About this subject
▶ Watch this part of the lecture (0:00)
Contract Law II has six units, from indemnity to how these rules work for governments and consumers. These contracts arise daily: handing car keys to a valet, pledging gold for a loan, buying a phone, starting a business with a friend. Connecting each rule to such situations aids understanding and memory.
For every important case, learn the facts, the question before the court, the decision and the principle. The principle matters most, because it is what is applied in examination answers.
Special contracts
Contract Law I deals with the general rules that apply to every contract; Contract Law II deals with special contracts. The Indian Contract Act deals with five: indemnity, guarantee, bailment, pledge and agency. The Act once also covered sale of goods and partnership, but these now have their own Acts (Units 4 and 5). Unit 1 covers the contracts of indemnity and guarantee.
Every special contract must first satisfy the general rules of a valid contract, such as free consent, lawful consideration and a lawful object.
Contract of Indemnity: Meaning and Nature
Prince asks Farhan to do something that may land Farhan in a legal dispute. Farhan hesitates. Prince says: "Go ahead; if anyone sues you over this, I will bear the loss." This promise to make good another's loss is an indemnity.
Section 124: 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, is called a contract of indemnity. The promisor is the indemnifier; the person protected is the indemnity holder (or indemnified).
Illustration: one person contracts to indemnify another against the consequences of any proceedings which a third person may take against him in respect of a certain sum of ₹200.
Essentials
- Two parties.
- One promises to save the other from loss.
- Under the Indian Act, the loss must be caused by the conduct of the promisor himself or of some other person.
- All the essentials of a valid contract must be present.
- It may be express (as in an indemnity bond) or implied from the circumstances.
A shareholder who has lost the original share certificate asks the company for a duplicate. The company takes an indemnity bond: a promise to save the company from loss if someone later turns up with the original.
Nature and scope
The Indian definition is narrow; English law treats indemnity as a promise to save a person harmless from the consequences of an act.
| Point | Indian law (Section 124) | English law |
|---|---|---|
| Cause of loss | Only human conduct, of the promisor or another person; loss by accident, fire or flood not due to anyone's conduct is not mentioned | Any cause |
| Form | Speaks of a "promise", so seems to cover only express contracts | Also recognises indemnities implied by law, without an express promise |
Adamson v. Jarvis (1827): Jarvis, falsely claiming the right to sell cattle and goods in his possession, had Adamson, an auctioneer, sell them; Adamson paid him the proceeds in good faith. The true owner recovered heavy damages from Adamson for conversion (dealing with his goods as if they were his own). Sued for indemnity, Jarvis pleaded that one wrongdoer cannot claim from another. Held: the Court of Common Pleas (Chief Justice Best) rejected the plea. Every man who employs another to do an act which the employer appears to have a right to authorise undertakes to indemnify him for all such acts as would be lawful if the employer had the authority he pretends to have. Principle: an indemnity may be implied by law from a request.
Implied indemnities in India
- The Contract Act is not an exhaustive code; where it is silent, Indian courts apply justice, equity and good conscience.
- The Act itself contains implied indemnities: Section 145 (surety against the principal debtor) and Sections 222 and 223 (principal must indemnify his agent; see Unit 3).
The Secretary of State for India v. The Bank of India Ltd. (1938): a broker forged Gangabai's endorsement on her ₹5,000 Government promissory note and passed it to the bank, which in good faith had the Public Debt Office renew it in its own name. Gangabai recovered its value from the Secretary of State, who sued the bank for indemnity. The Bombay High Court (Chief Justice Beaumont) dismissed the claim, treating the government securities statute as a complete code. Held: the Privy Council (Lord Wright) reversed. One who asks another to do an act not obviously wrongful, which turns out to injure a third person's rights, must indemnify the one who acted. Principle: an indemnity can be implied from a request, even outside the words of Section 124.
Indemnity and insurance
| Point | Fire, marine, motor insurance | Life insurance |
|---|---|---|
| Contract of indemnity? | Yes (as are most insurance contracts) | No |
| Payment | Actual loss, up to the sum insured, and no more | A fixed sum on death or at maturity, since the loss of a life cannot be measured in money |
A shop insured for ₹10 lakh suffers a fire loss of ₹4 lakh. The insurer pays only ₹4 lakh.
Insurance contracts are governed mainly by their own terms, the insurance laws and special principles: utmost good faith, insurable interest and subrogation.
Rahee Industries Ltd. v. Export Credit Guarantee Corporation of India Ltd. (2008): an exporter insured with the Corporation, a government company, against non-payment by the Egyptian National Railways. An Egyptian embargo stopped the price; the Corporation paid 90 per cent of the loss under the policy. After the embargo lifted, the money arrived, worth much more as the dollar had risen. Held: the Supreme Court (Justice S.H. Kapadia) held the policy a contract of indemnity; under its recoveries clause, recoveries were shared in the same 90:10 ratio as the loss, so the Corporation got 90 per cent of the whole. Principle: an indemnifier who has paid shares in later recoveries as the contract provides.
Rights of the Indemnity Holder
▶ Watch this part of the lecture (8:16)
Section 125 gives the indemnity holder, acting within the scope of his authority, three rights:
- Damages he may be compelled to pay in any suit on a matter to which the promise to indemnify applies.
- Costs he may be compelled to pay in such a suit, if he did not go against the indemnifier's orders and acted as a prudent person would have acted without any indemnity, or if the indemnifier authorised him to bring or defend the suit.
- Sums paid under a compromise of such a suit, if the compromise was not against the indemnifier's orders and was one a prudent person would have made without any indemnity, or if the indemnifier authorised it.
Prince promises to indemnify Farhan against any claim by Aadil over a transaction. Aadil sues; Farhan defends sensibly but loses, paying ₹50,000 damages and ₹10,000 costs. He recovers both from Prince. Had Prince told him not to defend and he defended anyway without good reason, he could not recover the costs.
Rights of the indemnifier
The Act is silent, but courts apply equity: once the indemnifier has paid, he steps into the shoes of the indemnity holder and may use all his rights and remedies against third persons. This is subrogation.
Commencement of the indemnifier's liability
Must the indemnity holder first pay out of his own pocket? The old English common law said yes: he must first be damnified (suffer actual loss). The English courts of equity took a kinder view, and Indian law follows equity.
Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri (1942), the leading Indian case: Gajanan transferred to Moreshwar, at his request, the benefit of a long-lease agreement with the Bombay Municipal Corporation. Moreshwar built on the plot with materials bought on credit; at his request Gajanan, in whose name the lease stood, twice mortgaged the property to the supplier (₹5,000 each) and personally promised to pay. Moreshwar wrote that he would pay off the mortgages but never did. Gajanan sued before paying anything. Held: the Bombay High Court (Justice Chagla) found for him. The Act is not exhaustive and Section 124 did not cover these facts, so equity applied: an indemnity holder who has incurred an absolute liability may call upon the indemnifier to save him from it and pay it off. Moreshwar had to obtain Gajanan's release from the mortgages or pay the amount into court. Principle: the indemnifier's liability begins when the indemnity holder's liability becomes absolute, not only after payment.
In April 2026, the Supreme Court quoted and applied this rule.
Absolute liability is enough; actual payment is not needed.
Contract of Guarantee: Meaning
▶ Watch this part of the lecture (12:11)
Farhan wants a ₹1 lakh loan from a bank, which asks for security. His friend Prince, who has a good job, tells the bank: "Lend him the money; if he does not repay, I will." The bank is the creditor, Farhan the principal debtor and Prince the surety.
Section 126: A contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person giving the guarantee is the surety; the person in respect of whose default it is given is the principal debtor; the person to whom it is given is the creditor. A guarantee may be oral or written.
Three parties, three contracts
- Creditor and principal debtor: the contract under which the debt arises.
- Surety and creditor: the guarantee itself.
- Principal debtor and surety: by Section 145 the principal debtor impliedly promises to indemnify the surety. So a guarantee always contains an indemnity within it.
Secondary (collateral) liability
The surety's liability is secondary or collateral: the principal debtor is primarily liable, and the surety pays only on his default.
Birkmyr v. Darnell (1704), the classic authority: at the defendant's request, the plaintiff let his horse to Joseph English to ride to Reading, the defendant orally promising its safe return. It was not returned. The English Statute of Frauds requires a promise to answer for another's default to be in writing. Held: the Court of King's Bench (Chief Justice Holt, for all the judges) held the promise collateral, as English himself was liable and the defendant only added his credit as further security; being oral, the claim failed. Principle (the court's example): telling a shopkeeper "if he does not pay you, I will" to gain a buyer credit is a collateral undertaking, a guarantee; "let him have the goods, I will be your paymaster" is an original promise, like an indemnity.
Taylor v. Lee (1924), Supreme Court of North Carolina: a landowner came to a store with his tenant and told the storekeepers, "this man will be on our land this year, sell him anything he wants and I will see it paid." Nothing was written; the tenant did not pay, and the storekeepers sued both. Held: such words, spoken before credit was given, could be the landowner's own original promise if the credit was really given to him or he had his own interest in the transaction; he could be liable without writing. Principle: the same words may create a guarantee or an original promise; the test is to whom the credit was really given.
Indemnity and Guarantee Compared
A favourite examination comparison:
| Point | Indemnity | Guarantee |
|---|---|---|
| Parties | Two: indemnifier and indemnity holder | Three: creditor, principal debtor and surety |
| Contracts | One | Three |
| Liability | Primary and independent | Secondary; arises only on the principal debtor's default |
| Existing debt | Not needed; a promise against a possible loss | Presupposes a debt or liability of the principal debtor, present or future |
| Request | No such third person | Surety usually acts at the principal debtor's request |
| Rights after payment | No statutory right; relies on equity | Steps into the creditor's shoes under Section 140 and may sue the principal debtor in his own right |
State Bank of India v. Mula Sahakari Sakhar Karkhana Ltd. (2006): to free 10 per cent of the price a sugar factory had withheld from the company building its paper plant, SBI promised to indemnify and keep indemnified the factory against all losses from the company's default, up to ₹34 lakh. The factory ended the contract and demanded the full sum; the bank said loss must first be proved. The Bombay High Court treated it as an unconditional bank guarantee. Held: the Supreme Court (Justice S.B. Sinha) reversed: a document must primarily be construed on its own terms, and a court cannot add words its author did not use. This was an indemnity, not an absolute bank guarantee. Principle: the words of the document, not its label, decide whether it is an indemnity or a guarantee.
Essential Features of a Guarantee
▶ Watch this part of the lecture (18:07)
1. A recoverable debt
There must be a principal debt, present or future, which the principal debtor is liable to pay. If the principal debtor has no liability at all, there is usually nothing to guarantee.
Prasanjit Mahatha v. The United Commercial Bank Ltd. (1978): directors of a Nagpur company guaranteed its cash credit account. After the bank's decree, a director's minor son sued, saying his father as surety received nothing, so the debt could not bind family property. Held: the Patna High Court dismissed the suit. A guarantee implies an actual or future liability of a third person and is a collateral promise given as extra security. Principle: the surety need not receive anything himself, and even an implied request by the principal debtor is enough.
2. Writing not necessary
Under Section 126 a guarantee may be oral or written. In English law, under the Statute of Frauds of 1677, it must be evidenced in writing and signed by the surety. Indian banks take written guarantees only as a matter of proof.
3. Consideration (Section 127)
Section 127: Anything done, or any promise made, for the benefit of the principal debtor may be a sufficient consideration to the surety for giving the guarantee. The surety himself need get nothing.
Illustrations:
- A seller's promise to deliver goods on credit to a buyer is sufficient consideration for a guarantee of the price.
- A creditor's promise, made at the surety's request, not to sue the debtor for a year is sufficient.
- Where goods have already been delivered and someone later agrees, without consideration, to pay if the buyer defaults, the agreement is void.
Is past consideration enough?
Section 2(d) allows past consideration for ordinary contracts, but the third illustration to Section 127 suggests that a guarantee for a debt already incurred, with nothing new in return, is void.
Sornalinga Mudali v. Pachai Naicken (1913): of five joint signatories to a promissory note, the fifth said he signed only as surety and got none of the money. Held: the Madras High Court (Justice Spencer) held him liable; under Section 127 the value received by the principal debtor is sufficient consideration. Principle: a surety need not benefit personally.
State Bank of India v. Premco Saw Mill (1983): after the bank threatened legal action against a woman owning a saw mill, her husband signed guarantee bonds. The trial court held him not liable for want of consideration. Held: the Gujarat High Court reversed; the bank's forbearance from the threatened action was good consideration, as the second illustration shows.
Kali Charan v. Abdul Rahman: after a dispute and compromise, the buyer of a zamindar's trees agreed in writing to pay the balance in instalments and furnish security; weeks later four persons signed a surety bond. The Allahabad High Court let off the sureties. Held: the Privy Council (Sir John Edge) called the plea of no consideration an idle defence; the bond was part of the arrangement under which the buyer got the trees, so consideration was ample.
Muthukaruppa Mudali v. Pi. Mu. Kathappudayan (1914): lenders had earlier lent to the principal debtors on the first defendant's recommendation; he later guaranteed those debts. Held: the Madras High Court accepted that in India a past act can be consideration, but it must have been done at the desire (request) of the promisor. A mere recommendation is not a request, so the earlier loans did not support the guarantee.
Ram Narain v. Lieutenant Colonel Hari Singh (1963): a landlord signed an entry in a firm's account books saying he was responsible for his tenant's account, but the entry only recorded old dues and no fresh money was given. Held: Justice B.P. Beri of the Rajasthan High Court, relying on the third illustration, held him not liable; the benefit to the principal debtor must be given at the time of the guarantee.
M. Ghulam Hussain Khan v. M. Fayyaz Ali Khan: Held: the Chief Court of Oudh read the word "done" in Section 127 as covering a benefit already given to the principal debtor, so a past benefit could support a guarantee. A Division Bench of the Bombay High Court later agreed: an illustration cannot narrow the plain words of the section.
| Point | Past benefit not enough | Past benefit enough |
|---|---|---|
| Authority | Ram Narain v. Lt. Col. Hari Singh (Rajasthan High Court) | M. Ghulam Hussain Khan (Chief Court of Oudh); Division Bench of the Bombay High Court |
| Basis | Third illustration to Section 127 | Word "done" in Section 127; an illustration cannot narrow the section |
A surety need receive nothing; a fresh benefit to the principal debtor, or the creditor's forbearance, is enough. Whether a past benefit supports a later guarantee is disputed. The safer view, based on the third illustration, is that a guarantee for a past debt needs something new in return. The Supreme Court has not settled the conflict, so state both views in the examination.
4. No misrepresentation or concealment by the creditor
The surety takes a risk for someone else, often a friend or relative, and gets nothing, so the law protects him.
- Section 142: a guarantee obtained by misrepresentation made by the creditor, or with his knowledge and assent, concerning a material part of the transaction, is invalid.
- Section 143: a guarantee obtained by the creditor by keeping silence as to material circumstances is invalid.
Second illustration to Section 143: a surety guarantees payment for iron supplied to a buyer. Seller and buyer have secretly agreed that the buyer will pay ₹5 per ton above market price to clear an old debt. As this is concealed from the surety, he is not liable.
A guarantee is not a contract of utmost good faith like insurance, but the creditor must not hide any unusual fact affecting the surety's risk.
London General Omnibus Company Ltd. v. Holloway (1912): Lee, a collecting clerk, had once misappropriated company money, made good by his relatives. To keep him, the company required a bond with a surety for his honesty; Holloway, a relative, signed for £200, untold of the earlier dishonesty. Lee again took at least £100. Held: Lord Alverstone, Lord Chief Justice, found the silence not fraudulent but still a good defence; the Court of Appeal affirmed. Principle: an employer taking a guarantee for a servant's honesty must disclose any previous dishonesty known to it, which is the principle and first illustration of Section 143.
Extent of the Surety's Liability
▶ Watch this part of the lecture (26:52)
Section 128: The liability of the surety is co-extensive (of the same extent) with that of the principal debtor, unless it is otherwise provided by the contract.
The surety is liable for the whole amount the principal debtor owes, including interest and charges. Illustration: the surety for a dishonoured bill of exchange is liable for its amount plus interest and charges due on it. By the words "unless otherwise provided", a surety may limit his liability.
Prince guarantees Farhan's loan only up to ₹2 lakh. Even if Farhan owes ₹5 lakh, Prince cannot be made to pay more than ₹2 lakh.
Yarlagadda Bapanna v. Devata Chinna Yerakayya (1964): a surety signed a security bond to a court for up to ₹15,000, though it also spoke of any amount finally decreed. Held: the Andhra Pradesh High Court (Chief Justice Chandra Reddy) limited his liability to ₹15,000. Principle: "unless otherwise provided" allows a surety to fix a limit.
Remedies against the principal debtor and the surety
A common examination question: can the creditor go straight to the surety, without first suing the principal debtor? Yes. The surety's liability is immediate once the principal debtor defaults; the creditor need not first exhaust his remedies against the principal debtor unless the contract says so.
Bank of Bihar Ltd. v. Damodar Prasad (1968): decreeing a bank's suit against borrower and surety, the trial court (upheld by the High Court) let the bank proceed against the surety only after exhausting its remedies against the borrower. Held: the Supreme Court (Justice R.S. Bachawat) set this aside. Absent some special equity, a surety cannot restrain execution until the creditor exhausts those remedies; he must pay, and then recover from the principal debtor after subrogation under Section 140. Otherwise the very object of the guarantee is defeated. Principle: the surety's liability is immediate; the creditor may proceed against him first.
Union Bank of India v. Noor Dairy Farm: sued for unpaid loans, a firm and its partners argued the bank had taken no action against the guarantor. Held: Justice R.G. Vaidyanatha of the Bombay High Court rejected this; the principal debtor cannot escape liability merely because the guarantor is not sued. Principle: the creditor may sue the principal debtor alone.
Karnataka State Industrial Investment and Development Corporation Ltd. v. State Bank of India (2004): SBI guaranteed a company's loan, the appellant giving SBI a counter guarantee. Having paid, SBI sued both; the suit against the company was dismissed for default. The appellant pleaded that this freed it, and that the company, which also signed the counter guarantee, was a co-surety. Held: a Division Bench of the Karnataka High Court (Justice Tirath S. Thakur) rejected both pleas; the company, which received the money, remained the principal debtor, and its signature did not make it a surety. Principle: the appellant could be sued alone.
N. Narasimhaiah v. Karnataka State Financial Corporation (2008): the Corporation invoked Section 29 of the State Financial Corporations Act (take-over and sale, without going to court, of a defaulting industrial concern's property) against directors who had guaranteed their companies' loans. Held: the Karnataka High Court, affirmed by the Supreme Court (Justice S.B. Sinha), held it could not. Section 29 speaks only of the industrial concern; a surety has distinct rights and may raise additional defences, so the Corporation must sue him under Section 31. Principle: a surety is liable to the same extent as the principal debtor, but not necessarily by the same remedies.
Insolvency and Bankruptcy Code, 2016: the Supreme Court has held that the moratorium protecting a company in insolvency does not protect its personal guarantors, and approval of a resolution plan for the company does not by itself discharge them. This is the rule of immediate liability at work.
Co-sureties and Contribution
▶ Watch this part of the lecture (32:29)
Two or more persons guaranteeing the same debt are co-sureties.
- Section 146 (contribution): co-sureties for the same debt or duty, bound jointly or severally, under the same or different contracts, with or without each other's knowledge, must, absent a contrary contract, pay as between themselves an equal share of the whole debt or of the part the principal debtor leaves unpaid.
- Section 147: co-sureties bound in different sums must pay equally, so far as the limits of their obligations permit.
- Section 138: the creditor's release of one co-surety does not discharge the others, nor free the released surety from his responsibility to the others.
- Section 144: where a guarantee is given on a contract that the creditor shall not act on it until another person has joined as co-surety, the guarantee is not valid if that person does not join.
Three friends guarantee a ₹3 lakh loan, and the bank recovers it all from one of them. He can recover ₹1 lakh from each of the other two.
National Provincial Bank of England v. Brackenbury (1906): the defendant agreed to be surety on the footing that three others would join as co-sureties; only two signed. Held: the defendant was not liable, since the bank took the guarantee on that condition and it failed. Principle: exactly the rule of Section 144.
Continuing Guarantee
If Prince guarantees the price of goods supplied to Farhan, whether the guarantee covers one supply or all supplies over time depends on its terms.
Section 129: A guarantee which extends to a series of transactions is a continuing guarantee; one for a single transaction is a specific guarantee. Which it is depends on the intention of the parties, shown by the words and the circumstances.
| Point | Continuing guarantee | Specific guarantee |
|---|---|---|
| Scope | Series of transactions | Single transaction |
| Illustration | Payment, up to £100, for any tea a dealer may from time to time supply to a buyer; liable up to £100 for later unpaid supplies | Price of five sacks of flour payable in a month; once paid, no liability for later sacks |
| Revocation | At any time as to future transactions, by notice (Section 130) | Not once liability has been incurred |
Kay v. Groves (1829): on the flour illustration's facts, five sacks were supplied and paid for; later supplies went unpaid. Held: the guarantee covered only the one supply and was not continuing, so the surety was not liable for later supplies.
Union Bank of India, Ernakulam v. T.J. Stephen (1989): the bank sued a borrower and the two guarantors of his fishing-boat loan under a continuing guarantee; the guarantors pleaded limitation. Held: the Kerala High Court held that under a continuing guarantee not withdrawn, where the guarantors had not refused to pay before the suit, a suit filed within limitation lies against them too; they were liable for the borrower's dues.
Discharge of the Surety
▶ Watch this part of the lecture (36:21)
1. Revocation (Section 130)
A continuing guarantee may be revoked at any time by the surety, as to future transactions, by notice to the creditor; he remains liable for transactions already entered into. A specific guarantee cannot be revoked once liability is incurred.
A surety for bills discounted by a banker for a year revokes after three months. He remains liable for bills already discounted.
2. Death (Section 131)
The surety's death, in the absence of a contract to the contrary, revokes a continuing guarantee as regards future transactions. His estate remains liable for earlier transactions.
3. Variance (Section 133)
Any variance in the terms of the contract between principal debtor and creditor, made without the surety's consent, discharges him as to transactions after the variance, because he agreed to answer for one contract and cannot be bound by another.
Illustration: without the surety's consent, a bank raises its manager's salary and makes him liable for one-fourth of overdraft losses. When a customer overdraws and the bank loses money, the surety for the manager's conduct is discharged.
M.S. Anirudhan v. The Thomco's Bank Ltd. (1962): Anirudhan signed a guarantee form for a customer's overdraft of up to ₹25,000 and gave it to the customer to deliver. As the bank would not lend beyond ₹20,000, the customer changed the figure to ₹20,000 before handing it over. Anirudhan argued that the alteration discharged him. Held: the Supreme Court, by 2:1, held him liable. Justice Kapur (Justice Hidayatullah agreeing in the result) held that the customer carried the document as the surety's agent and it was not altered in the bank's hands; the change also only lowered his liability. Justice Sarkar dissented: no contract was made on the altered terms. Principle: an alteration by the surety's own messenger, before the creditor receives the document, does not discharge him.
4. Release or discharge of the principal debtor (Section 134)
The surety is discharged by any contract between creditor and principal debtor releasing the principal debtor, or by any act or omission of the creditor whose legal consequence is the principal debtor's discharge.
Maharashtra State Electricity Board v. Official Liquidator, High Court, Ernakulam (1982): a supplier, under the Board's tender terms, furnished a ₹50,000 bank guarantee. When the Board demanded payment, the supplier was being wound up, and the Kerala High Court's company judge restrained the Board. Held: the Supreme Court (Justice Venkataramiah) set this aside: the bank's liability to pay on demand was absolute and unconditional, and the principal debtor's winding up did not affect it. Principle: Section 134 discharges a surety only when the creditor releases the principal debtor or causes his discharge by his own act or omission, not when the discharge is by operation of law (insolvency, winding up).
5. Composition, time or promise not to sue (Sections 135 to 137)
Section 135: if the creditor makes a composition with, promises to give time to, or promises not to sue the principal debtor, the surety is discharged unless he assents. Limits:
- Section 136: an agreement to give time made with a third person, not with the principal debtor, does not discharge the surety.
- Section 137: mere forbearance to sue the principal debtor or to enforce any other remedy does not discharge the surety.
If the bank simply does not sue Farhan for a year after the loan falls due, Prince remains liable. If the bank signs an agreement giving Farhan two more years without asking Prince, Prince is discharged.
6. Impairing the surety's remedy (Section 139)
If the creditor does any act inconsistent with the surety's rights, or omits any act his duty to the surety requires, and the surety's eventual remedy against the principal debtor is thereby impaired, the surety is discharged. For example, the creditor through wilful negligence sells the debtor's security for a very low price.
7. Loss of security (Section 141)
See the right to securities below.
8. Invalid guarantee (Sections 142 to 144)
Misrepresentation, concealment, or the failure of a co-surety to join.
Rights of the Surety
▶ Watch this part of the lecture (42:46)
The surety has rights against the principal debtor, the creditor and his co-sureties.
Against the principal debtor
Subrogation (Section 140): once a guaranteed debt is due, or the principal debtor has defaulted in a guaranteed duty, the surety, on payment or performance of all he is liable for, is invested with all the creditor's rights against the principal debtor. To subrogate is to substitute one person for another: the surety steps into the creditor's shoes.
Indemnity (Section 145): every guarantee contains an implied promise by the principal debtor to indemnify the surety. The surety may recover whatever he has rightfully paid, but not sums paid wrongfully.
Prince, as surety, defends the bank's suit on reasonable grounds and loses: he recovers the debt and the costs from Farhan. Had he defended without any real ground, he could recover the debt but not the costs.
In re Lamplugh Iron Ore Company Ltd.: a director who had guaranteed the company's rent paid the overdue rent as surety. Held: in the winding up, he could stand in the place of the landlord (creditor) and use the creditor's rights against the company.
Mamata Ghosh v. United Industrial Bank Ltd. (1987): sued by a bank with the borrowing firm and its partners, the guarantor sought, relying on subrogation, to restrain a debtor from disposing of his properties. The bank argued that under Section 140 she gets the creditor's rights only on payment, and she had paid nothing. Held: the Calcutta High Court dismissed her appeal; even if subrogation could be invoked, she showed no prima facie case and no risk of irreparable injury. Principle: subrogation under Section 140 follows payment.
Against the creditor
Right to securities (Section 141): the surety is entitled to the benefit of every security the creditor has against the principal debtor when the suretyship is entered into, whether the surety knows of it or not. If the creditor loses it, or parts with it without the surety's consent, the surety is discharged to the extent of its value.
Illustration: a landlord lends money to his tenant on a surety's guarantee and also holds a mortgage of the tenant's furniture. He cancels the mortgage and the tenant becomes insolvent. The surety is discharged to the extent of the furniture's value.
Amrit Lal Goverdhan Lalan v. State Bank of Travancore (1968): a firm had a ₹1 lakh cash credit account with the bank, secured by goods pledged with it, and Amrit Lal guaranteed the account up to ₹1 lakh. Later, goods worth ₹35,690 went missing from the pledged stock. Held: the Supreme Court (Justice V. Ramaswami) held that "security" in Section 141 includes all the creditor's rights against property when the guarantee was given. As the shortage arose from the bank's negligence, the surety was discharged to the value of the goods lost.
Set-off: when sued, the surety may use any set-off or counter-claim the principal debtor has against the creditor.
Share in reduction of the debt:
Hobson v. Bass (1871): two sureties for goods supplied to a wine and beer merchant each limited liability to £250. Goods worth £657 were supplied, the buyer went bankrupt, and each surety paid £250; the supplier later received a small dividend on the whole debt. Held: Lord Hatherley, Lord Chancellor, reversing the Vice-Chancellor, held each surety entitled to share the dividend in the proportion 250 to 657. Principle: a surety who guarantees and pays part of a debt shares proportionately in what the creditor later recovers.
Against co-sureties
Contribution (Sections 146 and 147) and the protection of Section 138, discussed above.
M.C. Chacko v. State Bank of Travancore (1969): Chacko managed a bank whose overdraft with another bank (later merged into the State Bank of Travancore) his father had guaranteed. The father gave away his properties to his family by a deed reciting that Chacko and the property given to him would answer for any payment under the guarantees. As the claim against the father's estate was time-barred, the creditor bank claimed a charge on that property. Held: the Supreme Court (Justice J.C. Shah) held that the deed created no charge; the guarantee was the father's personal obligation, and the deed only settled that burden within the family. Even had a charge been intended, the bank, not a party to the deed, could not enforce it. Principle: except for a beneficiary under a trust or in a family arrangement, no right may be enforced by a person who is not a party to a contract.
A bank lends ₹5 lakh to Farhan, with Prince and Aadil as co-sureties. The guarantee is valid even if oral; the loan to Farhan is its consideration; hiding Farhan's earlier defaults would make it invalid. On Farhan's default the bank may sue Prince at once for the whole amount. A contract giving Farhan more time without the sureties' consent would discharge them, and giving up a security would discharge them to its value. When Prince pays, he steps into the bank's shoes, recovers from Farhan, and claims half from Aadil.
Contract of Bailment: Meaning and Essentials
▶ Watch this part of the lecture (49:18)
In bailment and pledge, one person hands over his goods to another for a time: the owner keeps the ownership, the other gets the possession. A dry cleaner, a watch repairer or a hotel valet has possession of things the customer still owns. The word bailment comes from an old French word meaning to deliver.
Definition: Section 148
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 the bailor; the person to whom they are delivered is the bailee.
Explanation: a person already in possession of another's goods who contracts to hold them as bailee becomes the bailee, even though the goods were not delivered to him by way of bailment.
Essentials of Bailment
- Delivery of possession. Under Section 149, delivery may be made by doing anything which has the effect of putting the goods in the possession of the bailee, or of a person authorised to hold them for him. Handing over the keys of a car can be delivery of the car.
- Goods, that is, movable property.
- A purpose, such as repair, safe custody or carriage.
- A contract.
- Return of the same goods, or dealing with them as the bailor directs, when the purpose is over. They may come back in an altered form: cloth given to a tailor returns as a shirt, and it is still bailment.
In bailment only possession passes, never ownership. A deposit of money in a bank account is not a bailment, because the bank need not return the same notes; it is a loan to the bank, and the bank becomes the depositor's debtor. Formula: Delivery + Purpose + Return = Bailment.
Kaliaperumal Pillai v. Visalakshi Achi: goldsmiths working in Kaliaperumal's house were making jewels for Visalakshi. Each evening she left the half-made jewels in a box in a room there, but kept the key herself. The jewels went missing and she sued him as a bailee. Held (Madras High Court, Justice Varadachariar): there was no delivery under Section 149, so he was not a bailee. Principle: an owner who keeps control of the goods has not delivered them, so there is no bailment.
Atul Mehra v. Bank of Maharashtra: burglars broke open all the lockers in a bank's strong room; a hirer claimed jewellery worth over ₹4 lakh without ever having told the bank what was inside. Held (Punjab and Haryana High Court, Justice S.S. Nijjar): mere hiring of a locker does not by itself make the bank a bailee of its contents, as exclusive possession is essential for bailment. The hirer must prove the contents, and no negligence by the bank was proved either.
Bank Lockers: The Modern Position
Amitabha Dasgupta v. United Bank of India (2021): the Supreme Court left open whether hiring a locker is a bailment, but held that banks owe a duty of care in managing lockers and cannot contract out of a minimum standard of care.
Under the Reserve Bank of India rules in force from 1 January 2022, a bank is liable for loss caused by fire, theft, burglary, building collapse or fraud by its employees. Its liability is 100 times the annual locker rent, and it is not liable for natural calamities.
Bailment Without a Contract
Section 148 speaks of a contract, yet a finder of lost goods, or police seizing goods under a law, have no agreement with the owner and must still take care of the goods and return them. Four cases show how the law developed.
Ram Gulam v. Government of Uttar Pradesh (1949), the old view: stolen ornaments recovered by the police and kept in a government storeroom as evidence were stolen again. The owners sued the government as a bailee. Held (Allahabad High Court, Justice Seth): the obligation of a bailee arises only from a contract of bailment. The owners' suit failed mainly because the State was held not liable for acts of its servants done under a duty imposed by law.
Lasalgaon Merchants' Co-operative Bank Limited v. Prabhudas Hathibhai (1965): tobacco pledged to a bank by handing over the godown key was seized by a government officer, over the bank's protest, for the firm's income tax arrears, and was then damaged by heavy rain. Held (Bombay High Court): the seizure was illegal and the bank's claim was decreed. The government stood in the position of a bailee, heavy rain is not an act of God, and it had to prove proper care.
State of Gujarat v. Memon Mahomed Haji Hasam (1967), the leading case: in 1947 customs officers of the old State of Junagadh seized two trucks, a station wagon and other goods of a Veraval fish exporter, alleging smuggling. Pending his appeal, the vehicles lay uncared for in the open for years, their parts were stolen, and the police had them auctioned as unclaimed property without telling him. The next day the appeal authority set aside the confiscation and ordered their return, and he sued the State for their value. The State pleaded that there can be no bailment without a contract.
Held (Supreme Court, unanimous, Justice Shelat): a bailment can exist without an enforceable contract and even without consent. Like a finder of goods, the State, having seized the vehicles under a statute, held them as a bailee, bound to take reasonable care and to return them or pay their value. Principle: bailment can arise by operation of law whenever a person lawfully takes possession of goods which he must later return. The old view in Ram Gulam cannot stand with this decision.
Basavva Kom Dyamangouda Patil v. State of Mysore (1977): stolen ornaments produced before a magistrate were, on the court's order, kept by the police in a trunk at the Haveri police station; when called for, the trunk held only stones. Held (Supreme Court, Justice S. Murtaza Fazal Ali): property produced before a court is in the custody of the court, which must keep it safe. The State, which had not even pleaded due care, had to pay ₹10,000, the value of the ornaments.
Whenever the law puts the goods of one person into the hands of another, even without an agreement, the holder must take reasonable care of them and return them, just like a bailee.
Kinds of Bailment
| Basis | Kind | Example |
|---|---|---|
| Reward | Gratuitous: the bailee gets nothing | Prince keeps Farhan's bicycle as a favour |
| Reward | For reward: money passes | Farhan pays a repairer |
| Benefit | Exclusive benefit of the bailor | Safe custody for a friend |
| Benefit | Exclusive benefit of the bailee | Farhan lends his book free to Prince |
| Benefit | Benefit of both | Hiring a car; a pledge |
Duties of the Bailor
- To disclose faults (Section 150) which he knows of and which materially interfere with the use of the goods or expose the bailee to extraordinary risks; otherwise he is responsible for damage arising directly from them. If the goods are bailed for hire, he is responsible whether he knew of the faults or not.
- To repay necessary expenses (Section 158) where the bailee keeps, carries or works on the goods without remuneration.
- To indemnify the bailee (Section 164) for loss suffered because the bailor was not entitled to make the bailment, to receive back the goods, or to give directions about them.
- To receive back the goods when the bailee properly returns them.
One who lends a horse he knows to be vicious, without warning, is liable when the borrower is thrown. One who hires out an unsafe carriage is liable to an injured hirer even if he did not know of the defect.
Duties of the Bailee
▶ Watch this part of the lecture (59:33)
The duties of the bailee are the most important part of the law of bailment.
1. Duty of Care (Sections 151 and 152)
Section 151: in all cases of bailment, the bailee must 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. Section 152: in the absence of any special contract, a bailee who has taken that care is not responsible for loss, destruction or deterioration of the goods.
"In all cases": English law used to apply different standards of care to different kinds of bailment; the Indian Act lays down one standard for all, paid or unpaid. "Special contract": lets a bailee accept a higher liability, but courts have generally not allowed a bailee to contract out of the minimum standard of reasonable care.
A dry cleaner who leaves a suit on an open verandah, where it is stolen, is liable. If thieves break a strong lock at night despite a watchman, he may not be liable, because he took reasonable care.
Taj Mahal Hotel v. United India Insurance Company Limited (2019), the leading modern case on bailment: one night in August 1998 a guest handed his Maruti Zen and its keys to the hotel valet; the parking tag said owner's risk. A young man took the keys from the desk and drove off despite a guard, and the car was never traced. The insurer paid ₹2,80,000 and, with the owner, filed a consumer complaint. Held (Supreme Court, Justice Mohan M. Shantanagoudar, November 2019): the hotel was liable.
- Handing the car and keys to the valet is delivery; a bailment arises even if valet parking is free, as it is part of what the guest pays for.
- The hotel is not an insurer, but negligence is presumed when the car is not returned, and it must prove the care required by Section 151.
- That standard is sacrosanct: "special contract" in Section 152 allows a higher liability, not a lower one, so the owner's risk clause gave no protection.
Union of India v. Udho Ram and Sons (1962): goods in a sealed wagon from Calcutta to Delhi were lost after the train, soon after leaving Howrah, stood about 14 minutes at night for a signal; a door's seals were found broken, and the railway police had stayed in the guard's van. Held (Supreme Court, Justice Raghubar Dayal): the railway was negligent under Section 151, as a prudent owner would watch his goods when a train stops at night. Principle: reasonable care includes reasonable precautions against foreseeable theft.
2. No Unauthorised Use (Section 154)
A bailee who uses the goods in a way not permitted by the bailment must compensate the bailor for any damage to the goods from or during that use, even if he was careful. Illustration: a horse hired in Calcutta to ride to Benares is ridden to Cuttack instead, falls by accident and is injured; the hirer is liable.
3. No Inconsistent Act (Section 153)
The bailment is voidable at the option of the bailor if the bailee does any act with regard to the goods inconsistent with its conditions. If Prince hires Farhan's car for his own use and starts running it as a taxi, Farhan may end the bailment at once.
4. No Mixing (Sections 155 to 157)
Mixing the bailor's goods with his own with consent: both share the mixture in proportion. Without consent: the bailee bears the cost of separation or, if the goods cannot be separated, compensates the bailor.
5. Duty to Return (Sections 160 and 161)
Section 160: the bailee must return the goods, or deliver them as the bailor directs, without demand, as soon as the time has expired or the purpose has been accomplished. Section 161 (strict rule): if, by the bailee's default, the goods are not returned at the proper time, he is responsible for any loss, destruction or deterioration from that time. After the due date, even an accident is his risk.
A repairer promises to return Farhan's laptop on Monday but keeps it without reason, and on Friday his shop is flooded. He must pay for the laptop, however careful he was.
6. Return of Increase (Section 163)
The bailee must deliver any increase or profit from the goods: a cow left with another must be returned with her calf.
7. Return to a Bailor Without Title (Sections 166 and 167)
Under Section 166, a bailee who in good faith returns the goods to the bailor is not liable to the true owner, even if the bailor had no title. Under Section 167, a third person claiming the goods may ask the court to stop their delivery to the bailor and decide the title.
Rights of the Bailee
The bailee's rights mostly mirror the bailor's duties: expenses, indemnity, and compensation for undisclosed faults. He also has two important rights: a right of lien and a right to sue wrongdoers.
Rights of Bailor and Bailee Against Third Parties
Under Section 180, if a third person wrongfully deprives the bailee of the use or possession of the goods, or injures them, the bailee may use the same remedies as the owner; either the bailor or the bailee may sue. Under Section 181, whatever is recovered is shared according to their respective interests.
Prince, a mechanic, is repairing Farhan's car when a truck driver carelessly smashes it in the workshop. Either Prince or Farhan may sue the driver.
Bailee's Lien
▶ Watch this part of the lecture (1:06:21)
A lien is the right to keep possession of goods until a debt is paid. It is only a right to retain, not a right to sell, unless a law gives that right.
Particular Lien (Section 170)
Where the bailee has, in accordance with the purpose of the bailment, rendered any service involving the exercise of labour or skill in respect of the goods, he may, in the absence of a contract to the contrary, retain them until he receives due remuneration for those services.
Illustrations: a jeweller who cuts and polishes a rough diamond may keep the stone until paid. A tailor who promised to deliver a coat as soon as it is finished and to give three months' credit cannot keep the coat until paid, because he agreed to give credit.
General Lien (Section 171)
Bankers, factors, wharfingers, attorneys of a High Court and policy brokers may, in the absence of a contract to the contrary, retain any goods bailed to them as security for a general balance of account. A factor is a mercantile agent who sells goods for others; a wharfinger is the keeper of a wharf where goods are stored. No other person has a general lien unless there is an express contract.
| Point | Particular lien | General lien |
|---|---|---|
| Coverage | Only the goods on which labour or skill was spent, and only for that work | The whole balance of account |
| Who has it | Any bailee who improves goods | Only the five named classes, unless there is an express contract |
A car mechanic may keep a car until paid for its repair, but not for an old unpaid bill for the owner's scooter. A bank may hold a customer's securities for everything the customer owes it.
K. Sita v. Corporation Bank (1999): gold pledged for a small agricultural loan (partly repaid, partly written off under a government debt relief scheme) was withheld because another loan of ₹21,000 from the same bank was unpaid. Held (Andhra Pradesh High Court): for the bank. A banker has a general lien under Section 171, and pledging the gold for one particular loan is not by itself a contract to the contrary. Section 174 also presumes that a pledge covers later advances.
Vijay Kumar v. Jullundur Body Builders, reversed in Syndicate Bank v. Vijay Kumar (1992); both stages matter. A firm deposited two fixed deposit receipts with Syndicate Bank to support a bank guarantee. The covering letters kept them with the bank so long as any amount on any account was due, though the receipts were marked as a lien for the guarantee. After the guarantee ended, Vijay Kumar, a decree holder against the firm, attached them; the bank claimed a general lien for the firm's overdraft. Delhi High Court (1981): only a particular lien for the guarantee. Supreme Court (Justice K. Jayachandra Reddy): reversed. The covering letters created a general lien, and by mercantile custom a banker has a general lien over securities deposited in the ordinary course of banking. The bank could first adjust its dues; only the surplus could be attached.
Termination of Bailment
- Expiry of the fixed time or accomplishment of the purpose (Section 160).
- By the bailor, when the bailee acts inconsistently with its conditions (Section 153).
- Recall of a gratuitous loan at any time (Section 159); but if the borrower acted on the faith of the loan and early return causes him a net loss, the lender must make it good.
- Death of the bailor or bailee, in a gratuitous bailment (Section 162).
- Destruction of the goods, or mutual agreement.
Finder of Lost Goods
▶ Watch this part of the lecture (1:09:54)
Under Section 71, a person who finds goods belonging to another and takes them into his custody has the same responsibility as a bailee: he must take reasonable care of them and try to find the owner. So Farhan, who finds a wallet on the road with ₹10,000 and a phone, must do both. The finder has a better right to the goods than anyone except the true owner.
Rights of the Finder (Section 168)
- He cannot sue the owner for his trouble and expense in preserving the goods and finding the owner, but he may retain the goods until paid such compensation.
- If the owner has offered a specific reward, he may sue for it and retain the goods until he receives it.
Right to Sell (Section 169)
When a thing commonly sold is lost, and the owner cannot be found with reasonable diligence or refuses to pay the finder's lawful charges, the finder may sell it only:
- when it is in danger of perishing or of losing the greater part of its value; or
- when the finder's lawful charges amount to two-thirds of its value.
Zoya finds a basket of mangoes that will rot in two days and cannot trace the owner. She may sell them.
Contract of Pledge: Meaning and Essentials
A pledge is a special kind of bailment. In a gold loan, the borrower hands over a gold chain as security: on repayment it comes back; on default the bank may sell it. Section 172: the bailment of goods as security for payment of a debt or performance of a promise is called pledge. The bailor is called the pawnor and the bailee the pawnee.
Essentials of Pledge
- It is a bailment, so possession must be delivered, actually or constructively.
- The delivery is by way of security for a debt or the performance of a promise.
- Ownership stays with the pawnor. The pawnee gets only a special property: the right to hold the goods and, on default, to sell them.
- Delivery may be through documents of title, such as a railway receipt or warehouse receipt, because transferring the document can transfer possession of the goods.
Formula: Bailment + Security = Pledge.
The Official Assignee of Madras v. The Mercantile Bank of India Limited (1934): Madras groundnut traders borrowed by handing the bank railway receipts endorsed in blank, then became insolvent while the goods were in transit or in the port sheds. The Official Assignee (who manages an insolvent's property for his creditors) claimed them. Held (Privy Council): a railway receipt is a document of title, so handing it over was a valid pledge of the goods themselves; the bank, not the Official Assignee, was entitled to the proceeds.
Morvi Mercantile Bank Limited v. Union of India (1965): a Bombay firm railed goods worth ₹35,500 to itself at Delhi and endorsed the railway receipts to the bank for an advance of ₹20,000. Different goods arrived; the bank sued the railway, and the High Court allowed only ₹20,000. Held (Supreme Court, 3 to 2, Justice Subba Rao): an owner can pledge goods by transferring the railway receipt, and the pledgee bank could recover the full value, holding the surplus for the pawnor, because a pledgee, like any bailee, has the owner's remedies against a wrongdoer under Section 180. Justice Ramaswami and Justice Mudholkar dissented; the majority view is the law.
Pledge, Bailment and Hypothecation Compared
| Point | Bailment | Pledge | Hypothecation |
|---|---|---|---|
| Purpose | Any purpose, such as repair or safe custody | Always security for a debt or promise | Security |
| Possession | Passes to the bailee | Passes to the pawnee | Stays with the borrower; the lender gets only a charge |
| Right of sale | None | After reasonable notice on default | Lender must first take possession, under the agreement or a statute, before selling |
| Law | Contract Act | Contract Act | Not defined in the Contract Act |
Hypothecation is defined in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 as a charge on movable property, existing or future, created by a borrower in favour of a secured creditor without delivery of possession, as security for a loan. Under that Act, a secured creditor may, after notice, take possession of such goods without going to court.
Farhan's car bought on a loan stays with him, but the bank has a charge over it and the registration certificate records that it is hypothecated to the bank: hypothecation. His gold left with the bank for a gold loan: pledge. His car left with a mechanic for repair: simple bailment. For immovable property, such as a house, the security is a mortgage under the Transfer of Property Act.
Rights of the Pawnee
- Retainer (Section 173): for the debt, its interest, and all necessary expenses of keeping or preserving the goods.
- Other debts (Section 174): in the absence of a contract, no retainer for any other debt; but such a contract is presumed for later advances by the pawnee.
- Extraordinary expenses (Section 175) incurred for preserving the goods.
- Rights on default (Section 176), the most important.
Rights on Default (Section 176)
If the pawnor defaults in payment of the debt or performance of the promise at the stipulated time, the pawnee may either:
- sue the pawnor upon the debt and retain the goods as collateral security; or
- sell the goods on giving the pawnor reasonable notice of the sale.
If the sale brings less than the amount due, the pawnor remains liable for the balance; if more, the pawnee must pay the surplus to the pawnor.
The pawnee cannot simply keep the goods as his own in place of the debt. He must sell them properly, or keep them only as security.
Lallan Prasad v. Rahmat Ali (1966), the leading case on the rights of a pawnee: Lallan Prasad lent ₹20,000 to Rahmat Ali on a promissory note against an agreed pledge of goods, then sued on the note, claiming the goods were never delivered; the court found they had been. Held (Supreme Court, Justice J.M. Shelat): he could not recover the debt while denying the pledge and keeping the goods. Under Section 176 a pawnee may sue on the debt and retain the goods as collateral security, but until sale the pawnor may redeem; so the right to sue assumes the pawnee is ready to return the goods on payment. One who has put himself in a position where he cannot return them cannot get a decree for the debt.
A jeweller who holds Prince's gold chain as a pledge, but falsely denies receiving it, cannot sue Prince for the loan.
Shrenuj Investment and Finance Private Limited v. STCI Finance Limited (2022) (STCI: Securities Trading Corporation of India, the lender's former name): a company borrowed ₹30 crore against pledged shares. When it stopped paying and prices fell, the lender invoked the pledge by notice and sold the shares on the stock exchange; an arbitral tribunal awarded the shortfall of about ₹10 crore. Held (Delhi High Court, Justice Vibhu Bakhru): award upheld, as the shares were sold after notice in open market transactions with no evidence of manipulation. Principle: after reasonable notice the pawnee may sell under Section 176, and the pawnor must pay any shortfall.
Pledge of Shares in Electronic Form
Shares today are held in electronic form, and a pledge is recorded in the books of a depository. In May 2022 the Supreme Court held that when a pledgee invokes the pledge and is recorded as the beneficial owner, that is not yet a sale. The pledgee does not become owner in place of the debt, and the pawnor can still redeem the shares until they are actually sold.
Standard Chartered Bank v. Custodian (2000), from the securities scam of 1992: stockbroker Hiten P. Dalal had pledged shares with the bank. Held (Supreme Court, Justice B.N. Kirpal): bonus shares, dividends and interest later accruing on them are part of the pledge. Section 163 only means that such an increase does not become the bailee's property and must be returned with the goods; until then the pawnee may hold it and sell it along with the original shares.
Rights and Duties of the Pawnor
Right to Redeem (Section 177)
A pawnor who defaults at the stipulated time may still redeem the goods at any later time before their actual sale, but must also pay any expenses arising from his default.
Prince pledges his gold chain for a loan due in March and fails to pay. He can still pay the debt with interest and expenses in June and get his chain back, so long as the bank has not already sold it.
Duties
The pawnor must repay the debt with interest, pay the extraordinary expenses of preserving the goods and, like any bailor, disclose known faults in the goods. The pawnee has the duties of a bailee: to take reasonable care of the goods, not to use them without authority, and to return them when the debt is paid.
Pledge by Persons Who Are Not Owners
Ordinarily only the owner, or his authorised agent, can pledge goods. The exceptions resemble those in the sale of goods:
- Mercantile agent (Section 178). A pledge by a mercantile agent in possession of goods, or of documents of title to goods, with the owner's consent, made in the ordinary course of his business, is as valid as if the owner had expressly authorised it, provided the pawnee acts in good faith and does not know that the pawnor lacks authority to pledge.
- Possession under a voidable contract (Section 178A). If the pawnor obtained possession under a contract voidable for fraud, coercion, misrepresentation or undue influence, not rescinded at the time of the pledge, the pawnee acquires a good title if he acts in good faith and without notice of the defect.
- Limited interest (Section 179). A pledge by a person with only a limited interest in the goods is valid to the extent of that interest. If Prince, holding a scooter as a repairer with a lien of ₹5,000, pledges it, the pledge is good only to that extent.
Connecting everything: Farhan leaves his car with Prince for repair, a bailment for reward. Prince must take the care of a prudent owner, must not use the car as a taxi, and must return it on time, or bear every later loss. After repairing it, he has a particular lien until he is paid. If a truck damages the car in the garage, either of them may sue. Later, Farhan pledges his gold with a bank. The bank may retain it for the loan and interest, and may sell it after reasonable notice if he defaults; but until the sale, Farhan can still redeem it.
Agency: Agent and Principal
▶ Watch this part of the lecture (1:24:27)
In bailment and pledge one person holds the goods of another. In agency one person acts for another and can make contracts that bind him. Agency is why companies, banks and governments can do business at all: when a flat is booked through a property dealer, or a company contracts through its manager, the person bound is not the dealer or manager but the person for whom they act.
Definitions: Section 182
Section 182: an agent is a 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 the principal.
Maxim: qui facit per alium facit per se (he who acts through another acts himself).
Prince asks Farhan to sell his car to anyone for at least ₹3 lakh. Farhan sells it to Aadil. Prince is the principal, Farhan the agent, Aadil the third person. The contract is between Prince and Aadil, though they never met.
The true test of agency
The test is the power of one person to create legal relations between another and third persons. The label the parties use is not decisive. A dealer who buys goods from a company and resells them at his own price is usually not an agent, even if called one, because he cannot bind the company.
Agent and servant compared
| Basis | Agent | Servant |
|---|---|---|
| Control | Follows the principal's directions but usually uses his own judgment about the manner of work. | Under the master's direct control as to what he does and how he does it. |
| Legal relations | Brings the principal into contracts with third persons. | Ordinarily does not. |
| Employers | May act for many principals (e.g. a property dealer). | Usually serves one master. |
| Payment | Often a commission. | Usually a salary. |
Prince's driver is his servant; the broker who sells his shares is his agent.
Who may employ and who may be an agent
- Section 183: any person of the age of majority according to the law to which he is subject, and of sound mind, may employ an agent.
- Section 184: as between the principal and third persons, any person may become an agent; but no person who is not of the age of majority and of sound mind can become an agent so as to be responsible to his principal.
- Section 185: no consideration is necessary to create an agency.
A minor can be an agent and bind his principal to third persons, but is not himself liable to the principal. Because no consideration is needed, even a friend who helps for free is an agent.
Creation of Agency
An agency may be created in six ways: express authority, implied authority, necessity, estoppel, operation of law and ratification.
1. Express authority
Section 186: an agent's authority may be express or implied. Section 187: it is express when given by words spoken or written, as in a power of attorney.
2. Implied authority
Authority is implied when inferred from the circumstances of the case; things spoken or written, and the ordinary course of dealing, count as circumstances.
Illustration: a shop owner lives in Calcutta and visits his shop only occasionally. His manager regularly orders goods from a supplier in the owner's name and pays from the owner's funds, with the owner's knowledge. The manager has implied authority to order such goods.
Section 188 (extent of authority): an agent authorised to do an act may do every lawful thing necessary to do it; an agent authorised to carry on a business may do every lawful thing necessary for it, or usually done in its course.
3. Necessity
Section 189: in an emergency, an agent may do all such acts to protect his principal from loss as a person of ordinary prudence would do in his own case under similar circumstances.
Illustration: a trader sends food supplies to his agent in Calcutta with directions to send them on at once to Cuttack. If they will spoil on the journey, the agent may sell them in Calcutta.
4. Estoppel
Section 237: where an agent, without authority, does acts or incurs obligations to third persons on the principal's behalf, the principal is bound if by his words or conduct he induced them to believe the acts were within the agent's authority.
Prince lets Farhan use his letterhead and seal for months to buy stock and never objects. He cannot later deny Farhan's authority against a supplier who relied on it.
Implied agency can arise even between businesses that never signed an agency agreement, as the following case shows.
Kuchwar Lime and Stone Company v. Dehri Rohtas Light Railway Company Limited (1968): under a government control order sanctioning supply for the appellant company, a colliery booked coal by rail to it, the company to pay freight. The company refused part of the coal; the railway sold it after notice and sued for demurrage (the charge for detaining wagons). The company pleaded no privity, since the colliery made the contract of carriage. Held (Supreme Court, Justice J.C. Shah): the colliery must be inferred to have acted as the company's agent, so the company was liable, though only for a reasonable period of demurrage. Principle: agency may be implied from the circumstances.
5. Operation of law
For example, under the Partnership Act every partner is the agent of the firm.
6. Ratification
Dealt with separately below.
Ratification
▶ Watch this part of the lecture (1:31:07)
Section 196: where acts are done by one person on behalf of another but without his knowledge or authority, he may elect to ratify or disown them. If he ratifies, the same effects follow as if they had been done by his authority. Section 197: ratification may be express or implied from conduct.
Farhan, without authority, buys a rare painting for Prince, who loves it. If Prince hangs it in his drawing room and pays for it, he has ratified the purchase.
Conditions of valid ratification
- The agent must have acted on behalf of the person who ratifies, not for himself.
- That person must have existed and been competent to contract when the act was done.
- Section 198: a person whose knowledge of the facts is materially defective cannot validly ratify.
- Section 199: ratifying an unauthorised act ratifies the whole transaction of which it formed part; one cannot keep the benefits and reject the burdens.
- The act must be lawful; a forgery cannot be ratified.
- Ratification must come within a reasonable time.
- Section 200: an act which would subject a third person to damages, or end his right or interest, cannot be given that effect by ratification. So an owner cannot ratify an unauthorised demand for his goods so as to make the holder liable in damages for refusing.
Effect: relation back
Ratification relates back to the date of the original act, as if authority had existed from the start.
Bolton Partners v. Lambert (1889): Lambert offered to buy a company's property; its managing director accepted without authority. Lambert withdrew, after which the board ratified the acceptance and sued for specific performance. Held (English Court of Appeal): Lambert was bound, because ratification relates back to the unauthorised acceptance.
The rule is much criticised because it lets one side choose later whether there is a contract. Later cases limited it: it does not apply where the agent accepted expressly subject to ratification, and ratification must come within a reasonable time. In India, Section 196 gives ratification the effect of prior authority, but Section 200 protects third persons from harm by it.
Keighley, Maxsted and Company v. Durant (1901): Roberts, authorised by Keighley Maxsted to buy wheat at a certain price jointly for them and himself, could not buy at that price and bought at a higher price from Durant in his own name, without disclosing that he acted for anyone. Keighley Maxsted later agreed with Roberts to take the wheat on joint account at that price, but refused delivery, and Durant sued. The Court of Appeal held them liable; the House of Lords reversed. Held: only a person on whose behalf the agent professed to act at the time can ratify; an undisclosed principal cannot ratify an unauthorised contract. So Keighley Maxsted were not liable to Durant.
Study the two cases as a pair: Bolton Partners shows what ratification does; Keighley Maxsted shows who can ratify.
Sub-Agents and Substituted Agents
▶ Watch this part of the lecture (1:34:57)
General rule against delegation
Maxim: delegatus non potest delegare (a person to whom a power is delegated cannot delegate it further), because the principal chose the agent personally, trusting his skill and honesty.
Section 190: an agent cannot lawfully employ another to perform acts he has expressly or impliedly undertaken to perform personally, except where the ordinary custom of trade allows a sub-agent or the nature of the agency requires one.
Sub-agent
Section 191: a sub-agent is a person employed by, and acting under the control of, the original agent in the business of the agency.
Section 192 (properly appointed sub-agent):
- The principal is represented by him as regards third persons and is bound by his acts.
- The agent is responsible to the principal for the sub-agent's acts.
- The sub-agent is responsible to the agent, not to the principal, except for fraud or wilful wrong.
Section 193 (appointed without authority): the principal is not bound by him at all. The agent stands as principal towards him and is responsible for his acts both to the principal and to third persons.
Substituted agent
Section 194: where an agent having authority to name another person to act for the principal names such a person, that person is not a sub-agent but an agent of the principal for the part of the business entrusted to him. Section 195: the agent must choose him with the discretion of a man of ordinary prudence; if he does, he is not responsible for the substituted agent's acts or negligence.
| Basis | Sub-agent | Substituted agent |
|---|---|---|
| Works for | Under the control of the agent. | Directly for the principal. |
| Privity with principal | None. | Exists. |
| Agent's responsibility | Agent is responsible for his acts. | Agent not responsible, if chosen with ordinary prudence. |
A lawyer engaged by Prince sends his junior to argue: the junior is a sub-agent. If Prince authorises his lawyer to engage a senior advocate in the High Court for him, that advocate is a substituted agent.
Duties of an Agent
- Follow directions (Section 211): conduct the principal's business according to his directions or, in their absence, the custom of business of the same kind at that place. If he acts otherwise, he must make good any loss and account for any profit.
- Skill and diligence (Section 212): act with the skill generally possessed by persons in similar business, unless the principal knows he lacks skill, and always with reasonable diligence. He must compensate the principal for the direct consequences of his neglect, want of skill or misconduct, but not for remote losses.
- Accounts (Section 213): render proper accounts on demand.
- Communication (Section 214): in cases of difficulty, use reasonable diligence in communicating with the principal and seeking his instructions.
- Not to deal on his own account (Sections 215 and 216): if he deals on his own account in the agency business without first obtaining the principal's consent and disclosing all material facts, the principal may repudiate the transaction where the agent dishonestly concealed a material fact or the dealing was disadvantageous to him (Section 215). A secret profit may be claimed by the principal (Section 216). This is the duty to avoid a conflict between duty and interest.
- Pay over money (Section 218): subject to lawful deductions, pay the principal all sums received on his account.
- Protect interests on the principal's death or insanity (Section 209): take all reasonable steps, on behalf of the principal's representatives, to protect the interests entrusted to him.
Farhan is asked to buy a plot for Prince and secretly sells him his own plot. Prince may reject the deal.
Narandas Morardas Gajiwala v. S.P.Am. Papammal (1966): an agent sued his principals for accounts; they sued him on his promissory note. He pleaded an oral understanding that the note would not be enforced during the agency, and only if money remained due after accounts. The trial court decreed the note but ordered it adjusted against any sum found due to the agent. Held (Supreme Court, Justice V. Ramaswami): upheld. An agent has no statutory right to accounts from his principal, but special circumstances may make it fair that the principal account, e.g. where all accounts are with the principal, or the agent's remuneration depends on dealings he cannot otherwise know.
Rights of an Agent
The agent's rights are mostly the principal's duties.
- Retainer (Section 217): retain, out of sums received on the principal's account, money due for advances, proper expenses and remuneration.
- Remuneration (Sections 219 and 220): in the absence of a special contract, payment for an act is not due until the act is completed; an agent guilty of misconduct is not entitled to remuneration for the part of the business he misconducted.
- Lien (Section 221): in the absence of a contract to the contrary, retain the principal's goods, papers and other property, movable or immovable, received by him, until the amount due for commission, disbursements and services in respect of them is paid.
- Indemnity (Sections 222 to 224): the employer must indemnify the agent against the consequences of all lawful acts done in exercise of his authority (Section 222); for an act done in good faith, even if it injures the rights of third persons (Section 223), which is the principle of Adamson v. Jarvis; but not for a criminal act (Section 224).
- Compensation (Section 225): for injury caused to the agent by the principal's neglect or want of skill.
The agent's lien is a particular lien. Like a bailee's lien it depends on possession, and is lost if the agent gives up possession, waives it, or agrees to something inconsistent with it.
Liability of the Principal to Third Parties
▶ Watch this part of the lecture (1:43:30)
- Section 226: contracts made through an agent, and obligations arising from his acts, may be enforced in the same manner and have the same legal consequences as if made or done by the principal in person.
- Sections 227 and 228 (excess of authority): the principal is bound by the authorised part if it can be separated from the rest; if it cannot, he is not bound by the transaction.
- Section 229: notice to the agent, or information he obtains in the course of the principal's business, has the same effect as notice to the principal.
- Section 238: misrepresentations or frauds by agents acting in the course of their business affect their agreements as if made or committed by the principal; those in matters outside their authority do not affect the principal.
- Section 231 (undisclosed principal): if the agent contracts with a person who neither knows nor suspects that he is an agent, the principal may require performance, but the other party has the same rights against the principal as he would have had against the agent.
- Section 233: where the agent is personally liable, the third person may hold the agent, the principal, or both liable.
Harshad J. Shah v. Life Insurance Corporation of India (1997): four policies taken through a general agent of LIC lapsed for non-payment of a premium. Months later the agent collected a premium cheque from the insured but deposited the money with LIC only two months after that; the insured died in an accident one day before the deposit, and LIC rejected the widow's claim. Held (Supreme Court, Justice S.C. Agrawal): under LIC's regulations its agents have no authority to collect premiums, so payment to the agent was not payment to LIC and the policies had lapsed; the Court directed a refund of the premiums with interest. Principle: one who pays an agent outside his authority does so at his own risk.
Personal Liability of the Agent
Section 230: in the absence of a contract to that effect, an agent cannot personally enforce contracts made on behalf of his principal, nor is he personally bound by them. Such a contract is presumed where:
- the agent contracts for the sale or purchase of goods for a merchant resident abroad;
- the agent does not disclose the name of his principal;
- the principal, though disclosed, cannot be sued.
Other cases:
- Section 235: a person who falsely represents himself to be another's authorised agent, and so induces a third person to deal with him, must compensate that person for any loss if the alleged principal does not ratify.
- Section 236: a person who contracts as agent but is really acting on his own account cannot require the other party to perform.
Farhan falsely tells a car dealer that Prince has authorised him to buy a car. Prince refuses to accept it. Farhan must make good the dealer's loss.
Termination of Agency
▶ Watch this part of the lecture (1:47:24)
Section 201: an agency is terminated by:
- revocation of authority by the principal;
- renunciation of the business by the agent;
- completion of the business of the agency;
- death or unsoundness of mind of the principal or the agent;
- adjudication of the principal as an insolvent.
Agency coupled with interest (Section 202): where the agent himself has an interest in the property forming the subject matter of the agency, the agency cannot, without an express contract, be terminated to the prejudice of that interest. Illustration: a landowner authorises his creditor to sell the land and pay himself his debts out of the proceeds. The owner cannot revoke this authority, and it does not end even on his insanity or death.
- Section 203: the principal may revoke authority at any time before it has been exercised so as to bind him.
- Section 204: not after it has been partly exercised, as regards acts already done.
- Sections 205 and 206: where an agency is for a fixed period, revocation or renunciation without sufficient cause, or without reasonable notice, must be compensated.
- Section 208: termination takes effect for the agent, and for third persons, only when they come to know of it.
- Section 210: when the agent's authority ends, so does that of all his sub-agents.
Prince, of Delhi, appoints Farhan to sell his Mumbai flat for at least ₹1 crore. Farhan must follow instructions, use skill, keep accounts and not secretly buy the flat himself; he earns commission only on completing the sale and may hold the flat papers until paid. If he sells for less without authority, Prince may ratify or disown the sale, but must take the whole deal or nothing. The buyer may enforce the contract against Prince, and a revocation binds the buyer only once he knows of it.
The Sale of Goods Act, 1930: Background
The contract of sale, by which ownership of goods passes for a price, is the most common contract of all.
- The law of sale was originally in Sections 76 to 123 of the Contract Act.
- In 1930 these were replaced by the Sale of Goods Act, modelled largely on the English Sale of Goods Act of 1893.
- Section 3: the unrepealed provisions of the Contract Act still apply to sales except where inconsistent with this Act, so the rules on offer, acceptance, capacity and free consent apply to every sale.
Meaning of Goods
Section 2(7): "goods" means every kind of movable property other than actionable claims and money, and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.
- Movable: a house or plot cannot be sold under this Act; its sale falls under the Transfer of Property Act.
- Actionable claims excluded: a claim enforceable only by going to court, such as a debt.
- Money excluded: money is the price, not the thing bought. But a rare old coin sold to a collector is goods, being bought as an article.
- Shares are goods.
- Crops, grass and trees become goods when agreed to be cut and taken away.
Prince sells the mangoes on his trees to a trader who will pluck them next week. This is a sale of goods.
Tangibility not required. The test is whether the thing can be transferred, delivered, possessed, and bought and sold like any other article. A thing with no market value is not goods.
Commissioner of Sales Tax, Madhya Pradesh v. Madhya Pradesh Electricity Board (1969): the Board, taxed on its sales of electricity, argued electricity is not goods. Held (Supreme Court): electricity is goods, being movable property that can be transmitted, transferred, delivered, stored and possessed like other movable property. A sale of electricity is a sale of goods.
Tata Consultancy Services v. State of Andhra Pradesh (2004): the Supreme Court treated software sold on a disc as goods.
R.D. Saxena v. Balram Prasad Sharma (2000): an advocate refused to return his former client's (a cooperative bank's) case files until paid, claiming a lien. Held (Supreme Court, Justice K.T. Thomas): no lien. There was no bailment, as the files were not delivered to be returned after a purpose was accomplished. "Goods" in Section 171 of the Contract Act carries the Sale of Goods Act meaning, and litigation papers, not bought and sold in the market, are not goods. The advocate must return the files and sue separately for fees.
Kinds of Goods
The kinds matter later, in deciding when ownership passes.
- Existing goods: owned or possessed by the seller.
- Future goods: to be manufactured, produced or acquired by the seller after the contract.
- Contingent goods: whose acquisition depends on an uncertain event.
- Specific goods: identified and agreed upon when the contract is made (e.g. "this blue scooter").
- Unascertained goods: described only by kind (e.g. 100 bags of rice from a large godown).
Section 6(3): a present sale of future goods operates only as an agreement to sell.
Sale and Agreement to Sell
▶ Watch this part of the lecture (1:53:54)
Section 4(1): a contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property (ownership) in goods to the buyer for a price. There may be a contract of sale between one part-owner and another.
- Section 4(3): where property passes at once, it is a sale; where it is to pass at a future time or subject to a condition to be fulfilled later, it is an agreement to sell.
- Section 4(4): an agreement to sell becomes a sale when that time passes or those conditions are fulfilled.
Prince tells Farhan, "This motorcycle is yours for ₹60,000; pay me tomorrow," and Farhan agrees: a sale, as ownership passes at once. "I will sell you this motorcycle next month, when my new one arrives" is an agreement to sell.
| Basis | Sale | Agreement to sell |
|---|---|---|
| Nature | Executed contract. | Executory contract. |
| Buyer's right | Right in the goods good against the whole world (in rem). | Right only against the seller (in personam). |
| Risk (usually follows ownership) | Buyer bears the loss. | Seller bears the loss. |
| Seller's remedy | Suit for the price. | Usually only damages. |
Essentials of a Contract of Sale
- Two different parties: buyer and seller.
- Subject matter must be goods.
- Price: Section 2(10) defines price as the money consideration for a sale of goods; exchanging a cycle for a cricket kit is barter, not sale.
- Transfer (or agreement to transfer) of general property, i.e. full ownership. A pledge transfers only special property, so it is not a sale.
- All essentials of a valid contract, including free consent.
Where the line lies between sale and other contracts is a favourite exam question. Four sales-tax cases answer it.
State of Madras v. Gannon Dunkerley and Company (Madras) Limited (1958): the State sought sales tax on materials used by a building contractor. Held (Constitution Bench of the Supreme Court, Justice Venkatarama Aiyar): "sale of goods" bears its Sale of Goods Act meaning: an agreement to transfer goods, as goods, for a price. A single, indivisible building contract has no separate agreement to sell bricks and cement, which become part of the building as it is built. No sale, no sales tax. The Forty-sixth Amendment (1982) added Article 366(29A), treating such transfer of goods in a works contract as a sale, but only for tax.
State of Punjab v. Associated Hotels of India Limited (1972): a hotel charged resident guests one daily rate for room, meals and amenities, and sales tax was sought on the meals. Held (Supreme Court, Justice J.M. Shelat, agreeing with the Punjab High Court): not a sale. The transaction was essentially one of service, meals being an amenity; the guest could not take food away or claim a deduction for a missed meal. The Forty-sixth Amendment now treats such supply of food as a sale for tax, but under the Sale of Goods Act a service is still not a sale.
Vishnu Agencies Private Limited v. Commercial Tax Officer (1977): under control orders, cement could be sold only to permit holders at fixed prices, and rice millers had to sell fixed quantities to government agents. Dealers argued such compelled transactions were not sales. Held (seven-judge bench, Supreme Court): they were sales. Regulation may narrow the area of choice, but a core of consent remains, as the parties still agree to deal on fixed terms. The earlier contrary view was overruled. Principle: a sale needs consent, but even minimal consent is enough.
Coffee Board, Karnataka v. Commissioner of Commercial Taxes (1988): under the Coffee Act growers had to deliver coffee to the Board, which paid later; the Board called this an acquisition, not a purchase. Held (Supreme Court, Justice Sabyasachi Mukharji): all four elements of sale were present: competent parties, consent (though minimal), transfer of property, and price (though deferred). Purchase tax was payable. Study it with Vishnu Agencies as a pair.
Formation of the Contract of Sale
Section 5: a contract of sale is made by an offer to buy or sell goods for a price and its acceptance. Delivery or payment may be immediate, by instalments or postponed. Subject to any other law, the contract may be written, oral, partly both, or implied from conduct (e.g. picking up a packet of biscuits and paying at the counter without a word).
Perished goods
- Section 7: in a contract for sale of specific goods, if the goods had perished without the seller's knowledge when the contract was made, the contract is void.
- Section 8: in an agreement to sell specific goods, if the goods perish without the fault of either party before risk passes to the buyer, the agreement becomes void.
Prince agrees to sell Farhan a particular horse which, unknown to anyone, had died that morning. The contract is void.
Price
- Section 9: price may be fixed by the contract, left to be fixed in an agreed manner, or determined by course of dealing; otherwise the buyer pays a reasonable price.
- Section 10: if the third person agreed upon to fix the price cannot or does not, the agreement is void; but a buyer who has received and used the goods must pay a reasonable price.
- Section 11: stipulations as to time of payment are not of the essence unless a different intention appears.
Conditions and Warranties
▶ Watch this part of the lecture (2:00:57)
Prince buys a laptop from Farhan, saying he needs 16 GB memory for video editing; it comes with 8 GB. A promised free laptop bag never arrives. The memory goes to the heart of the bargain (a condition); the bag is a side promise (a warranty). Prince can reject the laptop but can only claim damages for the bag.
Section 12: a stipulation in a contract of sale may be a condition or a warranty. A condition is essential to the main purpose of the contract; its breach gives a right to treat the contract as repudiated. A warranty is collateral to the main purpose; its breach gives a claim for damages but not a right to reject the goods. Which it is depends on the construction of each contract; a stipulation may be a condition though called a warranty.
| Breach of | Buyer's remedy |
|---|---|
| Condition | Reject the goods and claim damages. |
| Warranty | Keep the goods and claim damages. |
Condition treated as warranty (Section 13)
- The buyer may waive the condition, or elect to treat its breach as a breach of warranty.
- Where the contract is not severable and the buyer has accepted the goods or part of them, he can treat a breach of condition only as a breach of warranty, unless the contract says otherwise.
This is called a warranty ex post facto (arising after the event).
Wallis, Son and Wells v. Pratt and Haynes (1911): seed sold as common English sainfoin, under a clause giving no warranty, express or implied, as to growth, description or any other matters, was in fact giant sainfoin, an inferior variety that looked the same. The buyers resold it, paid damages to their own buyer, and sued. Held (House of Lords, adopting Lord Justice Fletcher Moulton's dissent in the Court of Appeal): the sellers were liable. Correspondence with description was a condition, and the clause excluded only warranties; having accepted the goods, the buyers could claim only damages, but the term remained a condition in origin, so the clause did not cover it. Principle: an exclusion of warranties does not exclude conditions.
Baldry v. Marshall: a buyer asked a motor dealer for a car suitable for touring, relying on his advice, and got a Bugatti unsuitable for touring. The contract excluded any guarantee or warranty, statutory or otherwise. Held (English Court of Appeal): the requirement of fitness for touring was a condition. The clause excluded only guarantees and warranties, not conditions, so the buyer could reject the car and recover his money.
Read Wallis and Baldry together: a seller who wants to exclude conditions must say so in clear words.
Implied Conditions and Warranties (Sections 14 to 17)
These terms are read into every sale even if the parties say nothing.
1. Title (Section 14)
Unless the circumstances show a different intention:
- Implied condition that the seller has a right to sell (in a sale), or will have it when property is to pass (in an agreement to sell).
- Implied warranty of quiet possession.
- Implied warranty that the goods are free from any charge or encumbrance in favour of a third party not declared or known to the buyer when the contract is made.
Rowland v. Divall (1923): a car dealer bought a car from the defendant for £334 and resold it. About four months later the police took it away, as it had been stolen before the defendant got it. The dealer refunded his buyer and sued for the full price, though the car had been used for months. Held (English Court of Appeal): the full price was recoverable, as breach of the implied condition of right to sell meant a total failure of consideration; per Lord Justice Atkin, the whole object of a sale is to transfer property, not mere use. Principle: a buyer who gets no title recovers the full price even after using the goods.
Niblett Limited v. Confectioners' Materials Company Limited (1921): condensed milk shipped from America bore "Nissly" labels on some tins. Nestlé alleged trademark infringement; customs held the goods, and the buyers could sell them only unlabelled, at a loss. Held (English Court of Appeal): sellers liable for breach of the implied condition of right to sell, since Nestlé could have stopped the sale by injunction, and of the warranty of quiet possession. Principle: right to sell means right to sell free from legal hindrance, not merely ownership.
2. Description (Section 15)
In a sale by description there is an implied condition that the goods correspond with the description. If the sale is by sample as well as description, it is not enough that the bulk corresponds with the sample if the goods do not also correspond with the description.
Prince orders basmati rice online and receives ordinary rice: breach of condition, even if the rice is of good quality.
Nicholson and Venn v. Smith Marriott (1947): napkins and tablecloths auctioned as bearing the crest of King Charles the First and as his authentic property were in fact eighteenth-century and worth far less. Held (Justice Hallett): a sale by description; the description was broken and the sellers were liable for breach of condition. Principle: even an old, unique article can be sold by description and must match it.
Wieler v. Schilizzi (1856): goods sold as "Calcutta linseed", a known trade description, were mixed with a considerable quantity of other seeds. Held (English Court of Common Pleas): the buyer's damages claim succeeded. Goods sold under a trade description must be merchantable under it, i.e. saleable in the market as goods of that name. The case links Sections 15 and 16: goods must answer their description, and must also be merchantable as goods of that description.
3. Quality and fitness (Section 16)
Section 16 states the general rule (caveat emptor, below) and then the exceptions:
- Fitness for purpose: where the buyer makes known to the seller the particular purpose for which he needs the goods, so as to show reliance on the seller's skill or judgment, and the goods are of a description the seller deals in, there is an implied condition that they are reasonably fit for that purpose. No such condition arises where a specified article is sold under its patent or other trade name.
- Merchantable quality: where goods are bought by description from a seller who deals in such goods, there is an implied condition that they are of merchantable quality, i.e. fit to be sold in the market under that description. If the buyer has examined the goods, there is no implied condition as to defects that examination ought to have revealed.
- Usage of trade: a condition as to quality or fitness may be annexed by usage of trade.
Frost v. Aylesbury Dairy Company Limited (1905): milk supplied to the plaintiff's household carried typhoid germs; his wife caught typhoid and died. The dairy proved it took every care and the germs were undetectable. Held (English Court of Appeal): still liable. The plaintiff relied on the dairy's skill and judgment to supply milk fit for drinking, so the implied condition of fitness was broken however careful the seller was. Principle: the implied condition of fitness imposes strict liability, independent of negligence.
4. Sample (Section 17)
Three implied conditions:
- the bulk shall correspond with the sample in quality;
- the buyer shall have a reasonable opportunity of comparing the bulk with the sample;
- the goods shall be free from any defect rendering them unmerchantable that would not be apparent on reasonable examination of the sample.
Caveat Emptor
▶ Watch this part of the lecture (2:10:48)
Caveat emptor: let the buyer beware. Section 16 opens with it: subject to the Act and any other law, there is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale. Ordinarily the buyer must examine the goods and use his own judgment.
Farhan buys a second-hand fridge after inspecting it. He cannot later complain that it is not as cold as he hoped.
Exceptions
- Fitness for a purpose made known to the seller.
- Merchantable quality in a sale by description.
- Usage of trade.
- Sale by sample.
- Sale by description.
- Fraud: a seller who actively hides a defect or lies about it gets no protection. Mere silence, however, is usually not fraud.
Ward v. Hobbs (1878): the seller sold pigs at a market "with all faults", knowing they had a contagious fever, though exposing such pigs at a market was an offence. The infection spread to the buyer's other pigs and many died. Held (House of Lords): not liable. Sending pigs to market was no representation of health, "with all faults" excluded any warranty of soundness, and mere silence was not fraud. Principle: caveat emptor; a seller who gives no warranty and tells no lie is not liable even for known defects, though active concealment or a false statement would change the result.
Consumers today: the rule is much weaker. Under the Consumer Protection Act, 2019, a consumer may bring a product liability action against the manufacturer, service provider or seller for harm caused by a defective product.
Transfer of Property and Risk
Among the effects of a contract of sale, the key question is when ownership passes from seller to buyer. It matters because it decides who bears the risk (Section 26), who can sue a thief, and whose creditors can take the goods.
Section 26: unless otherwise agreed, goods remain at the seller's risk until property is transferred to the buyer; thereafter they are at the buyer's risk, whether delivery has been made or not. But where delivery is delayed through the fault of either party, the goods are at the risk of the party at fault for any loss caused by that fault.
Transfer of Property in Goods (continued)
Sections 18 to 25 decide when the property (ownership) in goods passes from the seller to the buyer.
Section 18: unascertained goods
In a contract for the sale of unascertained goods, no property passes until the goods are ascertained.
Section 19: specific or ascertained goods
The main rule: property passes when the parties intend it to pass. Intention is found from the terms of the contract, the conduct of the parties and the circumstances. Where no different intention appears, Sections 20 to 24 lay down rules for finding it.
Sections 20 to 22: specific goods
- Section 20: in an unconditional contract for the sale of specific goods in a deliverable state, property passes when the contract is made, even if payment or delivery is postponed.
- Section 21: where the seller must do something to put specific goods into a deliverable state, property passes only when that is done and the buyer has notice.
- Section 22: the same applies where the seller must weigh, measure or test the goods to find the price.
Deliverable state means such a state that the buyer would be bound to take delivery.
Prince buys a particular scooter from a showroom, ready to ride: ownership passes at once. If the dealer must first fit a new engine, ownership passes only when that is done and Prince is told.
Section 23: unascertained and future goods
Where such goods, of the contract description and in a deliverable state, are unconditionally appropriated to the contract by one party with the assent of the other, property passes to the buyer. The assent may be express or implied, and may be given before or after the appropriation.
- Appropriation simply means setting aside particular goods for this contract.
- Section 23(2): delivery to a carrier for transmission to the buyer, without reserving a right of disposal, is treated as an unconditional appropriation.
Rohde v. Thwaites (1827): sellers agreed to sell 20 hogsheads (large barrels) of sugar out of a larger stock, to be delivered on request. The buyer took away 4. The sellers filled the remaining 16 and asked him to take them; he promised to do so as soon as he could, but never did. Held (English Court of King's Bench): property in the 16 hogsheads had passed, since the sellers had appropriated them to the contract and the buyer had assented, so the sellers could sue for the price. Principle: as in Section 23, unconditional appropriation with the buyer's assent passes the property.
Section 24: goods on approval or on sale or return
Property passes when the buyer:
- signifies his approval; or
- does any other act adopting the transaction; or
- keeps the goods beyond the fixed time, or a reasonable time, without giving notice of rejection.
A boutique sends Zoya three sarees on approval, and she wears one to a wedding. That saree is hers.
Section 25: a seller may reserve the right of disposal until conditions such as payment are met.
Risk before property passes
Appleby v. Myers (1867): the plaintiffs agreed to make and fix machinery on the defendant's premises, to be paid for on completion. Before completion, the premises and machinery were destroyed by accidental fire. Held (English Court of Exchequer Chamber, judgment by Justice Blackburn): the plaintiffs could recover nothing. The contract was for complete work paid for on completion, property in the machinery was not to pass until then, and both parties were excused. Principle: until the property passes, the goods are at the risk of the seller.
Contracts in International Trade
The Act has no special section on these contracts, so the general rule of intention in Section 19 and the custom of the trade decide when property and risk pass.
| Contract | Seller's duty | Risk passes | Property passes |
|---|---|---|---|
| FOB (free on board) | Place the goods on board a ship at the port of shipment, at his own cost | Ordinarily when the goods are put on board | Ordinarily when the goods are put on board, unless the seller reserves the right of disposal |
| CIF (cost, insurance and freight) | Ship the goods, pay freight and insurance to the port of destination, and send the shipping documents: bill of lading, insurance policy and invoice. The buyer pays against the documents | On shipment | Usually when the documents are handed over against payment |
| Ex-ship | Actually deliver the goods to the buyer from the ship at the port of destination | Only on that delivery | Only on that delivery |
Because ownership passes with the documents against payment, a CIF contract is called a sale of documents.
A Kolkata trader buys machines on CIF terms and the ship sinks after loading. The buyer bears the loss and claims from the insurer.
Sale by a Person Who Is Not the Owner
▶ Watch this part of the lecture (2:18:51)
Farhan steals Prince's phone and sells it to Aadil, who pays the full price in good faith. Prince still owns the phone.
Section 27: where goods are sold by a person who is not their owner, and who does not sell them under the authority or with the consent of the owner, the buyer acquires no better title than the seller had. Latin maxim: nemo dat quod non habet, no one gives what he does not have.
Security of property is protected, but honest buyers are also protected in some cases so that trade can go on.
Exceptions: buyer gets a good title
- Estoppel: the owner, by his conduct, is precluded from denying the seller's authority.
- Mercantile agent (proviso to Section 27): sale by a mercantile agent in possession of the goods or their documents of title, with the owner's consent, in the ordinary course of business, to a buyer in good faith.
- Joint owner (Section 28): sale by a joint owner in sole possession with the permission of the others, to a buyer in good faith.
- Voidable contract (Section 29): sale to a buyer in good faith by a seller who obtained the goods under a contract voidable for fraud, coercion, misrepresentation or undue influence, not yet rescinded.
- Seller in possession (Section 30(1)): a seller who remains in possession after a sale may sell again; the second buyer who takes delivery in good faith is protected.
- Buyer in possession (Section 30(2)): a buyer who gets possession with the seller's consent before property passes may pass a good title to a person in good faith.
| Goods obtained by fraud (Section 29) | Stolen goods |
|---|---|
| The seller gets a title that can be cancelled | Theft gives no title at all |
| A buyer in good faith before rescission gets a good title | The buyer gets no better title than the thief (Section 27) |
Rights of an Unpaid Seller
Section 45: unpaid seller
A seller is unpaid when:
- the whole of the price has not been paid or tendered; or
- a bill of exchange or other negotiable instrument was received as conditional payment and the condition has failed (for example, the cheque bounced).
Note the word whole: even if only a small part of the price remains, he is an unpaid seller.
Section 46: rights against the goods
A lien, a right of stoppage in transit when the buyer is insolvent, and a right of resale. Where property has not yet passed, he has a similar right to withhold delivery.
Lien: Sections 47 and 49
Section 47: a seller in possession may retain the goods until payment where:
- they were sold without any stipulation as to credit;
- the credit period has expired; or
- the buyer has become insolvent.
Section 49: he loses the lien when he delivers the goods to a carrier for the buyer without reserving the right of disposal, when the buyer lawfully obtains possession, or when he waives the lien. He does not lose it merely by obtaining a decree for the price.
A furniture maker who sells a sofa to Farhan on cash terms may keep it until Farhan pays.
Stoppage in transit: Sections 50 to 52
- Section 50: when the buyer becomes insolvent, an unpaid seller who has parted with possession may resume it while the goods are in transit, and keep them until payment.
- Section 51: goods are in transit from delivery to a carrier until the buyer takes delivery from the carrier.
- Section 52: the seller acts by taking actual possession or by giving notice to the carrier.
| Lien | Stoppage in transit |
|---|---|
| Needs possession | Begins after possession is lost |
| Available in the three cases of Section 47 | Available only on the buyer's insolvency |
Resale: Section 54
The contract is not cancelled merely by exercising lien or stoppage. The seller may resell where the goods are perishable, or where he gives notice of his intention to resell and the buyer does not pay within a reasonable time; he may then recover any loss from the original buyer. If he resells without notice, he cannot claim any loss, and any profit belongs to the buyer. The new buyer gets a good title.
Section 53: sale or pledge by the buyer
Does not affect the lien or right of stoppage unless the seller agreed to it. Exception: the buyer has transferred a document of title to someone who took it in good faith and for consideration.
Personal remedies
| Seller against buyer | Buyer against seller |
|---|---|
| Suit for the price (Section 55) | Damages for non-delivery (Section 57) |
| Damages for non-acceptance (Section 56) | Specific performance for specific or ascertained goods (Section 58) |
| Interest (Section 61) |
Prince agrees to buy 50 bags of cement from Farhan, a dealer, for a new house. Farhan sets aside 50 bags and Prince agrees: property passes (Section 23). The bags must be fit for building (Prince relied on the dealer's skill), match their description and be merchantable. If a stranger owned them, Section 27 would protect the true owner. If Prince does not pay, Farhan may exercise his lien, stop the bags in transit if Prince becomes insolvent, or resell after notice.
Partnership: Meaning and Essentials
▶ Watch this part of the lecture (2:24:48)
Partnership is built on the idea of agency, so the rules of agency remain relevant: every partner is an agent of the firm. The law was originally in Chapter 11 of the Contract Act and is now in the Indian Partnership Act, 1932.
Prince and Farhan open a sweet shop. Both put in money, both work at the counter, and they agree to divide the profit equally. They have formed a partnership.
Section 4: partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Individually they are partners, collectively a firm, and the name of their business is the firm name.
Essentials
- Agreement: under Section 5, partnership arises from contract, not status. Members of a Hindu undivided family carrying on a family business are not partners, as their relation arises by birth.
- Business: under Section 2, includes every trade, occupation and profession.
- Sharing of profits of that business.
- Mutual agency: business carried on by all, or by any acting for all. This is the true test of partnership.
Agreement + business + sharing of profits + mutual agency = partnership.
- A firm is not a legal person separate from its partners, as a company is; it is only a short name for the partners together.
- Minimum two persons. The Companies Act, 2013, with its rules, allows at most 50 partners.
Mode of Determining the Existence of Partnership
Section 6: whether persons are a firm, or a person is a partner, is decided by the real relation between the parties, shown by all relevant facts taken together. The label used is not decisive.
- Explanation 1: sharing profits or gross returns from jointly held property does not by itself make persons partners. Prince and Farhan, joint owners of a building sharing its rent, are co-owners, not partners.
- Explanation 2: receiving a share of profits does not by itself make a person a partner. Four such persons: (1) a lender to the business; (2) a servant or agent paid by a share of profits; (3) the widow or child of a deceased partner receiving an annuity; (4) a previous owner receiving a share of profits as the price of goodwill. None of them carries on the business or can bind the others. This rule grew from the English case below.
Cox v. Hickman (1860): two traders named Smith ran an iron business and fell deeply into debt. Under a creditors' deed, trustees were to run the business and divide net profits among the creditors until the debts were paid. Cox and Wheatcroft, creditors, were named trustees (Cox never acted; Wheatcroft acted briefly). Hickman, holding bills of exchange accepted in the business name, sued them as partners. Held (House of Lords): not partners. Sharing profits is evidence of partnership but not conclusive; the real test is whether the business was carried on on their behalf, so that those acting were their agents. Principle: mutual agency, not mere sharing of profits, is the true test.
Shanti Ranjan Das Gupta v. Dasuram Murzamal (1972): the owner of a rice mill in Assam sued for dissolution and accounts, claiming the defendants were his partners in the milling business; they said there was only a milling agreement to mill their paddy at fixed rates. Held (Supreme Court, Justice I.D. Dua): no partnership proved. There was no written deed and no accounts were ever kept, not even privately, though real partners almost always keep some record. Principle: Section 6; the real relation is judged from all the facts, and conduct matters more than words.
Kinds of Partnership
- At will (Section 7): the contract makes no provision for duration or ending; any partner can end it by notice.
- Particular partnership (Section 8): for a particular adventure or undertaking. If Prince and Farhan join only to supply chairs for one wedding season, the partnership ends when that job is done.
- Fixed term: for example, five years.
Registration of a Firm and Effects of Non-Registration
▶ Watch this part of the lecture (2:30:28)
Registration is not compulsory, but an unregistered firm pays a heavy price.
- Section 58: a statement signed by all partners is sent to the Registrar of Firms, giving the firm name, principal and other places of business, the date each partner joined, the partners' names and addresses, and the duration of the firm.
- Section 59: when the Registrar records it in the Register of Firms, the firm is deemed registered.
Section 69: effects of non-registration
- 69(1), between partners: no suit to enforce a right arising from a contract or conferred by the Act, by a person suing as partner against the firm or any partner, unless the firm is registered and the plaintiff is shown in the Register as a partner.
- 69(2), against outsiders: no suit by or on behalf of the firm against a third party to enforce a right arising from a contract, unless the firm is registered and the persons suing are shown in the Register as partners.
- 69(3): the same bar applies to a claim of set-off or any other proceeding to enforce a contractual right.
Not barred:
- a suit for dissolution, for accounts of a dissolved firm, or to realise the property of a dissolved firm;
- a suit by a third party against the unregistered firm;
- a suit by the firm against a stranger for a wrong, such as copying its trade name, since the bar covers only rights arising from a contract.
The unregistered firm of Prince and Farhan supplies sweets worth ₹2 lakh to a hotel, which does not pay. The firm cannot sue for the price, but the hotel can sue the firm for spoiled sweets.
Sharad Vasant Kotak v. Ramniklal Mohanlal Chawda (1997): a registered firm of builders was reconstituted when a partner died and his widow was admitted, without fresh registration. A partner later sued for dissolution and accounts; a Maharashtra State amendment of 1984 extends the Section 69 bar even to such suits. Held (Supreme Court, Justice K. Venkataswami): the suit was maintainable. A reconstituted firm needs no fresh registration; failure to inform the Registrar of a change attracts only the penalties in the Act and does not end the registration.
Umesh Goel v. Himachal Pradesh Co-operative Group Housing Society Limited (2016): can an unregistered firm go to arbitration? Held (Supreme Court): arbitral proceedings are not proceedings in a court for the purposes of Section 69. Principle: the bar does not by itself defeat an arbitral award in favour of an unregistered firm.
Relations of Partners to One Another
- Section 9: partners must carry on the business to the greatest common advantage, be just and faithful to each other, and render true accounts and full information to every partner.
- Section 10: every partner must indemnify the firm for loss caused by his fraud in the conduct of the business.
- Section 11: mutual rights may be fixed by contract; notwithstanding Section 27 of the Contract Act, partners may agree that no partner shall carry on any other business while a partner.
Section 12: conduct of business (subject to contract)
- Every partner may take part in the business and must attend diligently to his duties.
- Differences on ordinary matters: decided by majority, after every partner has expressed his opinion.
- The nature of the business cannot be changed without the consent of all.
- Every partner may inspect and copy the books.
Two partners of a sweet shop may, after hearing the third, add a bakery counter; turning it into a mobile phone shop needs everyone's consent.
Section 13: mutual rights and liabilities (subject to contract)
- No salary for taking part in the business.
- Profits shared equally; losses contributed equally.
- Interest on capital, where allowed, only out of profits.
- Advances beyond agreed capital earn interest at 6 per cent a year.
- The firm indemnifies a partner for payments and liabilities in the ordinary and proper conduct of business, and for prudent acts in an emergency.
- A partner indemnifies the firm for loss caused by his wilful neglect.
Sections 14 to 16: firm property and personal profits
Firm property, including goodwill, must be used only for the business (Sections 14 and 15). Under Section 16, a partner must pay to the firm any personal profit from a firm transaction or from use of its property, business connection or name, and all profits of a competing business of the same nature.
If Farhan quietly uses the firm's suppliers to run his own sweet stall, he must hand over those profits.
Relations of Partners to Third Parties
▶ Watch this part of the lecture (2:36:10)
Section 18: subject to the Act, a partner is the agent of the firm for the purposes of its business.
Implied authority, Section 19(1): the act of a partner done to carry on, in the usual way, business of the kind carried on by the firm binds the firm.
Section 19(2): unless usage or custom of trade allows it, implied authority does not cover:
- submitting a firm dispute to arbitration;
- opening a bank account for the firm in his own name;
- compromising or giving up a claim of the firm;
- withdrawing a suit filed by the firm;
- admitting liability in a suit against the firm;
- acquiring immovable property for the firm;
- transferring immovable property of the firm;
- entering into a partnership on behalf of the firm.
Section 20: partners may extend or restrict implied authority by contract, but a restriction does not bind a third party who does not know of it.
Liability: Sections 25 to 27
- Section 25: every partner is liable jointly and severally for all acts of the firm done while he is a partner, so a creditor may sue any one partner for the whole debt.
- Section 26: the firm is liable for a partner's wrongful act in the ordinary course of business. If Prince injures a cyclist while delivering sweets for the firm, the firm is liable.
- Section 27: the firm must make good money received from a third party and misapplied by a partner.
The Doctrine of Holding Out
Section 28(1): anyone who, by words spoken or written or by conduct, represents himself to be a partner, or knowingly permits himself to be represented as one, is liable as a partner to anyone who has given credit to the firm on the faith of that representation, whether or not he knows the representation reached that person.
The rule rests on estoppel: one who lets others believe he is a partner cannot later deny it against someone who relied on that belief.
Aadil, not a partner, allows his name to be printed on the sweet shop's letterhead as a partner. A supplier gives credit because Aadil is wealthy. Aadil is liable to that supplier as a partner.
Section 28(2): continuing the business in the old firm name after a partner's death does not by itself make his estate liable for later acts of the firm.
Juggilal Kamlapat v. Sew Chand Bagri (1959): three brothers carried on the family business in partnership in their father's name, Sew Chand Bagri, and registered the firm. After dissolution, one brother continued in the old name while the register still showed all three. A company that later dealt with the business got a decree against the firm and sought to execute it against the two brothers who had left. Held (Justice G.K. Mitter, Calcutta High Court): refused. Under the proviso to Section 45, a former partner is not liable for later acts to a person who never knew him to be a partner. The old register entries did not help: the company had not shown that it relied on them or gave credit on the faith of any representation by them. The appeal failed in 1963. Principle: liability by holding out depends on the reliance of the person dealing with the firm.
Rights of a Transferee of a Partner's Interest
A partner may transfer his interest, but the transferee does not become a partner. Under Section 29, while the firm continues he cannot interfere in the business, demand accounts or inspect the books; he gets only the transferor's share of profits and must accept the account of profits agreed by the partners. On dissolution, he may claim that share of the assets. Reason: partnership rests on personal trust, and the partners never chose the stranger.
Position of a Minor Admitted to the Benefits of Partnership
▶ Watch this part of the lecture (2:40:46)
A minor cannot be a partner, because a minor cannot make a contract. Section 30 provides a middle path:
- 30(1): with the consent of all partners for the time being, a minor may be admitted to the benefits of partnership.
- 30(2): he is entitled to an agreed share of property and profits, and may inspect and copy the accounts.
- 30(3): his share is liable for acts of the firm, but he is not personally liable.
- 30(4): he cannot sue the partners for his share unless he is severing his connection with the firm.
- 30(5): within six months of attaining majority or of learning of his admission, whichever is later, he may give public notice whether he elects to become a partner. Without notice, he becomes a partner automatically when those six months end.
| Becomes a partner | Elects not to become a partner |
|---|---|
| Personally liable to third parties for all acts of the firm since he was first admitted to the benefits | His share is not liable for acts after his public notice |
Silence is dangerous for the minor: without public notice, he becomes a partner automatically.
Shivagouda Ravji Patil v. Chandrakant Neelkanth Sedalge (1964): the respondent, admitted to the benefits as a minor, saw the firm dissolved before he came of age. When the partners committed acts of insolvency, creditors sought to have him declared insolvent, arguing that his failure to give notice under Section 30(5) made him a partner. Held (Supreme Court): rejected. A minor cannot be a partner, and Section 30(5) assumes the partnership still exists when he attains majority. Principle: if the firm is already dissolved, there is nothing to join, and silence cannot make him a partner.
Incoming and Outgoing Partners
- Section 31: no one can be introduced as a partner without the consent of all existing partners; a new partner is not liable for earlier acts of the firm.
- Section 32: a partner may retire with the consent of all, under an express agreement, or, in a partnership at will, by written notice. He remains liable to third parties for acts of the firm until public notice of retirement, but not to a person who dealt with the firm without knowing he was a partner.
- Section 33: no expulsion by any majority, except in good faith under a power given by the partners' contract.
- Section 34: a partner adjudicated insolvent ceases to be a partner from the date of the order.
- Section 35: where the firm continues after a partner's death, his estate is not liable for acts done after his death.
Outgoing partner: Sections 36 and 37
He may carry on a competing business and advertise it, but, unless otherwise agreed, may not use the firm name, represent himself as carrying on its business, or solicit its old customers. He may validly agree not to carry on a similar business within a reasonable period or area, an exception to Section 27 of the Contract Act. Under Section 37, if the others carry on the business with firm property without settling his account, he may claim a share of later profits or interest at 6 per cent a year.
Section 38 (read with Section 129 of the Contract Act): a continuing guarantee given to a firm, or for its dealings, is revoked for the future by any change in the constitution of the firm, unless otherwise agreed.
Dissolution of a Firm
▶ Watch this part of the lecture (2:44:59)
Section 39: dissolution of partnership between all the partners is the dissolution of the firm.
| Reconstitution | Dissolution of the firm |
|---|---|
| One partner retires, the others continue | The relation ends between all partners |
| The firm continues | The firm itself is dissolved |
Modes of dissolution
- Agreement (Section 40): consent of all partners, or under their contract.
- Compulsory (Section 41): all partners, or all but one, adjudicated insolvent; or an event makes the business unlawful. Where the firm runs several separate undertakings, illegality of one does not dissolve it as regards the others.
- Contingencies (Section 42), subject to contract: expiry of fixed term, completion of the adventure, death of a partner, or a partner adjudicated insolvent.
- Notice (Section 43): in a partnership at will, written notice by any partner to all others.
- Court (Section 44).
Section 44: grounds for dissolution by the court (at a partner's suit)
- a partner has become of unsound mind;
- another partner has become permanently incapable of performing his duties;
- another partner's conduct is likely to affect the business prejudicially;
- another partner wilfully or persistently breaks agreements on management, so that it is not reasonably practicable to carry on with him;
- another partner has transferred his whole interest to a third party, or allowed his share to be charged or sold for his dues;
- the business can be carried on only at a loss;
- any other ground making dissolution just and equitable.
After dissolution: Sections 45, 46 and 48
- Section 45: partners remain liable to third parties for acts after dissolution until public notice is given.
- Section 46: every partner may insist that firm property be applied first to pay firm debts.
- Section 48, losses: paid first out of profits, next out of capital, lastly by partners individually in their profit-sharing ratio.
- Section 48, assets: applied to (1) firm debts to third parties, (2) partners' advances, (3) partners' capital, (4) the residue divided in the profit-sharing ratio.
Order: outsiders first, then loans from partners, then capital, then profit.
S.V. Chandra Pandian v. S.V. Sivalinga Nadar (1993): arbitrators divided the properties of a firm of six brothers, including immovable properties, among them. It was argued that the award needed registration under the Registration Act as a document transferring rights in immovable property. Held (Supreme Court, Justice A.M. Ahmadi): it did not. While the firm lasts, a partner is entitled only to a share of profits; after dissolution, only to his share of the residue after accounts are settled under Section 48, which in law is movable property. Distributing it is not a partition or transfer of immovable property. Principle: a partner's interest is a share in the surplus, not a right in any particular asset.
Sale of Goodwill after Dissolution
Goodwill is the benefit of the reputation and connections of a business; Lord Macnaghten called it "the attractive force which brings in custom". Under Section 55, on dissolution goodwill is included in the assets and may be sold separately or with other property. After the sale, a partner may carry on a competing business but, unless otherwise agreed, may not use the firm name, represent himself as carrying on the old business, or solicit its customers. He may agree with the buyer not to carry on a similar business within a reasonable period or area.
The famous name of Prince and Farhan's sweet shop is sold to Aadil. Prince may open a new shop, but not under the old name.
Limited Liability Partnership
▶ Watch this part of the lecture (2:49:36)
An ordinary firm's weakness is unlimited liability: creditors can take every partner's house and savings. The Limited Liability Partnership Act, 2008 (in force 2009) combines the flexibility of a partnership with the limited liability of a company.
- Section 3: a body corporate formed and incorporated under the Act, a legal entity separate from its partners, with perpetual succession (a change of partners does not affect its existence, rights or liabilities).
- Section 6: at least two partners. Section 7: at least two designated partners who are individuals, at least one resident in India; they are responsible for compliance with the law.
- Section 26: every partner is the agent of the LLP for its business, but not of the other partners.
- Section 27: its obligations, in contract or otherwise, are solely its own, met out of its own property.
- Section 28: a partner is not personally liable for them merely because he is a partner; he is liable for his own wrongful act, not another partner's.
- Section 30: if business is carried on to defraud creditors or for any fraudulent purpose, the liability of the LLP and of the partners who acted with that intent becomes unlimited.
- The 2021 amendment turned many offences into civil penalties and created categories such as small limited liability partnerships.
An architecture LLP run by Prince, Farhan and Zoya loses a large claim. Zoya's savings are safe, unless she herself was negligent or dishonest.
| Point | Partnership firm | Limited liability partnership |
|---|---|---|
| Legal personality | None separate from partners | Body corporate |
| Partners' liability | Unlimited | Generally not personally liable for its debts |
| Agency | Agent of the firm, and so of all partners | Agent only of the LLP |
| Registration | Optional | Exists only on incorporation |
| Maximum partners | 50 | No upper limit |
| Perpetual succession | No | Yes |
The Partnership Act does not apply to an LLP at all.
Public-Private Partnership
A long-term arrangement between a government body and a private company to build or run public infrastructure or services such as highways, airports and metro rail. The company invests money or manages the project for a fixed period, shares substantial risk, and is paid through user charges (such as tolls) or performance-linked payments.
- Build, operate and transfer: the company builds a road, collects tolls for some years, then hands it back.
- Hybrid annuity model (highways): the government pays part of the cost during construction and the rest in instalments over the years.
A public-private partnership is not a partnership under the 1932 Act: there is no business carried on by all acting for all, and no sharing of profits in that sense. It is a concession contract, a government contract, so the law of government contracts applies: the contract must be in the form required by Article 299, and the government must act fairly under Article 14 in choosing the private partner.
Partnership Rules Applied
Prince, Farhan and Aadil run a catering firm. Their agreement makes them partners (test: mutual agency). Unregistered, they cannot sue customers for unpaid bills. Each binds the firm in the usual course of catering, but none may transfer its godown alone. A stranger shown as a partner with his permission is liable to those who relied on it. If Aadil retires, he must give public notice. On dissolution: outsiders, then partners' loans, then capital, then profits.
Unit Six: Miscellaneous
Unit Six applies the rules already studied to special settings: contracts with the government, escrow and franchise agreements, contracts with universities and in sports, and consumer contracts.
Government Contracts
▶ Watch this part of the lecture (2:55:00)
When the government buys computers, builds a road or hires a caterer, it mostly contracts like anyone else: the Contract Act applies to it just as it applies to Prince or Farhan. The Constitution adds special rules because public money is involved and the government acts through thousands of officers.
Article 298: the power to contract
The executive power of the Union and of each State extends to carrying on any trade or business, acquiring, holding and disposing of property, and making contracts for any purpose.
Article 299(1): the form
Contracts made in the exercise of the executive power of the Union or a State shall be expressed to be made by the President or the Governor, and executed on their behalf by such persons and in such manner as they direct or authorise.
Three conditions under Article 299(1):
- The contract must be expressed to be made in the name of the President or the Governor.
- It must be executed, that is, in writing.
- It must be signed by an authorised person.
The Supreme Court has explained that these formalities are not a mere form: they protect the government against unauthorised contracts by its officers, so they rest on public policy.
Article 299(2): no personal liability
Neither the President nor the Governor is personally liable on such a contract, nor is the officer who makes or signs it on their behalf.
Effect of non-compliance
If the form is not followed, the contract is void and neither side can enforce it.
Mulamchand v. State of Madhya Pradesh: Held: the formalities of Article 299 cannot be waived or dispensed with.
K.P. Chowdhry v. State of Madhya Pradesh: Held: there can be no implied contract with the government, because an implied contract would make Article 299 useless.
Section 70 of the Contract Act: no free benefit
Section 70: where a person lawfully does anything for another, or delivers anything to him, not intending to do so gratuitously, and the other enjoys the benefit, the latter must pay compensation or restore the thing.
State of West Bengal v. B.K. Mondal and Sons: contractors did additional construction work for the government at its officers' request, without a contract in the required form; the government refused to pay. Held (Supreme Court, five-judge bench, judgment by Justice Gajendragadkar): having accepted and enjoyed the work, the government must pay compensation under Section 70. Principle: the government cannot keep a benefit for free.
But a person claiming restitution must also account for what he has received.
Mulamchand v. State of Madhya Pradesh (restitution): the claimant deposited ₹10,000 for the right to collect lac from forest land, worked the contract for a while, then sued for a refund. Held: the contract was void, but he got no refund because he did not prove how much he had gained from it.
An officer orally asks Prince's tent house to put up a pandal for a government function. There is no valid contract, but if the government uses the pandal, Prince can claim fair compensation under Section 70.
Government servant's suit for salary
State of Bihar v. Abdul Majid: a Sub-Inspector of Police in Bihar was dismissed in 1940 by an officer lower than his appointing authority, which the Government of India Act, 1935 did not allow. He sued for arrears of salary; the State argued that under English law a Crown servant holds office at pleasure and cannot sue for salary. Held (unanimous, Chief Justice Mehr Chand Mahajan): the English rule does not apply in India, as Indian statutes had negatived it. A creditor can attach a government servant's salary, so it would be strange if the servant himself could not sue for it. His claim rested on contract or on quantum meruit (payment for the value of work done). Principle: a government servant can sue the State for arrears of salary.
Today the pleasure doctrine is in Article 310, with safeguards in Article 311.
Fairness in awarding contracts
Ramana Dayaram Shetty v. International Airport Authority of India (1979): Held (Supreme Court, speaking through Justice P.N. Bhagwati): the State cannot act arbitrarily when it awards contracts.
Tata Cellular v. Union of India (1994): Held: judges review the process of decision, not the merits of the choice.
Escrow Agreements
▶ Watch this part of the lecture (3:00:18)
Prince wants to buy a used car from Farhan, who lives in another city. Prince fears paying first; Farhan fears sending the car first. They ask a trusted third person to hold the money until the car is delivered. This is an escrow.
Escrow: an arrangement in which a neutral third person (the escrow agent) holds money, documents or property for two parties and releases it only when the agreed conditions are met.
Features
- There are three parties.
- The agent is neutral and owes a duty to both sides.
- One party alone cannot call the deposit back.
India has no separate statute on escrow; it rests on the Contract Act.
Uses
- SEBI takeover regulations: a person making an open offer for shares of a listed company must first deposit in an escrow account 25% of the first ₹500 crore payable under the offer and 10% of the balance.
- Real Estate (Regulation and Development) Act, 2016: a builder must keep 70% of buyers' money in a separate bank account, used only for the land and construction costs of that project (a similar idea).
Siddhivinayak Realties Private Limited v. Tulip Hospitality Services Limited: the leading Supreme Court case on escrow. In 2005 Tulip agreed to sell the Centaur Hotel, Juhu, Mumbai, to Siddhivinayak for about ₹349 crore. Undated resignation letters of Tulip's directors and share transfer forms were handed to two joint escrow agents (the parties' solicitors); on Tulip's default the buyer could take control of the company, and the agents were jointly to decide whether default had occurred. When disputes arose, the buyer's solicitor had already written a letter taking sides on that very question, so the arbitral tribunal restrained the buyer from going before the escrow agents. Held (Supreme Court, judgment by Justice Altamas Kabir): the restraint was upheld. Escrow agents are trusted by both parties to act fairly and without bias, and no one can be a judge in his own cause; the escrow arrangement itself survived alongside the arbitration. Principle: an escrow agent is a neutral stakeholder and must remain impartial.
Franchise Agreements
Zoya wants to open a pizza outlet. Instead of building her own brand, she pays a well-known pizza brand an initial fee and a monthly royalty for the right to use its name, recipes and systems, and must follow its standards. The brand owner is the franchisor; Zoya is the franchisee.
A franchise agreement usually covers: licence of the trademark and know-how, fees and royalty, quality control, territory, term, termination, confidentiality and a promise not to compete. India has no special statute on franchising, so the Contract Act governs it, along with the laws on trademarks and competition.
- A franchise is usually terminable by notice, and under Section 14 of the Specific Relief Act a contract in its nature determinable cannot be specifically enforced. A wrongly terminated franchisee usually gets damages, not the franchise back.
- A promise not to compete during the term is generally valid; a restraint continuing after the agreement ends is usually void under Section 27 of the Contract Act.
Dario Restaurant Franchise India Private Limited v. R. Arvind and A. Malinga (2019): the franchisor gave a franchise for an Italian restaurant under its brand, Dario's, to a firm of which the respondents were partners. Over unpaid dues it terminated the franchise in 2015; the franchisee admitted the breaches in writing but did not pay. The agreement provided for a sole arbitrator at Pune; the franchisee wanted Chennai. Held (Justice S.J. Kathawalla, Bombay High Court): a sole arbitrator was appointed under Section 11 of the Arbitration and Conciliation Act, with the venue kept at Pune as agreed; the court did not decide who was right. Principle: franchise disputes usually go to arbitration, and courts enforce the agreed clause and venue.
University Contracts
Admission is, in a sense, a contract: the student applies, is admitted and pays fees; the institution promises teaching, examinations and a degree according to its rules. The prospectus and regulations largely become its terms. But it is not a purely private bargain: most universities are created by statute, their rules have the force of law, and their decisions can be challenged before the High Court under Article 226.
Is the student a consumer?
Maharshi Dayanand University v. Surjeet Kaur (2010): a consumer forum had directed a university to award a degree. Held (Supreme Court, judgment by Justice B.S. Chauhan): the forum's order was set aside. A university conducting examinations and awarding degrees performs statutory functions, and the student is not a consumer of a service in that respect.
In 2017 the Supreme Court repeated that education is not a commodity, and that disputes about admission and fees are not complaints of deficiency in service.
According to the Supreme Court, a student cannot use consumer law against a university over examinations, degrees, admission or fees; such grievances usually go to the civil court or the High Court.
Sports Contracts
Sport is now a big business, and it runs on contracts: player contracts with clubs or franchises (such as Indian Premier League teams), sponsorship and endorsement, broadcasting, and contracts with coaches and venues. They are ordinary contracts, but two rules matter most:
- A contract to play or coach depends on personal skill, so no specific performance under Section 14 of the Specific Relief Act.
- Any restraint on a player's freedom to work is tested under Section 27 of the Contract Act.
Percept D'Mark India Private Limited v. Zaheer Khan (2006): a sports management company was the cricketer's exclusive manager for a fixed period, with a right of first refusal even after the agreement ended, so he could not accept another manager's offer without first letting the company match it. After the term he signed with another agency, and the company sought an injunction. Held (Supreme Court, judgment by Justice AR. Lakshmanan): injunction refused. A restraint operating after the contract has ended is void under Section 27 and will not be enforced by injunction. Principle: a player cannot be tied to his manager once the contract has ended.
Consumer Contracts
▶ Watch this part of the lecture (3:08:07)
Opening a bank account, buying a flight ticket or tapping "I agree" on a shopping app involves no negotiation: the company prints the terms in advance, to be taken or left. These are standard form contracts. They save time, but the company has far greater bargaining power and may hide one-sided terms in the small print. The law answers in three ways.
| Response | Source | Leading case |
|---|---|---|
| Unfair term void as opposed to public policy | Section 23, Contract Act | Central Inland Water Transport v. Brojo Nath Ganguly (1986) |
| Unfair contract terms declared null and void | Consumer Protection Act, 2019 | Pioneer Urban Land v. Govindan Raghavan (2019) |
| Balance: not every harsh term is rewritten | Courts; RBI regulates interest rates | HSBC v. Awaaz (2024) |
1. The Contract Act
Central Inland Water Transport Corporation Limited v. Brojo Nath Ganguly (1986): a government company's service rule allowed it to remove even a permanent employee on three months' notice. Held (Supreme Court): an unfair and unreasonable term forced on a weaker party by a party with far greater bargaining power is opposed to public policy and void under Section 23.
2. The Consumer Protection Act, 2019
Unfair contract (Section 2(46)): a contract between a manufacturer, trader or service provider and a consumer, with terms causing a significant change in the rights of the consumer.
Six examples given by the Act:
- manifestly excessive security deposits;
- a penalty wholly disproportionate to the loss caused by breach;
- refusing early repayment of a debt even on payment of the applicable penalty;
- allowing one party to end the contract on its own without reasonable cause;
- allowing one party to assign the contract to the consumer's detriment without his consent;
- any unreasonable charge, obligation or condition putting the consumer at a disadvantage.
The State Commission and the National Commission can declare such terms null and void.
Pioneer Urban Land and Infrastructure Limited v. Govindan Raghavan (2019): the builder could charge 18% a year interest on delayed instalments and cancel the allotment, while the flat buyer's remedies for the builder's delay were far weaker. Held (Supreme Court, judgment by Justice Indu Malhotra): such one-sided terms are an unfair trade practice, and the buyer is not bound by them.
3. Balance
Hongkong and Shanghai Banking Corporation Limited v. Awaaz (20 December 2024): the National Commission had treated credit card interest above 30% a year as an unfair trade practice. Held: the Supreme Court set that order aside, because the rates were disclosed to cardholders and the Reserve Bank of India, not a consumer forum, regulates interest rates. Principle: courts do not rewrite every term that looks harsh.
Online shopping
- Consumer Protection (E-Commerce) Rules, 2020: sellers must clearly display their terms on return, refund, exchange, warranty and delivery.
- Central Consumer Protection Authority guidelines (November 2023): against dark patterns, that is, tricks in app design such as false urgency or items added to the basket without asking.
Privity and the dealer
Indian Oil Corporation v. Consumer Protection Council, Kerala: a consumer paid a cooking-gas distributor for a new connection. The distributor had released more connections than Indian Oil allowed and issued no subscription voucher, so Indian Oil refused to regularise it. All three consumer forums held Indian Oil liable. Held (Supreme Court, judgment by Justice S. Mohan): the forums were reversed. The distributorship agreement said the distributor acted as a principal, not an agent; the connection was unauthorised and there was no privity of contract between the consumer and Indian Oil, so no deficiency in its service.
A dealer is not an agent just because he sells a company's goods (see the test of agency in Unit Three). Today, the product liability chapter of the Consumer Protection Act, 2019 gives a consumer a direct claim for harm caused by a defective product, even without privity.
Quick revision
▶ Watch this part of the lecture (3:12:25)
Contract Law II runs from the promise to make good the loss of another all the way to contracts with governments and consumers. Three habits for the examination:
- In every problem, first identify the special contract, then walk through its essential ingredients one by one.
- Always name the section and support it with the leading case.
- Whenever two concepts look similar, such as indemnity and guarantee or pledge and hypothecation, write their differences clearly, with an example.
