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General Principle: Holding someone harmless from the consequences they might face.
It is duty on me to compensate you incase you suffer any loss from me or a third party.
Indemnity clauses are classic examples of contingent contracts (subject to something
In UK system, guarantee contracts fall under indemnity contracts, however, in India
indemnity is very narrow under Section 124.
Insurance does not come under indemnity in Indian Contract Act because by
definition, the ross is caused by (a) by the promisor himself, or (b) by another person
A contracts with B to pay B Rs. 1,000, if he fails to pay B Rs. 500 on a given day. A
fails to pay B Rs. 500 on that day. B is entitled to recover from A such compensation,
not exceeding Rs. 1,000, as the Court considers reasonable. - This is a damages
clause because original contract was breached by A’s act.
Krishnaswamy Iyer v. Raghaviya Shetty - damages and indemnity clauses are
confounding. Similar but different
Just because a sum recovered is larger than the original sum does not mean it’s a
damages and not an indemnity clause.
Capped Indemnification - if in a contract this loss occurred to you, we will indemnify
you but bar the money to this much amount
Uncapped Indemnification - no bar to money
There are statutes in addition to Indian Contract Act which define a duty on a partner
to indemnify - Section 10 and 13 of Indian Partnership Act. Similar statutes in
Negotiable Instruments Act, etc.

Extent of Liability:

Section 125 lays down the extent of liability.

The indemnity holder, acting within the scope of his authority, is entitled to recover

1. All damages which he may be compelled to pay in any suit in respect of any matter to
which the promise of indemnity applies
2. All costs which he may be compelled to pay in such suits if, in bringing or defending it,
he did not contravene orders of the promisor, and acted as it would have been
prudent for him to act in the absence of any contract of indemnity, or, if the promisor
authorised him to bring or defend the suit
3. All sums which he may have paid under the terms of any compromise of any such
suit, if the compromise was not contrary to the orders of the promisor, and was one
which it would have been prudent for the promisee to make in the absence of any
contract of indemnity, or if the promisor authorised him to compromise the suit

Commencement of Liability

When does the indemnifier become liable to pay, or when is the indemnity holder
entitled to recover? Is it when actual loss happens or is the liability absolute?
Original English rule was that indemnity was payable only after the indemnity holder
had suffered actual loss by paying off the claim.
However, since then the courts of equity have held that if the indemnified’s liability had
become absolute then he was entitled either to get the indemnifier to pay off the claim
or to pay into court sufficient money which would constitute a fund for paying off the
clim whenever it was made.
Indemnity is not repayment after payment. Indemnity requires that a party to be
indemnified shall never be called upon to pay
Osman Jamal & Sons Ltd v Gopal Pushattam followed this principle. The court was
directed that the amount should be set apart so that it was used in full payment of the
vendor in respect of whose contract the company had incurred liability.
Gajanan Moreshwar Parlekar v. Moreshwar Madan Mantri: discusses ‘loss'
covered/ compensated under indemnity contracts

Section 126 - defines a contract of guarantee.
Same section defines Surety, Principal Debtor, and Creditor
Surety - is the person who gives the guarantee
Principal Debtor - is the person in respect of whose default the guarantee is given
Creditor - is the person to whom the guarantee is given
May be written or oral

Essentials of a contract of guarantee

1. Principal Debt
2. Consideration - Section 127
3. No-misrepresentation - Section 142 and Section 143

Liability of surety
Section 128 makes clear that the liability of the surety is co-extensive with the
principal-debtor but by a contract, a surety can limit his liability to a fixed sum.
Thus, the liability depends on the terms of the contract
In order to hold the surety liable, it is not necessary that the creditor should exhaust all
remedies against the principal debtor, unless it is expressly provided by the contract
Surety may be liable when the original contract between the principal debtor and
creditor is voidable or void. In such cases, the contract between the creditor and
surety will not be deemed collateral contract but an original contract.
Thus, when the principal debtor is not liable due to his minority, the agreement being
void, the surety is liable
Further, a surety has the right to limit his liability. It is not essential that he undertakes
surety for the whole debt.
Section 144 - when guarantee given by a person is conditional on the co-suretyship of
another person, such a guarantee is not valid unless the other surety joins the
guarantee. He has equitable right to be relieved because the instrument is not
executed by a co-surety.

Continuing Guarantee

Section 129 - is a guarantee which is limited to fixed transactions or is a guarantee for

a fixed period to fixed transactions
Meant for continuing transactions which if given for a fixed period, it would apply to
the transactions up to that period only. It would not apply to transactions after expiry
of the period.
Specific Guarantee - is for a specific transaction

Performance Guarantee by Bank

A bank guarantee is sort of an absolute undertaking on the part of the bank under the
arrangement with its customer to pay to the creditor whenever the latter invokes the
Bank guarantee is ordinarily a contract different and independent of the underlying
contract, the performance of which it seeks to secure. Bank is required to honour the
guarantee according to its terms. The duty of the bank under a performance
guarantee is created by the document of guarantee itself.
Money payable on demand and not on breach - performance guarantees are virtually
promisor notes payable on demand.
The commitments of the bank under a bank guarantee must be honoured free form
interference by the Courts otherwise trusts in commerce, internal and international,
would be irreparably damaged.
It is only in exceptional cases, that is to say in case of irretrievable injustice of fraud,
that the Court should interfere.
Nature of fraud is fraud of an egregious nature as to vitiate the entire underlying
transactions. It is fraud of the beneficiary, not the fraud of somebody else. There must
be specific plea of fraud. The party alleging fraud must necessarily plead and produce
all necessary evidence in proof of the fraud in execution of the contract of guarantee.
Moreover, fraud like another charge of criminal proceeding must be established
beyond reasonable doubt. A finding as to fraud cannot be based on suspicion and
Irretrievable injustice should be the kind arising in irretrievable situation. The
irreparable harm should not be speculative. It should be genuine and immediate as
well as irreversible. It should be a case where the party seeking restaurant on
invocation of a bank guarantee has no adequate remedy of law at all and the harm to
him would be irreparable.
The enforcement of a bank guarantee cannot be made the subject matter of
arbitration proceeding.

Joint-debtors and suretyship

Section 132 - principle that liability of persons who are primarily liable as joint-debtors
is not affected by any arrangement between them as to the order of their liability
A creditor is not affected by any private arrangement entered into as between his two
debtors that one will be the surety of the other even if the creditor knows of this
Creditor may not be a consenting party to the arrangement

Discharge of Surety from Liability

A surety is said to be discharged form liability when his liability comes to an end.
The Act recognises the following modes of discharge:

1. Revocation of continuing guarantee - Section 130

Continuing guarantee can be revoked at any time by the surety as to future

transactions by notice to the creditor
Revocation becomes effective for the future transactions while the surety remains
liable for transactions already entered into

2. Revocation by death of surety - Section 131

Continuing guarantee is also determined by the death of the surety unless there is a
contract to the contrary.
Termination becomes effective only for the future transactions, the surety’s heirs can
be sued for liability already incurred.
Liability of the deceased surety can be enforced against his legal heirs but only to the
extent of the property inherited by them.
3. Variance in terms of contract - Section 133

Surety is held discharged when, without his consent, the creditor makes any change in
the nature or terms of his contract with the principal debtor

4. Release or discharge of principal debtor - Section 134

Section provides for two kinds of discharge from liability:

(i) Release of principal debtor:

If the creditor makes any contract with the principal debtor by which the latter is
released, the surety is discharged
Effect of Debt Relief Acts - where the liability of the principal debtor is reduced under
the provisions of a statute, the surety is also released.
Application of Insolvency Laws - a discharge which the principal debtor may secure
by reason on winding up or insolvency does not absolve the surety of his liability

(ii) Act or Omission:

If the creditor does or does not do something that would discharge principal debtor,
the surety would also be discharged.

5. Creditor compounding with, giving time to or agreeing not to sue principal

debtor - Section 135

Section provides for three modes of discharge from liability:

(i) Composition:

If the creditor makes a composition with the principal debtor without consulting the
surety, the latter is discharged

(ii) Promise to give time:

It is one of the duties of the creditor towards the surety not to allow the principal
debtor more time for payment
In giving time to the principal debtor, the creditor suspends his remedy to sue, which
is contrary to the right to the surety to insist on immediate action against the principal
debtor when the debt becomes due. Therefore, in such an eventuality, the surety is

(iii) Promise not to sure the principal debtor:

If the creditor under an agreement with the principal debtor promises not to sure him,
the surety is discharged.
Main reason is that a surety is entitled at any time to require the creditor to call upon
the principal debtor to pay off the debt when it is due and this right is positively
violated when the creditor promises not to sure the principal debtor.
This is, however subject to two important qualifications:
(a) Forbearance to Sue (Section 137) - the creditor, from mere restraining to sue the
principal debtor does not allow for discharge of surety’s liability
(b) Promise to give Time Made with Third Person (Section 136) - where a contract to
give time to the principal debtor is made by the creditor with a third person, and not
with the principal debtor, the surety is not discharged

6. Impairing surety’s eventual remedy - Section 139

It is plain duty of the creditor not to do anything inconsistent with the rights of the
If an act or omission from the creditor does anything against his duty to the surety,
and the eventual remedy of the surety towards the principal debtor is impaired, the
surety is discharged.
Creditor’s Duty in Realising Security - Creditor’s duty is not merely to handle the
security carefully but also to use reasonable care in realising its value. Before
disposing of the security the guarantor should be informed of it on principles of natural
justice. This would enable him to exercise the option of taking over the security by
paying off the dues. If notice not given, guarantor not liable.
Duty when security is hypothecation - Under a hypothecation goods remain in the
custody of the borrower and he also enjoys the right to deal with them in the ordinary
course of business. A hypothecation, being not a possessory security, not much duty
can be expected from the creditor towards the care of the security

Rights of Surety Against Principal Debtor

1. Right of Subrogation - Section 140

After payment - When the surety has paid all that he is liable for, he is invested with all
the rights which the creditor had against the principal debtor.
Surety steps into the shoes of the creditor
He can also compel the debtor, after the debt has become due, to exonerate him from
liability by paying off the debt
Before payment - possible that in a case the surety finds that the amount having
become due, the principal debtor was disposing off his personal properties one after
the other lest the surety, after paying may seize them and in that case, the surety may
seize a temporary injunction to prevent the principal debtor from doing so

2. Right to Indemnity - Section 145

In every contract of guarantee there is an implied promise by the principal debtor to

indemnify the surety.
Right enables surety to recover from the principal debtor whatever sum he has
rightfully paid under the guarantee, but not the sums which he has paid wrongfully
(falsely saying he actually paid more).

Rights of Surety against Creditor

1. Right to Securities - Section 141

General rule of equity that the surety is entitled to every remedy which the creditor had
against the principal debtor, including enforcement of every security.
On paying off the creditor the security steps into his shoes and gets the rights to have
the securities, if any, which the creditor had against the principal debtor.
Surety is only entitled to securities on the payment of debt. However, difficulty raised
when the surety has guaranteed only a part of the debt and consequently even when
he has paid all that he was liable for, the creditor’s claim against the principal debtor is
not yet fully wiped out

2. Right of Set Off

If the creditor sues the surety, the surety may have the benefit of the set off, if any, that
the principal debtor had against the creditor.
He is entitled to use the defences of the debtor against the creditor.
Ex: if the creditor owes him something, or the creditor has in his hand something
belonging to the debtor for which the debtor could have counter-claimed, the surety
can also put up that counter claim.
He can claim such a right only only against the creditor, but also against third parties
who have derived title from the creditor.

Right of Surety against Co-Sureties

1. Effects of Releasing a Surety - Section 138

The creditor may at his will release any of the co-sureties form his liability. But that will
not operate as a discharge of his co-sureties.
However, the released co-surety will remain liable to the others from contribution in the
event of default

2. Right to Contribution - Section 146 and Section 147

S. 146 - Where there are several sureties for the same debt and the principal debtor
has committed a default, each surety is liable to contribute equally to the extent of the
Principle will apply whether their liability is joint or several, under the same or different
contracts, and whether with or without the knowledge of each other.
Principle of equal contribution is subject of the maximum limit, if any, fixed by a surety
to his liability
This is because, S. 147 - co-sureties who are bound in different sums are liable to pay
equally as far as the limits of their respective obligations permit.

Difference between Indemnity and Guarantee

Indemnity Guarantee

Bilateral agreement between Tripartite agreement. The three parties are

indemnifier and indemnity principal debtor, creditor, and surety

There is only one contract There are three contracts:

1. Between the principal debtor and creditor

to pay off the debt to the creditor
2. Between creditor and surety that the
surety will discharge the obligation of the
principal debtor
3. Implied contract between the principal
debtor and the surety that in case the
surety discharges the obligation of the
principal debtor to the creditor, the surety
has all the rights for indemnity against the
principal debtor which creditor has against

Liability of indemnified is Liability of surety is not primary.

primary The primary liability is of the principal
The liability os the surety is secondary
which arises only when the principal
debtor does not discharge his primary
Therefore, if the principal debtor is not
liable to the creditor because of the
discharge of the liability on the repayment,
the surety will not remain liable.

Relationship in which the personal property of one person temporarily goes into the
possession of another
Ex: delivering a cycle, watch or any other article for repair, leaving a car at an stand
Definition - Section 148

Essential Features of Bailment:

1. Delivery of Possession - Section 149

the goods must be handed over to the bailee for whatever is the purpose of bailment
It is of two kinds - (i) actual delivery, and (ii) constructive delivery
When the bailor hands over to the bailee physical possession of the goods, it is actual
Constructive delivery takes place when there is no change of physical possession,
goods remaining where they are but something is done which has the effect of putting
them in the possession of the bailee
Bank Locker - does not constitute bailment. Things kept there are in a way put in a
hired portion of the premises and not entrusted to the bank

2. Delivery upon contract - not so essential

Delivery of goods should be made for some purpose and upon a contract that when
the purpose is accomplished the goods shall be returned to the bailor.
This has been criticised, however. And now bailment is recognised without contract
Contract may be express or implied

3. Conditional delivery

Bailment of goods is always made for some purpose and is subject to the contain that
when the purpose is accomplished the goods will be returned to the bailor or
disposed of according to his mandate.
A carrier is a bailee.
A hire purchase is bailment with an element of sale.
Duty of Bailor

Section 150
Gives two kinds of bailors:

1. Gratuitous Bailor - a person who lends his articles or goods without any charge

Conditions of his liability: (i) He should have knowledge of the defect and the bailee
should not be aware, (ii) The defect in the goods must be such as exposes the bailee
to extraordinary risks or materially interferes in the use of goods

2. Bailor for reward - bailor for hire or consideration

Duty is much greater since he is making profit from his profession and therefore it is in
his duty to see that the goods which he delivers are reasonably safe for the purpose of

Duties of Bailee

1. Duty of reasonable care - Section 151

Section prescribes a uniform standard of care in all cases of bailment, that is, a degree
of care which a man of ordinary prudence would take of his own goods of the same
type and under similar circumstances. If the care devoted by the bailee falls below this
standard, he will be liable for loss of or damage to the goods, but not otherwise
No negligence, no liability for loss - Section 152
Loss by theft - where the bailor’s goods are stolen from the custody of the bailee, he
will be liable, if there has been negligence on his part
Burden of proof - on the bailee
Loss due to act of bailee’s servant - bailee would be liable if the servant’s act is within
the scope of his employment
Bailee’s own goods lost with those of bailor - the fact that the bailee is generally
negligent with his own goods is no justification for his negligence towards the bailor’s
goods, unless the bailors is aware of his habits, and therefore, knew what to expect
Involuntary Bailee - A person who has come into possession of a chattel through no
act of his own and without consent. Still liable

2. Duty not to make unauthorised use - Section 154

Goods must be used by the bailee strictly for the purpose for which they have been
bailed to him
Any unauthorised use of the goods would make the bailee absolutely liable for any
loss or damage to the gods.
Even an act of God or inevitable accident would be no defence
In this case, the bailor may terminate the contract at once and insist on the goods
being returned to him - Section 153

3. Duty not to mix - Section 155-157

Bailee should maintain the separate identity of the bailor’s goods. He should not mix
his goods with those of the bailor without his consent
If mixture is made without consent, bailee is bound to bear the expenses of separation
as well as any damage arising from the mixture
If mixture beyond separation, bailee must compensate the bailor for his loss

4. Duty to return - Section 160 and 165

When the purpose of bailout in accomplished or the time for which the goods were
bailed has expired, the bailee should return the goods to the bailor without demand -
Section 157
If he fails to do so, he will keep the goods at risk and will be responsible for any loss or
damage to the goods arising howsoever - Section 161
Gratuitous Bailment - bailor may at any time require the return of the goods, even
though he lent them for a specified time purpose.
But if the bailee has acted on the faith of the loan and made for a specified time or
purpose in such manner that if the goods are demanded back before the agreed time,
the bailee’s loss would be greater than the benefits derived, the bailor must, if he
compels the return, indemnify the bailee for the amount in which the loss occasioned
exceeds the benefits derived - Section 159
A gratuitous bailout is also terminated by the death either of the bailor or of the bailee
- Section 162

5. Duty not to set up jus tertii - Section 166 and 167

A bailee is not entitled to set up, as against the bailor’s demand, the defence of jus
tertii - to say that goods belong to a third person
Even if there is a person who has a better title to the goods than that of the bailor or
who claims ownership of the goods, the bailee may safely return the goods to the
bailor and he will not be liable to the owner for conversion
But the person who claims the ownership may apply to the court to prevent the bailee
from returning the goods to the bailor and to have the question of title decided -
Section 167
If the bailee has already delivered the goods to the person having a better title, and yet
the bailor sues him, he may prove that such person had a better right to receive the
goods as against the bailor - Section 117 of Evidence Act
Where goods have been bailed by several joint owners, the bailee may deliver them
back to one joint owner without the consent of all, in the absence of agreement to the
contrary - Section 165
6. Duty to return increase - Section 163

In the absence of Any agreement to the contrary, the bailee is bound to return to the
bailor natural increases or profits accruing to the goods during the period of bailment.
Ex: 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
Finder (Section 168 and 169) - A finder of goods is a bailee and is bound by the duty
of reasonable care.
He does not have the right to sue the owner for compensation for trouble and expense
voluntarily incurred by him to preserve the goods and to find out the owner
S. 168 and 169 protect the finder in two ways
168 allows he finder to retain the goods against the owner until he receives
compensation for trouble and expense. Further, where the owner has offered a
specific reward for the return of goods lost, the finder may sue for such reward and
may retain the goods until he receives it.
169 allows he finder to sell the goods in certain circumstances, (i) when the thing is in
danger or perishing or of losing greater part of its value, or (ii) when the lawful charges
of the finder, in respect of the thing found, amount to two-third of its value

Rights of Bailee

1. Right to compensation - Section 164

If the bailor has no right to bail the goods, or to receive them back or to give directions
respecting them and consequently the bailee is exposed to some loss, the bailor is
responsible for the same

2. Right to necessary expenses or remuneration - Section 158

The bailee is entitled to lawful charges for providing his services

Lien can be exercised only as long as possession is retained whereas the right to
charges remains alive even when possession has been parted with.

3. Right of lien - Section 170 and 171

If the bailee’s lawful charges are not paid he may retain the goods.
Right of lien - Right to retain any property until charger due in respect of property are
Liens are of two kinds:

Particular Lien

Section 170
Bailee is entitled only to a particular lien, which mean the right to retain only that
particular property in respect of which the charge is due
Exercise of Labour and Skill - Right is available subject to certain important conditions

(i) Bailee must have rendered some service involving the exercise of labour or skill in respect
of the goods bailed. Labour or skill exercised by the bailee must be such as improves the
(ii) Labour or skill must have been exercised in accordance with the purpose of the bailment
(iii) Only such goods can be retained on which the bailee has bestowed trouble and expense
(iv) Right depends on possession and is lost as soon as possession of goods is lost -
personal right
General Lien

Section 171
Right to hold the goods bailed as security for a general balance of account
Entitles the bailee to detain any goods bailed to him for any amount due to him
whether in respect of those goods or any other goods.
Is a privilege specially conferred to certain kinds of bailies only:

(i) Bankers

Attaches to all goods and securities deposited with them as bankers by a customer or
by a third person on a customer’s account, provided there is no contract, express or
implied inconsistent with such a lien
Distinction between bailment and deposit - money paid into a bank to be credited into
the current account of person making payment does not constitute bailment
Money is a species of goods which may be the subject of bailout and over which lien
may be exercised

(ii) Factors

Means and agent entrusted with possession of goods for the purpose of selling them
for his principal
Has general lien on the goods of his principal for his balance of account against the

(iii) Wharfingers

Wharf - place contiguous of water, used for the purpose of loading and unloading
goods, and over which the goods pass in loading and unloading
Wharfinger - owns/ keeps the wharf
Essential to a wharf that goods should be in transit over it
General lien on the goods bailed to him until his wharfage is paid

(iv) Attorneys of a High Court

Attorney or solicitor who is engaged by a client is entitled to general lien until the fee
for his professional service and other costs incurred by him are paid
Advocates have no right of lien over client’s papers for their unpaid fee
Goods should be saleable and court papers can’t be sold

(v) Policy brokers

An insurance agent employed to effect a policy of marine insurance is a policy broker

Lien extends to any balance on any insurance account due to him from person who
employed him to effect the policy

4. Right to sure - Section 180 and 181

180 - enables person wrongfully deprived of use of possession of the gods bailed or
suffered injury
Bailee’s rights and remedies against the wrongdoer are just the same as those of the

Section 172 defines pledge.
It is a special kind of bailment
Distinction: is the object of contract
In pledge the object of the delivery of goods is to provide a security for a loan or for
the fulfilment of an obligation.

Essential Characteristics of a Pledge

1. Delivery of Possession

Property pledged should be delivered to the pawnee

Delivery may be actual or constructive or by attornment
Constructive Delivery - Delivery of ket of the godown where the goods are stored
Delivery by Attornment - Where the goods are in the possession of a third person,
who, on the directions of the pledger, consents to hold them on the pledgee’s behalf
Hypothecation - sometimes goods are allowed to remain in custody of the pledger for
a special purpose

2. In pursuance of contract

Pledge is conveyance pursuant to a contract of pledge

But it is not necessary that the delivery and pledge must happen at the same time
Rights of Pawnee:

1. Right of Retainer - Section 173 and 174

Right to retain goods pledged until his dues are paid.

Not only payment of debt but also for the interest due on the debt and all necessary
expenses incurred by him in respect of possession
When pledge is by way of hypothecation the creditor cannot directly seize the goods
by entering premises or otherwise
He has to do so either with consent or through court order

2. Right to extraordinary expenses - Section 175

Pawnee entitled to receive from the pawnor extraordinary expenses incurred by him
for the preservation of the goods pledged
For these expenses, however, he does not have the right to retain the goods. He can
only sue to recover them

3. Right of sale - Section 176

Upon a default being made by the pawnor in the payment of the debt or performance
of the promise, the pledgee gets two distinct rights under Section 176
First, the pledgee may sue upon the debt and retain the goods as a collateral security
Secondly, he may sell the goods after reasonable notice of the intended sale to the
Requirement of reasonable notice is a statutory obligation. It cannot be excluded by a
The pawnee cannot buy the goods himself
A hypothecated is not in actual possession of the goods. He grants the right of use to
the borrower and has a right to take possession of the goods if the borrower makes
default. He can then sell them in his capacity as a pledgee
Pawnor’s Right to Redeem - Section 177 Pawnor can redeem goods pwned after
expiration but before goods are sold. And in that case, he must pay any expenses
which may have arisen on account of his default.
Right to redeem is not extinguished by the expiry of time specified in the notice of
sale, but by the actual sale of the goods.
Pawnor has right to take back any increase on the goods.

Who can Pledge

Ordinary goods may be pledged by the owner or by any person with the owner’s
There are exceptions where a pledge can be made by someone being left in
possession with the consent of the owner, without the owner’s authority:

1. Mercantile Agent - Section 178

Mercantile Agent - meaning under Sales of Goods Act, 1930. Mercantile agent means
an agent having the customary course of business as such agent authority to either
sell goods, or to consign goods for the purpose of sale, or to buy goods, or to raise
money on the security of goods.
Possession should be with owner’s consent
It should be in the course of business. Goods should have been entrusted to the agent
in his capacity as a mercantile agent
Good faith - pawnee should act in good faith and should not have at the time of
pledge notice that the pawnor has not authority to pledge
Pledge by documents of title - where a. Mercantile agent is in possession of the
document of title relating to the principal’s goods, and if he pledges the same, the
pledgee gets a goods title if he acts in good faith and without notice.

2. Person in possession under voidable contract - Section 178-A

Where goods are pledged by a person who has obtained possession under a voidable
contract, the pledge is valid, provided that the contract has not been rescinded at the
time of the pledge and the pledgee has acted in good futz and without notice of the
pledger’s defect of title.

3. Pledgee - Section 179

This section applies where the pawner has possession of goods and some interest in
it but not the whole interest.
Thus, a pledge by a pledgee is valid to the extent of the interest of the pledge in it

Definition - Section 182
Every person ho acts for another is not an agent
Distinguishing feature is representative character and derivative authority
Only when a person acts as a representative of the other in business negotiations, that
is to say, in the creation, modification or termination of contractual obligations,
between that other and third person, that he is an agent

Essentials of Agency
1. Principal should be competent to contract - Section 183

Needs to be a major and of sound mind

2. Agent need not be competent - Section 184

Need not be competent to contract but then he will not be responsible to the agent

3. Consideration for appointment not necessary - Section 185

An agent is remunerated by way of commission for services rendered, but no

consideration is immediately necessary at the time of appointment

Agent vs. Servant

Agent Servant

Has authority to act on behalf of This kind of power is not generally

the principal and to create enjoyed by a servant
contractual relations between the
principal and a third party

A principal has the right to direct Master has not only that right but also
what the agent has to do the right to say how it is done.
An agent, though bound to A servant acts under the direct control
exercise his authority in and supervision of his master and is
accordance with lawful bound to conform to all reasonable
instructions is not subject in orders given to him in the course of his
exercise to direct control or work
supervision of the principal

Agent receives commission on Servant is paid by way of salary or

the basic of work done wages

Principal is liable for his agent’s Master is liable for the wrong of his
wrong done within the scope of servant if it occurs in the course of
authority employment

An agent may work for several Servant usually serves one master
principals at the same time

Kinds of Agent

1. Factor - is a mercantile agent. He is entrusted with the possession of goods by the

principal to sell them. He can sell the goods on credit also and may receive the price
to discharge the buyer. He can sell the goods in his own name
2. Broker - Is a mercantile agent who negotiates sale and purchase of the goods for a
commission but he is never put in possession of the goods. He links the buyer and the
seller and if the transaction materialises through his negotiation, he gets his
3. Del Credere Agent - is a mercantile agent for extra commission (del credere
commission) to undertake that the persons with whom he contacts on behalf of his
principal, will perform it. Thus, his position as an agent is also as a surety to his
principal for which he is paid extra remuneration. His position is partly of an insurer
and partly of a surety for the parties with whom he deals for any default due to
insolvency or some other equivalent thing.
4. Auctioneer - Is a mercantile agent. He sells the goods of his principal through a public
auction. If the owner of the goods puts a person in possession of goods without any
authority to sell but he sells it through an auction, the person purchasing such goods
in good faith acquired a good title over such goods.

Creation of Agency
An agency may be created in anyone of the following ways:

1. By express or implied authority - Section 186 and Section 187

A person may confer an authority on another person to act on his behalf and to bind
him in dealing with the third persons. Generally such authority is conferred expressly
either orally or in writing. Any person who is competent to contract may confer the
Sometimes, the agency is also created by an implied authority, The customs of a
trade, usage of a particular place, trade or market confer such authority on a person

2. By conduct of the parties

If a person by his conduct holds out another as his agent, this is agency by conduct
and such person is then estopped from taking the plea that there was no agency
It protects the interest of the innocent third parties who deal under the impression that
there is an agency

3. By ratification - Section 196 - 200

The principal may ratify the acts already done by his agent without the authority of the
S. 196 - Accords approval to an agency by ratification
S. 197 - provides that the ratification may be express or implied
S. 198 - acts must be done for and in the name of the supposed principal, and there
must be full knowledge of what those acts were
S. 199 - A person ratifying any unauthorised act done on his behalf ratifies the whole
of the transaction of which such acts forms a part.
S. 200 - Only lawful acts can be ratified
A ratification to be effective must come within reasonable time. If a time is fixed for
performance of the contract, ratification must come before that time otherwise it will
be too late
Effects of ratification -

(i) It established the relationship of principal and agent insofar as the act ratified is concerned
between the person ratifying and the person doing the act
(ii) Ratification established the relationship of contract between the principal and the third

Doctrine of Relation Back - Ratification relates back to the date on which the agent
first contracted.

4. By necessity - Section 189

In an emergency, it may become necessary for a person to do an act immediately and

it is not practicable to obtain the instruction of the person for whom the act is done;
agent’s acts fairly done under such circumstances will be binding upon the principal

5. By cohabitation

The agency between the husband and wife is based on necessity. The wife living with
her husband is in the eyes of the world so connected with him as to bind him for her
dealings relating to domestic purposes
She can bind her husband only when she is cohabiting with him in a domestic
Duties of Agent not to delegate - Section 190

Delegates non protest delegate - well known maxim of law of agency. The principal
chooses a particular agent because he has trust and confidence in his integrity and
competence. Ordinarily, therefore, the agent cannot further delegate the work which
has been delegated to him by his principal.
There are exceptions; in the following cases the agent may delegate the work to

1. Nature of work - sometimes the very nature of work makes it necessary for the agent
to appoint a sub agent. For example, an agent appointed to sell an estate may retain
the services of an auctioneer and the one authorised to file a suit may engage a lawyer
2. Trade Custom - a sub agent may be appointed and the work delegated to him if there
is ordinary custom of trade to that effect. Architects generally appoint surveyors
3. Ministerial Action - an agent cannot delegate acts which he has expressly or impliedly
undertaken to perform personally like acts requiring personal or professional skill. But
an agent may delegate acts which are purely ministerial in nature, like authority to sign
4. Principal’s Consent - the principal may expressly allow his agent to appoint a sub
agent. His consent may also be implied form the conduct of the parties. The principal
may ratify his agent’s unauthorised delegation.

Effects of Delegation

A person who is appointed by the agent and to whom the principal’s work is
delegated is known as sub-agent - Section 191
Relationship between principal and the sub agent and the agent depends on whether
the sub agent has been properly or improperly appointed.

1. Improper delegation - Section 193

Delegation is improper when it is not authorised, that is, when it is not within any of
the recognised exceptions.
Effect is that the principal is not bound by the appointment.
He is not represented by that person nor bound by his acts
That person is also not responsible to the principal
But the agent will be responsible to the principal for any act of that person. The agent
stands in position of principal towards the person and is as such responsible for his
acts to third parties

2. Proper delegation - Section 192

Principal represented by sub agent - so far as regarding a third person, the principal is
represented by sub agent. He is bound by and responsible for his acts as if he were an
agent originally appointed by the principal
Agent’s responsibility for sub agent - agent is responsible to the principal for the acts
of the sub agent. There is no privity of contract between the principal and the sub
agent and therefore, the principal cannot sue sub agent except for fraud or wilful
wrong. Even where fraud or wilful wrong is established, the principal has the choice to
sue wither the agent or the sub agent. But the agent may exempt himself from such
Sub-agent’s liability to principal - the sub agent is not directly liable to the principal,
except for fraud or wilful wrong.

Substituted Agent - Section 194 and 195

A sub agent has to be distinguished from a substituted agent.

194 - When an agent has an express or implied authority of his principal to name a
person to act for him and the agent has accordingly named a person, such a person is
not a sub agent, he becomes an agent for the principal in respect of the business
which is entrusted to him
On of the effects of appointing a substitute is that a direct privity of contract is
established between the principal and the substitute. The agent is not concerned
about the work of the substitute.
195 - His only duty is to make the selection of the substitute with reasonable care


Definition - Section 4(1) and (2)
“A contract of sale of goods is a contract whereby the seller transfers or agrees to
transfer the property in goods to the buyer for a prince"
May be conditional or absolute
Essential features:

1. Bilateral Contract

Between seller and purchaser. No one can sell his goods to himself
Consensual - it is necessary that the parties should agree with their free consent
Forced purchase or procurement is an acquisition not a sale

2. Money Consideration

Consideration for a sale of goods must be money - price

Barter is not a sale
Where the goods are sold for a definite sum and the price is paid partly in terms of
valued up goods and partly in cash, that is sale

3. Sale and Contract for Work and Material

Contract of sale has to be distinguished from a contract involving the exercise of skill
or labour on some material
Question depends on terms and subject of contract

4. Goods - Section 2(7) and Section 6

Subject matter of the contract must be goods

Every kind of movable property other than actionable claims and money
Immovable Goods - Transfer of Property Act
Ex - goodwill, copyright, oil, electricity, lottery tickets, coins or currency ceased to be
legal tender
Existing goods - Goods which are physically in existence and which are in seller’s
ownership and/or possession at the time of entering the contract of sale. Where seller
is the owner & has a general property in them and if he is an agent, he has the right to
sell them. Existing goods are further classified into 2 types:
a. Specific goods - Goods identified and agreed upon at the time of the making of the
contract of sale are called Specific Goods. Ex: Where A agrees to sell B a particular
radio bearing a distinctive number there is a contract of sale of specific or ascertained
b. Unascertained goods - Goods that are not separately identified or ascertained at
the time of making of the contract are known as unascertained goods. Ex: If A agrees
to sell to B one bag of sugar out of the lot of one hundred bags lying in his go down, it
is a sale of unascertained goods because it is not known which bag is to be
Future goods - Goods that are to be manufactured, produced or acquired by the seller
after the making of the contract of sale. Ex: If A Agrees to sell B all the milk that his
cow may yield during the coming year, this is a contract for the sale of future goods.
Contingent goods - Goods, the acquisition of which by the seller depends upon an
uncertain contingency are called contingency goods. Ex: If A agrees to sell to B a
specific rare painting provided he is able to purchase it from its present owner this is a
contract of sale of contingent goods.

Sale and Agreement to Sell - Section 4(3) and (4)

Sale Agreement to Sell

Makes the buyer the owner of Is a contract, pure and simple
goods It is not a conveyance
Immediate Effect of transferring Agreement to sell the property is to
property pass at some future time or subject to
He can exercise all the some condition
proprietary rights in respect of
them, such as an action for
conversion or detentue

He acquires a jus in rem - right Buyer’s rights are jus in personam -

against the goods only personal against the seller
Effect: if the seller refuses to He can sue only for damages for
deliver the goods, the buyer may breach and not for recovery of goods
sue for recovery of the goods by A contract to sell coal-ash which might
specific performance. accumulate at a particular pump house
If the seller has resold the goods has been held to be an agreement to
to another person, the buyer may sell future goods
follow the goods in his hands,
unless that other had bought
them in good faith and without

The risk of loss, if any, of the The seller remains the owner of the
goods is on the buyer. goods and, therefore, he runs all the

If the buyer commits default, the The seller’s only remedy is to sue for
seller may sue him for the damages for breach
price that is, for specific
enforcement of the contract

An agreement to sell can become a sale when the time elapses or the conditions
are fulfilled subject to which the property in the goods is to be transferred.

Sale Hire Purchase

Buyer is able to pass a good title Entitles hirers only to possession of the
to a bona fide purchaser from him goods
He cannot pass a good title to any
buyer from him (because ownership
was not transferred in the first place)

Right to Terminate: Not after sale Right to Terminate: Hirer can terminate
Right to repossess: no can only contract anytime
sue for damages Right to Repossess: Right to repossess
of the vendor if the hirer defaults

Hirer cannot claim the benefit of

implied conditions and warranties
created by the Act unless it becomes a
Conditions implied under the Hire
Purchase Act, 1972 do apply
Sales tax not leviable on hire purchase
until it becomes a sale

Contract of Sale Contract of Agency

An agent after taking delivery of the

property does not sell it as his own
property but sells the same as the
property of the principal and under his
instructions and directions
Since the agent is not the owner of the
goods, if any loss is suffered but he
agent he is to be indemnified by the


Section 12
Before a contract of sale is entered into, a seller frequently makes representations or
statements, which influence the buyer to clinch the bargain. Such representations or
statements differ in character and importance. Whether any statement or
representation made by the seller with reference to the goods is a stipulation forming
part of the contract or is a mere representation forming no part of the contract,
depends on the construction of the contract. If there are no such representations then
the concept of “ buyer beware” applies. This means the buyer gets the goods as they
come and it is no part of the seller’s duty to point out the defects in the goods to the
A stipulation in a contract of sale with reference to goods may be a condition or a

Condition Warranty

A condition is a stipulation, which is A warranty is a stipulation, which

essential to the main purpose of the is collateral to the main purpose of
contract. the contract.

If there is a breach of a condition the In case of a breach of a warranty,

aggrieved party can repudiate the the aggrieved party can claim
contract of sale damages only.

A breach of a condition may be A breach of a warranty however,

treated as a breach of a warranty. cannot be treated as a breach of a
- Section 13 condition.
It is not that the condition becomes a
warranty, only the remedy changes
This happens in the following cases:

1. Waiver by buyer - The agreed party is

contended with damages only and has
agreed to waive the breach of a
condition. Buyer’s election may be
express or implied.
2. Acceptance of goods by buyer -
After accepting the goods, the buyer
discovers that some condition was not
fulfilled, he cannot reject it. He must
keep them for whatever they are worth
and recover damages to make up for
his loss.

Acceptance - defined in Section 42

The distinction between the two i.e. Condition & warranty can be explained as follows:

A man buys a particular horse, which is warranted quiet to ride & drive. If the horse turns
out to be vicious the buyer’s only remedy is to claim damages. But if instead of buying a
particular horse, a man asks a dealer to supply him with a quiet horse & the horse turns
out to be vicious, the stipulation is a condition, & the buyer can reject the horse, or keep
the horse & claim the damages.

Express and Implied Conditions & Warranties:

Conditions & Warranties may be either express or implied.

They are said to be express when at the will of the parties they are inserted in the
contract and they are said to be implied when the law presumes their existence in the
contract automatically though they have not been written out into express words.
Implied Conditions & Warranties may however be negative or varied by express
agreement, or by course of dealing between the parties or by usage of trade.

Implied Conditions

Unless otherwise agreed, the law incorporates the following implied conditions:

1. Condition as to Title - Section 14

In the case of a sale, he has the right to sell the goods at the time when the property is
to pass. As a result of this condition if the sellers title turns out to be defective the
buyer is entitled to reject the goods and the recover the price.
There can be no sale at all of goods which the seller has no right to sell.
Ex: where a second hand car is purchased from a dealer and within few months is
seized by the police as a lone one, the buyer may recover full price from the seller,
although he has had some months’ use of the car.
Remedies of the buyer:
Can claim damages for any loss caused to him by reason of the seller’s failure to
provide the buyer a sale and secure title.
Refund of the whole purchase
2. Condition in a sale by description - Section 15

Where there is a contract of sale of goods by description, there is an mplied condition

where the goods shall correspond to the with the description. If the article tendered is
different in any respect, it is not the article bargained for, the other party is not bound
to take it”.
Further the fact that the buyer has examined the goods, will not affect his rights to
reject the goods, if the deviation of the goods from the description is such which could
not have been discovered by casual examination i.e. if the goods show any latent
Ex: a ship was sold by description viz , “copper fastened vessel” but actually it was
partly copper fastened. Held, that the goods did not correspond to description &
hence could be returned or else if the buyer took the goods, he could claim damages
for breach. This was even though the ship was sold subject to all faults & defects.
Sale by description includes many situations: buyer purchasing on the basis of
description; packing as description; time and place of arrival of ship as description;
shipment to be in good condition; reliance on description to be in contemplation of
parties; correspondence with description.

3. Condition in a sale by sample as well as by description - Section 15

If the sale is by sample as well as by description, it is not sufficient that the bulk of the
goods corresponds with the sample, if the goods do not also correspond with the
description - goods shall not merely agree with the sample, but must also correspond
with the description.
Ex: A agreed to sell to B some oil describes as “Foreign refined rape oil warranted only
equal to sample”. the goods tendered were equal to sample but contained an
admixture of Hemp oil. Held, B could reject the goods.

4. Condition in a sale by sample - Section 17

When under a contract of sale, goods are supplied according the a sample agreed
upon, the implied conditions are:

a. The bulk shall correspond with the sample in quality

b. The buyer shall have a reasonable opportunity of comparing the bulk with the sample.
c. The goods shall be free from any defect, rendering them unmerchantable, which would not
be apparent on reasonable examination of the sample.

Ex: A certain shoes were sold by sample by the French Army. The Shoes were found
to contain paper not discoverable by ordinary inspection. Held, the buyer was entitled
to the refund of price plus damages.

5. Conditions Implied by way of Exceptions to Rule of Caveat Emptor - Conditions

as to quality or fitness - Section 16
Normally there is no implied condition or warranty as to quality or fitness for any
particular purpose of goods supplied, the rule of law being let the 'buyer
beware’ (caveat emptor).
Caveat Emptor: the seller is not bound to supply goods which should be fit for any
particular purpose or which should possess any particular quality. It is the buyer’s duty
to select goods of his requirement.
Ex: A approached B, a motor car dealer & asked for a comfortable car for touring
purpose recommended his Bugatti car, a Trade name & also showed a specimen of
the same. A there upon ordered for a bugatti car, which was supplied. The car proved
to be unsuitable for touring purposes. A claimed to reject the car & recover back the
purchase money paid by him. It was held that he was entitled to do so because, while
ordering that car by its trade name he was still relying on the sellers skill & judgment
as regards the suitability of the car for the specific purpose.
Exceptions to the rule of caveat emptor:

a. Fitness for Buyer’s Purpose - Section 16(1)

Sub section requires the seller in certain circumstances to supply goods which shall
be fit for the buyer’s purpose. For this condition to arise, the following points have to
be proved:

(1) The buyer should make known to the seller the particular purpose for which the goods are
(2) The buyer should rely on the seller’s skill or judgement
(3) The goods must be of a description which is in the course of the seller’s business to

Proviso to subsection: No implied condition as to fairness for any particular purpose if

buyer asks for a specific brand name.

b. Merchantable Quality - Section 16(2)

Merchantable Quality - goods are marketable at their full value. Goods are
merchantable if they are fit for any one of the several purposes for which they may be
ordinarily used
Ex: Where A purchases a certain quantity of black yarn from B, a dealer in yarn, and
finds if damaged by white ants, the condition as to merchantability has been broken
and A is entitled to reject as unmerchantable.

c. Conditions Implied by Trade Usage - Section 16(3)

d. Express Terms - Section 16(4)

It is open to the parties to include any express conditions/ warranties in their contract.
But an express warranty or condition does not negate a warranty or condition implied
by the Act unless the express terms are inconsistent with the implied condition.
Ex: where sleepers supplied to a railway company were required to be approved by its
experts, it was held that tat did not exclude the implied condition of

Implied Warranties

Section 62 permits parties to exclude implied terms by their agreement

Section 14 - Unless otherwise agreed the law also incorporates into a contract of sale
of goods the following implied warranties:

1. Warranty of Quiet Possession - Section 14(b)

“the buyer shall have & enjoy quiet possession of the goods.” If the quiet possession
of the buyer is in anyway disturbed by a person having superior right than that of the
seller, the buyer can claim damages from the seller.
Seller not liable for disturbance caused by third party unless they are in connivance or
if the seller is sufficiently connected with the sale
Ex: The plaintiff a lady purchased a second hand typewriter from the defendant. She
thereafter spent some money on its repairs and used it for some months. Unknown to
the parties, the typewriters was a stolen one and the plaintiff was compelled to return
the same to its true owner. She was held entitled to recover from the seller’s for the
breach of the warranty, damages reflecting not merely the price paid, but also the cost
of repair.

2. Warranty of freedom from encumbrances - Section 14(c)

Where the goods shall be free from any charge or encumbrance in favour of any third
party not declared or known to the buyer before or at the time when the contract is
made” If the goods are afterwards found to be subject to a charge and the buyer has
to discharge the same, then there is a breach of warranty & buyer is entitled to
Ex: A, the owner of the watch, pledges it with B. After a week obtains possession of
the watch from B for some limited purpose and sells it to C. B approaches C and tells
him about the pledge affair. C has to make payment of the pledge amount to B. There
is breach of this warranty and C is entitled to claim compensation from A.

There are primarily 3 stages in the performance of a contract of sale of goods by a

1. The transfer of property in the goods.

2. The transfer of possession in the goods.
3. The passing of the risk.
Transfer of property in the goods from the seller to the buyer is the main object of a
contract of sale. Property in Goods means the ownership of goods, whereas
“possession of goods” refers to the custody or control of goods.
Hence it is important to know the precise moment of time at which the property in the
goods passes from the seller to the buyer for the following reasons:

1. Risk follows ownership

Unless otherwise agreed, risk follows ownership, whether delivery has been made or
not and whether the price has been paid or not. Hence the risk of loss lies with the
owner. When the property of the goods gets transferred to the buyer, the goods are at
the buyers risk, whether the delivery has been made or not. But if the delivery has
been delayed by fault of either the buyer or seller, the goods are at the risk of the party
at fault. Thus risk and Property go together.
EX: B contracts to purchase 30 Tons of apple juice from S. S crushes the apples, puts
juice in casts and keeps it ready for delivery. B, however, delay to take the delivery and
the juice goes putrid and has to be thrown away. B is liable to pay the price.

2. Action against Third Parties

When the goods are in anyways damaged or destroyed by the action of third parties, it
is only the owner of the goods who can take action at that time.

3. Insolvency of the Seller or the Buyer

In the event of insolvency of the seller of the buyer, whether the official receiver or
Assignee can take over the goods or not depends on whether the property in the
goods has passed from the seller to the buyer.

4. Suit for Price

The seller can sue for the price, unless otherwise agreed, only if the goods have
become the property of the buyer.

Passing of Property:

“Property in Goods” - means ownership of the goods.

But it should be understood that “Property in Goods” is not the same as “Possession
of Goods”. Possession of goods refers to the custody of goods.

Rules regarding the passing or property in goods - Section 18-25

Primary Rules of ascertaining the when the property of the rights gets transferred to
the buyer as follows:
1. Goods must be ascertained - Section 18

Where there is a contract for the sale of unascertained goods, no property in the
goods is transferred to the buyer unless and until the goods are ascertained.
Ex: Under a contract of sale, B was entitled to cut teak tree’s of more that 12 in Girth.
The stumps of the tree’s after cutting had to be 3 inches high. Held in these
circumstances the property in the timber that was cut would pass to B when the trees
are cut. Till the trees were felled, they were not ascertained.

2. Intention of the parties

Where there is a contract for the sale for specific or ascertained goods, property in
them passes to the buyer at the time when the parties intend to pass. For purpose of
ascertaining the intention of the parties, regard shall be had to the terms of the
contract, conduct of the parties & the circumstances of the case.
Ex: S offers to sell B a certain machine for Rs. 5000/-. B refuses to buy it unless
certain work was done on it to put it under proper running conditions. S replied that B
could get it done himself and when the cost of repairs was known B might pay S Rs
5000 less the cost of repairs. To this B agreed and took the machine to his repair
shop. While being repaired the machine was destroyed without any fault of the
repairman. The property in the machine did not pass from S to B.
But where the intention of the parties as to the time when the property in the goods is
to pass to the buyer cannot be ascertained from the contract, the rules contained

Rules for Intention - Section 20 to 24

1. Specific Goods:

The rules relating to the transfer of property of specific goods are as follows:

a. Passing of property at the time of contract:

When there is an unconditional contract for sale of specific goods in a deliverable

state, the property in the goods passes to the buyer when the contract is made.
Deliverable state means such a state that the buyer under the contract be bound to
take delivery of them. The fact that the time of payment of the price or the time of
delivery of the goods, or both, is postponed does not prevent the property in the
goods, passing at once.
Ex: X sells to B a horse, which is to be delivered to B the next week. B is to pay the
price on delivery, B asks his servant to keep the horse separate from the other horses.
The horse dies before it is delivered and paid for. The property of the goods has
passed to B and he has to bear the loss.

b. Passing of property delayed beyond the date of the contract:

(i) Goods not in a deliverable state: Where there is a contract for the sale of specific goods
not in a deliverable state, i.e.; the seller has to do something to the goods to put them into a
deliverable state, the property does not pass until such a thing is done and buyer has notice
of it.
Ex: There is a contract of sale for a machine weighing 30 Tons and embedded into the
concrete floor. A part of the machine was destroyed while being removed. Held, the buyer
was entitled to refuse to take the machine, as it was not in a deliverable state.
(ii) When the price of goods is to be ascertained by weighing: Where there is a contract for
the sale of specific goods in deliverable state, but the seller is bound to weigh, test, measure
or do some other act or thing with reference to the goods for the purpose of ascertaining the
price, the property does not pass until such act or thing is done, and buyer has notice

2. Unascertained Goods:

Where there is a contract for the sale of unascertained goods, the property is the
goods do not pass to the buyer until the goods are ascertained. Until goods are
ascertained there is merely an agreement to sell.
Further under section 23 states that where there is a contract for sale of unascertained
or future goods by description & goods that description and in a deliverable state are
unconditionally appropriated in the contract, the property of the goods thereupon
passes to the buyer.
The “ascertainment of the goods” and their unconditional “appropriation to the
contract” are two pre-conditions for the transfer of property from the seller to the
buyer in case of unascertained goods.
Ascertainment is a process by which the goods answering the description are
identified and set apart.
Ex: in a sale of 20 hog-heads of sugar out of a large quantity, 4 were filled and taken
away by the buyer. The remaining 16 were subsequently filled and the buyer was
informed of the same. The buyer promised to take them away, but before he could do
so the goods were lost. Held the property had passed to the buyer at the time of the

3. Goods sent on approval or “ on sale or return” - Section 24

Where goods are delivered to the buyer on approval or “on sale” or “on return” or
other similar terms, the property there in passes to the buyer:

a. When he signifies his approval or acceptance to the seller.

b. When he does some act adopting the transaction.

Ex: Goods are delivered by A to B on “sale or return”. They are further delivered by B
to C and then by C to D on similar terms. The goods are stolen while in custody of D.
As between A and B and B and C, has not passed to D. As such, C cannot recover the
loss from D, but is bound to pay the price to B and B is bound to pay the price to A.
Summary of Passing of Property

1. Sale is transfer of property in the goods (sold) from the seller to the buyer (section 4)
2. The transfer of property may take place either when the contract of sale is made or
subsequent thereto.
3. The transfer takes place when the contract is made, if the goods are specific and in a
deliverable state at the contract

Reservation of rights of disposal - Section 25

The property in goods, whether specific or unascertained, does not pass to the buyer
if the
seller reserves the right of disposal of goods.
If for Ex: it is the term of the contract that the buyer is to pay for the goods before
delivery, the seller reserves the right for disposal. In such a case the property of the
goods does not pass to the buyer until the conditions imposed by the seller is fulfilled.


Duties of the seller and the buyer - Section 31

It is the duty of the seller to deliver the goods & of the buyer to accept (Section 42)
and pay for them, in accordance with the terms of the contract of sale
Unless otherwise agreed (like CIF contracts), delivery & payment of price are
concurrent conditions - Section 32
In other words, no delivery needs to be done, if the buyer is not ready and willing to
pay the price, nor need the buyer pay the price, unless the seller is ready and willing to
give the delivery.

Delivery - Section 33

“a voluntary transfer of a possession from one person to another.”

Delivery of goods may, therefore be;

1. Physical or actual delivery: The physical possession of the goods is handed over by
the seller to the buyer.
2. Symbolic Delivery: The deliver is made by delivering some symbol. Ex: Delivery of a
railway receipt properly endorsed, key of godown for goods inside it - it should give
complete access
3. Constructive Delivery: There is only an acknowledgement by the person in possession
of goods that he holds them on behalf of another.
First kind of delivery is actual delivery (treated as delivery in the first part of the
section) and the next two are deliveries which have the effect of putting the goods in
possession of the buyer (second part of the section)
Section 34 - Delivery of Part of Goods: Part of goods sold may amount to delivery of
the whole if it is so intended and agreed. But, however, where the part is intended to
be severed from the whole, part delivery does not amount to delivery of the whole.
Section 35 - Unless agreed otherwise, the seller is not bound to deliver the goods,
unless the buyer applies for delivery.

Rules Regarding Delivery:

1. Place of Delivery: Where at the place at which delivery of the goods is to take place is
specified in the contract, the goods must be delivered at that place during business
hours on a working day. Where there is no specific agreement as to place, the goods
sold are to be delivered at the place at which they are at the time of sale.
2. Time of Delivery: When under the contract of sale, the seller is bound to sell the goods
to the buyer, but no time for sending them is fixed, the seller is bound to send them
within a reasonable time. What is a reasonable time is a question of fact.
3. Delivery by Attornment:
4. Demand or Tender of Delivery:
5. Expenses of Delivery: Unless otherwise agreed, all expenses of and incidental to the
making of delivery are borne by the seller, but all expenses of and incidental to
obtaining of delivery are borne by the buyer.

Delivery of Wrong Quantity - Section 37

Where the seller delivers to the buyer a quantity of goods, less that he contracted to
sell, the buyer may reject them. But, if the buyer accepts the goods delivered he
should be required to pay for them at the contracted rate. Where a larger quantity is
delivered, the buyer may accept the goods included in the contract and reject the rest
or he may reject the whole. If the buyer accepts the whole of the goods so delivered,
he shall pay for them at the contract rate.

Installment Deliveries - Section 38

The buyer is not bound to accept delivery by installment, unless otherwise agreed.

Delivery to the carrier or wharfinger - Section 39

Delivery of the goods by the seller to a carrier for transmission to buyer or to

wharfinger for safe custody is prima facie deemed to be a delivery of the goods to the
buyer, unless the right of disposal has been recovered by the seller. The seller is
bound to make with the carrier such a contract of carriage as properly protects the
interest of the buyer. If he fails to do so, he is liable in damages to the buyer.

Right of Buyer

Right of Examination - Section 41

Where goods are delivered to a buyer, which he has not previously examined, he is not
deemed to have accepted them, unless he has reasonable opportunity of examining
them and ascertaining whether they conform to the contract.

Liability of the buyer - Section 44

When the seller is ready and willing to deliver the goods and requests the buyer to
take delivery and buyer does not within a reasonable time after such request take
delivery of the goods, he is liable to the seller for any loss occasioned by his neglect
or refusal to take delivery.


Unpaid seller - Section 45

1. The whole of the price has not been paid or tendered;

2. A bill of exchange or other negotiable instrument has been received as a conditional
payment and the condition on which it was received has not been fulfilled by reason of
dishonor of the instrument.

Conditions to be fulfilled before a seller can be said to be an unpaid seller:

1. He must be unpaid and the price must be due.

2. He must have an immediate right of action for the price.
3. A bill of exchange or other negotiable instruments was received but the same has
been dishonored. When payment is made by a negotiable instrument it is usually a
conditional payment, the condition being that the instrument shall be duly honored. If
the instrument is not honored the seller is deemed to be an unpaid seller.

Rights of an unpaid seller:

These may be broadly classified under two heads:

1. Rights against goods - Section 46

An unpaid seller has the following rights against the goods

(a) Right of Lien

(b) Right of Stoppage in Transit - The right of stoppage in transit is a right of stopping the
goods while they are in transit, resuming possession of the goods as long as they are in the
course of transit, & retaining possession until payment or tender of the price.
(c) Right of Resale - Applicable when:
(i) Where the goods are of perishable nature.
(ii) Where the seller expressly reserves the right of resale in case the buyer should make
(iii) Where he gives notice to buyer of his intention to resale the goods & the buyer does
not within a reasonable time pay or tender the price.

These rights presuppose that the property in the goods has passed to the buyer.
Section 46(2) specially declares that if the goods have passed to the buyer the seller
would have the same rights of lien and stoppage in transit as he would have if the
goods had passed. This is in addition to his other remedies.

2. Rights against the buyer personally.

These are the rights, which an unpaid seller may enforce against the buyer personally.
These rights of the seller against the buyer personally are called Rights
in personnem as against the rights in rem (i.e rights against the goods & are in addition
to his rights against the goods.
The rights in personam are explained as follows:

(a) Suit for Price

(b) Suit for damages for non-acceptance.
(c) Repudiation of contract before due date.
(d) Suit for interest.

Right of Lien - Section 47

Lien - to retain possession of. An unpaid seller who is in possession of goods, is

entitled to retain them in his possession until payment or tender of the price in the
following cases, namely:

1. Where the goods have been sold, without any stipulation as to credit.
2. Where the goods have been sold on credit, but the term of credit has expired.
3. Where the buyer becomes insolvent.

Lien can be exercised only for the non-payment of the price, and not for any other
charges due against the buyer.
Ex: The seller cannot claim lien for go down charges for storing the goods in exercise
for his lien of the rights.
Section 48 - Where an unpaid seller has delivered a part of the goods, he may
exercise his lien on the remainder. However, where delivery of a part is intended as a
delivery of the whole, the lien is lost. The party who alleges that part delivery was
intended to operate as delivery of the whole has to prove that fact

Termination of Lien - Section 49

An unpaid seller, looses his lien in the following cases:

1. By delivery to carrier. Ex: Seller take Railway Receipt in the name of the buyer or his
2. By delivery to buyer
3. By waiver
4. By tender of price

Seller’s Right Buyer’s Right Seller’s Duty Buyer’s Duty

23 (2). & 25. 20.Ascertainment 21. Deliverable State 31.Duty of

Right of Disposal Buyer

24.Buyer cant 25.Continuation to 22. And 23. 32.Payment

refute refute right of Ascerntainand and delivery
disposal appropriate

44.Right of seller 28.Right against joint 31.Duty of Seller 35.Buyer to

to get owners apply to
compensated (for delivery
refusal of delivery)

46, 47 and 48. 29.Title in voidable 32.Payment and delivery


50.Right of 38 (1). Instalment 36 (2). Delivery of goods,

Stoppage Deliveries 36 (3). Duty to inform third
party, 36 (5). Expenses

55.Suit for price 39 (2). 39 (3). Delivery by seller

56.Damage for 41, 43.


49 (1) (a), (b), (c)

57.Damage for non-