Q. When is agency terminated? When is it irrevocable by the Principle?

Ans: Termination of Agency

According to S. 201 the relationship of the principal and agent may end in two
ways - .
(a) By Acts of parties and (b) By Operation or Law.
(a) By Acts of Parties - The agency may be terminated by the acts of parties in
the following ways -
1. By Revocation of Agent's authority by the Principal- According to S. 203
the principal may, revoke the authority given to his agent at any time before the
authority has been exercised so as to bind the principal.

S. 207 further provides that revocation may be expressed Or implied by the

conduct of the principal. For Example - A empowers B to let A’s house.
Afterwards A lets it himself. Thus, it is an implied revocation of B’s authority.

Similarly where the owner of a colliery (coal mine) appointed a sole selling agent
for his coals for seven years, it was held that the owner could sell the colliery
even before the expiry of this period and thus terminate the agency. He was not
bound to keep his colliery.

Notice of revocation must be given-According to S. 206 “reasonable notice

must be given of such revocation or renunciation; other wise the damage there
by resulting to the principle or the agent, as the case may be, must be made good
to the one by the other’.

Liability to compensate each other – According to S. 205 “ where there is an

express or implied contract that the agency should be continued for any period
of time, the principal must make compensation to the agent, or the agent to the
principal, as the case may be for any previous revocation or renunciation of the
agency without sufficient cause.
2. By renunciation by agent- S. 206 provides that an agent may renounce the
business of agency in the same manner in which the principal has the right of
revocation. In the first place, if the agency is for a fixed period, the agent would
have to compensate the principal for any premature renunciation without
sufficient cause. Secondly, a reasonable notice of renunciation is necessary.
(b) By Operation of Law- According to S.201 the agency may be terminated
automatically operation of law in the following as under-

1. By completion of business of agency- An agency is automatically and

by operation of law determined when its business is completed. Thus, For
Example, the authority of an agent appointed to sell goods cases to be
exercisable when the sale is completed. He cannot afterwards alter the
terms of the sale. But the Allahabad and Calcutta High Courts have held
that agency is not terminated on the completion of the sale but continues
until payment of the sale proceeds to the principal.

2. By death or Insanity of the principal or agent-An agency is

determined automatically by the death or insanity of the principal or the
agent. Winding up of a company or dissolution of a partnership has the
same effect. Acts done by the agent before death of principal would
remain binding but the acts done subsequent to death would be invalid.
For Example:-
Where a principal authorized his power of attorney to present a
document disposing of his property for registration, but the principal died
before the agent could do so, a subsequent registration was held to be
invalid. In this case the Registrar also knew that the principal was dead.
3. By the principal's insolvency - An agency is. terminated
automatically on the principal being adjudicated insolvent.
4. By the expiry of the period of agency - Where an agent has been
appointed for a fixed term; the. Expiration of the term puts an end to the
agency; whether the purpose of the agency has been accomplished or not.
5. By destruction of the subject-matter-of the agency-When the
subject matter of the contract of agency is destroyed the agency comes to
 an end. For Example:-A was appointed agent by B to sell his bales of
cotton in Calcutta. The agency is terminated when the bales are gutted by
fire.

When the authority given to an agent cannot be revoked, it is said to be an

irrevocable agency. An agency becomes irrevocable in the following cases:

1. Where the agency is coupled with interest (Sec. 202):

Where the agent has himself an interest in the subject-matter of agency, the
agency is said to be coupled with interest. Such an agency is created with the
object of protecting or securing any interest of the agent.

So where a creditor is employed for valuable consideration as an agent to

collect rents due to the principal (debtor) for adjusting the amount towards his
debt, the principal thereby confers an interest on the agent and the authority
cannot be revoked unilaterally during the subsistence of the interest, in the
absence of an express contract to the contrary.

It is important that the doctrine of agency coupled with interest applies only, if
the authority was intended for the protection of an interest of the agent
existing at the time of the creation of the agency and it is not sufficient that it
does so incidentally. It, therefore, cannot apply where the interest arises after
the creation of the agency.

It must also be noted that an agency coupled with interest is not terminated
even by the death, insanity or insolvency of the principal.

Illustration (Appended To Sec. 202): A gives authority to B to sell A’s land and to
pay himself, out of the proceeds, the debts due to him from A. A cannot revoke this authority,
nor can it be terminated by his insanity or death.
2. When revocation would cause the agent personal loss:
Where the agent has, in pursuance of his authority, contracted a personal
liability, the agency becomes irrevocable and the principal cannot revoke the
authority unilaterally. This is so because the principal cannot be permitted to
defeat rights already established.

Illustration: A gives authority to B to pay A’s creditor C and places the

necessary money in the hands of B for that purpose. Thereupon B informs C
that he has received money in his hands for payment of his debt and that C
may collect the same any time from him. A cannot revoke B’s authority to pay
to C as B has incurred a personal liability.

3. When the authority has been partly exercised by the agent (Sec. 204):
Where the agent has partly exercised his authority, it becomes irrevocable so
far as regards such acts and obligations as “arise from acts already done in
the agency.

Illustration (Appended To Sec. 204):

A authorises B to buy 1,000 bales of cotton on account of A, and to pay for it
out of A’s money remaining in B’s hands. B buys 1.000 bales of cotton in A’s
name and so as not to render him personally liable for the price. A cannot
revoke B’s authority so far as regards buying the cotton but can revoke B’s
authority to pay for the cotton.

Q. Describe analytically the right available to surety agaimst Principle debtor,

the creditor and the co-surety?

Ans: Rights of Surety against Creditor

Surety has the following rights against his creditor.

1. Rights in Case of Fidelity Guarantee

In case of fidelity guarantee i.e., guarantee as to good behaviour, honesty, etc.,
of the principal debtor, the surety can ask the employer to dispense with the
services of the employee if the latter is proved to be dishonest.

2. Before the Payment of the Debt Guaranteed

A surety may, after the debt has become due but before he is called upon to
pay, require the creditor to sue the principal debtor to recover the debt. But, in
such cases, the surety must undertake to indemnify the creditor for any risk,
delay or expense resulting there from.

3. Right to Claim Securities

After payment of the debt to the creditor or the performance of the promise of
the principal debtor, the surety can recover all the securities which the
creditor had with him either before or after the contract of guarantee was
entered into. This right is available to the surety whether or not he knows
about the existence of such security. He is entitled to all of them.

4. Right of Equities
After paying the amount due to the creditor, the surety is entitled to all
equities of the creditor that he had against the debtor as well as any other
person with regard to the debt.
5. Right of Set-off
Sometimes, the principal debtor is entitled to certain counter claim or
deductions from the loan obtained from the creditor. In such cases, the surety
is entitled to the benefit of such counter claim or deductions, if the creditor
files a suit against the surety.

Rights of Surety against the Principal Debtor

1. Right of Subrogation
After the payment of the debt to the creditor, the surety is subrogated to the
rights of the creditor i.e., he has the same rights as those of the creditors.
Therefore, he can sue the principal debtor to exercise those rights. Thus if the
surety has performed his promise towards the creditor, all the rights of the
principal debtor against the creditor devolve upon him.

2. Right of Indemnity
In every contract of guarantee, there is an implied promise by the principal
debtor to indemnify the surety i.e., to compensate the surety. Therefore, upon
the payment of debt of the principal debtor, the surety becomes entitled to
recover from the principal debtor, all the amount including interest plus costs
rightly paid to the creditor under the guarantee. The reason is that the surety
is entitled to full indemnification.

3. Right to be Relieved Earlier

A surety can, even before making any payment, compel the debtor to relieve
him from liability by paying off the debt. But, before doing so, the debt should
be ascertained.

Rights of Surety against Co-sureties

When two or more persons give a guarantee for the same debt, they are called
as co-sureties. All of them are equally liable to the creditor for the payment of
the debt to the creditor. The rights of one co-surety against the other co-
sureties are as follows:

1. Right to Contribute Equally

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

Sometimes, one co-surety discharges the entire obligations. In such cases, he

can obtain equal contribution from the other co-sureties.

2. Liability of Co-sureties bound in Different Sums

If the co-sureties are bound in different sums, they are liable to pay equally
but not more than the maximum amount guaranteed by each one of them.

Example: A, B and C are sureties for D, enter into three several bonds, each in
a different penalty, such as A in the penalty of Rs.5,000, B in that of
Rs.10,000, C in that of Rs.20,000, conditioned for D’s duly accounting to E. D
failed to the extent of Rs.15,000, A, B and C are each liable to pay Rs.5,000
each.

Q. Describe the variuos modes of creation of agency? What are the

conditions requisite for and consequencies of a valid ratification of acts
done by person not authorised to do them?

Ans: The contract of agency may be in writing under seal and it is then called
a power of attorney, or it may be simple writing, or it may be by an oral
agreement, or may be inferred from the conduct of the parties and the
circumstances of the case, as in case of master and servant, or husband and
wife, or partners inter se.

Various ways of constituting agency:-

An agency may be created in following five ways:-

1.By Express appointment by the principal called express agency:-

Any person who is competent to contract and who is of sound mind may
appoint an agent. The appointment may be expressed in writing or it may be
oral. But our definition of agency is wider than that of English Law. Our
definition does not limit the employment to one by the principal only…….. It
will include an employment by any authority authorized by law to make the
employment. Thus, where an agent was appointed under the provisions of
Bengal Tenancy Act, 1885 for the protection of the interests of quarrelling co-
owners and of third person, the Calcutta High Court held that the agent so
appointed would come within the definition, though he would not have the
same “ well-known and settled incidents”. Attached to him as arise in the case
of contractual agency, Similarly, loan incurred by an agent appointed under
the terms of a statute was held binding on the proprietors.

2. By implication of law from the conduct of the parties called implied

agency:- Implied agencies arise from the conduct, situation or relationship of
parties. Whenever a person places another in a situation in which that other is
understood to represent or to act for him, he becomes an implied agent. For
Example-
(i) Smith Vs. Moss, 1940 K.B. a woman allowed her son to drive a car for her
she paying all the expenses of maintenance and operation, it was held that
the son n was an implied agent of the mother and when he made a collision
injuring his wife, the wife could sue the mother for the fault of her agent.

(ii) Ormrod Vs. Crasvil1e Motor Series Ltd. 1953. A permission granted to a
person to ferry a car from one place to another makes him an agent for the
limited, purpose so as to create. liability for consequences of negligent driving.

3. By Necessity - Agency of necessity is created in the following two ways-

(i) Law itself creating relationship of principal and agent-In certain

circumstances law itself creates a relationship of principal and agent between
two parties without their consent. For Example-A husband is bound to
maintain his wife; and if he makes no adequate provision for her maintenance,
she is entitled to supply her needs 'by pledging her husband's credit for
necessaries. In such a case the wife will be treated as an agent of necessity
of the husband.

(ii) Law allowing the agent to exceed his authority in emergency-An

authority of necessity is conferred by law in certain cases w re an agent, in the
course of his employment, is faced with an emergency in which the property
or interests of his principal are in imminent jeopardy and it becomes
necessary, in order to preserve the property or interests of the principal, to act
before the principal's instructions can be obtained. Thus, a carrier of goods, or
a master of ship, may under certain circumstances, in the interest of his
employer pledge his credit or incur such other ob1igation as is necessary, and
will be considered to have his authority to do. so.

For Example -

(i) A horse was sent by train. On its arrival at the destination there was no one
to receive it. The railway company fed the horse. Held the railway company
was an agent by necessity of the owner and was entitled to recover the
amount spent in feeding the horse.

(ii) The master of a ship in case of necessity can pledge the ship as security
for the cost of repairs necessary to enable her to continue the voyage. The
master will be considered as' agent of the owner by necessity.
(iii) A master of a ship finds that the cargo is, perishing rapidly. He puts into
the nearest port and sells the goods for the best price obtainable. He Win be
considered as agent of the owner by necessity.

4. By Estoppel or by Holding out-

Where any person by words or conduct; represents or permits it to be

represented that another person has authority to act on his behalf, he is
bound by the acts of such other person with respect to anyone dealing with
him as an agent on the faith of such representation to the same extent as if
such other person had the authority which he was so represented to have. For
Example

(i) Summers Vs. Solomon (1857) 26 L. Q. B: 301':"'A had for some years
managed a shop belonging to B and ordered goods in B's name from C, and
B had duly paid for them. A absconded, called on C and bought goods in B's
name and took them away. Held B was liable for the price of the goods.

(ii) Pickering Vs. Busk (1812) 15 East 38 -A employed B, a broker, to buy

hemp for him and at the request of A it was kept in the name of B in the
warehouse. B without A’s authority sold the hemp. Held, A was bound 'by the
sale because he had allowed B. to assume the apparent right of disposing of
the hemp in the ordinary course of trade.

5. By Ratification or Ex-post facto agency - Where an act is done in the,

name or professedly on behalf of 'a. person without his authority by another
person purporting to act as his agent, the person in whose name or on whose
behalf the act is done may, by ratifying the act make it as valid and effectual,
as if it had been originally done by his authority. The effect of ratification is to
render the contract as binding on the principal as if the agent had been
properly authorized beforehand. Ratificaion relates back to the original making
of the contract. For Example - A purchases goods for B without B's authority.
B sells those goods to C in his own account. This shows that B has ratified the
act of A..

An agency relationship has a tripartite structure. It involves the principal, the

agent and a third party. The agent acts on behalf of the principal in relation to
the third party. Consequently, an agent is said to be a conduit pipe between
the principal and the third party. In the circumstance, the agent acts under the
express or implied authority of the principal. However, there are occasions
when the agent acts without the pre-knowledge of the principal. This places
the principal in a position to legally ratify the agent’s acts. In this article, we
shall consider the conditions under which a valid ratification of the acts of an
agent may occur.

For a valid ratification to be consummated, certain basic essential elements

must occur. These include the following:

 Existence of a principal: At the material time when the agent entered

into the contract, the principal must be in existence and ascertainable
as at the time when the agent purportedly acted on his behalf.

 Express contract of the agent: The agent must expressly state at the
time he was entering into the contract that he was acting on behalf of
his principal who will subsequently ratify the contract. The agent must
not act for himself; otherwise, the principal cannot ratify the contract.

 Validity of the contract: The contract must not be void ab initioat the
time the contract was entered into by the agent. Thus, for a principal to
validly ratify the act of the agent, the contract entered into by the agent
must be valid from inception. If the contract is an illegal contract, it will
be null and void and incapable of ratification.

 Full knowledge of the act: The principal must at the time of the
ratification have a full knowledge of all the material facts of the
contract. Put differently, the agent is expected to disclose all the facts
of the contract to the principal before the principal can ratify the acts of
the agent in relation to the contract.

 Contractual capacity: The principal and the agent must possess

requisite contractual capacity to enter into the contract at the time the
contract was made. In addition, the principal must be capable of
ratifying the acts of his agent. This is important because the law does
not recognise certain persons as being capable of entering into
contracts generally. Examples of such persons include infants, lunatics,
drunkards, etc. However, there are some exceptions to the general rule
that these persons are incapable of entering into contracts.
  Reasonable time: For the ratification of the acts of the agent by the
principal to be valid, the ratification must occur within a reasonable
time. Since reasonable time is not a definite prescription, what amounts
to a reasonable time is dependent on the circumstances of each case.

Ratification of the acts of an agent who initially was lacking in authority is a

valuable rule which promotes commercial transactions. It is noteworthy that
when a principal ratifies the acts of an agent, the principal is treated as though
he was part of the contract ab initio. He is therefore entitled to all the benefits
arising from the contract. If losses emanate from the contract, the principal is
equally entitled to them. In other words, the principal assumes both the
benefits and burdens of the ratified contract.

Q. Define Sale. What are the elements of sale? Distinguish between sale
and hire purchase agreement?

Ans: A ‘Contract of Sale‘ is a type of contract whereby one party (seller) either
transfers the ownership of goods or agrees to transfer it for money to the
other party (buyer). A contract of sale can be a sale or an agreement to sell.
In a contract of sale, when there is an actual sale of goods, it is known
as Sale whereas if there is an intention to sell the goods at a certain time in
future or some conditions are satisfied, it is called an Agreement to sell.
1. Essential Elements of a Valid Contract

All the requirements of a valid contract such as free consent, consideration,

competency of the parties, lawful object and consideration must be fulfilled. If
any of the essential elements of a valid contract is absent, then the contract of
sale will not be valid.

For e.g., A agreed to sell an almirah to B without any consideration. Such a

contract of sale is not valid because it is made without consideration.

2. Two Parties

Another essential element of a contract of sale is that there must be two

parties to the contract of sale viz., seller and buyer.

In a contract of sale, the ownership of goods has to pass from one person to
another. Hence the seller and the buyer must be different persons because
one person cannot be both the buyer and the seller.
But there are certain exceptions to this – where a person’s goods are sold
under an execution of decree he may purchase his own goods.

For e.g., A and B were partners. After some years, the firm was dissolved. On
the dissolution, some goods were divided among all the partners. Such a
distribution of goods among the partners was not a sale.

3. Goods

There must be some goods as a subject-matter. Goods must be one which is

defined as goods in Sec. 2(7) of the Sale of Goods Act. As per the definition
given in Sec. 2(7) of the Act, goods means every kind of movable property
and it includes

1. stock and share,

2. growing crops, grass,

3. the things attached to or forming a part of the land which can be

severed from the land.

For e.g., A agreed to sell to B, wheat crops which is grown in his

field. A and Bagreed that B may cut the crop and take it away upon the
payment of the price. As the growing crop is included in the term “goods”, this
is a valid contract of sale.

4. Transfer of Ownership

In a contract of sale, ownership over goods has to be transferred to the buyer

by the seller or there should be an agreement to transfer the ownership by the
seller to the buyer.

The property in the goods means “all ownership rights” of the goods. In a
contract of sale, all the ownership rights of the goods must be transferred by
the seller to the buyer. However, the physical delivery of the goods is not
required.

For e.g., A agreed to buy a new two wheeler from B an agent for
Rs.25,000. Apaid the price and got the two wheeler registered in his name
and the registration book was delivered by B to A. This is a valid contract of
sale because the ownership of the two wheeler has been transferred to A.

5. Price

Another essential element of a contract of sale is that there must be some

price for the goods. That means, the goods must be sold for some price.
According to Sec. 2(10) of the Sale of Goods Act, the term price means “the
money consideration for a sale of goods“.

Thus the price is the consideration for contract of sale which should be in
terms of money. If the ownership of the goods is transferred for any
consideration other than the money, that will not be a sale but an exchange.
However, consideration can be paid partly in money and partly in goods.

For e.g., A delivered to B 10 cows valued at Rs.2,000 per cow. B delivered

to A20 bags of rice at Rs.750 per bag and paid the balance of Rs.5,000 in
cash in exchange of the cows. This is a valid contract of sale.

Distinction between a sale and a hire-purchase agreement

In hire purchase agreement the goods are delivered to the hire purchaser for
his use at the time of the agreement but the owner of the goods agrees to
transfer the property in the goods to the hire purchaser only when the hirer
pays a certain fixed number of installments of price.

However, Distinction between a sale and a hire-purchase agreement are as

follows:

Under the Sale-->Ownership is transferred from the seller to the buyer as

soon as the contract is entered into.

Under the Hire-purchase agreement-->Ownership is transferred from the

seller to the hire-purchaser only when a certain agreed number of installments
are paid.

In the Sale -->The position of the buyer is that of the owner.

In Hire-purchase agreement-->The position of the hire-purchaser is that of the
bailee.

In Sale -->The buyer cannot terminate the contract and as such is bound to
pay the price of the goods.

In Hire-purchase agreement-->The hire-purchaser has an option to terminate

the contract at any stage, and cannot be forced to pay the further instalments.

In Sale -->If the buyer makes the payment in instalments, the amount payable
by the buyer to the seller is reduced, for the payment made by the buyer is
towards the price of the goods.

In Hire-purchase agreement-->The instalments paid by the hire-purchaser are

regarded as hire charges and not as payment towards the price of the goods
till option to purchase the goods is exercised.

Q. Differentiate between dissolution of a firm and dissolution of

patnership. Discuss the procedure of dissilotion of firm by the court.

Ans: Dissolution of Partnership is not equal to the dissolution of partnership

firm. It is due to the fact that when the jural relation present between all
partners, comes to an end, it is known as dissolution of firm, however, when
any one of the partners become incapacitated, then the partnership between
the concerned partner and other partners of the firm, comes to an end, but the
firm may continue to operate, if other partners desire so.

The fundamental difference between the dissolution of partnership and

dissolution of the firm is that when the partnership is dissolved, there is no
other dissolution, but when the firm is dissolved, partnership too comes to an
end. Here in this article, we’ve broken down all the relevant facts and
differences, take a read.

Key Differences Between Dissolution of Partnership and Dissolution of

Firm

The points presented below explain the difference between the dissolution of
partnership and dissolution of the firm, on various grounds:

1. Dissolution of Partnership can be defined as the breaking of the

relationship between the partner and other partners of the firm. On the
other hand, dissolution of a firm is used to mean discontinuance of the
entire firm including the relation among all the partners.
 2. Dissolution of the partnership is voluntary in nature, as it is dissolved
by mutual agreement. Conversely, a firm is dissolved either voluntarily
or compulsorily.
3. Dissolution of partnership does not lead to the discontinuance of
business, and so it is carried on by the remaining partners as before. As
against this, with the dissolution of the firm, the business carried on by
the firm also comes to an end.
4. In the case of dissolution of the partnership, the economic relationship
between the partners continues to exist but in changed form. On the
contrary, in the dissolution of the firm, economic relationship between
partners ceases to exist.
5. When there is the dissolution of the partnership, revaluation account is
prepared in order to revalue assets and reassess liabilities. In contrast,
realisation account is prepared when the dissolution of firm takes
place.
6. The firm’s books of accounts are not closed in the dissolution of the
partnership, but the firm’s books are closed along with the closure of
partner’s account, in the dissolution of the firm.
Example

 Suppose A, B, C are partners in a firm, B retires, and A and C decide to

continue the partnership with a new profit sharing ratio. In this case,
there is a dissolution of partnership between B and A, C.
 Suppose A, B, C are partners in a firm, engaged in the business of
selling a particular chemical, after that, a law has been passed in which
selling of that particular chemical is banned. In this case, the business
becomes unlawful, and the firm is dissolved.

Dissolution by Court (S 44)

The court may order for the dissolution of the firm on the following grounds:-

(i) Insanity of Partner-On the application of any of the partner, court may
order for the dissolution of the firm if a partner has become of an unsound
mind. Lunacy of a partner does not itself dissolve the partnership but it will be
a ground for dissolution at the instance of other partners. It is not necessary
that the lunacy should be permanent. In the case of a dormant partner the
court may not order dissolution even on the ground of permanent insanity,
except in special circumstances.

(ii) Incapacity of Partner-If a partner has become permanent in capable of

discharging his duties and obligations then court may order for the dissolution
of firm on the application of any of the partner. where a partner is imprisoned
for a long period of time the court may dissolve the partnership was held in
case ofWhitwell v. Arthur

(iii) Misconduct of Partner-If any partner other than partner suing is

responsible for any loss to the firm, which amounts to misconduct and
prejudicially affects the carrying on of business then the court may order for
the dissolution of the firm.

(iv) Constant breach of agreement by partner-The court may order for the
dissolution of the firm if the partner other than the suing partner is found guilty
for constant breach of agreement regarding the conduct of business or the
management of the affairs of the firm and it becomes impossible to continue
the business with such partner.

(v) Transfer of Interest-When any of the partner other than the suing partner
transfers whole of its share to the third party for permanently.

(vi) Continuous Losses-The court may order for dissolution if the firm is
continuously suffering losses and there is no more capital available for the
future growth of the firm.

(vii) Just and Equitable-The court may order for dissolution on any other
ground which court think is just, fair and equitable. e.g. loss of total confidence
between the partners was held in case of Havidatt singh v. Mukhe Singh

Q. Explain that every contract of pledge is a contract of bailment but

every contract of bailment is not a contract of pledge.

Ans: A ‘pledge’ is a bailment of goods wherein the goods are delivered as a

security for payment of a debt or performance of a promise. The bailor is
called the ‘pledgor’ or ‘pawnor’ and the bailee is called the ‘pledgee’ or
‘pawnee’. Thus, pledge is a special kind of bailment. Whereas, 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, by returned or
otherwise disposed of according to the directions of the person delivering
them.

1. A Bailment is a contract in which goods are transferred from one

party to another party for a short period for a specific objective.
The Pledge is a kind of Bailment in which goods are pledged as
security against payment of debt.
2. In bailment, the consideration may or may not be present, but in
the case of a pledge, the consideration is always present.
3. The objective of bailment is safe custody or repairing of goods
delivered. On the other hand, the sole purpose of delivering the
goods is to act as security against the debt.
4. In bailment, the goods are used by the bailee only for the said
purpose. Conversely, in pledge, Pawnee has no right to use the
goods.
We all have no idea, when we enter into these type of contract in our
life especially the contract of bailment because all of us has left our
car or motorcycles in the service center for repairs, it is bailment.
The pledge has a limited scope as compared to bailment; many
businessmen take a loan from the financial institution by pledging
their stock as security. In short, we can say that every pledge is a
bailment, but every bailment is not a pledge. So, both of them are
very important at their places and we must know their differences.

Q. Write note on the doctrine of “Caveat emptor” refer to

emerging trends in this respect in the Indian society.
Ans: Section 16 of the Sale of Goods Act 1930 incorporates the
principle of caveat emptor which reads as- “Subject to the
provisions of this act or any other law for the time being in force
there is no implied condition or warranty as to quality or fitness for
any particular purpose of goods supplied.”

Caveat emptor means "Let the buyer beware”. Generally, caveat

emptor is the contract law principle that controls the sale of real
property after the date of closing, but may also apply to sales of other
goods. The phrase caveat emptor and its use as a disclaimer of
warranties arise from the fact that buyers typically have less
information about the good or service they are purchasing, while the
seller has more information. The quality of this situation is known as
“information asymmetry”. Defects in the good or service may be
hidden from the buyer, and only known to the seller.

A common way that information asymmetry between seller and

buyer has been addressed is through a legally binding warranty, such
as a guarantee of satisfaction. But without such a safeguard in place
the ancient rule applies, and the buyer should beware.

Under the principle of caveat emptor, the buyer could not recover
damages from the seller for defects on the property that rendered the
property unfit for ordinary purposes. The only exception was if the
seller actively concealed latent defects or otherwise made material
misrepresentations amounting to fraud.

Scope Of Caveat Emptor

In Ward v. Hobbes (1878) 4 AC 13, the House of Lords held that a

vendor cannot be expected to use artifice or disguise to conceal the
defects in the product sold, since that would amount to fraud on the
vendee; yet the doctrine of caveat emptor does not impose duty on
vendor to disclose each and every defect in the product. The caveat
emptor imposes such obligation on vendee to use care and skill while
purchasing such product.

In Wallis v. Russel (1902) 2 IR 585, the Court of Appeal explained

the scope of caveat emptor-

“Caveat emptor does not mean in law that the buyer must “take a
chance,” it means he must “take care.” It applies to the purchase of
specific things, e.g. a horse, or a picture, upon which the buyer can,
and usually does, exercise his own judgment; it applies also
whenever the buyer voluntarily chooses what he buys; it applies also
whereby usage or otherwise it is a term of the contract, that the buyer
shall not rely on the skill or judgment of the seller.”

Exceptions To The Rule Of Caveat Emptor- Section 16 of The Sale of

Goods Act, 1930

Section 16(1) – Fitness for buyers purpose

Sub section (1) of Section 16 of the said Act prescribes the

circumstances in which the seller is obliged to supply goods to the
buyer as per the purpose for which he intends to make a purchase. It
states that when the seller either expressly or by necessary
implication is aware of the purpose for which buyer makes purchase
thereby relying on seller’s skill and judgment and the goods to be
purchased are of a description which the seller in his ordinary course
of business supply, then there is as implied condition that the goods
shall be reasonably in accordance with the purpose

Requirements of the Section 16(1) are as follows:-

The buyer should make the seller aware of the particular purpose for
which he is making purchase;

The buyer should make purchase on the basis of seller’s skill or

judgment;
The goods must be of a description which it is in the course of the
seller’s business to supply.

In the case of Shital Kumar Saini v. Satvir Singh, the petitioner

purchased a compressor with one year warranty. The defect
appeared within three months. The petitioner asked for a
replacement. The seller replaced it but without providing any further
warranty. The State Commission allowed it to be rejected stating that
there was an implied warranty guaranteed under Section 16 of the
Sale of Goods Act, 1930 that the goods should be reasonably fit for
the purpose for which they are sold.

Sale under Trade Name [Proviso to S. 16 (1)]

Sometimes a buyer purchases goods not on the basis of skill and

judgment of the seller but by relying on the trade name of the
product. In such case, it would be unfair to burden the seller with the
responsibility for quality. The proviso to Section 16 of the Sale of
Goods Act, 1930 deals with such cases. The proviso says:

“Provided that, in the case of a contract for the sale of a specified

article under its patent or other trade name, there is no implied
condition as to the fitness for any particular purpose.”

Merchantable quality [Section 16(2)]

The second important exception to the doctrine of caveat emptor is

incorporated in Section 16(2) of the Act. The Section provides that
the dealer who sells the goods has a duty to deliver the goods of
merchantable quality.

Sub-Section (2) which contains this exception says:

“Where the goods are bought by description from a seller who deals
in goods of that description (whether he is the manufacturer or
producer or not), there is an implied condition that the goods shall
be of the merchantable quality.”

Meaning of Merchantable Quality: Merchantable quality

means that if the goods are purchased for resale they must be
capable of passing in the market under the name or description by
which they are sold.

Merchantable quality depends on two factors:-

Marketability- Merchantability does not merely mean that the goods

shall be marketable, but that they shall be marketable at their full
value. “Merchantability does not mean that the things are saleable in
the market because it looks all right; it is not merchantable in that
event if it has defects unfitting it for its only proper use but not
apparent on ordinary examination.”[2]

Reasonable fitness for general purposes- “Merchantable quality”

means, in the second place, that if the goods are purchased for self-
use, they must be reasonably fit for the purpose for which they are
generally used. Example: The plaintiff bought a hot-water bottle
which is ordinarily used for application of heat to the human The
bottle burst scalding the plaintiff’s wife. The seller was held liable.[3]

Examination by buyer [Proviso to S.16(2]

The proviso to section 16(2) declares that “if the buyer has examined
the goods, there shall be no implied condition as regards defects
which such examination ought to have revealed. The requirement of
the proviso is satisfied when the seller gives the buyer full
opportunity to examine the goods and whether the buyer made any
use of the opportunity or not should make no difference.

Conditions implied by trade usage [ Sec. 16(3)]

Sub-Section (3) of section 16 gives statutory force to conditions

implied by the usage of a particular trade. It says:

“An implied warranty or condition as to the quality or fitness for

the particular purpose may be annexed by the usage of trade.”

In another case of Peter Darlington Partners Ltd v Gosho Co

Ltd, where a contract for the sale of canary seed was held subject to
the custom of the trade that for impurities in the seed, the buyer
would get a rebate on the price, but would not reject the goods.

However, an unreasonable custom will not, however, affect the

parties’ contract.

Express Terms [ Section 16(4)]

It is open to the parties to include any express conditions or

warranties in their contract. But an express warranty or condition
does not negative a warranty or condition implied by the Act unless
the express terms are inconsistent with the implied conditions. Thus,
where sleepers supplied to a railway company were required to be
approved by its experts, it was held that it did not exclude the
implied condition of merchnatableness.
Origin Of Caveat Venditor:

In the twentieth century with the enactment of English Sale of Goods

Act, 1893 and later modified by English Sale of Goods Act, 1979 the
exceptions to the rule of caveat emptor have become more prominent
than the rule itself. Further, on account of the complex structure of
modern goods, it is only the sellers who can assure the contents and
the quality of the goods. For these reasons, it became necessary to
restrict the rule of caveat emptor by grafting a few exceptions upon
its scope. There is a duty now to deliver appropriate goods and also
to provide appropriate information about them. Thus, it has led to
the birth of ‘caveat venditor’ which means ‘let the seller beware’ in
contrast to caveat emptor.

Q. The relationship of Partnership arises from contract and

not from status, comment.
Ans: Section 5 in The Indian Partnership Act, 1932 - Partnership not created
by status.—The relation of partnership arises from contract and not
from status; and, in particular, the members of a Hindu undivided
family carrying on a family business as such, or a Burmese Buddhist
husband and wife carrying business as such, are not partners in such
business. State Amendment Goa, Daman and Diu.—In section 5, for
the words “Burmese Buddhist husband and wife carrying on
business as such”, substitute the words “a husband and wife under
the regime of communion of property carrying on business as such”.
[Vide Goa, Daman and Diu Act 6 of 1966, sec. 2 (w.e.f. 22-8-1966)].

Partnership is the form of business organization, where two or more

persons can join together or jointly carrying on some business. It is
an improvement over the 'sole-trade business', where one single
individual with his own resources, skill and effort carries on his own
business.

In a partnership, a number of persons could pool their resources and

efforts and could start a much larger business. In case of loss also,
the burden gets divided amongst various partners in a partnership.

According to Section 4 of the Indian Partnership Act, " The relation

of partnership arises from contract and not from status; and ,
particular, the members of a Hindu undivided family carrying on a
family business as such, or a Burmese Buddhist husband and wife
carrying on business as such, are not partners in such business."
Partnership is the result of agreement. Agreement here means a
contract. It arises from an agreement between two or more people. It
cannot arise from status. The presence of agreement is a must. It
indicates the voluntary contractual relationship of partnership.

Q. “No body can pass a better title than he himself has”,

discuss statement with its exceptions.

Ans: General Provision : ‘No body can transfer a title better than he
himself has’

The general rule is that only the owner of goods can sell the goods.
Conversely, the sale of an article by a person who is not or who has
not the authority of the owner, gives no title to the buyer. The rule is
expressed by the maxim; "Nemo dot quod non habet" . No one can
pass a better title than what he himself has. As applied to the sale of
goods, the rule means that a seller of goods cannot give a better title
to the buyer than he himself possess. Thus, even bona fide buyer
who buys stolen goods from a thief or from a transfree from such a
thief can get no valid title to them, since the thief has no title, nor
could he give one to any transferee.

Example:

1. A, the hirer of goods under a hire purchase agreement, sells them

to B, then B though, a bonafide purchaser, does not acquire the
property in the goods. At most he can acquire such an interest as
the hirer had.

2. A finds a ring of B and sells it to a third person who purchases it

for value and in good faith. The true owner, Le. B can recover
from that person, for A having no title to the ring could pass
none the better.

Exceptions to the General Rule

The general rule in Section 27 is subject to the provisions of this act

and to any other law for the time being in force. The Act while
recognizing the general rule that no one can give a better title
than what he himself has, laid down important exceptions to it.
The exceptions have come up in the interest of trade and
commerce and are mentioned in the Sales of Goods Act, 1930
and the Indian Contract Act. Various exceptions to this rule are
mentioned in Section 27 to 30 in Sales of Goods act, 1930.
In these exceptional situations, the seller of the goods may not be
having a good title to the goods, yet the buyer of the goods gets
good title to them. In other words the buyer gets a better title of
the goods than the seller himself. These exceptions are given
below:

1. Sale by a mercantile agent

The expression ‘mercantile agent’ shall mean a mercantile agent

having, in the customary course of his business, such agent authority
either to sell goods, or to consign goods for

the purpose of sale, or to buy goods, or to raise money on the

security of goods. A buyer will get a good title if he buys in good faith
from a mercantile agent who is in possession either of the goods or
documents of title of goods with the consent of the owner, and who
sells the goods in the ordinary course of his business because the
sale made will be valid as if he was expressly directed to do so.

In order that the proviso to Section 27 may apply, several conditions

may be fulfilled:

The agent effecting the sale must be a merchantile agent

The merchantile agent must be in possession of the goods.

1. He must be independent from the person for whom he is agent

(his principal)

2. He must act in a business capacity (even if only occasionally).

3. He must be in possession of the actual goods or documents of

title to the goods when he sells them on to the third party

4. Such possession must:

(i) be with the owner’s consent. However, such consent may be

established even if the owner was tricked into giving the agent
possession.

(ii) be in his capacity as mercantile agent and for a purpose

connected with his business as a mercantile agent and the sale.
Thus, possession of the goods by a mercantile agent for the
purpose of, for example, repairing them would not satisfy this
requirement; and
 (iii) amount to current possession of the goods and not where he
had been in possession in the past

5. He must actually sell or dispose of the goods. A mere agreement

to sell them will not be enough.

6. The dealing in the goods by the mercantile agent must be in

the ordinary course of business of mercantile agents generally.
This means that the sale or disposition:

(i) must be made during business hours; (ii) from business

premises; and

(iii) acting in such a way as the third party would expect a

mercantile agent to act

7. The third party must acquire the goods in good faith and without
knowing that the mercantile agent lacked the authority to sell
them. The burden of proof in this regard rests with the third
party. The test of good faith is subjective and is satisfied when it
is done honestly, irrespectively as to whether it is done
negligently.

When the conditions contained in the proviso are satisfied the seller
can confer a good title on the buyer.

Q. What is contract of bailment? What is standard of care a

bailee has to take in respect of goods bailed to him?

Ans: Bailment is a common law term and involves the change of

possession, i.e., delivery of goods or personal property by one person
to another, but the ownership remains unchanged. Chapter IX of the
Indian Contract Act, 1872 deals with the sections regarding the
Contract of Bailment.

Section 148 to Section 171 lays down the definitions, nature of the
contract of bailment as well as the rights, duties and liabilities of both
the bailor and the bailee. Bailment, as per the Indian Contract Act,
puts certain legal obligations on bailee at the time of redelivery or
disposing of goods as directed by the bailor.

Duties of Bailee
The following are some of the duties of Bailee.
1. To Take Reasonable Care of the Goods Bailed
It is the duty of the bailee to take reasonable care of the goods bailed to him.
He must take as much care as an ordinary sensible man would take, under
the similar circumstances, in respect of his own goods of the same type. If he
has taken the required degree of care, then he is not liable for any loss or
destruction of the goods bailed. However, if the bailee is negligent in taking
care of the goods bailed, then he is liable to pay damages for loss or
destruction of the goods.

2. Not to make Any Unauthorized Use of Goods

The bailee should use the goods bailed to him strictly in accordance with the
conditions of the contract of bailment. If he unauthorisely uses the goods
bailed to him, the contract of bailment becomes voidable at the option of the
bailor. Further, the bailee is also liable to the bailor for any loss or damage
caused to the goods on account of such unauthorized use of the goods, even
though he is not guilty of negligence, and even if the damage is the result of
an accident.

3. Not to Mix the Goods Bailed with his Own Goods

The bailee must keep the goods bailed separate from his own goods. He
should not mix them with his own goods.

4. Not to Set up an Adverse Title

The bailee holds the goods on behalf of and for the bailor. So he has to return
them to him. He cannot deny the right of the bailor as to the ownership of the
goods. However, if it is proved that the goods belonged to a person other than
the bailor by a competent authority, he may return the goods to such a
person.

5. To Return the Goods

The bailee should return the goods bailed to the bailor on the expiry of the
period or/on the fulfillment of the object for which the goods were bailed. The
goods must be returned or disposed of according to the directions of the
bailor. If he fails to do so, he is responsible to the bailor for the loss, even if it
arises without his negligence.

6. To Return any Accretion to the Goods

In the absence of any contract to the contrary, the bailee is bound to the
bailor, or according to his direction, any increase or profit, which may have
accrued from the goods, bailed.

Example: 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.