Contract

Indian Contract Act came into force on September 1, 1872. Extends to the whole of
India except J&K. Mainly based on English law and precedents. But decisions of
English courts possess only a persuasive value (Satyabrata Ghose v Mugneeram
Bangur). There are separate acts which deal with contracts relating to negotiable
instruments, transfer of property, sale of goods, partnership, insurance etc.
Sections 1-75 General principles of contract law
Sections 124-238 - Specific kind of contracts. E.g indemnity and guarantee,
balment and pledge and agency.
Essentials of a valid contract
Section 2(h) ICA 1872 defines the term contract as an agreement enforceable by
law. Section 2(e) every promise and every set of promises forming consideration
for each other is called agreement. An agreement is a promise and promise is an
accepted form of proposal (agreement wider term than contract). Thus every
contract made up of proposal/offer from side and acceptance by the other. Every
contract is an agreement but every agreement is not a contract.
Agreement becomes a contract when following conditions are in sec 2(h), sec10
and other sections of the ICA are satisfied:
1. Offer & acceptance (must be)
2. Intention to create legal relations test is objective not subjective what a
reasonable man would think. Above is essential in order to create a contract
Banwari Lal v Sukhdarshan Dayal) (no provision in the ICA).
May also be inferred (Thawadas Pherumal v UOI)
Balfour v Balfour Wife unable to go with husband to Ceylon. H
promised to pay 30 p/m to wife as maintenance but he failed to pay.
Husband not held liable, as no intention to create LR, only an
arrangement.
But Mcgregor v Mcgregor H & B withdrew their complaints une an
agreement by which the H promised to pay W an allowance and she
refrained from pledging his credit. Held there was a binding contract.
SVR Mudaliar v Rajababu agreement described an gentlemans
understanding. That property which is being conveyed will be
reconveyed to vendor. Substance of contract not label important. Held
binding.

3. Lawful consideration is the price for which the promise of the other is
bought.
4. Contractual capacity must be competent to contract. Minor, person of
unsound mind, convict incompetent to contract
5. Free consent not cause by coercion, undue influence, fraud,
misrepresentation or mistake
6. Lawful object not forbidden by law, or opposed to public policy, or
fraudulent. E.g sale of liquor without license is illegal
7. Not expressly declared void - an agreement in restraint of trade/marriage,
agreement by way of wager
8. Legal formalities may be oral or in writing or registered as the case may be
where so required by law.
9. Must be capable of performance an agreement to do an impossible act is
void
10.Terms of the agreement must not be vague and uncertain

I.

Kinds of contracts (on basis of enforceability)

i.
ii.

Valid contract agreement enforceable by law - sec 2(h)

Voidable contract agreement which is enforceable by law at option of
one or more of parties, but not at the option of the other or others (sec
2(i)]. Party may rescind or affirm at his option. If affirms, or fails to
rescind within reasonable time or if 3rd party acquire rights in the goods,
he may be bound by it. If repudiates, void contract
Void contract one which cease to be enforceable by law becomes void.
(sec 2(j)]. Such a contract is a nullity. An agreement not enforceable by
law is said to be void sec 2(g). is ab initio no agreement since its
inception. A void agreement never amounts to a contract; a void contract
is valid when ti si entered into, but subsequent to it formation something
happens which makes it unenforceable by law. A valid contract become
void because of supervening impossibility illegality (sec 56) or
repudiation of a voidable agreement, or when the event in a contingent
contract becomes impossible (sec 32).
Illegal agreement sec 23 agreement is illegal or unlawful if object or
consideration (a) is forbidden by law (b) is of such nature that if
permitted it would defeat the provisions of the law or (c) is fraudulent (d)
involves or implies injury to the person or property (e) court regards it as
immoral, or opposed to public policy.

iii.

iv.

v.

Unenforceable contract it is one which is valid it itself, but is not

capable of being enforced in a court of law because of some technical
defect such as absence of writing, registration etc or time barred by law
of limitation

II.

On basis of mode of creation

- Express contract section 9 where both offer and acceptance are made in
words, oral or written
- Implied Contract section 9 where offer and acceptance are made
otherwise than in words i.e acts and conducts of the parties.
- Constructive or quasi contract such a contract does not arise by virtue of
any agreement between the parties but eth alw infers or recognizes a contract
under certain specific circumstances.
III.

On basis of execution

- Executed where parties to contract have completely performed their

respective obligations and nothing remains to be done
- Executory where parties are still to perform their obligations
- Unilateral one party completed obligation, other has outstanding obligation
- Bilateral where contract obligations of both parties are outstanding
Standard form of contract
1. Reasonable Notice Henderson v Stevenson where adequate notice not
given, oofferee is not bound by terms. Also must be brought to notice of
person (small print on back of a ticket)
2. Notice should be contemparenaous with contract
3. terms of contract should be reasonable not unreasonable or against public
policy
4. fundamental breach of contract- no exemption claue allowed to be negative
by any term of the contract
5. Non-contractual liability
6. Strict construction
7. Statutory protection UCTA 1977 limit the right of parties to exclude or
limit their liability through exemption clauses. But No Indian Act.

Contractual liability of the state

Article 299(1) of constitution deals with manner and mode for entering into
contract by govt. Section details requirements to bind the Govt.
i.
Contract must be expressed to be made by president or by governore of
state
ii.
Contarct must be executed on behalf of president or governor
iii. Contract must be executed by such person and in such manner as
president or governor may authorize.
Mandatory character. Their contravention nullifies contracts and makes them void.
State of UP v Murari lal)
FORMATION OF AN AGREEMENT
Legal rules for a valid offer
1.
2.
3.
4.

5.
6.
7.
8.

An offer must be made with intention of creating legal obligation - Balfour

Offer may be express or implied
Terms of offer must be definite and nto vague (sec 29)
An offer cannot prescribe silence as mode of acceptance Felthous v
bindley person made an offer to nephew to buya particular horse and
wrote: if I hear no more about him, I shall conder horse mine. Nephew
didnt reply but told auctioneer not to sell that horse as he ntinend to
reseeerve it for his uncle. Auctioneer sold horse by mistake. Uncle sued
auctioneer. Held that there was no contract between nephew and uncle for
horse.
Offer must be an expression of willingness to do or to abstain from doing
something (sec 2(a))
An offer must be made to obtain the assent of the other
Two identical cross offers do not result in a contract
Offer may be general or specific carlill v carbolic smoke ball D issue
advt. offering a reward of 100p to anyone who contracted influenza after
using their smoke ball 3 times daily for 2 weeks. 1000 deposited in bacnk to
show their sincerity. P contracted influenza. D liable to pay. Harbhajan v
Harcharan anybody who finds trace of the boy and brings him home
entitled to Rs. 500. P saw boy a station, overhear part of the conversation,
realized he was the missing boy and promptly took him to police station.

Entitled to reward as the terms of the general offer were substantially though
literally complied with.
9. Offer must be different from invitation to offer Pharmaceuatical society of
GB v Boots display of goods in a shop is not an offer to sell but simply an
invitation to offer. Customer selected drug from self service shelf and
brought to counter. Only an offer to buy, not an offer. Display of goods in a
shop with price chits attached is not an offer even if there is a self service
system. Shopkeeper entitled to refuse or accept sale/offer.
Also a quotation pf prices not an offer, but an invitation to offer Harris v
Nickerson.
Harvey v Facey mere statement of the lowest price at which the vendor
would sell contains no implied contract to sell at this to the person making
the enquiry will you sell us bumper hall penn ? telegraph lowest price. D
replied lowest price is 900. P replied we agree to buy pen. On refusal to
sell penn, P sued D. Held that indication of lowest acceptable price does not constitute
an offer to sell. Rather, it is considered an offer to treat (i.e., to enter into negotiations). Last

telegram was an offer to buy, that required to be accepted by the D. Ds reply only gave
precise reply to precise question.

Acceptance
Sec 2(b) acceptance is the assent given to a proposal.
-

Acceptance may be express or implied

Specific offer can only be accepted by the person to whom it is made
Must be absolute and unqualified
Must be according to the mode prescribed
Must be given before offer lapses or is revoked

Modes of communication of acceptance

1. Acceptance by post proposer becomes bound as soon as the acceptance is
put in the course of transmission to him. But acceptor will become bound
only when the communication of acceptance is received by the proposer.
Proposer becomes bound immediately on the posting of the letter correctly
addressed to him and it makes no difference that the letter is delayed in
transit or is even lost in the post (Adams v Lindsell, Household fire

insurance v Grant). Position advanategous to an acceptor because he is not

bound by the letter of acceptance till it reaches the offerer.
(Cases)
2. Acceptance by phone/fax contract is complete when acceptance is
received. Contract deemed to be made at the time and place where
acceptance is received or heard.
3. Tenders invitation to offer. When a tender is approved, it is converted
to a standing offer. A contract arises only when an order is placed on
the continuing offer. Standing offer can be revoked or withdrawn.
CONSIDERATION
Section 2(d) ICA - Recompense given by the party contracting to the other.
Quid pro Quo. Price of the promise. May consist either in some right, interest,
profit or benefit accruing to one party, or some forbearance, detriment, loss
or responsibility given, suffered or undertaken by the other (Currie v Misa).
(A) At the desire of the promisor
An act shall not be a good consideration for a promise unless it is done at the
desire of the promisor. Durga Prasad v Baldeo P built a shopping complex
on the order of the Colelctor. The shops came to be occupied by the
defendants who, in consideration of the Plaintiff having expended money in
the construction, promised to pay him commission on articles sold by them.
Ps action to recover the commission was rejected on the ground that Ps act
was the result not of the promise but of the Collectors order.
Promissory Estoppel
Kedar Nath v Gorie Mohd D was held liable to pay the promised
subscription fee of Rs. 100 as on the faith of the promised subscription of Rs.
100 as on the faith of the promised subscriptionthe P entered into a contract
with a contractor for the purpose of building town hall in Howrah. But
Abdul Aziz v Masum Ali D, who promised to pay Rs. 500 for rebuilding a
mosque, was held not liable to pay the subscription because nothing had
been done to carry out the repair and reconstruction and therefore, there
was no consideration for the promise to pay.
(B) Promise or any other person

Tweedle v Atkinson necessary that consideration must move from promise.

However, Indian Law sec 2(d) expressly provides that consideration may
move from the promise or any other promise. Also called doctrine of
constructive consideration. (English law has privity of consideration).
(C)Past, present and future consideration
Sindha Shri Ganpat v Abraham P rendered services to the D at the
desire of the D during Ds minoroity and continued those services after
the majority. The D after attaining majority, promised to pay an annuity to
the P for the services. Agreement held to be enforceable.
Executed consideration consideration provided simultaneously along
with the making f the contract. E.g payment of a railway ticket. The act
forms the consideration. A makes an offer of reward Rs 100 to anyone
who finds his dog. When B finds dog, that provides consideration in
respect of the contract.
Executory consideration liability on both sides outstanding.
(D)

Must be something of value

Something which not only the parties regard but the law can regard as
having some value. Must be real and not illusory. (Chidambara v P.S
Ranga). But consideration need not be adequate! Courts will not enquire
whether it was equivalent to the promise which a party gave in return.
Law unconcerned with adequacy and leave it to the parties to determine
at the time of making the agreement.
(E)Such act, abstinence or promise is called consideration
Forbearance to sue has always been regarded as valuable consideration,
provided that the P has a bonafide belief that he has a reasonably good claim
against the D. Kind of abstinence.
Pre-existing obligations consideration must be something more than what
the promise is already bound to do by contract or by law. Doing or agreeing
to do more than ones legal or official duty will serve as consideration. Stilk v
Myrick 2 seamen deserted ship. Captain said if work the shop home short
handed, would pay extra wages. One seamen sued for extra wages. Held
crew were already bound by their contract to meet the normal emergencies
of the voyage and were doing no more than their duty in working the ship
home.
Exception to Consideration
Written and registered agreements arising out of love and affection

[25 (1)]
Expressed in writing and registered under law for the time being in force for registration of
document
Natural love and affection
Between parties standing in a near relation to each other
Example:- An elder brother, on account of natural love and affection, promised to pay the debts
of his younger brother. Agreement was put to writing and registered. Held, agreement was valid.
Rajlukhy Dabee Vs Bhootnath Mukharjee: A Hindu husband by a registered document, after
referring to quarrels and disagreements between himself and his wife, promised to pay his wife a
sum of money for her maintenance and separate residence. Held that the promise was
unenforceable since natural love and affection was missing. Agreement void for lack of
consideration.
2. Past voluntary service/Promise to compensate
Promise to compensate wholly or in part who has already voluntarily done something for the
promisor is enforceable without consideration. Something which the promisor was legally
compellable to do.
E.g - A finds Bs purse and give to him. B Promise to give A Rs.500. This is a valid contract.
3. Promise to pay a time barred debt.
Promise to pay a time barred debt is enforceable. Hence, a promise to pay a such a debt is
without any consideration. Can be enforced only when in writing and sighed by Debtor or his
authorized agent. Example :A owes B Rs.10,000 but the debt is barred by Limitation Act. A signs
a written promise to pay B Rs.8,000 on account of debt. This is a valid contract.
4. Completed gift- gift do not require any consideration
5. Agency (185) According to the Indian contract Act. No consideration is necessary to create
an agency.
6. Bailment (148)- consideration is not necessary to effect a valid bailment of goods. It is Called
Gratuitous Bailment.
7. Remission (63)
8. Charity- If a person promises to contribute to charity and on this faith the promises undertakes
a liability to the extent not exceeding the promised subscription, the contract shall be valid.
PRIVITY OF CONTRACT

Means that a contract is a contract between the parties only and no third
person can sue upon it. Means that a stranger cannot sue. (MC Chacko v
State Bank of Tranvancore)
Dunlop pneumatic tyre v Selfridge P sold good to De & Co and secured
agreement from them not to sell goods below the list price and if they sold
goods to another trader, they would obtain from him a similar undertaking.
Dew & Co sold goods Selfridge who undertook to observe the restrictions and
to pay to Dunlop 5P for each tyre sold in breach of agreement. On their not
doing so, P sued for BOC.
a) The doctrine of Privity, which states that only a party to a contract can sue
in breach of the contract;
b) the doctrine of consideration would require the promisee (Dunlop) to give
consideration to Selfridge for the contract to be completed, and this did not
occur as Dunlop did not give anything to Selfridge here (Selfridge made a
promise to Dunlop to only sell at a certain price but it was gratuitous
because Dunlop gave no consideration in return);
c) the only way that a principal not named in a contract can be sued is if he
acted as an agent on behalf of one of the parties privy to the contract. Dew
was not acting as an agent for Dunlop, therefore this does not apply in this
case.
Exceptions
-

Beneficiaries under trust or charge Where trust created by contract, B

may enforce his rights. Khwaja Mohd Khan v Husaini Begum
agreement between father in law and father that in consideration of
her marriage with his son, he ould pay to her Rs. 500 per month for
betel leaf expenses. Suit brought by wife for recovery of annuity. Held
Although wife was not a party to the agreement, she was entitled to
enforce her claim as the contract had been entered into for her benefit
and certain immovable properties had been charged for the allowance.
Marriage settlement, partition or other family arrangements Rose v
Joseph where a girls father entered into agreement for her marriage
with the D, it was held that the girl could sue the D for damages for the
breach of the promise of marriage even though she was not a party to
the agreement.
Acknowledgment or estoppel If a person is required under the terms
of a contract to pay a certain sum of money to a third person and he
acknowledges it to that person, he becomes bound to pay the money
to the third person.
Covenants running with land person who purchases a land with
notice that the owner of the land is bound by certain duties created by
an agreement or covenant affecting the land, shall be bound by them
although he was not a party to the agreement (Tulk v Moxhay).

Assignee in insurance policy the assignee of an insurance policy (e.g

a wife in case of husband or vice versa) is entitled to sue on the
contract made between the insured and the insurer (insurance
company).

Capacity
Minors of unsound mind and person disqualified by law are incompetent to
contract. ICA does not expressly say that a minors agreement is void.
However, Mohoribibi stated that a minors agreement is absolutely void
(where minor is charged with obligations and the other contracting party
seeks to enforce those obligations against him). A minor cannot make a
promise enforceable in law (Raj Rani).
Nature of minors agreements:
1. Absolutely void
2. No estoppel Estoppel section 115 Evidence Act. But section 115 has
no application to an infant. No estoppel against a minor even if he has
acted fraudulently. Minor not estopped from setting up the
defence/pleading his of minority. Sadiq Ali Khan v Jai Kishore a deed
executed by a minor is a nullity and incapable of founding a plea of
estoppel on the ground that there can be no estoppel against the
statute which has declared a minors contract to be void.
3. Limited applicability of doctrine of restitution if the minor has unjustly
enriched himself, equity demands that property or goods be restored.
Rules of restitution as in s64 and s65 do not apply against a minor.
However, the court may order restitution under SRA. do not apply to
minor
English law

Defendant obtained loans from plaintiff by fraudulently misrepresenting that he was of full
age at the time of contract. Defendant sued him to recover the money.
1) Whether defendants are entitled to equitable restitution against loan given to minor? 2)
Whether they could claim restitution either under action for tort arising out of contract, or of
quasi-contractual claim?
HELD:
1) If an infant obtains property or goods by misrepresenting his age, he can be compelled to
restore it so long as the same is traceable in his possession. This is known as equitable
doctrine of restitution.

However, in present case, since the money was spent by the defendant, there was neither
any possibility of tracing it nor any possibility of restoring the thing got by fraud, for if the
court will ask defendant to pay the equivalent sum as that of loan received, it would amount
to enforcing a void contract. 2. Restitution stops when repayment begins and equity
does not enforce against minor any contractual obligation.
3) Where minor has sold the goods or converted them, he cannot be made to repay the
value of goods, because that would amount to enforcing a void contract. In present case,
since an action either on torts or on quasi contractual claim would be tantamount to
enforcing the contract by making defendant liable to pay the damages or restitution, hence,
no such action lies.

4. Beneficial contracts A minor is allowed to enforce a contract, which is

of some benefit to him and under which he is required to bear no
obligation. Incapacity to contract does not preclude the capacity for
legal rights. E.g of contracts beneficial to minor:
-

If a minor has advanced the whole of mortgage money and there is a

mortgage in his favor, he can sue for enforcement of the contract. Thus
where a minor has already given full consideration to be supplied by
him, he is entitled to enforce the contract.
Minor can sue on a promissory note executed in his favor. An infant
may become a promisee.
A minor can recover insurance money when on his behalf the goods
were insured.
If contract made on behalf of a minor by his guardian having
competence to do so, and for the benefit of the minor, the minor is
entitled to sue on the contract. But such contract can be specifically
enforced against the minor.
Minor bound by contract of apprenticeship under Indian Apprenticeship
Act 1850.

But following not binding:

- Lease to a minor is void
- Contracts of service are void
- When a minor, while carrying on business, enters into a trade contract
such contract will not be binding on him.
Raj Rani v Prem Adib - a minor, was allotted the role of an actress in a certain
film by the defendant, a film producer. The agreement was made with her
father. Subsequent, the role was given to another actress by the defendant

and the agreement with the father was terminated. It was held that neither
the minor nor her father could sue on the promise. The contract, if with the
minor, was null and void. If the contract was with the father, it was without
consideration and thus, void. It was clarified that the promise of a minor to
serve was not enforceable against her and thus, could not have furnished
any consideration for the defendants promise to pay her a salary.

Contract of marriage - Prima facie, a contract for the marriage of a minor is for his or her benefit.
However, only the minor can get such a contract enforced. The contract cannot be enforced against the
minor.Such actions find support in the court of law provided they are not in contravention of the laws
applicable to age of marriage. Khimji v lalji contract of marriage can be enforced against the other
contracting party at the instance of the minor, but it cannot be enforced against the minor. Agreement of
marriage made for a daughter by his guardian has been treated as an exceptin to the general rule laid down
by Mohiri Bibi case.

5. Liability for necessaries -

A minors estate is liable to a person who supplies necessaries to the

minor. This obligation on the estate of the minor arises of an obligation resembling a contract as dealt with
under Section 68 of the Indian Contract Act, 1872 and often, termed as quasi contractual obligations. There
is also a common law doctrine termed the Necessaries Doctrine which provides that a parent or spouse is
liable for the price of goods sold or services provided to the child or the other spouse as basic necessities.
E.g ) A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be reimbursed
from Bs property.

6. Liability for tort minor is generally liable for tort but hr cannot be
madeliable for what was in truth a breach of contract.
- Minor partner - Minor cannot be partner in a partnership firm, but
under Sec 30 of IPA can be admitted to the benefits of the partnership.
7. Minor agent s183 ICA, minor can be appointed an agent, but the
liability will be that of the principal.
8. Minor cannot be declared insolvent, as incapable of contracting debts.
In Raghava Chariar vs. Shrinivas[28], a mortgage was enforced on behalf of a minor who had advanced a sum of
money for which the mortgage has been executed in his favour.
A transfer of property or a mortgage, given by a minor, can be avoided at the minors option. However, a transfer in
favour of a minor is valid transfer. A minor is also capable of purchasing immovable property and it was held that he
may sue to recover the possession of the property purchased upon tender of the purchase money.[29]
Similarly, a transfer already executed in the favour of the minor may also be held valid as in the case of Ulfat Rai vs.
Gauri Shanker.[30] Herein, the court observed that there was nothing in the Transfer of Property Act which makes a
minor incapable of being a transferee of immovable property. He cannot transfer immovable property, it is true, but
that is a different thing from recovering as transferee.

S12 - Persons of Unsound Mind (see illustrations)

2 tests:
- Person making a contract should be capable of understanding it, and
- He should be capable of forming a rational judgment as to its effect
upon his interest
Whether a person satisfies both these test question of fact, it is to be
decided by the court on the basis of evidence adduced.
Inder Singh v Parmeshwardhari Singh property worth Rs 25k was sold for
Rs 7k. his mother proved that he was born an idiot incapable of
understanding the transaction. Sale held to be void. Held person entering
into a contract must be a person who understand what he is doing and is
able to form a rational judgment as to whether what he is about to do is in
his best interest or not. He was incapable of exercising his own judgment.
Lingaraj v Parvathi distinction between weakness of intellect and lunacy.
Here appellant was not held to be a person of unsound mind as he was able
to give relevant and rational answers to simple questions put to him.
Others disqualified from contracting are: alien enemy, foreign sovereigns and
their agents, convict, insolvent, joint stock company and corporations.

BREACH OF CONTRACT
Occurs when a) party renounces liability under contract b) by his own act
makes it impossible that he could perform his obligations under the contract
c) totally or partially fails to perform his part of the contract. 2 types.
Actual takes place in course of or at the time of performance
Anticipatory (s39) takes place before the due date of performance has
come. May take place when contract is still wholly executory. E.g promisee
expressly or implicitly refuses to perform his part of the obligation before the
due time of performance has arrived.
Hochster v De La Tour D agreed in April to employ plaintiff as his courier
during a foreign tour commencing 1st June. May 11TH he wrote that he
changed his mind and therefore would not require a courier. Plaintiff sued for

damages before 1st June and was successful. The result of an anticipatory
breach of contract is that the promise acquires an immediate cause of
action. But he need not enforce it. Effect of A.B - He can either wait until that
day of performance arrives or treat the contract as discharged and take
immediate proceedings.
DAMAGES
1. Rescission and damages entitles party to recover compensation for
the loss suffered by it due to the breach of contract, from the party
who suffered the breach (Secs 73-75)
2. Specific performance and injunction equitable relief given by courts
under SRA, requiring the D to actually perform the contract according
to the terms and stipulations. Only allowed when damages would not
be an adequate remedy. Not granted where monetary compensation is
adequate relief, or where cannot supervise actual execution of the
contract (e.g building contract)

3. Quantum Merit In proportion to the work done. Where injured party

has performed a part of his obligation under the contract before the
breach of contract has occurred, he is entitled to recover the value of
what he has done. Party indefault cannot sue upon quantum merit.
Ubi jus ibi remedium where there is a right, there is a remedy.
(Remoteness of damage) Section 73 has incorporated the law laid down by
Hadley v Baxendale General damages and special damages. GD are for the
losses which arise naturally and directly in the usual course of things from
breach of contract. Liability depends on reasonable mans foresight. SD are
for the loss which arise on account of special circumstances of the P. SD not
recoverable unless special circumstances were made known to the D.
GD Fazal ilahi v East indian Railway P delivered to D railway companys
parcel office at Kanpur four boxes of crackers for consignment to Allahabad.
P needed the crackers for festival on 5th June, but he did not disclose the
purpose to the railway company. Employees of railway company considered
it unsafe to send the crackers by train and therefore sent them by goods
train. Goods arrived after the festival. Held that P not entitled to cliam profits
which would have been made as the Ps special purpose was not known the
company.

SD those damages which the parties knew, when they made the contract,
to be likely to result from the breach of it. SD are such that if they are not
communicated it would be not fair and reasonable to hold the D responsible
for losses which could not be taken to contemplate as likely to result from his
BOC.
Nominal damages - Where party suffers no pecuniary loss, the court may allow nominal
damages simply to establish that party has proved his case and won. Nominal damage is very
small in amount.
Damages for mental pain and suffering and exemplary damages Addis v
Gramophone 3 situations in which mental pain and suffering can be taken
into account. (vindictive damages)
- Unjustified dishonor of a cheque
- Breach of promise of marriage
- Failure of vendor of real estate to make title
Ghaziabad Development Authority v UOI Mental agony cannot be head of
damages for Breach of ordinary commercial contract. A vender who breaks
the contract cannot by failing to convey the land to the purchaser is liable to
pay damages for the purchasers loss of bargain by paying the market value
of the property of the time fixed for completion less the contract price.
Purchaser may claim the loss of profit he intende to make from a particular
use of the land if the vendor had actual or implied knowledge thereof. For
delay in performance the normal nature of the damages is the value of the
use of the land for the period of delay, usually its rental value.
Jarvis v Swan Tours - Where a contract is entered for the specific purpose of the

provision of enjoyment or entertainment, damages may be awarded for the

disappointment, distress, upset and frustration caused by a breach of contract in failing
to provide the enjoyment or entertainment.
Raj Kishore v Binod contract to purchase an American car, which the seller faield to
supply. Court allowed compensation for pain and agony.

Damages are compensatory, not penal. Motive and manner of breach not
considered. But damages may be given for inconvenience. Hobbs v London
Due to negligence of the D railway company, P and his family were set
down at a wrong station. Neither any nearby hotel accommodation nor any
conveyance was available to them and had to walk miles in the rain.
Substantial damages were awarded for inconvenience to the family.

Duty to mitigate the loss

S73 aggrieved party must take all reasonable steps to mitigate the loss
consequent on the breach
In the case of Neki v. Pribhu, A took a shop from B on rent and paid one
months rent in advance. B could not give possession of shop to A. there
were other shops available in the vicinity but A chose not to do business for
eight months. After eight months, A sued B for breach of contract claiming
damages including advance rent and loss of profits for eight months. The
court held that he was entitled to a refund of his advance and nothing more,
as he failed in his duty to minimize the loss by not taking another shop in the
neighborhood.
SS Shetty v Bharat Nidhi where an employee is dismissed, even though
wrongfully, it is his duty to mitigate the loss by seeking other employment.
He can recover only nominal damages if he refuses a reasonable offer of
fresh employment.
Most frequent application of this rule takes place in contracts of sale or
purchase of goods. On buyers refusal to take delivery, the seller could resell
the goods at the rpevailign market price and he may then recover from the
defaulting buyer the difference between the price he realized and the
contract price. If the seller does not resell the goods, and his loss is
aggravated by the failing market, he cannot recover the enhanced loss.

- Market price
Normally aggrieved party entitled to claim difference between market price
and contract price. Rule presupposes the existence of a market and the
possibility of ascertaining the price of goods in that market
-

Measure of damages in the works contract. MSK projects v State of

Rajasthan in a works contract, the party entrusting the work
committed a BOC, contractor is entitled to claim damages for loss of
profits which he expected to earn by undertaking the works contract.

Precontract expenditure can be recovered as damages if it was within

the knowledge of the parties at the time of entering into the contract.

Liquidated Damages and penalty (s74)

Sometimes, parties at the time of making the contract, agree to tan amount
for compensation payable in the event of BOC. Such amount may be LD or
penalty. Dunlop Penumatic Tyre stipulated sum was intended to be genuine
compensation for the loss suffered and thus liquidated damages. Question
whether sum is penalty or LD question of construction to be decided upon
the terms and inherent circumstances of each contract.
Ford Motor v Armstrong D received from P supplies of cars and parts and
agreed not to sell any item below the listed price. Sum of 250p was payable
for every breach as agreed damages. Held that the sum fixed was penalty
as it might happen that a part sold in breach was of lesser value than the
damages payable. The sum bore no relation with the degree or extent of
breach.
Unless parties have made a stipulation for payment of interest, or there is a
usage to that effect, interest cannot be recovered legally as damages,
generally speaking (Mahabir v Durga).
Forfeiture of earnest money and security deposit
Earnest money part of purchase price when transaction goes forward.
Giving an EM is a mode of signifying assent to a contract of sale or the like
by giving to the vendor a nominal sum as a token that the parties are in
earnest made up their minds. Fateh Chand v Bal Kishan Das Agreement for
a sale of bungalow required buyer to pay sum as earnest monet and sum on
delivery of possession. Agreement said if balance was not provided, the
enrite sum would stand forfeited. Buyer defaulted. Seller was allowed to
forfeit Rs 1000 as EM and to retain the sum of Rs. 24k representing the use
value of the properties when these were in the possession of the buyer.
Maula Bux If the deposit is not appropriated towards payment of price it is
not by way of EM and therefore cannot be forfeited.
But EM or any other kind of deposit cannot be forfeited if the underlying
contract is void.
Chiranjit Singh v Har Swaroop contract provided that 20k was to be paid as
EM. Buyer did not pay EM but paid some amount towards the purchase price
and he could not pay the balance. Court allowed the seller to forfeit 20k.
Shree Hanuman Cotton Mill, 5 principles of EM 1. It must be given at the
moment when contract Is concluded
2. represents a guarantee that the contract will be
fulfilled
3. It is part of the purchase price when
contract is carried out
4. it is forfeited when the transaction falls through
by reason of
default or failure of the buyer

of the
entitled to forfeit EM.

5. unless there is anything to the contrary in terms

contract, on default by purchaser, S

Distinction between deposit and EM is not practical. Initial payment, whether

anmes as EM or security was intended as a cover or protection against
inconvenience or possible loss likely to be caused by the breach. If the
deposit was named as earnest the court allowed it to be forfeited, but not
otherwise.
S74 to be read along with s73. Every person aggrieved by BOC need not
prove actual loss or damage suffered by him. Court is competent to award
reasonable compensation in case of breach if no actual damage is proved to
have been suffered in consequences of BOC.
Quantum Meruit
Applicable in the following cases:
- Work done in pursuance of a contract, which has been discharged by
default of the D
- Where services are rendered in pursuanc eof an agreement which
turns out to be a nullity
- Where person enjoys the benefit of a non gratuitous act
But doesnt apply where the contract requires complete performance; and a
person who is himself guilty of breach cannot sue on quantum meruit.

Quasi-Contracts (s68-72)
A quasi contract does not arise from any formal agreement but is imposed by law. (b) Every
quasi contract based upon the principle of equity and good conscience. (c) A quasi contract is
always a right to money and generally though not always to a liquidated sum of money. (d) A suit
for its breach may be filed in the same way as in case of a complete contract. (e) The right
grouted to a party under a quasi contract is not available to him against the whole world but
against particular person(s) only. (f) A suit for breach of a quasi contract may be filed in the same

way as in case of an ordinary contract (g) Although there is no contract between the parties under
a quasi contracts, yet they are put in the same position as if he were a contract between them .
QC obligations based on the principle that law as well as justice should try to
prevent unjust enrichment.
1. Claim for necessaries supplied to person incapable of contracting or on
his account
2. Reimbursement of person paying money due to another, in payment of
which he is interested.
Conditions:
-P should be interested in making the payment
-P himself should not be bound to pay. He should only be interested in
making the payment to protect his own interest.
-D should have been bound by law to pay the money
-P should have made the payment to another person and not to himself
3. Obligation of person enjoying benefit of non gratuitous act
-A person should lawfully do something for another person or deliver
something to him
-in doing the said thing or delivering the said thing he must not intend
to act gratuitously
-the other person for whom something is done or to whom something
is delivered must enjoy the benefits thereof.
4. Responsibility of finder of goods
Under s151, he is bound to take as much care of the goods as a man of
ordinary prudence would under similar circumstances, take of his own
goods of the same bulk, quality and value. To avoid liability, finder
must find out real owner and must no appropriate the property.
Rights of finder of goods (s68 and 169)
- Finder of goods may sue for specific reward offered s168. S169
5. Liability of person to whom money is paid, or thing delivered, by
mistake or under coercion.
Ketrabarsapp v Indian bank a bank has wrongly credited account of a
customer with a sum of Rs 1 lac and withdrew the same. Held that the
amount has got t be paid back to the bank.

BAILMENT

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.
ESSENTIALS OF A VALID CONTRACT OF BAILEMENT (Sec.148)
There must be a contract.
The contract may be expressed or implied.
Goods Bailment can be made of goods only.
Delivery
There must be delivery of goods by one person to another person.
Purpose of delivery
The goods must be delivered for some purpose.
The purpose may be expressed or implied.
Return or disposal of goods
The delivery of goods must be conditional
The condition shall be that the goods shall be
- returned (either in original form or in any altered from); or
- disposed of according to the directions of the bailor, when the purpose is accomplished.
MODES OF DELIVERY (Sec.149)
Actual delivery
Transfer of physical possession of goods from one person to another .
Symbolic delivery
Physical possession of goods is not actually transferred but the person does some act resulting in
transfer of possession to any other person.
Examples: (a) Delivery of keys of a car to a friend (b) Delivery of a railway receipt.
Constructive delivery If
A person is already in possession of goods of owner. Such person contracts to hold the goods
as a bailee for a third person.
Then Such person becomes the bailee, and the third person becomes the bailor.

CLASSIFICATION OF BAILMENT

Gratuitous bailment
Bailment without any charges or reward, i.e.
No hire charges are paid by bailee; and
No custody charges are paid by bailor.
Non gratuitous bailment Bailment for some charges or reward, i.e. Hire charges are paid by bailee; or
Custody charges are paid by bailor.
DUTIES OF A BAILOR (Sec. 150, 158, 159 and 164)
Disclose faults in goods [Sec. 150]: Bailor is bound to disclose to Bailee, faults in the goods
bailed, of which he has knowledge. He should also disclose such information which
(a) materially interferes with the use of goods, or
(b) expose the Bailee to extraordinary risk.
Liability for Defects in Goods
In case of Gratuitous bailment
Bailor is liable only for those losses

In case of Non Gratuitous Bailment

Bailor is liable for damages whether or not.
he was aware of the existence of

faults
which arise due to non disclosed risks.
Example: A owning a motorcycle, allows B, his friend, to take it for a joy ride. A knows that its
brakes were not proper but does not disclose it to B. B meets with an accident. A is liable to
compensate B for damages. But when A had lent the motorcycle on hire, he is liable to B even if
he did not know of the failure of his brakes.
Example: M lends his car to N and it runs out of petrol. N can recover the amount paid for
refueling (ordinary expenses). If in case, the car suffers a breakdown, N can recover such charges
as are paid by him in bringing it back to condition (extra ordinary expenses). He M hired the
car to N, he shall be liable only for the repair charges, being extra ordinary expenses.
Indemnify the bailee for defective title
The bailor shall indemnify the bailee for any loss caused to bailee due to defective title of bailor.
Indemnify the bailee for premature termination If - the bailment is gratuitous; and - for a
specific period. Then
(a) the bailor may compel the bailee to return the goods before expiry of the peiod of bailment;
but
(b) the bailor shall indemnify the bailee for any loss incurred by the bailee.

Receive back the goods

It is the duty of the bailor to receive back the goods, when returned by bailee.
If the bailor wrongfully refuses to receive back the goods, he shall be liable to pay ordinary
expenses of custody of goods incurred by the bailee.
DUTIES OF A BAILEE (Sec.151 to 157)
Take reasonable care
The bailee must take such case of goods as a man of ordinary prudence would take care of his
own goods.
The bailee shall not be liable for any loss or destruction of goods, if
(a) he is not negligent; or (b) the loss was caused due to an act of God or other unavoidable
reasons.
Not to make unauthorized use of goods
The bailee must not make any unauthorized use of the goods.
If the bailee makes any unauthorized use of goods, then
(a) the bailment becomes voidable at the option of the bailor; and
(b) the bailee shall be liable for any loss or damage even if such loss is caused due to an act of
God or other unavoidable reasons.
Not to mix goods
Goods are mixed with bailors consent
The parties shall have a proportionate interest in such mixture.
Goods are mixed without bailors consent, but the goods are separable
The bailee shall pay the expenses of separation.
The bailee shall pay damage incurred by the bailor.
Goods are mixed without bailors consent, and goods are not separable.
The bailee shall compensate the bailor for any loss caused to him.
Return the goods
The bailee must return the goods, without waiting for demand from bailor, if
(a) the time specified in the contract has expired ; or
(b) the purpose specified in the contract is accomplished.
If the goods are not so returned, then
(a) the goods shall be at the risk of the bailee;
(b) the bailee shall be liable for any loss or damage, even if such loss is caused without any fault
or negligence of the bailee or due to an act of God or other unavoidable reasons.
Return accretion to goods
The bailee must return to the bailor any accretion (i.e., addition) to the goods bailed.

Not to set up an adverse title

The bailee has no right to allege that the bailor had no authority to bail the good
RIGHTS OF A BAILOR (Sec. 153, 159, 163, 180, 181)
Terminate the bailment If
The bailee does any act inconsistent with the terms and conditions of the contract of bailment.
Then The bailment becomes voidable at the option of the bailor.
Demand back the goods If
The bailment is gratuitous; and
For a specific period. Then
(a) the bailor may compel the bailee to return the goods before expiry of the period of bailment;
and
(b) the bailor shall indemnify the bailee for any loss incurred by the bailee.
File suit against wrongdoer
The bailor has the right to sue
A third party who does any damages to the goods; or
A third party who deprives the bailee from using the goods
Sue the bailee
The bailor may sue the bailee to enforce his duties.
RIGHTS OF A BAILEE (Sec. 165, 166, 167, 170, 180)
Right to compensation
The bailee has the right to be indemnified by the bailor, if
The bailor has no title to the goods; and
As a consequence, the bailee suffers some loss.
Return the goods
It is the duty as well as the right of the bailee to return the goods to the bailor.
In case of joint bailor, the goods may be returned to any of joint bailors.
Recover charges incurred
Extra ordinary expenses
The bailor is liable to pay the extraordinary expenses.
The bailee may recover the extraordinary expenses paid by him.
Ordinary expenses
If the bailment is gratuitous, the bailor is liable to pay the ordinary necessary expenses, i.e., the
bailee has the right to recover the ordinary necessary expenses incurred by him.

Suit for deciding the title

The bailee may apply to the Court for deciding the title to goods, if a person other than the bailor
claims that the goods belong to him.
File suit against wrongdoer
The bailee has the right to sue
A third party who does any damages to the goods; or
A third party who deprives the bailee from using the goods.
Lien
Lien is in its primary sense a right in one man to retain that which is in his possession belonging
to another, until certain demands of the person in possession are satisfied. In this primary sense,
it is given by law and not by contract. There are no pre-conditions attached for the right of lien to
vest with a person. i.e. there is no need of any special agreement, written or oral to create the
right of lien. The right of lien arises by operation of law!
For example: When you give a piece of cloth to a tailor for making a suit of it, the tailor has
every right to retain the suit in case you dont pay him the cost of his services. This is what the
right of lien is. It is a right to retain something that belongs to another for satisfying ones
demands.
In case of bailment, the bailee has the right to keep the possession of the property of the bailor
until the bailor pays lawful charges to the bailee.Thus, right of lien is probably the most
important of rights of a bailee because it gives the bailee the power to get paid for his services.
By giving the right of lien to bailees, the idea is to give some leverage to these people to secure
their money. In essence, this also helps reduce the burden on the courts. Under the ICA, there are
two kinds of lien: (a) General Lien, and, (b) Particular Lien.
Right of lien
The bailee has the right to retain the goods delivered to him until the charges due to him are paid
by the bailor
Example: Vivek is the owner of 5 horses. He usually never leaves his house and takes care of all
the 5 horses on his own. However, today he wants to go to attend a very important meeting. He
tells his servant to take care of the horses in a certain manner and leaves.
Does the servant here stand as a bailee to Vivek?
If a master servant relationship exists between the parties, then
essentially speaking the master is supervising and controlling the work done by the servant. The
servant is in a sense representing the master by merely carrying out the order given to him.
Therefore, a servant who receives certain goods from his master under some specific directions,
simply has custody of the goods; possession continues with the master. If, however, he is given
some discretion that he could exercise, then he may be considered a bailee, depending on the
exact facts and circumstances of the case at hand.

Difference between Quasi Contract and Contract Matter Quasi contract Contract Intentionally
Form It is not intentionally formed but law imposes upon the parties. It is intentionally formed
by parties. Essentials of contract A quasi contract does not possess all the essential of a valid
contract. A contract possesses all the essentials of a valid contract. Obligations Obligations are
implied upon by the law. Obligations are mutually created by the parties. Foundation It is
founded upon the principle of equity. It is founded upon general principal of law of contracts.

SALE OF GOODS
Definition of Sale
Section 4 of the Sales of Goods Act, 1930 defines a sale of goods as a
contract of sale whereby the seller transfers or agrees to transfer the
property in goods to the buyer for price. The term contract of sale includes
both a sale and an agreement to sell.
A contract of sale is made by an offer to buy or sell goods for a price and the
acceptance of such offer by the other party. The contract may be oral or in
writing. A contract of sale may be absolute or conditional.

Formalities of a contract of sale: Section 5 of the Act specifically provides for

the following three steps or formalities in a contract of sale:
1) Offer and Acceptance: A contract of sale is made by an offer to buy or sell
the goods for a price and acceptance of such offer.
2) Delivery and Payment: It is not necessary that the payment for the goods
to the seller and delivery of goods to the buyer must be simultaneous. They
can be made at different times or in instalments as per the contract.
3) Express or Implied: The contract can be in writing, oral or implied. It can
also be partly oral and partly written.
Essentials
The five essential features of a contract of sale are as discussed below:
1) Two parties
2) Subject matter to be goods
3) Transfer of ownership of goods
4) Consideration is price.
5) Essential elements of a valid contract
1) Two parties: A sale has to be bilateral because the goods have to pass
from one person to another. There must be a buyer a person who buys or
agrees to buy the goods and a seller a person who sells or agrees to sell
goods. The seller and the buyer must be different persons. A part owner can
sell to another part owner. A partner may, therefore, sell to his firm or a firm
may sell to a partner. But if joint owners distribute property among
themselves as per mutual agreement, it is not sale. A person cannot be the
seller of his own goods as well as the buyers of them.

However, when a bankrupt persons goods are sold under an execution of

decree, the person may buy back his own goods from his trustee.
Andhra Sugars v State of A.P In this case under A.P. sugarcane (Regulation
of supply and purchase) Act 1961 the sugarcane grower was free to make or
not to make an offer of sale of sugarcane to occupier of the factory but letter
was bound to accept the offer, if made by sugarcane grower. In spite of such
legal compulsion upon occupier of factory to enter in to an agreement, their
agreement, according to the supreme court was valid and enforceable as the
consent of occupier of factory is not vitiated by any of the vitiating elements
(fraud, misrepresentation, coercion etc). To constitute a sale under the sale
of goods act there must be an agreement for sale of goods for a price and
the passing of property pursuant to agreement which conditions were
satisfied in the facts of Andhra sugar case.

Sugarcane supplied to a sugar factory is goods within the meaning of Section

2(7) of the Act as held in the case of UP Cooperative Cane Unions Federation
vs. West UP Sugar Mills Assn. [AIR 2004 SC 3697].
Performance Parties free to provide as to when performance of the contract
by each side will be made. Same w.r.t to payment of the price.
2) Subject matter to be goods: The term goods is defined in Section 2(7). It
states that goods means every kind of movable property other than
actionable claims and money; and includes stock and shares, growing crops,
grass and things attached to or forming part of the land which are agreed to
be severed before sale or under the contract of sale.
Money cannot be sold because money means legal tender and not the old
coins which can be sold and purchased as goods. Actionable claims are
things that a person cannot make use of, but which can be claimed by him
by means of legal action such as a debt.
Sale of immovable property is not covered under this Act. As per Section 3 of
the Transfer of Property Act, 1882, immovable property does not include
standing timber, growing crops or grass. They are considered movable
property and thus goods. Standing timber is taken as movable property while
trees are immovable property.
Chattels and goods which have been attached permanently for the beneficial
enjoyment of land constitute immovable property. Things attached to, or
forming part of the land, though immovable property, fall within the
definition of goods, if they are agreed to be severed before sale or under
contract of sale.
Things like goodwill, copyright, trademark, patents, water, gas, electricity are
all goods. In the case of Commissioner of Sales Tax vs. Madhya Pradesh
Electricity Board, the Supreme Court observed electricitycan be
transmitted, transferred, delivered, stored, possessed, etc., in the same way
as any other movable property. If there can be sale and purchase of electric
energy like any other movable object, we see no difficulty in holding that
electric energy was intended to be covered by the definition of goods.
Jabalpur Cable v ESPN Software electric TV signals are goods.
In the case of H. Anraj vs. Government of Tamil Nadu [AIR 1986 SC 63], it
was held that lottery tickets are goods and not actionable claims. Lottery
tickets confers 2 rights on purchaser:
- right to participate in the draw
- right to claim the prize, if successful in the draw. Thus, sale of lottery tickets
is sale of goods.

SBI v Neela Ashok Naik FDRs are goods. May be pledged as collateral
security and file suit for recovery of loan.
Actionable claims means either:
-an unsecured debt
-a beneficial interest in movable property, not in possession of the claimant.
The transfer of actionable claim is to be made by assignment under TOPA
1882.
Money are not goods but old and rare coins are.
Existing or Future Goods
S6(1) goods may existing or future goods. EG are such goods as are owned
or possessed by the seller at the time of making the contract.
S2(6) future goods.
Specific or Unascertained Goods
S2(14) SG
If goods are not identified and agreed upon at the time of making of contract,
they are known as UG.
3) Transfer of ownership of Goods: There must be transfer of ownership
or an agreement to transfer the ownership of goods from the seller to the
buyer not the transfer of mere possession or limited interest as in the case
of pledge, lease or hire purchase agreement). If goods remain in possession
of seller after sale transaction is over, the possession is with seller, but
ownership is with buyer. The Act uses the term general property implying
that sale involves total ownership and not a specific right limited by
conditions.
Delivery of goods refers to a voluntary transfer of possession of goods from
one person to another. Delivery may be constructive or actual depending
upon the circumstances of each case. A contract may provide for the
immediate delivery of the goods or immediate payment of the price or both.
Alternatively, the delivery or payment may be made by instalments or be
postponed.
S4(3) If property transferred at the time of making of the contract, contract
is known as a sale. But if on the other hand, transfer of property in the goods
is to take place at a future time or subject to some conditions thereafter to
be fulfilled, the contract known as agreement to sell.

4) Consideration is Price: The consideration in a contract of sale has to be

price i.e., money. If goods are offered as the consideration for goods, it will
not amount to sale. It will be barter. If there is no consideration, it will be
called gift. But where the goods are sold for definite sum and the price is
paid partly in kind and partly in cash, the transaction is a sale.
Consideration is an essential for a valid contract as per the Indian Contract
Act, 1872. It is the duty of a buyer who has received and appropriated the
goods to pay a reasonable price. According to Section 2(10) price means
the money consideration for the sale of goods. If the price is not fixed, the
contract is void ab initio.
Section 9 lays down how the price may be fixed in a contract of sale:
a) It can be fixed by the contract itself; or
b) It can be fixed in a manner provided by the contract, such as appointment
of a valuer; or
c) It can be determined by the course of dealings between the parties; or
d) If the price is not capable of being fixed in any of the ways mentioned
ways, the buyer is bound to pay reasonable price. What is a reasonable price
is a question of fact dependent on the circumstances of each particular case.
It is not necessary that reasonable price should be equal to the market price.
Section 10 makes it clear that if the third party appointed under the
agreement to fix the price cannot or does not make such valuation, then the
agreement to sell goods will become void. If the third party is prevented in
his valuation due to the buyer or the seller, the party not at fault can file a
suit for damages against the party in fault. If third party fails to specify, contract is
void but if goods are delivered to buyer and used by him, he is required to pay reasonable price.
If the third party is prevented from fixing price, defaulting party is liable for the damages.

5) Essential elements of a valid contract: All the essentials of a valid contract

must be present. viz., competent parties, free consent, legal object and so
on. The transfer of possession and ownership under the Act has to be
voluntary and not be tainted with fraud or duress.
Time: Any stipulation with respect to time is not deemed to be of essence to
a contract of sale unless a different intention appears from the terms of the
contract.
Effect of Goods Perishing (s7)
1. If goods perish before making the contract
Contract is void ab initio, due to mistake as to existence of subject matter.
It is to be noted that if the seller has knowledge about the destruction of goods, even then the
enters into the contract of sale with buyer, then seller is bound to compensate to the buyer.

Where a part of the goods is perished before making contract

If the goods was divisible, then the contract can be enforced party and if the goods was
indivisible, then the contract becomes void ab initio.
Example: A contracted to sell one wagon containing 700 bags of groundnut to B. Unknown to A,
109 bags had been stolen at the time of sale, Therefore, A made a delivery of 591 bags. Held, the
sale was void. When subject matter has perished at time of making of the contract, performance
of the contract is impossible and therefore such agreement void. Similar situation when common
mistake as to the subject matter of the contract.
2. Goods perishing before sale but after agreement to sell
The contract is void if subsequently the goods have perished, and there is no fault on the part of
the buyer or seller in perishing the goods. If the goods perish or are damaged to such an extent so
that they no longer answer to their description in the agreement, and such loss or damage occurs
without any fault on the part of either of the parties and before the risk passes to the buyer, the
agreement is thereby avoided.
Example: A horse was delivered upon trial for 8 days. However, the horse died within 8 days,
without the fault of buyer or seller. Held, the seller must bear the loss, as the contract was void.
However, parties to the contract may provide otherwise also.
Section 7 and 8 are applicable only in case of specific goods.
Therefore, if unascertained goods are destroyed either before or after making the agreement, the
contract shall not become void. Thus, in an agreement to sell unascertained goods, even if the
entire stock of goods is destroyed, the contract that not become void and the seller will have to
perform his promise.
Example A agreed to sell to B 100 bags of wheat from his stock of 1,000 bags in his go down.
The entire stock was destroyed by fire. A is bound to deliver 100 bags of wheat or else he will
be liable for damages.
3. Amount of increased or decreased taxes to be added or deducted.
S64A This is a special provision which provides for specified contingency.
In contracts of sale of goods, if during working or performance of the same, customer or excise
duty or tax on the sale or purchase of goods is imposed by any law for the time being in force,
then if such an imposition takes place, clause (a) of subsection (1) provides that the seller may
add so much of such increase to the contract price as will be equivalent to the amount paid or
payable in respect of such tax or increase in tax.

SALE & AGREEMENT TO SELL

A contract of sale is a generic term and includes both an actual sale and an agreement to
sell. Section 4 provides that if the property in goods is transferred from the seller to the buyer
under a contract, the contract is called a sale. Where the transfer of the property in the goods will
take place at a future time or is subject to some condition which has to be fulfilled, the contract is
called an agreement to sell. Such an agreement to sell becomes a sale when the prescribed time
lapses or the conditions are fulfilled.

Basis of
Distinction
Contract

Transfer of
property
Conveyance of
property

Transfer of risk
Right of seller in
case of breach
Right of buyer in
case of breach

Sale

Agreement to Sell
It is an executory
It is an executed contract. contract.
The property passes
when it becomes sale
on the expiry of
prescribed time or the
fulfilment of certain
The property in the goods conditions. It takes
sold passes to the buyer at place at a future time or
the time of contract. It
subject to fulfilment of
passes immediately.
conditions.
It creates a right in rem
a right to enjoy the goods It creates a right in
against the whole world personam right against
including the seller.
the seller.
The transfer of risk takes
place immediately. It is
related to ownership and
when ownership is
There is no transfer of
transferred, the risk also risk of loss of goods as
passes to the person. If ownership is not
there is loss of goods, it transferred. The loss
will fall on the buyer
will be borne by the
even though the goods seller even though the
maybe in the possession goods are in possession
of the seller.
of the buyer.
Since the property has
The seller can only sue
passed to the buyer, the for damages, unless the
seller can sue the buyer price was payable at a
for price of the goods.
particular date.
He can sue the seller for He can sue the seller
damages. He can also sue for damages only.
the third party who

bought those goods for

the goods.
He cannot claim the
Insolvency of seller He can claim the goods goods but only a
in possession of
from the Official assignee rateable dividend for
goods
or Receiver.
the money paid.
The seller has to deliver
the goods to the Official The seller can refuse to
Insolvency of
assignee except where he deliver the goods to the
buyer before
has a lien over the
Official Assignee or
paying the price
property.
Receiver.

SALE & HIRE PURCHASE AGREEMENT

A Hire purchase agreement is an agreement for hire of goods where the person who hires the goods has an option to
purchase the goods at the end. The possession of the goods is delivered to such a hirer and he has to pay via
instalments. The property in the goods passes to the hirer on the payment of the last instalments. The Hire purchase
agreements are treated as bailment and the parties have the same rights as a bailor and bailee. The hirer has a right
to terminate the agreement at any time before the property passes.
The test whether an agreement is sale or hire purchase was given in the case of Lee vs. Butler [1893 2 QB 318] If
a person taking the goods has no option to terminate the agreement, is a contract of sale irrespective of where the
price is paid in instalments.
Basis of distinction Contract of Sale
Hire Purchase Agreement
A contract of sale is
governed by the Sale of
They are governed by
Law
Goods Act, 1930.
Hire Purchase Act, 1972
It is an agreement to hire
It may be written, oral or and an agreement to sell.
Nature of contract implied.
It has to be in writing.
Possession may or may not Possession passes
Possession
transfer immediately.
immediately
It transferred only when
the option to purchase is
Transfer of
The ownership of goods is exercised and the last
ownership
transferred immediately.
payment is made.
The hirer is a bailee, and
not the owner until he
pays all the instalments
of the price in full or
The buyer becomes the full exercises the option to
Buyer
owner of the goods
purchase.
The buyer can transfer a
good title to third parties The hirer cannot transfer
because ownership of
a good title to a third
Transfer to third
goods has been
party as ownership has
parties
transferred.
not been transferred.
Right to repossess The seller can sue for price The hire vendor has a
but he cannot repossess
right to repossess the

Right to terminate

the goods.
In a sale, there is no option
to the buyer to return the
goods bought.

Sales Tax

In case of sale of taxable

goods, sales tax is levied.

goods if the hirer defaults

in the payments.
The hirer can terminate
the agreement before the
ownership is transferred.
Even if taxable goods are
hired, sales tax is not
levied.

SALE OF GOODS & WORK AND LABOUR

A contract of sale of goods is one in which some goods are sold or are to be sold for a price. It requires the delivery of
goods. But there are transactions where there is a contract of exercise of skill and labour, and the delivery of goods is
subsidiary. These are the contracts for work or labour or the contracts for service. It is the intention of the parties that
creates the difference whether only delivery of goods is intended or exercise of skill and labour with regard to the
goods has to be delivered.
Example: A commissions B to paint his portrait and supplies him with the material to paint. It is a contract for work and
labour and not a contract of sale because the substance of the contract is the artists skill and not the delivery of the
material.
In a similar case of Robinson vs. Graves [1935 1 KB 579], A, a painter was orally commissioned by B to paint
portrait of a lady. Later, B repudiated the contract before its completion. It was held that the contract was of work and
labour because the substance of the contract was the skill and experience of the artist in producing the picture.
Example: A bought a portrait painted by B, a famous artist. It is a contract of sale and not a contract for work and
labour because the substance of the work is the delivery of the portrait.
In Lee vs. Griffin [1861 30 LJ QB 252], a dentist was engaged by a lady to make false teeth to be fitted into her
mouth. The lady died before the completion of work and a question arose as to the nature of the contract. It was held
that the contract was one of sale.
Where gold is given to a goldsmith for preparing ornament, it is a contract of work and labour. When a photographer
takes a photograph, develops the negative and does other photographic work and then supplies the prints to his
client, the contract is one of skill and labour and not that of sale of goods as held in the case of Asstt. Sales Tax
Officer vs. B C Kame [AIR 1977 SC 1642]
Sale and Barter: A sale is always for a price but in case of barter, the transfer of ownership of goods is in return
for other goods there is not price paid.

Auction Sale
Sale by auction is a sale where various intending buyers make their offers to purchase the goods
by making successive bids. The bidders compete with each other and each successive bid or offer

for the purchase of the goods is higher than the previous one. Goods are sold to the highest
bidder whose bid the auctioneer accepts.
It means public sale. The seller invites the interested parties by advertisement to offer the price.
(i.e. bid)
The seller may hire service of auctioneer. An auctioneer is an agent of seller.
Advertisement of auction sale is not offer but an invitation to make an offer and therefore if
an auction sale is not held on appointed day, bidder cant sue auctioneer.
Every bid amounts as offer and acceptance is given by auctioneer by some usual mode of
acceptance e.g., fall of hammer, going going gone or one two three.
Auction sale starts with placing of bids. Auctioneer accepts the highest bids but he may accept
lower bid without giving any reason. When bid accepted, valid contract is formed.
Bid once made can be withdrawn before fall of hammer even if expressly prohibit.
Seller can bid at auction sale if bidders are informed of fact. (pretended bidding)
If the seller makes use of pretended bidding to raise the price, the sale is voidable at the
option of the buyer. The bid is said to be pretended when it is made by the seller or some one on
his behalf.
Only one person can be appointed for bidding. (called puffer)
Auctioneer may set reserve price or upset price. Bid lower that which is invalid.
In the case of Knockout agreement, the buyers joint their hands to eliminate competition
among themselves at and raise the bid against each other and only one of them will bid at the
auction. When the profit. Prima facie, a knockout agreement is not illegal. However, if the
intention of the parties to the agreement is to defraud a third party, this will be illegal. Sujan
Singh v Mohkam Chand both agreed that they would not outbid each other, and had
understanding when ones bid was accepted, he would transfer the other half to other party.
Agreement was valid and enforceable.
Damping is illegal, it includes;
Pointing out defects in the goods, or
Misleading the purchaser or doing any other act so that he may not participate in the auction. It
empowers the auctioneer to with draw the property from the auction.
If the bidder retracts his bud after the hammer is fallen then the security amount is liable to be
forfeited (Zila Parishad v Udai Veer Singh).
Sellers Right to Accept Lower Bid:
A seller has the liberty of choosing the bids as in case of sale by tender.
A seller is not bound to accept the higher bid or any bid at all. A lower bid may be accepted where the conditions
may provide so. However an offer of some amount or percentage over and above the highest offer is untenable (
Their final offer will be 1% higher than price offered by other parties. (Amco Traders v
W.B State Electricity Board). Quotation of Amco was actually the highest offer. The
selection of National Steel Corporation as the highest offer and to treat them as such was
bad, illegal and arbitrary and without jurisdiction.

Failure to deposit purchase money in time

Jagdish Radhakisan v Ramesh court directed auction of certain property and required payment
of 25% of purchase money on the date of the auction. The auction purchaser failed to deposit the
required deposit on the same day till 5.30 am as directed by court. Next day auction purchaser
deposited the amount. Held that non-payment of 25% of money in time resulted in automatic
cancellation of auction sale. Late payment could not validate the sale.
Sale in lots: When the goods are put up for sale in lots, each lot is deemed, prima facie, to be the
subject matter of a separate contract of sale.

Conditions and Warranties

Sec 12(2) if stipulation forms the very basis of contract or is essential to the main purpose of
the contract, is called a condition. Entitles other party to repudiate contract.
Sec 12(3) if stipulation not essential to the main purpose of the contract, but is only of
secondary importance, or is collateral to the main purpose of the contract, it is called a warranty.
Entitles other party to damages.
Stipulation as to time
-

If time is of essence of the contract and the promisor makes a delay in the performance of
the contract, contract is voidable at the option of the promisors, s55 ICA. If time not of
essence, delayed performance entitles promisee to claim damages for loss occasioned to
him.
See s11

On breach of condition by the seller, buyer may treat contract as repudiated, waive the condition
or treat the breach of condition as a breach of warranty (and claim compensation)
Sec13 when a BOC will be treated as a BOW.
Sec 42 when buyer deemed to have accepted the goods.
Sec 59(1) - remedy for BOW
Sec 56 no liability for impossibility of performance
- Liability of Seller under Law of Torts
Clarke v Army and Navy CS P purchased tin of disinfectant powder from D. Lid of tin being
defective, when P tried to open it in a normal way, its contents flew towards D and injured her
eyes. Defect of tins was known to Seller. Seller held guilty for negligence in nto giving warning
to buyer.

Implied Conditions
1. Conditions as to title sec 14(a)
There is an implied condition on the part of the seller that the seller has a right to sell the
goods, and in the agreement to sell, the seller will have a right to sell the goods at the time of
passing of ownership in goods. If the title of seller out to be defective, the buyer must return the
goods to the true owner and recover the price from the seller.
Venkateswar v Rampratap D sold stolen vehicle to P. Nothing on record to show that the
Purchaser had any doubt about title or that the P was aware that it was a stolen vehicle. In suit for
recovery, P entitled to get back amount of consideration from D. Cannot claim damages from S
as P cannot plead that he had lost title of the car, which was never his in first place.
2. Conditions as to description Sec 15 Where the goods are sold by description, there is
an implied condition that the goods shall correspond to the description. Because p doesnt
see the goods, only relies upon their description.
Varley v Whipp S described item as new singer cars. But one had run considerable mileage
and was found to be a very old one. Held, the car was not according to the description and S
liable for compensation.
Re Moore & Laundauer - held that mode of packing may also constitute a part of the description
of the goods. Held if goods supplied did not correspond with description, B liable to reject all
goods.
Macpherson v Howard Ross date of arrival of ship at its destination may also be a part of
description of goods to be supplied.
3. Sale by sample Sec 17 purpose is to present to the eye the real meaning of intention
of parties with regard to the subject matter of the contract, which owing to imperfection
of language, may be difficult to express in words. Where the goods are sold by sample,
the following are implied conditions. - The bulk shall correspond to sample in quality. The buyer shall be given a reasonable opportunity to compare the goods with the sample
(failing to do so would result in right to repudiate Lorymer v Smith) - The goods shall
be free from any defect, rendering them unmerchantable.
Mody v Gregson D agreed to manufacture and supply 2500 piece of grey shirting
according to sample. Each piece delivered was according to sample but they contained
china clay to the extent of 15% of their weight which had been added to increase their

weight. Presence of such a defect could not be discovered on reasonable examination and
same had rendered goods unmerchantable. S liable.
It is to be noted that this implied condition applies only in the case of latent defects, i.e.
those defects which cannot be discovered by ordinary inspection. In fact, such defects are
discovered when the goods are put to use or by examination in laboratories. The seller is
not liable for apparent or visible defects which can be discovered by examination.
4. Sale by description as well as sample Sec 15 Both conditions must be satisfied,
goods must correspond with sample as well as description. Example: A agreed to sell to C
some oil described as Foreign refined oil and warranted only equal to sample. The
goods supplied were equal to sample, but contained a mixture to hemp oil. Held, C could
reject the goods.
Wallis v Pratt there was a sale by sample of seed in english sainfoin but S gave no
warranty as to growth, description of the same. Seed was sown and when crop was ready,
it was discovered that the seed supplied and the sample shown were not english sainfoin
but giant sainfoin. Held BOC and B entitled to recover damages.
2 implied conditions, being exceptions to the rule of Caveat Emptor sec 16 buyer beware Re Andrew Yule & Co Buyer ordered for hessian cloth without specifying purpose for which he
wanted it. It was needed for packing. Because of unusual smell, it was unsuitable for the purpose.
B had no right to reject the same.

5. (1st exception) Conditions as to quality and fitness for buyers purpose Sec 16
Where the buyer, expressly or impliedly, tells the seller the particular purpose for which
he needs the goods and relies on the skill or judgment of the seller, there is an implied
condition that the goods shall be reasonably fit for such purpose.
When the article can be used only for one particular purpose, the buyer need not inform the
seller the purpose for which the goods are required. Example: A purchased a hot water bottle
from a chemist. D said would stand hot hot not boiling water. While the bottle was being used by
As wife, it burst and injured As wife. Held, the seller was liable for damages as the bottle was
not fit for the purpose for which it was meant Priest vs Last.
Chaproniere v Mason Bun purchased from bakery injured teeth of B. Fact that B bought it
from bakery was sufficient to show that the b had relied on Ss skill and judgment.
The condition as to quality or fitness well not apply, if the buyer is suffering from an
abnormality, which renders the goods unsuitable for a particular purpose and the buyer does not
inform the seller about that abnormally. A purchased a coat. He had abnormally sensitive skin,

By wearing the coat, he got skin complaint. Held, there was no breach of condition, as he had not
disclosed the abnormally of his skin.
Where the goods can be used for a number of purposes, the buyer should inform the particular
purpose for which such goods were required. If the does not disclose, there is no such conditions
of quality or fitness.
Condition as to wholesomeness In the case of eatable and food stuff, there is an implied
condition that the goods shall be wholesomeness, i.e., free from any defect which renders them
unfit for human consumption. Example: A Purchased milk from B, a milk dealer. The milk
contained typhoid germs. As wife on taking the milk got infected and died. Held, A was entitled
to get damages Frost vs Aylesbury Dairy Co. Ltd
(2nd exception) Conditions as to merchantability
Where goods are bought by description from a seller, who deals in goods of that description,
there is an implied condition that the goods shall be of merchantable quality.
Merchantability means that there is no defect in the goods, which renders them unfit for
sale. Thus, a watch that will not keep time and a pen that will not write cannot be regarded as
merchantable. Example: A radio set was sold to a layman. The set was defective. It did not work
in spite of repairs, Held, the buyer could return the set and claim refund.
Grant v Australian Knitting mills underwears contained chemicals which would cause skin
disease to a person wearing hem next to skin, held that the underwears were not of merchantable
quality. Similarly, if defect in underwears discovered later, when put to use, the defect being a
latent one, B could claim compensation when they caused him skin disease nd thus were found
to be unmerchantable quality.
-

Liability also for all natural consequences, following a breach of an implied condition.
Jackson v Watson Contents of tin were poisonous and P wife died. D iable to
compensate the P for loss of service of hi wife.

But condition negative when goods examined by buyer s16(2) (however still protected in
case of latent defects).
Doctrine of caveat emptor is not applicable: Implied conditions as to quality or fitness. It means
when buyer has specified his purpose and and relied on skill of seller, the doctrine of caveat
emptor is not applicable.
When goods are sold by description, it should be of merchantable quality. In case of edible items,
implied condition of wholesomeness is applicable and goods should
are not fit for human consumption then buyer is not liable but seller will be liable.- Usage or
custom of trade. -When consent of B is obtained by fraud. -

Implied Warranties
Warranty as to quiet possession sec 14
In the absence to any contract showing contrary intention, there is an implied warranty that the
buyer shall have and enjoy quiet possession of the goods. If the buyer is disturbed in the
enjoyment of the goods, he can claim damages from the seller.
Mason v Burmingham P purchased second hand typewriteR for 20P and thereafter spent 11p on
it. Turned out typewriter was stolen. D liable for BOW.
Warranty against encumbrances s 14(c)
Unless the circumstances of the case are such as to show a contrary intension, there is an implied
warranty that the goods shall be free from any charge or encumbrance in favour of any party not
declared to the buyer before or at the time contract is made. However, there will not be any such
warranty if charge is declared to buyer at the time of sale.
Exclusion of implied T & C s 62. But courts wont give effect to exemption clause if it results
in fundamental BOC. Karsales v Wallis Sale of Buick, no condition or warranty, fitness
certificate given. B spent 150p on repair. Held B right to reject the car because fundamental BOC
in so far that the car was fundamentally different from one showed to driver
An implied warranty as to quality or fitness for a particular purpose may be annexed by the
usage of trade.
English Law - S55 1979 UCTA.

TRANSFER OF PROPERTY AND TITLE

I.

Transfer of property in specific goods

Property transferred as intended sec 19

Transfer of a motor vehicle Vasantha Vishwanathan v Elayalwar property in the vehicle is

not passed on the toransferee on the day when the order of transfer of registration is passed by
Regional transport Authority. Sec 31 MVA prescribed procedure for entering the factum of
transfer, but the transfer of ownership in vehicle will be governed by s19 of SOGA.
II.

Specific goods in deliverable state sec 20

Ownership is transferred immediately at the time of making the contract if all the following
conditions are satisfied:
Contract is for specific goods.
Goods are in deliverable state
Goods are not required to be weighed or measured for determining price

Presumption under s20 where contract for sale of unascertained goods, no property in the
goods will be transferred to the buyer unless and until and the goods are ascertained.
Ghulam Mohammed Wani v State of J&K Contract of sale of timber to P. timber to be supplied
on availability of stock. At the time of making contract, timber was unascertained. It was also not
in a deliverable state. Moreover the price was not fixed in sanction order, nor did the contract
imply that the price prevailing at the time of passing of the sanction order was to be paid. Held
that while there a demand for payment of higher revised prices from the purchase of timber, the
price to be chargeable was to reasonable price to be determined by the court.
III.

Specific goods not in a deliverable state s21

If the goods are not ready in deliverable state at the time of making contract of sale, ownership of
goods is transferred after formation of contract of sale when following conditions are satisfied;
Contract is for specific goods. Goods are put in deliverable state by seller. Fact that the
goods are put into deliverable state has come to knowledge to the buyer.
Example : Certain quantity of oil was purchased by A. The oil was to be filled in tins. B filled up
some of the tins and informed A to take the delivery. In the meantime, a fire destroyed the entire
quantity of oil. Held, A will bear the loss of the oil which was filed in the tins and the seller must
bear the loss of the balances. Because property had not passed to the buyer as goods werent in a
deliverable state at the time of making the contract.
- Seller must also give notice to Buyer
IV.

Specific goods to be weighed etc. by seller sec 22

If the goods are not weighed or measured at the time of making contract, ownership of goods is
transferred after the following conditions are satisfied. Contract is for specific goods At the

time of formation, price is not determined or measurement. Goods are put in deliverable state
by seller; Fact that the goods have been weighed or measured in order to determine price has
come to knowledge of the buyer
Simmons v Swift COS for stack of bark, which was to be weighed by S and B. Part of the bark
was weighed and taken away by buyers. But before remained could be weighed, it was carried
away by floods. Held that the loss of unweighed portion, which was ruined by floods, fell upon S
as property had not passed to the buyer.
-

V.

For application of this section, something must remain to be done by the S i.e weighing,
measurement etc and property does not pass until the S has done and the B has notice of
the same.

Goods delivered on approval or on sale or return sec 24

3 conditions: When B signifies to S that has approved or accepted the goods; when the b adopts
the transaction; when goods are sold on approval and B neither signifies his approval nor does he
give any notice of rejection.
e.g X gave diamonds to Y on sale or return basis. Y gave them further and they were lost. Held
since Y had transferred them further, he had adopted the transaction.
VI.

Transfer of Property in unascertained or Future goods s23 & s25

-

Appropriation of goods (AOG)

AOG made by 1 party with assent of the other
Goods appropriated are of same description and in a deliverable state
Appropriation is unconditional

Appropriation means doing any act by the parties which indicates that certain goods are
to be assigned to a particular contract.
Example: A having a quantity of sugar in bulk, more than sufficient to fill 20 bags, contracts to
sell to B 20 bags of it. After the contract A fills 20 bags with the sugar, given notice to B that the
Bags are ready and requires him to take them away. B says he will take them as soon as he can.
By this appropriation by A, and assent by B, property in the sugar passes to B. Contract to sell
unascertained goods is not complete sell, it is agreement to sell.
Assent to appropriation (express or implied)

Has to be coupled with assent of other party. If B makes appropriation, S assent and vice versa.
If one party has made appropriation, but other doesnt assent to it, property in goods does not
pass.
Appropriation of goods of contract description and in a deliverable state
Unconditional appropriation if goods appropriated but the appropriation is a conditional
one, the property in the goods does not pass on such an appropriation. S23(2). If
appropriation is conditional and the intention of the parties is that no property in the
goods would pass until some particular act, say the shipment of the goods is done, the
property in the goods does not pass until that act is done even though the goods have
been appropriated to the contract.

Passing of Risk s26

Generally owner bears the loss (for 3 exception, read section). Risk and ownership go together,
unless express agreement provides otherwise.
Possession of goods is immaterial for risk.
When delivery is delayed because of fault of any party, he is liable for risk.
Sometime, risk is based upon custom or usage of trade
Where the delivery of goods has been delayed due to the fault of buyer/seller, goods are at the
risk of the party in fault.
Transfer of Title
-

S27 - Nemo dat quod non habet no one can give what he does not himself possess. If
sellers title is defective, then buyers title will be defective.

Exceptions to the rule

1. Sale of Estoppel [Sec. 27]: Where the owner by his conduct or by his act leads the buyer
to believe that the seller has the goods, he shall be estopped from denying the fact that
seller had no right to sell the goods
Example:
2. Sale by mercantile agent Sec. 27 - Agent of seller can transfer the title if following
conditions are satisfied: Agent must be in possession of goods or documents of title.
Agent has sold goods in ordinary course of business Buyer has acted in good faith.
Buyer has no knowledge that seller had no authority to sell.

Example: Folks v King Agent entrusted by car owner to sell car on reserve price. Agent
sold car below RP to bonafide purchaser and misappropriated the proceeds. Held that
since B had purchased car from agent in good faith, he had good title
A mercantile agent means an agent having in the customary course of business as such
agent authority either to sell goods, or to consign goods for the purpose of sale, or to buy
goods, or to raise money on the security of goods [Section 2(9)].
3. Sale by of the joint Owners s28
One of the joint owners can sell the goods if following condition are satisfied: Goods are in
sole possession of one of the joint owners; Buyer has acted in good faith & Buyer has no
knowledge that seller had no authority to sell.
4. Sale by a person in possession under a Voidable contract s29
Seller must be in possession of goods under contract voidable; Goods must have been sold
before contract is rescinded & Buyer has no knowledge that seller had no authority to sell.
E.g A purchased a watch from B under fraud. A sold the watch to C, who bought it in good
faith. C gets goods title.
5. Sale by seller in possession after sale Sec 30
Ownership of goods has been passed to buyer; Seller continuous to be in possession of
goods even after sale; Seller resells goods to new buyer; New buyer buys without notice
to prior sell.
Example A sells certain goods to B and promises to deliver the goods the next day.
Before the delivery, A sells and delivers the goods to C, who buys them in good faith and
without notice of the prior sale to B, C gets a good title to the goods, not with standing
that the property had, before he purchased, passed to B.
6. Sale by buyer in possession s30(2)
Buyer means a person who buys or agrees to buy. Even if a person has agreed to buy
conditionally, he can convey good title.
7. Resale by unpaid seller Sec. 54
After exercise of his right of lien or right of stoppage goods in transit. If the owner of
goods has declared insolvent and his goods, is sold by official receiver or assignee or
liquidator.
8. Sale by finder of goods (Sec.169 of IC Act 1872).
The owner cant be found or found but refuse to pay lawful charges to finder; The Goods
are perishable in nature or in danger. To save goods from loss, finder can sale it; Lawful
charges of finder amount as 2/3 of its original value.
9. Sale by pawnee or pledge (Sec.176 of IC Act 1872).

If there is default on part of payment of price or performance within time. Reasonable

notice is given by pawnee or pledge.

Performance of the Contract

1. Meaning Sec.2(2): Delivery means voluntary transfer of possession from one person to
2. Duty of Seller Sec. 31: It is the duty of the Seller to deliver the goods and of the buyer to
accept and pay for them in accordance with the contract of Sale.
3. Mode of delivery: Sec. 33: Delivery of Goods sold may be made by (a) doing anything
which the parties agree shall be treated as delivery; or (b) which has the effect of putting the
Goods in the possession of the Buyer or of any person authorized to hold them on his behalf.
Types of Delivery
Actual
Where goods are handed over
to the buyer or his authorized
agent. It means goods are
physically put in possession of
the buyer.

Rules regarding Delivery

Symbolic
When goods are not physically
delivered to the buyer but
some symbol of the real
possession or control over
goods is handed over to buyer,
so he has control fo the goods
e.g delivery of key of a car

Constructive
Where the third party who is
in possession of goods,
acknowledge to hold goods on
behalf of the buyer is known
as construction delivery.
E.g: A sells 100 bags of
cement lying in Bs godown.
B agrees to hold the 100 bags
of cement on behalf of A.

a. Delivery according to contract (s31)

b. Time of delivery (s32) - If no time is specified in contract as to time of delivery of goods,
it should be delivered within reasonable time (payment and delivery are concurrent)
c. Buyers duty to apply for delivery (s35) unless there is an express contract to the
contrary, the rule is that the seller is not bound to deliver the goods unless the buyer
applies for delivery
d. Place of delivery parties free to being out their agreement the place of the delivery of
the goods. C.I.F (cost, insurance and freight) contract, the seller is supposed to dispatch
the goods after paying insurance and freight charges and send the documents of title to
the buyer. In a F.O.B (free on board) contract, S is to put the goods on the board of the
ship at the starting point (similarly F.O.R).
e. Expenses of delivery incidental expenses, unless otherwise stated, shall be borne by the
Seller. In (d), all expenses in above modes of transport must be borne by seller.
f. Effect of part delivery (s34) - A delivery of part of goods with an intention of giving the
delivery of the whole amounts to the delivery of the whole for the purpose of transfer of
ownership of goods but a delivery of part of goods with an intention of separating it from
the whole lot does not amount to the delivery of the whole of the goods. E.g when B with
a view of taking delivery, gets the whole of the goods weighed but takes away only a part
of them, the delivery of the part would operate as a delivery of the whole.
g. Delivery of goods in wrong quantity or of different description (s37) If the seller has delivered excess quantity, the buyer has the following options:
To accept the whole of the goods delivered to him.
To reject the whole of the goods delivered of him.
To accept contracted quantity and reject the excess.
Seller has delivered less quantity, buyer has following options.
To accept the goods delivered to him. To reject whole quantity delivered to him.
Right to reject the goods in excess of the contract does not apply where the variation is
negligible.
Further, the right to reject the goods is not similar to the right to cancel the contract. If the
buyer rejects the goods (either because they are less than or in excess of the quantity contracted
for), the seller has a right to tender again the contract quantity and the buyer is bound to accept
the same.
Delivery of Mixed Quality Quantity
The seller is bound to deliver goods of exact quality quantity otherwise buyer may: Reject
the whole. Reject the goods not complying with quality or quantity and accept the rest.
[Contract is not repudiated] means subsisting
h. Delivery by installment (s38) - is not valid except when the contract provides so or buyer
accepts the delivery in installment. If in instalments, and S makes defective delivery of
one or more instalments, it is question of fact, court will decide if repudiation of whole

contract or breach giving rise to compensation, but cant treat whole conract as
repudiated (s38(2))
i. Delivery to Carrier or Wharfinger Sec 39
Delivery to carrier or wharfinger amounts as delivery to buyer if the following
conditions satisfy: Buyer has made reasonable contract with carrier. Seller is required
to give notice to buyer to enable him to insure goods. If not to do then his risk.
If seller makes valid delivery of goods, buyer has following duties: To accept the
goods. To pay the unpaid price.
Where goods are sent by sea route, seller shall give notice to buyer to insure goods
other wise he will be liable for loss.
j. Risk where goods are delivered to a distant place (s40)
Where the seller agrees to deliver the Goods at his own risk at a place other than at which
they are sold, the Buyer shall bear the risk of deterioration necessarily incident to the
course of transit, unless otherwise agreed.
Buyers Duties
a. Duty to accept the goods (but not bound to accept if s15 & 37)
b. Right to examine the goods s41(2) to examine if they are in conformity with the
contract
What is acceptance of goods? s42 SOGA
c. Duty to pay the price simultaneous obligation to make payment when accept goods
F.O.B & C.I.F
CIF
-

Responsibility of goods being insured on Seller and no question to notice to the buyer to
get them insured.

.
;.
..
.
.
.

FOB, sellers duty:

- To ship at port of shipment goods of description contained in the contract
- To procure a contract of affreightment under which the goods will be delivered at the
destination contemplated by the contract.
- To arrange for an insurance upon terms current in the trade
- To make out an invoice as described, Keland v Livingstone or in similar form

To tender these documents to the Buyer, so that he may know what freight he has to pay
and obtain delivery of goods if they arrive or recover for their loss if they are lost on the
voyage.

Seller has further duty to give such a notice to the B which will enable him to insure
the goods during sea transit. If not, goods will be Sellers liability

Initially, partnership was governed by provisions contained in Sections 239 to 266 of chapter XI of the Indian Contract
Act, 1872. These sections were repealed in 1930 and a new act the Indian Partnership Act, 1932 was passed. The
Act came in to force on the 1st of October 1932, except Section 69 which came into force on the 1stof October, 1933. It
aims to define and amend the law relating to partnership. The Act extends to the whole of India except the state of
Jammu and Kashmir. The Act is not exhaustive. Partnership is a special kind of contract and thus, the provisions of
Indian Contract Act, 1872 also apply to a partnership firm unless the Indian Partnership Act provides otherwise.

PARTNERSHIP AND CO-OWNERSHIP

Co-ownership means two or more people have joint ownership of a property. The two or more people who own the
property jointly are called co-owners.
Basis of
distinction

Contract

Business and
Profit Sharing

Agent

Transfer of
Interest

Partition
Change in
membership

Partnership
It arises by contract. The
interests of partners are
determined by contract of
partnership.

Co-ownership

It may arise out of status or

contract for example
birth, marriage or adoption.
It may exist without any
It always implies a business. business. It may not involve
It involves the sharing of
sharing of profits and
profits and losses.
losses.
Every partner in a
partnership is an agent of
A co-owner is not the agent
the other partners.
of the others co-owners.
A co-owner may transfer his
A partner cannot transfer his interest to a third party
interest without the consent without the consent of
of all other partners.
other co-owners,
A partner may sue the other
partners for dissolution of
firm and accounts but he
A co-owner has the right to
cannot claim partition of the claim partition of the jointly
firm property.
owned property.
It is not dissolved by death
It is dissolved by death or
or insanity of one of the coinsanity of a partner.
owners.

Number of
members
Mutual Agency

Lien

A partners liability is not

limited to the extent of his A co-owners liability is
interests in the assets of the limited to the extent of his
firm.
share.
There is a restriction on the There is no restriction on
number of partners in a firm. number of co-owners.
Mutual agency between
There is no mutual agency
partners is a must.
between co-owners.
A partner has a right of lien A co-owner has no lien on
on the partnership property the jointly owned property
for the expenses he may
for expenses or for a
incur on behalf of the firm. common debt.

PARTNERSHIP AND COMPANY

A company is an artificial person a body corporate created by the operation of law and registration under the
Companies Act 1956. It is a separate legal entity from its members. It has perpetual succession and a common seal.
Basis of
distinction

Partnership
Company
A firm is not a legal entity. It is
the collective name of the
A company is a legal
Legal Personality individuals who constitute it. person.
A partnership firm has no
A company is a separate
Relationship to existence apart from its
legal entity distinct from
members
members.
all its members.
A member of a company
Mutual agency is the essence is not an agent of other
Mutual Agent
of partnership.
members.
The liability of a
The liability of a partner is
shareholder is limited to
unlimited and includes his
the extent of value of
Liability
personal assets.
shares held by him.
A shareholder can freely
A partner cannot his share or transfer his share subject
interest in the partnership
to restrictions contained
Transfer of
without the consent of all the in the Articles of
Interest
other partners of the firm.
association.
A company enjoys a
The death, retirement or
perpetual succession.
insolvency of a partner can
The death or insolvency
result in the dissolution of the of a member of the
Change in
firm unless there is a contract company does not
membership
to the contrary.
dissolve the company.
Number of
There must be minimum two The minimum
members
people to constitute a
membership is 2 in case
partnership. Section 11 of the of private companies and

Property

Audit

7 in case of public
companies. There is no
Companies Act, 1956 provides limit for maximum
that number of partners
membership in case of a
cannot exceed 10 persons in public company but a
case of banking business and private company cannot
20 in other businesses.
have more 50 members.
The company property
belongs to the company
and not to individual
Property of the firm is the joint members separately or
property of all the partners.
jointly.
For companies, there is
an obligatory audit of the
Audit is not compulsory
accounts.

PARNTERSHIP AND HINDU UNDIVIDED FAMILY

A Hindu Undivided Family is a family which consists of all people lineally descended from a common ancestor and
includes their wives and unmarried daughters. A HUF carries on its traditional business under the management of
the Karta the senior most male member of the family. A HUF is governed by Hindu Law and the members of the
family are called co-parcerners
Basis of
distinction
Partnership
Joint Hindu Family
It exists because of the
status. One becomes a
Section 5 of the Indian
member by birth.Section
Partnership Act, 1932
5specifically provides that
states that a partnership
the members of a Hindu
arises out of a contract A
undivided family carrying on
partnership comes into
a family business as such or
existence through an
a Burmese Buddhist husband
express or implied
and wife carrying business as
agreement between the
such are not partners in such
Contract
partners.
business.
New members can be
admitted into the
No such consent is needed
partnership with the
for the addition of a member
Membership
consent of all the members. into the joint Hindu family.
There is a minimum and
Number of
maximum limit on the
There is no limit on the
members
number of partners.
number of members.
Females cannot be members
unless they are the wives of
Restriction on There is no bar on females the co-parcerners or
membership
becoming partners.
unmarried daughters.
A minor cannot become a
partner but he can be
admitted to the benefits of
an already existing
Minors are members from the
Minor
partnership
date of their birth.

Death of a partner
dissolves the firm unless
Death leaves the business of
agreed otherwise.
the HUF unaffected.
Mutual agency is important. The family members are not
Here, every partner is an
mutual agents. The Karta has
agent of the rest of the
the authority to contract and
partners and his acts bind bind the family; the other
Mutual Agency the firm.
coparceners cannot do so.
Only the Karta is liable
unlimitedly. Other members
are liable only to the extent
of share in profits of the
family business unless they
took part in the act or
Every partner is unlimitedly transaction done by
Liability
liable.
the Karta.
A partner can file a suit for A co-parcener has the tight
Partition.
dissolution and accounts. to file a suit for partition.
Change in
membership

ESSENTIAL FEATURES
The essential features of partnership as per the definition of partnership are listed below:
1) Two or more people
2) Valid Agreement
3) Created for the purpose of carrying on business
4) Sharing of Profits
5) Mutual Agency
1) Two or more people: Minimum two people are needed to create a partnership. The Indian
Partnership Act, 1932 does not prescribe any upper limit on the number of people who can be
partners. However, Section 11 of the Companies Act, 1956 provides that number of partners
cannot exceed 10 persons in case of banking business and 20 in other businesses. If the number
of partners exceeds the limit, the partnership becomes an illegal association. Similarly, if the
number falls below two, the partnership is deemed dissolved.
The people who are partners in a firm must be competent to contract. If all partners are minors or
if there is only one adult partner, it is not a partnership at all.
2) Valid Agreement: The foundation of partnership is an agreement. Section 5clearly states that
partnership is not created by status the relationship of partnership can arise only out of a
contract. Thus, if a Hindu Undivided Family is carrying on a family business, it is not a
partnership. Similarly, a Burmese Buddhist husband and wife carrying business are not partners
in such business.
The partnership agreement must fulfil all the requirements of a valid contract. There should be
free consent, competency of the parties, lawful consideration and object. The agreement to create
partnership may be express or implied. The agreement can also be inferred from the conduct of
the parties. The agreement need not be in writing except where required under the Income Tax
Act or if the partners wish to get the firm registered.

Partnership does not arise by mere joint acquisition of property like in the case of co-ownership.
If a wife entrusts her stridhan to her husband, it is not an agreement of partnership even if the
husband uses the property for business.
3) Created for the purpose of carrying on business: The partnership must have been created to
carry on business. It is not necessary that all the partners actively participate in the conduct of the
business. For example, one partner may contribute skill or experience while another may
contribute capital for the firm. The business may be permanent or temporary, trading or non
trading.
Section 2(b) of the Indian Partnership Act, 1932 says that Business
includes every trade, occupation and business. Thus, a partnership
does not exist between members of a religious association and the
like.
Services rendered jointly also constitute a partnership. For example, if two advocates may agree
to jointly plead a case and divide the fees, they are partners in respect to that case. But an
agreement to carry on business in the future is not a partnership.
4) Sharing of Profits: The purpose of a partnership is to carry on business. Thus, it is obvious that
the partners have an interest in sharing the profits so earned from the business of the firm. Here,
profits include losses as well. Division of profits is an important element in a partnership. There
was a time when sharing of profits was used as a test to determine whether a partnership existed
or not. If a person shared the profits and incurred liabilities too, he was deemed a partner as held
in Grace vs. Smith [1775 2 WM Blacks 998]
However, in the present day, a person does not become a partner merely because he shares the
profits of the business. Similarly, sharing of losses is not a must for a partnership. Sharing profits
and contributing to losses are indications or prima facieevidence of a partnership but not the
conclusive test of partnership. It is possible that a partner may be paid salary or a fixed sum
periodically in lieu of profits. In Cox vs. Hickman [1860 8 HL Cas 268], it was held that the
conclusive test for partnership is mutual agency because it is possible that every man who gets a
share in the profits might not be liable for the losses of the firm or might not be a partner.
For example, a servant or agent may receive a share of profits instead of his salary or as a bonus.
Similarly, a person who sells his business and goodwill may be given a share of profits as
consideration for sale. An employee of the firm may loan some money to the firm. But these
persons do not ipso facto become partners in the firm due to such participation.
In the case of Mollow vs. Court of Wards [1872 LR 4 PC 419], a Hindu Raja loaned some money
to a company. In return, he was given a certain percentage of profit and also allowed to exercise
control on some aspects of the business. But the Raja was not empowered to direct the
transactions of the company. It was held that although sharing of profits is a very strong test, the
relationship of partnership depends on the real intention and conduct of the parties.
The partners can decide the ratio or proportion of share in profits and losses through an
agreement between them. A partner may get more percentage of the profits than the other(s)
based on factors like contribution of capital, special skills or taking a more active part in the
daily functioning of the firm.

5) Mutual Agency: Section 4 of the Act states that the business of the partnership must be carried
on by all or any of them acting for all. Thus, there must be a relationship of mutual agency
amongst all the partners.
Mutual agency means that every partner has a dual role that of a principal and of an agent.
Every partner is an agent of the other partners and can bind other partners by his acts done on
behalf of the firm in all matters that are within the scope and object of the partnership. Similarly,
every agent is also the principal for the other partners in the firm and in turn, is bound by their
acts. Section 18 stresses the necessity of mutual agency again and states that a partner is an agent
of the firm. The act of the partner is binding on the firm just like an act of an agent is binding
upon the principal.
The foundation or basis of the law of partnership is agency. The law of partnership is
undoubtedly, a branch of the law of the principal and agent. Every partner is both an agent and
principal for the other partners. For example, a notice to partner serves as a notice to the firm.
The acts of a partner during the ordinary course of business bind the other partners and they are
liable for the same.
Subject to limitations under Section 20 of the Act, one partner can always bind the other
partner(s) in any matter that falls within the scope of partnership. Partners are not agents for each
other outside of the firm or for other purposes.
COX vs. HICKMAN [1860 8 HL Cas 268]
Facts: The business of Smith & Son into some financial problems.
They entered into an agreement with their creditors that five
representatives of the creditors would be appointed as trustees to
manage the business. A was one of the trustees. While the trustees
were managing the business, the firm was supplied some goods on
credit. The invoice was marked accepted by agents for the trustees.
This converted the invoice into a negotiable instrument. The
accepted invoice was then endorsed in favour of B who paid a sum of
money for the endorsement in his favour. After all the debts of the
creditors were repaid, the business was returned to the owners. But
the invoice remained unpaid and B an action against the trustees
including B for the price.
Held: A was not a partner in the firm of Smith & Son and thus, he
was not liable. Though the creditors had a share in the profits of the
firm and were managing the affairs of the firm through their trustees,
the nature of relationship between them never changed. The trustees
were managing the business to recover money of the creditors and not
as partners of the firm helping it survive. The intention of being
partners was absent.
In the above case, House of Lords clarified that the sharing of profits only created a rebuttable
presumption of partnership. Lord Cranworth elaborated further Where two or more persons are
engaged as partners in any ordinary trade, each of them has an implied authority from the other
to bind all by contracts entered into according to the usual course of business in that trade. ..The

public have a right to assume that every partner has authority from his co-partner to bind the
whole firm in contracts made according to the ordinary usages of trade.
Whether there was a partnership or not is a mixed question of fact and law, depending upon the
varying circumstances in different cases.
CONCLUSION
Partnership is an intangible relationship between two or more people. It arises only out of a
contract which may be express or implied. If two or more persons work in the same business and
agree to share profits and losses, it is still not a partnership unless there is mutual agency. A
partner plays the role of an agent as well as that of a principal with respect to the other partners
in the firm.
Firm & Firm Name
In the case of Ex parte Corbett: In re Shand [1880 LR 14 Ch.D 122 126], James, LJ said
there is no such thing as firm known to law. A firm is nothing more than a compendious name of
the partners forming itUnlike a joint stock company which is a legal entity, a firm has no
separate existence apart from it members. A firm is not a body corporate. The rights and
obligations of the firm are, in fact, those of the individuals composing a firm.
Thus, a firm is only a convenient phrase used to describe the two or more persons constituting
the partnership. It has no legal existence apart from such persons. If some partners draw a salary
from the firm, they are still not the employees of the firm. A firm cannot be a member of a
partnership nor enter into partnership with another firm. The property or assets of the firm are
jointly owned property of the partners.
A firm has limited identity for purpose of tax laws. Though a partnership firm is not a juristic
person, the Civil Procedure Code, 1908 enables the partners of a partnership firm to sue or to be
sued in the name of the firm depending upon whether the firm is registered or not.
The name in which the partners carry on their business is the firm name. A firm name can be
anything as long as it does not go against the rules relating to trade name or goodwill. Section 58
(3) of the Indian Partnership Act. 1932 says that A firm name shall not contain any of the
following words, namely crown, Emperor, Empress, Implied, King, Queen, Royal,
or words expressing or implying the sanction, approach or patronage of government except when
the State government signified its consent to the use of such words as part of the firm name by
order in writing.
It can be said that a firm is the concrete description of the people who constitute it while
partnership is an abstract notion that is the relationship between the people constituting the firm.

Section 5 states that partnership is not created by status. It makes it clear that relation of
partnership can arise out of a contract only.
There must be a minimum two or more people in a partnership. There is no upper limit on the
number of members in a partnership under the Act. However, Section 11of the Companies Act,
1956 provides that number of partners cannot exceed 10 persons in case of banking business and
20 in others. If the number of members exceeds the limit, the partnership becomes an illegal
association. It gets dissolved if the number goes below one. Thus, it follows that if there is a

partnership to carry on an illegal business or if the number of partners exceeds the maximum
given, then it is an illegal partnership.
The Indian Partnership Act, 1932 gives two specific types of partnerships on the basis of
duration:
1) Partnership at will
2) Particular Partnership
1) Partnership at will: Section 7 says where no provision is made by contract between the
partners for the duration of their partnership or for the determination of their partnership, the
partnership is Partnership at Will.
The survival of such partnership depends on the willingness of the partners. It can be dissolved at
any time by any of the partners by giving a notice to the other partners. The partnership at will
dissolves from the date of notice of termination. If a partnership constituted for a particular time
period is still carried on after the expiry of the time, it will be presumed that the limitation is no
longer applicable.
For example, if two people decide to sell coconut water at two ends on a particular street without
having any contract or without specifying when will the partnership come to an end, it is a
partnership at will. It will exist only as long as both the parties want the partnership to last.
But if the partnership deed provides of termination only by mutual agreement, a mere notice to
the other partners will not dissolve the partnership firm. Also, a partnership at will dissolves
immediately upon the death or insanity of a partner.
2) Particular Partnership: Section 8 states that a person may become a partner with another
person in particular adventures or undertakings. Such a partnership ends on the completion of
the task. A partner cannot retire from such a partnership half way through the project for which
partnership was entered into without the other partners.
When two people enter into a partnership for a particular construction project, this is particular
partnership. A person can still carry on his usual business or work while he in a particular
partnership; he is not required to give up his other professional pursuits. For example,
partnership between two advocates or doctors for a particular case does not take away their
freedom to attend to their other cases. Two auditors engaged in a particular audit might be
regarded as partners in that audit.
It does not matter whether the business is of temporary or permanent nature. A single venture can
amount to carrying on of business. In the case of K Jaggaiah vs. Kokumanu [AIR 1984 AP 149],
three people got together and managed a contract for road maintenance. It was a partnership for
building roads. The activity of the partnership arose from a single contract but was spread over a
particular period and various aspects. The employment of workers, supervision, getting sanctions
and approvals was just a part carrying on of business under Section 4.
English Law: There is a concept of a limited partnership. In the case of Miles vs. Clarke [1953 1
AER 779], a photographer cum photo studio owner entered into an agreement with a freelance
photographer. The agreement was that the freelance photographer would go to marriages and
other functions and get the prints from the particular photo studio. The profits earned were
shared equally. After a few years, a dispute arose whereby the freelance photographer claimed a
partnership with the photo studio and thus, entitlement to the property. It was held to a particular
partnership and not a partnership with the photo studio. Thus, the freelance photographer was not
entitled to a share in the photo studio.
Section 17 of the act contemplates situations where the partnership has to be continued despite
no provisions for it. The Section says that subject to the contract to the contrary:

i) The rights and duties of partners after a change in the firm will remain the same as before.
ii) The mutual rights and duties of the partners will the same after the expiry of the term of the
firm as far as they are consistent with a partnership at will.
iii) The rights and duties of partners are the same as in the original undertakings if the
partnership has taken up additional undertakings.

TYPES OF PARTNERS
i) Partner by holding out or Partner by Estoppel.
The rule of agency by Estoppel has been extended to the case of partnership too. Holding out is
merely application of the principle of Estoppel which is a rule of evidence wherein a person is
prevented or estopped from denying a statement he made or existence of facts that he makes
another person believe. Holding out refers to course of action or omission that leads others to
believe that one possesses an authority which in fact one does not.
Simply put, if a person represents that he is a partner of a particular firm, he is estopped from
denying this representation later on.
Section 28 says that a person is held liable as a partner by holding out if:
a) he represented himself or knowingly allowed himself to be represented as a partner.
b) such representation may be by spoken or written words, by conduct or by knowingly
permitting others to make such representation by words or conduct.
c) the other party on the faith of such representation gave credit to the firm.
For example, A and B are partners in a firm. Another person C manages the firm on their behalf;
places all the orders, makes the payments due etc. If C places an order, A and B will have to pay
for the same as they have allowed C to function as a partner and did not to inform the suppliers
or the customers that C was only a manager.
But a person who is aware that C is not a partner can not sue A and B to make good losses
incurred by dealing with C.
A partner by holding out is liable to the person giving credit, to make good the loss which any
third party may suffer. But he does not acquire any claim over the firm. A person does not
become a real partner but he does become liable for compensation to the third party whom he
induced as a partner by holding out and caused such man loss or injury. The real partners of the
firm are safe unless the partner by holding out has acted on their orders or with their consent.
SCARF vs. JARDINE is an important case for the principle of holding out wherein the
importance of notice of retirement was highlighted. A partner must give notice of his retirement
from a firm the same way the notice of a new member to the firm is made to the public so that
people know about his status or rather the absence of participation of such retiring person in the
firm. Otherwise, he might be treated as partner by holding out no matter how long back he
retired from the firm without notice.
Thus, the liability of a retired partner to old creditors or customers continues till a notice of his
retirement is given. Similarly, the firm will also be liable for the retired partner, should just a
situation arise, if the notice has not been give. It is immaterial whether the retiring partner gives
the notice or the other partners.

SCARF v. JARDINE
FACTS: A firm consisted of two partners, Scarf and Rodgers. Scarf
retired and Beach joined in his place. The business was carried on as
before and no public notice about the change of partners was given to
the customers of the firm. Jardine was an old supplier to the firm. He
supplied the goods ordered without any idea about the change. He
came to know about the change when the firm failed to pay the dues
and he was considering a legal action against the firm. He preferred to
sue the new firm which subsequently went bankrupt. Then he sued
the earlier partner, Scarf.
HELD: He had a right against Scarf provided he had proceeded
against the old firm and partners in the first instance itself. Now he
had acknowledged the new firm, he could not reject its identity and
sue Scarf. It was held that novation might involve either a change of
parties with the contract remaining the same or a change in the
contract between the same parties. An implied agreement is presumed
from the fact that the creditor, after the knowledge of the change, has
brought a suit against the new firm. Jardine knew of the change of the
constitution of the firm when he sued and he chose to sue the new
firm. Now he could not sue the older firm for the same cause of
action as it is against principles of natural justice as well as
Partnership Act.
There are exceptions to the rule established in the SCARF vs. JARDINE case as given below:
a) Death of a partner constitutes sufficient notice by itself.
b) Insolvency of a partner is also sufficient notice and attracts Section 42 of the Indian
Partnership Act.
c) If one has been a dormant or sleeping from beginning to end, notice can be dispensed with
as neither the customers nor the clients know of his participation in the firm.
In English law, Partnership by holding out is referred to as apparent partnership instead and the
legal provisions in both countries are very similar.
In SMITH vs. BAILEY 2 QB 432, it was decided that the liability on the principle of Estoppel
extends only on account of credit given to the firm and not to torts or civil wrongs committed on
behalf of the firm.
ii) Dormant or Sleeping Partner
A dormant partner does not take active part in the business, but he is liable like any other partner.
Likened to an undisclosed principal, the moment he is discovered to be a partner, he can be made
liable. He is not required to give notice in order to absolve himself from the liability for the acts
of other partners after he ceases to be a partner.
iii) Nominal Partner
A nominal partner is a partner only in name. He is not entitled to share the profits of the firm but
is liable for all the acts of the firm as if he was a real partner.

iv) Sub Partner.

He comes into existence when one of the partners agrees to share the profits derived by him from
the firm with a stranger. He is not a partner in law and has no rights against the firm and is not
liable for the debts of the firm.
v) Working Partner
A partner, due to his special qualifications, may be assigned the management and control of the
business. He normally receives a fixed amount of salary, besides his share in the profits. For all
his acts, the other partners will be liable to third parties.
vi) Incoming Partner
He is a person who is admitted as a partner in an already existing firm with the consent of all the
existing partners as under Section 31. He is not liable for any act done by the firm before his
admission. Where he specifically agrees to bear the past liabilities, he will be liable to the other
partners for the same. But third parties cannot hold him liable as there is no privity of contract
between the new partner and the creditors.
vii) Outgoing or retiring Partner
A partner who leaves a firm in which the rest of the partners continue to carry on the business is
an outgoing partner. A partner can retire by the consent of all the partners (Section 31), by
agreement between the partners (Section 3) and by notice as per Section 32, by death (Section
35), insolvency (Section 34) or by expulsion under Section 33.
He has to retire as per Section 36(1). He is liable to the third parties for all the acts of the firm
until public notice is given about the retirement. Such notice can be given by the outgoing
partner himself or by any member of the new firm. He does not cease to be liable for debts and
obligations of the firm incurred before his retirement. He is also liable to a third party for
transactions of the firm begun but unfinished at the time of his retirement. However, Section
36 also acknowledges a retiring partners right to compete as long as he:
a)
b)
c)

does not use the name of the firm for the firm from which he has retired.
does not represent that he is working for the firm from which he has retired.
does not solicit the clients of the firm from which he has retired.

He may be discharged from any liability to any third party for the acts of the firm done before his
retirement if it is so agreed with the third party and the partners of the reconstituted firm. Such
agreement may be implied from the course of dealing between the firm and the third party after
he had knowledge of the retirement.
Section 33 further provides that though a partner may retire, he cannot be expelled unless such a
power is conferred by the contract between partners and exercised in good faith. Grounds of
expulsion in the contract can include, committing a criminal act, becoming insolvent, not
investing the required share in the firm or causing loss to the firm die to grossly negligent act. A
retiring partner is also entitled to a share in the subsequent profits if his account has not been

finally settled as per Section 30 of the IPA. In case of death, his legal representatives have a right
to the same.
Section 38 says that the continuing guarantee by the outgoing partner given to the firm or a third
party can be revoked with respect to future transactions in the absence of a contract to the
contrary.
viii) Minor as a partner
Partnership arises of a contract and minors are deemed incompetent to contract as per Section
11 of the Indian contract Act, 1872. Thus, a person domiciled in India under the age of 18 years
or 21 years if covered under Guardianship Act, can not enter into a partnership. In Mohribibee
vs. Dharmodas Ghose [1903] ILR 30 CAL 539, it was held that a minor cannot enter into a
contract and minors contract is void.
However, if all the partners agree, a minor may be admitted to the benefits of an already existing
firm. There can be no partnership firm with just one adult and all other partners being minor.
A minor does not become a full fledged partner. He is not personally liable; only his share in the
partnership is. As per Section 30, he
a) has a right to such share of the property and of the profits of the firm as may be agreed upon
by the partners.
b) may have access to and inspect and copy any of the accounts of the firm. Since the word used
is may, it seems that right of minor to inspect accounts can be restricted by agreement among
partners. Trade secrets of the firm are, however, not accessible to a minor.
c) has a share in the property and profits of the firm and therefore, these are liable to the acts of
the firm but the minor is not personally liable and neither is his private property liable.
d) has no right to file a suit against the other partners for accounts or for payments of his share in
the profits or property of the firm while he continues to be a member. He can do so only when he
has or is the process of severing the connection with the firm.
e) may file a suit for severing his connections with firm and his share will be determined by the
valuation according to the principles laid down in Section 48 for making accounts of a dissolved
firm. This severance can be effected by a guardian on behalf of the minor. If the firm dissolves,
the share of the minor will determined along with the share of the other partners.
f) can at any time within 6 months of attaining majority or of him obtaining the knowledge that
he has been admitted (whichever is later) give a public notice that he has or he has not elected to
become a member of the partnership. This proceeds on the presumption that a minor may not
actually know that he has been admitted to the benefits of a partnership and gives him the right to
elect whether he wants to be a partner or not. Failure to give notice within 6 months will give rise
to the presumption that he is a partner in the firm.
During the six months, the position of the minor remains the same i.e., a minor admitted to the
benefits of the partnership but without any personal liability.
g) may have his share in the firm attached for the acts of the firm.

h) may be liable for holding himself out as a partner despite the fact he elected not to be a partner
after attaining majority.
i) During minority, the privilege of minority or infancy can be used only as a shield and
therefore, a minor is liable under tort.
j) If a minor does decide to become a partner after attaining majority, he will become personally
liable to third parties for all acts of the firm done from since he was first admitted to the benefits
of partnership. The share in property and profits he was entitled to as a minor will continue
when he has elected to be a partner.
k) If a minor decides not to be a partner, his rights and liabilities (as those of a minor in benefits
of partnership) will continue till the date of his public notice of his decision. His share will not be
liable for any act of the firm after the date of the notice and he can sue for his share in the
property and profits.
If he elects to be a partner or if he fails to give a public notice that he does not elect to be a
partner, he will be liable for the debts of the firm contracted since the time he was admitted to the
benefits of the partnership.

TEST OF PARTNERSHIP
Whether or not the relationship between two or more people is partnership or not depends on
what the true relationship is and not on any mere label attached to that relationship.
Section 6 makes it clear that in determining whether a group of persons is or is not a firm, or
whether a person is or is not a partner in a firm, regard shall be had to the real relation between
the parties, as shown by all relevant facts taken together.
The existence of a partnership cannot be determined on the basis of expressed intentions.
In Raghunathan vs. Hormusjee [51 Bom 342], it was held that mere use of the word partner
does give rise to a partnership where there is none. The existence of a partnership is determined
by the actual or real relationship between the so called partners of the firm as inferred from all
relevant facts. It depends upon the intention of the parties as shown by their agreement or
conduct which gives rise to an implied agreement or both. Mere common interest does not make
a person a partner. In the same manner, sharing finances does not mean two people are partners.
In Cox vs. Hickman [1860 8 HL Cas 268], it was decided that of all the essentials of a
partnership, sharing profits is an important criterion but is not conclusive. The true test of
determining the existence of partnership is mutual agency. If one partner can bind the other
partners and the firm by his actions and is also, in turn, bound by the actions of the other
partners, only then it can be said that a partnership exists.

DUTIES OF A PARTNER
The general duties of a partner start from the moment of negotiation and continue even after
cessation.

a) Section 9 enlists the general duties of a partner:

i) to carry on the business of the firm to the greatest common advantage.
ii) to be just and faithful to each other.
iii) to render true accounts and full information of all things affecting the firm to any partner or
his legal representatives.
These are all based on the principle of good faith or uberrimae fidei.
BENTLEY vs CRAVEN is a classic example of how a partner may not benefit his personal self by
the business transaction of a firm.
b) Section 10 deals with the duty to indemnify the firm for the loss caused to it by his fraud in the
conduct of the business of the firm. It tries to impose on the partners a duty to conduct
themselves fairly and honesty towards their partners and the persons dealing with the firm.
c) Section 11 (2) says that a partner is restricted by an agreement with the other partners; he has a
duty not to carry on any business other than that of the firm, where he is a partner.
d) Sections 12 (b) and 13(f) impose a duty on the agent of due diligence and if this rule is
violated, liability will be incurred.
e) Section 12 (b) says that a partner has to attend diligently to his duties in the conduct of the
firms business without any remuneration.
f) Section 13 (f) of the IPA says that a partner has to indemnify the firm for any loss caused to it
by his wilful neglect in the conduct of the business of the firm.
g) Section 15 imposes a duty on the agent to use the property of the firm properly. The property
has to be used only for the purposes of the firm. If a partner does not submit an account of his
dealings with respect to the firm property, he will be liable for it.
h) Section 16 (a) asks a partner to account for any profit, including secret profit derived by the
partner from any transaction of the firm, or from the property, or the business connections of the
firm or the firm name. Section 16(b) says that if a partner carries on any business competing with
that of the firm, he shall account for and pay to the firm all the profits made by him in that
business.
i) A partner also has the duty not to carry on any business similar to or in competition with the
business of the firm as per Section 16(b). A partner should not exploit any information received
by him on the course of conducting the firm business or due to his connection with the firm.
j) A partner has the duty not to assign his share or else the partnership will stand dissolved.
k) A partner also has the duty to contribute equally and make good for the losses of the firm
unless otherwise agreed.

5.1 Dissolution of a Partnership The relation of partnership among different partners is changed
without changing the partnership firm. Thus, in case of dissolution of partnership, the economic
basis of relationship of partners is reconstituted without affecting the entity of the firm which
continues to remain in business as ever before. A partnership is dissolved by change of mutual
contract in the following cases :
Change in profit sharing ratio among partners;
Admission of a new partner;
Retirement of a partner, where at least two persons remain as partners;
Death of a partner (Section 42);
Adjudication of a partner as an insolvent;

Completion of a venture if partnership is formed for that;

Expiry of the period of partnership if partnership is for a pre-determined period;
Merger of one partnership firm into another.
Dissolution of a Firm Dissolution of a firm takes place in the following cases :
(1) Dissolution by agreement : A firm is dissolved in case:
(a) All the partners give consent to it, or
(b) As per the terms of partnership agreement.
(2) Compulsory dissolution : A firm is dissolved compulsorily in the following cases :
(a) Where all the partners or all except one partner, become insolvent or insane rendering them
incompetent to sign a contract;
(b) Where the business becomes illegal;
(c) Where all the partners except one decide to retire from the firm;
(d) Where all the partners or all except one partner dies;
(e) Where the partnership deed includes any provision regarding the happening of the following :
(i) Expiry of the period for which the partnership was formed; (ii) Completion of the specific
venture or project for which the firm was formed.
(3) Dissolution by notice : In case of partnership at will, the firm may be dissolved if any of the
partners gives a notice in writing to the other partners signifying his intention of seeking
dissolution of the firm.
(4) Dissolution by court : A court, may order a partnership firm to be dissolved (under Section
44), in case of a suit by a partner in the following situations :
(a) A partner becomes insane;
(b) A partner becomes permanently incapable of performing his duties as a partner;
(c) A partner deliberately and consistently commits breach of agreements relating to the
management of the firm;
(d) A partners conduct is likely to adversely affect the business of the firm;
(e) The partner transfers whole of his interest in the firm to a third party;
(f) The business of the firm cannot be carried on, except at a loss; (g) The court, on any ground,
regards dissolution to be just and equitable.
DISSOLUTION OF A PARTNERSHIP FIRM
Settlement of Accounts
In case of dissolution of firm, the firm ceases to conduct business and has to settle its accounts.
For this purpose, it disposes off all its assets for making payment to all the claimants against it.
Section 48 of the Partnership Act provides the following rules for the settlement of accounts
between the partners :
(1) Loss to be paid first out of profits, next out of capital and lastly by the partners individually in
the proportion in which they were entitled to share the profits. In other words, losses are to be
shared by the partners in their profit sharing ratio;

(2) Assets of the firm are first to be applied in paying off the debts of the firm to the third parties,
next in paying off to each partner proportionately what is due to him from the firm for advances
as distinguished from capital; and the residue to be divided among the partners in the proportion
in which they were entitled to share profits. In simple words, following is the order of payment
from the proceeds of the sale of the firm :
Expenses of realization;
Payment to outside creditors. It is to be noted that secured creditors are to be paid off first out of
the proceeds of secured assets before anything is paid to unsecured creditors;
Loans and advances made by partners spouse;
Loans and advances made by a partner apart form his capital; and
Final claims of the partners on their capital account.
Debts of firm verses personal debts of partners
If assets of the firm are not sufficient to pay off the firms creditors, the partners may be required
to make contributions because of the unlimited nature of the liability of the partner. In such a
case, the partner will have the right to apply his personal assets in paying off his personal debts
first. Thereafter, the remaining surplus of personal assets will be used for making his contribution
to satisfy the unsettled portion of outside creditors. It is to be further noted that personal assets of
the partner are individually owned assets excluding the personal property of wife (Streedhan).
Accordingly the following steps are taken :
1. All assets would be disposed off and cash has to be realized;
2. With the available funds, claims are satisfied in the following order
(a) Payment of expenses for realizing the assets and collection of debts;
(b) Payment of outside liabilities of the firm, i.e. creditors, loans, bank overdrafts, bills payable,
advances from partners relatives;
(c) Loans and advances made by a partner;
(d) Repayment of advances extended by the partners;
(e) Repayment of capital contribution to the partner; (f) Any surplus left, is distributed among all
partners in their profit sharing ratio.
DISSOLUTION OF A PARTNERSHIP FIRM
Accounting Treatment
The books of accounts are closed and profit or loss on realizing the assets and discharge of
liabilities has to be computed in the event of dissolution of the firm. For this purpose, a
realization account is prepared for recording the realization of assets and payment of liabilities.
Sale of assets is recorded at the realized value and payment to creditors is recorded at the
settlement value. After recording of all transactions with respect to sale, transfer or takeover of
assets and payment of all external liabilities, the realization account would have a balance that

will either be profit or loss. Profit arises when assets are realized at more than the book value
and/or liabilities are settled at less than book value. In an otherwise situation there is loss. The
profit or loss on realization is transferred to partners capital accounts in their profit sharing ratio.

Dissolution of partnership is different from the dissolution of firm.

Dissolution of a partnership firm merely involves a change in the relation of partners;
whereas the dissolution of firm amounts to a complete closure of the business. When
any of the partners dies, retires or become insolvent but if the remaining partners still
agree to continue the business of the partnership firm, then it is dissolution of
partnership not the dissolution of firm. Dissolution of partnership changes the mutual
relations of the partners. But in case of dissolution of firm, all the relations and the
business of the firm comes to an end. On dissolution of the firm, the business of the firm
ceases to exist since its affairs are would up by selling the assets and by paying the
liabilities and discharging the claims of the partners. The dissolution of partnership
among all partners of a firm is called dissolution of the firm.

Sale of goodwill after dissolution (S.55)

(1) In settling the accounts of a firm after dissolution, the goodwill shall, subject to
contract between the partners, be included in the assets, and it may be sold either
separately or along with other property of the firm.
(2) Rights of buyer and seller of goodwill-Where the goodwill of a firm is sold after
dissolution, a partner may carry on a business competing with that of the buyer and he
may advertise such business, but, subject to agreement between him and the buyer, he
may not(a) use the firm name,
(b) represent himself as carrying on the business of the firm, or
(c) solicit the custom of persons who were dealing with the firm before its dissolution.
(3) Agreement in restraint of tradeAny partner may, upon the sale of the goodwill of a
firm, make an agreement with the buyer that such partner will not carry on any
business similar to that of the firm within a specified period or within specified local
limits and, notwithstanding anything contained in section 27 of the Indian Contract Act,
1872 (9 of 1872), such agreement shall be valid if the restrictions imposed are
reasonable.
Curt Brothers Ltd. V. Webster in this case A sells the goodwill of his business to B and
sets up a new business. X who remains customer of the old firm deals his own accord
with the new firm set by A. A is not entitled to solicit even such a customer as X, though
if X continues to deal with A of his own accord, A would be entitled to deal with him.

FORMATION OF PARTNERSHIP
In a contract of partnership all the elements of a valid contract must be present. There
must be free consent,consideration, lawful object and the parties must have capacity to
contract. Thus an alien friend can enter intopartnership, an alien enemy cannot. A minor is
not competent to be a partner. A minor can, however, be admitted tothe benefits of partnership,
if all the partners agree to do so.A partnership agreement may be oral or it may beimplied or infe
rred from the conduct
of the parties. When it is reduced to writing it is incorporated in a documentknown as the
Deed of Partnership or Articles of Partnership. The deed must be stamped according to the
provisions ofthe Stamp Act. Thereafter, the firm may be registered with the Registrar of
Firms, although registration is notcompulsory. Because of the disabilities suffered by an
unregistered firm, it is advisable to register every firm.
According to S.58 the registration should be made in the form of a Statement
signed by all the partners and giving :
(1) the name of the firm;
(2) the principal place of business of the firm;
(3)
(4)
(5)
(6)

name of the other place (if any) where the firm carries on business;
the date on which each partner joined the firm;
the names in full and addresses of the partners;
the duration of the firm. Furthermore, every change in the names and addresses of
the partners
or place of business should be notified to the Registrar of Firms from
time to time.
REGISTRATION OF A FIRM

Effect of Non-registration of a Firm: Unlike English law registration is optional under

Indian Partnership Act, But it becomes indirectly necessary, so that if a firm is not registered,
the following consequences will ensue:
1.
A partner of an unregistered firm cannot file a suit against the firm or any partner to enforce a ri
ght arising from a contract or conferred by the Partnership Act [S.69(1)] Where A, B, C an
d D are
partners in an unregistered firm. D is wrongfully expelled from the firm by the rest of partners. D
can not file a suit for his wrongful
expulsion, the only remedy available to him is to file a suit for the dissolution of firm.
2. An unregistered firm cannot file a suit against any third party to enforce a right
arising from a contract. [S. 69(2)]. This clause does not prohibit an unregistered firm
to enter into contract with third parties, the bar is only against taking action against
third parties. However, the third parties are free to take action against unregistered partnership.
3. An unregistered firm cannot claim a set off above Rs.100 in a suit [S.69(3)].
According to Section 69 of the Partnership Act the nonregistration of a firm does not affect the following :

1.
2.

The right of a third party to sue the firm or any partner .

The right of a partner to sue for dissolution of the firm or for settlement of accounts
if the firm is already dissolved or for his share of the assets of the dissolved firm.
3.
The right of an unregistered firm to sue to enforce a right arising otherwise than out
of contract, e.g., for an injunction against a person wrongfully using the name of the
firm; or for wrongful infringement of a trade mark. Registration is not necessary for
a suit in respect of tort committed by a partner.
4.
The power of an Official Assignee or Official Receiver to realise the property of an
insolvent partner.
5. A suit or set-off not exceeding Rs. 100 in amount.
6. The rights of firms or partners of firms having no place of business in India.
Registration Time: An unregistered firm can get itself registered at any time before it
is actually
dissolved. But in any case it should be registered before filling a suit in the court,
otherwise the court will
reject such suit. In order to institute a suit, not only the firm must
be a registered one, but all the partners suing must also be shown as partners in the register
of firms.
Example: A partnership firm consisting of A, Band C as partners was formed and it
commenced its
business before getting itself registered. The firm filled a suit against X for
a claim of Rs.5000 for goods
supplied to him and immediately after filling the suit, the firm
was registered. The court will dismiss the suit
because the firm was unregistered at the time
of filling the suit.
But where a suit is dismissed because of the nonregistration of a firm or it is with-drawn
before it is dismissed by the court, the firm can subsequently get itself
registered and file the
suit again provided the suit has not become time barred.
Firm and Firm Name:
Persons who have entered into partnership with one another are
called individuallypartners and collectively a firm, and the name under which their
business is carried on is called thefirm name (Sec. 4).A firm is not an artificial and legal perso
n like a company. It is merely a collective name for the
partners. It is just a convenient way of describing the partners. The rights and obligations of the
partnership firms are really the rights and obligations of the partners constituting it.
Duration of Partnership: The parties may fix the duration of the partnership or say
nothing about it.
Where the partners decide to carry on the business for a certain period of
time, it is called a partnership
for a fixed period. When the period is over, the partnership
comes to an end. Where the partnership is
formed for the purpose of carrying on particular
venture, it is called a particular partnership. It comes to
an end on the completion of the
venture. It is also open to partners to say nothing about the duration or
to agree that the
business shall be carried on not for a fixed period, but so long as the partners are inclined
to
carry it on. Such a partnership is called Partnership at will. It is dissolved by notice by a
partner to his copartners.

Partnership Property: The property of the firm includes (i) all property and rights and interests in
property originally brought into the stock of the firm, or subsequently added
thereto; (ii) the property
acquired in the course of the business with money belonging to the
firm; (iii) the goodwill of the business,
the property of the firm is acquired to be used by the
partners for the exclusive use of the firm.
Examples of Partnership Property
(a)
A partnership is formed with A, Band C as partners. A contributes to the stock of
the firm a plot of land. B a
motor lorry and C the sum of Rs.10,000. Subsequently,
the firm purchases, out of its earnings, a house. All these
properties and the goodwill
of the business are properties of the firm.
(b) A colliery owned by A was taken on lease by a firm consisting of A and B as partners
and was worked.
The profits were shared by the partners. The colliery was taken to
be property of the firm for the time being. But if the colliery were only worked in partnership by
A and B who shared profits of the venture, the
colliery remained the
property of A, and did not become the property of the firm.

Partnership Deed. The agreement creating partnership may be express or implied, and
the latter may be
concluded from the conduct or the course of dealings of the parties or from
the circumstances of the case.
But it is in the interest of the partners that the agreement must
be in writing. The document which contains
this agreement is called Partnership Deed. It
contains provisions relating to the nature and principal place of business, the name of the firm,
the names and addresses of the partners, the duration of the firm, profit
sharing ratio, interest
on capital and drawings, valuation of goodwill on the death or retirement of a partner,
management, accounts, arbitration, etc. The Indian Stamp Act, 1889, requires that the Deed must
be stamped.
Who can become a partner
Any person who is competent to contract can enter into partnership agreement. The positio
n of following persons need special consideration :
1. Minor: A minor is not competent to contract, hence he can not enter into partnership
contract. However he may be admitted to the benefits of partnership, if all the
partners agree to do so.
2. Alien: An alien enemy can not be partner in an Indian firm.
3. Person of unsound mind: A person of unsound mind, not being competent to
contract cannot enter into a partnership contract.
4. Company: A company, if authorised by its articles of association can enter into
partnership because it is a person competent to contract in the eyes of law.
5. Firm: A firm can not enter into partnership contract. If a firm, at all enters into
partnership inthat case, the members become partners in the other firm in their
individual capacity.

Position of a Minor admitted as a partner to the Benefits of Partnership

We have seen earlier that partnership results from a contract. Consequently, a minor
cannot enter into a
contract of partnership as an agreement by a minor is void. It follows that
a minor cannot become a partner,
nor can a partnership be created with a minor as a partner.
But if all the partners agree a minor may be
admitted to the benefits of an already existing
partnership firm. It should be remembered that even after
such admission the minor does not
become one of the group of persons called the firm.
Section 30 of the Partnership Act lays down the rights and liabilities of a minor admitted
to the benefits of a partnership as follows :
1. The minor has a right to such share of the property and of the profits of the firm
as may be agreed upon by the partners.
2. The minor has access to and inspect and copy any of the accounts of the firm.
3.
The minor is not personally liable for the debts and obligations of the firm although
his share in the profits and of the assets of the firm will be liable for the same.
4. So long as the minor continues to be in the firm, he cannot file a suit against the other pa
rtners for an account or for the payment of his share of the property or profits of the fir
m. He can file such a suit only when he wants to severe his connection with the firm.
5. At any time within six months of his attaining majority, or of his obtaining knowledge
that he had been admitted to
the benefits of partnership, whichever date is later, the minor
has to elect either to become or not to
become a partner in the firm. Such election may be
made by a public notice. If he gives no notice to this effect he
shall become a partner in the
firm on the expiry of the said six months.
6. A minor who thus becomes a partner will become personally liable for all debts and
obligations of the firm incurred since the date of his admission to the benefits of partnership.
7. Where the minor elects not to become a partner the following rules will apply:
(a)
His rights and liabilities continue to be those of a minor up to the date on which he
gives public notice to not to become its partner.
(b) His share will not be liable for any act of the firm done after the date of the notice.
(c) He can sue the partners for his share of the property and profits of the firm.

Classes of Partners
A person who deals with a firm would like to know who are the partners, and to what
extent they are liable to him
for his claim against the firm. The position of different classes
of partners may be examined as follows :
Actual Partner: A
part in the conduct

person who has by agreement become a partner and who takes actual
of partnership business is an actual and working partner. He is the agent

of other partners for the purposes

of the business. All his acts in the ordinary course of the
business bind him and the other partners to third parties.
Partner by Holding Out: A person may, under certain circumstances, be liable for the
debt of the firm
although he is not a partner. If a person by words spoken or written, or by
conduct represents himself or
knowingly permits to be represented, to be a partner in a firm,
he is liable as a partner in that firm to
anyone who has, on the faith of such representation,
given credit to the firm (Sec. 28), So, where a person
conducts himself as to lend another to
believe that he is a partner, although really he is not, and on that
belief the other person gives
credit to the firm, he is deemed to be a partner by holding out.
(a)
A, B and C carry on a business for profit. C contributes neither labour nor money,
and does not receive any
share of the profits, but his name is used as a partner in
the firm. He is liable to every outsider who gives
credit relying on his being there
as partner.
(b) Suresh carried on business in the name of the business as Ram Saran and Co.,
employed a person named Ram Saran to act as manager of the business. Ram Saran
was regarded as partner by holding out or estoppel.
The position of a partner by holding out is peculiar. He is liable to make good the loss
which the person giving credit
to the firm may suffer, but he has no claim upon the firm. A
partner who has retired from the firm but allows the use
of his name to continue with the firm
may become liable to third parties by the principal of holding out.
Example: P
retired from a firm consisting of PX and R as its partners. He failed to give
notice of his retirement. After
his retirement S joined the firm and the firm continued its
business under the old name. One creditor filed
a suit for the recovery of his debt after the
retirement of P. It was held the creditor could make P and his
co-partners and R liable for his
debt on the principle of estoppel. But he can not file a suit against P, X, Rand S, all of them
together.
Dormant or Sleeping Partner: A person who is in reality a partner but whose
name does
not appear in any way as partner, nor does he take part in the management of the business,
and is not, therefore, known to outsiders as partner in the firm, is called a dormant or sleeping
partner. Such
a partner is liable to third parties who gave credit to the firm even without
knowing of his being partner
but subsequently discovering the fact. A sleeping partners
liability rests on his being in the position of an undisclosed principal.
One important distinction exists between a sleeping and active partner with regard to
liability
towards third parties.
A sleeping partner is responsible for the debts of the firm taken
during the tenure of hispartnership like an active partner. But his liability ceases immediately
on retirement and he is not supposed to give anotice on his retirement like other active partners.
Partners in Profits only: A partner may stipulate with his co-partners that he will be
entitled to a certain
share of the profits without being liable for losses. But he will be liable
to outsiders for all debts and obligations of the firm.

Sub-partner : Where a member of a firm agrees to share the profit derived by him from
the firm with a
stranger, there arises a sub-partnership between him and the stranger. Such
stranger is said to be a sub-partner, although he is in no way a partner in the original firm,
has no rights against it, nor he is liable for its debts.
Incoming Partner: A person who is admitted as a partner into an already existing firm
with the consent of all the partners is called an incoming or new partner. The incoming partner
does not become liable for any
act of the firm done before he becomes partner, unless he
agrees to be so liable. His liability commences from the date of admission as a partner.
Retired or Outgoing Partner: A partner who goes out of a firm in which the remaining
partners continue
to carry on the business is called retired or outgoing partner; A retired
partner continues to be liable for
all debts and obligations of the firm incurred before his
retirement. A, B and C are partners and D is the creditor of the firm. A retires from the firm. A
remains liable to D. Two years after As retirement the firm becomes
insolvent. A wil1 be
liable for the debts existing at the time of his retirement.
A retired partner will be liable for all
debts incurred after his retirement if he fails to give
proper notice of his retirement. In that case he is deemed to be
a partner by holding out. A
retiring partner will also be liable to third parties for all transactions of the firm began
but
unfinished at the time of his retirement, even though notice of his retirement is given to third
party. A retiring partner may, however, be discharged from the liability by the consent of the
creditors. The remaining partners will be
liable in such a case. This rule is the application of
the general rule of the law of contract known as Novation.

Right after retirement to share profits or interest -(Sec. 37)

Where a member of a firm ceases to be the partner of the firm and the continuing partner
carry on the business with
the property of the firm without any final settlement of accounts,
i.e., without the share of the assets of the
outgoing partner being paid over, or without his
interest being purchased by the remaining partners, the estate of the
partner is entitled to share
in the profit earned with the aid of the assets of such outgoing partner, or interest at 6%per
annum at the option of the out going partner. The option to claim a share of the profits or
interest can be
exercised only when the accounts of the subsequent business are made. But
a claim both for share of the subsequent
profits as well as interest will not be allowed. Also,
once the outgoing partner has decided, then he will not be
allowed to go back on it, nor he
be permitted to claim profits for part of the period and interest for remaining period.
Nominal Partner: If a persons name is used as a member of the firm, although he is
not a real member
and not entitled to the share of profits of the firm, is known a nominal
partner. Such a person is a necessary party only in cases of negotiable instruments
Relationship of Partners to 3rd parties

Power of partner to bind the firm: Every partner is the agent of the firm and his copartners for the
purposes of the business of the firm. When two or more persons agree to
carry on a partnership business
and share its profits, each is a principal and each is an agent
for the others. Each is bound by the others
contract in carrying on the business, just as a
single principal would be bound by the acts of an agent. The
principal of agency governs the
relationship between the partners. It is because of this that the law of
partnership is said to
be a branch of the law of agency.
The authority of a partner to act on behalf of the firm
may either be express or implied.
Any authority which is expressly given to a partner by agreement of partnership is
called
Express Authority. The firm is bound by all acts done by a partner by virtue of any express
authority given to
him. Implied Authority means the authority to bind the firm which arises
by implication of law-from the fact of partnership.