Business Law

Indian Contract Act 1872 : Meaning and essentials of a valid contract Formation of
contract – Performance of contract – Termination and discharge of contract – Remedies
for breach of contract – Quast contract

Special Contracts : Indemnity of guarantee – Bailment – Agency

Sale of Goods Act, 1930 : Contract of sale – Conditions and warranties – Transfer of
property – Performance of the sale Rights of an unpaid seller
Negotiable Instruments Act, 1881 : Negotiable instruments – Parties to a negotiable
instrument – Material alteration – Crossing of cheques – Endorsement Payment and
collection of cheques

Indian Partnership Act, 1932 : Meaning and test of partnership – Registration of firms
– Relations of partners – dissolution of firms
Arbitration Act, 1940 : Arbitration – Arbitration without intervention of court –
Arbitration in suits
Carriage of Goods : Classification of Common Carriers – Rights duties and liabilities of
common carrier – Carriage by rail – Contract of affreightment – Charter Party – Bill of
Lading – Carriage by air – Documents relating thereto – Liability of the air Carrier

Contract of Insurance : Basic elements – Kinds of Insurance – Fire Insurance –

Marine Insurance

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Lesson No. Title

1. Indian Contract Act. 1972

Special Contracts
2. Contract of Indemnity and Guarantee
3. Contract of Bailments
4. Contract of Agency
5. Sale of Goods Act. 1930
6. Negotiable Instruments Act, 1881
7. Partnership Act. 1932
8. Arbitration Act. 1940
9. Common Carriers Act
10 Contract of Insurance

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 LESSON 1
INDIAN CONTRACT ACT. 1872

MEANING

The law relating to the contracts is contained in the Indian Contract Act. 1872. It is that
branch of law which lays down the essentials of a valid contract, the different modes of
discharging the contract and the remedies available to the aggrieved parts in the case
of breach on contract. It is the most important branch of business law. It is of particular
importance to people engaged in trade, commerce and industry as bulk of their
business transactions are based on contracts.

A contract is an agreement made between two or more parties which the law will
enforce Sec. 1 the of the Indian Contract Act defines it as “An agreement enforceable
by law” Sec 10 lays down that “All agreements are contracts if they are made by the
free consent of parties competent to contract for a lawful consideration and with a lawful
object and are not hereby – expressly declared to be void.

ESSENTIALS OF A VALID CONTRACTS

A valid contact must have the following essentials
1. Two parties : for a valid contract, there must be two parties
2. Offer and acceptance: There must be an offer and acceptance One party has to
make an offer and the other party has to accept it.
3. Consensus-ad-idem or Identity of Minds: The parties to the contract must
have agreed about the subject matter of the contract at the same time and in the
same sense.

Illustration: A has two houses, one at Chennai and another at Coimbatore. He has
offered to sell one to B. B accepts thinking to purchase the house at Coimbatore, while
A, when he offers, has in his mind to dispose of house at Chennai. There is no
Consensus-as-idem.

4. Consideration: It means “Something in return” Every contract must be

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 supported by consideration.
Illustration : A offers to sell his watch for Rs. 500 to B and B accepts the offer. Thus Rs.
500 is the consideration for the watch and vice-versa.

5. Capacity; The parties to the contract must be competent to contract. For

example a contract by a minor is void
6. Free Consent: The consent of the parties must be free from any flow – it must
not be caused by a mistake or coercion or undue influence
7. Lawful consideration: The consideration to a contract must be lawful
Illustration: A promises to pay Rs. 500 – to B, in consideration of B murdering C.
The consideration is illegal.
8. The objects of the contact must be lawful
Illustration: A promises to pay Rs. 500 – for letting B’s house for running a
brothel. The objects is illegal. Hence, the contract is void.
Thus, “the essence of legal contract is that there shall be an agreement between
two persons, that one of them shall do something either for the benefit of the
other or for his own detriment and that these persons intend that the agreement
shall be enforceable at law”

CLASSIFICATION OF CONTRACTS
Contracts may be classified according to their validity, formation or performance.
I. Classification According to validity
A contract is based on an agreement. An agreement becomes a contract when all
the essential elements referred to above are present. In such a case, the contract
is a valid contract. If one or more of these elements are missing, the contract is
either voidable, void, illegal or unenforceable.

Voidable Contract
An agreement which is enforceable by law at the option of one or more of the arties
thereto, but not at the option of the other or others, is a voidable contract.
Sec.2(i).
Example : A promises to sell his house to B for Rs. 2,00,000. His consent is
obtained by use or force. The contract is voidable at the option of A. He may
avoid the contract.

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Void Contract
A contract which is at enforceable by law is a void contract.
Example : A contract enter4ed into by a minor is void.

Illegal Agreement
An illegal agreement is one which is criminal is nature or which is immoral. Such an
agreement is a void contract. All illegal agreements are void but all more
agreements or contracts are not necessarily illegal.

Unenforceable Contract
An unenforceable contract is one which cannot be enforced in a Court of aw
because of some technical defect, such as absence of writing or where the
remeds has been barred by lapse of time.

II CLASSIFICATIONS ACCORDING TO FORMATION

Contracts may be classified according to the mode of their formation as follows:

Express Contract
If the terms of a contract are expressly agreed upon whether by words spoken or
written at the time of the formation of the contract, the contract is said to be an
express contract.

Implied Contract
An implied contract is one which is inferred from the acts or conduct of the parties or
course of dealings between them. It is not the result of any express promise or
promises by the parties but of their particular act.
Example: A enters into a hotel and takes lunch. It is an implied contract that he has
to pay the cost of lunch after taking it.

III CLASSIFICATION ACCORDING TO PERFORMANCE

These may be classified as Executed contracts or Executory contracts. Unilateral

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 contracts or Bilateral contracts.

Executed Contracts
An executed contract as one in which both the parties have performed have
performed their respective obligations.
Example: A agrees to supply a watch to B for Rs. 500. When A supplies the watch
and B pays the price, the contracts is said to be executed.

Executory Contracts
An executory contract is one in which both the parties have yet to perform their
obligations. Thus in the above example, the contract is executor if A has not yet
supplied the watch and B has not paid the price.

Unilateral Contract
A unilateral or one-sided contract is one in which only one party has to fulfil his
obligation at the time of the formation of the contract, the other party having
fulfilled his obligation at the time of the contract or before the contract comes into
existence.

Bilateral Contract
A bilateral contract is one in which the obligations on the part of both the parties to
the contract are outstanding at the time of the formation of the contract. In this
sense, bilateral contracts are similar to executor contracts.

OFFER AND ACCEPTANCE

OFFER
An offer is also called a proposal. Sec. 2 (a) of the Indian Contract Act defines a
proposal as, :When one person signifies to another his willingness to do or to
abstain from doing anything. With a view to obtaining the assent of that other to
such act or abstinence, he is said to make a proposal.” The person making the
proposal is called the “prosper” or “offerer” and the person to whom the proposal
is made is called “offeree”
LEGAL RULES RELATING TO OFFER

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1. It must contain either definite terms or capable of being made definite.
Montreal dfgdfgdfghgdh : It was held in this case, that a clause to favourate consider
the applies that renewal is ambinguous and not binding the compans
2. It must intend to give use to legal consequences
Gdfgjdfkgjdflkgd : A husband promised to pay Rs. 1000/- per month to his wife,
staying away from him. Held that the promise was never intended to b e enforced in
law.
3. It must be distinguished from a quotation or an invitation to offer
Ghdkjdfkgjdkgjdgdfgkj : P offered to buy D’s property for Rs. 6000. D replied, “Won’t
accept less than 10,000” P agreed to pay Rs. 10,000. But D sold it to another
person. It was held that mere statement of price by D contained no implied contract
to sell it at that price.
A catalogue or price list or tenders invited for the supplier to goods are not
proposals.
4. An offer may be made to an individual or addressed to the worlds at large. An
offer is called a specific offer when it is made to a particular person.
Gdfgdfgdfgdfgdf fgdfgd dfgd dfg: The company has offered by advertisement, a
reward of £ 100 to anybody contracting influenza after using their smoke ball
according to their direction. Mrs. Carlill used it as directed but still had an attack
of influenza. So, she sued for the award of £ 100. It was held that she was
entitled to the award since an offer made at large, can ripen itself into a contract
with anybody who performs the terms of the offer.
5. An offer is different from a tender
A offers to supply goods at a particular rate for a particular period from a certai9n
trade. If this offer is accepted by B, it is called a tender. It becomes an
acceptance only when B places an order for a part of the goods.

6. An offer must be communicated to the offeree

Gdfg dfgdf dfg dfg dfg : A’s nephew was missing is who was an employee of A,
volunteered his services to search for the boy. Meanwhile, A had announced a
reward to anybody who could trace the boy. It found the boy and brought him
back to home and sued for the reward. It was held that he was not entitled to the
reward as he was ignorant of the offer.
Section 4 lays down that the communication of an offer is complete only when it
reaches the offeree. So an offer binds the offeror only when the offeree has the

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 knowledge of an offer.

ACCEPTANCE
Section 2 the of the Indian Contract Act defines acceptances as. When the person to
whom the proposal is made signifies his assent thereto the proposal is said to be
accepted. A proposal when accepted becomes a promise. An offer when
accepted becomes a contract.
An offer can be accepted only by the persons to whom the offer is made.
Boulton Vs Jones A sold his business to B. This sale is not known to V’s customers.
So Jones who is a usual customer of the vendor places an order for goods with
the vendor. A by name B, the new owner receives the order and supplies, the
goods without disclosing the fact of sale of business to him. It was held that the
price could not be recovered as the contract was not entered into with him.

Essentials of Valid Acceptance

1. Acceptance must be communicated in usual and reasonable manner. It may be
made by express words, spoken or written or by conduct of the parties, i.e. by
doing an act which amounts to acceptance according to the terms of the offer or
by the offeree accepting the benefit offered by the offeror.
Any method can be prescribed for the communication of acceptance. But silence
can never be prescribed as a method of communication. Hence, mere mental
assent without expressing it and communicating it may means of word or an act,
is not sufficient.
Brogden Vs Metropolitan Railway Co. The Manager of a railway company simply
wrote on the proposal “approved” and kept it in a drawer. By oversight it was not
communicated. It was held that the acceptance was not communicated and
hence there was no contract.

2. Communication of acceptance may be warved by the offeror : This rule is

established in the case of Carill V’s gdfg gdfg ng gdf where the advertisement
never wanted the communication apart from fulfilling the conditions of offer.
3. Acceptance should be made before the offer lapses or is revoked or is received
4. Acceptance must be absolute and unconditional and should correspond with the
terms of the offeror. Otherwise, it amount to counter offer which may be accepted
or rejected by the offeror. For example, A offeror to sell his car for S. 1 lakh B

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 asks for Rs. 70,000. It is not an acceptance but a counter offer only.
5. Acceptance once made, concludes the contract

CONSIDERATION
Consideration means “something in return for something”. Section 2 of the Indian
Contract Act defined consideration thus “When at the desire of the promisor, the
promise or any other person has done or abstained from doing, or does or abstains
from doing, or promises to do or abstain from doing something, such act or abstinence
or promise is called a consideration for the promise.”
1. Consideration at the Desire of the Promisor
Consideration must proceed at the request of the promisor. Hence acts done
voluntarily or at the request of third parties do not constitute a valid consideration.
Durga Prasad Vs Baldev : A built a market at the request of the Collector of the
place B promised to pay. A commission on the articles sold in the market. It was
held that B’s promise to pay commission did not constitute a valid consideration
because A did not build the market at the request of B.

2. The Promisee or any other Person

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

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

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

Consideration may not be adequate. But it must be real and lawful. Example : A
agrees to sell a cow worth Rs. 1200 for Rs. 10. He has given his consent freely.
The agreement is a contract though consideration is inadequate.

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 An agreement made without consideration is void. But the following are exceptions.

(1) An agreement expressed in writing and registered and made on account of

natural love and affection between parties standing in neat relation to each other.
(2) A promise to compensate a person who has already voluntarily done something
for the promisor, or
(3) A promise to discharge a time-barred debt.

CAPACITY TO CONTRACT
The parties who enter into a contract must have the capacity to do so ‘Capacity’ means
competence of the parties to enter into a valid contract. According to Sec. 10, an
agreement becomes a contract if it is entered into between the parties who are
competent to contract. Thus Sec. 11 declares the following person to be incompetent to
contract.
(i) Minors
(ii) Persons of unsound mind, and
(iii) Persons disqualified by any law to which they are subject.

Incapacity to contract
Fgsdklgjfdsklg asdgjsdlkgsdfg sgsdf Mental deficiency

Ing incapacity arising of hdfgdf

1. Foreign Suvereigns and Ambassadors
They may enter into contracts. But they cannot be sued except with the permission
of the Central Government and certified by the Secretary.
2. Alien Enemy
The enemy’s status is to be determined by the place at residence of the
individual, but not by his nationality. If a contract is already entered into into
before the declaration of war, its performance will be suspended during the
period of war and in case the war continues to where period, the contract
becomes void on the ground of impossibility of perticugdfgdf contract.

3. Conviet

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 He is no competent to contract during the period of sentence.

4. Bankrupt
He cannot enter into contract and bind his property as his property shall be
vested in the official receiver when he is adjudged an insolvent.

5. Artificial Person : Corporation

It is a person in the eye of law. It is a legal entity. It can purchase properties enter
into contracts, sue and be sued on such contracts. Its contractual capacity is
limited. For example, it cannot enter into contract to marry or which is ultra vires
its powers.

(B) INCAPACITY ARISING FROM MENTAL DEFICIENCY

A person is sand to be mentally deficient when (a) he does not attain majority. E.g. a
minor or (b) he is of unsound mind.

1. When he does not attain majority: Minor

A minor is a person who has not completed 18 years of age. He attain majority on
completion of his 21 year in England and 18 year in India. A minor cannot enter
into a valid contract.
2. When he is of Unsound Mind
Section 12 lays down that : A person is said to be of sound mind for the purpose of
making a contract if at the time when he makes it, he is capable of understanding
it and of forming a rational judgement as to tis effect upon his interests. A person
who is usually of unsound mind, but occasionally of sound mind may mase a
contract when he is of sound mind.
Illustration: a patient in a lunatic asylum, who is at intervals of sound mind may
contract during those intervals.

MINOR IN INDIAN LAW

A minor is a person who is not a major. He attains majority on completion of 21 years in
England and 18 years in India. Even in India he attains majority on completion of 21
years when his property is managed by a court of wards or a guardian.

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 1. In Indian law, a contract by a minor is void. It cannot be even ratified by him after
attaining majority.
2. A contract entered into by a minor by fraudulently misrepresenting his age is
void. He cannot be stopped from setting up the plea of minority.
3. “Minors can have no privilege to cheat men”, though law protects them, so that
people may not exploit their tender age. So, if a minor receives goods on credit
while payment cannot be enforced goods can be recovered, if restitution is
possible.
4. The property of the minor is liable for the necessaries supplied to him, provided
the goods are suitable tot eh condition of his life and status. Even here, he is not
personally liable, but his estate only is liable.
5. While a sale or mortgage by a minor is void, a sale or mortgage in favour of a
minor is enforceable by him.
6. A contract by a guardian on behalf of the minor is enforceable by or against the
minor, provided the guardian is competent to contract and the contract is
beneficial to the minor. But he cannot purchase immovable property without
obtaining the consent of the court.
7. Under Sec. 3 of the Indian Partnership Act a minor may be admitted to the
benefits of partnership with the consent of all the partners.

CONSENT AND FREE CONSENT

Consent: It means acquiescence or act of assenting to an offer. “Two or more persons
are said to consent when they agree upon the same thing in the same sense”. (Sec.
13)
Free Consent: Consent is said to be free when it is not caused by
(1) Consent as defined in Sed. 15 or
(2) Undue influence as defined in Sec. 16, or
(3) Fraud as defined in Sed. 17, or
(4) Misrepresentation as defined in Sec. 18, or
(5) Mistake, subject to the provisions of Secs. 20, 21, and 22 (Sec. 14)

When there is no consent, there is no contract

Example : A is forced to sign a promissory note at the point of pistol. A knows what he is
signing but his consent is not free. The contract in this case is voidable at this option.

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COERCION
When a person is compelled to enter into a contract by the use of force by the other
party or under a threat, “coercion” is said to be employed. Coercion is the committing, or
threatening to commit, any act forbidden by the Indian Penal Code 1860 or the unlawful
detaining, or threatening to detain, any property, to the prejudice of any person
whatever, with the intention of causing any person to enter into an agreement.

Example: a threatens to kill B if he does lend Rs. 1000 to C. B agrees to lend the
amount to C. The agreement is entered into under coercion.
A threat to commit suicide also amounts to coercion.

EFFECT OF COERCION
When consent to an agreement is caused by coercion, fraud or misrepresentation, the
agreement is a contract voidable at the option of the party whose consent was so
caused (Sec. 19)

UNDUE INFLUENCE

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Sometimes a party is compelled to enter into an agreement against his will as a result of
unfair persuasion by the other party. This happens when a special kind of relationship
exists between the parties such that one party is in a dominant position to exercise
undue influence over the other.
Sec. 16(1) defines : undue influence” as follows
A contract is said to be induced by undue influence where the relations
subsisting between the parties are such that one of the parties is in a position to
dominate the will of the other and uses that position to obtain an unfair advantage over
the other.
The following relationships usually raise a presumption of undue influence viz.
(i) Parent and child
(ii) Guardian and ward
(iii) Trustee and beneficiary
(iv) Doctors and patient
(v) Solicitor and client, and
(vi) Finance and fiancée
The presumption of undue influence applies whenever the relationship between the
parties is such that one of them is by reason of confidence reposed in him by the
other, able to take unfair advantage over the other.

EFFECT OF UNDUE INFLUENCE

When consent to an agreement is obtained by undue influence, the agreement is a
contract voidable at the option of the party whose consent was so obtained. Any
such contract may be set aside either absolutely or if the party who is entitled to
avoid it has received any benefit thereunder, upon such terms and conditions as
to the Court may seem just and equitable (Sec. 19-A)

DIFFERENCE BETWEENS COERCION AND UNDUE INFLUENCE

S. No. Coercion Undue Influence
1. The consent is given under the The consent is given by a person
threat of an offence who is so situated in relation to

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 another that the other person is in
a position to dominate his will
2. Coercion is mainly of a physical Undue influence is of moral
character. It involves mostly use character. It involves use of moral
of physical or violent force. force or mental pressure.
3. There must be intention of Here the influencing party uses its
causing any person to enter into position to obtain an unfair
an agreement advantage over the other party
4. It involves a criminal act No criminal act is involved

MISREPRESENTATION AND FRAUD

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

FRAUD
Fraud exists when it is shown that a false representation has been made (a) knowingly,
or (b) without belief in its truth, or (c) recklessly, not caring whether it is true or false,
and the maker intended the other party to act upon it.
MISTAKE OF LAW
Mistake of law be (1) mistake of law of the country or (2) mistake of law of a foreign
country.
1. Mistake of law of the country: Ignorantta juris non exerts Ex. Ignorice of laws is
no exclause : is a well settled rule of law. A party cannot be allowed to get any
relief on the ground that it had done a particular act in ignorance of law. A

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 mistake of law is, therefore, no excuse, and the contract cannot be avoided.
Example: A and B enter into a contract on the erroneous belief that a particular
debt is barred by the Indian Law of Limitation. This contract may be voidable.
2. Mistake of law of a foreign country: Such a mistake is treated as mistake of
fact and the agreement in such a case is void. (Sec. 21)

MISTAKE OF FACT
Mistake of fact may be (1) a bilateral mistake, or (2) a unilateral mistake

1. Bilateral Mistake
Where both the parties to an agreement are under a mistake as to a matter of fact
essential to the agreement, there is a bilateral mistake. In such a case the
agreement is void (sec. 20). The following two conditions have to be fauced for
the application of Sec. 20.
(i) The mistake must be mutual i.e. both the parties should misunderstand each
other and should be at a cross-purposes.
Example: A agreed to purchase B’s motor-car which was lying in B’s garage.
Unknown to either party, the car and garage where completely destroyed by
fire a day earlier. The agreement is void

(ii) The mistake must relate to a matter of fact essential to the agreement. As to
what facts are essential in an agreement will depend upon the nature of the
promise in each case.
Example: A man and a woman entered into a separation agreement under which the
man agreed to pay a weekly allowance to the woman mistakenly believing
themselves lawfully married leld the agreement was void as there was mutual
mistake on a point of fact which was material to the existence of the agreement.

The various cases which fail under bilateral mistake are as follows:

Mistake as to the Subject – Matter:

Where both the parties to an agreement are working under a mistake relating to the
subject-matter, the agreement is void. Mistake as to the subject-matter covers the
following cases.

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(1) Mistake as to the existence of the subject-matter: If both the parties believes
the subject-matter of the contract to be in existence, which in fact at the time of
the contract is non-existent, the contract is void.
Example: A agrees to buy from B a certain goat. It turns out that the goat was
dead at the time of the bargain, though neither parts was aware of the fact. The
agreement is void.

(2) Mistake as to the identity of the subject-matter: It usually arises where one
party intends to deal in one thing and the other intends to deal in another.
Example: W agreed to buy from R a cargo on cotton to arrive ex-peerless from
Bombay”. There were two ships of that name sailing from Bombay, one sailing in
October and the other in December. W meant the former ship R meant the latter.
Held, there was a mutual or a bilateral mistake and there was no contract.

(3) Mistake as to the quality of the subject-matter: If the subject matter is

something essentially different from what the parties thought it to be the
agreement is void.
Example: A sells to B a prece of silk B thinks that it is foreign silk. A knows that B
thinks so but knows that it is Indian silk only.

(4) Mistake as to the quantity of the subject-matter: If both the parties are
working under a mistake as to the quantity of the subject-matter the agreement is
void.
Example: A silver bar was sold under a mistake as to its weight. There was a
difference in value between the weight of the bar as it was and as it was
supposed to be Held the agreement was void.

(5) Mistake as to the title to the subject-matter: If the seller as selling a thing
which he is not entitled to sell and both the parties are acting under a mistake,
the agreement is void.
Example: A person took a lease of a fishery which, unknown to either party
already belonged to him. Held, the lease was void.

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 (6) Mistake as to the price of the subject-matter: if there is a mutual mistake as to
the price of the subject-matter, the agreement is void.
Example: C wrote to D offering to sell certain property for Rs. 15,000. He had
earlier declined an offer from D to buy the same property for Rs. 20,000. D who
knew that his offer of Rs. 15,000 was a mistake for Rs. 25,000, immediately
accepted the offer. Held, D knew perfectly well that the offer was made by
mistake and hence the contract could not be enforced.

Mistake as to the Possibility of Performing the Contract

Consent is nullified if both the parties believe that in agreement is capable of being
performed when in fact this is not the case. The agreement, in such a case, is void on
the ground of impossibility.
Impossibility may be—
(i) Physical Impossibility
Example: A contract for the hire of a room for witnessing the coronation
procession of Edward VII was held to be void because unknown to the parties
the procession had already been cancelled.

(ii) Legal Impossibility: A contract is void if it provides that something shall be

done which cannot, as a matter of law be done.

2. Unilateral Mistake
When in a contract only one of the parties is mistaken regarding the subject
matter or in expressing or understanding the terms or the legal effect of the
agreement the mistake is a unilateral mistake. According to Sec. 22, a contract is
not voidable merely because it was caused by one of the parties to it being under
a mistake as to a matter of fact. A unilateral mistake is not allowed as a defence
in avoiding a contract unless the mistake is brought about by the other party’s
fraud or misrepresentation.
Example: A offers to sell his house to B for an intended sum of Rs. 44,000. By
mistake he makes an offer in writing of Rs. 40,000. He cannot plead mistake as a
defence.

LEGALITY OF OBJECT

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A contract must have a lawful object. The word object means purpose of design. In
some cases consideration for an agreement may be lawful but the purpose for which
the agreement is entered into may be unlawful. In such cases the agreement is void. As
such both the object and the consideration of an agreement must be lawful otherwise
the agreement is void.

The consideration or object of an agreement is unlawful

1. If the object is forbidden by law

Example: A promise to obtain for B an employment in the public service and 18
promises to pay Rs. 1,00,000 to A. the agreement is void, as the consideration is
unlawful.
2. If the object is permitted, it would defeat the provisions of any law
Example: N agreed to enter a company’s service in consideration of a weekly
wage of Rs. 75 and a weekly expense allowance of Rs. 25. Both the parties
knew that the expense allowance was a device to evade tax. Held the agreement
was unlawful.
3. If the object is fraudulent: An agreement which is made for a fraudulent purpose
is void. Thus an agreement in fraud of creditors with a view to defeating their
rights is void.
4. If the Court regards the object as immoral
Example: A agrees to let her daughter to B for concubinage (state of living
together as man and wife without being married. The agreement is unlawful,
being immoral.
5. Where the Court regards it as opposed to public policy.

UNLAWFUL AND ILLEGAL AGREEMENTS

An unlawful agreement is one which, like a void agreement, is not enforceable by law.
An illegal agreement is not only, void as between the immediate parties but has further
effect that the collateral transactions to it also become tainted with illegality.

Example: T lends Rs. 50,000 to B to help him to purchase some prohibited goods from
T, an alien enemy. If B enters into an agreement with T, the agreement will be illegal
and the agreement between B and T shall also become illegal, because it is collateral to

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the main transaction. T cannot, therefore, recover the amount.

AGREEMENTS OPPOSED TO PUBLIC POLICY

An agreement is said to be opposed to public policy when it is harmful to the public
welfare. Some of the agreements which are opposed to public policy and are unlawful
are as follows.
1. Agreements of trading with enemy: An agreement made with an alien enemy in
time of war is illegal on the ground of public policy.
2. Agreement to commit a crime: Where the consideration in an agreement is to
commit a crime, the agreement is opposed to public policy. The Court will not
enforce such an agreement.
3. Agreements which interfere with administration of police: An agreement, the
object of which is to interfere with the administration of justice is unlawful, being
opposed to public policy. It may take any of the following forms.

(a) Interference with the course of justice: An agreement which obstructs the
ordinary process of justice is unlawful.
(b) Stifling prosecution: It is in public interest that if a person has committed a
crime, he must be prosecuted and punished.
(c) Maintenance and champerty: Maintenance’ is an agreement to give
assistance, financial or otherwise, to another to enable him to bring or defend
legal proceedings when the person giving assistance has got no legal interest of
his own in the subject-matter.

4. Agreements in restraint of legal proceedings : Sec. 28 which deals with these

agreements.
(a) Agreements restricting enforcement of rights: An agreement which wholly or
partially prohibits any party from enforcing his rights under or in respect of any
contract is void to that extent.
(b) Agreements curtailing period of limitation: Agreements which curtail the
period of limitation prescribed by the Law of Limitation are void because their
object is to defeat the provisions of law.
5. Trafficking in public offices and rules: Agreements for the sale or transfer of
public offices and titles or for the procurement of a public recognition like Padma
Vibhushan or Param Veer Chakra for monetary consideration are unlawful being

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 opposed to public policy.
Example: R paid a sum of Rs, 2,50,000 to A who agreed to obtain a seat for R’s
son in a Medical College. On A’s failure to get the seat, R filed a suit for the
refund of Rs. 2,00,000. Held, the agreement is void on the ground of public
property.

6. Agreements tending to create interest opposed to duty: If a person enters into an

agreement whereby he is bound to do something which is against his public or
professional duty the agreement is void on the ground of public property.
7. Agreements in restraint of paternal rights: A father, and in his absence the
mother, is the legal guardian of his/her minor child. This rights of guardianship
cannot be bartered away by any agreement.
8. Agreements restricting personal liberty: Agreements which unduly restrict the
personal freedom of the parties to it are void as being against public policy.
9. Agreements in restraint of marriage: Every agreement in restraint of the marriage
of any person, other than a minor, is void (Sec. 26). This is because the law
regards marriage and married status as the right of every individual.
10. Marriage brokerage or brocage agreements: An agreements by which a person
for a monetary consideration, promises in return to procure the marriage of
another is void being opposed to public policy.
11. Agreements interfering with marital duties: Any agreement which interferes with
the performance of marital duties is void being opposed to public policy. Such
agreements have been held to include the following.
(a) A promise by a married person to marry during the lifetime or after the death
of spouse.
(b) An agreement in contemplation of divorce e.g. an agreement to lend money
to a woman in consideration of her getting a divorce and marrying the lender.
(c) An agreement that the husband and wife will always stay at the wife’s
parents’ house and that the wife will never leave her parental house.

12. Agreements to defraud creditors or revenues authorities: An agreement the

object of which is to defraud the creditors or the revenue authorities is not
enforceable being opposed to public policy.
13. Agreements in restraint of trade: An agreement which interferes with the liberty of
a person to engage himself in any lawful trade profession or vocation is called an

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 agreement in restraint of trade.

VOID AGREEMENTS
A void agreement is one which is not enforceable by law [Sec. 2 ] Such an agreement
does not give rise to any legal consequences and exaused ab initio.

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

WAGERING AGREEMENTS OR WAGER

A wager is an agreement is an agreement between two parties by which one
promises to pay money or money’s worth on the happening of some uncertain
event in consideration of the other party’s promise to pay if the event does not
happen. Thus if A and b enter into an agreement that A shall pay B Rs. 100 if it
rains on Monday, and that B shall pay A the same amount if it does not rain, it is
a wagering agreement.

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Essentials of Wagering Agreement:
(1) Promise to pay money or money’s worth: The wagering agreement must contain
a promise to pay money or money’s worth.
(2) Uncertain event: The promise must be conditional on an event happening or not
happening.
(3) Each party must stand to win or lose: Upon the determination of the
contemplated event, each party should stand to win or lose.
(4) No control over the event: Neither party should have control over the happening
of the event one way or the other
(5) No other interest on the event: Neither party should have nay interest in the
happening or non-happening of the event other gdfgjdg sum or stake he will with
or lose

CONTINGENT CONTRACTS
‘Contingent’ means that which is dependent on something else. A Contingent Contract
is a contract to do or not to do something, if some event collateral to such contract, does
or does not happen (Sec. 31). For example, goods are sent on approval the contract is
a contingent contract depending on the act of the buyer to accept or reject the goods.
There are three essential characteristics of a contingent contract.

1. Its performance depends upon the happening or non-happening in future of

some event. It is this dependence on a future event which distinguishes a
contingent contract from other contracts.
2. The event must be uncertain. If the event if bound to happen, and the contract
has got to be performed in any case it is not a contingent contract
3. The event must be collateral, i.e. incidental to the contract
Contracts of insurance, indemnity and guarantee are the commonest instances
of a contingent contract.

RULES REGARDING CONTINGENT CONTRACTS

1. Contingent contracts dependent on the happening of an uncertain future event
cannot be enforced until the event has happened. If the event becomes
impossible, such contracts become void (Sec. 32)
Example: A contracts to pay B a sum of money when B marries C. C dies without

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 being married to B. The contract becomes void.
2. Where a contingent contract is to be performed if a particular event does not
happen, its performance can be enforced when the happening of that event
becomes impossible. (Sec. 33)
Example: A agrees to pay B a sum of money, if a certain ship does not return.
The ship is sunk. The contract can be enforced when the ship sinks.

3. If a contract is contingent upon how a person will act at an unspecified time, the
event shall be considered to become impossible when such person does
anything which renders it impossible that he should so act within any definite
time, of otherwise than under further contingencies (Sec. 34)
Example: A agrees to pay B a sum of money if B marries C. C marries D. The
marriage of B to C must not be considered impossible, although it is possible that
D may die and that C may afterwards marry B.

4. Contingent contracts to do r onto to do anything, if a specified uncertain event

happens within a fixed time, become void if the event does not happen or its
happening becomes impossible before the expiry of that time.
Example: A promises to pay B a sum of money if a certain ship returns within a
year. The contract may be enforced if the ship returns within the year and
becomes void if the ship is burnt within the year.

5. Contingent agreements to do or not to do anything, if an impossible event

happens are void, whether or not the fact is known to the parties (Sec. 36).

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 PERFORMANCE OF CONTRACT
Performance of a contract takes place when the parties to the contract fulfil their
obligations arising under the contract within the time and in the manner presented.

OFFER TO PERFORM
Sometimes it so happens that the promisor offers to perform him obligation under the
contract at the proper time and place but the promise does not accept the performance.
This is known as “attempted performance” or “tender”.

REQUISITES OF A VALID TENDER

1. It must be unconditional. It becomes conditional when it is not in accordance with
the terms of the contract.
2. It must be of the whole quantity contracted for or of the whole obligation. A tender
of an installment when the contract stipulates payment in full is not a valid tender.
3. It must be by a person who is in a position, and is willing, to perform the promise.
4. It must be made at the proper time and place. A tender of goods after the
business hours or of goods or money before the due date is not a valid tender.
5. It must be made to proper person, i.e. the promise or his duly authorized agent. It
must also be in proper form.
6. It may be made to one of the several joint promises. In such a case it has the
same effect as a tender to all of them.
7. In case of tender of goods, it must give a reasonable opportunity to the promise
for inspection of goods.
8. In case of tender of money, the debtor must make a valid tender in the legal
tender money.

RECIPROCAL PROMISES
Promises which form the consideration or part of the consideration for each other are
called: reciprocal promises” [Sec. 2(f)]. Where, for example: A promises to do or not to
do something and consideration of B is promise to do or not to do something the
promises are reciprocal.

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These promises have been classified is follows:

(1) Mutual and Independent: Where each party must perform his promise
independently and irrespective of the fact whether the other party has performed
or is willing to perform his promise or not the promises are mutual and
independent.
Example: In a contact of sale, B agrees to pay the price of goods on of instant. S
promises to supply the goods on 2nd instant. The promises are mutual and
independent.

(2) Conditional and Dependent: Where the performance of the promise by one party
depends on the prior performance of the promise by the other party the promises
are conditional and dependent.

Example: A promises to remover certain debris lying in front of B’s house

provided B supplies him with the cart. The promises in this case are conditional
and dependent. A need not perform his promise if B fails to provide him with the
cart.

(3) Mutual and Consent: Where the promises of both the parties are to be performed
simultaneously they are said to be mutual and concurrent. The example of such
promises may be sale of goods for cash.

Rules Regarding Performance of Reciprocal Promises

1) Simultaneous performance of reciprocal promises
2) Order of performance of reciprocal promises
3) Effect of one party preventing another from performing promise
4) Effect of default as to promise to be performed first.
5) Reciprocal promise to do things legal and also other things illegal

TIME AS THE ESSENCE OF THE CONTRACT

The expression “time is of the essence of the contract “ means that a breach of the
condition as to the time for performance will entitle the innocent party to consider the

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breach as a repudiation of the contract.

Sec. 55 deals with the question of “time as the essence of the contract” and provides.

1. When time is of the essence: In a contract, in which time if of the essence of the
contract, if there is a failure on the part of the promisor to perform his obligation
within the fixed time. The contract (or so much of it as remains unperformed
becomes voidable at the option of the promise (Sec. 55 para 1). If, in such a case
the promise accepts performance of the promise after the fixed time, he cannot
claim compensation for nay loss occasioned by the non-performance of the
promise at the agreed time. But if at the time of accepting the delayed
performance he gives notice to the promisor of his intention to claim
compensation, he can do so (Sec. 55 para 3)
In commercial or mercantile contracts which provide for performance within a
specified time, time is ordinarily of the essence of the contract. This is so
because businessmen want certainty.
Example: In a contract for the sale or purchase of goods the prices of which
fluctuate rapidly in the market, the time of delivery and payment are considered
to be of the essence of the contract.

2. When time is not of the essence: In a contract, in which time is not of the
essence of the contract, failure on the part of the promisor to perform his
obligation within the fixed time does not make the contract voidable, but the
promise is entitled to compensation for any loss occasioned to him by such
failure (Sed. 55 para 2)
Intention to make time as the essence of the contract, if expressed in writing,
must be in a language which is unambiguous and unmistakable. The mere fact
that a certain time is specified in a contract for the performance of a promise
does not necessarily make time as the essence of the contract. If the contract
includes clauses providing for extension of time in certain contingencies or for
payment of fine or penalty for every day or week the work undertaken remains
unfinished on the expiry of time provided in the contract, such clauses are
construed as rendering ineffective the express provision relating to the time being
of the essence of the contract.

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 TERMINATION AND DISCHARGE OF CONTRACT
Discharge of contract means termination of the contractual relationship between the
parties. A contract is said to be discharged when it ceases to operate, i.e. when the
rights and obligations created by it come to an end.

A contract may be discharged

1. By Performance
2. By Agreement or Consent
3. By impossibility
4. By Lapse of Time
5. By operation of Law
6. By Breach of Contract

1. Discharge by Performance
Performance means the doing of that which is required by a contract. Discharge
by performance takes place when the parties to the contract fulfill then
obligations arising under the contract within the time and in the manner
prescribed.
Performance of a contract is the most usual mode of its discharge. It may be
(1) Actual Performance: When both the parties perform their promises the
contract is discharged. Performance should be complete precise and
according to the terms of the agreement.
(2) Attempted Performance or Perfer: Tender is not actual performance but is
only an after to perform the obligation under the contract.
2. Discharge by agreement or consent
(a) Sec. 62 lays down that if the parties to a contract agree to substitute a new
contract for it or to rescind or to alter it the original contract is discharged and
need not be performed.
The various cases of discharge of contract by mutual agreement are dealt with in
Sec. 62 and 63 are given below.
Rescission Sec. 62: Novation takes place when a new contract is substituted for
an existing one between the same parties.
Example: A owes money to B under a contract. It is agreed between A, B and C

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that B shall henceforth accept C as his debtor, instead of A. the old debt of A to B
is at an end and a new debt from C to B has been contracted.

(b) Rescission Sec. 62: Rescission of a contract takes place when all or some of
the terms of the contract are cancelled. It may occur
(i) By mutual consent of the parties or
(ii) Where one party fails in the performance of his obligation in such a case
the other party may rescind the contract without prejudice to his right to
claim compensation for the breach of contract.
Example: A promises to supply certain goods to B six months after date. By that
time, the goods go out of fashion. A and B may rescind the contract.

(c) Alteration (Sec 62): Alteration of a contract may take place when one or more
of the terms of the contract is are altered by the mutual consent of the parties
to the contract. In such a case, the old contract is discharged.
Example: A enters into a contract with B for the supply of 100 bales or cotton
at his Godown No. 1 by the first of the next month. A and B may after the
terms of the contract by mutual consent.

(d) Remission Sec. 63) Remission means acceptance of a lesser fulfilment or

the promise made, i.e. acceptance of a lesser sum than what was contracted
for the discharge of the whole of the debt.
Example: A owes B Rs. 50,000. A pays to B and B accepts in satisfaction of
the whole debt. Rs. 20,000 paid at the time and place at which Rs. 50,000
were payable. The whole debt is discharged.

(e) Waver: Waver takes place when the parties to a contract agree that gdfsg
shall no longer be bound by the contract. This amounts to a mutual
thandonment at rights by the parties to the contract.
(f) Merger: Merger tales place when an inferior right accuring to a party under a
contract merger into a superior right accruing to the same party under the
same on some other contract.
Example: P holds a property under a lease. He later buys the property. His
rights as a lessee merge into his rights as an owner.

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 3. DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE
If an agreement contains an undertaking to perform an impossibility, it is void ab
initio. This rule is based on the following maxims:
1. Impossibility existing of the time of agreement: Sec. 56 lays down that can
agreement to do an impossible act itself is void”. This is known as pre-contractual
or initial impossibility.
2. Impossibility arising subsequent to the formation of contract: Impossibility which
arises subsequent to the formation of a contract (which could be performed at the
time when the contract was entered into) is called post-contractual or
supervening impossibility.

Discharge by Supervening Impossibility

A contract is discharged by supervising impossibility in the following cases

1. Destruction of subject-matter of contract: When the subject-matter of a contract,

subsequent to its formation, is destroyed without any fault of the parties to the
contract, the contract is discharged.
Example: C let a music hall to T for a series of concerts on certain days. The hall
was accidentally burnt down before the date of the first concert. Held the contract
was void.

2. Non-existence or Non-occurrence of a particular state of things: Sometimes, a

contract is entered into between two parties on the basis of a continued
existence or occurrence of a particular state of things. If there is any change in
the state of things which ought to have occurred does not occur, the contract is
discharged.
Example: A and B contract to marry each other. Before the time fixed for the
marriage, A goes mad. The contract becomes void.

3. Death or Incapacity for personal service: Where the performance of a contract

depends on the personal skill or qualification of a party, contract is discharged on
the illness or incapacity or death of that party. The man’s life is an implied
condition of the contract.

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 Example: An artist undertook to perform at a concert for a certain price. Before
she could do so, she was taken seriously ill. Held she was discharged due to
illness.
4. Change of law: When subsequent to the formation of a contract change of law
takes place, and the performance of the comerge becomes impossible the
contract discharged.
Example: D enters into a contract with P on 1 st March for supply of ghdkjfg
imported goods in the month of September of the same year in June gdfg fgdf
Parliament the import of such goods is banned. The contract is discharged.

5. Outbreak of war : A contract entered into with an after enems during war is
unlawful and therefore impossible for performance. Contracts entered into before
the outbreak of war are suspended during the war and may be revived after the
war is over.

4. DISCHARGE BY LAPSE OF TIME

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

5. DISCHARGE BY OPERATION OF LAW

A contract may be discharged by operation of law. This includes discharge

(a) By Death: In contracts involving personal skill or ability, the contract is terminated
on death of the promissory. In other contracts the rights and liabilities of a
deceased person pass on to the legal representatives of the deceased person.
(b) By Merger: When an inferior right accruing to a party merges into a superior
rights accruing to the same party under the same or some other contract the
inferior right accruing to the party is said to be discharged.
(c) By Insolvency: When a person is adjudged insolvent, he is discharged from all
liabilities incurred prior to his adjudication.

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 (d) By Authorised Alteration of the terms of a written agreement: Where a party to a
contract makes any material alteration in the contract without the consent of the
other parts, the other parts can avoid the contract. A material alteration is one
which changes in a significant manner the legal identity or character of the
contract or the rights and liabilities of the parties to the contract.
(e) B y Rights and Liabilities becoming visited of the dfgdfg Person: Where the rights
and liabilities under a contract vested in the same person for example when a bill
gets into the hands of the acceptor, the other parties are discharged.

6. DISCHARGE BY BREACH OF CONTRACT

Breach of contract means a breaking of the obligation which a contract imposes.
It occurs when a party to the contract without lawful excuse does not fulfil his
contractual obligation or by his own act makes it impossible that he should
perform his obligation under it. It confers a right of action for damages on the
injured party.

REMEDIES FOR BREACH OF CONTRACT

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

1. Rescission of the contract

2. Suit for damages
3. Suit upon quantum meruit
4. Suit for specific performance of the contract
5. Suit for injunction

1. RESCISSION
When a contract is broken by one party, the other party may sue to treat the
contract as rescinded and refuse further performance. In such a case, be is
absolved of all his obligations under the contract.
Example: a promises B to supply 10 bags of cement on a certain day. B agrees
to pay the price after the receipt of the goods. A does not supply the goods. B is
discharged from liability to pay the price.
The Court may grant rescission.

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 (a) Where the contract is voidable by the plamtiff of
(b) Where contract is unlawful to fgdfg but apparent off its face and the defendant is
more to blame thatn the gdfgdf

When a party treats the contracts as rescinded be makes himself liable to restgdf any
benefits he has fgdfg of under the contract to the party from whom such benefits were
received. But if a person rightfully rescinds a contract he is entitled to compersation for
any damage which he has sustained through non-fulfilment of the contract by the other
party.

2. DAMAGES
Damages are a moctars compensation allowed to the injured party by the Court for
the loss or injurs suffered by him by the breach of a contract. The object of
awarding damages for the search of a contract is to put the injured party in the
same position, so far as money am the it, as if he had not been injured, i.e. in the
position in which he would have been had there been performance and not
breach. This is called the doctrine of restitution.

The rules relating to damages may be considered as under

1. Damages arising naturally – Ordinary damanges
When a contract has been broken, the injured party can recover from the other
party such damages as naturally and directly arose in the usual course of things
from the breach. This means that the damages must be the proximate
consequence of the breach of contract. These damages are known as ordinary
damages.
Example: A contracts to sell and deliver 50 quintals of Farm Wheat to B at Rs.
1000 per quintal, the price to be paid at the time of delivery the price of wheat
rises to Rs. 1200 per quintal and A refuses to sell the wheat B can claim
damages at the rate of Rs. 200 per quintal.

2. Damages in contemplation of the parties – Special damages

Special damages can be claimed only under the special circumstances which
would result in a special loss in case of breach of a contract. Such damages
knows as special damages cannot be claimed as a matter of right.

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 Example: A. a builder, contracts to erect a house for B by the 1 st of January. The
order that B may give possession of it at that time to C to whom B has contracted
to hfdg it. A is informed of the contract between B and C. A builds the house so
badly that before the 1st January, it falls down and has to be rebuilt by B fgdfg
vonsequence loses the rent which be was to have received from C, and
gdfgdfgdf to make compensation to C fvor the breach of the contract. A must
make cgdfgdfgd to gdfg for the cost of rebuilding the house for the rent lost, and
for the compensation made to.

3. Vindictive or Exemplary damages

Damages for the breach of a contract are given by way of compensation for loss
suffered, and not by way of punishement for wrong inflicted. Hence vindictive or
exemplary’ damages have no place in the law of contract because they are
punitive involving punishment by nature. But in case of (a) breach of a promise to
marry and the dishonor of a cheque by a banker wrongfully when he possesses
sufficient funds by the credit of the customer, the Court may award exemplary
damages.

4. Nominal damages
Where the injured party has not in fact suffered any loss by reason of the breach
of a contract, the damages recoverable by him are nominal. These damages
merels acknowledge that the plaintiff has proved his case and won.
Example: A firm consisting of four partners employed B for a period of two years.
After six months two partners rebred the business being carried on by the other
two B declined to be employed under the continuing partners. Held, he was only
entitled to nominal damages as he had suffered no loss.

5. Damages for loss of reputation

Damages for loss of reputation on case of breach of a contract are generally not
recoverable. An exempuon to this rule exists in the case of a banker who
wrongfully refuses to honour a customer’s cheque. If the customer happens to be
a tradesman, he can recover damages in respect of any loss to his trade
reputation byh the breach. And the rule of law is the smaller the amount of the
cheque dishonoured the larger the amount of damages awarded. But if the
customer is not a tradesman be can recover only nominal damages.
6. Damages for inconvenience and discomfort

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 Damages can be recovered for physical inconvenience and discomfort. The
general rule in this connection is that the measure of damages is not affected by
the motive or the manner of the breach.
Example: A was wrongfully dismissed in a harsh and humiliating manner by from
his employment. Held (a) A could recover a sum representing his wages for the
period of notice and the commission which he would have earned during that
period but (b) he could not recover anything for his injured feelings or for the loss
sustained from the fact that his dismissal made it more difficult for him to obtain
employment.

7. Mitigation of damages
It is the duty of the injured party to take all reasonable steps to mitigate the loss
caused by the breach. He cannot claim to be compensated by the party in default
for loss which the ought reasonably to have avoided. That is he cannot claim
compensation for loss which is really due not to the breach, but due to his own
neglect to mitigate the loss after the breach.

8. Difficulty of Assessment
Although damages which are incapable of assessment cannot be recovered the
fact that they are difficult to assess with certainty or precision does not prevent
the aggrieved party from recovering them. The Court must do its best estimate
the loss and a contingences may be taken into account.
Example: H advertised a beauty competition by which gfdgfk of certain
newspapers were to select fifty ladies. He himself was to select twelve out of
these fifty. The selected twelve were to be provided theatrical encagements. C
was one of the fifty and by H’s breach of contract she was not present when the
final section was made. Held C was entitled to damages although it was difficult
to assess them.

9. Cost of Decree
The aggrieved party is entitled in addition to damages to get the cost of getting
the decree for damages. The cost of suit for damages is in the discretion of the
Court.

10. Damages agreed upon in advance in case of breach

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 If a sum is specified in a contract as the amount to be paid in case of its gdfgdf or
if the contract contains any other stipulation by way of gdfgdfg dfg failure to
perform the obligations the aggrieved party is entiled to gfdgd from the gdfgd has
broken the contract a reasonable compensation not exceeding the fgdfg named.
Example: A contracts with B to pay Rs. 1000 if he fails to pay gdfgdf g given day.
B is entitled to recover from A such compensation not exceeding Rs. Dfgd as the
Court considers reasonable.

Liquidated Damages and Penalty

Sometimes parties to a contract stipulate at the time of its formation that on the breach
of the contract by either of them a certain specified sum gdfgd be payable as damages.
Such a sum may amount to either liquidated damages or a penalty. Liquidated damages
represent a sum fixedc or ascertained by the parties in the contract which is a fair and
genuine pre-estimate of the probable loss that gdfg fgd fg as a result of the breach. If it
takes place. A penalty is a sum named in the contract at the time of its formation, which
is dispropoetionate to the damages likely to fdgdfgd as a result of the breach. It is fixed
up with a view to securing the performance of the contract.

Payment of Interest
The largest number of cases decided under Sec. 74 relate to stipulation if a contract
providing for payment of interest. The following rules are observed with regard to
payment of interest.
1. Payment of interest in case of default.
2. Payment of interest at higher rate
a. From the date of the bond, and
b. From the date of default
3. Payment of compound interest on default
a. At the same rate as simple interest and
b. At the rate higher than simple interest
4. Payment of interest at a lower rate, if interest paid on due date.

3. QUANTUM MERUIT
The phrase quantum meruit ghdfgfdgh much as earned. A right to sue on a
quantum meruit arises where a ggdfg performed by one party has become

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 discharged to the breach of the contract dghdfghdf party.

4. SPECIFIC PERFORMANCE
In certain cases of breach of contract damages are not an adequate remedy. The
Court may, in such cases direct the party in breach to carry out his promise
according to the terms of the contract.
Some of the cases in which specific performance of a contract may in discretion
of the Court be enforced are as follows:
(a) When the act agreed to be done is such that compensation in money for its
non performance is not an adequate relief.
(b) When there exists no standard for ascertaining the actual damage caused by
the non-performance of the act agreed to be done.
(c) When it is probable that the compensation in money cannot be got for the
non-performance of the act agreed to be done.

5. INJUNCTION
Where a party is in breach of a negativbe term of a contract the where gdfg is
doing something which he promised not to do, the Court may be issuing an order
restrain him from doing what he promised not to do. Such an order of the Court is
known as injunction’.
Example: W agreed to sing at L’s theatre, and during a certain period to sing
nowhere else. Afterwards W made contract with Z to sing at another theatre and
refused to perform the contract with L. Held, W could be restrained by injunction
from singing for Z.

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 QUASI CONTRACTS
Under certain circumstances, a person may receive a benefit to which the law
regards another person as better entitled, or for which the law considers he
should pay to the other person, even though there is no contract between the
parties. Such relationships are termed quasi-contracts, because, although there
is no contract or agreement between the parties, they are put in the same
position as if there were a contract between them.
A quasi-contract rests on the ground of equity that a person shall not be allowed to
enrich himself unjustly at the expense of another. The principle of unjust enrichment
requires:
 That the defendant has been ‘enriched’ by the receipt of a ‘benefit’
 That this enrichment is at the expense of the plaintiff, and
 That the retention of the enrichment is unjust.
Law of quasi-contracts is also known as the law of restitution. Strictly speaking, a
quasi-contract is not a contract at all. A contract is intentionally entered into. A quasi-
contract, on the other hand, is created by law.

KINDS OF QUASI-CONTRACTS
1. SUPPLY OF NECESSARIES (Sec. 68)
If a person, incapable of entering into a contract, or anyone whom he is legally
bound to support, is supplied by another with necessaries suited to his condition in
life, the person who has furnished such supplies is entitled to be reimbursed from
the property of such incapable person.
Example: A supplies B, a lunatic, with necessaries suitable to his condition in life. A
is entitled to be reimbursed from B’s property.

2. PAYMENT OF INTERESTED PERSON (Sec. 69)

A person who is interested in the payment of money which another is bound by law
to pay, and who therefore pays it, is entitled to be reimbursed by the other.
Example: P left his carriage on D’s premises. D’s landlord seized the carriage as
distress for rent. P paid the rent to obtain the release of his carriage. Held, P
could recover the amount from D.
The essential requirements are as follows:
(a) The payment made should be bonafide for the protection of one’s interest.

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(b) The payment should not be voluntary one.
(c) The payment must be such as the other party was bound by law to pay.

3. OBLIGATION TO PAY FOR NON-GRATUITOUS ACTS (Sec. 70)

When a person lawfully does anything for another person or delivers anything to
him, not intending to do so gratuitously, and such other person enjoys the benefit
thereof, the latter is bound to make compensation to the former in respect of, or to
restore, the thing so done or delivered.
Example: a, a tradesman, leaves goods at B’s house by mistake. B treats the goods
as his own. He is bound to pay for them to A.

Before any right of action under Sec. 70 arises, three conditions must be satisfied.
(a) The thing must have been done lawfully.
(b) The person doing the act should not have intended to do it gratuitously
(c) The person for whom the acts is done must have enjoyed the benefit of the act.

4. RESPONSIBILITY OF FINDER OF GOODS (sec. 71)

A person, who finds goods belonging to another and takes them into his custody, is
subject to the same responsibility as a bailee. He is bound to take as much care
of the goods as a man of ordinary prudence would, under similar circumstances,
take of his own goods of the same bulk, quality and value. he must also take all
necessary measures to trace its owner. If he does not, he will be guilty of
wrongful conversion of the property. Till the owner is found out, the property in
goods will vest in the finder and he can retain the goods as his own against the
whole world (except the owner).
Example: F picks up a diamond on the floor of S’s shop. He hands it over to S to
keep it till true owner is found out. No one appears to claim it for quite some
weeks in spite of the wide advertisements in the newspapers. F claims the
diamond for S who refuses to return. S is bound to return the diamond to F who
is entitled to retain the diamond against the whole world except the true owner.

The finder can sell the goods in the following cases:

• When the thing found is in danger of perishing.
• When the owner cannot, with reasonable diligence, be found out.

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 • When the owner is found out, but he refuse to pay the lawful charges of the
finder, and
• When the lawful charges of the finder, in respect of the thing found amount to
two-thirds of the value of the thing found. (Sec. 169)

5. MISTAKE OR COERCION (Sec. 72)

A person to whom money has been paid, or anything delivered, by mistake or under
coercion, must repay or return it to the person who paid it by mistake or under
coercion. The word ‘coercion’ is used in Sec. 72 in its general sense and not as
defined in Sec. 15.
Example: A and B jointly owe Rs. 100 to C. A alone pays the amount to C and B, not
knowing this fact, pays Rs. 100 over again to C. C is bound to pay the amount to
B.

QUANTUM MERUIT
‘Quantum meruit’ literally means ‘as much as earned’ or as much as it merited’.
When a person has done some work under a contract, and the other party
repudiates the contract, or some event happens which makes the further
performance of the contract impossible, them the party who has performed the
work can claim remuneration for the work he has already done. Likewise, where
one person has expressly or impliedly requested another to render him a service
without specifying any remuneration, but the circumstances of the request imply
that the service is to be paid for, there is implied a promise to pay quantum
meruit, i.e. so much as the party rendering the service deserves. The right to
claim quantum meruit does not arise out of contract as the right to damages
does, it is a claim on the quasi-contractual obligation which the law implies in the
circumstances.

The claim for quantum meruit arises only when the original contract is discharged. If
the original contract exists, the party not in default cannot have quantum meruit
remedy, he has to take resort to remedy in damages. Further the claim for
quantum meruit can be brought only by the party who is not in default.
The claim for quantum meruit arises in the following cases
(a) When an agreement is discovered to be void (Sec. 65)
(b) When something is done without any intention to do so gratuitously (Sec. 70)

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 (c) When there is an express or implied contract to render services but there is no
agreement as to remuneration
(d) When the completion of the contract has been prevented by the act of the other
party to the contract
(e) When a contract is divisible
(f) When an indivisible contract is completely performed but badly.

Review Questions

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

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

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 SPECIAL CONTRACTS
LESSON – 2
INDEMNITY AND GUARANTEE

DEFINITION
Section 124 of the Indian Contract Act defines it as “a contract by which one party
promises to save the other from loss caused to him by the conduct of the promisor
himself or by the conduct of any other person”. The person who promises is called the
Indemnifier and the person to whom the promise is made is called the Indemnified or
Indemnity Holder.

Illustration: A promises not to construct buildings on a particular site so as to prevent

light and air to B’s house and in case of breach of such promise, to indemnify for the
consequent loss.
This is a contract of indemnity. A contract of insurance is also a contract of indemnity.

RIGHTS OF AN INDEMNITY HOLDER

He is entitled to recover—
 All damages
 All costs which he may be compelled to pay in any suit in respect of any matter to
which the promise to indemnity applies, and
 All sums which he may have paid under the terms of any compromise of any
such suit provided, such compromise was not contrary to the orders of the
promisor and was prudent or the promisor authorizes him to compromise the suit.

CONTRACT OF GUARANTEE
Section 126 of Indian Contract Act defines it as “a contract to perform the promise, or
discharge the liability, of a third person in case of his default”. The person who gives the
guarantee is called the “surety”, the person in respect of whose default, the guarantee is
given is called the “principal debtor”, and the person to whom the guarantee is given is
called the “creditor”.
Illustration: A purchases goods from B on credit. C agrees to stand as a surety which
means that if A does not pay the price of the goods, he will pay. Here, A is the principal

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debator, B is the creditor and C is the surety or guarantee.

Distinction between Contract of Indemnity and Contract of Guarantee

Contract of Indemnity Contract of Guarantee
1 There are two parties, namely There are three parties, viz the principal
Indemnifier and the debtor, the creditor and the surety
Indemnified.
2 The liability of the Indemnifier is The liability of the surety is subsidiary
primary
3 The liability of the Indemnifier is The liability of the surety is subsisting
contingent
4 The Indemnifier cannot sue the The surety can sue the principal debtor
third party in his name even in his own name after paying the creditor
after making good the loss
unless there is an assignment
in his favour from the
indemnified.

RIGHTS OF SURETY
Rights against the Principal Debtor
1) After discharging the liability of the principal debtor, the surety is entitled to all
those rights which the creditor himself exercises against the principal debtor. This
right of the surety is called “subrogation”.
Illustration: The right of the creditor to receive dividends from the official assignee
when the principal debtor becomes bankrupt, can be exercised by the surety.
2) The surety can proceed against all those securities of the principal debtor, which
the creditor himself can proceed against.
3) The surety is entitled to be indemnified for all payments rightfully made by him.

Illustration: B is indebted to C, and A is surety for the debt. C demands payment

form A, and on his refusal sues him for the amount. A defends the suit, having
reasonable grounds for doing so but is compelled to pay the amount of the debt with
costs. He can recover from B the amount paid by him for costs as well as the
principal debt.

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Rights against the Creditor

1) The surety may require the creditor to sue the debtor. But he cannot compel the
creditor to do so.
2) In the case of fidelity contracts, he can insist upon the creditor to dispense with
the services of the principal debtor when his dishonesty is established.
3) He can claim set off or counter-claim which the principal debtor could have
obtained against the creditor.
4) On payment of the guaranteed debt, ha can require the creditor to assign to him
all the securities held by the creditor in respect of the debt. If the creditor loses or
parts with such securities without the consent of the surety, the surety is
discharged to the extent of the value of the security.
Illustration: C advances to B, his tenant, Rs. 2000 on the guarantee of A. C has also
a further security for the sum of Rs. 2000 by mortgage of B’s furniture. C cancels the
mortgage. B becomes insolvent and C sues A on his guarantee. A is discharged
from liability to the amount of the value of the furniture.

Rights against the Co-Sureties

1) All the sureties shall bear equally, the loss caused by the insolvency of the
principal debtor. If one of them bears the entire loss in the first instance he can
claim contribution from other co-sureties.
2) Where the co-sureties agreed to become liable in different sums, they should
contribute, according to English Law, proportionately.
Illustration: A, B and C have agreed to become liable for Rs. 10,000, 20,000 and
40,000 respectively, as sureties for D’s liability. D’s indebtedness was Rs. 30,000.
A,B and C would contribute in the ratio of 1 : 2 : 4. But according to Indian Law they
shall bear such loss equally but not exceeding the sums which they have agreed to
pay. So, A, B and C will have to pay Rs. 10,000 each.

SURETY DISCHARGED FROM LIABILITY

1. The surety is discharged from liability if the contract of guarantee becomes
void or voidable, on the ground of misrepresentation by the creditor with
regard to a material circumstance, or on the ground that the guarantee was
given on condition that another person will join as a co-surety and that such
other person has not joined as such.

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 Illustration: A engages B as clerk to collect money for him. B fails to account for
some of his receipts and A in consequence, calls upon him to furnish security for
his accounting. C gives his guarantee for B’s accounting. A does not acquaint C
with B’s previous conduct. B afterwards makes default. The guarantee is invalid.

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

continuing guarantee.
3. The surety is discharged
a. By variance of contract: Any variance in the terms of the contract
between the principal debtor and the creditor without the surety’s consent
discharges the surety.
Illustration: C, contracts to lend B Rs. 5000 on the 1st of March. A
guarantees repayment. C pays Rs. 5000 to B on the 1st of January. A is
discharged from his liability, as the contract has been varied in as much as
C might sue B for the money before the 1st of March.

b. By release or discharge of principal debtor: The surety is discharged

by any contract between the principal debtor and the creditor by which the
principal debtor is discharged or by any act or omission of the creditor, the
legal consequence of which is the discharge of the principal debtor.
Illustration: A, contracts with B for a fixed price to build a house for B within a
stipulated time, B supplying the necessary timber. C guarantees A’s performance of
the contract. B omits to supply the timber. C is discharged from his surety ship.

c. By composition with debtor: The surety is discharged when the

principal debtor and creditor enter into a contract by which the creditor (1)
composition with or (2) promises to give time or (3) promises not to sue
the principal debtor.
d. By act or omission impairing surety’s remedy: The surety is
discharged if the creditor does any act inconsistent with the rights of the
surety or omits to do any act which his duty to surely requires him to do.
Illustration: A puts M as apprentice to B, and gives a guarantee in B for M’s fidelity. B
promises on his part that he will, at least once a month, see M make up the cash.
B omits to see this done as promised and M embezzles. A is not liable to B on
his guarantee.

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 e. Loss of security: the surety is discharged if the creditor losses or parts
with the securities belonging to the principal debtor, without the consent of
the surety.

The surety is not discharged in the following cases:

1. A surety is not discharged when a contract to give time to the principal debtor is
made by the creditor with a third person and not with the principal debtor.
Illustration: C, the holder of an overdue bill of exchange drawn by A as surety for
B, and accepted by B, contracts with M to give time to B. A is not discharged.
2. Mere forbearance on the part of the creditor to sue the principal debtor does not
discharge the surety.
Illustration: B owes C, a debt guaranteed by A. The debt becomes payable C
does not sue B for a year after the debt has become payable. A is not discharged
from his liability.
3. Release of one co-surety does not discharge the other.

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 LESSON – 3
CONTRACTS OF BAILMENTS
Section 148 of the Indian Contract Act defines that “a bailment is the delivery of goods
by one person to another for some purpose, upon a contract that they shall when the
purpose is accomplished, be returned or otherwise disposed of according to the
directions of the person delivering them.” The person delivering the goods is called the
“bailor”. The person to whom they are delivered is called the “bailee”.

Essentials of Bailments
1. There must be delivery of goods: Such delivery may be actual or constructive.
2. The delivery must be made for some specific purpose.
3. The delivery must be made on condition that the goods shall be returned in
specific when the purpose is over, or disposed of according to the direction of the
bailor.
4. Only possession but not the ownership of the goods is transferred.
Examples: Delivery of a radio for repair.

DUTIES OF A BAILEE
1. To take reasonable care of the goods bailed to him
Section 151 lays down that in all cases of bailment the bailee should take that much
of care which an ordinary prudent man would take of his own goods under similar
circumstances. Section 152 lays down that the bailee is not responsible, in the
absence of any special contract, for the loss, destruction or deterioration of the
thing bailed, if he has taken the amount of care described above.
Illustration: A gives to B, to be made into an ornament. B keeps them in a safe
where he usually keeps his own valuables. B is not liable if the goods are lose by
him.
2. Not to make unauthorized use of goods bailed
The bailee should not make use of goods for purposes inconsistent with the terms of
the contract. If he does so, the bailor is entitled to terminate the contract and
claim damages, if any.

Illustration: A lends a horse to B for his own riding only. B allows C, to ride the horse.

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 C rides carefully but the horse accidentally falls and is injured. B is liable to
compensate A for the injury caused to the horse.

3. Not to mix the goods of the bailor with his own goods
a) If a bailee mixes the goods of the bailor with his own goods with the consent of
the bailor, both the bailor and the bailee shall have proportionate interest in the
mixture.
b) If the goods mixed by the bailee without the consent of the bailor and the goods
are separable, the bailee is bound to bear the expenses of separation and pay
damages if any.
c) If the goods are mixed by the bailee without the consent of the bailor and the
goods are inseparable, the bailee should compensate the bailor for the loss of
goods.

Illustration: A bails a barrel of Cape flour worth Rs. 45 to B. B without A’s consent,
mixes the flour with country flour of his own, worth only Rs. 25 a barrel. B must
compensate A for the loss of his flour.

4. Not to set up adverse title

The bailee should not deny the bailor’s title. He should not set up his own title or that
of a third party.
5. To return the goods bailed
The bailee should return goods bailed, to the bailor when the fixed period is over or
when the purpose is accomplished. The bailee should also deliver any increase
or profit which may have accrued from the goods bailed.
Illustration: A leaves a cow in the custody of B to be taken care of The cow has a
calf B is bound to deliver the calf as well as the cow to A.

DUTIES OF A BAILOR
1. To disclose the faults in the goods bailed
The bailor should disclose to the bailee, faults in the goods bailed, of which he is
aware. If he does not disclose, he will be liable for the loss resulting therefrom.
Illustration: A lends a horse which he knows to be vicious to B. He does not disclose
this fact. The horse runs away. B is thrown down and injured. A is responsible to

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 B for damages sustained.

2. To bear extra-ordinary expenses

While the ordinary expenses are payable by the bailee, extra-ordinary expenses shall
be borne by the bailor.
Illustration: Where a horse is lent for a journey, the bailee shall bear the expenses of
feeding the horse. But in case of the horse becoming sick, the bailor shall have to bear
the necessary expenses for its recover.

3. Responsibility for want of title

The bailor is responsible to the bailee for any loss sustained by he latter by the
reason, that the bailor was not entitled to make the bailment or to receive back
the goods or to give directions respecting them.

RIGHTS OF BAILOR
1. He is entitled to the increase or profit from goods bailed
2. In the case of gratuitous loan, the lender may require the goods to be returned,
even though he lent it for a fixed period for specific purpose. But if such a request
causes loss to the bailee exceeding the benefit he derives, the bailor should
indemnify the borrower.
3. The bailor is entitled to terminate the contract when the bailee does any act
inconsistent with the terms of bailment.
Illustration: A gives a horse to B for hire for his own riding. B drives the horse in his
carriage. The bailment can be terminated at the option of A.

LIEN
Lien is a right of a person, who has possession of goods of another, to return such
possession until a debt due to him has been discharged. This right is called a
“Possessory lien”.
Lien is of two kinds: 1. Particular lien, and 2. General lien

1. A Particular Lien is one which is available only against that property in respect of
which the skill and labour are exercised or any expenses are incurred.

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 Illustration: A delivers a watch for repairs to B, a repairer. B has a right to retain
the watch till he is paid for the services rendered.
The bailees, repairers and unpaid vendors of goods are entitled to particular lein.

2. A General Lien is the right to retain the property of another for a general balance
of accounts. Bankers, can exercise this right for any debt due to them.

The duties and rights of A finder of lost goods

A person who finds an article need not take charge of it. But if he takes them into his
possession, be becomes a bailee.

Duties and Rights

1. He must take as much care of the goods as an ordinary prudent man would,
under similar circumstances, take of his own goods.
2. He cannot sue for remuneration for trouble and expense incurred by him to
preserve the goods or to find out the owner of the goods.
3. He may exercise particular lien against the goods for such remuneration.
4. If a reward has been offered for the return of the goods, he can sue for such
reward.
5. If the goods are the subject of the sale and if the owner is not found or when
found refuses to pay the lawful charges, the finder may sell the goods.
a. When the goods are about to perish or
b. When they lose the greater part of their value of
c. When lawful charges amount to two-thirds of their value

PLEDGE
A pledge is a “bailment of goods as security for payment of a debt or performance of a
promise”. The bailor is called the “pawnor” and the bailee is called the “pawnee”. In the
case of pawn, there is no transfer of property in goods. Only possession of the goods is
transferred. Hence, it is different from mortgage. Pawn is also different from lien, as in
the case of lien, there is not power to sell the article while a pawnee can sell, subject to
some conditions.

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Rights of Pawnor
Even after the expiry of a stipulated period, he may redeem the goods pledged at any
subsequent time before the actual sale of the goods pledged. But he must pay
expenses which may have arisen from his default.

Rights of Pawnee
1. He can retain the goods pledged until he recovers the debt, interest and other
expenses incidental to possession or preservation of the goods.
2. He cannot retain the goods for debts other than those for which pawn is made.
3. He is entitled to receive extra-ordinary expenses incurred for the preservation of
goods.
4. If the pawnor makes a default, the pawnee may
a. Bring a suit upon the debt or promise and
b. Retain the goods pledged or
c. Sell the goods by giving a reasonable notice of sale to the pawnor.
If the proceeds of such are less than the amount due in respect of the debt or
promise, the pawnor is still liable to pay the balance. If the proceeds of the sale
are greater than the amount so due, the pawnee shall pay over the balance to
the pawnor.

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 LESSON – 4
CONTRACT OF AGENCY

Section 182 of the Indian Contract Act defines an agent as person employed to do any
act for another or to represent another in dealings with third persons. The person for
whom such act is done, or who is so represented is called the “principal”.

ESSENTIALS OF A CONTRACT OF AGENCY

1. The principal and third parties must be competent into contracts
An agent may be even a minor who can effectively bind his principal. But the
principal cannot make the minor agent liable for misconduct or negligence.

Example: P, a principal gives M, a minor, a jewel worth Rs. 100 and instructs fgdgdf
to sell it on credit or for less than Rs. 500. M sells the jewel on credit for Rs. 400.
P cannot make him liable while he is bound by the sale..

Consideration is not essential. That the principal gives his consent to be represented
by the agent is sufficient consideration for the agent gdg dfgd dfgd.

CREATION OF AGENCY
An agency may be created in the following ways:
1. By Express Authority: The authority of any agency may be expressed in words
spoken or written. For example, a contract of agency can be written by means of
power of attorney.
2. By Implied Authority: The authority of an agent can be interred from the
circumstances of the case.

Illustration: A living in Bombay, owns a shop in Madras and he occasionally visits it.
B is managing the shop and is in the habit of ordering goods from C in the name of A
for the purpose of the shop and of paying to them out of A’s funds with A’s
knowledge. B has an implied authority from A to order goods from C in the name of
A for the purpose of the shop.

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 3. By Necessity: Sometimes, exigencies of circumstances require a man to act for
another as an agent, though not appointed as such.
Illustration: A horse was sent by rail. The owner had not taken delivery of the same
at the destination. So, the station master had to feed it. It was held that the station
master had become an agent by necessity and was therefore entitled to recover the
charges incurred by him.

4. By Holding Out: Where a master usually sends his servant to pledge his credit for
certain mangdfgfd he is bound by the acts of the servant for similar purposes
though done without his consent.
5. By Estoppel: When one man by words or conduct causes another to believe that
some other person is his agent and that another person had acted on that belief,
he would be stopped from denying the authority of that another person to act on
his behalf.
Illustration: a tells B in the presence and within the hearing of P that he (A) is P’s
agent and P does not contradict this statement B, on the faith of this statement,
subsequently enters into a contract with A, taking him to be P’s agent. P is bound
by that contract.

6. By Ratification or Expost Eacto Agency : Section 196 of the Indian Contract Act
lays down that where acts are done by one person on behalf of another, but
without his knowledge of authority, he may elect to ratify or to disown such acts.
If he ratifies them the same effects will follow as if they had been performed by
his authority. Thus ratification relates back to the date of the original contract and
binds the principal as if he has expressly authorized it.

TERMINATION OF CONTRACT OF AGENCY

A contract of agency is terminated in the following ways:
1. When the period of agency expires or
2. When the purpose of the agency is accomplished or
3. When the principal or agent dies or becomes of unsound mind
4. When the principal becomes insolvent
5. When the subject matter of the contract is destroyed
6. When the object of the contract becomes unlawful

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 7. When the agent renounces the authority
8. When the principal revokes his authority

The termination that takes effect so far as regards the agent, the moment, it
becomes know to him and so far as regards third persons, the moment it
becomes know to them. So, if an agent knowing the termination of agency,
contracts with third persons who are not aware of the termination, the becomes
liable to the principal for damages while the contract binds the principal and third
persons.

An Agency cannot be terminated in the following cases:

(a) When the agency is one, coupled with interest. A, gives authority to B to sell A’s
land and to pay himself, out of the proceeds, the debts sue to him (B) from A. A
cannot revoke this authority nor can it be terminated by his insanity or death.
(b) When the agent has incurred personal liability and
(c) When the authority ahs been partly exercised by the agent.

RIGHTS OF AN AGENT
1. He is entitled to remuneration and other expenses properly incurred by him in the
agency. But if he is guilty of misconduct, he is not entitled to receive the
remuneration.
Illustration: A employs B to recover Rs. 1000 from C. Through B’s misconduct,
the money is not recovered. B is entitled to no remuneration for his services and
must make good the loss.
2. He is entitled to retain the goods, papers and other property, movable on
immovable, of the principal for his claims.
3. The agent has a right to be indemnified by the principal for all lawful acts.
Illustration: B at Singapore under instructions from A of Calcutta, contracts with C
to deliver goods. A does not send the goods to B and C sues B breach of
contract. B informs A of the suit and A authorizes him to defend the suit. B
defends and is compelled to pay damages etc. A is liable to B for such damages
etc.
4. The agent is entitled to be indemnified for the injury caused to him by the
principal’s neglect or want of skill.

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 Illustration: A employs B as a brick-layer in building in a house and puts a
scaffolding himself unskillfully and B is in consequence, hurt. A must compensate
B.
5. When an agent acts in good faith, the employer must indemnify him for the
consequence of that act, through it causes an injury to the rights of third parties.
Illustration: B, at the request of A, sells goods in the possession of A, but which A
had no right to dispose of B does not know this and hands over the sale
proceeds to A. afterwards C the true owner sues A and recovers the value of
goods and costs. A must indemnify B for what he has paid and for B’s own
expenses.

DUTIES OF AN AGENT
1. He should act according to the directions of the principal and in default, indemnify
the principal for the loss, if any
2. In the absence of instructions, he must act according to the trade custom.
Illustration: A, an agent engaged in carrying on for B, a business, in which it is the
custom, to invest from time to time, at interest the monies which may be in hand,
omits to make such investment. A, must make good to B the interest usually
obtained by such investment.
3. In case of difficulty, he must be diligent in communicating with the principal and
obtaining his instruction.
4. He must conduct the business of agency with as much skill as is generally
possessed by persons engaged in similar business, unless the principal has
notice of want of skill.
Illustration: A, having authority to sell on credit, sells goods to B without enquiring
about his solvency, B at the time of sale, is bankrupt. A must make good the loss.
5. He must render proper accounts on demand.
6. He must not delegate his authority without the consent of the principal.
7. He must deliver all monies including secret commission, to the principal. He can
deduct his remuneration and other lawful expenses spent by him.
8. He should not set up his own title or title of third parties to the goods of the
principal in hi hands.
9. If, by the nature of profession, an agent is purported to have special skill, he must
exercise that degree of skill ordinarily expected from the members of the
profession.

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 Illustration: A solicitor, who started the proceedings under a wrong section or field a
suit in a court having no jurisdiction, is liable.
10. He should not disclose confidential information.
11. His interest should not conflict with his duty.

CONDITIONS UNDER WHICH THE AGENT IS PERSONALLY LIABLE

1. An agent is liable for breach of warranty of authority. He is liable to third parties
when he exceeds his ostensible authority. He becomes liable to pay damages to
the principal, when he exceeds his actual authority but acts within the ostensible
authority and enters into contracts with third parties who are not aware of the
curtailment of his authority.
2. An agent cannot claim performance of a contract entered into by him apparently
on behalf of the principal but really on his own account.
3. An agent is personally liable
a. When the contract expressly provides
b. When he does not sign the negotiable instrument as agent
c. When he acts for a foreign principal
d. When he acts for an undisclosed principal
e. When the agency is coupled with interest
f. When the trade usage makes him liable, and
g. When the principal cannot be sued as he is a minor or a foreign sovereign
etc.
REVIEW OF QUESTIONS
1. Define Contract of Indemnity and Contract of Guarantee and bring out
differences between them.
2. What are the rights of the Surety against (i) Principal debtor, (ii) Creditor and (iii)
Co-Sureties
3. When the Surety is discharged from his liabilities?
4. Define bailment. What are the rights and duties of bailor and bailee?
5. What are the duties of finder of lost goods?
6. What are the different methods of creation of agency?
7. What are the rights and duties of an agent?

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 LESSON – 5
SALE OF GOODS ACT, 1930
Section 4 of the Sale of Goods Act defines a contract of sale as “a contract whereby the
seller transfers or agrees to transfer the property in goods to the buyer for a price”. The
term “contract of Sale” includes an actual sale as an agreement to sell. It may be
absolute or conditional.

When the property in the goods is transferred, the contract is called a sale. The contract
called an agreement to sell, when the transfer of property is take place at a future time
or subject to fulfilment of some condition. An agreement to sell becomes a sale, when
the time lapses or such condition is fulfilled.

Differences between a sale and an agreement to sell may be summarized as follows:

Sale Agreement to Sell

1. Ownership is transferred to the
buyer
2. It is an executed contract
3. It creates rights in rem.
4. The seller can sue for the price
though the goods are in the his
possession
5. If the seller re-sells the goods,
the buyer can claim damages
for conversion and exercise right
of recovery of goods from third
parties who are aware of the
prior sale
6. If the goods are destroyed by
accident, the buyer has to bear
the loss, though the goods are
in the possession of the seller
Ownership does not pass to the
buyer. It remains with the seller.
It is an executor contract
It creates rights in personam
The seller can sue for the damages if
the buyer refuses to take delivery and
pay the price
In case of re-sale the buyer can only
claim damages.
In such cases, the seller has to bear
the loss, even if the goods are in the
possession of the buyer

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7. If the buyer becomes insolvent,
the seller, in the absence of a
lien, must deliver the goods to
the official receiver and claim
only ratable dividend for the
price due
8. If the seller becomes insolvent,
the buyer can recover the goods
from the official receiver since
the ownership has passed to
him.
If the buyer becomes bankrupt before
payment of price, the seller may
refuse to deliver the goods unless
paid for since ownership rests with
the seller
In such cases, the buyer who has
paid the price can only claim retable
dividend.

CONDITION AND WARRANTY

A term or a stipulation in a contract of sale with reference to goods may be either a
condition or a warranty. A condition is a term which is essential to main purpose of the
contract and hence is the foundation of the contract. The effect of a breach of condition
is that it gives the right to the aggrieved party to treat the contract as void and also to
claim damages, if any.
A warranty is a term which is collateral to the main purpose of the contract and hence is
only a subsidiary promise. The breach of warranty does not give right to the aggrieved
party to treat the contract as void but entitles him to claim damages only. In the absence
of contract to the contrary, time of delivery of goods is treated as condition and for
payment of price, as warranty.
In the following cases, the breach of a condition will be treated as breach of warranty
only.
(i) When the buyer waives the condition or
(ii) When the buyer treats the breach of condition as a breach
warranty and does not treat the contract as void or
(iii) Where the contract of sale is inseparable and the buyer has
accepted the goods or part thereof or
(iv) Where the contract is for specific goods, the property in which
has passed to the buyer.
Condition and warranties may be express or implied, When they are definitely written in
the contract, they are called express conditions and warranties. They are called implied
conditions and warranties, when they are not written in the contract and applied to the
contract either by operation of law or by trade custom.

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IMPLIED CONDITIONS
1. As to title to goods: There is an implied condition that the seller has a right to sell
in case of sale and that in the case of agreement to sell, he will have the right to
sell the goods at the time when the property is to pass.
Rowland Vs Divall: A purchased a car from B for a certain price and used it for
some period. Subsequently, it was found that the car was stolen by B and
therefore, A had returned back the car to the true owner. It was held that A could
recover the full price paid to B.
2. Sale by description: The implied condition is that the goods delivered must
correspond with the description
Example: Where a machine was described as almost new and used very little but
when delivered, was found to be an old and repaired one, it was held that the
buyer was entitled to reject the machine.
3. Sale by sample: The implied condition as ---
a. That the goods delivered shall correspond with the sample
b. That the buyer shall have a reasonable opportunity of comparing the bulk
with the sample and
c. That the goods shall be free from any defect rendering them
unmerchantable, which would not be apparent on reasonable examination
of the sample.
Drummond & Sons Vs Van Ingen & Co.: Where worsted coating was supplied
corresponding with the sample but not suitable for stitching due to a latent defect,
it was held that the buyer was entitled to reject the goods.

4. Sale by sample as well as description: In the case of sale of goods by sample as

well as description, the goods delivered must correspond with both sample as
well as description.
5. As to quality or fitness: The general rule is “Caveat Emptor”, i.e. let the buyer
beware. So, the seller need not disclose the faults in the goods he sells nor need
he guarantee that the goods are fit for the purposes of the buyer. So, the buyer
takes them as they come. But in the following cases, there is an implied condition
as to quality or fitness of goods for any particular purpose.
a. Where the buyer makes known the purpose to the seller, who is ordinarily
dealing with sale of goods of that description and the buyer relies on the

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 judgement of the seller.
b. Where the seller does not disclose the faults in his goods and such faults
cannot be detected on reasonable examination.
c. Where the seller makes a statement and the buyer relies upon it.
Baldry V’s Marshall: A purchased a motor car from B for using it as
a tourist car. B, the seller knew the purpose. The car turned out to be unfit
for the purpose. Held, A the buyer could repudiate the contract.
But there is not implied condition as to fitness or quality of goods
when they are sold under the patent or trade name.
E.W. Evans V’s Stella Benjamin: Where a refrigerator was sold, it
was held that the name of the article itself implies that it is fit for a
particular purpose.
6. As to Merchantability: In case of sale of good by description, there is an implied
condition that the goods shall correspond with the description and also that they
shall be of merchantable quality.
Brant Vs Australian Knitting Mills Ltd.: The buyer was supplied wollen underpants
by the manufacturers. The buyer wore them for sometime and contracted a skin
disease. Held, that the buyer was entitled to damages.
Exception: If the buyer has examined the goods, there is not implied condition as
to quality of goods as regards defects which such examination must have
revealed.
7. As to wholesomeness: In the case of sale of vision, there is an implied condition
that they are fit for immediate use, A, purchased a bun from B and injured his
teeth by biting a stone in the bun. B was held liable.

IMPLIED WARRANTIES
1. Warranty of Quiet Possession: There is an implied warranty that the buyer shall
have and enjoy quiet possession.
2. Warranty against Encumbrances: There is an implied warranty that the goods
shall be free from encumbrance or charges in favour of any third party not
declared or known to the buyer before or at the time of contract.

RIGHTS OF AN UNPAID SELLER

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The seller of goods is deemed to be an “unpaid-seller” where—
a) The whole of the price has not been paid or tendered or
b) When a bill of exchange or any other negotiable instrument has been given as
conditional payment but the same has been dishonoured.

An unpaid vendor has the right of withholding the delivery of goods when the property in
goods has not passed to the buyer.
He has the following rights when the property in goods has passed to the buyer.

1. Rights of Lien

The unpaid vendor who is in possession of the goods, can retain such possession until
the price is paid or rendered. And if the goods are partly delivered, the an exercise this
right on the remaining goods except when such part delivery amounts to show that he
has give up the right of lien. This right of lien extends to the whole of goods in the
possession of the unpaid vendor and can be exercised only for the recovery of the price
of goods but not the amounts like godown rent, incurred in storing the goods in exercise
of lien for the practice.
He can exercise the right of lien –
• Where the goods have been sold without any stipulation as to credit
• Where the goods have been sold on credit, but the term of credit has expired
and the price remains unpaid.
• Where the buyer becomes bankrupt
This right of lien is lost—
• When the goods are delivered by him to a carrier, or other bailee for the
purpose of transmission without reserving the right of disposal,
• When the buyer or his agent lawfully obtains the possession of goods
• When the unpaid vendor has given up his right of lien

2. Right of stoppage of goods in transit

When the seller has parted with the possession of goods, he may regain and retain
such possession by stopping the goods in transit, from being delivered to the buyer.
This right is available (1) when the goods are in transit and (2) when the buyer becomes

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bankrupt.
Following are the rules regarding duration of transit
a) Goods are deemed to be in transit so long as the buyer or his agent does not
take delivery of the goods
b) The transit is at an end, when the buyer or his agent obtains delivery before the
arrival of the goods at their destination
c) The transit is at an end, if the carrier or other bailee acknowledges to the buyer
after the arrival of the goods at the destination the he holds the possession of
goods as a bailee for the buyer.
d) The goods are in transit, if the buyer or his agent rejects the goods.
e) The transit is at an end if the carrier or other bailee wrongfully refuses to deliver
the goods to the buyer.

The unpaid vendor must give notice of his claim to the carrier or other bailee, who is in
possession of the goods, in order to exercise this right of stoppage. Such notice takes
effect when it reaches the carrier or his agent who is in actual possession of goods. On
receipt of notice of the stoppage, the carrier must re-deliver the goods to or according to
the directions of the seller. The seller shall have to bear the expenses of such re-
delivery.
3. Right of Re-Sale
The unpaid vendor can re-sell the goods—
1) without notice to the buyer if the goods are perishable goods and
2) With notice to the buyer of his intention to re-sell. If the goods are not perishable.

He can retain the profit resulting form such re-sale and claim damages from the
original buyer for loss if any. But if he does not give notice to the buyer of his
intention to re-sell the goods where necessary, he must pay back the surplus or
profit to the original buyer and bear the loss, if any.

REVIEW QUESTIONS
1. Distinguish between sale and agreement to sell
2. What are the implied conditions and warranties laid down under the Sale of
Goods Act’

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3. What are the rights of an unpaid seller?

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 LESSON – 6
NEGOTIABLE INSTRUMENTS ACT, 1881

Section 13 of the Negotiable Instruments Act defines that a negotiable instrument

means a promissory note, bill of exchange or cheque, payable either to order or bearer.

FEATURES
1. The property in it passes either by mere delivery or by endorsement and delivery
2. The holder in due course is not affected by the defect in the title of his transferor
or any previous party.
3. The holder in due course, can sue in his own name. He need not give notice to
the debtor that he has become the holder.
4. He is not affected by certain defects like fraud to which he is not a partly
5. Consideration is presumed to have passed
6. It is convenient method of discharging payments
The Act does not stipulate that only bills of exchange, promissory notes and
cheques are only the negotiable instruments. So, other instruments may also be
added to the list of negotiable instruments provided.
• They are transferable by mere delivery and
• The holder in due course can sue in his own name
Hence, Dividend Warrants, Port Trust or Improvement Trust Debentures, Railway
Bonds, payable to bearer or Railway Receipts having the feature of negotiability
are all negotiable instruments. So, a negotiable instrument is an ordinary chattel
for chose-in-action clothed with the feature of negotiability.

PARTIES TO NEGOTIABLE INSTRUMENTS

The parties to a bill of exchanges, a promissory note and a cheque are as follows:
Parties to a Bill of Exchanges: (1) Drawer, (2) Drawee, (3) Acceptor, (4) Payee,
(5) Holder, (6) Indorser, (7) Indorsee, (8) Drawee in case of need, and (9)
Acceptor for honour.
Parties to a Promissory Note: (1) Maker, (2) Payee (3) Holder, (4) Indorser and (5)
Indorsee

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 Meker, Drawer: The person who makes a promissory note is called the “maker”.
The person who makes or draws a bill of exchange or cheque is called the
“drawer”.
Drawee, Acceptor: The person on whom the bill of exchange or cheque is drawn
and who is directed to pay is called the “drawee”. In case of a cheque, the
drawee is always a banker. In case of a bill of exchange, the drawee becomes
the “acceptor” when he accepts the bill, i.e. signs his accent upon the bill and
delivers the same or gives notice of such signing to the holder or to some person
on his behalf A cheque does not require acceptance as it is intended for
immediate payment.
Payee: The person named in the bill, note or cheque, to whom or to whose order the
money is to be paid, is called the “payee”. In a bill or cheque, the drawer may
himself be the payee. Where the payee named in a bill is a fictious or non-
existing person, the bill is treated as payable to bearer.
Indorser: The person who endorses the bill, note or cheque to another is called the
“indorser”.
Indorsee: The person to whom the bill, note or cheque is endorsed is called the
“Indorsee”.

MATERIAL ALTERATION
Material alteration refers to changes introduced on a cheque which affects its
fundamental character. In other words, “any change in any instrument which makes it
speak a different language, for all legal purposes from what it spoke originally” would
constitute a material alteration. If the alteration is material, it renders the cheque invalid.

Examples of Material Alteration

There is material alteration when
 The date of the instrument is altered
 The time of payment is altered
 The amount is altered
 The rate of interests altered
 The place of payment is altered
 The name of payee is altered
 A new party is added etc.

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 There is no material alteration when
• A mistake corrected
• Alteration is made with the consent of all the parties
• Alteration is made to carry out the common intention of the parties
• Blank indorsement is converted into full indorsement
• An inchoate instrument is completed etc.

EFFECT OF MATERIAL ALTERATION

According to Sec. 87 of the Negotiable Instruments Act, if a cheque is materially
altered it canot be regarded as a cheque at all. Therefore material alteration
renders the cheque void.
CROSSING OF CHEQUES
Crossing means drawing two parallel transverse lines across the face of the cheque
with or without the words “and company” in between the lines. It is a direction to the
drawee bank not to pay the amount at the counter, but only through a bank. It is made
to guard payment against forgery by unscrupulous persons.

KINDS OF CROSSING
Is is of two kinds (1) General Crossing and (2) Special Crossing

1. General Crossing
Sec. 123 of the Negotiable Instruments Act defines General Crossing as, “where
a cheque bears across its, face an addition of the words “And Company” or any
abbreviation thereof between two parallel transverse lines or of two parallel
transverse lines simply, either with or without the words ‘not negotiable’, that
addition shall be deemed to be a crossing and the cheque shall be deemed to be
crossed generally”.
Two parallel transverse lines across the face of the cheque with or without the
words, “& Co.”, “Account Payee only”, “Not Negotiable”, constitute general
crossing. The cheque which is crossed generally, is payable only to banker.

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 Specimens of General Crossing

2. Special Crossing
Sec. 124 of the Negotiable Instruments Act defines Special Crossing as, “where
a cheque bears across its face an addition of the name of a banker, with or
without the words “not negotiable”, that addition shall be deemed a crossing and
the cheque shall be deemed to be crossed specially and to be crossed to that
banker”. When a cheque is crossed specially, the amount is payable by the
drawee only, only to the bank named in the crossing.

Specimens of Special Crossing

“Account Payee Crossing”

When the words “Amount Payee”, “Account Payee only” are added to the general or
special crossing, it is called account Payee Crossing. The collecting banker must
collect the amount of the cheque for the account of the payee only and none
else.

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 Otherwise, it is not a collection in due course and the banker is liable if the title of the
person for whom the bank collects, turns out to be defective.

“Not Negotiable” Crossing

When the words “not negotiable” are added either in general or special crossing, the
person taking the cheque cannot have and cannot give a better title than what his
transferor has. So, a ‘not negotiable’ cheque is transferable. But the transferee gets no
better title than what the transferor has.

RULES OF CROSSING
1. An uncrossed cheque may be crossed generally or specially by the drawer or the
holder.
2. A cheque crossed generally, may be crossed specially by the holder.
3. The holder may add the words “not negotiable”.
4. The banker to whom the cheque is crossed specially, may re-cross it, but only to
another bank as his agent for collection.
5. Where an uncrossed cheque or a cheque crossed generally is sent to a banker
for collection, he may cross it specially to himself. But he cannot enjoy Statutory
protection against being sued for conversion.

INDORSEMENTS
It means the writing of a person’s name (otherwise than as maker) on the face or back
of a netgotiable instrument or on a slip of paper (called alloonge) annexed thereto, for
the purpose of negotiation (Sec. 15). The person who signs the instrument is called the
“indorser’. The person to whom the instrument is indorsed is called the ‘indorsee’.

KINDS OF INDORSEMENTS
1. Bank Indorsement or General Indorsement
When the indorser signs his name only, it is called blank indorsement. An
instrument endorsed in blank is payable to bearer. The holder of an instrument
may write above the indorser’s signature, a direction to pay the amount to or to
the another person. When the holder does so, he does not become liable as an
endorser on the instrument, as he had not signed it.

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2. Special or Full Indorsement
If the indorser signs his name and adds a direction to pay the amount to or to the
order of a certain person, it is called full indorsement.
Illustration : A bill made payable to Smith, may be endorsed in full by him as “Pay A
or order”.

[Sd.] Smith
An instrument having been endorsed in blank is indorsed in full the indorser in full is
liable to the person to whom it is indorsed in full or to others who derive title through
such person.

3. Restrictive Indorsement
It is one which prohibits or restricts further negotiation or which constitute the
indorsee an agent to receive its contents for his indorser.
Example: (1) “Pay C only” (2) “Pay D for my use” (3) “Pay D on account of E” (4)
“Pay E or order for collection.
4. Partial Indorsement
When a part of the amount of the instrument is endorsed, it is called partial
indorsement. It is void:
Example: A holds a bill for Rs. 800 A endorses thus
“Pay Rs. 400 to B or order” (or)
“Pay B or order Rs. 400 and to C or order Rs. 400”

But if the part of the amount of the instrument is already paid, the unpaid balance
may be endorsed thus. “Pay B or order Rs. 400, being unpaid residue of the bill”.
5. Conditional or Qualified Indorsement
This is one which negotiates or limits the indorser’s liability, in the following
ways:
(a) By Sans Recourse Indorsement: The indorser excludes his liability by express
words in indorsement.
Examples: (1) “Pay A or order

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 Sans Recourse”
(Sd) B

(2) “Pay A at his own risk”

(Sd) B

(3) “Pay A without recourse to me”

(Sd) B

(b) By making his liability depend upon the happening of a specified event,
though such event may never happen.
Example : “Pay A or order on his marrying B”

(c) By making the right of the indorsee to receive the amount, depend upon the
happening of a specified event, though it may never happen.
(d) By Facultative Indorsement: This is one which extents the liability of the
indorser.
Example: “Pay A or order
Notice of dishonor waived”
(Sd.) B

PAYMENT AND COLLECTION OF CHEQUE

The paying banker should use reasonable care and diligence in paying a cheque so as
to abstain from any action likely to damage his customer’s credit.

PRECAUTIONS BEFORE HONOURING A CHEQUE

In order to safeguard his position, the paying banker has to observe the following
precautions before honouring a cheque.
(1) Presentation of Cheque
First of all a paying banker should note whether the presentation of the cheque is
correct. It can be found out by noting the following factors.

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(a) Type of Cheque: Cheques may generally be of two types – open or crossed. If it
is open one, the payment may be paid at the counter. If it is crossed, the
payment must be made only to a fellow banker.
(b) Branch: The paying banker should see whether the cheque is drawn on the
branch where the account is kept.
(c) Banking Hours: The paying banker should also note whether the cheque is
presented during the banking hours on a business day.
(d) Multination: If the cheque is from into pieces or cancelled or mutilated, then the
paying banker should not honour it.

3. From of the Cheque

Before honouring a cheque, a banker shold see the form of cheque and find out
whether it is regular or not.
(a) Printed Form: The customer should draw cheques only on the printed leaves
supplied by the bankers failing which the banker may refuse to honour it.
(b) Enconditional Order: The cheque should not contain any condition
(c) Date: Before honouring a cheque, the paying banker must see whether there is a
date on the instrument. if a cheque is ante dated, it may be paid if it has not
exceeded six months from the date of its issue otherwise it will become stale
one. If a cheque is post dated, he should honour it only on its due date.
(d) Amount: The paying banker should see whether the amount stated in the
cheque both in words and figures agree with each other.
(e) Material Alteration: If there is any material alteration the banker should return it
with a memorandum “Alteration requires drawer’s confirmation”.
(f) Sufficient Balance: If the funds available are not sufficient to honour a cheque,
the paying banker is justified in returning it.
(g) Signature of the Drawer: It is the duty of the paying banker to compare the
signature of his customer found on the cheque with that of his specimen
signature.
(h) Endorsement: The banker must verify the regularity of endorsement, if any, that
appears on the instrument.
(i) Legal Bar: The existence of legal bar like Garnishee order limits the duty of the
banker to pay a cheque.

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CIRCUMSTANCES UNDER WHICH A CHEQUE MAY BE DISHONOURED
A paying banker is under a legal obligation to honour his customer’s mandate. He is
bound to do so under his contractual relationship with his customer. A wrongful dishonor
will have, the worse effect on the banker. However, under the following circumstances,
the payment of a cheque may be refused.
a) Countermanding: Countermanding is the instruction given by the customer of a
bank requesting the bank not to honour a particular cheque issued by him. When
such an order is received, the banker must refuse to pay the cheque.
b) Upon receipt of notice of death of a customer: When a banker receives
written information from an authoritative source, regarding the death of a
particular customer, he should not honour any cheque drawn by that deceased
customer.
c) Upon the receipt of notice of insolvency: Once a banker has knowledge of the
insolvency of a customer he must refuse to pay cheques drawn by him.
d) Upon the receipt of notice of insanity: Where a banker receives notice of a
customer’s insanity, he is justified in refusing payment of the cheque drawn by
him.
e) Upon the receipt of notice of Garnishee order: Garnishee order refers to the
order issued by a court attaching the funds of the judgement debtor (i.e. the
customer) in the hands of a third party (i.e. the banker). In such a case, the
banker may refuse payment.
f) Upon the receipt of notice of assignment: The bank balance of a customer
constitutes an asset and it can be assigned to any person by giving a letter of
assignment to the banker. In such case also the banker may refuse payment.
g) When a breach of trust is intended: In the case of trust account, mere
knowledge of the customers intention to use the trust funds for his personal use
is a sufficient reason to dishonor his cheque.
h) Defective Title: If the person who brings a cheque for payment has no title or his
title is defective, the banker should refuse to honour the cheque presented by
him.
i) Other Grounds: A banker is justified in dishonouring a cheque under the
following circumstances also:
• a conditional one,
• drawn on an ordinary piece of paper,
• a stale one,

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 • post-dated one,
• mutilated,
• drawn on another branch where the account is not kept,
• presented during non-banking hours.
• If the words and figures differ,
• If there is no sufficient funds,
• If the signature of the customer is forged,
• If the endorsement is irregular and,
• If a crossed cheque is presented at the counter.

COLLECTING BANKER
A collecting banker is one who undertakes to collect the amount of a cheque for his
customer from the paying banker.

DUTIES OF COLLECTING BANKER

1. Exercise reasonable care and diligence in his collection work: As an agent,
he should exercise reasonable care, diligence and skill in collection work. He
should observe utmost care when presenting a cheque.
2. Present the cheque for collection without any delay: If there is any delay in
presenting the cheque for presentment by the banker, the customer may suffer
losses due to the insolvency of the drawer or insufficiency of funds in the account
of the drawee or insolvency of the banker himself. Hence the collecting banker
has to present the cheque for collection without any delay.
3. Notice to customer in case of dishonor of cheque: If the cheque he collects
has been dishonoured, he should inform him customer without any delay.

Review Questions
1. Define Negotiable Instruments. What are the characteristics of negotiable
instruments?
2. What are the different kinds of crossing?
3. What is indorsements? What are the kinds of indorsements?
4. What are the precautions to be taken by a banker while honouring a cheque?

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5. What are the duties of a collecting banker?

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 LESSON – 7
INDIAN PARTNERSHIP ACT, 1932
Section 4 of the Indian Partnership Act defines it as ‘the relation between persons who
have agreed to share the profits of a business cancelation by gfdg any of them acting
for all” Persons who have entered into partnership with one of other are called
individually “partners” and collectively “a firm”, and the name under which their business
is carried on, is called the “firm name”.

ESSENTIALS OF PARTNERSHIP
1. Relationship: Partnership is the abstract relationship between partners
2. Two or More Persons: As no one can be a partner with himself, there must be
at least two persons. The maximum number of members is 10 for a partnership
carrying on banking business and 20 for a partnership carrying on any other
business.
3. Agreement or Deed: Partnership arises out of an agreement but not out of
status. Such agreement, also called as deed, may be express or implied from the
conduct of the parties. It may be oral or written. It contains details relating to—
• name of the firm and the names of the partners,
• nature and place of business,
• the date of commencement and the duration of partnership,
• capital and banking account,
• sharing of profits and losses,
• management,
• accounts
• arbitration etc.
4. Business: The object of the partnership is to carry on any business, profession,
vocation, trading or calling. Such business must be lawful. Mere holding of
property in common is not partnership, e.g. co-ownership.
5. Profit Sharing: Sharing of profits is essential though it does not mean that all
those who participate in profits are necessarily partners.
6. Carried on by all or any of them acting for all: Each partner acts as an agent
as well as a principal. Each one can act in the course of business and bind the

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 other partners by his acts. As such, he can be called an agent. Since he is also
bound by the acts of the other partners, he can be called the principal. Thus, the
law of partnership is a branch of the general law of agency as every partner has
implied power to bind other partners for the acts of the firm, done in the course of
conduct of the business.

KINDS OF PARTNERSHIP
1. Partnership at will: Where the partners have not provided in their deed, for the
duration of partnership or for the termination of partnership, the partnership is
called “partnership at will”. A partner may retire to dissolve the partnership at his
will, by giving a notice to other partners, of his intention to do so.
2. Particular partnership: A person may become a partner with another person in
particular adventures or undertakings.
3. Partnership for a fixed term: Where the partners fix the definite period or
duration of partnership, it is called a partnership for a fixed term.

TEST OF PARTNERSHIP
In determining whether a partnership exists or not, or whether a person is a partner
or not the real relation between the parties as shown by all relevant facts, must be
taken into consideration.
The joint use of property in common in business for sharing of profits is evidence
that a partnership exists. But this is not conclusive evidence to show that a
partnership exists. Likewise, an active participation in the conduct of business is
evidenced that a partnership exists. But again, it is no conclusive evidence to
establish the fact of existence of partnership. For example, a servant may manage
the affairs of a firm. Yet he is not a partner. In the same way, a joint venture having
no object of profit sharing is not a partnership, while sharing of profits is evidence,
though no conclusive, that a partnership exists. So, Section 6 lays down that the
receipt of a share of profit, or a payment contingent or varying with the profits does
not of itself, make the recipient a partner. Therefore, the true test of partnership is
no sharing of the profit, but whether the relationship of agency exists or not.

KINDS OF PARTNERS
Following are different kinds of partners
1. Actual or Ostensible Partner: An actual partner is one who actively participates
in the conduct of the business of the partnership.

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 2. Dormant or Sleeping Partner: He is a partner who is not known to third parties
as such. He does nto take active part in the conduct of business. He occupies
the position of an undisclosed principal. Hence, third parties can sue him on
discovering that he is a partner. While he has access to accounts and examine
and verify them, he has not duties to perform. Hence no notice of his retirement
to the public is necessary nor the firm is dissolved when he becomes insane.
3. Partner by Estoppel: Where a person causes, by his conduct, another to
believe him to be a partner and on that belief such other person gives credit to
the firm, he is estopped from denying that he is a partner.
Example: X, Y and Z are partners of a firm. X, in the presence and within the
hearing of A, represents to D that A is a partner of their firm. A does not
contradict this representation. A, on faith of that representation, lent Rs. 5000 to
the firm, A, is liable as a partner.
4. Partner by Holding Out : Where a person represents himself or allows others
to represent him as a partner of a particular firm, he becomes liable to all those
who act and lend money to the firm, on the faith of such representation.
Example: A, represents himself as a partner of a particular firm. D on the faith of
the representation, lends credit to the firm. A becomes liable.

REGISTRATION OF FIRMS
The Partnership Act does not provide for the compulsory registration of firms. It has left
it to the option of the firms to get themselves registered. But indirectly, by creating
certain disabilities from which an unregistered from suffers, it has made the registration
of firms compulsory.

PROCEDURE FOR REGISTRATION

The registration of a firm may be effected at any time by filling an application in the form
of a statement, giving the necessary information, with the Registrar of Firms of the area.
The application for registration of a firm shall be accompanied by the prescribed fee. It
shall state:
(a) the name of the firm
(b) the place or principal place of business of the firm
(c) the names of other places where the firm carries on business
(d) the date when each partner joined the firm

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 (e) the names in full and permanent address of the partners
(f) the duration of the firm.

The statement shall be signed by all the partners or by their agents specially authorized
in this behalf [Sec. 58(1)]. It shall also be verified by them in the prescribed manner
[Sec. 58(2)].
When the Registrar is satisfied that the above provisions have been duly compiled with,
he shall record an entry of the statement in the Registrar of Firms (maintained by
Registrar of Firms in respect of each registered firm for recording the necessary
information relating to that firm) and file the statement (Sec. 59). He shall then issue
under his hand a certificate of registration. Registration is effective from the date when
the Registrar files the statement and makes entries in the Register of Firms.

EFFECTS OF NON-REGISTRATION (SEC. 69)

1. Suits between partners and firm: A person suiting as a partner of an
unregistered firm cannot sue the firm or any partners of the firm to enforce a right
from a contract or conferred by the Partnership Act.
2. Suits between firm and third parties: An unregistered firm cannot sue a third
party to enforce a right arising from a contract until –
• the firm is registered, and
• the names of the persons suing appear as partners in the Register of Firms
[Sec. 69(2)]
3. Clain of set-off: An unregistered firm or any partner thereof cannot claim a set-
off in a proceeding instituted against the firm by a third party to enforce a right
arising from a contract, until the registration of the firm is effected [Sec. 69(3)]

RELATIONS OF PARTNERS
The relations of the partners of a firm to one another are usually governed by the
agreement among them. Such agreement may be express or implied.

RIGHTS OF A PARTNER
1. Right to take part in Business
The partnership agreement usually provides the mode of the conduct of the
business. Subject to pay such agreement between the partners, every partner

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 has a right to take part in the conduct of business [Sec. 12(a)]. This is based on
the general principal that partnership business is the common business of all the
partners.
2. Right to be Consulted
Every partner has an inherent right to be consulted in all matters affecting the
business of the partnership and express his views before any decision is taken
by the partners.
3. Right of Access to Accounts
Subject to contract between the partners, every partner has a right to have
access to and inspect and copy any of the books of the firm.
4. Right to Share in Profit
In the absence of any agreement, the partners are entitled to share equally in the
profits earned and are liable to contribute equally to the losses sustained by the
firm.
5. Right to Interest on Capital
The partnership agreement may contain a clause as to the right of the partners to
claim interest on capital at a certain rate. Such interest, subject to contract
between the partners, is payable only out of profits, if any, earned by the firm.
6. Right to Interest on Advances
Where a partner makes, for the purposes of the business of the firm, any
advance beyond the amount of capital, he is entitled to interest on such advance
at the rate of six per cent annum. Such interest is not only payable out of the
profits of the business but also out of the assets of the firm.
7. Right to be Indemnified
A partner has authority, in an emergency, to do all such acts for the purpose of
protecting the firm from loss as would be done by a person of ordinary prudence,
in his own case, acting under similar circumstances. Such acts of the partner
bind the firm. If as a consequence of any such act, the partner incurs any liability
or makes any payment, he has a right to be indemnified.
8. Right to the Use of Partnership Property
Subject to contract between the partners, the property of the firm must be held
and used by the partners exclusively for the purposes of the business of the firm.
No partner has a right to treat it as his individual property. If a partner uses the
property of the firm directly or indirectly for his private purpose, he must account
to the firm for the profits which he may have earned by the use of that property.

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9. Right of Partner as Agent of the Firm
Every partner for the purposes of the business of the firm is the agent of the firm.
10. No New Partner to be Introduced
Every partner has a right to prevent the introduction of a new partner unless he
consents to that or unless there is an express term in the contract permitting
such introduction. This is because partnership is founded on mutual trust and
confidence.
11. No Liability before Joining
A person who is introduced as a partner into a firm is not liable for any act of the
firm done before he became a partner.
12. Right to Retire
A partner has a right to retire (a) with the consent of all other partners, or (b) in
accordance with an express agreement between the partners, or (c) where the
partnership is at will, by giving notice to all the other partners of his intention to
retire.
13. Right of Outgoing Partner to Share in the Subsequent Profits
Where a partner has died, or has ceased to be a partner by retirement,
expulsion, insolvency, or any other cause, the surviving or continuing partners
may carry on the business with the property of the firm without any final
settlement of accounts as between them and the outgoing partner or his estate.
In such a case, legal representative of the deceased partner or the outgoing
partner is entitled to such share of the profits as is proportionate to his share in
the property of the firm.

DUTIES OF A PARTNER
Partnership is a contract of uberrimae fide. The partners must act with utmost
good faith as the very basis of partnership is mutual trust and confidence.
According to Sec. 9, which deals with the general duties of partners, partners are
bound –
(a) to carry on the business of the firm to the greatest common advantage,
(b) to be just and faithful to each other, and
(c) to render true accounts and full information of all things affecting the firm to
any partner or his legal representative.

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The other duties are spread over the Partnership Act. These duties are summed as
under:
1. To carry on business to the greatest common advantage
Every partner is bound to carry on the business of the firm to the greatest
common advantage. He is bound, in all transactions affecting the partnership, to
do his best in the common interest of the firm.
2. To observe faith
Partnership is a fiduciary relation. Every partner must be just and faithful and
observe utmost good faith towards every other partner of the firm.
3. To indemnify for fraud
Every partner is bound to indemnify the firm for any loss caused to it by his fraud
in the conduct of the business of the firm.
4. To attend diligently
It is the duty of every partner to attend diligently to his duties in the conduct of the
business of the firm [Sec. 12b], and to use his knowledge and skill to the
common advantage of all the partners.
5. Not to claim remuneration
A Partner is not entitled to receive any remuneration in any form for taking part in
the conduct of the business of the firm. It is however, usual to allow some
remuneration to the working partners provided there is a specific agreement to
that effect.
6. To share losses
It is the duty of every partner to contribute to the losses of the firm. In the
absence of an agreement to the contrary, the partners are bound to contribute
equally to the losses sustained by the firm. An agreement to share profits implies
an agreement to share losses also.
7. To indemnify for willful neglect
Every partner is bound to indemnify the firm for any loss caused to it by his willful
neglect in the conduct of the business of the firm.
8. To hold and use property of the firm exclusively for the firm
It is the duty of every partner of the firm to hold and use the property of the firm
exclusively for the purposes of the business of the firm
9. To account for personal profits
If a partner derives any benefit, without the consent of the other partners, from

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 partnership transactions, he must account for it and pay it to the firm. This is
because the relationship between partners is a fiduciary relationship and no
partner is entitled to make any personal profit.
10. To account for profit in competing business
A partner must not carry on any business of the same nature as competing with
that of the firm. If he does that he is bound to account for and pay to the firm all
profits made by him in that business.
11. To act within authority
Every partner is bound to act within the scope of his actual or implied authority.
Where he exceeds the authority conferred on him and the firm suffers a loss, he
shall have to compensate the firm for any such loss.
12. To be liable jointly and severally
Every partner is liable, jointly with all the other partners and also severally, for all
the acts of the firm done while he is a partner.
13. Not to assign his rights
A partner cannot assign his rights and interest in the firm to an outsider so as to
make him the partner of the firm. He can, however, assign his share of the profit
and his share in the assets of the firm.

DISSOLUTION OF FIRMS
Section 39 of the Indian Partnership Act lays down that the dissolution of partnership
between all the partners of a firm is called the “dissolution of the firm”. This is
different from the dissolution of partnership. A partnership may be dissolved without
dissolution the firm. But dissolution of firm involves dissolution of partnership. In the
firm of A, B and C, if C dies or retires, the firm will be dissolved. But A and B may
take in D and continue doing the business. This new firm of A, B and D is called the
new or reconstituted firm.

Dissolution of Partnership on the happening of certain contingencies

A partnership is dissolved by ---
 The death of the partner
 The completion of the adventure of partnership
 The insolvency of a partner, and
 The retirement of a partner

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 In all these cases, the remaining partners, may constitute the firm. Hence,
dissolution of partnership does not necessarily involve dissolution of the firm. If
they do not continue, the firm is dissolved automatically.

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

REVIEW QUESTIONS

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1. define Partnership. What are the different kinds of partnership?
2. What are the rights and duties of partners?
3. What is the procedure for registration of partnership firm? What is the effect of
non-registration?
4. What are the modes of dissolution of firm?

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 LESSON – 8
ARBITRATION OF ACT, 1940
Arbitration is one of the oldest methods of settling civil disputes between two or more
persons by reference to the dispute to an independent and impartial third person
instead of litigating the matter in the usual way through the Courts.
In Union of India Vs D.P. Wadia & Sons, A.I.R. (1977) Bom. 10, it was observed that
“arbitration is a domestic forum. It is a forum other than a Court of law for determination
of disputes and differences, after hearing both the sides, in a judicial manner”. The law
relating to arbitration is contained in the Arbitration Act, 1940.
The person appointed to adjudicate upon the difference is called an arbitrator.
Section 2(a) defines that an “Arbitration Agreement means a written agreement to
submit, present or future differences to arbitration, whether an arbitrator is named
therein or not”.

MATTERS REFERRED TO ARBITRATION

1. All disputes of civil and quasi-civil nature
2. All matters affecting the private rights of the parties which can be the subject-
matter of a civil suit
3. All matters connected with the personal rights of the parties such as marriage,
maintenance or conditions on which husband and wife may separate etc.
4. Matters of questions of law and fact.
5. A time-barred debt, etc.

But the following matters cannot be referred to arbitration:-

(a) A suit for divorce of restitution of conjugal rights
(b) Right arising out of an illegal transaction
(c) Insolvency proceedings
(d) Matters relating to public charities
(e) Matters of criminal nature, e.g. murder, theft etc.
(f) Proceedings with regard to lunacy.
(g) Testamentary matters
(h) Appointment of a guardian to a minor

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Who can refer
A person who is competent to contract, may refer matters to arbitration because a
reference or submission is an agreement.
 The manager or partner of a Joint Hindu Family
 An agent duly authorize by the principal
 The official receiver by the leave of court
 Trustees acting together, and
 A company may refer a dispute.

But an insolvent or a partner in a firm or an executor or administrator, or a minor

cannot refer matters to arbitration.

KINDS OF ARBITRATION
ARBITRATION WITHOUT INTERVENTION OF A COURT
Unless the intention of the parties is otherwise expressed, following provisions shall be
implied in an arbitration agreement.

a) Except when it is provided otherwise, the reference shall be to a sole arbitrator.

b) If the reference is to an even number of arbitrators, the arbitrators shall appoint
an umpire not later than one month from the latest date of their respective
appointments.
c) The arbitrators shall make their award within four months, after entering on the
reference or after having been called upon to act, by notice in writing, from any
party to the arbitration agreement or within such extended time as the court may
allow.
d) When the arbitrators have either allowed time to expire without making an award
or expressed in writing, to any of the parties to the agreement or umpire, that
they cannot agree, the umpire shall forthwith enter on the reference in lieu of the
arbitrators.
e) The umpire shall make his award within two months of entering on the reference
or within such extended time as the court may allow
f) The arbitrators may examine all the parties to the agreement and other persons

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 claiming under them and all documents and papers relating to the dispute and do
all other necessary things.
g) The award shall be final and binding on the parties.
h) Costs of references and the award shall be borne by the parties, as the
arbitrators, at their discretion, may direct.

ARBITRATION IN SUITS
Arbitration through the Intervention of Court where no Suit is Pending
Though the parties have entered into an arbitration agreement before a suit in
respect of any matter relating to the agreement is field in a court, one of the
parties may apply to the court for the filling up of the agreement with it. Such an
application must be in writing, numbered and registered as a suit. The interested
parties shall be made as plaintiffs and disinterested as defendants. The court
having heard the objections, if any, of all the parties to the agreement, issues an
order of reference to an arbitrator appointed by the parties or by the court itself.
Thereafter, all the rules applicable in the case of arbitration without intervention
of the court, shall apply.

Arbitration through the Intervention of the Court where a Suit is Pending

On receiving an application from the parties to the suit, the court may refer the
matter in difference to an arbitrator appointed by it, for determination within a
specified time. Where some of the parties to the suit apply to the court for
reference to arbitration, the other parties who were not applicants shall be bound
by the suit only, which continues so far as it relates to those parties.

ARBITRATOR
An arbitrator is one, who is appointed by the contending parties for negotiation
and settlement of a dispute referred to him. Since, he is appointed by the parties
to the dispute at their own choice, anybody, including a minor or one of
themselves may be appointed as an arbitrator. But when the parties cannot
appoint any arbitrator or if an appointed arbitrator neglects or refuses to act or is
incapable of acting or dies, and if such vacancy is not duly filled within 15 days of
the notice by any party on the other parties to fill such a vacancy, the court, on
the application of the party who gave notice to other parties for filling the
vacancy, may appoint an arbitrator or arbitrators. The court, on receiving an
application from any of the parties can remove an arbitrator when he fails to

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 proceed with the reference or when he has misconducted himself of the
proceedings.

POWERS OF ARBITRATOR
1. He can administer oath to the parties and witnesses
2. He can state a special case for the opinion of the court on any matter of law
3. He can state the award in the form of a special case for the opinion of the
court
4. He can make the award conditional or in the negative
5. He can administer necessary interrogatories to any party to arbitration
6. He can administer necessary interrogatories to any party to arbitration.

DUTIES
1. He must act judicially as he is an extra-judicial court at the choice of the parties.
So, he must fix the time and place for hearing and grant adjournments as may be
necessary to do justice.
2. He must observe the fundamental principles of justice. He may not strictly follow
the technical rules of procedure. But he should not disregard the substance of
justice.
3. He must be impartial and act fairly to both the parties.
4. He must not act as an agent or advocate of a party. He must act as an impartial
judge.
5. He must decide on all matters relating to the dispute and make an award
6. He must not delegate his authority to someone else except when the delegation
involves ministerial acts. He may however, take the assistance of experts like a
Chartered Accountant etc. but he must give his own decision.
7. He must not investigate into matters which are outside the scope of terms of
reference to arbitration. So, he must not exceed his authority.
8. He must make an award within four months from the date on which reference is
made or within such extended time as the court may allow.

POWERS AND DUTIES OF AN UMPIRE

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 Where two or more even numbers of arbitrators are appointed and the reference
provides that in the event of their disagreement, the matter in dispute shall be
referred to the decision of a third person, such third person is called an umpire.
So, an umpire may be appointed by the arbitrators within one month from the
latest date of their respective appointments. He may be appointed by the court
(1) when the arbitrators do not appoint him or (2) when the parties fail to appoint
arbitrators. The court may remove him on same grounds on which an arbitrator is
removed, namely, when he fails to proceed with arbitration or when he
misconducts himself or the proceedings. He has to make an award within two
months or such extended period as the court may allow. He may fix the amount
of costs and the persons who shall bear such costs. his other rights and duties
are the same as those of an arbitrator.

AWARD
An award is the final decision of the arbitrators or an umpire in respect of a dispute
referred to arbitration. It must be in writing and signed by the arbitrators or an umpire. It
may be filed in the court which thereupon, gives notice to the parties of the award. The
opinion of the court, on matters which the arbitrators stated a special case for the
opinion of the court, shall be added to and forms part of the award. Unless a contrary
intention appears, an award is binding on the parties to the arbitration agreements and
persons claiming under them.

The court may modify an award:

1. When a part of the award is on matters not referred to arbitration and such part
can be separated without affecting decision or
2. When the award is imperfect in form or contains obvious error or
3. When the award contains clerical mistake or an accidental omission.

The court may remit an award for reconsideration:

1) When certain matters referred to arbitration are not determined or
2) When the award determines the matters not referred to arbitrations or
3) When the award is incapable of execution or
4) When the legality of the award is objected to and such objection is apparent on
the face of it.

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When the award is remitted for reconsideration, the arbitrators or umpire shall give their
decision within the fixed time, or such extended time as the court may allow. Otherwise,
the award becomes void.
The court may set aside the award:
1) When the arbitrator or umpire misconducts himself or the proceedings,
2) When the award is improperly procured or is otherwise invalid,
3) When the award is made after the arbitration has become invalid or has been
superseded by an order of the court.

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 LESSON – 9
COMMON CARRIES ACT
A Common Carrier is one whose business is to transport properly or goods of all
persons from place to place for hire.
Section 2 of the Carriers Act 1865, defines that “Common Carrier denotes a person,
other than the government, engaged in the business of transporting for hire, property
from place to place, by land or inland navigation for all persons indiscriminately.” But the
government or a carrier of passengers or a carrier by a sea or air cannot be regarded as
a carrier. Further, a common carrier is different from a private carrier who carries goods
of particular persons of his own choice either for hire or gratuitously in a casual
occupation or under a special contract.

DUTIES OF COMMON CARRIER

1. He is bound to carry goods for all persons indiscriminately,
2. He is bound to carry goods which he professes to carry, but not those which he
does not profess to carry
3. He is bound to carry the goods safely
4. He is bound to carry goods by his ordinary route to the usual destination or
destinations in his customary manner without unnecessary delay or deviation.
So, he is not bound to follow the shortest route.
5. He must deliver the goods at the place stated by the consignor of the goods,
except when the consignee instructs him to deliver the goods at a particular
place.
6. If the consignee does not take delivery of the goods when they reach the
destination, he must warehouse them for a reasonable time so that the
consignee can take delivery thereof.

RIGHTS OF COMMON CARRIER

1. He has a right to have the goods delivered to him.
2. He is entitled to prescribe the hire for the carriage of goods by him.
3. He is entitled to exercise a lien on the goods in his possession for hire and other
expenses or charges.
4. He has a right to be reimbursed for the expenses incurred by him in the

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 protection of the goods when the consignee refuses to take delivery of them.
5. If the goods are perishable, he can sell away the goods when the consignee has
not taken delivery of them and the goods are about to perish or if the goods get
spoiled in transit.

LIABILITIES OF COMMON CARRIERS

1. At common law, he is liable as a bailee and hence should take much care of the
goods as a man of ordinary prudence would take care of his own goods.
2. He is liable as an insurer for any loss or damage caused to the goods whether by
his negligence or not. But the following are the exceptions:
a) Act of Nature: He is not liable if the loss of goods is caused by unforeseen
circumstances beyond his control and contemplation, such as cyclone lighting
etc.
b) Alien Enemies: He is not liable for the loss of goods caused by the foreign
enemies during wars.
c) “Inherent Fire” in the Goods: He is not liable for inherent defect in the goods
such as deterioration of perishable goods like fruits, vegetables etc.
d) Consignor’s Fault: He is not liable for the loss or damage of goods due to
consignor’s fault such as bad packing etc.

Liability in respect of Scheduled Goods

In case of unusually valuable goods like gold and silver and unusually perishable goods
such as glass, ivory articles, musical instruments etc. he is not liable for the loss of
goods if the value of goods exceeds Rs. 100, unless the consignor or his agent
expressly declares their value and their description to the carrier.

Liability in respect of Non-Scheduled Goods

The liability of the carrier in respect of loss of these goods can be limited by a special
contract signed by the consignor or owner of the goods, except when such loss is
caused by the criminal acts of negligence of the carrier himself or his agents or
servants.
In order to sue the carrier for loss of goods, notice in writing of the loss of goods must
be given to the carrier, within six months from the date on which the plaintiff has the
knowledge of the loss of goods.

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Liability in respect of dangerous goods
In case of dangerous goods like explosives, acids etc the consignor must sufficiently
inform the carrier of the dangerous character of the goods. If not, the consignor would
be answerable. But even if the consignor is unaware of the dangerous character of
goods, he would be answerable. On the other hand, if the carrier is aware of the
dangerous character of the goods carried, the consignor is not responsible for any
consequent loss.

CARRIAGE BY RAIL
Carriage by rail in India is regulated by the Indian Railways Act. 1890

Responsibility of Railway Administration as Carriers

Execution of forwarding note (Sec. 72). Any person derivering to a railway
administration any animals or goods to be carried by railway shall execute a forwarding
note. The forwarding note shall be in a form prescribed by the railway administration
and approved by the Central Government. The sender or his agent shall give the
required particulars in the forwarding note in respect of the animals or goods delivered
to the railway administration where:
(a) The animals or goods are to be carried by a train intended solely for the carriage
of goods, or
(b) The goods are to be carried by any other train and consist of articles of any of the
following categories namely –
a. Articles carried at owner’s risk rate
b. Articles of a perishable nature
c. Articles mentioned in the Second Scheduled (which includes articles of
special value which are to be declared and insured).
d. Articles in a defective condition or defectively packed.
e. Explosives and other dangerous goods.

As per the amended Sec. 73, a railway administration is responsible for the loss
destruction or deterioration in transit of animals or goods received by it for carriage by
rail from all causes except losses arising from –
• Act of God

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 • Act of war
• Act of public enemies
• Arrest, restraint or seizure under legal process
• Orders or restrictions imposed by or on behalf of the Central or a State
Government
• Natural deterioration or wastage in weight due to some inherent defect or vice
in the goods
• Latent defects
• Fire, explosion or any unforeseen risk
The railway administration is responsible for the non-delivery of animals or goods
delivered to be carried by railway arising from any cause except the above.

When any loss destruction, damage, deterioration or non-delivery has occurred as a

result of one or more of the cause given above, the railway administration shall
be responsible unless it satisfactorily proves that it had exercised reasonable
care and prudence in the carriage of goods or animals.

CONTRACT OF AFFREIGHTMENT
A contract for the carriage of goods by sea is called a contract of affreightment. It is
an agreement whereby the ship owner undertakes either to carry the goods by
water or to supply a ship for the carriage of goods by water in consideration of a
price called “freight”. A contract of affreightment is of two kind.
1. Charter-Party and 2. Bill of Lading

CHARTER-PARTY
It is an agreement by which the ship owner agrees to let an entire ship or substantial
part of it to a shipper for the conveyance of goods on a certain voyage, to a definite
place or for a specific period in consideration of “freight”.

BILL OF LADING
“A bill of lading is a receipt for the goods shipped on board a ship, signed by the person
who contracts to carry them, or his agent and stating the terms on which the goods
were delivered to and received by the ship”.

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A bill of lading contains the following particulars
1. The name of the ship and its national character.
2. A statement that it is subject to the rules laid down by the Act
3. Marks for the identification of goods, the number of packages and the order and
condition of the goods
4. The port of loading, the destination and the route
5. The amount of freight
6. Expected perils and other terms of carriage of goods.
A Bill of Lading is a document to title of goods and can be sold while the goods
are still in transit. The transfer of bill of lading serves as the symbolic delivery of
goods. But strictly speaking, it is not a negotiable instrument though it is
deliverable to a particular person or his order. therefore, it is sometimes
described a “quasi-negotiable” or “as good as negotiable”.

CARRIAGE BY AIR
The law relating to carriage of goods and passengers across inter-national borders is
regulated in India by the Carriage by Air Act, 1972. It also makes provisions for applying
the rules contained in the Warsaw Convention and the Hague Protocol (subject to
certain exceptions, adaptations and modifications) to non-international carriage by air.

DOCUMENTS OF CARRIAGE
When passengers and goods are carried by air, the following documents are issued:
Passenger Tickets: For carriage of passengers, the carrier must deliver a passenger
ticket which must contain the following particulars.
(1) The place and date of issue
(2) The place of departure and of destination
(3) The agreed stopping places, but the carrier may reserve the right to alter the
stopping places in case of necessity and the exercise of this right would not
deprive the carriage of its international character;
(4) The name and address of the carrier or carriers;
(5) A statement that the carriage is subject to the rules relating to liability contained
in the First Schedule [Rule 3(1)]

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The passenger ticket shall constitute prima facie evidence of the conclusion and
conditions of the contract of carriage.

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 LESSON – 10
CONTRACT OF INSURANCE
The Contract of Insurance is a contract whereby a ‘person undertakes to indemnify
another against a loss arising on the happening of an event or by pay a sum of money
on the happening of an event. The person who insures is called “Insurer”. The person
who effects the insurance is called the “Insured” or “Assured”. The price for the risk
undertaken by the insurer and paid by the insured to the insurer is called “Premium” and
the document which contains the contract of insurance is called “Policy”.
Following are the general principles of contracts of insurance:
1. A contract of insurance is a contract uberrimae fider, i.e. a contract requiring
utmost good faith of the parties. So, all material facts which are likely to influence
the insurer in deciding the amount of premium payable by the insured must be
disclosed by the insured. Failure to disclose material facts renders the contract
voidable at the option of the insurer.
2. The assured must have, that is called “insurable interest” in the subject matter of
the contract of insurance. “He must be so situated with regard to the thing
insured that he would have benefit from its existence, loss from its destruction”.
3. Every contract of insurance such as life insurance and personal accident and
sickness insurance, is a contact of indemnity. So, the insurer pays the actual loss
suffered by the insured. He does not pay the specified amount unless this
amount is the actual loss to the insured.
4. The insured must take reasonable precautions to save the property, ion the event
of some mishap to the insured property. He must act as a prudent uninsured
person would act in his own case under similar circumstances to mitigate or
minimize losses.
5. The insurer must run the risk of indemnifying the insured. If he does not run the
risk, the consideration for which the premium is paid, fails and consequently, he
must return the premium paid by the insured.
6. The insurer is liable for loss which is proximately caused by the risk insured
against. The rule is “causa proxima non remota spectalur”, i.e. the proximate but
not the remote cause is to be looked to. So, the loss must be proximately caused
in order that the insurer is to become liable.
7. Except in the case of life insurance, every contract of insurance comes to an end
of the expiry of every year, unless the insured continues the same and pays the
premium before the expiry of the year.
8. According to the rule of subrogation when the loss is caused to the insured by

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 the conduct of third party, the insurer shall have to make good such loss and
them have a right to step into the shoes of the insured and bring an action
against such third party who caused the loss to the insured. This right of
subrogation is enforceable only when there is an assignment of cause of action
by the insured in favour of the insurer. The doctrine of subrogation does not
apply to life insurance.
there are different kinds of insurance. (1) Life (2) Fire (3) Marine (4) Accident and
(5) Guarantee insurance etc.

LIFE INSURANCE CONTRACT

Life insurance is popularly referred to as life assurance. In this case, the underwriter
agrees to pay the assured or his heirs, a certain sum of money on death or on the
happening of an event dependent upon human life in consideration of premiums paid by
the assured. It also grants disability and accident benefits annuities and super-
annuation allowances.

A life insurance policy is mainly to two types, (1) the whole life policy and (2) the
endowment policy. In the former one, the premiums have to be paid either for a
specified number of years or till the death of the assured. The policy matures on the
death of the assured. But in the case of the latter type, the amount assured is payable
either on the death of the assured or on the expiry of a specified number of years
whichever is earlier.
Again, a life insurance policy may be either, (1) with profits or (2) without profits. In the
case of the former policy, the assured gets not only the sum assured but also a share in
the profits of the underwriter in the form of bonus. But he has to pay more premium in
this case than that is payable in respect of “without profits” policy. But in the case of
“without profits” policy, the assured is not entitled to any share in the profits.

FIRE INSURANCE
A contract of fire, insurance is a contract whereby the insurer undertakes, in
consideration of the premium paid, to make good any loss or damage caused by fire
during a specific period. The contract specified the maximum amount which the assured
can claim in case of loss. This amount is fixed by the parties at the time of the contract.
It is, however, not the measure of the loss. The loss can be ascertained only after the
fire has occurred. The insurer is liable to make good the actual amount of loss nor
exceeding the maximum amount fixed by the parties.

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CHARACTERISTICS OF FIRE INSURANCE CONTRACT
1. It is a contract of indemnity. The assured can, in the event of loss, recover the
actual amount of loss from the insurer. This is subject to the maximum amount
for which the subject-matter is insured.
2. It is a contract of uberrinate fider. The assured and the insurer have to disclose
everything which is in their knowledge and which will affect the contract of
insurance.
3. The assured must have insurable interest in the subject-matter both at the time of
insurance and at the time of loss. The insurable interest must be capable of
valuation in terms of money.
4. The risk covered by a fire insurance contract is the loss resulting from fire or
some cause which is the proximate cause of the loss.
5. It is subject to the principles of subrogation and contribution
6. It is contract from year to year. It comes to an end after the expiry of the year. It
can, however, be renewed if the assured pays the premium during the days of
grace.

TYPES OF FIRE POLICIES

1. Specific Policy
It is policy which covers the loss of the assured up to a specific amount which is
less than the real value of the property. Specific policy is a case of under-
insurance to check under-insurance, the insurers usually insert average clause in
the policy in which case the policy is known as average policy.
2. Comprehensive Policy
It is a policy which covers losses against fire, theft, burglary, third party risks, etc.
such a policy is also known as “all-in-one” policy. It may also cover loss of profits
during the period the business remains closed due to fire.
3. Valued Policy
It is a policy in which the amount payable in case of loss is fixed at the time the
policy is taken. In the event of loss, the fixed amount is payable irrespective of
the actual amount of loss. A valued policy can be legally challenged because it is
not a contract of indemnity.

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 4. Floating Policy
It is a policy which covers property at different places against loss by fire. It
might, for example, cover goods lying in two warehouses at two different places.
It is always subject to average clause
5. Replacement or Reinstatement Policy
In order to prevent fraudulent devices by the assured, the insurers usually insert
a clause in the policy, called the re-instatement clause, whereby the insurer
undertakes to pay the cost of the replacement of the property damaged or
destroyed by fire.

MARINE INSURANCE
A contract of marine insurance is a contract whereby the insurer undertakes to
indemnify the insured, in manner and to the extent thereby agreed, against marine
losses, in consideration of a premium paid by the insured. It is a contract of indemnity. It
is a contract ‘uberrimae fider”. It must have insurable interest. The doctrine of
subrogation applies to it. The usual form of the policy is what is called “Lloyd’s Policy”.
Lloyds are a registere body of several members and a broker is always employed in the
case of this policy. Sometimes, a company policy also may be issued.

KINDS OF MARINE POLICIES

1. Time Policy: It insures the subject matter for a certain specified period, not
exceeding twelve months.
2. Voyage Policy: It insures the subject-matter for a certain voyage only i.e.
journey from one fixed port to another fixed port.
3. Valued Policy: It specified the agreed value of the subject-manner insured.
Insurers are liable only for the loss not exceeding the value mentioned in the
policy.
4. Unvalued or Open Policy: It does not specify the value of the subject-matter.
The value is to be ascertained subsequently at the time of actual loss.
5. Mixed Policy: It insures the subject-matter for a specified voyage and for a
particular period.
6. Floating Policy: It describes the general terms of insurance, leaving other
particulars such as the name of the ship etc. to be declared subsequently.
7. Wagering or Honour Policy: It is also known as “policy proof of interest” or
“Interest or no interest policy”. In this case, the insurer does not have insurable

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 interest in the subject-matter of the contract. It resembles a wages and hence
void Losses are indemnified depending on the honour of the insurer.

A marine insurance policy contains the following particulars:

1. Name of the ship
2. Name of the parties
3. The time of commencement and duration of the risk
4. “Lost or not lost” clause whereby the insurer is made liable whether the goods
were in existence or not at the time when the insurance was effected, except
when the insured knew that the goods were destroyed already.
5. “Touch and Stay” clause which mentions the various parts which the ship
touches and the period of its stay at these parts.
6. Accepted perils for which the insurer undertakes to be liable.
7. “Free from capture and seizure” clause which exonerates the insurer from has
liability for the loss arising out of the capture and seizure of the ship.
8. “Free from particular average” or “Free from all average” clause whereby the
insurer is exempted from his liability for any particular average loss or for all
average loss caused to the subject-matter of the contract.
9. “Barratry” clause relates to the liability of the insurer for the loss arising out of the
wrongful act of the master or any of the crew of the ship.
10. “Sue, Labour and Travel” clause which entitles the insured to minimize the loss
and claim for expenses from insurer and to recover the goods lost by falling
overboard accidentally.
11. “Collision or running down” clause whereby the owner of an insured ship shall
indemnify the owner of another ship if the former ship collides negligently with the
latter.
12. “Inchmaree” clause which protects the insured against any latent defect in the
machinery of the ship.
13. “Expected Perils” clause which specified the risks not covered by the insurance
policy.

A marine policy is thus a formal document signed by the insurer. It must be stamped.
It contains the terms of the insurance as explained above. It is an actionable
claim and can be transferred by means of an assignment.

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REVIEW QUESTIONS:
1. What is an “arbitration”. What are the kinds of arbitration?
2. Define common carriers. What are right, duties and liabilities of common
carriers?
3. What are the general principles of contract of insurance?
4. What is marine insurance? What are the kinds of marine policies?

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1. Define offer. What are legal rules relating to valid offer?
2. Who is a minor? Discuss the nature of contract entered into with minors.
3. What are the agreements opposed to public policy?
4. What are the remedies for breach of contract?
5. Distinguish between contract of indemnity and contract of guarantee.
6. What are the duties of finder of lost goods?
7. What are the principles of contract of insurance?
8. What are the rights of an unpaid vendor?

PART – B (4 x 15 = 60)
Answer any Four of the following
All questions carry equal marks

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

10. What are the different methods of discharging a contract?
11. When the surety is discharged from his liabilities?
12. What are the implied conditions and warranties laid down under the Sale of
Goods Act?
13. What are the rights and duties of an agent?
14. What are the rights, duties and liabilities of common carriers?
15. What are the different kinds of arbitration?

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