Contract Law II: Important Case Laws on Indemnity, Guarantee, Bailment, Agency, Sale of Goods and Partnership

Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri

Decided by the Bombay High Court in 1942. The case answers whether a person can ask for protection from a debt before actually paying it. It is an important Indian decision on indemnity.

Facts

• Gajanan had agreed with the municipal corporation in Bombay to take a very long lease of a plot of land.
• At the request of Moreshwar, Gajanan transferred the benefit of that arrangement to him.
• Moreshwar took possession and began construction. Building materials were supplied on credit, and the supplier demanded payment.
• Because the lease arrangements were still connected with Gajanan, Moreshwar asked him to mortgage the property to secure what was owed to the supplier. Gajanan agreed.
• The arrangements created mortgages, and Gajanan also became personally responsible for payment.
• Moreshwar promised to clear the mortgages but did not do so.
• Gajanan went to court without first paying the supplier himself.

Issue

Must the person protected by an indemnity lose money from his own pocket before he can demand indemnity, or is a definite legal liability already enough?

Risk that might happen	Absolute liability
Uncertain; it may or may not arise.	A duty to pay that has already become binding.

Judgment (held)

• The court accepted Gajanan's claim. Justice Chagla delivered the judgment.
• The Contract Act does not contain every rule governing indemnity. Section 124 defines a contract of indemnity in particular terms. Section 125 mentions damages, costs and compromise payments that an indemnity holder may recover in specified circumstances.
• These provisions do not mean that courts must refuse protection when liability is already fixed but payment has not yet been made.
• The court applied a principle of fairness (equity, meaning fairness applied through legal principles). Otherwise the promise could become useless: the indemnifier could simply wait while the indemnity holder struggled to find the money to pay a large secured debt, which the promise was meant to prevent him from carrying.
• The court directed Moreshwar to secure the release of Gajanan from the mortgages or to make the required payment into court.
• The decision was not based on a mere fear of possible future litigation. It concerned a definite obligation already incurred.

Principle / ratio

Significance

Legal protection should operate when it is needed, not only after avoidable financial harm.

Exam points

• Start with Section 124, then mention Section 125.
• Explain that Indian courts may apply wider equitable principles where the Act does not fully answer the question.
• Give the actual facts: the mortgages and the unpaid building-material debt.
• End with the limited but powerful rule: when an indemnified liability has become absolute, relief may be claimed before actual payment.

State Bank of India v. Mula Sahakari Sakhar Karkhana Limited

Decided by the Supreme Court in 2006. A paper issued by a bank may be called a guarantee, but the name does not decide what the bank has actually promised. The exact words of a commercial document matter more than a convenient label.

Facts

• The sugar cooperative wanted to set up a paper plant using material left after crushing sugarcane, and contracted with an engineering company for the project.
• Part of the price could be held back as security for proper performance.
• To obtain release of that retained amount, a bank issued a document in favour of the cooperative, limited to 34 lakh rupees.
• The document said the bank would indemnify the cooperative against losses, claims, damages, actions and costs arising from the supplier's liability under the transaction.
• A dispute arose between the cooperative and the contractor, and the cooperative demanded money from the bank.

Issue

Reading 1: pay on demand	Reading 2: indemnity against loss
The bank pays immediately on demand, simply because the cooperative says there is a default.	The bank compensates actual losses falling within the terms of the indemnity.
Much stronger for the person making the demand.	Requires attention to the loss and to the language defining liability.

Judgment (held)

• The High Court had treated the document as an unconditional bank guarantee. The Supreme Court disagreed.
• Justice S. B. Sinha delivered the judgment and examined the document itself.
• The words used were words of indemnification against loss. The document did not contain the usual clear language making payment absolute and unconditional, without delay or objection.
• The court would not insert such language merely because the document was issued by a bank or carried the word "guarantee".

Principle / ratio

• Section 124 explains indemnity as a promise to save a person from specified loss caused by conduct.
• Section 126 deals with guarantees for the liability or default of a third person.
• In commercial transactions a document may use familiar words without fitting neatly into the category suggested by its heading. The court must read the whole document.
• The commercial background may help if the language is unclear, but clear language should not be rewritten.

Significance

The judgment connects indemnity, guarantee and the interpretation of written agreements. Legal obligations arise from what parties actually promised, not from the title printed at the top of the page.

Exam points

• State the facts: the paper plant, the retained price and the indemnity wording.
• Explain why the High Court's unconditional reading was rejected.

Bank of Bihar Limited v. Damodar Prasad

Decided by the Supreme Court in 1968. The question was whether a bank must chase the borrower before asking the guarantor to pay. The answer matters for almost every personal guarantee signed in India.

Facts

• The bank advanced money to Damodar Prasad. Paras Nath Sinha stood as surety for the loan.
• A surety is someone who promises the creditor that a debt will be paid if the main borrower defaults.
• The borrower did not pay, and demands were unsuccessful. The bank sued both the borrower and the surety.
• The trial court granted a decree against both, but added a special direction that the bank could proceed against the surety only after exhausting its remedies against the borrower.
• The High Court left that direction in place. The bank appealed to the Supreme Court.

Issue

Not whether the debt existed, nor whether a valid guarantee had been signed, but whether a court could make the bank wait to enforce its decree against the surety until it had tried every available recovery step against the principal debtor (the person who owes the loan in the first place).

Judgment (held)

• Justice R. S. Bachawat delivered the decision. The Supreme Court removed the direction requiring the bank to proceed first against the borrower.
• Under Section 128 the liability of the surety is co-extensive with that of the principal debtor, unless the contract says otherwise. Co-extensive means it normally covers the same amount or extent of debt.
• The surety's duty became enforceable when the conditions of the guarantee, including the required demand, were satisfied.
• The guarantee did not require the bank to exhaust its remedies against the borrower first, and the Court saw no sufficient special reason to insert that requirement.
• A guarantee is valuable because it gives the creditor another person from whom payment can be obtained. If the creditor must first spend a long time attempting recovery from the borrower, much of that additional security would be lost.

Surety's protection

• Section 140 (subrogation): after paying what he is liable to pay under the guarantee, the surety receives the creditor's rights against the principal debtor.
• Section 145: the surety has a right of indemnity for sums rightfully paid.
• So the bank may claim payment from the surety, while the surety may later seek reimbursement from the borrower.

Two cautions

1. The case does not remove special conditions that the parties themselves have placed in a guarantee.
2. The case does not say that the surety must pay amounts that were never lawfully due under the guarantee.

Significance

The judgment teaches a balanced rule: the lender may rely on the guarantee at the time of default, and the paying surety has rights against the debtor.

Exam points

• Name the three parties to a guarantee under Section 126: the creditor, the principal debtor and the surety.
• Connect Section 128 with the immediate nature of the surety's liability.
• Explain the surety's later rights under Sections 140 and 145.

Maharashtra State Electricity Board v. Official Liquidator, High Court, Ernakulam

Decided by the Supreme Court in 1982. The question was whether a bank that guaranteed a company's performance becomes free from its promise when the company is ordered to be wound up. It is an important judgment on the continuing responsibility of a guarantor.

Facts

• The electricity board accepted a supplier's tender. The arrangement included a bank guarantee for 50,000 rupees.
• Later the supplier company went into winding-up proceedings. Winding up is a legal process in which a company's affairs and assets are dealt with before the company comes to an end.
• The board demanded payment under the bank guarantee, but a company court restrained it from collecting the amount.

Issue

Whether the supplier's winding up removed the bank's independent obligation.

Judgment (held)

• The bank had undertaken to pay according to the terms of the guarantee. The company's financial difficulty did not itself change the words the bank had signed.
• The bank's promise in this transaction was unconditional and enforceable upon the proper demand.
• The Court set aside the restraint on payment. Justice Venkataramiah explained the position of the bank's liability: the board was entitled to rely on the unconditional undertaking, and the winding up of the supplier did not make the bank guarantee disappear.
• Otherwise, the protection obtained by a buyer would be weakest at precisely the moment when the supplier's financial failure made it most important.

Principle / ratio

Section 134 says that a surety is discharged where the creditor releases the principal debtor by contract, or where an act or omission of the creditor has the legal effect of discharging the debtor. The Court distinguished this from a debtor being affected by a court-supervised winding up or another operation of law. That is not a voluntary release by the creditor. The reason for the change is what matters.

Discharge of surety under Section 134	Winding up of principal debtor
Creditor releases the principal debtor by contract, or the creditor's act or omission legally discharges the debtor.	Debtor affected by a court-supervised process or other operation of law.
Surety discharged.	Not a voluntary release by the creditor; the bank guarantee does not disappear.

Three separate matters

1. The underlying contract between the board and its supplier.
2. The bank's promise to the board.
3. The process of winding up the supplier.

These are connected in business, but the bank's responsibility cannot be answered simply by pointing to the supplier's insolvency. The guarantee and the governing law must be read.

Significance

A creditor does not lose the benefit of a valid bank guarantee merely because the principal company enters winding up.

Exam points

• Start with the simple question: was the debtor discharged by the creditor's act, or affected by law?
• Identify the exact kind of bank promise.
• Mention Section 134 and the separate character of an unconditional bank guarantee.

Amrit Lal Goverdhan Lalan v. State Bank of Travancore

Decided by the Supreme Court in 1968. A bank took goods as security for a loan, and a friend guaranteed the debt; the bank then carelessly lost part of those goods. The case explains that a surety has rights in the creditor's securities, even when the surety never held them personally.

Facts

• A business firm obtained a cash credit facility from the bank, secured by goods pledged to the bank.
• Amrit Lal gave a guarantee with a limit of one lakh rupees.
• A shortage in the pledged stock was later discovered: goods worth 35,690 rupees were missing.
• Evidence showed that the loss of that security was due to negligence on the bank's part.
• The bank nevertheless sought to enforce its claim against the surety.

Arguments

• Surety: his liability should be reduced because the bank had failed to preserve security that could have helped discharge the debt.
• Bank: disputed the extent of that protection.

Issues

The legal issue went beyond the amount of the original loan.

1. Could the surety use a right over property that the bank had held when the guarantee was made?
2. Would negligence by the creditor reduce the amount recoverable from the surety?

Law: Section 141

A surety is entitled to the benefit of every security that the creditor holds against the principal debtor when the suretyship begins, whether or not the surety knows that the security exists. If the creditor loses it, or parts with it without the surety's consent, the surety is discharged to the extent of its value. Discharged means released from the legal responsibility to that extent.

Judgment (held)

• The word "security" must not be understood in a narrow technical sense. It includes rights that the creditor had against the property at the relevant time.
• The missing goods had formed part of the bank's security. Because their loss was caused by the bank's negligence, the surety received a reduction corresponding to their value.
• The reduction was not an automatic cancellation of the entire guarantee; it was proportionate to the security lost.

Principle / ratio

Why the law protects the surety: when a surety pays a guaranteed debt, Section 140 allows him to step into the creditor's position against the borrower, and valuable security may make that right useful. If the bank allows pledged goods to disappear, it may damage the surety's ability to recover from the borrower. The creditor should not keep the full advantage of the guarantee while carelessly destroying part of the protection available to the surety.

Significance

The judgment connects the creditor's duty to preserve security with the surety's right to a fair recovery position after payment.

Exam points

• Mention both Section 141 and the right of subrogation under Section 140.
• Describe the pledged goods, the bank's negligence and the amount of the shortage.
• Avoid saying that any minor handling error releases a surety from the entire debt.

State of Bombay (now Gujarat) v. Memon Mahomed Haji Hasam

Decided by the Supreme Court in 1967. Police or customs officers take property under legal powers, with no agreement with the owner. Must they still take care of what they seized? The judgment is a major authority for bailment arising by operation of law.

Facts

• Customs officers of the former State of Junagadh seized vehicles and other goods belonging to a fish exporter from Veraval, alleging a customs offence.
• The owner challenged the confiscation. While proceedings continued, the vehicles were left exposed for years and parts went missing.
• The vehicles were eventually auctioned as unclaimed property without proper notice to the owner.
• Soon afterwards the order of confiscation was set aside, and the authorities were directed to return the property. The owner could no longer get back what had been seized in its original condition.

Arguments

The State resisted a claim for the value of the property. It argued that bailment depends on a contract, and there had been no consensual delivery of the vehicles: there was seizure under legal authority, not a voluntary agreement.

A bailment usually means that goods are delivered for a specific purpose and must later be returned or dealt with as directed.

Issue

Was the absence of a voluntary agreement enough to free the State from a bailee's duty of care?

Judgment (held)

• The Supreme Court rejected the narrow idea. Justice Shelat explained that a relationship like bailment may arise even where there is no enforceable contract and no consent from the owner.
• The officers had authority to seize property, subject to legal conditions and review. But until a confiscation became final, the authorities were under an obligation to preserve it.
• If the order was overturned, they had to return the goods or answer for failure to keep them properly.
• The State's possession was not ownership. A power to seize does not permit careless treatment of an owner's vehicle. The Court held the State responsible.
• The claim was not that every loss during lawful seizure must automatically result in compensation.

Related provisions

• Section 148: defines ordinary contractual bailment.
• Section 151: standard of care; a bailee must act as a reasonably careful person would with goods of similar nature and value.
• Section 71: places a finder of another person's goods under responsibilities like those of a bailee.

These provisions explain why possession carries duties. The case applies that idea to statutory custody, meaning property held because a law authorises the seizure.

Principle / ratio

Significance

Government control over private property is accompanied by legal accountability, even when no contract was ever signed.

Exam points

• Identify the seized vehicles, the pending challenge, the damage and the failed attempt to return them.
• Explain the difference between a power to take possession and a responsibility to protect what has been taken.

Taj Mahal Hotel v. United India Insurance Company Limited

Decided by the Supreme Court in 2019. A guest gives car keys to a hotel valet; the parking ticket says the car is parked at the owner's risk; the car disappears. Can the hotel escape responsibility by pointing to those words?

Facts

• In 1998 a guest arrived at the hotel in a Maruti Zen car and handed over the vehicle and keys for valet parking.
• The hotel issued a parking tag with an owner's-risk condition.
• During the night, another person got the keys from the hotel desk and drove away. A security guard tried to stop the vehicle, but the car was not recovered.
• An insurer compensated the owner and joined in proceedings to recover the loss from the hotel.

Arguments

The hotel argued that its parking arrangement and the printed condition protected it from liability.

Issues

1. Did a bailment arise when the guest gave the car to the valet?
2. Was the valet service free, and would that change the legal position?
3. Could a printed exclusion clause reduce the basic legal duty to take reasonable care of another person's property?

Judgment (held)

• The Supreme Court held the hotel responsible. Justice Mohan M. Shantanagoudar delivered the judgment.
• Handing the car and keys to the valet transferred possession for a limited purpose. The guest remained the owner. The hotel, through its staff, had custody and was expected to return the same car. That is the essential pattern of bailment.
• Even where no separate parking fee is charged, the service may form part of the facilities offered to a paying hotel guest.
• The minimum standard of reasonable care cannot be reduced through a clause allowing the bailee to escape the consequences of its own negligence.
• When a car is not returned, the hotel cannot rely on a bare statement that it had no responsibility. It must answer for its custody and demonstrate the level of care required by law.

Relevant provisions

• Section 148: defines bailment.
• Section 149: recognises delivery that puts goods into another person's possession.
• Section 151: fixes a duty of ordinary reasonable care.
• Section 152: generally protects a bailee who proves that the required care was taken, unless there is a special contract.

Principle / ratio

The decision does not make every hotel an insurer against every possible danger.

Insurer	Bailee
Promises to pay according to an insurance contract.	Duty is to take proper care of the goods.

Both may become relevant after a theft, but they are different obligations.

Custody versus permission to use a parking space

Mere permission to park	Valet custody
The hotel lets guests use an area without taking control of their cars.	The valet takes both the vehicle and the keys.
Not necessarily a bailment relationship.	Possession delivered; bailment arises.

Significance

The lesson is not that a hotel pays for every theft. A business which takes charge of a guest's vehicle must meet the legal standard of reasonable care.

Exam points

• Follow the sequence: delivery, then duty, then failure to return.
• Cite Sections 148, 149, 151 and 152.
• Explain why the printed owner's-risk clause was not enough.

Union of India v. Udho Ram and Sons

Decided by the Supreme Court in 1962. When a railway carries goods in a sealed wagon, does a seal alone prove that it has taken proper care? The judgment explains how reasonable care is judged from real circumstances, not from a fixed checklist.

Facts

• Goods were booked for transport by railway from Calcutta to Delhi. The railway receipt was endorsed to Udho Ram and Sons.
• Some goods were not delivered at the destination.
• During the journey the train stopped at night near Howrah while waiting for a signal, and stood for several minutes.
• Later it was discovered that the seals of a wagon had been broken.
• Railway protection personnel had remained in the guard's van instead of keeping watch over the wagons during the stoppage.

Arguments

The railway administration resisted the claim.

Issues

• Did the missing goods result from misconduct or negligence on the railway's part?
• A sealed wagon is one precaution, but was it enough when the train stopped at night in circumstances where someone could approach the wagons?

The court assessed what a reasonably careful person would have done to protect valuable goods.

Judgment (held)

• Justice Raghubar Dayal delivered the judgment. The Court agreed that the railway had been negligent.
• An ordinary careful owner travelling with important property would pay attention to it when the train stopped in the dark.
• Railway personnel entrusted with protecting consignments could reasonably be expected to watch the wagons. Remaining inside the guard's van throughout the stoppage did not satisfy the standard in the circumstances proved.
• The Court did not announce that railway officers must follow one precise security procedure on every journey. It looked at a foreseeable danger and an available precaution: the train was stationary at night, unauthorised access was possible, and the persons assigned to protection could have observed the wagons more closely. That practical failure helped establish negligence.

Principle / ratio

• Section 151: a bailee must take as much care of the goods as an ordinarily prudent person would take of personal goods of similar size, quality and value. Prudent means sensibly careful.
• Section 152: deals with responsibility for loss where that degree of care has been taken.
• The obligation is one of reasonable care, not an unlimited guarantee that every shipment will arrive regardless of events.

Significance

A person holding another's goods must take practical steps against risks that an ordinarily careful person could foresee.

Exam points

• Give the actual facts: the sealed wagon, the night stop and the failure to watch.
• Explain why ordinary care is judged by circumstances rather than an abstract promise of perfect safety.

Morvi Mercantile Bank Limited v. Union of India

Decided by the Supreme Court in 1965. A bank lends money against goods still travelling by railway and never physically touches them. Can it become a pledgee of those goods, and if the goods disappear, may it sue for their full value?

Facts

• A firm sent boxes said to contain menthol crystals by rail from the Bombay region towards Delhi. The consignments were booked in the firm's own name.
• The firm endorsed the railway receipts to Morvi Mercantile Bank against an advance of 20,000 rupees. Endorsement means signing or transferring a document in the required manner.
• The railway did not deliver the actual goods consigned.
• The bank claimed compensation for their value, which was higher than the amount it had advanced.

Arguments

The railway disputed the bank's right to sue. It argued that transferring a railway receipt did not create a pledge over the goods themselves. If the bank had only a paper document without legally recognised possession of the goods, its claim would be weaker.

A pledge is a special form of bailment in which goods are held as security for a debt.

Issues

1. Did the endorsement of railway receipts against the loan create a pledge of the goods?
2. Could a pledgee sue for the entire value of damaged or lost goods, and not merely the amount owed to it?

Judgment (held)

• The Supreme Court decided by a majority of three judges to two. Justice Subba Rao gave the majority judgment.
• In this commercial arrangement, endorsed railway receipts were documents of title representing the goods. Their transfer against the loan created a valid pledge.
• Constructive delivery, meaning legally recognised transfer of control without moving the goods by hand, was enough. The law did not insist that the bank first take physical possession of boxes travelling in a railway wagon.
• The pledgee could claim the full proved value from the wrongdoer. A bailee who has a legal interest in the goods may use remedies that would otherwise be available to the owner.
• The bank could recover the value, but could not keep any surplus as its own profit.
• The two dissenting judges took a different view of the legal consequences.

Relevant provisions

• Section 172: defines pledge.
• Section 149: recognises delivery that effectively puts goods into another person's possession.
• Section 180: the bailee or bailor may sue when a third person wrongfully injures goods or deprives the bailee of their use or possession.
• Section 181: recovery is to be divided according to their interests.
• The decision also considered rules concerning documents of title under related property and sale-of-goods law.

Principle / ratio

Sometimes the document controlling delivery of goods is the commercial way of controlling the goods themselves. A person with a limited security interest may sue to protect the entire property while accounting for the owner's share.

Significance

The case remains useful for loans secured against goods in transit. It explains how trade documents can perform the role of possession. Legal possession can sometimes travel through documents, not just through physical delivery.

Exam points

Lallan Prasad v. Rahmat Ali (1966)

A leading Supreme Court case on the duties of a pawnee, that is, a lender who holds pledged goods. The question: can a lender sue for a loan while refusing to return the goods that the borrower gave as security?

Facts

• Lallan Prasad advanced Rs. 20,000 to Rahmat Ali on a promissory note and related documents.
• The borrower had agreed to pledge certain goods as security for the loan.
• The lender later sued to recover the money, but said the goods had never been delivered to him, so no pledge had come into existence.
• The courts found from the evidence that the goods had, in fact, been delivered and were in the lender's custody.

Issues

A lender who holds goods as a pledge may have a right to sue for the debt. But where he denies the pledge, does not offer to return the goods and acts as though the borrower has no right over them, can he obtain an ordinary money decree and also retain the security without answering for it? The Supreme Court held that the law does not permit that result.

Relevant provisions

Section 176, Contract Act gives the pawnee two important remedies after the pawnor defaults:

1. Sue on the debt while retaining the goods as collateral security. Collateral means additional security for payment.
2. Sell the goods after giving reasonable notice of the intended sale. If the sale price is less than the debt, the borrower remains liable for the balance. If it is more, the surplus must be returned.

Section 177 protects the pawnor's right to redeem the goods before an actual sale. To redeem means to recover pledged property by paying the debt and the expenses properly due. This right would become meaningless if the pawnee could deny possession of the goods and refuse to return them.

Judgment (held)

• A pawnee seeking a decree on the debt must be in a position to redeliver the pledged property upon proper payment.
• On the facts, the lender could not succeed by denying the pledge.

Justice J. M. Shelat explained the connection between the lender's rights and the borrower's protection:

• A pledge gives the lender security; it does not transfer full ownership simply because repayment is late.
• The lender cannot lawfully keep the goods as his personal property while demanding the entire loan as though the security never existed.
• The choice to sue without selling carries a continuing responsibility toward the goods.

Principle / ratio

The pawnee's remedy and duty must be treated together:

• If there is a lawful sale, the rules about surplus and deficiency apply.
• If there is no sale, the right of redemption remains relevant.
• The evidence about delivery and possession must be checked before deciding the remedy.

The case does not mean that a borrower can refuse to repay every loan whenever pledged goods exist.

Exam points

• Begin with Section 172, the definition of pledge.
• Then explain the two choices under Section 176 and the right of redemption under Section 177.
• State that the lender denied receiving the goods although delivery was proved.

Syndicate Bank v. Vijay Kumar (1992)

A business keeps fixed deposit receipts with a bank as security. A particular bank guarantee ends, but the business still owes money on another account. Must the bank release those receipts immediately? The Supreme Court answered this question in this case, which explains the general lien of a banker and why the wording of security documents matters.

Facts

• Jullundur Body Builders received banking facilities from Syndicate Bank, including an overdraft.
• It also deposited fixed deposit receipts as security connected with a bank guarantee.
• Later, that guarantee ceased to operate.
• Vijay Kumar, a decree holder who had obtained a money decree against the firm, sought to attach the deposits.
• Syndicate Bank said the firm still owed money on its banking facilities and that the bank had a right to hold the deposits against those dues.

Issues

The dispute centred on the scope of the bank's lien. A lien means a right to keep property in one's possession until a debt or obligation is satisfied. Was the bank entitled to hold the receipts only for the specific guarantee, or for the firm's wider account balance? The answer depended on:

• the legal right of bankers to retain security; and
• the letters signed when the deposits were placed with the bank.

Judgment (held)

• The Delhi High Court had treated the arrangement as limited to the particular guarantee.
• The Supreme Court reversed that approach. Justice K. Jayachandra Reddy examined the transaction and the covering letters, which indicated that the deposits would remain available while amounts were due from the firm on its accounts.
• The Court also recognised the established mercantile practice concerning bankers' general lien over securities deposited in the ordinary course of banking.
• The bank could protect its outstanding dues before the decree holder could claim the available balance.

Relevant provisions

Section 171, Contract Act recognises a general lien for bankers and certain other named classes, unless there is a contract to the contrary. Section 170 covers a particular lien for services involving labour or skill applied to goods. The two are different in scope.

General lien (Section 171)	Particular lien (Section 170)
Right to retain goods for a general balance of account.	Right to retain goods for services involving labour or skill applied to those goods.
Not confined to one bill arising from work on the very same goods.	Confined to the charge for work on the very same goods.
Available to bankers and certain other named classes, unless there is a contract to the contrary.	Available to the person who has applied labour or skill to the goods.

Principle / ratio and limits

• The ruling did not give the bank an unrestricted right to take any stranger's property. The deposits belonged to the customer whose debts were relevant, and the surrounding arrangements mattered.
• A bank cannot ignore an express contract excluding a general lien. What the parties actually agreed remains important.
• A security right is different from ownership. Holding the fixed deposit receipts did not make the bank the final owner of every rupee; the bank's right was tied to its legitimate claim.

Exam points

• Give the real facts: the fixed deposit receipts, the expired guarantee and the separate overdraft.
• Mention the contrary High Court view, then the Supreme Court's ruling.
• Explain Section 171 and the covering letters.

Official Assignee of Madras v. Mercantile Bank of India Limited (1934)

Can goods become valid security for a bank loan while they are still travelling on a train? The Privy Council addressed this question. The decision is important because commercial trade often uses documents instead of physically carrying goods from one lender to another.

Facts

• A trading firm dealt in groundnuts purchased from places outside Madras. The nuts were sent by railway towards the city.
• The traders obtained railway receipts for the consignments.
• They arranged bank advances by passing the endorsed receipts to the Mercantile Bank of India and executing the related borrowing documents.
• Later, the traders became insolvent. Insolvency means that a person cannot meet debts in the ordinary way, leading to legal proceedings concerning property and creditors.
• An Official Assignee took charge of the insolvent traders' property for the benefit of their creditors. A dispute arose over the proceeds of the groundnut consignments.

Issues and arguments

• Official Assignee: the bank had not received a valid pledge over the goods themselves.
• Bank: delivery of the properly endorsed railway receipts gave it the relevant control over the goods.
• Issue: who had the better claim to the goods or their proceeds?

Judgment (held)

• The Privy Council held that the bank had a valid pledge.
• Railway receipts of this character functioned as documents of title. A document of title is a recognised commercial document that enables its lawful holder to obtain or deal with identified goods.
• By transferring the receipts in the manner used in trade, the traders had effectively transferred possession of the goods as security for the advances.
• The bank's claim was not merely a claim based on owning pieces of paper; it held security over the groundnuts represented by those receipts.
• The Official Assignee could not treat the same goods as freely available for all creditors, ignoring the bank's prior lawful security.

Principle / ratio: constructive delivery

Physical delivery	Constructive delivery
Someone hands over the goods themselves.	Conduct or a recognised document gives another person legal control over the goods without moving them by hand.

• Section 149, Contract Act recognises delivery that has the effect of putting goods into another's possession.
• Section 172 defines pledge.
• The Privy Council applied the former wording of Section 178, which was later replaced.

Limits: not every receipt or emailed transport note automatically creates a pledge. The document must have the required legal and commercial character, and the security arrangement must be validly made.

Significance

• Particularly important for trade finance, in which merchants borrow against stock already moving through transport networks.
• The ruling was later discussed by the Supreme Court while considering railway receipts and pledged consignments.
• It remains a useful historical foundation for the principle that control of goods can be represented by trade documents.

Exam points

• Remember the groundnuts, the insolvency, the endorsed receipts and the bank's superior security claim.

Kuchwar Lime and Stone Company v. Dehri Rohtas Light Railway Company Limited (1968)

An order for goods is arranged through one company, but the goods are meant for another business. When transport charges arise, can the receiving business avoid payment by saying it never personally booked the railway? The Supreme Court considered this question.

Facts

• A colliery sent coal under a supply arrangement made through government control rules. The coal was intended for Kuchwar Lime and Stone Company.
• The consignment was booked by railway on terms requiring freight to be paid at the destination.
• Kuchwar did not accept part of the consignment. The wagons stood without being unloaded, and demurrage accumulated. Demurrage means charges imposed because wagons or goods remain beyond the allowed time.
• The railway eventually took steps to sell the coal and sought recovery of its charges.

Arguments and issues

• Kuchwar: the railway's contract was made by the colliery, not directly by Kuchwar; it denied liability under a contract it had not signed.
• Issue: whether the colliery had acted as Kuchwar's agent in booking the transport.
• An agent is a person authorised to act on behalf of another, called the principal. Such authority need not always be written down in a document headed power of attorney.

Judgment (held)

1. Agency: an agency could be inferred from the surrounding facts and the nature of the supply arrangement. The colliery had arranged transportation for the intended recipient in circumstances connecting the recipient with the freight obligation. The company could not escape the transaction by pointing to the name written by the person who booked the consignment.
2. Demurrage: the railway did not win everything it demanded. It claimed demurrage for 202 days; the Court allowed charges for only one month, because the railway had failed to take reasonable steps to reduce the loss. The company could be responsible for appropriate charges, but the railway was not entitled to recover an unlimited amount caused by a prolonged failure to unload and deal with the coal.

Relevant provisions

• Section 182, Contract Act: defines agent and principal.
• Section 186: authority may be express or implied.
• Section 187: implied authority may arise from circumstances, conduct or the ordinary course of dealing.

An agency by implication is not a guess. Facts must support the conclusion that one person was acting for another in the relevant transaction.

Principle / ratio

• Actual business arrangements may create agency even without an express appointment in formal words.
• Legal recovery may be limited by the claimant's own conduct and the reasonableness of the amount charged.

Exam points

• Explain why the court inferred authority from the transport and supply relationship.
• Then separately discuss the question of reasonable demurrage.

Bolton Partners v. Lambert (1889)

A company's manager accepts an offer without authority. The other side withdraws the offer. Can the company's board approve the manager's act later and make that earlier acceptance effective? The English Court of Appeal considered this question.

Facts

• Lambert made an offer concerning property belonging to a company.
• A managing director accepted it on the company's behalf, but lacked the authority needed to bind the company at that time.
• Later, Lambert attempted to withdraw his offer.
• After that attempted withdrawal, the company's board ratified the managing director's earlier acceptance. Ratification means a principal's later approval of an act already done on its behalf without proper prior authority.

Arguments

• Lambert: the acceptance had been unauthorised, so he could withdraw before the company properly accepted.
• Company: the board's later ratification should count as though the managing director had possessed authority from the beginning.

Issue

The effect of ratification on time: would approval operate only from the date of the board's decision, or relate back to the date of the original act?

Judgment (held)

• The Court of Appeal accepted the relation-back approach.
• The later ratification gave the unauthorised acceptance the same legal effect it would have had if the manager had been authorised at the time.
• Lambert's attempted withdrawal therefore came too late. The company could rely on the earlier acceptance once it had been ratified.

Conditions and limits of ratification

The outcome shows a powerful feature of agency law, but it is not an unlimited rule. Ratification has conditions:

• The act must have been done on behalf of an identifiable principal, not merely for the agent's private account.
• The principal must be capable of authorising the act.
• Approval must concern the relevant transaction, with knowledge of material facts.
• Later case law has examined how far ratification can fairly affect the rights of others.

Indian law

• Section 196, Contract Act: a person may adopt an act performed on his behalf without prior authority, with effects similar to prior authorisation.
• Section 197: ratification may be express or implied.
• Section 198: deals with knowledge of facts.
• Section 200 (particularly important): ratification must not be used to injure a third person's rights or subject that person to an obligation that did not bind him, merely by treating an earlier act as authorised.

Exam points

• Study this case with Keighley Maxsted and Company v. Durant, which concerns an agent who acted entirely in his own name. Together, the cases show both the power and the limits of ratification.
• Give the manager's unauthorised acceptance, the attempted withdrawal, and the later board approval.
• Lasting lesson: later approval can sometimes validate earlier agency acts, but it must operate within rules protecting fair dealing and the rights of third persons.

Keighley Maxsted and Company v. Durant (1901)

An agent secretly intends to buy goods for another business but tells the seller nothing about that business. If the business later approves the purchase, does it become legally bound? The House of Lords answered this question, placing an important limit on ratification.

Facts

• Roberts was authorised to buy wheat for himself and a firm called Keighley Maxsted and Company, provided he could obtain it at a particular price.
• He could not buy on those terms. He purchased wheat from Durant at a higher price and made the transaction in his own name.
• He did not tell Durant that he was acting on behalf of the firm.
• Later, the firm agreed with Roberts that the wheat should be taken on a joint account, but it then declined to accept delivery.

Arguments and issue

• Durant sued the firm. His argument depended on the firm's later approval: if that approval operated as ratification, the firm might be bound by the earlier purchase.
• Key question: not simply whether the firm liked or approved the transaction afterward, but whether Roberts had acted, or purported to act, on the firm's behalf when he contracted with Durant.

Judgment (held)

• There had been no effective ratification by the firm.
• A person cannot ratify as principal an unauthorised transaction where the contracting agent had not professed to act for that person.
• Roberts had contracted in his own name without presenting himself as an agent for Keighley Maxsted. His private intention to involve them later was not enough.
• The firm was not made liable to Durant by this supposed ratification.

Distinction: undisclosed principal and ratification

Undisclosed principal	Situation in Keighley Maxsted
The person has authority from a principal but does not disclose the principal's identity.	An unauthorised act, followed by an attempt to ratify it.
Raises questions about an undisclosed principal.	To ratify, the later principal must have been the person for whom the agent purported to act at the relevant time.

Indian law

• Section 196, Indian Contract Act speaks of acts done by one person on behalf of another without that other's knowledge or authority. The words "on behalf of another" are central.
• Section 197 allows express or implied ratification.
• Section 198 requires knowledge of material facts.
• These sections do not permit a stranger to adopt any profitable bargain made solely in somebody else's name simply because the bargain later looks attractive.

Significance

• Sellers need to know which legal person they are dealing with, especially when credit and commercial risk are involved.
• Ratification should correct missing authority where a person acted for a principal. It should not freely replace the original party after the deal.
• Otherwise a business could take profitable contracts and reject unprofitable ones based on decisions made later.

Exam points

• Mention the wheat, the agreed maximum price, Roberts's purchase in his own name, and the firm's attempted later adoption.
• Explain why private intention is not the same as acting on behalf of a principal.
• State that the House of Lords refused to bind the firm.

Harshad J. Shah v. Life Insurance Corporation of India (1997)

A life insurance agent accepts a premium cheque from a customer, who believes the insurance is safe, but the agent does not pay the insurer on time. Who bears the legal risk? The Supreme Court examined this question; the answer turned on the agent's actual authority.

Facts

• A policyholder had taken four life insurance policies through an agent.
• Premium payments were not kept up, and the policies lapsed.
• Some months later, the agent collected a cheque intended to pay the overdue premium, but delayed sending the money to the Life Insurance Corporation.
• The insured person died in an accident before the delayed payment reached the insurer.
• When the widow sought payment under the policies, the Corporation disputed the claim because the policies had lapsed and had not been validly revived.

Arguments

• Claimants: the person who collected the money was an insurance agent associated with the Corporation, so receipt by the agent should count as payment to the insurer.
• Corporation: relied on the rules governing its agents and their powers.

Issue

Did the agent have authority to receive the premium in a way that would legally bind the insurer?

Judgment (held)

• The Supreme Court examined the relevant regulations and held that the agent lacked authority to collect premiums on behalf of the Corporation in that manner.
• Payment to a person who is not authorised to receive it for the principal is not automatically payment to the principal.
• The policies were not treated as revived merely because money had been given to the agent.
• The Court directed refund of the premiums paid to the Corporation on all four policies, with 15% annual interest.

Relevant provisions

• Section 182, Contract Act: an agent is a person employed to act for another or to represent another in dealings with third persons.
• Sections 186 and 187: express and implied authority.
• Section 226: contracts made through an authorised agent generally have the same legal effect as contracts made by the principal.

Principle / ratio and limits

• The Court had to respect the limitations imposed on the agent's authority.
• An insurance contract also depends on its terms concerning premiums, lapse and revival. Revival means restoring a policy that has ended because required payments were not made.
• A premium handed to the wrong person does not necessarily satisfy the official steps for revival.
• The ruling did not create a general rule that all agents in India can never collect payments. It concerned this insurer, these rules and this transaction.

Exam points

• Begin with the policy lapse, the late payment to the agent and the death before the insurer received it.
• Then identify the issue of authority.
• Explain why the insurer was not treated as having received valid payment through that agent.
• Significance: important financial payments must follow the principal's authorised method, particularly when insurance cover depends on strict timing.

Commissioner of Sales Tax, Madhya Pradesh v. Madhya Pradesh Electricity Board (1968)

Electricity cannot be picked up like a book or carried in a sack. Can it still be goods in the eyes of commercial and tax law? The Supreme Court answered yes. Legal categories depend on real qualities, not only on whether something can be touched.

Facts

• The Electricity Board generated and supplied electric energy to consumers in the State.
• Tax authorities treated the transactions as sales and sought tax under the relevant State laws.
• A related dispute concerned steam supplied to a paper mill. The mill provided water, and the Board converted it into steam for payment.

Arguments and issues

• Board: electricity was not goods at all.
• Issue 1: whether electricity is goods for the sales tax legislation.
• Issue 2: the legal character of the steam arrangement, which required separate consideration.

Judgment (held)

• The High Court had accepted that electricity was not goods under the applicable sales tax legislation. The Supreme Court disagreed on that point.
• Electric energy can be transmitted, transferred, delivered, controlled, consumed and used for value. Although not handled like ordinary solid objects, it has qualities that make it commercially transferable.
• The term "movable property" in the legal definition of goods cannot be confined to things that one can physically hold.
• Electricity was goods for the sales tax statutes under consideration, and the Board could be a dealer in electricity. Justice A. N. Grover delivered the judgment.
• The steam supply was treated differently on the facts: the mill supplied water and the Board's role was connected with converting it into steam. That arrangement was a works or service transaction rather than an ordinary taxable sale of steam.

Electricity supplied to consumers	Steam produced for the paper mill
Held to be goods; the Board could be a dealer in electricity.	Held to be a works or service transaction, not an ordinary taxable sale of steam.
Can be transmitted, transferred, delivered, controlled, consumed and used for value.	The mill supplied the water; the Board converted it into steam for payment.

Principle / ratio

• A case may contain more than one legal question and more than one result. Do not remember only that electricity is goods and then claim that every supply involving energy or steam must be a sale of goods.
• The Court examined what was supplied, who owned the material and what service was actually performed. Classification depends on the legal transaction, not just the physical result.
• Section 2(7), Sale of Goods Act defines goods broadly as movable property, subject to specified exclusions.
• The judgment also interpreted the particular sales tax Acts in force at that time. A continuing legal concept must be distinguished from tax rules that have since changed.

Exam points

• Name both disputes: electricity supplied to consumers and steam produced for the mill.
• Explain why electricity was treated as goods and why the steam arrangement was considered separately.
• Remember the actual decision year, 1968, even though later law reports carry different years.
• Significance: the judgment adapted commercial law to property that is real and valuable even when it is not an ordinary physical object.

State of Madras v. Gannon Dunkerley and Company (1958)

A builder promises to construct a house using bricks, cement and labour. Is that one building contract, or a collection of separate sales of materials? This question became extremely important in this Supreme Court case, whose historical rule later led to a major constitutional change.

Facts

• Gannon Dunkerley carried out construction work.
• Tax authorities in the former State of Madras tried to impose sales tax on the value of materials used in building contracts.
• The State's law had attempted to treat the transfer of materials during construction as taxable sales. The company challenged that approach.

Issues

The meaning of a "sale of goods" and the limit of the State's taxing power under the constitutional arrangements applicable at the time.

Arguments

State	Contractor
Bricks, steel and other materials became part of the building and ultimately passed to the customer.	The agreement was a single promise to construct a completed work.
The value of those materials should be treated as a sale.	The customer had not separately agreed to buy individual bricks and bags of cement as movable goods; the material became part of the building through performance of the works contract.

Judgment (held)

• A Constitution Bench of the Supreme Court accepted the contractor's position under the law then applicable.
• Justice Venkatarama Aiyar explained that "sale of goods" had a recognised legal meaning.
• In an indivisible building contract, materials did not pass under an independent agreement to sell them as movable goods.
• The State could not simply divide that single contract by legislation and tax the materials as though there had been ordinary sales.

Principle / ratio

Section 4, Sale of Goods Act deals with contracts of sale, which involve transfer or agreement to transfer property in goods for a price. Building work includes labour, service and materials, but the presence of materials alone did not meet the older test for a separate sale. The Court therefore rejected the State's attempted tax treatment in that historical setting.

Later development: the Forty-Sixth Amendment

• The rule did not remain unchanged. The Forty-Sixth Amendment to the Constitution, enacted in 1982, added Article 366(29A).
• The amendment was intended to overcome the earlier restriction on taxing the goods element of works contracts.
• It did not mean that an entire building agreement became the sale of one item of movable property for every legal purpose.
• Under modern tax law, particularly the goods and services tax system, further constitutional provisions and legislation must be examined.

Exam points

1. First describe the construction contract and the attempted sales tax.
2. Second explain the original Supreme Court ruling about indivisible works contracts.
3. Third mention the Forty-Sixth Amendment and Article 366(29A)(b).

Significance: the judgment shows how a court's interpretation can reveal a gap that the Constitution is later amended to address.

Baldry v. Marshall (1925)

A buyer tells a car dealer that he needs a comfortable vehicle for long journeys. The dealer recommends a particular car, but it proves unsuitable. Can a printed exclusion of warranties defeat the right to reject it? The English Court of Appeal considered this in a decision commonly reported in 1925.

Facts

• The buyer approached motor dealers and explained that he wanted a car suitable for touring. Touring means travelling comfortably over substantial distances.
• The dealers suggested a Bugatti car as appropriate. The buyer relied on their advice and purchased it.
• The written terms contained language excluding additional guarantees and warranties.
• When delivered and used, the car proved uncomfortable and unsuitable for the purpose the buyer had explained.

Arguments

• Buyer: wished to reject the car and recover his money.
• Dealers: pointed to the written clause and to the fact that a named make of car had been ordered.

Issue

Whether fitness for the buyer's stated purpose was an essential condition of this particular contract, or merely a secondary warranty that could be excluded by the printed words.

Judgment (held)

• The Court of Appeal ruled for the buyer.
• Suitability for touring went to the very reason the buyer had entered the agreement, so it was a condition.
• The seller's clause spoke about warranties and guarantees; it did not clearly remove the important condition of suitability.
• Naming a brand does not automatically prove that a buyer relies only on personal judgment. The buyer had identified the intended purpose and asked the dealer for expert advice; that the answer happened to be a particular make of car did not remove that reliance. Courts look at the conversation and the circumstances, not merely the name on the order form.

Condition	Warranty
An important contractual term.	Generally a less central term.
Breach can justify treating the contract as ended (rejection).	Breach ordinarily supports damages rather than rejection.

Indian law

• Section 12, Sale of Goods Act distinguishes a condition from a warranty.
• Section 16(1) deals with fitness for a particular purpose where:
  • the buyer makes the purpose known;
  • the seller deals in goods of that kind; and
  • the buyer relies on the seller's skill or judgment.
• The facts must meet the statutory requirements. The law does not guarantee that every product will satisfy every private expectation a buyer never communicates.

Exclusion clauses

• Exclusion clauses must be interpreted carefully. A printed statement about warranties is not always the same as a clear agreement excluding a particular condition.
• Statutory rights, limits on exclusions and the consumer protection law of the relevant jurisdiction also matter. An old English case is not permission to disregard present Indian consumer legislation.

Exam points

• Explain the buyer's request, the dealer's advice, the unsuitable Bugatti car and the exclusion clause.
• Distinguish condition from warranty and connect the principle with Sections 12 and 16 of the Indian Sale of Goods Act.

Rowland v. Divall (1923)

Decided by the English Court of Appeal in 1923. The case concerns something more basic than the quality of goods: the seller's legal right to sell. The question it answers is whether a buyer of stolen goods can recover the whole purchase price even though he has used the goods for several months.

Facts

• A car dealer purchased a vehicle from Divall and later sold it to another buyer.
• After some months, the police discovered that the vehicle had been stolen before Divall sold it.
• The police took the car away so that it could be dealt with according to the rights of the true owner.
• The dealer had to repay his own buyer and then claimed back from Divall the full price he had paid.

Arguments

The defendant (Divall) resisted the claim, pointing out that the dealer had enjoyed the use of the car for a period.

Issue

Whether using the car meant that the dealer had received some part of the promised legal benefit.

In an ordinary sale, the buyer is not simply paying for a temporary chance to drive a vehicle; the buyer expects lawful ownership. If the seller never had title (a legal right of ownership sufficient to transfer the car), the essential promise of the sale has failed.

Judgment

• The Court of Appeal allowed recovery of the full purchase price.
• The buyer had received no valid title.
• The use of the car did not count as the consideration that had been promised. The essential return promised by the seller was the transfer of property in the car, not merely some months of possession that the real owner could challenge.

Lord Justice Atkin explained the importance of the right to sell. A purchaser under a contract of sale expects property in the goods and lawful possession. Because Divall lacked ownership, that essential promise was broken. The buyer was not forced to treat months of use as a substitute for the ownership he had paid to obtain.

Indian law: relevant provisions

• Section 14(a), Sale of Goods Act: in an ordinary sale there is an implied condition that the seller has the right to sell the goods. "Implied" means the law treats a term as part of the agreement even when it is not written out in every document.
• Section 12 helps distinguish conditions from warranties. The right to sell is not a minor promise concerning appearance or performance; it goes to the foundation of a valid sale.

Distinction: defect in title v. defect in quality

Defect in title	Mechanical / quality defect
The seller has no right to transfer the goods (e.g. the car was stolen).	A part of the goods fails (e.g. the car's air conditioner breaks).
The buyer never obtains the very ownership promised.	The legal question may involve quality, fitness or warranty.
Goes to the foundation of the sale, which is why the result in Rowland v. Divall was so strong.	Usually a repairable problem, not a total failure of the sale.

Exam points

• Start with the stolen car and the later police recovery.
• Explain the total failure of the promised transfer of property and the refund despite use.
• Link the principle with Section 14 of the Sale of Goods Act.

Cox v. Hickman (1860)

Decided by the House of Lords in 1860. The case remains important to the Indian law of partnership because it distinguishes sharing money from carrying on business as partners. It answers whether a person who receives a share of business profits because the business owes him money thereby becomes a partner responsible for its debts.

Facts

• Two traders called Smith were running an iron business and faced serious financial difficulties.
• Their creditors agreed to an arrangement: the business was to continue under trustees, and the income remaining after expenses would go towards paying the creditors.
• Cox and Wheatcroft were among the creditors connected with the trusteeship arrangement. Cox did not actively manage the business; Wheatcroft participated only for a limited time.
• Later, bills of exchange issued in the business's name were left unpaid.
• Hickman, a holder of the bills, sought to make the creditors personally liable as partners.

Arguments

The argument for liability relied on the creditors' connection with the profits of the business: if creditors were receiving money generated by trading, could they be treated as owners of the business?

Issue

Whether participation in profits by itself creates a partnership. An answer of yes would expose many creditors, lenders and advisers to partnership debts even where they had never agreed to carry on business as principals.

Judgment

• The House of Lords rejected the idea that profit sharing alone is conclusive.
• The decisive question was whether the business was being carried on by persons acting on behalf of the alleged partners.
• The creditors were seeking repayment of existing debts through a managed business. That financial interest was not treated as sufficient proof that Cox and Wheatcroft were partners liable on the bills.
• The nature of the relationship mattered more than the fact that profits would be used for their benefit.

Principle: mutual agency

Each partner can, within the scope of partnership business, act as an agent of the firm and bind it. Where the business is not carried on on a person's behalf in that legal sense, merely receiving money measured by profits does not necessarily make him a partner. The case helped move partnership law away from a rigid rule based only on receiving a share of profit.

The case also teaches that a partnership can exist even where there is no elaborate written deed. The actual arrangement, actions, responsibilities and legal authority must be examined.

Indian law: relevant provisions (Partnership Act)

• Section 4: partnership is the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The last words ("acting for all") are especially important.
• Section 6: courts must determine the real relation between persons from all relevant facts.
• Section 18: a partner is an agent of the firm for the purposes of its business.

Exam points

• Describe the failing iron business, the creditors' trust arrangement and the unpaid bills.
• State why the House of Lords refused to impose partnership liability merely because the creditors would receive profits.
• Connect the rule with Sections 4, 6 and 18 of the Partnership Act.

Shanti Ranjan Das Gupta v. Dasuram Murzamal (1972)

Decided by the Supreme Court in 1972. An important case on proving the real existence of a partnership: a mill owner said a customer had become his business partner, while the customer said he had only hired the mill to process grain.

Facts

• Shanti Ranjan owned a rice mill in Assam.
• He claimed that the defendants had entered into a partnership with him for running the milling business.
• When their dealings broke down, he sued for dissolution of the alleged partnership and an account of its affairs.
• The defendants denied that they were partners. They relied on a written milling-hire arrangement under which the mill processed paddy for payment at an agreed rate.

Arguments

• Owner: an oral partnership had been created. "Oral" means spoken, not necessarily written in a signed deed.
• Defendants: there was only a written milling-hire arrangement, not a partnership.

Issue

Indian law does not require every partnership to be written, but a court must still be satisfied that the legal relationship really existed. The question was whether the conduct and documents showed a joint business as partners or only a commercial arrangement for processing another party's grain.

Judgment

• The Supreme Court examined the evidence and upheld the conclusion that a partnership had not been proved.
• There was a written milling arrangement, but no convincing material establishing the claimed partnership.
• The lack of accounts supporting the alleged shared business was significant in the setting of the case.
• The Court did not say that absence of account books always makes a partnership legally impossible. It treated the missing records as one factor among the facts before it.

Relevant provisions (Partnership Act)

• Section 4: requires an agreement to share profits of a business carried on by all or any acting for all.
• Section 6: the real relationship is to be found by considering all relevant facts together.

Relevant facts may include:

• the parties' agreements;
• how money is handled;
• who bears losses;
• who manages the business;
• whether one person may bind the others.

None of these individual details should be treated as a substitute for examining the whole relationship.

Distinction: payment for services v. share of partnership profits

Payment measured by production	Share of partnership profits
A mill is paid a fixed amount for every quantity of paddy processed.	An actual partner shares in the results of a business carried on under the partnership arrangement.
Normally a charge for services.	Reflects joint business as partners.
Regular money from dealings does not make the customer a partner.	Requires an agreement to carry on business as partners.

Exam points

• Remember the rice mill, the written milling-hire document, the alleged oral arrangement and the lack of convincing proof of a partnership.
• Mention Sections 4 and 6.
• The Court's conclusion was about the real nature of the dealings, not a universal rule about keeping books.
• Lasting importance: partnership liability cannot be created merely by describing an ordinary business customer as a partner.

Sharad Vasant Kotak v. Ramniklal Mohanlal Chawda (1997)

Decided by the Supreme Court in 1997. The decision is important for understanding reconstitution of a firm and the right to bring partnership disputes to court. It answers whether a registered firm suddenly becomes unregistered, unless fresh registration is obtained, when one partner dies and another person joins.

Facts

• Paramount Builders was a registered partnership firm.
• One partner died, and the composition of the firm changed when a widow was admitted. This change is called reconstitution: the business relationship continues, but the people who make up the firm are not exactly the same.
• Later, a dispute arose, and proceedings were brought concerning dissolution and accounts.

Arguments

• The other side argued that the firm could not maintain the proceedings because no fresh registration had taken place after the change.
• The argument relied partly on the statutory restrictions concerning unregistered firms, including Section 69(2A), introduced by a special Maharashtra amendment to the Partnership Act.

Issues

• Whether a change in membership automatically destroyed the effect of an earlier valid registration.
• Whether the parties needed to register a new firm rather than record the change in the existing one.

Judgment

• On the facts, there had been a reconstitution of the registered firm, not the creation of a wholly new unregistered firm.
• The existing registration did not simply vanish when membership changed.
• The failure to notify the Registrar of Firms about the alteration could have consequences under the registration provisions, but it did not necessarily make the continuing registered firm unregistered for the purpose argued.
• The Court rejected the demand for fresh registration.
• Bench: Justice K. Venkataswami delivered the judgment.

Later development

In 2009, the Supreme Court declared the special Maharashtra Section 69(2A) unconstitutional in V. Subramaniam v. Rajesh Raghuvandra Rao. The continuing-firm principle survives, but that Maharashtra restriction does not.

Relevant provisions (Partnership Act)

• Section 58: application for registration.
• Section 59: registration by the Registrar.
• Section 63: recording changes in the constitution of a registered firm.
• Section 69: restrictions on certain legal proceedings involving unregistered firms.
• The Maharashtra amendment relevant to this litigation also mattered.

These provisions must be read according to the nature of the particular claim and the law applicable at the relevant time.

Distinction: dissolution v. reconstitution

Dissolution	Reconstitution
The partnership relationship itself comes to an end.	The firm continues.
Followed by settlement of accounts.	Membership is altered (e.g. death of a partner, admission of a new one).

Exam points

• Begin with the registered builders' firm and the admission of the widow after a partner's death.
• Explain the objection based on the lack of fresh registration, and why the Supreme Court rejected it.
• Discuss Sections 58 to 63 and Section 69.
• State the correct judgment year, 1997, even though the case was reported in 1998.

S.V. Chandra Pandian v. S.V. Sivalinga Nadar (1993)

Decided by the Supreme Court in 1993. The case answers whether an arbitral award that allocates partnership land among partners on dissolution must be registered as if it were a sale or transfer of land.

Facts

• Six brothers built a business together and carried it on through registered partnership firms.
• The business held several assets, including immovable property.
• Disagreements arose, and the brothers agreed to refer their disputes to arbitration.
• The arbitrators made an award that dissolved the firms and distributed the remaining assets among the partners. Some recipients received identified land and buildings.
• The award was challenged in part because it had not been registered as an instrument transferring interests in immovable property.

Issue

The nature of a partner's interest in partnership property:

• Does each partner own a fixed share of each building or plot while the partnership continues? or
• Does a partner have a right to share in the profits and, after dissolution, to receive part of the remaining value after the firm's liabilities are settled?

The Court adopted the second understanding.

Judgment

• Property brought into the business or acquired for it is property of the firm, subject to the actual partnership arrangements.
• A partner does not, merely by being a partner, own a separate identified corner of every building.
• During the business, the partner has rights connected with profits and the partnership relationship. After dissolution and settlement of accounts, the partner is entitled to the appropriate share of what remains.
• Allocating the residue of firm property among partners under this process is not the same as an ordinary conveyance of one person's separate land to another.
• Therefore the award, in the circumstances, did not require registration under Section 17 of the Registration Act simply because particular immovable assets were allocated among partners following dissolution and settlement.

The ruling depends on the character of the partnership property and the transaction. It is not a general exemption from registration for every document that mentions land or is written during arbitration.

Relevant provisions (Partnership Act)

• Section 14: property of the firm.
• Section 48: ordinary rules for settlement of accounts after dissolution. Losses and obligations must be addressed before the residue is distributed.

Exam points

• Describe the brothers, the registered partnerships, the arbitration award and the dispute about registration.
• Explain Sections 14 and 48 of the Partnership Act.
• Explain why distribution of partnership residue was not treated as an independent transfer of immovable property.
• Enduring lesson: an interest in a partnership is an interest in the business relationship and its surplus, not automatic ownership of each separate asset.

Mulamchand v. State of Madhya Pradesh (1968)

Decided by the Supreme Court in 1968. The case combines the rules about government contracts (Article 299) with the duty to account for benefits actually received (Section 70 of the Contract Act). It answers whether a person who paid money under a government arrangement that did not meet the Constitution's formal rules can automatically demand every rupee back after using the arrangement to earn income.

Facts

• Mulamchand had an interest in rights to collect forest produce.
• After changes in land ownership law, the State held an auction connected with collecting lac from forest areas. Lac is a natural resin used in industry.
• Mulamchand deposited Rs. 10,000 and carried on collection activities for a period.
• Later, he challenged the government arrangement because it had not complied with the formal requirements of Article 299 of the Constitution, and sought a refund of the deposit.

Article 299: government contracts

• Sets conditions for contracts made in the exercise of the executive power of the government.
• Government contracts must be expressed in the constitutionally required name and executed through authorised persons in the proper manner.
• These conditions protect public funds and create accountability.
• If they are not satisfied, a person may be unable to enforce the arrangement as a valid government contract merely because an official made an informal promise.

Issue

Whether the money claim could be resolved without accounting for the benefit Mulamchand had already gained by collecting forest produce for part of the period.

Judgment

• The Supreme Court accepted that the constitutional form requirements matter. There could be no ordinary enforcement of an agreement invalid for failure to meet them.
• That did not complete the question of relief.
• The Court did not award the refund on the facts, because Mulamchand had failed to establish the necessary accounting of the benefit he had received. His claim could not ignore the value of what he had already enjoyed.

Section 70: restitution

• Section 70 of the Contract Act provides a separate basis for compensation or restitution in appropriate circumstances.
• Restitution means restoring a benefit, or paying for one received, where the law requires it. It is not the same as enforcing a void contract.
• The claimant must establish the relevant benefit and the legal basis of recovery.
• A party cannot always keep what was obtained under an ineffective arrangement and also recover the full price as though nothing had happened.

Distinction: invalidity v. absence of remedy

Article 299	Section 70, Contract Act
Controls the formal validity of the government contract.	May create liability where work is lawfully performed without an intention to act free of charge and the other party enjoys the benefit.
Non-compliance means the contract cannot be enforced.	Provides a separate remedy of compensation or restitution, not enforcement.

Invalidity of a government contract must not be confused with a total absence of any possible remedy.

Exam points

• Mention the forest produce, the Rs. 10,000 deposit, the invalid government arrangement and the period of actual collection.
• Explain Article 299 and the separate concept of restitution under Section 70.
• Lesson: constitutional contract formalities are strict, while restitution requires a careful accounting of benefits rather than automatic payment to either side.

State of West Bengal v. B.K. Mondal and Sons (1961)

Decided by the Supreme Court in 1961. A leading authority on Section 70 of the Contract Act. It answers whether the government can keep the benefit of useful work done at its officers' request without paying anything, on the ground that there was no properly signed government contract.

Facts

• The contractor carried out construction activities for government purposes, including temporary structures used by public departments.
• The work was performed in response to requests connected with government officials.
• A claim for payment followed.
• The arrangements had not complied with the strict form requirements then governing government contracts.

Arguments

The State argued that, without a valid formal contract, the contractor had no enforceable right to the claimed payment.

Issue

The distinction between enforcing a contract and compensating someone for a benefit already received. A valid government contract requires compliance with specified formal rules. At the time, Section 175(3) of the Government of India Act, 1935 governed the form of the relevant contracts. Today the corresponding constitutional rule is Article 299.

Judgment

• The Supreme Court accepted the importance of the formal rules.
• But a separate claim arose under Section 70 of the Contract Act, and Section 70 could apply against the government.
• The contractor was not enforcing an invalid agreement as though it satisfied the required form. The claim rested on the law's duty to compensate for lawful, non-gratuitous work that the State had accepted and used.
• Bench: Justice Gajendragadkar delivered the principal judgment supporting the contractor's claim.

Section 70: the rule

Section 70 applies when one person lawfully does something for another, or delivers something to another, without intending to do it for free, and the other person enjoys the benefit. The person who enjoyed the benefit must then give compensation or restore the thing, where appropriate.

Three requirements of Section 70 (to be understood separately)

1. The work or delivery must be lawful.
2. The person doing it must not intend to provide it free of charge.
3. The recipient must actually enjoy the benefit.

Merely sending an unwanted item to a public office and demanding a large bill would not automatically prove all these requirements.

Exam points

• Identify the invalid government-contract formalities, then explain why Section 70 may nevertheless create a separate duty.
• Mention the lawful work, the expectation of payment and the government's use of the structures.
• Do not claim that Article 299 becomes optional.
• Lesson: constitutional safeguards for public contracts can coexist with a duty to compensate for valuable benefits actually received.

Ramana Dayaram Shetty v. International Airport Authority of India (1979)

Decided by the Supreme Court in 1979. The case asks whether a public authority that announces eligibility conditions for a contract, and then awards the contract to someone who does not meet them, is making a merely private business decision or can be held to constitutional fairness.

Facts

• The Authority invited tenders to run a restaurant and snack bars at the Bombay international airport.
• The invitation stated that applicants should be registered second-class hoteliers with at least five years of experience.
• The Authority selected a bidder who offered an attractive amount but did not satisfy the announced hotel-experience requirement in the required sense.
• The decision was challenged.

Issue

The issue went beyond whether the Authority could choose a bidder offering more money. It was whether a public body could ignore the standards it had itself set for deciding who was eligible. Other businesses could have decided not to apply because they lacked the announced qualification, so changing the rule after receiving offers could treat potential applicants unequally.

Judgment

• A body acting as an instrumentality of the State must observe Article 14, which prohibits arbitrary State action and protects equality before the law.
• An authority distributing public commercial opportunities cannot act as though it were a completely private person free to favour anyone without fair standards. When it sets eligibility criteria, it must respect the rules governing its own decision.
• The Court found the tender decision inconsistent with the requirement of fairness.
• Final result: the challenger had delayed bringing the case, and the successful bidder had already spent money and acted on the award. Because of the delay and the surrounding circumstances, the Supreme Court did not undo the completed award. The appeal was dismissed.
• Bench: Justice P.N. Bhagwati delivered the judgment.

Constitutional link

• Article 12 helps identify authorities treated as "the State" for constitutional purposes. The International Airport Authority was a public statutory body.
• Article 14 applied to its decisions.
• The decision became a foundation for administrative-law review of public contracts.

Principle: two parts (both must be included)

1. Government-linked bodies cannot distribute contracts arbitrarily or apply secret standards.
2. Establishing that a decision was unlawful does not guarantee every remedy requested.

Exam points

• Describe the restaurant tender, the experience requirement and the selection of a bidder who did not meet it.
• Connect Articles 12 and 14 with equal treatment in public contracting.
• State the actual outcome: despite the legal criticism, relief was refused because of delay and the circumstances.
• Public business decisions are subject to constitutional fairness, but legal remedies must be pursued responsibly and in time.

Percept D'Mark India Private Limited v. Zaheer Khan (2006)

Decided by the Supreme Court in 2006. The decision explains the difference between a restriction during a contract and an unlawful restraint after the contract has ended. It answers whether a sports management company can continue controlling an athlete's next business contract after its own agreement has ended.

Facts

• The management company entered an agreement to represent the cricketer Zaheer Khan for commercial and promotional activities.
• During the agreed period, the company had contractual rights to manage specified opportunities.
• Another clause gave it a right of first refusal linked to arrangements after the term.
• After the agreed period ended, Zaheer Khan entered into an arrangement with another agency.
• Percept sought an injunction to enforce its post-term contractual control.

Arguments

• Percept: the clause was a limited commercial protection rather than a complete prohibition on working with others.
• Zaheer Khan: opposed the restriction.

Issue

Whether the post-term restriction could be enforced in the light of Section 27 of the Contract Act.

Section 27, Contract Act

Section 27 generally makes agreements restraining a person from carrying on a lawful profession, trade or business void to the extent of the restraint, subject to the statutory exception and applicable legal principles.

Judgment

• The Court distinguished obligations operating while a valid contract is being performed from a restraint extending beyond its termination. The latter raises a serious problem under Section 27.
• The Court refused to enforce the post-term restriction sought against Zaheer Khan.
• Justice A.R. Lakshmanan explained that the challenged clause restrained his freedom after the contract had ended.
• The Court also considered the unsuitability of using an injunction to compel a continuing personal or confidential management relationship.
• The company's contractual language could not automatically override the athlete's right to choose future professional arrangements.

Limits of the decision

• It does not say that all exclusivity arrangements are invalid. An agreement may lawfully require exclusive performance during its agreed period in circumstances recognised by law.
• A properly drafted confidentiality obligation may raise different questions.
• The problem was the continuing restraint on future engagement beyond the agreed term, not the mere existence of a business manager.

Restriction during the term	Restraint after the term
Exclusive performance during the agreed period may be lawful in circumstances recognised by law.	Raises a serious problem under Section 27.
The athlete cannot ignore promises made in a current valid agreement.	Cannot normally tie the person's future profession to the same manager.

Significance

The case has particular importance in careers based on skill and reputation. Sports, entertainment and other personal-service contracts involve choices about who may negotiate for or represent an individual.

Exam points

• State the facts of the management agreement, the right of first refusal and the attempt to restrain a later agency contract.
• Explain Section 27 and the distinction between restrictions during and after the term.
• Do not write that an athlete can ignore every promise made in a current valid agreement.
• Lasting principle: a management contract cannot normally be used to tie a person's future profession to the same manager after the agreed relationship ends.

Central Inland Water Transport Corporation Limited v. Brojo Nath Ganguly (1986)

Decided by the Supreme Court in 1986. The case answers whether a court must treat a clause as fair simply because it appears in service conditions, where a permanent employee can be terminated at the employer's choice on three months' pay and has little power to negotiate.

Facts

• The employer was a government-controlled corporation.
• Its service rules contained a clause allowing termination of a permanent employee's employment through notice, or pay in place of notice (three months' pay), without the ordinary protections against arbitrary removal.
• Employees challenged the rule.

Issue

The question was not whether employers can ever terminate employment lawfully. The problem was a broad discretionary power contained in standard rules imposed on workers who could not bargain on equal terms.

Arguments

• Corporation: defended its service conditions.
• Employees: the clause was extremely unfair and gave one side excessive power.

The Court examined the setting in which the rule operated: the relationship between employer and workers, the absence of real equality in bargaining power, and the public character of the corporation.

Judgment

• The Court held the challenged rule unconscionable and void.
• Section 23 of the Contract Act provides that an agreement has an unlawful object or consideration when it is opposed to public policy. The Court recognised that a highly oppressive contractual term imposed through serious inequality can fall within that rule.
• The corporation's public character brought in constitutional principles: Article 12 helps identify bodies treated as the State, and Article 14 prohibits arbitrary conduct by such bodies.
• The Court connected contractual fairness with the constitutional duty of a public employer to avoid arbitrary action. A rule allowing termination at broad discretion, without appropriate safeguards, could not be rescued solely by saying it had been written into employment conditions.

Limits of the decision

• The judgment did not make every unequal bargain void. Differences in money, experience or bargaining skill are common in contracts.
• Courts examine the actual term, the context, and whether there was a meaningful choice.
• The decision is particularly strong where a powerful party presents a deeply unfair standard condition to a person with very little practical alternative.
• It is not a general invitation for judges to cancel every agreement that later proves disappointing.

Exam points

• Describe the government corporation's termination rule, the unequal employment relationship and the Supreme Court's rejection of the clause.
• Explain Section 23 and Articles 12 and 14, without claiming that every private employment disagreement is identical.
• Significance: a contract is a legal relationship, not a licence for the stronger side to impose deeply unfair terms without judicial scrutiny.

Pioneer Urban Land and Infrastructure Limited v. Govindan Raghavan (2019)

Decided by the Supreme Court in 2019. The case answers whether a homebuyer is forced to accept an apartment agreement that punishes the buyer heavily for late instalments but gives the builder much weaker consequences for delay in handing over the flat.

Facts

• The buyer agreed to purchase an apartment and made substantial payments.
• The builder did not hand over possession within the promised period. Possession was eventually offered, but only after a substantial delay.
• The buyer sought a refund instead of taking the delayed flat.

Arguments

The builder relied on clauses of the apartment buyer's agreement and argued that the buyer had to follow those clauses before cancelling the arrangement and claiming the money back.

The one-sided terms

Buyer's delay	Builder's delay
Builder could charge high interest, including 18% a year, for delayed instalments.	Buyer's rights to compensation and termination were far more limited.
Heavy consequences.	Buyer had to wait through specified periods before claiming a refund.

Issue

Whether these one-sided terms could bind the consumer regardless of the builder's serious delay.

Judgment

• Bench: Justice Indu Malhotra delivered the judgment.
• Such unfair and unreasonable terms could not be imposed on the flat purchaser as though both parties had truly enjoyed equal bargaining power.
• The delay amounted to a failure of the builder's obligation to provide the promised service within a reasonable period.
• The buyer could not be forced to accept possession after the prolonged delay.
• The Court upheld refund of the amounts paid with 10.7% simple annual interest.

Statutory framework

• The decision arose under the Consumer Protection Act, 1986, which governed the proceedings.
• The present Consumer Protection Act, 2019 defines "unfair contract" in Section 2(46). That section helps in understanding the modern framework, but it was not the provision directly applied by the Supreme Court in this earlier dispute.
• Section 23 of the Contract Act helps explain why the law does not automatically respect every oppressive term in a signed agreement. However, the result must be understood through the consumer dispute and the Court's actual reasoning.
• The case does not mean that every delay of a few days gives an automatic right to cancel any property contract.

Significance

A home is often purchased through a standard form prepared entirely by the developer.

Exam points

• Mention the delayed flat, the unequal interest clauses, the buyer's request for refund and the Supreme Court's rejection of the unfair terms.
• Distinguish the consumer law applicable to the original case (1986 Act) from later legislation (2019 Act).
• Enduring lesson: signing a one-sided apartment agreement does not always require a buyer to accept an unreasonable delay or an unfair limit on lawful remedies.