” or “Not Negotiable.”
Why Cross a Cheque?

 Minimizing the risk: The crossing of the cheque gives the paying
banker instructions to pay the amount only through the banker and
not directly to the payee or holder presenting the amount at the
counter. It is an effective way to minimize the risk of loss or
falsification.
 Paying instructions: Crossing is a way for the paying banker to
generally pay the money to a bank or to a particular bank, as
applicable.
 Payment through the bank: Only a banker can secure the payment
of a crossed cheque, which makes it easy for the holder to present it
with a quarter of the respectability and credit that is known. By using
a crossed cheque, you can ensure that the specified amount cannot
be cashed but can only be credited to the bank account of the payee.
 The receiver of the amount: As only a banker secures the payment
of a crossed cheque, the money received can easily be traced for
whose use.
 Negotiability: Merely a cheque crossing does not affect its
negotiability.
Who is authorized to Cross a Cheque?

In accordance with the Sec. 125 of the Negotiable Instruments Act, the
following persons are authorized to cross the cheque, apart from the drawer:
The Holder
 The holder of a cheque is authorized to cross a cheque, either in

general or in particular if the cheque is not crossed.
175
 He is also entitled to cross a cheque, especially if the same is generally
crossed.
He can also add the words “non- negotiable” to crossed cheques in
general and in particular.
The Banker
 The banker in whose favour a cheque is crossed in particular can also

cross it in favour of another banker or his agent for collection
purposes. Such a crossing is called Special Double-crossing.
Different Types Of Crossing of Cheque

A crossing of cheques is basically of 2 types:
 General Crossing
 Special Crossing of cheques.
General Crossing
Section 123 of the Negotiable Instruments Act deals with the general crossing
of cheque, In the following cases, a cheque is generally considered to be
crossed:
 If two parallel transverse lines are marked across the cheque face.
 If the cheque has an abbreviation “& C” between the two parallel
transverse lines.
 If the cheque is written between the two parallel lines, the words “Not
Negotiable”.
 When the cheque comes with the words “A / C. Payee” between the
two parallel transverse lines.
Implications of General Crossing
 The effect of the general crossing is that any other banker must
submit such a cheque to the paying banker.
 Payment can only be made by bank account and should not be made
at the bank’s payment counter.
 The banker then credits the cheque amount to either the owner of the
cheque or the payee ‘s account.
Special Crossing
According to section 124 of the Negotiable instruments Act,
176
 For a cheque to be deemed to have been crossed, the banker’s name
had to be added across the face of the cheque.
 In case of a special crossing, a cheque must not be crossed by
drawing two parallel lines.
Section 124 of The Negotiable Instruments Act, 1881 defines Special
Crossing as: “Where a cheque bears across its face an addition of the name of
a banker, either with or without the words “not negotiable”, that in addition
shall be deemed a crossing, and the cheque shall be deemed to be crossed
specially and to be crossed to that banker.”
 Also known as Restricted Crossing.

 Two transverse lines must not necessarily be drawn.
 The banker’s name is added across the face of the cheque.
 The banker’s name may or may not carry the abbreviated word’ &
Co.’
 Payment can only be made through the bank of the crossing. The
banker mentioned at the crossing can appoint another banker to
collect such cheques as his agent. Therefore, it is safer than
‘generally’ crossed cheques.
 Specially Crossed Cheques are not convertible into General Crossing.
Implications of Special Crossing – The bank pays the banker with his name
between the crossing lines.
General Crossing v. Special Crossing

There are also substantial differences between the special and general crossing
of cheques. Whereas the inclusion of the banker’s name is a must in the case
of a special crossing, the need for a general crossing is to draw two parallel
lines. The special crossing of a cheque indicates that the paying banker must
only honour the cheque if it is presented to him by the bank mentioned at the
crossing. No other person can receive the cheque.
Double Crossing
Section 127 of The Negotiable Instruments Act, 1881
“Where a cheque is crossed specially to more than one banker except when
crossed to an agent for the purpose of collection, the banker on whom it is
drawn shall refuse payment thereof.”
 A double-crossed cheque shall be paid by the banker if the second

banker acts only as of the agent of the first collecting banker and this
is clearly stated on the cheque. i.e., Crossing must specify that the
177
banker to whom it was particularly crossed again acts as the first
banker’s agent for the purpose of collecting the cheque.
Why Double Crossing a Cheque?
 In the case that the banker to whom a cheque is crossed, has no

branch at the place of the paying banker,
 Or if he feels the need otherwise, he can cross the cheque to another
banker( specifying clearly).
Non-Negotiable Crossing
 Although the non- negotiable crossing does not result in the cheque
becoming non- transferable, it still loses much of the negotiability of
the cheques.
 This prevents anyone other than the cheque transferor from holding
a better title than the one he has.
 However, if such a cheque is transferred for consideration and if such
a transfer does not lead to a defect in the transferor ‘s title, the
validity of such a non- negotiable crossing is still not removed from
the cheque.
Section 130 of the Negotiable Instrument Act which deals with Non-
Negotiable crossing states that “a person taking a cheque crossed generally or
especially, bearing in either case the words ‘not negotiable’ shall not have and
shall not be capable of giving a better title to the cheque than that which
person from whom he took it had.”
A/C Payee Crossing

In order to ensure that a cheque will not be able to be encashed by anyone
but the rightful owner of the cheque, the words “account payee” are often
added to the crossing ensuring that the bank receiving such a cheque is to
collect the amount only for the purposes of the payee’s account.
The Advantages of A/C Payee Crossing
 The same does not lead to a reduction in the cheque ‘s negotiability

or transferability. The Court held that this was also the case in various
matters like National Bank v. Lilke and also in the case of A.Z.
Underwood Ltd. v. Bank of Liverpool & Martins Ltd.
 Checking with an account payee crossing does not affect the paying
banker in any way since it only has to ensure that even if the cheque
cannot be collected by the payee himself, the proceeds of the payee
are credited to the account of the payee.
Usage of A/C Payee: A Custom
178
Although the words ‘ account payee’ is not mentioned in the Negotiable
Instrument Act, they are still considered to be part of the law because of their
widespread practice and use.
Non-Negotiable A/C Payee Crossing

It has often been observed that both non- negotiable crossing and crossing of
accounts payee help to ensure that cheques are extremely secure. Sometimes,
a type of crossing is referred to as a’ non- negotiable account payee crossing.’
Advantages of Non-Negotiable Account Payee Crossing for the Payee:
 The non- negotiable element of the crossing makes the cheque non-
negotiable and therefore removes the more insecure element of the
cheque’s negotiability;
 The crossing of the’ account payee’ element serves as a direction for
the payee banker to collect the cheque from the payee only, serving
as a warning of the banker’s responsibility if he does not do the same.
The Implication of Non-Negotiable Account Payee Crossing– Payment
will be credited to the payee account named in the cheque.
Paying Banker Accountability

Paying banker is also accountable to:
1. The true owner of the cheque;

2. The drawer of such a cheque.
Reasons for such Accountability
 If the paying banker pays for a cross-cheque that does not comply
with the wishes of the drawer that is transmitted through the cheque,
Then the banker in question shall be held liable for any loss suffered
by him as a result of such payment to the true owner of the crossed
cheque.
 Similarly, if the paying banker fails to make the payment in

accordance with the provisions of Sec. 126 of the Negotiable
Instrument Act, the law considers it to be a payment not made in
accordance with the instructions of the drawer. This law prevents such
a banker from debiting the check amount on his customer’s account,
as such payment is considered to have been made to the wrong
person.
Duties of a paying banker as to crossed cheques
179
1. For general Crossing- Sec. 126 of the Negotiable Instruments
Act states that crossed cheques are usually only paid to a banker.
2. For Special Crossing- A cheque crossed in particular should only be
paid to the banker to whom it is crossed or who is a collection agent.
3. For Second Special Crossing- Sec. 127 of the Negotiable
Instruments Act, 1881, allows the banker who would act as the agent
of the first banker to collect a second special crossing. In the second
special crossing, it is, therefore, necessary to specify that the banker
in whose favour he is made is the collection agent on behalf of the
first banker.
4. Care and Attention- A banker must not pay a cheque by ignoring
the crossing since it is not legally justified to pay the payee in cash
over the counter.
Duties of a Collecting Banker

1. Drafts Collection: The collecting banker’s duty is to collect and place
the proceeds of both cheques and drafts for his customer’s account,
since 85-A of the Negotiable Instruments Act, 1881, defined drafts as
“an order to pay money, drawn from one bank office to another bank
office”.
2. Checking Account Holder bona-fides: Establish the Bona- fides of
the Account Holder: the banker must ask to determine the Bona- fides
of the person who wishes to become a customer. If the banker fails
to do so or fails to make a proper introduction or a reliable reference
from the proposed customer, he will commit a breach of duty in
accordance with section 131 of the Negotiable Instruments Act, 1881.
3. Crossings Examination: The collecting banker must carefully
examine all the crossings and cheques he receives for collection. If
the customer gives him a cheque crossed to any banker, in particular,
he should not accept it for collection. Likewise, a cheque crossed
“Account Payee Only” should only be collected for the payee named
in the cheque and nobody else.
4. Indorsements Examination: While paying, the paying banker
usually relies on the discharge of the collecting banker. It is,
therefore, a very important duty of the collecting banker to examine
all approvals and other material parts of all cheques and drafts before
submitting them for collection and discharge on the instruments.
5. Dishonour Notice: If a cheque is dishonoured upon presentation,
the collecting banker is responsible for informing his client
accordingly. In addition, the banker has the right to debit a
dishonoured cheque to the account of his customer if he has already
credited the cheque.
In accordance with Sec. 126 of the Negotiable Instrument Act, the paying
banker is obliged to make the payment in accordance with the terms of the
180
crossing on a crossed cheque. This was also laid down in Sec. 126 of the
Negotiable Instrument Act, according to which:
“Where a cheque is crossed generally, the banker on whom it is drawn shall

not pay it otherwise than to a banker and where a cheque is crossed specially,
the banker on whom it is drawn shall not pay it otherwise than to the banker
to whom it is crossed or his agent for collection.”
 Therefore, only a banker is allowed to receive a crossed cheque.

 The paying banker is not authorized to send the proceeds of a crossed
cheque to the payer or the cheque holder.
 Any failure by the paying banker to pay a crossed cheque shall be
punishable by liability as defined in Sec. 129 of the Negotiable
Instrument Act.
The term cheque is defined as “A bill of exchange drawn on a banker specified

and not expressed to be payable other than on request.” To understand this
definition clearly, however, it is important that we also consider how an
exchange bill was defined in accordance with the Act.
“Bill of exchange is a written instrument containing an unconditional order

signed by the manufacturer that directs a certain person to pay a certain
amount of money only to, or to, a certain person or to the instrument holder.”
What is Crossing of Cheques?

 Cheque crossing is recognized in the Negotiable Instruments Act of
1881.
 Crossing a cheque means drawing two parallel transverse lines
between the lines on the cheque with or without additional words such
as “& CO.” or “Account Payee” or “Not Negotiable.”
Why Cross a Cheque?

 Minimizing the risk: The crossing of the cheque gives the paying
banker instructions to pay the amount only through the banker and
not directly to the payee or holder presenting the amount at the
181
counter. It is an effective way to minimize the risk of loss or
falsification.
 Paying instructions: Crossing is a way for the paying banker to
generally pay the money to a bank or to a particular bank, as
applicable.
 Payment through the bank: Only a banker can secure the payment
of a crossed cheque, which makes it easy for the holder to present it
with a quarter of the respectability and credit that is known. By using
a crossed cheque, you can ensure that the specified amount cannot
be cashed but can only be credited to the bank account of the payee.
 The receiver of the amount: As only a banker secures the payment
of a crossed cheque, the money received can easily be traced for
whose use.
 Negotiability: Merely a cheque crossing does not affect its
negotiability.
Who is authorized to Cross a Cheque?

In accordance with the Sec. 125 of the Negotiable Instruments Act, the
following persons are authorized to cross the cheque, apart from the drawer:
The Holder
 The holder of a cheque is authorized to cross a cheque, either in

general or in particular if the cheque is not crossed.
 He is also entitled to cross a cheque, especially if the same is generally
crossed.
He can also add the words “non- negotiable” to crossed cheques in
general and in particular.
The Banker
 The banker in whose favour a cheque is crossed in particular can also

cross it in favour of another banker or his agent for collection
purposes. Such a crossing is called Special Double-crossing.
Different Types Of Crossing of Cheque

A crossing of cheques is basically of 2 types:
 General Crossing
 Special Crossing of cheques.
General Crossing
182
Section 123 of the Negotiable Instruments Act deals with the general crossing
of cheque, In the following cases, a cheque is generally considered to be
crossed:
 If two parallel transverse lines are marked across the cheque face.
 If the cheque has an abbreviation “& C” between the two parallel
transverse lines.
 If the cheque is written between the two parallel lines, the words “Not
Negotiable”.
 When the cheque comes with the words “A / C. Payee” between the
two parallel transverse lines.
Implications of General Crossing
 The effect of the general crossing is that any other banker must
submit such a cheque to the paying banker.
 Payment can only be made by bank account and should not be made
at the bank’s payment counter.
 The banker then credits the cheque amount to either the owner of the
cheque or the payee ‘s account.
Special Crossing
According to section 124 of the Negotiable instruments Act,
 For a cheque to be deemed to have been crossed, the banker’s name

had to be added across the face of the cheque.
 In case of a special crossing, a cheque must not be crossed by
drawing two parallel lines.
Section 124 of The Negotiable Instruments Act, 1881 defines Special
Crossing as: “Where a cheque bears across its face an addition of the name of
a banker, either with or without the words “not negotiable”, that in addition
shall be deemed a crossing, and the cheque shall be deemed to be crossed
specially and to be crossed to that banker.”
 Also known as Restricted Crossing.

 Two transverse lines must not necessarily be drawn.
 The banker’s name is added across the face of the cheque.
 The banker’s name may or may not carry the abbreviated word’ &
Co.’
 Payment can only be made through the bank of the crossing. The
banker mentioned at the crossing can appoint another banker to
183
collect such cheques as his agent. Therefore, it is safer than
‘generally’ crossed cheques.
 Specially Crossed Cheques are not convertible into General Crossing.
Implications of Special Crossing – The bank pays the banker with his name
between the crossing lines.
General Crossing v. Special Crossing

There are also substantial differences between the special and general crossing
of cheques. Whereas the inclusion of the banker’s name is a must in the case
of a special crossing, the need for a general crossing is to draw two parallel
lines. The special crossing of a cheque indicates that the paying banker must
only honour the cheque if it is presented to him by the bank mentioned at the
crossing. No other person can receive the cheque.
Double Crossing
Section 127 of The Negotiable Instruments Act, 1881
“Where a cheque is crossed specially to more than one banker except when
crossed to an agent for the purpose of collection, the banker on whom it is
drawn shall refuse payment thereof.”
A double-crossed cheque shall be paid by the banker if the second

banker acts only as of the agent of the first collecting banker and this
is clearly stated on the cheque. i.e., Crossing must specify that the
banker to whom it was particularly crossed again acts as the first
banker’s agent for the purpose of collecting the cheque.
Why Double Crossing a Cheque?
 In the case that the banker to whom a cheque is crossed, has no

branch at the place of the paying banker,
 Or if he feels the need otherwise, he can cross the cheque to another
banker( specifying clearly).
Non-Negotiable Crossing
 Although the non- negotiable crossing does not result in the cheque
becoming non- transferable, it still loses much of the negotiability of
the cheques.
 This prevents anyone other than the cheque transferor from holding
a better title than the one he has.
184
 However, if such a cheque is transferred for consideration and if such
a transfer does not lead to a defect in the transferor ‘s title, the
validity of such a non- negotiable crossing is still not removed from
the cheque.
Section 130 of the Negotiable Instrument Act which deals with Non-
Negotiable crossing states that “a person taking a cheque crossed generally or
especially, bearing in either case the words ‘not negotiable’ shall not have and
shall not be capable of giving a better title to the cheque than that which
person from whom he took it had.”
A/C Payee Crossing

In order to ensure that a cheque will not be able to be encashed by anyone
but the rightful owner of the cheque, the words “account payee” are often
added to the crossing ensuring that the bank receiving such a cheque is to
collect the amount only for the purposes of the payee’s account.
The Advantages of A/C Payee Crossing
 The same does not lead to a reduction in the cheque ‘s negotiability

or transferability. The Court held that this was also the case in various
matters like National Bank v. Lilke and also in the case of A.Z.
Underwood Ltd. v. Bank of Liverpool & Martins Ltd.
Checking with an account payee crossing does not affect the paying
banker in any way since it only has to ensure that even if the cheque
cannot be collected by the payee himself, the proceeds of the payee
are credited to the account of the payee.
Usage of A/C Payee: A Custom
Although the words ‘ account payee’ is not mentioned in the Negotiable

Instrument Act, they are still considered to be part of the law because of their
widespread practice and use.
Non-Negotiable A/C Payee Crossing

It has often been observed that both non- negotiable crossing and crossing of
accounts payee help to ensure that cheques are extremely secure. Sometimes,
a type of crossing is referred to as a’ non- negotiable account payee crossing.’
Advantages of Non-Negotiable Account Payee Crossing for the Payee:
 The non- negotiable element of the crossing makes the cheque non-
negotiable and therefore removes the more insecure element of the
cheque’s negotiability;
185
 The crossing of the’ account payee’ element serves as a direction for
the payee banker to collect the cheque from the payee only, serving
as a warning of the banker’s responsibility if he does not do the same.
The Implication of Non-Negotiable Account Payee Crossing– Payment
will be credited to the payee account named in the cheque.
Paying Banker Accountability

Paying banker is also accountable to:
1. The true owner of the cheque;

2. The drawer of such a cheque.
Reasons for such Accountability
 If the paying banker pays for a cross-cheque that does not comply
with the wishes of the drawer that is transmitted through the cheque,
Then the banker in question shall be held liable for any loss suffered
by him as a result of such payment to the true owner of the crossed
cheque.
 Similarly, if the paying banker fails to make the payment in

accordance with the provisions of Sec. 126 of the Negotiable
Instrument Act, the law considers it to be a payment not made in
accordance with the instructions of the drawer. This law prevents such
a banker from debiting the check amount on his customer’s account,
as such payment is considered to have been made to the wrong
person.
Duties of a paying banker as to crossed cheques

1. For general Crossing- Sec. 126 of the Negotiable Instruments
Act states that crossed cheques are usually only paid to a banker.
2. For Special Crossing- A cheque crossed in particular should only be
paid to the banker to whom it is crossed or who is a collection agent.
3. For Second Special Crossing- Sec. 127 of the Negotiable
Instruments Act, 1881, allows the banker who would act as the agent
of the first banker to collect a second special crossing. In the second
special crossing, it is, therefore, necessary to specify that the banker
in whose favour he is made is the collection agent on behalf of the
first banker.
4. Care and Attention- A banker must not pay a cheque by ignoring
the crossing since it is not legally justified to pay the payee in cash
over the counter.
186
Duties of a Collecting Banker
1. Drafts Collection: The collecting banker’s duty is to collect and place
the proceeds of both cheques and drafts for his customer’s account,
since 85-A of the Negotiable Instruments Act, 1881, defined drafts as
“an order to pay money, drawn from one bank office to another bank
office”.
2. Checking Account Holder bona-fides: Establish the Bona- fides of
the Account Holder: the banker must ask to determine the Bona- fides
of the person who wishes to become a customer. If the banker fails
to do so or fails to make a proper introduction or a reliable reference
from the proposed customer, he will commit a breach of duty in
accordance with section 131 of the Negotiable Instruments Act, 1881.
3. Crossings Examination: The collecting banker must carefully
examine all the crossings and cheques he receives for collection. If
the customer gives him a cheque crossed to any banker, in particular,
he should not accept it for collection. Likewise, a cheque crossed
“Account Payee Only” should only be collected for the payee named
in the cheque and nobody else.
4. Indorsements Examination: While paying, the paying banker
usually relies on the discharge of the collecting banker. It is,
therefore, a very important duty of the collecting banker to examine
all approvals and other material parts of all cheques and drafts before
submitting them for collection and discharge on the instruments.
5. Dishonour Notice: If a cheque is dishonoured upon presentation,
the collecting banker is responsible for informing his client
accordingly. In addition, the banker has the right to debit a
dishonoured cheque to the account of his customer if he has already
credited the cheque.
In accordance with Sec. 126 of the Negotiable Instrument Act, the paying
banker is obliged to make the payment in accordance with the terms of the
crossing on a crossed cheque. This was also laid down in Sec. 126 of the
Negotiable Instrument Act, according to which:
“Where a cheque is crossed generally, the banker on whom it is drawn shall

not pay it otherwise than to a banker and where a cheque is crossed specially,
the banker on whom it is drawn shall not pay it otherwise than to the banker
to whom it is crossed or his agent for collection.”
 Therefore, only a banker is allowed to receive a crossed cheque.

 The paying banker is not authorized to send the proceeds of a crossed
cheque to the payer or the cheque holder.
187
 Any failure by the paying banker to pay a crossed cheque shall be
punishable by liability as defined in Sec. 129 of the Negotiable
Instrument Act.
Notice of Dishonour
You might have heard of a cheque bouncing due to insufficient
funds. There might arise disputes in regard to acceptance of a
negotiable instrument, similar to the one mentioned above. The
resolution of such cases involves a procedure mandated by law. In
fact, the first step to such a procedure requires the holder or the liable
party to give notice of dishonour.
Dishonour of a Negotiable Instrument

Recollect that a negotiable instrument is a document that
guarantees the payment of a sum of money, either on demand or at a
set time, with the payer usually named on the document.
The Negotiable Instruments Act came into existence to regulate and

resolve disputes relating to the negotiable instruments in use.
Appropriately, the accepted negotiable instruments include- a
promissory note, bill of exchange or cheques, drafts, and certificates
of deposit.
Dishonour of a negotiable instrument means the loss of honour for

the instrument on the part of the maker, drawee or acceptor, which
renders the instrument unsuitable for the realization of the payment.
Note that the dishonour of a negotiable instrument can be done by the

maker, drawee or the acceptor depending on the case.
188
Further, Section 64 lays down the general rule as to presentment of

negotiable instruments for payment. It says all notes, bills, and
cheques must be presented for payment thereof respectively by or on
behalf of the holder during the usual hours of business and of the
maker or acceptor, and if at the banker’s within banking hours. To
point out, the presentment of payment is excused in the case of
dishonour.
Learn more about Classification of Negotiable Instruments here in

detail.
Cases of Dishonour
The above means that there can be several cases leading to dishonour
of a negotiable instrument, some of which are:
 When the maker, drawer or acceptor actively does something

so as to intentionally obstruct the presentment of the
instrument, e.g., deprives the holder of the instrument and
keeps it after maturity.
 When his business place is closed on the due date.
 In a situation, when there is no person present to make
payment at the specified place for payment.
 When we cannot find the person even after due searching.
189
 In the case of a promise to pay notwithstanding non-
presentment.
 When the party entitled to presentment waives the
presentment in an express or implied manner.
 When there would have been no damage to the drawer in the
case of non-presentment.
 If the drawer is incompetent to contract.
 In a case where the drawer and the drawee is the same
person.
 In the case of the situation that renders the presentment
impossible for e.g. the declaration of war between the
countries of the holder and the drawee.
 When there is a non-acceptance on some other grounds, even
though the presentment has been irregular.
Browse more Topics under Negotiable Instruments Act
 Definition of Negotiable Instrument

 Classification of Negotiable Instruments
 Promissory Notes
 Bills of Exchange
 Parties of a Cheque and Essentials
 Crossing and Types of Cheque Crossing
 Liability of Parties – Cheque
 Endorsement of Instruments
 Presentment for Acceptance
 Hundi
 NEFT and RTGS
190
Dishonour by Non-Payment
A promissory note, bill or cheque is dishonoured if the maker,
drawee or acceptor of the cheque commits default in payment upon
being required to do the same.
Furthermore, a holder of a promissory note or bill may call it

dishonoured if the maker or the acceptor expressly excuses the
presentment of payment when payment remains overdue.
It is important to realise that all the endorsers and maker of a bill are
liable to the holder in case of dishonour of the bill, provided the
holder issues notice of dishonour.
Further note that a drawee is liable to the holder only in the case of
dishonour by non-payment.
Dishonour by Non-Acceptance
Dishonour by non-acceptance is a situation of refusal to accept a
negotiable instrument. Further, we generally observe dishonour by
non-acceptance in the case of a bill of exchange.
This is because it is the only kind of negotiable instrument that

requires presentment for acceptance or non-acceptance.
Also, in case of dishonour by non-acceptance, only the makers and

endorsers are liable to the holder of the bill, provided the holder
issues a notice of dishonour. Some circumstances that lead to the
dishonour of a bill by non-acceptance are:
 When the drawee refuses to accept it within 48 of

presentment for acceptance.
 In the case of an excuse of presentment, leading to a non-
acceptance of the bill.
191
 When the drawee is incompetent to contract.
 When we cannot find the drawee after a reasonable search.
 If the drawee is a fictitious person.
 When acceptance is a qualified one.
Notice of Dishonour
In the case of dishonour of a negotiable instrument by non-
acceptance or non-payment, a liable holder should notify all the
parties of his liability by issuing a notice of dishonour.
Upon receiving a notice of dishonour, a party must issue a notice of

dishonour to other parties rendering them liable to himself, within a
reasonable amount of time.
To point out, the purpose of a notice of dishonour is to notify a party

of his liability. Further, in case of a drawer, it helps to protect himself
in case of a dishonour occurring at the end of a drawee or acceptor.
In fact, the notice of dishonour is so important that an omission to it

discharges all parties other than the maker or acceptor.
Further, a notice of dishonour can be oral or written. However, it

must be formal and should be issued within a reasonable amount of
time.
Unnecessary Situations For A Notice Of

Dishonour
There are certain situations where we do not require a notice of
dishonour, which are:
192
 When it is dispensed or waived by the entitled party. For e.g.,
if the endorser writes along with the instrument- ‘notice of
dishonour waived’.
 When the drawer himself cancels(countermands) the
payment.
 In a situation where the charged party would not suffer
damages for the want of notice.
 When we cannot find the party entitled to notice after a due
search.
 When omission is a result of unavoidable circumstances. For
example, in the case of the holder being critically ill.
 In the case of an acceptor is a drawer.
 If the promissory note is non-negotiable.
 When the party entitled to notice agrees to pay
unconditionally
193

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LAW OF CONTRACTS - II

Difference between contract of

According to Halsbury, indemnity refers to an express or implied contract

As per the Oxford Dictionary of Law, indemnity is an agreement by one

Section 124 : Contract of indemnity

A contract of indemnity can provide protection against loss caused—

1. By the conduct of promisor, or

What are the rights of an indemnity holder

1. Right to recover from the promisor, the damages that he may be

1. the compromise was not contrary to orders of the promisor, and

As far as Indian position is concerned, the Bombay High Court in Gajanan

Contract of guarantee : Section 126

 The principal debtor promises to make payment to the creditor.

4. There is a promise to pay upon default of payment by the debtor: In

Difference between contract of indemnity and

It consists of three contracts-A

The liability of the indemnifier is The liability of the surety is a

The liability of an indemnifier is not Liability of surety is conditional on

Principal debt is necessary. (refer to

After the surety has made the

Parties to the contract of Indemnity

1. Duty to Act Prudently: – Except as otherwise stated in the contract, the

A contract of guarantee enables an individual to get a loan or buy goods on

A contract of guarantee requires three parties: the principal debtor, the

There are three essential features of a contract of guarantee:

1. Consideration- It is an essential element of a contract of

Nature of liability of surety

Condition precedent to the surety’s liability

In National Provincial Bank of England v. Brackenbury (1906), a guarantee

The extent of liability of surety

Is creditor bound to exhaust his remedies before suing

Prominent case laws

The surety had an obligation to observe the debtor’s performance of his

The principle of co extensiveness was further enforced in the following cases

A similar judgment was held in State Bank of India v. Indexport Registered

In the case of Hukumchand Insurance Co Ltd v. Bank of Baroda (1977), the

A suit against principal debtor alone

A suit against surety alone

Death of principal debtor

In Orissa Agro Industries Corpn Ltd v. Sarbeswar Guru,(1985), it was held

Surety’s right to limit his liability or make it

There have been conflicting issues regarding the issue of initiating

What is a contract of guarantee

Essentials of a contract of guarantee

Essentials for making a contract valid

All the facts must be communicated

There must be a debt

Parties to a contract of guarantee

1. Creditor – The creditor is the person who lends money to the

Rights against the creditor

i) Right to securities with the creditor

Illustration– A being the creditor gave a loan to B of Rs 2,00,000 on the

Rights against the principal debtor

ii) Rights of indemnity against the principal debtor

iii) Securities received by the creditor after the contract of guarantee

i) Co-sureties right to get release from the contract

2.Co-sureties are entitled to contribute equally

3.Co-sureties entitled to pay the amount as promised