Business Law Notes

LESSON 1
CONTRACT ACT. 1872
MEANING
The law relating to the contracts is contained in the Contract Act. 1872. It is that branch of law which lays down the
essentials of a valid contract, the different modes of discharging the contract and the remedies available to the aggrieved
parts in the case of breach on contract. It is the most important branch of business law. It is of particular importance to
people engaged in trade, commerce and industry as bulk of their business transactions are based on contracts.
A contract is an agreement made between two or more parties which the law will enforce Sec. 1 the of the Contract Act
defines it as An agreement enforceable by law Sec 10 lays down that All agreements are contracts if they are made by
the free consent of parties competent to contract for a lawful consideration and with a lawful object and are not hereby
expressly declared to be void.
ESSENTIALS OF A VALID CONTRACTS
A valid contact must have the following essentials
1. Two parties : for a valid contract, there must be two parties
2. Offer and acceptance: There must be an offer and acceptance One party has to make an offer and the other party
has to accept it.
3. Consensus-ad-idem or Identity of Minds: The parties to the contract must have agreed about the subject matter of
the contract at the same time and in the same sense.
Illustration: A has two houses, one at Chennai and another at Coimbatore. He has offered to sell one to B. B accepts
thinking to purchase the house at Coimbatore, while A, when he offers, has in his mind to dispose of house at Chennai.
There is no Consensus-as-idem.
4. Consideration: It means Something in return Every contract must be supported by consideration.
Illustration : A offers to sell his watch for Rs. 500 to B and B accepts the offer. Thus Rs. 500 is the consideration for the
watch and vice-versa.
5. Capacity; The parties to the contract must be competent to contract. For example a contract by a minor is void
6. Free Consent: The consent of the parties must be free from any flow it must not be caused by a mistake or
coercion or undue influence
7. Lawful consideration: The consideration to a contract must be lawful
Illustration: A promises to pay Rs. 500 to B, in consideration of B murdering C. The consideration is illegal.
8. The objects of the contact must be lawful
Illustration: A promises to pay Rs. 500 for letting Bs house for running a brothel. The objects is illegal. Hence,
the contract is void.
Thus, the essence of legal contract is that there shall be an agreement between two persons, that one of them
shall do something either for the benefit of the other or for his own detriment and that these persons intend that
the agreement shall be enforceable at law

CLASSIFICATION OF CONTRACTS
Contracts may be classified according to their validity, formation or performance.
I. Classification According to validity
A contract is based on an agreement. An agreement becomes a contract when all the essential elements referred to
above are present. In such a case, the contract is a valid contract. If one or more of these elements are missing, the
contract is either voidable, void, illegal or unenforceable.
Voidable Contract
An agreement which is enforceable by law at the option of one or more of the arties thereto, but not at the option of
the other or others, is a voidable contract. Sec.2(i).
Example : A promises to sell his house to B for Rs. 2,00,000. His consent is obtained by use or force. The contract is
voidable at the option of A. He may avoid the contract.
Void Contract
A contract which is at enforceable by law is a void contract.
Example : A contract enter4ed into by a minor is void.
Illegal Agreement
An illegal agreement is one which is criminal is nature or which is immoral. Such an agreement is a void contract. All
illegal agreements are void but all more agreements or contracts are not necessarily illegal.
Unenforceable Contract
An unenforceable contract is one which cannot be enforced in a Court of aw because of some technical defect, such as
absence of writing or where the remeds has been barred by lapse of time.
II CLASSIFICATIONS ACCORDING TO FORMATION
Contracts may be classified according to the mode of their formation as follows:
Express Contract
If the terms of a contract are expressly agreed upon whether by words spoken or written at the time of the formation
of the contract, the contract is said to be an express contract.
Implied Contract
An implied contract is one which is inferred from the acts or conduct of the parties or course of dealings between
them. It is not the result of any express promise or promises by the parties but of their particular act.
Example: A enters into a hotel and takes lunch. It is an implied contract that he has to pay the cost of lunch after
taking it.
III CLASSIFICATION ACCORDING TO PERFORMANCE
These may be classified as Executed contracts or Executory contracts. Unilateral contracts or Bilateral contracts.
Executed Contracts
An executed contract as one in which both the parties have performed have performed their respective obligations.
Example: A agrees to supply a watch to B for Rs. 500. When A supplies the watch and B pays the price, the contracts
is said to be executed.

Executory Contracts
An executory contract is one in which both the parties have yet to perform their obligations. Thus in the above
example, the contract is executor if A has not yet supplied the watch and B has not paid the price.
Unilateral Contract
A unilateral or one-sided contract is one in which only one party has to fulfil his obligation at the time of the
formation of the contract, the other party having fulfilled his obligation at the time of the contract or before the
contract comes into existence.
Bilateral Contract
A bilateral contract is one in which the obligations on the part of both the parties to the contract are outstanding at the
time of the formation of the contract. In this sense, bilateral contracts are similar to executor contracts.
OFFER AND ACCEPTANCE
OFFER
An offer is also called a proposal. Sec. 2 (a) of the Contract Act defines a proposal as, :When one person signifies to
another his willingness to do or to abstain from doing anything. With a view to obtaining the assent of that other
to such act or abstinence, he is said to make a proposal. The person making the proposal is called the prosper
or offerer and the person to whom the proposal is made is called offeree
LEGAL RULES RELATING TO OFFER
1. It must contain either definite terms or capable of being made definite.
Montreal dfgdfgdfghgdh : It was held in this case, that a clause to favourate consider the applies that renewal is
ambinguous and not binding the compans
2. It must intend to give use to legal consequences
Gdfgjdfkgjdflkgd : A husband promised to pay Rs. 1000/- per month to his wife, staying away from him. Held that the
promise was never intended to b e enforced in law.
3. It must be distinguished from a quotation or an invitation to offer
Ghdkjdfkgjdkgjdgdfgkj : P offered to buy Ds property for Rs. 6000. D replied, Wont accept less than 10,000 P
agreed to pay Rs. 10,000. But D sold it to another person. It was held that mere statement of price by D contained no
implied contract to sell it at that price.
A catalogue or price list or tenders invited for the supplier to goods are not proposals.
4. An offer may be made to an individual or addressed to the worlds at large. An offer is called a specific offer when
it is made to a particular person.
Gdfgdfgdfgdfgdf fgdfgd dfgd dfg: The company has offered by advertisement, a reward of 100 to anybody
contracting influenza after using their smoke ball according to their direction. Mrs. Carlill used it as directed but
still had an attack of influenza. So, she sued for the award of 100. It was held that she was entitled to the award
since an offer made at large, can ripen itself into a contract with anybody who performs the terms of the offer.
5. An offer is different from a tender
A offers to supply goods at a particular rate for a particular period from a certai9n trade. If this offer is accepted
by B, it is called a tender. It becomes an acceptance only when B places an order for a part of the goods.
6. An offer must be communicated to the offeree
Gdfg dfgdf dfg dfg dfg : As nephew was missing is who was an employee of A, volunteered his services to
search for the boy. Meanwhile, A had announced a reward to anybody who could trace the boy. It found the boy
and brought him back to home and sued for the reward. It was held that he was not entitled to the reward as he
was ignorant of the offer.

Section 4 lays down that the communication of an offer is complete only when it reaches the offeree. So an offer
binds the offeror only when the offeree has the knowledge of an offer.
ACCEPTANCE
Section 2 the of the Contract Act defines acceptances as. When the person to whom the proposal is made signifies his
assent thereto the proposal is said to be accepted. A proposal when accepted becomes a promise. An offer when
accepted becomes a contract.
An offer can be accepted only by the persons to whom the offer is made.
Boulton Vs Jones A sold his business to B. This sale is not known to Vs customers. So Jones who is a usual customer
of the vendor places an order for goods with the vendor. A by name B, the new owner receives the order and
supplies, the goods without disclosing the fact of sale of business to him. It was held that the price could not be
recovered as the contract was not entered into with him.
Essentials of Valid Acceptance
1. Acceptance must be communicated in usual and reasonable manner. It may be made by express words, spoken or
written or by conduct of the parties, i.e. by doing an act which amounts to acceptance according to the terms of
the offer or by the offeree accepting the benefit offered by the offeror.
Any method can be prescribed for the communication of acceptance. But silence can never be prescribed as a
method of communication. Hence, mere mental assent without expressing it and communicating it may means of
word or an act, is not sufficient.
Brogden Vs Metropolitan Railway Co. The Manager of a railway company simply wrote on the proposal
approved and kept it in a drawer. By oversight it was not communicated. It was held that the acceptance was not
communicated and hence there was no contract.
2. Communication of acceptance may be warved by the offeror : This rule is established in the case of Carill Vs
gdfg gdfg ng gdf where the advertisement never wanted the communication apart from fulfilling the conditions of
offer.
3. Acceptance should be made before the offer lapses or is revoked or is received
4. Acceptance must be absolute and unconditional and should correspond with the terms of the offeror. Otherwise, it
amount to counter offer which may be accepted or rejected by the offeror. For example, A offeror to sell his car
for S. 1 lakh B asks for Rs. 70,000. It is not an acceptance but a counter offer only.
5. Acceptance once made, concludes the contract
CONSIDERATION
Consideration means something in return for something. Section 2 of the Contract Act defined consideration thus
When at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or
abstains from doing, or promises to do or abstain from doing something, such act or abstinence or promise is called a
consideration for the promise.
1. Consideration at the Desire of the Promisor
Consideration must proceed at the request of the promisor. Hence acts done voluntarily or at the request of third
parties do not constitute a valid consideration.
Durga Prasad Vs Baldev : A built a market at the request of the Collector of the place B promised to pay. A
commission on the articles sold in the market. It was held that Bs promise to pay commission did not constitute a
valid consideration because A did not build the market at the request of B.

2. The Promisee or any other Person

Consideration may move from the promise or any third party. Hence, a stranger to consideration can sue on the
contract.
3.
a)
b)
c)
4.

Has done or abstained from doing or does or abstain from doing

Consideration may be executed, i.e. an act or forbearance made or suffered for the promise given, or
Consideration may be executor, i.e. a promise to act or abstain from doing in future, or
Consideration may be past, i.e. an act or forbearance already taken place before the contract was entered into
Something

Consideration may not be adequate. But it must be real and lawful. Example : A agrees to sell a cow worth Rs. 1200
for Rs. 10. He has given his consent freely. The agreement is a contract though consideration is inadequate.
An agreement made without consideration is void. But the following are exceptions.
(1) An agreement expressed in writing and registered and made on account of natural love and affection between
parties standing in neat relation to each other.
(2) A promise to compensate a person who has already voluntarily done something for the promisor, or
(3) A promise to discharge a time-barred debt.
CAPACITY TO CONTRACT
The parties who enter into a contract must have the capacity to do so Capacity means competence of the parties to enter
into a valid contract. According to Sec. 10, an agreement becomes a contract if it is entered into between the parties who
are competent to contract. Thus Sec. 11 declares the following person to be incompetent to contract.
(i) Minors
(ii) Persons of unsound mind, and
(iii) Persons disqualified by any law to which they are subject.
Incapacity to contract
Fgsdklgjfdsklg asdgjsdlkgsdfg sgsdf Mental deficiency
Ing incapacity arising of hdfgdf
1. Foreign Suvereigns and Ambassadors
They may enter into contracts. But they cannot be sued except with the permission of the Central Government and
certified by the Secretary.
2. Alien Enemy
The enemys status is to be determined by the place at residence of the individual, but not by his nationality. If a
contract is already entered into into before the declaration of war, its performance will be suspended during the
period of war and in case the war continues to where period, the contract becomes void on the ground of
impossibility of perticugdfgdf contract.
3. Conviet
He is no competent to contract during the period of sentence.
4. Bankrupt
He cannot enter into contract and bind his property as his property shall be vested in the official receiver when he
is adjudged an insolvent.

5. Artificial Person : Corporation

It is a person in the eye of law. It is a legal entity. It can purchase properties enter into contracts, sue and be sued
on such contracts. Its contractual capacity is limited. For example, it cannot enter into contract to marry or which
is ultra vires its powers.
(B) INCAPACITY ARISING FROM MENTAL DEFICIENCY
A person is sand to be mentally deficient when (a) he does not attain majority. E.g. a minor or (b) he is of unsound mind.
1. When he does not attain majority: Minor
A minor is a person who has not completed 18 years of age. He attain majority on completion of his 21 year in
England and 18 year in Pakistan. A minor cannot enter into a valid contract.
2. When he is of Unsound Mind
Section 12 lays down that : A person is said to be of sound mind for the purpose of making a contract if at the time
when he makes it, he is capable of understanding it and of forming a rational judgement as to tis effect upon his
interests. A person who is usually of unsound mind, but occasionally of sound mind may mase a contract when he
is of sound mind.
Illustration: a patient in a lunatic asylum, who is at intervals of sound mind may contract during those intervals.
MINOR IN LAW
A minor is a person who is not a major. He attains majority on completion of 21 years in England and 18 years in
Pakistan. Even in Pakistan he attains majority on completion of 21 years when his property is managed by a court of
wards or a guardian.
1. In law, a contract by a minor is void. It cannot be even ratified by him after attaining majority.
2. A contract entered into by a minor by fraudulently misrepresenting his age is void. He cannot be stopped from
setting up the plea of minority.
3. Minors can have no privilege to cheat men, though law protects them, so that people may not exploit their
tender age. So, if a minor receives goods on credit while payment cannot be enforced goods can be recovered, if
restitution is possible.
4. The property of the minor is liable for the necessaries supplied to him, provided the goods are suitable tot eh
condition of his life and status. Even here, he is not personally liable, but his estate only is liable.
5. While a sale or mortgage by a minor is void, a sale or mortgage in favour of a minor is enforceable by him.
6. A contract by a guardian on behalf of the minor is enforceable by or against the minor, provided the guardian is
competent to contract and the contract is beneficial to the minor. But he cannot purchase immovable property
without obtaining the consent of the court.
7. Under Sec. 3 of the Partnership Act a minor may be admitted to the benefits of partnership with the consent of all
the partners.
CONSENT AND FREE CONSENT
Consent: It means acquiescence or act of assenting to an offer. Two or more persons are said to consent when they agree
upon the same thing in the same sense. (Sec. 13)
Free Consent: Consent is said to be free when it is not caused by
(1) Consent as defined in Sed. 15 or
(2) Undue influence as defined in Sec. 16, or
(3) Fraud as defined in Sed. 17, or
(4) Misrepresentation as defined in Sec. 18, or

(5) Mistake, subject to the provisions of Secs. 20, 21, and 22 (Sec. 14)
When there is no consent, there is no contract
Example : A is forced to sign a promissory note at the point of pistol. A knows what he is signing but his consent is not
free. The contract in this case is voidable at this option.

FLOW IN CONSENT
Coercion
(Sec. 15)

Undue influence Misrepresentation

(Sec. 16)

Fraudulent or
Willful (Sed. 17)

Mistake of law
(Sec. 21)

Mistake

Innocent or
unintentional
(Sec. 18)

Mistake of fact
(Sec. 20)

COERCION
When a person is compelled to enter into a contract by the use of force by the other party or under a threat, coercion is
said to be employed. Coercion is the committing, or threatening to commit, any act forbidden by the Penal Code 1860 or
the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention
of causing any person to enter into an agreement.
Example: a threatens to kill B if he does lend Rs. 1000 to C. B agrees to lend the amount to C. The agreement is entered
into under coercion.
A threat to commit suicide also amounts to coercion.
EFFECT OF COERCION
When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at
the option of the party whose consent was so caused (Sec. 19)
UNDUE INFLUENCE
Sometimes a party is compelled to enter into an agreement against his will as a result of unfair persuasion by the other
party. This happens when a special kind of relationship exists between the parties such that one party is in a dominant
position to exercise undue influence over the other.
Sec. 16(1) defines : undue influence as follows
A contract is said to be induced by undue influence where the relations subsisting between the parties are such
that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage
over the other.

The following relationships usually raise a presumption of undue influence viz.

(i) Parent and child
(ii) Guardian and ward
(iii) Trustee and beneficiary
(iv) Doctors and patient
(v) Solicitor and client, and
(vi) Finance and fiance
The presumption of undue influence applies whenever the relationship between the parties is such that one of them is
by reason of confidence reposed in him by the other, able to take unfair advantage over the other.
EFFECT OF UNDUE INFLUENCE
When consent to an agreement is obtained by undue influence, the agreement is a contract voidable at the option of
the party whose consent was so obtained. Any such contract may be set aside either absolutely or if the party who
is entitled to avoid it has received any benefit thereunder, upon such terms and conditions as to the Court may
seem just and equitable (Sec. 19-A)

DIFFERENCE BETWEENS COERCION AND UNDUE INFLUENCE

S. No.

Coercion

Undue Influence

1.

The consent is given under the threat of The consent is given by a person who is
an offence
so situated in relation to another that the
other person is in a position to dominate
his will

2.

Coercion is mainly of a physical Undue influence is of moral character. It

character. It involves mostly use of involves use of moral force or mental
physical or violent force.
pressure.

3.

There must be intention of causing any Here the influencing party uses its
person to enter into an agreement
position to obtain an unfair advantage
over the other party

4.

It involves a criminal act

No criminal act is involved

MISREPRESENTATION AND FRAUD

MISREPRESENTATION
Misrepresentation is a false statement which the person making it honestly believes to be true or which he does not know
to be false. It also includes non-disclosure of a material fact or facts without any intent to deceive the other party.
Sec. 18 defines misrepresentation According to it, there is misrepresentation
(1) When a person positively asserts that a fact is true when his information does not warrant it to be so, though he
believes is to be true.
(2) When there is any breach of duty by a person which brings an advantage to the person committing it by
misleading another to his prejudice.
(3) When a party causes, however innocently, the other party to the agreement to make a mistake as to the substance
of the thing which is the subject of the agreement.

FRAUD
Fraud exists when it is shown that a false representation has been made (a) knowingly, or (b) without belief in its truth, or
(c) recklessly, not caring whether it is true or false, and the maker intended the other party to act upon it.
MISTAKE OF LAW
Mistake of law be (1) mistake of law of the country or (2) mistake of law of a foreign country.
1. Mistake of law of the country: Ignorantta juris non exerts Ex. Ignorice of laws is no exclause : is a well settled
rule of law. A party cannot be allowed to get any relief on the ground that it had done a particular act in ignorance
of law. A mistake of law is, therefore, no excuse, and the contract cannot be avoided.
Example: A and B enter into a contract on the erroneous belief that a particular debt is barred by the Law of
Limitation. This contract may be voidable.
2. Mistake of law of a foreign country: Such a mistake is treated as mistake of fact and the agreement in such a case
is void. (Sec. 21)
MISTAKE OF FACT
Mistake of fact may be (1) a bilateral mistake, or (2) a unilateral mistake
1. Bilateral Mistake
Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, there is a
bilateral mistake. In such a case the agreement is void (sec. 20). The following two conditions have to be fauced
for the application of Sec. 20.
(i) The mistake must be mutual i.e. both the parties should misunderstand each other and should be at a crosspurposes.
Example: A agreed to purchase Bs motor-car which was lying in Bs garage. Unknown to either party, the
car and garage where completely destroyed by fire a day earlier. The agreement is void
(ii) The mistake must relate to a matter of fact essential to the agreement. As to what facts are essential in an
agreement will depend upon the nature of the promise in each case.
Example: A man and a woman entered into a separation agreement under which the man agreed to pay a weekly
allowance to the woman mistakenly believing themselves lawfully married leld the agreement was void as there was
mutual mistake on a point of fact which was material to the existence of the agreement.
The various cases which fail under bilateral mistake are as follows:
Mistake as to the Subject Matter:
Where both the parties to an agreement are working under a mistake relating to the subject-matter, the agreement is void.
Mistake as to the subject-matter covers the following cases.
(1) Mistake as to the existence of the subject-matter: If both the parties believes the subject-matter of the contract to
be in existence, which in fact at the time of the contract is non-existent, the contract is void.
Example: A agrees to buy from B a certain goat. It turns out that the goat was dead at the time of the bargain,
though neither parts was aware of the fact. The agreement is void.
(2) Mistake as to the identity of the subject-matter: It usually arises where one party intends to deal in one thing and
the other intends to deal in another.

Example: W agreed to buy from R a cargo on cotton to arrive ex-peerless from Bombay. There were two ships of
that name sailing from Bombay, one sailing in October and the other in December. W meant the former ship R
meant the latter. Held, there was a mutual or a bilateral mistake and there was no contract.
(3) Mistake as to the quality of the subject-matter: If the subject matter is something essentially different from what
the parties thought it to be the agreement is void.
Example: A sells to B a prece of silk B thinks that it is foreign silk. A knows that B thinks so but knows that it is
silk only.
(4) Mistake as to the quantity of the subject-matter: If both the parties are working under a mistake as to the quantity
of the subject-matter the agreement is void.
Example: A silver bar was sold under a mistake as to its weight. There was a difference in value between the
weight of the bar as it was and as it was supposed to be Held the agreement was void.
(5) Mistake as to the title to the subject-matter: If the seller as selling a thing which he is not entitled to sell and both
the parties are acting under a mistake, the agreement is void.
Example: A person took a lease of a fishery which, unknown to either party already belonged to him. Held, the
lease was void.
(6) Mistake as to the price of the subject-matter: if there is a mutual mistake as to the price of the subject-matter, the
agreement is void.
Example: C wrote to D offering to sell certain property for Rs. 15,000. He had earlier declined an offer from D to
buy the same property for Rs. 20,000. D who knew that his offer of Rs. 15,000 was a mistake for Rs. 25,000,
immediately accepted the offer. Held, D knew perfectly well that the offer was made by mistake and hence the
contract could not be enforced.
Mistake as to the Possibility of Performing the Contract
Consent is nullified if both the parties believe that in agreement is capable of being performed when in fact this is not the
case. The agreement, in such a case, is void on the ground of impossibility.
Impossibility may be
(i) Physical Impossibility
Example: A contract for the hire of a room for witnessing the coronation procession of Edward VII was held to be
void because unknown to the parties the procession had already been cancelled.
(ii) Legal Impossibility: A contract is void if it provides that something shall be done which cannot, as a matter of
law be done.
2. Unilateral Mistake
When in a contract only one of the parties is mistaken regarding the subject matter or in expressing or
understanding the terms or the legal effect of the agreement the mistake is a unilateral mistake. According to Sec.
22, a contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a
matter of fact. A unilateral mistake is not allowed as a defence in avoiding a contract unless the mistake is brought
about by the other partys fraud or misrepresentation.
Example: A offers to sell his house to B for an intended sum of Rs. 44,000. By mistake he makes an offer in
writing of Rs. 40,000. He cannot plead mistake as a defence.

LEGALITY OF OBJECT
A contract must have a lawful object. The word object means purpose of design. In some cases consideration for an
agreement may be lawful but the purpose for which the agreement is entered into may be unlawful. In such cases the
agreement is void. As such both the object and the consideration of an agreement must be lawful otherwise the agreement
is void.
The consideration or object of an agreement is unlawful
1. If the object is forbidden by law
Example: A promise to obtain for B an employment in the public service and 18 promises to pay Rs. 1,00,000 to
A. the agreement is void, as the consideration is unlawful.
2. If the object is permitted, it would defeat the provisions of any law
Example: N agreed to enter a companys service in consideration of a weekly wage of Rs. 75 and a weekly
expense allowance of Rs. 25. Both the parties knew that the expense allowance was a device to evade tax. Held
the agreement was unlawful.
3. If the object is fraudulent: An agreement which is made for a fraudulent purpose is void. Thus an agreement in
fraud of creditors with a view to defeating their rights is void.
4. If the Court regards the object as immoral
Example: A agrees to let her daughter to B for concubinage (state of living together as man and wife without
being married. The agreement is unlawful, being immoral.
5. Where the Court regards it as opposed to public policy.
UNLAWFUL AND ILLEGAL AGREEMENTS
An unlawful agreement is one which, like a void agreement, is not enforceable by law. An illegal agreement is not only,
void as between the immediate parties but has further effect that the collateral transactions to it also become tainted with
illegality.
Example: T lends Rs. 50,000 to B to help him to purchase some prohibited goods from T, an alien enemy. If B enters into
an agreement with T, the agreement will be illegal and the agreement between B and T shall also become illegal, because
it is collateral to the main transaction. T cannot, therefore, recover the amount.

AGREEMENTS OPPOSED TO PUBLIC POLICY

An agreement is said to be opposed to public policy when it is harmful to the public welfare. Some of the agreements
which are opposed to public policy and are unlawful are as follows.
1. Agreements of trading with enemy: An agreement made with an alien enemy in time of war is illegal on the
ground of public policy.
2. Agreement to commit a crime: Where the consideration in an agreement is to commit a crime, the agreement is
opposed to public policy. The Court will not enforce such an agreement.
3. Agreements which interfere with administration of police: An agreement, the object of which is to interfere with
the administration of justice is unlawful, being opposed to public policy. It may take any of the following forms.
(a) Interference with the course of justice: An agreement which obstructs the ordinary process of justice is
unlawful.
(b) Stifling prosecution: It is in public interest that if a person has committed a crime, he must be prosecuted and
punished.

(c) Maintenance and champerty: Maintenance is an agreement to give assistance, financial or otherwise, to
another to enable him to bring or defend legal proceedings when the person giving assistance has got no legal
interest of his own in the subject-matter.
4. Agreements in restraint of legal proceedings : Sec. 28 which deals with these agreements.
(a) Agreements restricting enforcement of rights: An agreement which wholly or partially prohibits any party
from enforcing his rights under or in respect of any contract is void to that extent.
(b) Agreements curtailing period of limitation: Agreements which curtail the period of limitation prescribed by
the Law of Limitation are void because their object is to defeat the provisions of law.
5. Trafficking in public offices and rules: Agreements for the sale or transfer of public offices and titles or for the
procurement of a public recognition like Padma Vibhushan or Param Veer Chakra for monetary consideration are
unlawful being opposed to public policy.
Example: R paid a sum of Rs, 2,50,000 to A who agreed to obtain a seat for Rs son in a Medical College. On As
failure to get the seat, R filed a suit for the refund of Rs. 2,00,000. Held, the agreement is void on the ground of
public property.
6. Agreements tending to create interest opposed to duty: If a person enters into an agreement whereby he is bound
to do something which is against his public or professional duty the agreement is void on the ground of public
property.
7. Agreements in restraint of paternal rights: A father, and in his absence the mother, is the legal guardian of his/her
minor child. This rights of guardianship cannot be bartered away by any agreement.
8. Agreements restricting personal liberty: Agreements which unduly restrict the personal freedom of the parties to
it are void as being against public policy.
9. Agreements in restraint of marriage: Every agreement in restraint of the marriage of any person, other than a
minor, is void (Sec. 26). This is because the law regards marriage and married status as the right of every
individual.
10. Marriage brokerage or brocage agreements: An agreements by which a person for a monetary consideration,
promises in return to procure the marriage of another is void being opposed to public policy.
11. Agreements interfering with marital duties: Any agreement which interferes with the performance of marital
duties is void being opposed to public policy. Such agreements have been held to include the following.
(a) A promise by a married person to marry during the lifetime or after the death of spouse.
(b) An agreement in contemplation of divorce e.g. an agreement to lend money to a woman in consideration of
her getting a divorce and marrying the lender.
(c) An agreement that the husband and wife will always stay at the wifes parents house and that the wife will
never leave her parental house.
12. Agreements to defraud creditors or revenues authorities: An agreement the object of which is to defraud the
creditors or the revenue authorities is not enforceable being opposed to public policy.
13. Agreements in restraint of trade: An agreement which interferes with the liberty of a person to engage himself in
any lawful trade profession or vocation is called an agreement in restraint of trade.
VOID AGREEMENTS
A void agreement is one which is not enforceable by law [Sec. 2 ] Such an agreement does not give rise to any legal
consequences and exaused ab initio.
The following agreements have been expressly deciared to be void by the Contract Act.

1) Agreements by incompetent parties (Sec. 11)

2) Agreements made under a mutual mistake of fact [Sec. 20].
3) Agreements the consideration or object of which is unlawful (Sec. 23)
4) Agreements the consideration or object of which is unlawful in part (Sec. 24)
5) Agreements made without consideration (Sec. 25)
6) Agreements in restraint of marriage (Sec. 26).
7) Agreements in restraint of trade (Sec. 27)
8) Agreements in restraint of legal proceedings (Sec. 28)
9) Agreements the meaning of which is uncertain (Sec. 29)
10) Agreements by way of wager (Sec. 30)
11) Agreements contingent on impossible events (Sec. 36)
12) Agreements to do impossible acts (Sec. 56)
13) In case of reciprocal promises to do things legal and also other things illegal, the second set of reciprocal promises
is a void agreement (Sec. 57)

WAGERING AGREEMENTS OR WAGER

A wager is an agreement is an agreement between two parties by which one promises to pay money or moneys worth
on the happening of some uncertain event in consideration of the other partys promise to pay if the event does
not happen. Thus if A and b enter into an agreement that A shall pay B Rs. 100 if it rains on Monday, and that B
shall pay A the same amount if it does not rain, it is a wagering agreement.
Essentials of Wagering Agreement:
(1) Promise to pay money or moneys worth: The wagering agreement must contain a promise to pay money or
moneys worth.
(2) Uncertain event: The promise must be conditional on an event happening or not happening.
(3) Each party must stand to win or lose: Upon the determination of the contemplated event, each party should stand
to win or lose.
(4) No control over the event: Neither party should have control over the happening of the event one way or the other
(5) No other interest on the event: Neither party should have nay interest in the happening or non-happening of the
event other gdfgjdg sum or stake he will with or lose
CONTINGENT CONTRACTS
Contingent means that which is dependent on something else. A Contingent Contract is a contract to do or not to do
something, if some event collateral to such contract, does or does not happen (Sec. 31). For example, goods are sent on
approval the contract is a contingent contract depending on the act of the buyer to accept or reject the goods.
There are three essential characteristics of a contingent contract.
1. Its performance depends upon the happening or non-happening in future of some event. It is this dependence on a
future event which distinguishes a contingent contract from other contracts.
2. The event must be uncertain. If the event if bound to happen, and the contract has got to be performed in any case
it is not a contingent contract
3. The event must be collateral, i.e. incidental to the contract
Contracts of insurance, indemnity and guarantee are the commonest instances of a contingent contract.

RULES REGARDING CONTINGENT CONTRACTS

1. Contingent contracts dependent on the happening of an uncertain future event cannot be enforced until the event
has happened. If the event becomes impossible, such contracts become void (Sec. 32)
Example: A contracts to pay B a sum of money when B marries C. C dies without being married to B. The
contract becomes void.
2. Where a contingent contract is to be performed if a particular event does not happen, its performance can be
enforced when the happening of that event becomes impossible. (Sec. 33)
Example: A agrees to pay B a sum of money, if a certain ship does not return. The ship is sunk. The contract can
be enforced when the ship sinks.
3. If a contract is contingent upon how a person will act at an unspecified time, the event shall be considered to
become impossible when such person does anything which renders it impossible that he should so act within any
definite time, of otherwise than under further contingencies (Sec. 34)
Example: A agrees to pay B a sum of money if B marries C. C marries D. The marriage of B to C must not be
considered impossible, although it is possible that D may die and that C may afterwards marry B.
4. Contingent contracts to do r onto to do anything, if a specified uncertain event happens within a fixed time,
become void if the event does not happen or its happening becomes impossible before the expiry of that time.
Example: A promises to pay B a sum of money if a certain ship returns within a year. The contract may be
enforced if the ship returns within the year and becomes void if the ship is burnt within the year.
5. Contingent agreements to do or not to do anything, if an impossible event happens are void, whether or not the
fact is known to the parties (Sec. 36).
PERFORMANCE OF CONTRACT
Performance of a contract takes place when the parties to the contract fulfil their obligations arising under the contract
within the time and in the manner presented.
OFFER TO PERFORM
Sometimes it so happens that the promisor offers to perform him obligation under the contract at the proper time and place
but the promise does not accept the performance. This is known as attempted performance or tender.
REQUISITES OF A VALID TENDER
1. It must be unconditional. It becomes conditional when it is not in accordance with the terms of the contract.
2. It must be of the whole quantity contracted for or of the whole obligation. A tender of an installment when the
contract stipulates payment in full is not a valid tender.
3. It must be by a person who is in a position, and is willing, to perform the promise.
4. It must be made at the proper time and place. A tender of goods after the business hours or of goods or money
before the due date is not a valid tender.
5. It must be made to proper person, i.e. the promise or his duly authorized agent. It must also be in proper form.
6. It may be made to one of the several joint promises. In such a case it has the same effect as a tender to all of them.
7. In case of tender of goods, it must give a reasonable opportunity to the promise for inspection of goods.
8. In case of tender of money, the debtor must make a valid tender in the legal tender money.

RECIPROCAL PROMISES
Promises which form the consideration or part of the consideration for each other are called: reciprocal promises [Sec.
2(f)]. Where, for example: A promises to do or not to do something and consideration of B is promise to do or not to do
something the promises are reciprocal.
These promises have been classified is follows:
(1) Mutual and Independent: Where each party must perform his promise independently and irrespective of the fact
whether the other party has performed or is willing to perform his promise or not the promises are mutual and
independent.
Example: In a contact of sale, B agrees to pay the price of goods on of instant. S promises to supply the goods on
2nd instant. The promises are mutual and independent.
(2) Conditional and Dependent: Where the performance of the promise by one party depends on the prior
performance of the promise by the other party the promises are conditional and dependent.
Example: A promises to remover certain debris lying in front of Bs house provided B supplies him with the cart.
The promises in this case are conditional and dependent. A need not perform his promise if B fails to provide him
with the cart.
(3) Mutual and Consent: Where the promises of both the parties are to be performed simultaneously they are said to
be mutual and concurrent. The example of such promises may be sale of goods for cash.
Rules Regarding Performance of Reciprocal Promises
1) Simultaneous performance of reciprocal promises
2) Order of performance of reciprocal promises
3) Effect of one party preventing another from performing promise
4) Effect of default as to promise to be performed first.
5) Reciprocal promise to do things legal and also other things illegal
TIME AS THE ESSENCE OF THE CONTRACT
The expression time is of the essence of the contract means that a breach of the condition as to the time for
performance will entitle the innocent party to consider the breach as a repudiation of the contract.
Sec. 55 deals with the question of time as the essence of the contract and provides.
1. When time is of the essence: In a contract, in which time if of the essence of the contract, if there is a failure on
the part of the promisor to perform his obligation within the fixed time. The contract (or so much of it as remains
unperformed becomes voidable at the option of the promise (Sec. 55 para 1). If, in such a case the promise accepts
performance of the promise after the fixed time, he cannot claim compensation for nay loss occasioned by the
non-performance of the promise at the agreed time. But if at the time of accepting the delayed performance he
gives notice to the promisor of his intention to claim compensation, he can do so (Sec. 55 para 3)
In commercial or mercantile contracts which provide for performance within a specified time, time is ordinarily of
the essence of the contract. This is so because businessmen want certainty.
Example: In a contract for the sale or purchase of goods the prices of which fluctuate rapidly in the market, the
time of delivery and payment are considered to be of the essence of the contract.

2. When time is not of the essence: In a contract, in which time is not of the essence of the contract, failure on the
part of the promisor to perform his obligation within the fixed time does not make the contract voidable, but the
promise is entitled to compensation for any loss occasioned to him by such failure (Sed. 55 para 2)
Intention to make time as the essence of the contract, if expressed in writing, must be in a language which is
unambiguous and unmistakable. The mere fact that a certain time is specified in a contract for the performance of
a promise does not necessarily make time as the essence of the contract. If the contract includes clauses providing
for extension of time in certain contingencies or for payment of fine or penalty for every day or week the work
undertaken remains unfinished on the expiry of time provided in the contract, such clauses are construed as
rendering ineffective the express provision relating to the time being of the essence of the contract.
TERMINATION AND DISCHARGE OF CONTRACT
Discharge of contract means termination of the contractual relationship between the parties. A contract is said to be
discharged when it ceases to operate, i.e. when the rights and obligations created by it come to an end.
A contract may be discharged
1. By Performance
2. By Agreement or Consent
3. By impossibility
4. By Lapse of Time
5. By operation of Law
6. By Breach of Contract
1. Discharge by Performance
Performance means the doing of that which is required by a contract. Discharge by performance takes place when
the parties to the contract fulfill then obligations arising under the contract within the time and in the manner
prescribed.
Performance of a contract is the most usual mode of its discharge. It may be
(1) Actual Performance: When both the parties perform their promises the contract is discharged. Performance
should be complete precise and according to the terms of the agreement.
(2) Attempted Performance or Perfer: Tender is not actual performance but is only an after to perform the
obligation under the contract.
2. Discharge by agreement or consent
(a) Sec. 62 lays down that if the parties to a contract agree to substitute a new contract for it or to rescind or to
alter it the original contract is discharged and need not be performed.
The various cases of discharge of contract by mutual agreement are dealt with in Sec. 62 and 63 are given below.
Rescission Sec. 62: Novation takes place when a new contract is substituted for an existing one between the same
parties.
Example: A owes money to B under a contract. It is agreed between A, B and C that B shall henceforth accept C
as his debtor, instead of A. the old debt of A to B is at an end and a new debt from C to B has been contracted.
(b) Rescission Sec. 62: Rescission of a contract takes place when all or some of the terms of the contract are
cancelled. It may occur
(i)
By mutual consent of the parties or
(ii)
Where one party fails in the performance of his obligation in such a case the other party may rescind the
contract without prejudice to his right to claim compensation for the breach of contract.

Example: A promises to supply certain goods to B six months after date. By that time, the goods go out of
fashion. A and B may rescind the contract.
(c) Alteration (Sec 62): Alteration of a contract may take place when one or more of the terms of the contract is
are altered by the mutual consent of the parties to the contract. In such a case, the old contract is discharged.
Example: A enters into a contract with B for the supply of 100 bales or cotton at his Godown No. 1 by the
first of the next month. A and B may after the terms of the contract by mutual consent.
(d) Remission Sec. 63) Remission means acceptance of a lesser fulfilment or the promise made, i.e. acceptance
of a lesser sum than what was contracted for the discharge of the whole of the debt.
Example: A owes B Rs. 50,000. A pays to B and B accepts in satisfaction of the whole debt. Rs. 20,000 paid
at the time and place at which Rs. 50,000 were payable. The whole debt is discharged.
(e) Waver: Waver takes place when the parties to a contract agree that gdfsg shall no longer be bound by the
contract. This amounts to a mutual thandonment at rights by the parties to the contract.
(f) Merger: Merger tales place when an inferior right accuring to a party under a contract merger into a superior
right accruing to the same party under the same on some other contract.
Example: P holds a property under a lease. He later buys the property. His rights as a lessee merge into his
rights as an owner.
3. DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE
If an agreement contains an undertaking to perform an impossibility, it is void ab initio. This rule is based on the
following maxims:
1. Impossibility existing of the time of agreement: Sec. 56 lays down that can agreement to do an impossible act
itself is void. This is known as pre-contractual or initial impossibility.
2. Impossibility arising subsequent to the formation of contract: Impossibility which arises subsequent to the
formation of a contract (which could be performed at the time when the contract was entered into) is called postcontractual or supervening impossibility.
Discharge by Supervening Impossibility
A contract is discharged by supervising impossibility in the following cases
1. Destruction of subject-matter of contract: When the subject-matter of a contract, subsequent to its formation, is
destroyed without any fault of the parties to the contract, the contract is discharged.
Example: C let a music hall to T for a series of concerts on certain days. The hall was accidentally burnt down
before the date of the first concert. Held the contract was void.
2. Non-existence or Non-occurrence of a particular state of things: Sometimes, a contract is entered into between
two parties on the basis of a continued existence or occurrence of a particular state of things. If there is any
change in the state of things which ought to have occurred does not occur, the contract is discharged.
Example: A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract
becomes void.
3. Death or Incapacity for personal service: Where the performance of a contract depends on the personal skill or
qualification of a party, contract is discharged on the illness or incapacity or death of that party. The mans life is
an implied condition of the contract.

Example: An artist undertook to perform at a concert for a certain price. Before she could do so, she was taken
seriously ill. Held she was discharged due to illness.
4. Change of law: When subsequent to the formation of a contract change of law takes place, and the performance of
the comerge becomes impossible the contract discharged.
Example: D enters into a contract with P on 1st March for supply of ghdkjfg imported goods in the month of
September of the same year in June gdfg fgdf Parliament the import of such goods is banned. The contract is
discharged.
5. Outbreak of war : A contract entered into with an after enems during war is unlawful and therefore impossible for
performance. Contracts entered into before the outbreak of war are suspended during the war and may be revived
after the war is over.
4.

DISCHARGE BY LAPSE OF TIME

The Limitation Act 1963 laws down that a contract should be performed within a specific period called period of
limitation. If it is not performed and if no action is taken by the promise within the period of limitation he is deprived of
his remedy at law. For example the price of goods sold without any stipulation as to credit should be paid within three
years of the delivery of the goods. If the price is not paid and creditor does not file a suit against the buyer for the recovery
of price within three years the debt becomes time-barred and hence irrecoverable.
5.

DISCHARGE BY OPERATION OF LAW

A contract may be discharged by operation of law. This includes discharge
(a) By Death: In contracts involving personal skill or ability, the contract is terminated on death of the promissory. In
other contracts the rights and liabilities of a deceased person pass on to the legal representatives of the deceased
person.
(b) By Merger: When an inferior right accruing to a party merges into a superior rights accruing to the same party
under the same or some other contract the inferior right accruing to the party is said to be discharged.
(c) By Insolvency: When a person is adjudged insolvent, he is discharged from all liabilities incurred prior to his
adjudication.
(d) By Authorised Alteration of the terms of a written agreement: Where a party to a contract makes any material
alteration in the contract without the consent of the other parts, the other parts can avoid the contract. A material
alteration is one which changes in a significant manner the legal identity or character of the contract or the rights
and liabilities of the parties to the contract.
(e) B y Rights and Liabilities becoming visited of the dfgdfg Person: Where the rights and liabilities under a contract
vested in the same person for example when a bill gets into the hands of the acceptor, the other parties are
discharged.
6. DISCHARGE BY BREACH OF CONTRACT
Breach of contract means a breaking of the obligation which a contract imposes. It occurs when a party to the
contract without lawful excuse does not fulfil his contractual obligation or by his own act makes it impossible that
he should perform his obligation under it. It confers a right of action for damages on the injured party.

REMEDIES FOR BREACH OF CONTRACT

When a contract is broken, the injured party has one or more of the following remedies:
1. Rescission of the contract

2.
3.
4.
5.

Suit for damages

Suit upon quantum meruit
Suit for specific performance of the contract
Suit for injunction

1. RESCISSION
When a contract is broken by one party, the other party may sue to treat the contract as rescinded and refuse
further performance. In such a case, be is absolved of all his obligations under the contract.
Example: a promises B to supply 10 bags of cement on a certain day. B agrees to pay the price after the receipt of
the goods. A does not supply the goods. B is discharged from liability to pay the price.
The Court may grant rescission.
(a) Where the contract is voidable by the plamtiff of
(b) Where contract is unlawful to fgdfg but apparent off its face and the defendant is more to blame thatn the gdfgdf
When a party treats the contracts as rescinded be makes himself liable to restgdf any benefits he has fgdfg of under the
contract to the party from whom such benefits were received. But if a person rightfully rescinds a contract he is entitled to
compersation for any damage which he has sustained through non-fulfilment of the contract by the other party.
2. DAMAGES
Damages are a moctars compensation allowed to the injured party by the Court for the loss or injurs suffered by him
by the breach of a contract. The object of awarding damages for the search of a contract is to put the injured party
in the same position, so far as money am the it, as if he had not been injured, i.e. in the position in which he would
have been had there been performance and not breach. This is called the doctrine of restitution.
The rules relating to damages may be considered as under
1. Damages arising naturally Ordinary damanges
When a contract has been broken, the injured party can recover from the other party such damages as naturally
and directly arose in the usual course of things from the breach. This means that the damages must be the
proximate consequence of the breach of contract. These damages are known as ordinary damages.
Example: A contracts to sell and deliver 50 quintals of Farm Wheat to B at Rs. 1000 per quintal, the price to be
paid at the time of delivery the price of wheat rises to Rs. 1200 per quintal and A refuses to sell the wheat B can
claim damages at the rate of Rs. 200 per quintal.
2. Damages in contemplation of the parties Special damages
Special damages can be claimed only under the special circumstances which would result in a special loss in case
of breach of a contract. Such damages knows as special damages cannot be claimed as a matter of right.
Example: A. a builder, contracts to erect a house for B by the 1st of January. The order that B may give possession
of it at that time to C to whom B has contracted to hfdg it. A is informed of the contract between B and C. A
builds the house so badly that before the 1st January, it falls down and has to be rebuilt by B fgdfg vonsequence
loses the rent which be was to have received from C, and gdfgdfgdf to make compensation to C fvor the breach of
the contract. A must make cgdfgdfgd to gdfg for the cost of rebuilding the house for the rent lost, and for the
compensation made to.

3. Vindictive or Exemplary damages

Damages for the breach of a contract are given by way of compensation for loss suffered, and not by way of
punishement for wrong inflicted. Hence vindictive or exemplary damages have no place in the law of contract
because they are punitive involving punishment by nature. But in case of (a) breach of a promise to marry and the
dishonor of a cheque by a banker wrongfully when he possesses sufficient funds by the credit of the customer, the
Court may award exemplary damages.
4. Nominal damages
Where the injured party has not in fact suffered any loss by reason of the breach of a contract, the damages
recoverable by him are nominal. These damages merels acknowledge that the plaintiff has proved his case and
won.
Example: A firm consisting of four partners employed B for a period of two years. After six months two partners
rebred the business being carried on by the other two B declined to be employed under the continuing partners.
Held, he was only entitled to nominal damages as he had suffered no loss.
5. Damages for loss of reputation
Damages for loss of reputation on case of breach of a contract are generally not recoverable. An exempuon to this
rule exists in the case of a banker who wrongfully refuses to honour a customers cheque. If the customer happens
to be a tradesman, he can recover damages in respect of any loss to his trade reputation byh the breach. And the
rule of law is the smaller the amount of the cheque dishonoured the larger the amount of damages awarded. But if
the customer is not a tradesman be can recover only nominal damages.
6. Damages for inconvenience and discomfort
Damages can be recovered for physical inconvenience and discomfort. The general rule in this connection is that
the measure of damages is not affected by the motive or the manner of the breach.
Example: A was wrongfully dismissed in a harsh and humiliating manner by from his employment. Held (a) A
could recover a sum representing his wages for the period of notice and the commission which he would have
earned during that period but (b) he could not recover anything for his injured feelings or for the loss sustained
from the fact that his dismissal made it more difficult for him to obtain employment.
7. Mitigation of damages
It is the duty of the injured party to take all reasonable steps to mitigate the loss caused by the breach. He cannot
claim to be compensated by the party in default for loss which the ought reasonably to have avoided. That is he
cannot claim compensation for loss which is really due not to the breach, but due to his own neglect to mitigate
the loss after the breach.
8. Difficulty of Assessment
Although damages which are incapable of assessment cannot be recovered the fact that they are difficult to assess
with certainty or precision does not prevent the aggrieved party from recovering them. The Court must do its best
estimate the loss and a contingences may be taken into account.
Example: H advertised a beauty competition by which gfdgfk of certain newspapers were to select fifty ladies. He
himself was to select twelve out of these fifty. The selected twelve were to be provided theatrical encagements. C
was one of the fifty and by Hs breach of contract she was not present when the final section was made. Held C
was entitled to damages although it was difficult to assess them.

9. Cost of Decree
The aggrieved party is entitled in addition to damages to get the cost of getting the decree for damages. The cost
of suit for damages is in the discretion of the Court.
10. Damages agreed upon in advance in case of breach
If a sum is specified in a contract as the amount to be paid in case of its gdfgdf or if the contract contains any
other stipulation by way of gdfgdfg dfg failure to perform the obligations the aggrieved party is entiled to gfdgd
from the gdfgd has broken the contract a reasonable compensation not exceeding the fgdfg named.
Example: A contracts with B to pay Rs. 1000 if he fails to pay gdfgdf g given day. B is entitled to recover from A
such compensation not exceeding Rs. Dfgd as the Court considers reasonable.
Liquidated Damages and Penalty
Sometimes parties to a contract stipulate at the time of its formation that on the breach of the contract by either of them a
certain specified sum gdfgd be payable as damages. Such a sum may amount to either liquidated damages or a penalty.
Liquidated damages represent a sum fixedc or ascertained by the parties in the contract which is a fair and genuine preestimate of the probable loss that gdfg fgd fg as a result of the breach. If it takes place. A penalty is a sum named in the
contract at the time of its formation, which is dispropoetionate to the damages likely to fdgdfgd as a result of the breach. It
is fixed up with a view to securing the performance of the contract.
Payment of Interest
The largest number of cases decided under Sec. 74 relate to stipulation if a contract providing for payment of interest. The
following rules are observed with regard to payment of interest.
1. Payment of interest in case of default.
2. Payment of interest at higher rate
a. From the date of the bond, and
b. From the date of default
3. Payment of compound interest on default
a. At the same rate as simple interest and
b. At the rate higher than simple interest
4. Payment of interest at a lower rate, if interest paid on due date.
3. QUANTUM MERUIT
The phrase quantum meruit ghdfgfdgh much as earned. A right to sue on a quantum meruit arises where a ggdfg
performed by one party has become discharged to the breach of the contract dghdfghdf party.
4. SPECIFIC PERFORMANCE
In certain cases of breach of contract damages are not an adequate remedy. The Court may, in such cases direct
the party in breach to carry out his promise according to the terms of the contract.
Some of the cases in which specific performance of a contract may in discretion of the Court be enforced are as
follows:
(a) When the act agreed to be done is such that compensation in money for its non performance is not an
adequate relief.
(b) When there exists no standard for ascertaining the actual damage caused by the non-performance of the act
agreed to be done.
(c) When it is probable that the compensation in money cannot be got for the non-performance of the act agreed
to be done.

5. INJUNCTION
Where a party is in breach of a negativbe term of a contract the where gdfg is doing something which he promised
not to do, the Court may be issuing an order restrain him from doing what he promised not to do. Such an order of
the Court is known as injunction.
Example: W agreed to sing at Ls theatre, and during a certain period to sing nowhere else. Afterwards W made
contract with Z to sing at another theatre and refused to perform the contract with L. Held, W could be restrained
by injunction from singing for Z.
QUASI CONTRACTS
Under certain circumstances, a person may receive a benefit to which the law regards another person as better
entitled, or for which the law considers he should pay to the other person, even though there is no contract
between the parties. Such relationships are termed quasi-contracts, because, although there is no contract or
agreement between the parties, they are put in the same position as if there were a contract between them.
A quasi-contract rests on the ground of equity that a person shall not be allowed to enrich himself unjustly at the
expense of another. The principle of unjust enrichment requires:
That the defendant has been enriched by the receipt of a benefit
That this enrichment is at the expense of the plaintiff, and
That the retention of the enrichment is unjust.
Law of quasi-contracts is also known as the law of restitution. Strictly speaking, a quasi-contract is not a contract at
all. A contract is intentionally entered into. A quasi-contract, on the other hand, is created by law.
KINDS OF QUASI-CONTRACTS
1. SUPPLY OF NECESSARIES (Sec. 68)
If a person, incapable of entering into a contract, or anyone whom he is legally bound to support, is supplied by
another with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be
reimbursed from the property of such incapable person.
Example: A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be reimbursed from
Bs property.
2. PAYMENT OF INTERESTED PERSON (Sec. 69)
A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it,
is entitled to be reimbursed by the other.
Example: P left his carriage on Ds premises. Ds landlord seized the carriage as distress for rent. P paid the rent to
obtain the release of his carriage. Held, P could recover the amount from D.
The essential requirements are as follows:
(a) The payment made should be bonafide for the protection of ones interest.
(b) The payment should not be voluntary one.
(c) The payment must be such as the other party was bound by law to pay.
3. OBLIGATION TO PAY FOR NON-GRATUITOUS ACTS (Sec. 70)
When a person lawfully does anything for another person or delivers anything to him, not intending to do so
gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former
in respect of, or to restore, the thing so done or delivered.
Example: a, a tradesman, leaves goods at Bs house by mistake. B treats the goods as his own. He is bound to pay for
them to A.

Before any right of action under Sec. 70 arises, three conditions must be satisfied.
(a) The thing must have been done lawfully.
(b) The person doing the act should not have intended to do it gratuitously
(c) The person for whom the acts is done must have enjoyed the benefit of the act.
4. RESPONSIBILITY OF FINDER OF GOODS (sec. 71)
A person, who finds goods belonging to another and takes them into his custody, is subject to the same responsibility
as a bailee. 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. he must also take all necessary
measures to trace its owner. If he does not, he will be guilty of wrongful conversion of the property. Till the
owner is found out, the property in goods will vest in the finder and he can retain the goods as his own against the
whole world (except the owner).
Example: F picks up a diamond on the floor of Ss shop. He hands it over to S to keep it till true owner is found out.
No one appears to claim it for quite some weeks in spite of the wide advertisements in the newspapers. F claims
the diamond for S who refuses to return. S is bound to return the diamond to F who is entitled to retain the
diamond against the whole world except the true owner.
The finder can sell the goods in the following cases:
When the thing found is in danger of perishing.
When the owner cannot, with reasonable diligence, be found out.
When the owner is found out, but he refuse to pay the lawful charges of the finder, and
When the lawful charges of the finder, in respect of the thing found amount to two-thirds of the value of the
thing found. (Sec. 169)
5. MISTAKE OR COERCION (Sec. 72)
A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it
to the person who paid it by mistake or under coercion. The word coercion is used in Sec. 72 in its general sense
and not as defined in Sec. 15.
Example: A and B jointly owe Rs. 100 to C. A alone pays the amount to C and B, not knowing this fact, pays Rs. 100
over again to C. C is bound to pay the amount to B.
QUANTUM MERUIT
Quantum meruit literally means as much as earned or as much as it merited. When a person has done some work
under a contract, and the other party repudiates the contract, or some event happens which makes the further
performance of the contract impossible, them the party who has performed the work can claim remuneration for
the work he has already done. Likewise, where one person has expressly or impliedly requested another to render
him a service without specifying any remuneration, but the circumstances of the request imply that the service is
to be paid for, there is implied a promise to pay quantum meruit, i.e. so much as the party rendering the service
deserves. The right to claim quantum meruit does not arise out of contract as the right to damages does, it is a
claim on the quasi-contractual obligation which the law implies in the circumstances.
The claim for quantum meruit arises only when the original contract is discharged. If the original contract exists, the
party not in default cannot have quantum meruit remedy, he has to take resort to remedy in damages. Further the
claim for quantum meruit can be brought only by the party who is not in default.
The claim for quantum meruit arises in the following cases

(a)
(b)
(c)
(d)
(e)
(f)

When an agreement is discovered to be void (Sec. 65)

When something is done without any intention to do so gratuitously (Sec. 70)
When there is an express or implied contract to render services but there is no agreement as to remuneration
When the completion of the contract has been prevented by the act of the other party to the contract
When a contract is divisible
When an indivisible contract is completely performed but badly.

Review Questions
1.
2.
3.
4.
5.
6.
7.

Define contract. What are the essentials of a valid contract?

What are legal rules relating to offer?
What are the rules relating to consideration?
Discuss the nature of contract entered into with minors.
What are the different modes of discharging the contract?
What are the remedies for breach of contract?
What are quasi-contracts? Enumerate the instances of quasi-contracts laid down under the Act.

SPECIAL CONTRACTS
LESSON 2
INDEMNITY AND GUARANTEE
DEFINITION
Section 124 of the Contract Act defines it as a contract by which one party promises to save the other from loss caused
to him by the conduct of the promisor himself or by the conduct of any other person. The person who promises is called
the Indemnifier and the person to whom the promise is made is called the Indemnified or Indemnity Holder.
Illustration: A promises not to construct buildings on a particular site so as to prevent light and air to Bs house and in
case of breach of such promise, to indemnify for the consequent loss.
This is a contract of indemnity. A contract of insurance is also a contract of indemnity.
RIGHTS OF AN INDEMNITY HOLDER
He is entitled to recover
All damages
All costs which he may be compelled to pay in any suit in respect of any matter to which the promise to
indemnity applies, and
All sums which he may have paid under the terms of any compromise of any such suit provided, such
compromise was not contrary to the orders of the promisor and was prudent or the promisor authorizes him to
compromise the suit.
CONTRACT OF GUARANTEE
Section 126 of Contract Act defines it as a contract to perform the promise, or discharge the liability, of a third person in
case of his default. The person who gives the guarantee is called the surety, the person in respect of whose default, the
guarantee is given is called the principal debtor, and the person to whom the guarantee is given is called the creditor.
Illustration: A purchases goods from B on credit. C agrees to stand as a surety which means that if A does not pay the
price of the goods, he will pay. Here, A is the principal debator, B is the creditor and C is the surety or guarantee.
Distinction between Contract of Indemnity and Contract of Guarantee
Contract of Indemnity
Contract of Guarantee
1

There are two parties, namely

Indemnifier and the Indemnified.

There are three parties, viz the principal debtor,

the creditor and the surety

The liability of the Indemnifier is

primary

The liability of the surety is subsidiary

The liability of the Indemnifier is

contingent

The liability of the surety is subsisting

The Indemnifier cannot sue the third

party in his name even after making
good the loss unless there is an
assignment in his favour from the
indemnified.

The surety can sue the principal debtor in his

own name after paying the creditor

RIGHTS OF SURETY
Rights against the Principal Debtor
1) After discharging the liability of the principal debtor, the surety is entitled to all those rights which the creditor
himself exercises against the principal debtor. This right of the surety is called subrogation.
Illustration: The right of the creditor to receive dividends from the official assignee when the principal debtor
becomes bankrupt, can be exercised by the surety.
2) The surety can proceed against all those securities of the principal debtor, which the creditor himself can proceed
against.
3) The surety is entitled to be indemnified for all payments rightfully made by him.
Illustration: B is indebted to C, and A is surety for the debt. C demands payment form A, and on his refusal sues him
for the amount. A defends the suit, having reasonable grounds for doing so but is compelled to pay the amount of the
debt with costs. He can recover from B the amount paid by him for costs as well as the principal debt.
Rights against the Creditor
1) The surety may require the creditor to sue the debtor. But he cannot compel the creditor to do so.
2) In the case of fidelity contracts, he can insist upon the creditor to dispense with the services of the principal debtor
when his dishonesty is established.
3) He can claim set off or counter-claim which the principal debtor could have obtained against the creditor.
4) On payment of the guaranteed debt, ha can require the creditor to assign to him all the securities held by the
creditor in respect of the debt. If the creditor loses or parts with such securities without the consent of the surety,
the surety is discharged to the extent of the value of the security.
Illustration: C advances to B, his tenant, Rs. 2000 on the guarantee of A. C has also a further security for the sum of
Rs. 2000 by mortgage of Bs furniture. C cancels the mortgage. B becomes insolvent and C sues A on his guarantee.
A is discharged from liability to the amount of the value of the furniture.
Rights against the Co-Sureties
1) All the sureties shall bear equally, the loss caused by the insolvency of the principal debtor. If one of them bears
the entire loss in the first instance he can claim contribution from other co-sureties.
2) Where the co-sureties agreed to become liable in different sums, they should contribute, according to English
Law, proportionately.
Illustration: A, B and C have agreed to become liable for Rs. 10,000, 20,000 and 40,000 respectively, as sureties for
Ds liability. Ds indebtedness was Rs. 30,000. A,B and C would contribute in the ratio of 1 : 2 : 4. But according to
Law they shall bear such loss equally but not exceeding the sums which they have agreed to pay. So, A, B and C will
have to pay Rs. 10,000 each.
SURETY DISCHARGED FROM LIABILITY
1. The surety is discharged from liability if the contract of guarantee becomes void or voidable, on the ground of
misrepresentation by the creditor with regard to a material circumstance, or on the ground that the guarantee
was given on condition that another person will join as a co-surety and that such other person has not joined as
such.
Illustration: A engages B as clerk to collect money for him. B fails to account for some of his receipts and A in
consequence, calls upon him to furnish security for his accounting. C gives his guarantee for Bs accounting. A
does not acquaint C with Bs previous conduct. B afterwards makes default. The guarantee is invalid.

2. The surety is discharged by revocation as to future transaction in case of continuing guarantee.

3. The surety is discharged
a. By variance of contract: Any variance in the terms of the contract between the principal debtor and the
creditor without the suretys consent discharges the surety.
Illustration: C, contracts to lend B Rs. 5000 on the 1st of March. A guarantees repayment. C pays Rs. 5000
to B on the 1st of January. A is discharged from his liability, as the contract has been varied in as much as
C might sue B for the money before the 1st of March.
b. By release or discharge of principal debtor: The surety is discharged by any contract between the
principal debtor and the creditor by which the principal debtor is discharged or by any act or omission of
the creditor, the legal consequence of which is the discharge of the principal debtor.
Illustration: A, contracts with B for a fixed price to build a house for B within a stipulated time, B supplying the
necessary timber. C guarantees As performance of the contract. B omits to supply the timber. C is discharged from
his surety ship.
c. By composition with debtor: The surety is discharged when the principal debtor and creditor enter into a
contract by which the creditor (1) composition with or (2) promises to give time or (3) promises not to sue
the principal debtor.
d. By act or omission impairing suretys remedy: The surety is discharged if the creditor does any act
inconsistent with the rights of the surety or omits to do any act which his duty to surely requires him to
do.
Illustration: A puts M as apprentice to B, and gives a guarantee in B for Ms fidelity. B promises on his part that he
will, at least once a month, see M make up the cash. B omits to see this done as promised and M embezzles. A is
not liable to B on his guarantee.
e. Loss of security: the surety is discharged if the creditor losses or parts with the securities belonging to the
principal debtor, without the consent of the surety.
The surety is not discharged in the following cases:
1. A surety is not discharged when a contract to give time to the principal debtor is made by the creditor with a third
person and not with the principal debtor.
Illustration: C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B, contracts
with M to give time to B. A is not discharged.
2. Mere forbearance on the part of the creditor to sue the principal debtor does not discharge the surety.
Illustration: B owes C, a debt guaranteed by A. The debt becomes payable C does not sue B for a year after the
debt has become payable. A is not discharged from his liability.
3. Release of one co-surety does not discharge the other.

LESSON 3
CONTRACTS OF BAILMENTS
Section 148 of the Contract Act defines that a bailment is the delivery of goods by one person to another for some
purpose, upon a contract that they shall when the purpose is accomplished, be returned or otherwise disposed of according
to the directions of the person delivering them. The person delivering the goods is called the bailor. The person to
whom they are delivered is called the bailee.
Essentials of Bailments
1. There must be delivery of goods: Such delivery may be actual or constructive.
2. The delivery must be made for some specific purpose.
3. The delivery must be made on condition that the goods shall be returned in specific when the purpose is over, or
disposed of according to the direction of the bailor.
4. Only possession but not the ownership of the goods is transferred.
Examples: Delivery of a radio for repair.
DUTIES OF A BAILEE
1. To take reasonable care of the goods bailed to him
Section 151 lays down that in all cases of bailment the bailee should take that much of care which an ordinary prudent
man would take of his own goods under similar circumstances. Section 152 lays down that the bailee is not
responsible, in the absence of any special contract, for the loss, destruction or deterioration of the thing bailed, if
he has taken the amount of care described above.
Illustration: A gives to B, to be made into an ornament. B keeps them in a safe where he usually keeps his own
valuables. B is not liable if the goods are lose by him.
2. Not to make unauthorized use of goods bailed
The bailee should not make use of goods for purposes inconsistent with the terms of the contract. If he does so, the
bailor is entitled to terminate the contract and claim damages, if any.
Illustration: A lends a horse to B for his own riding only. B allows C, to ride the horse. C rides carefully but the horse
accidentally falls and is injured. B is liable to compensate A for the injury caused to the horse.
3. Not to mix the goods of the bailor with his own goods
a) If a bailee mixes the goods of the bailor with his own goods with the consent of the bailor, both the bailor and the
bailee shall have proportionate interest in the mixture.
b) If the goods mixed by the bailee without the consent of the bailor and the goods are separable, the bailee is bound
to bear the expenses of separation and pay damages if any.
c) If the goods are mixed by the bailee without the consent of the bailor and the goods are inseparable, the bailee
should compensate the bailor for the loss of goods.
Illustration: A bails a barrel of Cape flour worth Rs. 45 to B. B without As consent, mixes the flour with country
flour of his own, worth only Rs. 25 a barrel. B must compensate A for the loss of his flour.
4. Not to set up adverse title
The bailee should not deny the bailors title. He should not set up his own title or that of a third party.
5. To return the goods bailed

The bailee should return goods bailed, to the bailor when the fixed period is over or when the purpose is
accomplished. The bailee should also deliver any increase or profit which may have accrued from the goods
bailed.
Illustration: A leaves a cow in the custody of B to be taken care of The cow has a calf B is bound to deliver the calf as
well as the cow to A.
DUTIES OF A BAILOR
1. To disclose the faults in the goods bailed
The bailor should disclose to the bailee, faults in the goods bailed, of which he is aware. If he does not disclose, he
will be liable for the loss resulting therefrom.
Illustration: A lends a horse which he knows to be vicious to B. He does not disclose this fact. The horse runs away. B
is thrown down and injured. A is responsible to B for damages sustained.
2. To bear extra-ordinary expenses
While the ordinary expenses are payable by the bailee, extra-ordinary expenses shall be borne by the bailor.
Illustration: Where a horse is lent for a journey, the bailee shall bear the expenses of feeding the horse. But in case of the
horse becoming sick, the bailor shall have to bear the necessary expenses for its recover.
3. Responsibility for want of title
The bailor is responsible to the bailee for any loss sustained by he latter by the reason, that the bailor was not entitled
to make the bailment or to receive back the goods or to give directions respecting them.
RIGHTS OF BAILOR
1. He is entitled to the increase or profit from goods bailed
2. In the case of gratuitous loan, the lender may require the goods to be returned, even though he lent it for a fixed
period for specific purpose. But if such a request causes loss to the bailee exceeding the benefit he derives, the
bailor should indemnify the borrower.
3. The bailor is entitled to terminate the contract when the bailee does any act inconsistent with the terms of
bailment.
Illustration: A gives a horse to B for hire for his own riding. B drives the horse in his carriage. The bailment can be
terminated at the option of A.
LIEN
Lien is a right of a person, who has possession of goods of another, to return such possession until a debt due to him
has been discharged. This right is called a Possessory lien.
Lien is of two kinds: 1. Particular lien, and 2. General lien
1. A Particular Lien is one which is available only against that property in respect of which the skill and labour are
exercised or any expenses are incurred.
Illustration: A delivers a watch for repairs to B, a repairer. B has a right to retain the watch till he is paid for the
services rendered.
The bailees, repairers and unpaid vendors of goods are entitled to particular lein.
2. A General Lien is the right to retain the property of another for a general balance of accounts. Bankers, can
exercise this right for any debt due to them.

The duties and rights of A finder of lost goods

A person who finds an article need not take charge of it. But if he takes them into his possession, be becomes a bailee.
Duties and Rights
1. He must take as much care of the goods as an ordinary prudent man would, under similar circumstances, take of
his own goods.
2. He cannot sue for remuneration for trouble and expense incurred by him to preserve the goods or to find out the
owner of the goods.
3. He may exercise particular lien against the goods for such remuneration.
4. If a reward has been offered for the return of the goods, he can sue for such reward.
5. If the goods are the subject of the sale and if the owner is not found or when found refuses to pay the lawful
charges, the finder may sell the goods.
a. When the goods are about to perish or
b. When they lose the greater part of their value of
c. When lawful charges amount to two-thirds of their value
PLEDGE
A pledge is a bailment of goods as security for payment of a debt or performance of a promise. The bailor is called the
pawnor and the bailee is called the pawnee. In the case of pawn, there is no transfer of property in goods. Only
possession of the goods is transferred. Hence, it is different from mortgage. Pawn is also different from lien, as in the case
of lien, there is not power to sell the article while a pawnee can sell, subject to some conditions.
Rights of Pawnor
Even after the expiry of a stipulated period, he may redeem the goods pledged at any subsequent time before the actual
sale of the goods pledged. But he must pay expenses which may have arisen from his default.
Rights of Pawnee
1. He can retain the goods pledged until he recovers the debt, interest and other expenses incidental to possession or
preservation of the goods.
2. He cannot retain the goods for debts other than those for which pawn is made.
3. He is entitled to receive extra-ordinary expenses incurred for the preservation of goods.
4. If the pawnor makes a default, the pawnee may
a. Bring a suit upon the debt or promise and
b. Retain the goods pledged or
c. Sell the goods by giving a reasonable notice of sale to the pawnor.
If the proceeds of such are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay
the balance. If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the balance
to the pawnor.

LESSON 4
CONTRACT OF AGENCY
Section 182 of the Contract Act defines an agent as person employed to do any act for another or to represent another in
dealings with third persons. The person for whom such act is done, or who is so represented is called the principal.
ESSENTIALS OF A CONTRACT OF AGENCY
1. The principal and third parties must be competent into contracts
An agent may be even a minor who can effectively bind his principal. But the principal cannot make the minor agent
liable for misconduct or negligence.
Example: P, a principal gives M, a minor, a jewel worth Rs. 100 and instructs fgdgdf to sell it on credit or for less than
Rs. 500. M sells the jewel on credit for Rs. 400. P cannot make him liable while he is bound by the sale..
Consideration is not essential. That the principal gives his consent to be represented by the agent is sufficient
consideration for the agent gdg dfgd dfgd.
CREATION OF AGENCY
An agency may be created in the following ways:
1. By Express Authority: The authority of any agency may be expressed in words spoken or written. For example, a
contract of agency can be written by means of power of attorney.
2. By Implied Authority: The authority of an agent can be interred from the circumstances of the case.
Illustration: A living in Bombay, owns a shop in Madras and he occasionally visits it. B is managing the shop and is in
the habit of ordering goods from C in the name of A for the purpose of the shop and of paying to them out of As
funds with As knowledge. B has an implied authority from A to order goods from C in the name of A for the purpose
of the shop.
3. By Necessity: Sometimes, exigencies of circumstances require a man to act for another as an agent, though not
appointed as such.
Illustration: A horse was sent by rail. The owner had not taken delivery of the same at the destination. So, the station
master had to feed it. It was held that the station master had become an agent by necessity and was therefore entitled
to recover the charges incurred by him.
4. By Holding Out: Where a master usually sends his servant to pledge his credit for certain mangdfgfd he is bound
by the acts of the servant for similar purposes though done without his consent.
5. By Estoppel: When one man by words or conduct causes another to believe that some other person is his agent
and that another person had acted on that belief, he would be stopped from denying the authority of that another
person to act on his behalf.
Illustration: a tells B in the presence and within the hearing of P that he (A) is Ps agent and P does not contradict
this statement B, on the faith of this statement, subsequently enters into a contract with A, taking him to be Ps
agent. P is bound by that contract.
6. By Ratification or Expost Eacto Agency : Section 196 of the Contract Act lays down that where acts are done by
one person on behalf of another, but without his knowledge of authority, he may elect to ratify or to disown such
acts. If he ratifies them the same effects will follow as if they had been performed by his authority. Thus

ratification relates back to the date of the original contract and binds the principal as if he has expressly authorized
it.
TERMINATION OF CONTRACT OF AGENCY
A contract of agency is terminated in the following ways:
1. When the period of agency expires or
2. When the purpose of the agency is accomplished or
3. When the principal or agent dies or becomes of unsound mind
4. When the principal becomes insolvent
5. When the subject matter of the contract is destroyed
6. When the object of the contract becomes unlawful
7. When the agent renounces the authority
8. When the principal revokes his authority
The termination that takes effect so far as regards the agent, the moment, it becomes know to him and so far as
regards third persons, the moment it becomes know to them. So, if an agent knowing the termination of agency,
contracts with third persons who are not aware of the termination, the becomes liable to the principal for damages
while the contract binds the principal and third persons.
An Agency cannot be terminated in the following cases:
(a) When the agency is one, coupled with interest. A, gives authority to B to sell As land and to pay himself, out of
the proceeds, the debts sue to him (B) from A. A cannot revoke this authority nor can it be terminated by his
insanity or death.
(b) When the agent has incurred personal liability and
(c) When the authority ahs been partly exercised by the agent.
RIGHTS OF AN AGENT
1. He is entitled to remuneration and other expenses properly incurred by him in the agency. But if he is guilty of
misconduct, he is not entitled to receive the remuneration.
Illustration: A employs B to recover Rs. 1000 from C. Through Bs misconduct, the money is not recovered. B is
entitled to no remuneration for his services and must make good the loss.
2. He is entitled to retain the goods, papers and other property, movable on immovable, of the principal for his
claims.
3. The agent has a right to be indemnified by the principal for all lawful acts.
Illustration: B at Singapore under instructions from A of Calcutta, contracts with C to deliver goods. A does not
send the goods to B and C sues B breach of contract. B informs A of the suit and A authorizes him to defend the
suit. B defends and is compelled to pay damages etc. A is liable to B for such damages etc.
4. The agent is entitled to be indemnified for the injury caused to him by the principals neglect or want of skill.
Illustration: A employs B as a brick-layer in building in a house and puts a scaffolding himself unskillfully and B
is in consequence, hurt. A must compensate B.
5. When an agent acts in good faith, the employer must indemnify him for the consequence of that act, through it
causes an injury to the rights of third parties.
Illustration: B, at the request of A, sells goods in the possession of A, but which A had no right to dispose of B
does not know this and hands over the sale proceeds to A. afterwards C the true owner sues A and recovers the
value of goods and costs. A must indemnify B for what he has paid and for Bs own expenses.

DUTIES OF AN AGENT
1. He should act according to the directions of the principal and in default, indemnify the principal for the loss, if
any
2. In the absence of instructions, he must act according to the trade custom.
Illustration: A, an agent engaged in carrying on for B, a business, in which it is the custom, to invest from time to
time, at interest the monies which may be in hand, omits to make such investment. A, must make good to B the
interest usually obtained by such investment.
3. In case of difficulty, he must be diligent in communicating with the principal and obtaining his instruction.
4. He must conduct the business of agency with as much skill as is generally possessed by persons engaged in
similar business, unless the principal has notice of want of skill.
Illustration: A, having authority to sell on credit, sells goods to B without enquiring about his solvency, B at the time
of sale, is bankrupt. A must make good the loss.
5. He must render proper accounts on demand.
6. He must not delegate his authority without the consent of the principal.
7. He must deliver all monies including secret commission, to the principal. He can deduct his remuneration and
other lawful expenses spent by him.
8. He should not set up his own title or title of third parties to the goods of the principal in hi hands.
9. If, by the nature of profession, an agent is purported to have special skill, he must exercise that degree of skill
ordinarily expected from the members of the profession.
Illustration: A solicitor, who started the proceedings under a wrong section or field a suit in a court having no
jurisdiction, is liable.
10. He should not disclose confidential information.
11. His interest should not conflict with his duty.
CONDITIONS UNDER WHICH THE AGENT IS PERSONALLY LIABLE
1. An agent is liable for breach of warranty of authority. He is liable to third parties when he exceeds his ostensible
authority. He becomes liable to pay damages to the principal, when he exceeds his actual authority but acts within
the ostensible authority and enters into contracts with third parties who are not aware of the curtailment of his
authority.
2. An agent cannot claim performance of a contract entered into by him apparently on behalf of the principal but
really on his own account.
3. An agent is personally liable
a. When the contract expressly provides
b. When he does not sign the negotiable instrument as agent
c. When he acts for a foreign principal
d. When he acts for an undisclosed principal
e. When the agency is coupled with interest
f. When the trade usage makes him liable, and
g. When the principal cannot be sued as he is a minor or a foreign sovereign etc.
REVIEW OF QUESTIONS
1. Define Contract of Indemnity and Contract of Guarantee and bring out differences between them.
2. What are the rights of the Surety against (i) Principal debtor, (ii) Creditor and (iii) Co-Sureties
3. When the Surety is discharged from his liabilities?
4. Define bailment. What are the rights and duties of bailor and bailee?
5. What are the duties of finder of lost goods?
6. What are the different methods of creation of agency?

7. What are the rights and duties of an agent?

LESSON 5
NEGOTIABLE INSTRUMENTS ACT, 1881
Section 13 of the Negotiable Instruments Act defines that a negotiable instrument means a promissory note, bill of
exchange or cheque, payable either to order or bearer.
FEATURES
1. The property in it passes either by mere delivery or by endorsement and delivery
2. The holder in due course is not affected by the defect in the title of his transferor or any previous party.
3. The holder in due course, can sue in his own name. He need not give notice to the debtor that he has become the
holder.
4. He is not affected by certain defects like fraud to which he is not a partly
5. Consideration is presumed to have passed
6. It is convenient method of discharging payments
The Act does not stipulate that only bills of exchange, promissory notes and cheques are only the negotiable
instruments. So, other instruments may also be added to the list of negotiable instruments provided.
They are transferable by mere delivery and
The holder in due course can sue in his own name
Hence, Dividend Warrants, Port Trust or Improvement Trust Debentures, Railway Bonds, payable to bearer or
Railway Receipts having the feature of negotiability are all negotiable instruments. So, a negotiable instrument is
an ordinary chattel for chose-in-action clothed with the feature of negotiability.
PARTIES TO NEGOTIABLE INSTRUMENTS
The parties to a bill of exchanges, a promissory note and a cheque are as follows:
Parties to a Bill of Exchanges: (1) Drawer, (2) Drawee, (3) Acceptor, (4) Payee, (5) Holder, (6) Indorser, (7)
Indorsee, (8) Drawee in case of need, and (9) Acceptor for honour.
Parties to a Promissory Note: (1) Maker, (2) Payee (3) Holder, (4) Indorser and (5) Indorsee
Meker, Drawer: The person who makes a promissory note is called the maker. The person who makes or draws a
bill of exchange or cheque is called the drawer.
Drawee, Acceptor: The person on whom the bill of exchange or cheque is drawn and who is directed to pay is called
the drawee. In case of a cheque, the drawee is always a banker. In case of a bill of exchange, the drawee
becomes the acceptor when he accepts the bill, i.e. signs his accent upon the bill and delivers the same or gives
notice of such signing to the holder or to some person on his behalf A cheque does not require acceptance as it is
intended for immediate payment.
Payee: The person named in the bill, note or cheque, to whom or to whose order the money is to be paid, is called the
payee. In a bill or cheque, the drawer may himself be the payee. Where the payee named in a bill is a fictious or
non-existing person, the bill is treated as payable to bearer.
Indorser: The person who endorses the bill, note or cheque to another is called the indorser.
Indorsee: The person to whom the bill, note or cheque is endorsed is called the Indorsee.
MATERIAL ALTERATION
Material alteration refers to changes introduced on a cheque which affects its fundamental character. In other words, any
change in any instrument which makes it speak a different language, for all legal purposes from what it spoke originally
would constitute a material alteration. If the alteration is material, it renders the cheque invalid.

Examples of Material Alteration

There is material alteration when
The date of the instrument is altered
The time of payment is altered
The amount is altered
The rate of interests altered
The place of payment is altered
The name of payee is altered
A new party is added etc.
There is no material alteration when
A mistake corrected
Alteration is made with the consent of all the parties
Alteration is made to carry out the common intention of the parties
Blank indorsement is converted into full indorsement
An inchoate instrument is completed etc.
EFFECT OF MATERIAL ALTERATION
According to Sec. 87 of the Negotiable Instruments Act, if a cheque is materially altered it canot be regarded as a
cheque at all. Therefore material alteration renders the cheque void.
CROSSING OF CHEQUES
Crossing means drawing two parallel transverse lines across the face of the cheque with or without the words and
company in between the lines. It is a direction to the drawee bank not to pay the amount at the counter, but only through
a bank. It is made to guard payment against forgery by unscrupulous persons.
KINDS OF CROSSING
Is is of two kinds (1) General Crossing and (2) Special Crossing
1. General Crossing
Sec. 123 of the Negotiable Instruments Act defines General Crossing as, where a cheque bears across its, face an
addition of the words And Company or any abbreviation thereof between two parallel transverse lines or of two
parallel transverse lines simply, either with or without the words not negotiable, that addition shall be deemed to
be a crossing and the cheque shall be deemed to be crossed generally.
Two parallel transverse lines across the face of the cheque with or without the words, & Co., Account Payee
only, Not Negotiable, constitute general crossing. The cheque which is crossed generally, is payable only to
banker.
2. Special Crossing
Sec. 124 of the Negotiable Instruments Act defines Special Crossing as, where a cheque bears across its face an
addition of the name of a banker, with or without the words not negotiable, that addition shall be deemed a
crossing and the cheque shall be deemed to be crossed specially and to be crossed to that banker. When a cheque
is crossed specially, the amount is payable by the drawee only, only to the bank named in the crossing.
Account Payee Crossing

When the words Amount Payee, Account Payee only are added to the general or special crossing, it is called
account Payee Crossing. The collecting banker must collect the amount of the cheque for the account of the payee
only and none else.
Otherwise, it is not a collection in due course and the banker is liable if the title of the person for whom the bank
collects, turns out to be defective.
Not Negotiable Crossing
When the words not negotiable are added either in general or special crossing, the person taking the cheque cannot have
and cannot give a better title than what his transferor has. So, a not negotiable cheque is transferable. But the transferee
gets no better title than what the transferor has.
RULES OF CROSSING
1. An uncrossed cheque may be crossed generally or specially by the drawer or the holder.
2. A cheque crossed generally, may be crossed specially by the holder.
3. The holder may add the words not negotiable.
4. The banker to whom the cheque is crossed specially, may re-cross it, but only to another bank as his agent for
collection.
5. Where an uncrossed cheque or a cheque crossed generally is sent to a banker for collection, he may cross it
specially to himself. But he cannot enjoy Statutory protection against being sued for conversion.
INDORSEMENTS
It means the writing of a persons name (otherwise than as maker) on the face or back of a netgotiable instrument or on a
slip of paper (called alloonge) annexed thereto, for the purpose of negotiation (Sec. 15). The person who signs the
instrument is called the indorser. The person to whom the instrument is indorsed is called the indorsee.
KINDS OF INDORSEMENTS
1. Bank Indorsement or General Indorsement
When the indorser signs his name only, it is called blank indorsement. An instrument endorsed in blank is payable
to bearer. The holder of an instrument may write above the indorsers signature, a direction to pay the amount to
or to the another person. When the holder does so, he does not become liable as an endorser on the instrument, as
he had not signed it.
2. Special or Full Indorsement
If the indorser signs his name and adds a direction to pay the amount to or to the order of a certain person, it is called
full indorsement.
Illustration : A bill made payable to Smith, may be endorsed in full by him as Pay A or order.
[Sd.] Smith
An instrument having been endorsed in blank is indorsed in full the indorser in full is liable to the person to whom it
is indorsed in full or to others who derive title through such person.
3. Restrictive Indorsement
It is one which prohibits or restricts further negotiation or which constitute the indorsee an agent to receive its
contents for his indorser.
Example: (1) Pay C only (2) Pay D for my use (3) Pay D on account of E (4) Pay E or order for collection.

4. Partial Indorsement
When a part of the amount of the instrument is endorsed, it is called partial indorsement. It is void:
Example: A holds a bill for Rs. 800 A endorses thus
Pay Rs. 400 to B or order (or)
Pay B or order Rs. 400 and to C or order Rs. 400
But if the part of the amount of the instrument is already paid, the unpaid balance may be endorsed thus. Pay B or
order Rs. 400, being unpaid residue of the bill.
5. Conditional or Qualified Indorsement
This is one which negotiates or limits the indorsers liability, in the following ways:
(a) By Sans Recourse Indorsement: The indorser excludes his liability by express words in indorsement.
Examples: (1) Pay A or order
Sans Recourse
(Sd) B
(2) Pay A at his own risk
(Sd) B
(3) Pay A without recourse to me
(Sd) B
(b) By making his liability depend upon the happening of a specified event, though such event may never happen.
Example : Pay A or order on his marrying B
(c) By making the right of the indorsee to receive the amount, depend upon the happening of a specified event,
though it may never happen.
(d) By Facultative Indorsement: This is one which extents the liability of the indorser.
Example: Pay A or order
Notice of dishonor waived
(Sd.) B
PAYMENT AND COLLECTION OF CHEQUE
The paying banker should use reasonable care and diligence in paying a cheque so as to abstain from any action likely to
damage his customers credit.
PRECAUTIONS BEFORE HONOURING A CHEQUE
In order to safeguard his position, the paying banker has to observe the following precautions before honouring a cheque.
(1) Presentation of Cheque
First of all a paying banker should note whether the presentation of the cheque is correct. It can be found out by
noting the following factors.
(a) Type of Cheque: Cheques may generally be of two types open or crossed. If it is open one, the payment may be
paid at the counter. If it is crossed, the payment must be made only to a fellow banker.
(b) Branch: The paying banker should see whether the cheque is drawn on the branch where the account is kept.
(c) Banking Hours: The paying banker should also note whether the cheque is presented during the banking hours on
a business day.

(d) Multination: If the cheque is from into pieces or cancelled or mutilated, then the paying banker should not honour
it.
3. From of the Cheque
Before honouring a cheque, a banker shold see the form of cheque and find out whether it is regular or not.
(a) Printed Form: The customer should draw cheques only on the printed leaves supplied by the bankers failing
which the banker may refuse to honour it.
(b) Enconditional Order: The cheque should not contain any condition
(c) Date: Before honouring a cheque, the paying banker must see whether there is a date on the instrument. if a
cheque is ante dated, it may be paid if it has not exceeded six months from the date of its issue otherwise it will
become stale one. If a cheque is post dated, he should honour it only on its due date.
(d) Amount: The paying banker should see whether the amount stated in the cheque both in words and figures agree
with each other.
(e) Material Alteration: If there is any material alteration the banker should return it with a memorandum Alteration
requires drawers confirmation.
(f) Sufficient Balance: If the funds available are not sufficient to honour a cheque, the paying banker is justified in
returning it.
(g) Signature of the Drawer: It is the duty of the paying banker to compare the signature of his customer found on
the cheque with that of his specimen signature.
(h) Endorsement: The banker must verify the regularity of endorsement, if any, that appears on the instrument.
(i) Legal Bar: The existence of legal bar like Garnishee order limits the duty of the banker to pay a cheque.
CIRCUMSTANCES UNDER WHICH A CHEQUE MAY BE DISHONOURED
A paying banker is under a legal obligation to honour his customers mandate. He is bound to do so under his contractual
relationship with his customer. A wrongful dishonor will have, the worse effect on the banker. However, under the
following circumstances, the payment of a cheque may be refused.
a) Countermanding: Countermanding is the instruction given by the customer of a bank requesting the bank not to
honour a particular cheque issued by him. When such an order is received, the banker must refuse to pay the
cheque.
b) Upon receipt of notice of death of a customer: When a banker receives written information from an authoritative
source, regarding the death of a particular customer, he should not honour any cheque drawn by that deceased
customer.
c) Upon the receipt of notice of insolvency: Once a banker has knowledge of the insolvency of a customer he must
refuse to pay cheques drawn by him.
d) Upon the receipt of notice of insanity: Where a banker receives notice of a customers insanity, he is justified in
refusing payment of the cheque drawn by him.
e) Upon the receipt of notice of Garnishee order: Garnishee order refers to the order issued by a court attaching the
funds of the judgement debtor (i.e. the customer) in the hands of a third party (i.e. the banker). In such a case, the
banker may refuse payment.
f) Upon the receipt of notice of assignment: The bank balance of a customer constitutes an asset and it can be
assigned to any person by giving a letter of assignment to the banker. In such case also the banker may refuse
payment.
g) When a breach of trust is intended: In the case of trust account, mere knowledge of the customers intention to
use the trust funds for his personal use is a sufficient reason to dishonor his cheque.
h) Defective Title: If the person who brings a cheque for payment has no title or his title is defective, the banker
should refuse to honour the cheque presented by him.

i)

Other Grounds: A banker is justified in dishonouring a cheque under the following circumstances also:
a conditional one,
drawn on an ordinary piece of paper,
a stale one,
post-dated one,
mutilated,
drawn on another branch where the account is not kept,
presented during non-banking hours.
If the words and figures differ,
If there is no sufficient funds,
If the signature of the customer is forged,
If the endorsement is irregular and,
If a crossed cheque is presented at the counter.

COLLECTING BANKER
A collecting banker is one who undertakes to collect the amount of a cheque for his customer from the paying banker.
DUTIES OF COLLECTING BANKER
1. Exercise reasonable care and diligence in his collection work: As an agent, he should exercise reasonable care,
diligence and skill in collection work. He should observe utmost care when presenting a cheque.
2. Present the cheque for collection without any delay: If there is any delay in presenting the cheque for
presentment by the banker, the customer may suffer losses due to the insolvency of the drawer or insufficiency of
funds in the account of the drawee or insolvency of the banker himself. Hence the collecting banker has to present
the cheque for collection without any delay.
3. Notice to customer in case of dishonor of cheque: If the cheque he collects has been dishonoured, he should
inform him customer without any delay.
Review Questions
1. Define Negotiable Instruments. What are the characteristics of negotiable instruments?
2. What are the different kinds of crossing?
3. What is indorsements? What are the kinds of indorsements?
4. What are the precautions to be taken by a banker while honouring a cheque?
5. What are the duties of a collecting banker?

LESSON 7
PARTNERSHIP ACT, 1932
Section 4 of the Partnership Act defines it as the relation between persons who have agreed to share the profits of a
business cancelation by gfdg any of them acting for all Persons who have entered into partnership with one of other are
called individually partners and collectively a firm, and the name under which their business is carried on, is called
the firm name.
ESSENTIALS OF PARTNERSHIP
1. Relationship: Partnership is the abstract relationship between partners
2. Two or More Persons: As no one can be a partner with himself, there must be at least two persons. The maximum
number of members is 10 for a partnership carrying on banking business and 20 for a partnership carrying on any
other business.
3. Agreement or Deed: Partnership arises out of an agreement but not out of status. Such agreement, also called as
deed, may be express or implied from the conduct of the parties. It may be oral or written. It contains details
relating to
name of the firm and the names of the partners,
nature and place of business,
the date of commencement and the duration of partnership,
capital and banking account,
sharing of profits and losses,
management,
accounts
arbitration etc.
4. Business: The object of the partnership is to carry on any business, profession, vocation, trading or calling. Such
business must be lawful. Mere holding of property in common is not partnership, e.g. co-ownership.
5. Profit Sharing: Sharing of profits is essential though it does not mean that all those who participate in profits are
necessarily partners.
6. Carried on by all or any of them acting for all: Each partner acts as an agent as well as a principal. Each one can
act in the course of business and bind the other partners by his acts. As such, he can be called an agent. Since he is
also bound by the acts of the other partners, he can be called the principal. Thus, the law of partnership is a branch
of the general law of agency as every partner has implied power to bind other partners for the acts of the firm,
done in the course of conduct of the business.
KINDS OF PARTNERSHIP
1. Partnership at will: Where the partners have not provided in their deed, for the duration of partnership or for the
termination of partnership, the partnership is called partnership at will. A partner may retire to dissolve the
partnership at his will, by giving a notice to other partners, of his intention to do so.
2. Particular partnership: A person may become a partner with another person in particular adventures or
undertakings.
3. Partnership for a fixed term: Where the partners fix the definite period or duration of partnership, it is called a
partnership for a fixed term.
TEST OF PARTNERSHIP
In determining whether a partnership exists or not, or whether a person is a partner or not the real relation between the
parties as shown by all relevant facts, must be taken into consideration.

The joint use of property in common in business for sharing of profits is evidence that a partnership exists. But this is
not conclusive evidence to show that a partnership exists. Likewise, an active participation in the conduct of business
is evidenced that a partnership exists. But again, it is no conclusive evidence to establish the fact of existence of
partnership. For example, a servant may manage the affairs of a firm. Yet he is not a partner. In the same way, a joint
venture having no object of profit sharing is not a partnership, while sharing of profits is evidence, though no
conclusive, that a partnership exists. So, Section 6 lays down that the receipt of a share of profit, or a payment
contingent or varying with the profits does not of itself, make the recipient a partner. Therefore, the true test of
partnership is no sharing of the profit, but whether the relationship of agency exists or not.
KINDS OF PARTNERS
Following are different kinds of partners
1. Actual or Ostensible Partner: An actual partner is one who actively participates in the conduct of the business of
the partnership.
2. Dormant or Sleeping Partner: He is a partner who is not known to third parties as such. He does nto take active
part in the conduct of business. He occupies the position of an undisclosed principal. Hence, third parties can sue
him on discovering that he is a partner. While he has access to accounts and examine and verify them, he has not
duties to perform. Hence no notice of his retirement to the public is necessary nor the firm is dissolved when he
becomes insane.
3. Partner by Estoppel: Where a person causes, by his conduct, another to believe him to be a partner and on that
belief such other person gives credit to the firm, he is estopped from denying that he is a partner.
Example: X, Y and Z are partners of a firm. X, in the presence and within the hearing of A, represents to D that A
is a partner of their firm. A does not contradict this representation. A, on faith of that representation, lent Rs. 5000
to the firm, A, is liable as a partner.
4. Partner by Holding Out : Where a person represents himself or allows others to represent him as a partner of a
particular firm, he becomes liable to all those who act and lend money to the firm, on the faith of such
representation.
Example: A, represents himself as a partner of a particular firm. D on the faith of the representation, lends credit
to the firm. A becomes liable.
REGISTRATION OF FIRMS
The Partnership Act does not provide for the compulsory registration of firms. It has left it to the option of the firms to get
themselves registered. But indirectly, by creating certain disabilities from which an unregistered from suffers, it has made
the registration of firms compulsory.
PROCEDURE FOR REGISTRATION
The registration of a firm may be effected at any time by filling an application in the form of a statement, giving the
necessary information, with the Registrar of Firms of the area.
The application for registration of a firm shall be accompanied by the prescribed fee. It shall state:
(a) the name of the firm
(b) the place or principal place of business of the firm
(c) the names of other places where the firm carries on business
(d) the date when each partner joined the firm
(e) the names in full and permanent address of the partners
(f) the duration of the firm.

The statement shall be signed by all the partners or by their agents specially authorized in this behalf [Sec. 58(1)]. It shall
also be verified by them in the prescribed manner [Sec. 58(2)].
When the Registrar is satisfied that the above provisions have been duly compiled with, he shall record an entry of the
statement in the Registrar of Firms (maintained by Registrar of Firms in respect of each registered firm for recording the
necessary information relating to that firm) and file the statement (Sec. 59). He shall then issue under his hand a certificate
of registration. Registration is effective from the date when the Registrar files the statement and makes entries in the
Register of Firms.
EFFECTS OF NON-REGISTRATION (SEC. 69)
1. Suits between partners and firm: A person suiting as a partner of an unregistered firm cannot sue the firm or any
partners of the firm to enforce a right from a contract or conferred by the Partnership Act.
2. Suits between firm and third parties: An unregistered firm cannot sue a third party to enforce a right arising from
a contract until
the firm is registered, and
the names of the persons suing appear as partners in the Register of Firms [Sec. 69(2)]
3. Clain of set-off: An unregistered firm or any partner thereof cannot claim a set-off in a proceeding instituted
against the firm by a third party to enforce a right arising from a contract, until the registration of the firm is
effected [Sec. 69(3)]
RELATIONS OF PARTNERS
The relations of the partners of a firm to one another are usually governed by the agreement among them. Such agreement
may be express or implied.
RIGHTS OF A PARTNER
1. Right to take part in Business
The partnership agreement usually provides the mode of the conduct of the business. Subject to pay such
agreement between the partners, every partner has a right to take part in the conduct of business [Sec. 12(a)]. This
is based on the general principal that partnership business is the common business of all the partners.
2. Right to be Consulted
Every partner has an inherent right to be consulted in all matters affecting the business of the partnership and
express his views before any decision is taken by the partners.
3. Right of Access to Accounts
Subject to contract between the partners, every partner has a right to have access to and inspect and copy any of
the books of the firm.
4. Right to Share in Profit
In the absence of any agreement, the partners are entitled to share equally in the profits earned and are liable to
contribute equally to the losses sustained by the firm.
5. Right to Interest on Capital
The partnership agreement may contain a clause as to the right of the partners to claim interest on capital at a
certain rate. Such interest, subject to contract between the partners, is payable only out of profits, if any, earned by
the firm.
6. Right to Interest on Advances
Where a partner makes, for the purposes of the business of the firm, any advance beyond the amount of capital, he
is entitled to interest on such advance at the rate of six per cent annum. Such interest is not only payable out of the
profits of the business but also out of the assets of the firm.
7. Right to be Indemnified

8.

9.
10.

11.

12.

13.

A partner has authority, in an emergency, to do all such acts for the purpose of protecting the firm from loss as
would be done by a person of ordinary prudence, in his own case, acting under similar circumstances. Such acts
of the partner bind the firm. If as a consequence of any such act, the partner incurs any liability or makes any
payment, he has a right to be indemnified.
Right to the Use of Partnership Property
Subject to contract between the partners, the property of the firm must be held and used by the partners
exclusively for the purposes of the business of the firm. No partner has a right to treat it as his individual property.
If a partner uses the property of the firm directly or indirectly for his private purpose, he must account to the firm
for the profits which he may have earned by the use of that property.
Right of Partner as Agent of the Firm
Every partner for the purposes of the business of the firm is the agent of the firm.
No New Partner to be Introduced
Every partner has a right to prevent the introduction of a new partner unless he consents to that or unless there is
an express term in the contract permitting such introduction. This is because partnership is founded on mutual
trust and confidence.
No Liability before Joining
A person who is introduced as a partner into a firm is not liable for any act of the firm done before he became a
partner.
Right to Retire
A partner has a right to retire (a) with the consent of all other partners, or (b) in accordance with an express
agreement between the partners, or (c) where the partnership is at will, by giving notice to all the other partners of
his intention to retire.
Right of Outgoing Partner to Share in the Subsequent Profits
Where a partner has died, or has ceased to be a partner by retirement, expulsion, insolvency, or any other cause,
the surviving or continuing partners may carry on the business with the property of the firm without any final
settlement of accounts as between them and the outgoing partner or his estate. In such a case, legal representative
of the deceased partner or the outgoing partner is entitled to such share of the profits as is proportionate to his
share in the property of the firm.
DUTIES OF A PARTNER
Partnership is a contract of uberrimae fide. The partners must act with utmost good faith as the very basis of
partnership is mutual trust and confidence. According to Sec. 9, which deals with the general duties of partners,
partners are bound
(a) to carry on the business of the firm to the greatest common advantage,
(b) to be just and faithful to each other, and
(c) to render true accounts and full information of all things affecting the firm to any partner or his legal
representative.

The other duties are spread over the Partnership Act. These duties are summed as under:
1. To carry on business to the greatest common advantage
Every partner is bound to carry on the business of the firm to the greatest common advantage. He is bound, in all
transactions affecting the partnership, to do his best in the common interest of the firm.
2. To observe faith
Partnership is a fiduciary relation. Every partner must be just and faithful and observe utmost good faith towards
every other partner of the firm.
3. To indemnify for fraud

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

Every partner is bound to indemnify the firm for any loss caused to it by his fraud in the conduct of the business
of the firm.
To attend diligently
It is the duty of every partner to attend diligently to his duties in the conduct of the business of the firm [Sec. 12b],
and to use his knowledge and skill to the common advantage of all the partners.
Not to claim remuneration
A Partner is not entitled to receive any remuneration in any form for taking part in the conduct of the business of
the firm. It is however, usual to allow some remuneration to the working partners provided there is a specific
agreement to that effect.
To share losses
It is the duty of every partner to contribute to the losses of the firm. In the absence of an agreement to the
contrary, the partners are bound to contribute equally to the losses sustained by the firm. An agreement to share
profits implies an agreement to share losses also.
To indemnify for willful neglect
Every partner is bound to indemnify the firm for any loss caused to it by his willful neglect in the conduct of the
business of the firm.
To hold and use property of the firm exclusively for the firm
It is the duty of every partner of the firm to hold and use the property of the firm exclusively for the purposes of
the business of the firm
To account for personal profits
If a partner derives any benefit, without the consent of the other partners, from partnership transactions, he must
account for it and pay it to the firm. This is because the relationship between partners is a fiduciary relationship
and no partner is entitled to make any personal profit.
To account for profit in competing business
A partner must not carry on any business of the same nature as competing with that of the firm. If he does that he
is bound to account for and pay to the firm all profits made by him in that business.
To act within authority
Every partner is bound to act within the scope of his actual or implied authority. Where he exceeds the authority
conferred on him and the firm suffers a loss, he shall have to compensate the firm for any such loss.
To be liable jointly and severally
Every partner is liable, jointly with all the other partners and also severally, for all the acts of the firm done while
he is a partner.
Not to assign his rights
A partner cannot assign his rights and interest in the firm to an outsider so as to make him the partner of the firm.
He can, however, assign his share of the profit and his share in the assets of the firm.

DISSOLUTION OF FIRMS
Section 39 of the Partnership Act lays down that the dissolution of partnership between all the partners of a firm is
called the dissolution of the firm. This is different from the dissolution of partnership. A partnership may be
dissolved without dissolution the firm. But dissolution of firm involves dissolution of partnership. In the firm of A, B
and C, if C dies or retires, the firm will be dissolved. But A and B may take in D and continue doing the business.
This new firm of A, B and D is called the new or reconstituted firm.
Dissolution of Partnership on the happening of certain contingencies
A partnership is dissolved by -- The death of the partner

 The completion of the adventure of partnership

The insolvency of a partner, and
The retirement of a partner
In all these cases, the remaining partners, may constitute the firm. Hence, dissolution of partnership does not
necessarily involve dissolution of the firm. If they do not continue, the firm is dissolved automatically.
Dissolution of Firm
A partnership between all the partners is dissolved in the following ways
1) Dissolution by Agreement: (a) By mutual consent of all the partners, or (b) in accordance with the contract
entered into by them.
2) Compulsory Dissolution: (a) by the insolvency of al the partners except one, or (b) by the business of the
partnership becoming illegal or unlawful by subsequent events.
3) Dissolution of Partnership at Will: The firm may be dissolved by any partner giving a notice to the other partners
of his intention to dissolve the firm. But the notice must be in writing and unambiguous. Once given, it cannot be
withdrawn. The firm is dissolved from the date mentioned in the notice, or if the date is not mentioned, from the
date of communication of the notice.
4) Dissolution through Court: A partnership for a fixed period will be dissolved by a court where it is not dissolved
for the reasons mentioned above.
At the suit of a partner, a firm may be dissolved on any of the following grounds:
(a) that a partner has become of unsound mind,
(b) that a partner has become permanently incapable of performing his duties,
(c) that a partner is guilty of conduct which is likely to affect prejudicially, the carrying on of the business.
(d) that a partner persistently commits breach of agreement. For instance, a firm is dissolved when: (i) a partner
commits breach of trust, or (ii takes away the partnership books etc.
(e) that a partner has transferred his interest to a third party or allowed his share to be charged or sold in the
recovery of arrears of land revenue
(f) that the business of the firm cannot be carried on, save at a loss, or
(g) on any other ground which renders it just and equitable that the firm should be dissolved.
REVIEW QUESTIONS
1. define Partnership. What are the different kinds of partnership?
2. What are the rights and duties of partners?
3. What is the procedure for registration of partnership firm? What is the effect of non-registration?
4. What are the modes of dissolution of firm?