INDORE INSTITUTE OF LAW

(Affiliated to D.A.V.V. & BCI)

LAW OF CONTRACT
SEMESTER -: II B.B.A.LL.B
STUDY MATERIAL

Q.1 Define indemnity? Explain the various aspects of the indemnity? Explain contract
of guarantee with the major difference with the contract of indemnity?
In the old English law, Indemnity was defined as a promise to save a person harmless from
the consequences of an act. Such a promise can be express or implied from the circumstances
of the case. This view was illustrated in the case of Adamson vs Jarvis 1872. In this case, the
plaintiff, an auctioneer, sold certain goods upon the instructions of a person. It turned out that
the goods did not belong to the person and the true owner held the auctioneer liable for the
goods. The auctioneer, in turn, sued the defendant for indemnity for the loss suffered by him
by acting on his instructions. It was held that since the auctioneer acted on the instructions of
the defendant, he was entitled to assume that if, what he did was wrongful, he would be
indemnified by the defendant.
This gave a very broad scope to the meaning of Indemnity and it included promise of
indemnity due to loss caused by any cause whatsoever. Thus, any type of insurance except
life insurance was a contract of Indemnity. However, Indian contract Act 1872 makes the
scope narrower by defining the contract of indemnity as follows:
Section 124 - A contract by which one party promises to save the other from loss caused to
him by the conduct of the promisor himself or by the conduct of any other person is a
"contract of Indemnity".
Illustration - A contracts to indemnify B against the consequences of any proceedings
which C may take against B in respect of a certain sum of Rs 200. This is a contract of
indemnity.

This definition provides the following essential elements -

1. There must be a loss.

2. The loss must be caused either by the promisor or by any other person.
3. Indemnifier is liable only for the loss.
Thus, it is clear that this contract is contingent in nature and is enforceable only when the loss
occurs.

Rights of the indemnity holder

Section 125, defines the rights of an indemnity holder. These are as follows -
The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to
recover from the promisor -
 i. Right of recovering Damages - all damages that he is compelled to pay in a suit in
respect of any matter to which the promise of indemnity applies.

ii. Right of recovering Costs -all costs that he is compelled to pay in any such suit if, in
bringing or defending it, he did not contravene the orders of the promisor and has acted as it
would have been prudent for him to act in the absence of the contract of indemnity, or if the
promisor authorized him in bringing or defending the suit.
iii. Right of recovering Sums -all sums which he may have paid under the terms of a
compromize in any such suite, if the compromize was not contrary to the orders of the
promisor and was one which would have been prudent for the promisee to make in the
absence of the contract of indemnity, or if the promisor authorized him to compromize the
suit.
As per this section, the rights of the indemnity holder are not absolute or unfettered. He must
act within the authority given to him by the promisor and must not contravene the orders of
the promisor. Further, he must act with normal intelligence, caution, and care with which he
would act if there were no contract of indemnity.
At the same time, if he has followed all the conditions of the contract, he is entitled to the
benefits. This was held in the case of United Commercial Bank vs Bank of India AIR 1981.
In this case, Supreme Court held that the courts should not grant injunctions restraining the
performance of contractual obligations arising out of a letter of credit or bank guarantee if the
terms of the conditions have been fulfilled. It held that such LoCs or bank guarantees impose
on the banker an absolute obligation to pay.
In the case of Mohit Kumar Saha vs New India Assurance Co AIR 1997, Calcutta HC held
that the indemnifier must pay the full amount of the value of the vehicle lost to theft as given
by the surveyor. Any settlement at lesser value is arbitrary and unfair and violates art 14 of
the constitution.

Commencement of liability
In general, as per the definition given in section 124, it looks like an idemnity holder cannot
hold the indemnifier liable untill he has suffered an actual loss. This is a great disadvantage to
the indemnity holder in cases where the loss is imminent and he is not in the position to bear
the loss. In the case of Gajanan Moreshwar vs Moreshwar Madan, AIR 1942, Bombay high
court observed that the contract of indemnity held very little value if the indemnity holder
could not enforce his indemnity untill he actually paid the loss. If a suit was filed against him,
he had to wait till the judgement and pay the damages upfront before suing the indemnifier.
He may not be able to pay the judement and could not sue the indemnifier. Thus, it was held
that if his liability has become absolute, he was entitled to get the indemnifier to pay the
amount.

Q. Define a contract of Guarantee. What are the essential elements of a contract of

Guarantee? What is a continuing Guarantee and what are its modes of revocation.
What are the rights of Surety? When is Surety discharged of Guarantee? What is the
extent of Surety's liability?
Section 126 of Indian Contract Act 1872 defines a contract of guarantee as follows :
 "A contract of guarantee is a contract to perform the promise, or to discharge the liabilities
of a third person in case of his default. The person who gives the guarantee is called Surety,
the person in respect of whose default the guarantee is given is called Principal Debtor, and
the person to whom the guarantee is given is called Creditor. A Guarantee may be either oral
or written."
For example, when A promises to a shopkeeper C that A will pay for the items being bought
by B if B does not pay, this is a contract of guarantee. In this case, if B fails to pay, C can sue
A to recover the balance. The same was held in the case of Birkmyr vs Darnell 1704, where
the court held that when two persons come to a shop, one person buys, and to give him credit,
the other person promises, "If he does not pay, I will", this type of a collateral undertaking to
be liable for the default of another is called a contract of guarantee.

A contract of guarantee has the following essential elements -

1. Existance of Creditor, Surety, and Principal Debtor - The economic function of a guarantee
is to enable a credit-less person to get a loan or employment or something else. Thus, there
must exist a principal debtor for a recoverable debt for which the surety is liable in case of the
default of the principal debtor.
In the case of Swan vs Bank of Scotland 1836, it was held that a contract of guarantee is a
tripartite agreement between the creditor, the principal debtor, and the surety.
2. Distinct promise of surety - There must be a distinct promise by the surety to be
answerable for the liability of the Principal Debtor.
3. Liability must be legally enforceable - Only if the liability of the principal debtor is legally
enforceable, the surety can be made liable. For example, a surety cannot be made liable for a
debt barred by statute of limitation.

4. Consideration - As with any valid contract, the contract of guarantee also must have a
consideration. The consideration in such contract is nothing but any thing done or the
promise to do something for the benefit of the principal debor. Section 127 clarifies this as
follows :
"Any thing done or any promise made for the benefit of the principal debtor may be
sufficient consideration to the surety for giving the guarantee."

Illustrations:
1. A agrees to sell to B certain goods if C guarantees the payment of the price of the goods.
C promises to guarantee the payment in consideration of A's promise to deliver goods to B.
This is a sufficient consideration for C's promise.
2. A sells and delivers goods to B. C, afterwards, requests A to forbear to sue B for an year
and promises that if A does so, he will guarantee the payment if B does not pay. A forbears to
sue B for one year. This is sufficient consideration for C's guarantee.
3. A sells and delivers goods to B. Later on, C, without any consideration, promises to pay
A if B fails to pay. The agreement is void for lack of consideration.
However, there is no uniformity on the issue of past consideration. In the case of Allahabad
Bank vs S M Engineering Industries 1992 Cal HC, the bank was not allowed to sue the surety
in absence of any advance payment made after the date of guarantee. But in the case of Union
Bank of India vs A P Bhonsle 1991 Mah HC, past debts were also held to be recoverable
under the wide language of this section. In general, if the principal debtor is benefitted as a
result of the guarantee, it is sufficient consideration for the sustenance of the guarantee.
5. It should be without mispresentation or concealment - Section 142 specifies that a
guarantee obtained by misrepresenting facts that are material to the agreement is invalid, and
section 143 specifies that a guarantee obtained by concealing a material fact is invalid as
well.
Illustrations -
1. A appoints B for collecting bills. B fails to account for some of the bills. A asks B to get
a guarantor for further employment. C guarantees B's conduct but C is not made aware of B
previous mis-accounting by A. B, afterwards, defaults. C cannot be held liable.
2. A promises to sell Iron to B if C guarantees payment. C guarantees payment however, C
is not made aware of the fact that A and B had contracted that B will pay 5 Rs higher that the
market prices. B defaults. C cannot be held liable.
In the case of London General Omnibus vs Holloway 1912, a person was invited to guarantee
an employee, who was previously dismissed for dishonesty by the same employer. This fact
was not told to the surety. Later on, the employee embezzled funds but the surety was not
held liable.

Continuing Guarantee
As per section 129, a guarantee which extends to a series of transactions is called a
continuing guarantee.
Illustrations -
1. A, in consideration that B will employ C for the collection of rents of B's zamindari,
promises B to be responsible to the amount of 5000/- for due collection and payment by C of
those rents. This is a continuing guarantee.
2. A guarantees payment to B, a tea-dealer, for any tea that C may buy from him from time to
time to the amount of Rs 100. Afterwards, B supplies C tea for the amount of 200/- and C
fails to pay. A's guarantee is a continuing guarantee and so A is liable for Rs 100.
3. A guarantees payment to B for 5 sacks of rice to be delivered by B to C over the period of
one month. B delivers 5 sacks to C and C pays for it. Later on B delivers 4 more sacks but C
fails to pay. A's guarantee is not a continuing guarantee and so he is not liable to pay for the 4
sacks.
Thus, it can be seen that a continuing guarantee is given to allow multiple transactions
without having to create a new guarantee for each transaction. In the case of Nottingham
Hide Co vs Bottrill 1873, it was held that the facts, circumstances, and intention of each case
has to be looked into for determining if it is a case of continuing guarantee or not.
Revocation of Continuing Guarantee
1. As per section 130, a continuing guarantee can be revoked at any time by the surety by
notice to the creditor.
Once the guarantee is revoked, the surety is not liable for any future transaction however he
is liable for all the transactions that happened before the notice was given.
Illustrations -
1. A promises to pay B for all groceries bought by C for a period of 12 months if C fails to
pay. In the next three months, C buys 2000/- worth of groceries. After 3 months, A revokes
the guarantee by giving a notice to B. C further purchases 1000 Rs of groceries. C fails to
pay. A is not liable for 1000/- rs of purchase that was made after the notice but he is liable for
2000/- of purchase made before the notice.
This illustration is based on the old English case of Oxford vs Davies.
In the case of Lloyd's vs Harper 1880, it was held that employment of a servant is one
transaction. The guarantee for a servant is thus not a continuing guarantee and cannot be
revoked as long as the servant is in the same employment. However, in the case of Wingfield
vs De St Cron 1919, it was held that a person who guarateed the rent payment for his servant
but revoked it after the servant left his employment was not liable for the rents after
revocation.
2. A guarantees to B, to the amount of 10000 Rs, that C shall pay for the bills that B may
draw upon him. B draws upon C and C accepts the bill. Now, A revokes the guarantee. C
fails to pay the bill upon its maturity. A is liable for the amount upto 10000Rs.
As per section 131, the death of the surety acts as a revocation of a continuing guarantee with
regards to future transactions, if there is no contract to the contrary.
It is important to note that there must not be any contract that keeps the guarantee alive even
after the death. In the case of Durga Priya vs Durga Pada AIR 1928, Cal HC held that in each
case the contract of guarantee between the parties must be looked into to determine whether
the contract has been revoked due to the death of the surety or not. If there is a provision that
says death does not cause the revocation then the constract of guarantee must be held to
continue even after the death of the surety.

Rights of the Surety

A contract of guarantee being a contract, all rights that are available to the parties of a
contract are available to a surety as well. The following are the rights specific to a contract of
guarantee that are available to the surety.

Rights against principal debtor

1. Right of Subrogation
As per section 140, where a guaranteed debt has become due or default of the principal
debtor to perform a duty has taken place, the surety, upon payment or performance of all that
he is liable for, is invested with all the rights which the creditor had against the princpal
debtor. This means that the surety steps into the shoes of the creditor. Whatever rights the
creditor had, are now available to the surety after paying the debt.
In the case of Lampleigh Iron Ore Co Ltd, Re 1927, the court has laid down that the surety
will be entitled, to every remedy which the creditor has against the principal debtor; to
enforce every security and all means of payment; to stand in place of the creditor to have the
securities transfered in his name, though there was no stipulation for that; and to avail himself
of all those securities against the debtor. This right of surety stands not merely upon contract
but also upon natural justice.
In the case of Kadamba Sugar Industries Pvt Ltd vs Devru Ganapathi AIR 1993, Kar HC held
that surety is entitled to the benefits of the securities even if he is not aware of theire
existence.
In the case of Mamata Ghose vs United Industrial Bank AIR 1987, Cal HC held that under
the right of subrogation, the surety may get certain rights even before payment. In this case,
the principal debtor was disposing off his personal properties one after another lest the surety,
after paying the debt, seize them. The surety sought for temporary injunction, which was
granted.

2. Right to Indemnity
As per section 145, in every contract of guarantee there is an implied promise by the principal
debtor to indemnify the surety; and the surety is entitled to recover from the the principal
debtor whatever sum he has rightfully paid under the guarantee but no sums which he has
paid wrong fully.
Illustrations -
B is indebted to C and A is surety for the debt. Upon default, C sues A. A defends the suit
on reasonable grounds but is compelled to pay the amount. A is entitled to recover from B the
cost as well as the principal debt.
In the same case above, if A did not have reasonable grounds for defence, A would still be
entitled to recover principal debt from B but not any other costs.
A guarantees to C, to the extent of 2000 Rs, payment of rice to be supplied by C to B. C
supplies rice to a less amount than 2000/- but obtains from A a payment of 2000/- for the
rice. A cannot recover from B more than the price of the rice actually suppied.
This right enables the surety to recover from the principal debtor any amount that he has paid
rightfully. The concept of rightfully is illustrated in the case of Chekkara Ponnamma vs A S
Thammayya AIR 1983. In this case, the principal debtor died after hire-purchasing four
motor vehicles. The surety was sued and he paid over. The surety then sued the legal
representatives of the principal debtor. The court required the surety to show how much
amount was realized by selling the vehicles, which he could not show. Thus, it was held that
the payment made by the surety was not proper.

Rights against creditor

1. Right to securities
As per section 141, a surety is entitled to the benefit of every security which the creditor has
against the principal debtor at the time when the contract of suretyship is entered into whether
the surety knows about the existance of such securty or not; and if the creditor loses or
without the consent of the surety parts with such security, the surety is discharged to the
extent of the value of the security.
Illustrations -
C advances to B, his tenant, 2000/- on the guarantee of A. C also has a further security for
2000/- by a mortgage of B's furniture. C cancels the mortgage. B becomes insolvent and C
sues A on his guarantee. A is discharged of his liability to the amount of the value of the
furniture.
C, a creditor, whose advance to B is secured by a decree, also receives a guaratee from A.
C afterwards takes B's goods in execution under the decree and then without the knowledge
of A, withdraws the execution. A is discharged.

A as surety for B makes a bond jointly with B to C to secure a loan from C to B. Afterwards,
C obtains from B a further security for the same debt. Subsequently, C gives up the further
security. A is not discharged.
This section recognizes and incorporates the general rule of equity as expounded in the case
of Craythorne vs Swinburne 1807 that the surety is entitled to every remedy which the
creditor has agains the principal debtor including enforcement of every security.
The expression "security" in section 141 means all rights which the creditor had against
property at the date of the contract. This was held by the SC in the case of State of MP vs
Kaluram AIR 1967. In this case, the state had sold a lot of felled trees for a fixed price in four
equal installments, the payment of which was guaranteed by the defendent. The contract
further provided that if a default was made in the payment of an installment, the State would
get the right to prevent further removal of timber and the sell the timber for the the realization
of the price. The buyer defaulted but the State still did not stop him from removing further
timber. The surety was then sued for the loss but he was not held liable.
It is important to note that the right to securities arises only after the creditor is paid in full. If
the surety has guaranteed only part of the debt, he cannot claim a propertional part of the
securities after paying part of the debt. This was held in the case of Goverdhan Das vs Bank
of Bengal 1891.

2. Right of set off

If the creditor sues the surety, the surety may have the benefit of the set off, if any, that the
principal debtor had against the creditor. He is entitled to use the defences that the principal
debtor has against the creditor. For example, if the creditor owes the principal debtor
something, for which the principal debtor could have counter claimed, then the surety can
also put up that counter claim.

Rights against co-sureties

1. Effect of releasing a surety
As per section 138, Where there are co-sureties, a release by the creditor of one of them does
not discharge the others; neither does it free the surety so released from his responsibilty to
the other surities.
A creditor can release a co-surety at his will. However, as held in the case of Sri Chand vs
Jagdish Prashad 1966, the released co-surety is still liable to the others for contribution upon
default.
2. Right to contribution
As per section 146, where two or more persons are co-surities for the same debt jointly or
severally, with or without the knowledge of each other, under same or different contractx, in
the absernce of any contract to the contrary, they are liable to pay an equal share of the debt
or any part of it that is unpaid by the principal debtor.

Illustrations -
A, B, and C are surities to D for a sum of 3000Rs lent to E. E fails to pay. A, B, and C are
liable to pay 1000Rs each.
A, B, and C are surities to D for a sum of 1000Rs lent to E and there is a contract among A
B and C that A and B will be liable for a quarter and C will be liable for half the amount upon
E's default. E fails to pay. A and B are liable for 250Rs each and C is liable for 500Rs.
As per section 147, co-sureties who are bound in different sums are liable to pay equally as
fas as the limits of their respective obligations permit.
Illustrations -
A, B and C as surities to D, enter into three several bonds, each in different penalty,
namely A for 10000Rs, B for 20000 Rs, and C for 30000Rs with E. D makes a default on
30000Rs. All of them are liable for 10000Rs each.

A, B and C as surities to D, enter into three several bonds, each in different penalty,
namely A for 10000Rs, B for 20000 Rs, and C for 40000Rs with E. D makes a default on
40000Rs. A is liable for 10000Rs while B and C are liable for 15000Rs each.

A, B and C as surities to D, enter into three several bonds, each in different penalty,
namely A for 10000Rs, B for 20000 Rs, and C for 40000Rs with E. D makes a default on
70000Rs. A, B and C are liable for the full amount of their bonds.

Discharge of Surety
A surety is said to be discharged from liability when his liability comes to an end. Indian
Contract Act 1872 specifies the following conditions in which a surety is discharged of his
liability -

1. Section 130 - By a notice of revocation - discussed above.

2. Section 131 - By death of surety - discussed above.

3. Section 133 - By variance in terms of contract - A variance made without the consent of
the surety in terms of the contract between the principal debtor and the creditor, discharges
the surety as to the transactions after the variance.

Illustrations -
A becomes a surety to C for B's conduct as manager in C's bank. Afterwards, B and C
contract without A's consent that B's salary shall be raised and that B shall be liable for 1/4th
of the losses on overdrafts. B allows a customer to overdraft and the bank loses money. A is
not liable for the loss.

A guarantees C against the misconduct of B in an office to which B is appointed by C. The

conditions of employment are defined in an act of legislature. In a subsequent act, the nature
of the office is materially altered. B misconducts. A discharged by the change from the future
liablity of his guarantee even though B's misconduct is on duty that is not affected by the act.

B appoints C as a salesperson on a fixed yearly salary upon A's guarantee on due account
of sales by C. Later on, without A's consent, B and C contract that C will be paid on
commission basis. A is not liable for C's misconduct after the change.

C promises to lends 5000Rs to B on 1st March. A guarantee the repayment. C gives the
money to B on 1st January. A is discharged of his liability because of the variance in as much
as C may decide to sue B before 1st march.

4. Section 134 - By discharge of principal debtor - The surety is discharged by any contract
between the creditor and the principal debtor by which the principal debtor is discharged; or
by any action of the creditor the legal consequence of which is the discharge of the principal
debtor.

Illustrations
A gives a guarantee to C for goods to be delivered to B. Later on, B contracts with C to
assign his property to C in lieu of the debt. B is discharged of his liability and A is discharged
of his liability.

A contracts with B to grow indigo on A's land and deliver it to B at a fixed price. C
guarantees A's performance. B diverts a stream of water that is necessary for A to grow
indigo. This action of B causes A to be discharged of the liability. Consequenty C is
discharged of his suretyship as well.

A contracts with B to build a house for B. B is to supply timber. C guarantees A's

performance. B fails to supply timber. C is discharged of his liability.

If the principal debtor is released by a compromise with the creditor, the surety is discharged
but if the principal debtor is discharged by the operation of insolvancy laws, the surety is not
discharged. This was held in the case of Maharashtra SEB vs Official Liquidator 1982.

5. Section 135 - By composition, extension of time, or promise not to sue - A contract

between the principal debtor and the creditor by which the creditor makes a composition
with, or promises to give time to, or promises to not sue the principal debtor, discharges the
surety unless the surety assents to such a contract.

It should be noted that as per section 136, if a contract is made by the creditor with a third
person to give more time to the principal debtor, the surety is not discharged. However, in the
case of Wandoor Jupitor Chits vs K P Mathew AIR 1980, it was held that the surety was not
discharged when the period of limitation got extended due to acknowledgement of debt by
the principal debtor.

Further, as per section 137, mere forbearance to sue or to not make use of any remedy that is
available to the creditor against the principal debtor, does not automatically discharge the
surety.
Illustration -
B owes C a debt guarateed by A. The debt becomes payable. However, C does not sue B
for an year. This does not discharge A from his suretyship.

It must be noted that forbearing to sue until the expiry of the period of limitation has the legal
consequence of discharge of the principal debtor and thus as per section 134, will cause the
surety to be discharged as well. If section 134 stood alone, this inference was correct.
However, section 137 explicitly says that mere forbearance to sue does not discharge the
surety. This contradiction was removed in the case of Mahanth Singh vs U B Yi by Privy
Council. It held that failure to sue the principal debtor until recovery is banned by period of
limitation does not discharge the surety.

6. Section 139 - By imparing surety's remedy - If the creditor does any act that is inconsistent
with the rights of the surety or omits to do an act which his duty to surety requires him to do,
and the eventual remedy of the surety himself against the principal debtor is thereby
impaired, the surety is dischared.
Illustrations -
C contracts with B to build a ship the payment of which is to be made in installments at
various stages of completion. A guarantee's C's performance. B prepays last two installments.
A is discharged of his liability.
A appoints M as an apprentice upon getting a guarantee of M's fidelity by B. A also
promises that he will at least once a month see M make up the cash. A fails to do this. M
embezzeles. B is discharged of his suretyship.

A lends money to B with C as surety. A also gets as a security the mortgate to B's
furniture. B defaults and A sells his furniture. However, due to A's carelessness very small
amount is received by sale of the furniture. C is discharged of the liability.
State of MP vs Kaluram - Discussed above.
In the case of State Bank of Saurashtra vs Chitranjan Ranganath Raja 1980, the bank failed to
properly take care of the contents of a godown pledged to it against a loan and the contents
were lost. The court held that the surety was not liable for the amount of the goods lost.
Creditor's duty is not only to take care of the security well but also to realize it proper value.
Also, before disposing of the security, the surety must be informed on the account of natural
justice so that he can have the option to take over the security by paying off the debt. In the
case of Hiranyaprava vs Orissa State Financial Corp AIR 1995, it was held that if such a
notice of disposing off of the security is not given, the surety cannot be held liable for the
shortfall.
However, when the goods are merely hypothecated and are in the custody of the debtor, and
if their loss is not because of the creditor, the suerty is not discharged of his liability.

Extent of Surety's Liability

As per section 128, the liability of a surety is co-extensive with that of the principal debtor,
unless it is otherwise provided in the contract.
Illustration - A guaratees the payment of a bill by B to C. The bill becomes due and B fails to
pay. A is liable to C not only for the amount of the bill but also for the interest.
This basically means that although the liability of the surety is co-extensive with that of the
principal debtor, he may place a limit on it in the contract. Co-extensive implies the
maximum extent possible. He is liable for the whole of the amount of the debt or the
promises. However, when part of a debt was recovered by disposing off certain goods, the
liability of the surety is also reduced by the same amount. This was held in the case of
Harigopal Agarwal vs State Bank of India AIR 1956.
The surety can also place conditions on his guarantee. Section 144 says that where a person
gives guarantee upon a contract that the creditor shall not act upon it untill another person has
joined it as co-surety, the guarantee is not valid if the co-surety does not join. In the case of
National Provincial Bank of England vs Brakenbury 1906, the defendant signed a guarantee
which was supposed to be signed by three other co-surities. One of them did not sign and so
the defendant was not held liable.
Similarly, a surety may specify in the contract that his liability cannot exceed a certain
amount.
However, where the liability is unconditional, the court cannot introduce any conditions.
Thus, in the case of Bank of Bihar Ltd. vs Damodar Prasad AIR 1969, SC overruled trial
court's and high court's order that the creditor must first exhaust all remedies against the
principal debtor before suing the surety.

Q. Differentiate between a contract of Indemnity and a contract of Guarantee.

Contract of Indemnity (Section 124) Contract of Guarantee (Section 126)

It is a bipartite agreement between the It is a tripartite agreement between the
indemnifier and indemnity-holder. Creditor, Principal Debtor, and Surety.
Liability of the indemnifier is contingent Liability of the surety is not contingent upon
upon the loss. any loss.
Liability of the indemnifier is primary to the Liability of the surety is co-extensive with
contract. that of the principal debtor although it
remains in suspended animation until the
principal debtor defaults. Thus, it is
secondary to the contract and consequenty if
the principal debtor is not liable, the surety
will also not be liable.
The undertaking in indemnity is original. The undertaking in a guarantee is collateral to
the original contract between the creditor and
the principal debtor.
There is only one contract in a contract of There are three contracts in a contract of
indemnity - between the indemnifier and the guaratee - an original contract between
indemnity holder. Creditor and Principal Debtor, a contract of
guarantee between creditor and surety, and an
implied contract of indemnity between the
surety and the principal debtor.
The reason for a contract of indemnity is to The reason for a contract of guarantee is to
make good on a loss if there is any. enable a third person get credit.
Once the indemnifier fulfills his liability, he Once the guarantor fulfills his liabilty by
does not get any right over any third party. paying any debt to the creditor, he steps into
He can only sue the indemnity-holder in his the shoes of the creditor and gets all the
own name. rights that the creditor had over the principal
debtor.

Q. Define Bailment. What are the rights, duties, and liabilities of a bailee? When is he
not responsible for loss, destruction, or deterioration of the things bailed? What are the
various kinds of lien held by the bailee. Explain the rights of finder of goods.
Bailment is a kind of activity in which the property of one person temporarily goes into the
possession of another. The ownership of the property remains with the giver, while only the
possession goes to another. Several situations in day to day life such as giving a vehicle for
repair, or parking a scooter in a parking lot, giving a cloth to a tailor for stitching, are
examples of bailment. Section 148 of Indian Contract Act 1872, defines bailment as follows -
Section 148 - A bailment is the delivery of goods by one person to another for some purpose,
upon a contract that they shall, when the purpose is accomplished, be returned or otherwise
disposed of according to the directions of the person delivering them. The person delivering
the goods is called the bailor and the person to whom they are delivered is called the bailee.
Explanation - If a person is already in possession of the goods of another contracts to hold
them as a baliee, he thereby becomes the bailee and the bailor becomes the bailor of such
goods although they may not have been delivered by way of bailment.

According to this definition the following are the essential elements of bailment -

1. Delivery of goods
The possession of goods must transfer from one person to another. Delivery is not same as
custody. For example, a servant holding his master's umbrella is not a bailee but only a
custodian. The goods must be handed over to the bailee for whatever is the purpose of the
bailment.
In Ultzen vs Nicols 1894, the plaintiff went to a restaurant for dining. When he entered the
room, the waiter took his coat and hung it on a hook behind him. When the plaintiff arose to
leave, the coat was gone. It was held that the waiter voluntarily took the responsibility of
keeping the coat while the customer was dining and was thus a bailee. Therefore, he was
liable to return it.
Contrasting this case with Kaliaperumal Pillai vs Visalakshmi AIR 1938, we can see the
meaning of delivery. In this case, a woman gave some gold to a jeweler to make jewelery.
Every evening she used to take the unfinished jewels, put it in a box, lock the box and take
the keys of the box with her while leaving the box at the goldsmith. One morning, when the
opened the box the gold was gone. It was held that, in the night, the possession of the gold
was not with the jeweler but with the plaintiff because she locked the box and kept the keys
with her.
As the explanation to section 148 says, even if a person already has the possession of goods
that he does not own, he can become a bailee by entering into a contract with the bailor. In
such a case, the actual act of delivery is not done but is considered to be valid for bailment.
Types of Delivery - As per section 149, the delivery to the bailee may be made by doing
anything which has the effect of putting the goods in the possession of the intended bailee or
of any person authorized to hold them on his behalf. This means that the delivery can be
made to either the bailee or to any other person whom the baliee authorizes. This person can
be the bailor himself. This gives us two types of delivery - Actual and Constructive. In actual
delivery, the physical possession of the goods is handed over to the bailee while in
constructive delivery the possession of the goods remains with the bailor upon authorization
of the bailee. In other words, the bailee authorizes the person to keep possession of the goods.
In Bank of Chittor vs Narsimbulu AIR 1966, a person pledged cinema projector with the
bank but the bank allowed him to keep the projector so as to keep the cinema hall running.
AP HC held that this was constructive delivery because something was done that changed the
legal possession of the projector. Even though the physical possession was with the person,
the legal possession was with the bank.

2. Delivery upon contract

For a valid bailment, the delivery must be done upon a contract that the goods will be
returned when the purpose is accomplished. If the goods are given without any contract, there
is no bailment. In Ram Gulam vs Govt. of UP AIR 1950, plaintiffs ornaments were seized by
police on the suspicion that they were stolen. The ornaments were later on stolen from the
custody or police and the plaintiff sued the govt. for returning the ornaments. It was held that
the goods were not given to the police under any contract and thus there was no bailment.
However, this decision was criticized and finally, in State of Gujarat vs Menon Mohammad
AIR 1967, SC held that bailment can happen even without an explicit contract. In this case,
certain motor vehicles were seized by the State under Sea Customs Act, which were then
damaged. SC held that the govt. was indeed the bailee and the State was responsible for
proper care of the goods.

3. Conditional Delivery
The delivery of goods is not permanent. The possession is given to the bailee only on the
condition that he will either return the goods or dispose them according to the wishes of the
bailer after the purpose for which the goods were given. For example, when the stitching is
complete, the tailor is supposed to return the garment to the bailor. If the bailee is not bound
to return the goods to the bailor, then the relationship between them is not of bailment. This is
a key feature of bailment that distinguishes it from other type of relations such as agency. J
Shetty of SC in U Co. Bank vs Hem Chandra Sarkar 1990, observed that the distinguishing
feature between a bailment and an agency is that the bailee does not represent the bailor. He
merely exercises some rights of the bailor over the bailed property. The bailee cannot bind
the bailor by his acts. Thus, a banker who was holding the goods on behalf of its account
holder for the purpose of delivering them to his customers against payment, was only a bailee
and not an agent.

Duties of a Bailor
A bailor may give his property to the bailee either without any consideration or reward or for
a consideration or reward. In the former case, he is called a gratuitous bailor, while in the
latter, a bailor for reward. The duties in both the cases are slightly different. Section 150
specifies the duties for both kinds of bailor. It says that the bailor is bound to disclose any
faults in the goods bailed that the bailor is aware of, and which materially interfere with the
use of them or which expose the bailee to extraordinary risk. This means that if there is a
fault with the goods which may cause harm to the bailee, the bailor must tell it to the bailee.
For example, if a person bails his scooter to his friend and if the person knows that the brakes
are loose, then he must tell this to the friend. Otherwise, the bailor will be responsible for
damages arising directly out of the faults to the bailee. But the bailor is not bound to tell the
bailee about the fault if the bailor himself does not know about it.
Section 150 imposes a bigger responsibility to the non-gratuitous bailor since he is making a
profit out of the bailment. A non gratuitous bailor is responsible for any damage that happens
to the bailee directly because of the fault of the goods irrespective of whether the bailor knew
about it or not.
In Hyman and Wife vs Nye & Sons 1881, the plaintiff hired a carriage from the defendant.
During the journey, a bolt in the under part of carriage broke, causing an accident in which
the plaintiff was injured. The defendants were held liable even though they did not know
about the condition of the bolt.

Duties/Responsibilities of a Bailee
1. Duty to take reasonable care
In English law the duties of a gratuitous and non-gratuitous bailee are different. However, in
Indian law, Section 151 treats all kinds of bailees the same with respect to the duty. It says
that in all cases of bailment, the bailee is bound to take as much care of the goods bailed to
him as a man of ordinary prudence would, under similar circumstances take, of his own
goods of the same bulk, quality, and value as the goods bailed. The bailee must treat the
goods as his own in terms of care. However, this does not mean that if the bailor is generally
careless about his own goods, he can be careless about the bailed goods as well. He must take
care of the goods as any person of ordinary prudence would of his things.
In Blount vs War Office 1953, a house belonging to the plaintiff was requisitioned by the
War Office. He was allowed to keep his certain articles in a room of the house, which he
locked. The troops who occupied the house were not well controlled and broke into the room
causing damage and theft of the articles. It was held that War office did not take care of the
house as an owner would and held the War Office liable for the loss.

Bailee, when not liable for loss etc. for thing bailed -
As per section 152, in absence of a special contract, the bailee is not responsible for loss,
destruction, or deterioration of the thing bailed, if he has taken the amount of care as
described in section 151. This means that if the bailee has taken as much care of the goods as
any owner of ordinary prudence would take of his goods, then the bailee will not be liable for
the loss, destruction, or deterioration of the goods. No fixed rule regarding how much care is
sufficient can be laid down and the nature, quality, and bulk of goods will be taken into
consideration to find out if proper care was taken or not. In Gopal Singh vs Punjab National
Bank, AIR 1976, Delhi HC held that on the account of partition of the country, when a bank
had to flee along with mass exodus from Pakistan to India, the bank was not liable for the
goods bailed to it in Pakistan.
If the bailee has taken sufficient care in the security of the goods, then he will not be liable if
they are stolen. However, negligence in security, for example leaving a bicycle unlocked on
the street, would cause the bailee to be liable. In Join & Son vs Comeron 1922, the plaintiff
stayed in a hotel and kept his belonging in his room, which were stolen. The hotel was held
liable because they did not take care of its security as an owner would.
If loss is caused due to the servant of the bailee, the bailee would be liable if the servant's act
is within the scope of his employment.

Special Contract
The extent of this responsibility can be changed by a contract between the bailor and the
bailee. However, it is still debatable whether the responsibility can be reduce or it can be
increased by a contract. Section 152 opens with, "In absence of special contract", which is
interpreted by Punjab and Haryana HC, as the bailee can escape his responsibility by way of
a contract with the bailor. However, in another case Gujarat HC held that the bank was liable
for loss of bales of cotton kept in its custody irrespective of the clause that absolved the bank
of all liability. This seems to be fair because no one can get a license to be negligent and a
minimum standard of care is expected from everybody.

2. Duty not to make unauthorized use (Section 154)

Section 154 says that if the bailee makes any use of the goods bailed which is not according
to the conditions of the bailment, he is liable to make compensation to the bailor for any
damage arising to the goods from or during such use of them.
Illustration - A lends horse to B for his own riding only. B allows C, a member of his family,
to ride the horse. C rides with care but the horse is injured. B is liable to compensate A for the
injury to the horse.
A hires a horse in Calcutta from B expressly to march to Benares. A rides with care but
marches to Cuttack instead. The horse accidentally falls and is injured. A is liable to make
compensation to B.
Thus, we can see that bailee is supposed to use the goods only as per the purpose of the
bailment. If the bailee makes any unauthorized use of the goods, he will be held absolutely
liable for any damages.

3. Duty not to mix (Section 155-157)

The bailee should maintain the separate identity of the bailor's goods. He should not mix his
goods with bailor's good without bailor's consent. If he does so, and if the goods are
separable, he is responsible for separating them and if they are not separable, he will be liable
to compensate the bailor for his loss. For example, A bails 100 bales of cotton with a
particular mark to B. B, without A's consent, mixes them with his own. A is entitled to have
his 100 bales returned and B is bound to bear all expenses for separation. But if A bails a
barrel of Cape flour worth Rs 45 to B and B mixes it with country flour worth Rs 25, B is
liable to A for the loss of his flour.

4. Duty to return (Section 160)

Section 160 - It is the duty of the bailee to return or deliver according to the bailor's
directions, the goods bailed, without demand, as soon as the time for which they were bailed
has expired or the purpose for which they were bailed has been accomplished.

If the bailee keeps the goods after the expiry of the time for which they were bailed or after
the purpose for which they were bailed has been accomplished, it will be at bailee's risk and
he will be responsible for any loss or damage to the goods arising howsoever.
In Shaw & Co vs Symmons & Sons 1971, the plaintiff gave certain books to the defendant to
be bound. The defendant bound them but did not return them within reasonable time.
Subsequently, the books were burnt in an accidental file. The defendants were held liable for
the loss of books.
5. Duty to return increase (Section 163)
As per Section 163, in absence of any contract to the contrary, the bailee is bound to deliver
to the bailor, or according to his directions, any increase of profit which may have accrued
from the goods bailed.
Illustration - A leaves a cow in the custody of B to be taken care of. The cow has a calf. B is
bound to deliver the calf as well as the cow to B.

6. Duty not to set up jus tertii (Section 166)

As per Section 166 if the bailor has no title and the bailee, in good faith returns the goods
back to the bailor or as per the directions of the bailor, he is not responsible to the owner in
respect of such delivery. Thus, once the bailee takes the goods from the bailor, he agrees that
the goods belong to the bailor and he must return them only to the bailor. He cannot deny
redelivery to the bailor on the ground that the bailor is not the owner.
If there is true owner of the goods, he can apply to the court to stop the delivery of the goods
from the bailee to the bailor. This right is given to the true owner in section 167.

Rights of a Bailee
1. Right to necessary expenses (Section 158)
The bailee is entitled to lawful charges for providing his service. As per Section 158 says that
where by conditions of the bailment, the goods are to be kept or to be carried or to have work
done upon them by the bailee for the bailor and the bailee is to receive no remuneration, the
bailor shall repay to the bailee the necessary expenses incurred by him for the purpose of
bailment. Thus, a bailee is entitled to recover the charges as agreed upon, or if there is no
such agreement, the bailee is entitled to all lawful expenses according to this section.
In Surya Investment Co vs STC AIR 1987, STC hired a storage tank from the plaintiff. On
account of a dispute, STC appointed a special officer to take charge of the tank, who
delivered the contents as per directions of STC. Thus, the plaintiff lost his possession and
with it, his right of lien. SC held that the plaintiff is entitled to the charges even if he loses his
right of lien because the bailor has enjoyed bailee's services.

2. Right to compensation (Section 164)

As per section 164, the bailor is responsible to the bailee for any loss which the bailee may
sustain by reason that the bailor was not entitled to make the bailment, or to receive back the
goods, or to give directions respecting them. This means that if the bailor had no right to bail
the goods and if still bails them, he will be responsible for any loss that the bailee may incur
because of this.

3. Right of Lien (Section 170-171)

In general, Lien means the right to keep the possession of the property of a person until that
person clear the debts. In case of bailment, the bailee has the right to keep the possession of
the property of the bailor until the bailor pays lawful charges to the bailee. Thus, right of Lien
is probably the most important of rights of a bailee because it gives the bailee the power to
get paid for his services.

Lien is of two kinds - Particular and General.

Particular Lien
This means that the lien holder has a right to keep possession of only that particular property
for which the charges are owed. For example, A gives a horse and a bicycle to B. A agrees to
pay B charges for training the horse and no charges for keeping the bicycle. Now, if A fails to
pay charges for the horse, B is entitled to keep possession only of the horse and not of the
bicycle. He must return the bicycle.
Section 170 gives this right to the bailee. It says that where the bailee has, in accordance with
the purpose of the bailment, rendered any service involving the exercise of labor or skill in
respect of the goods bailed, he has, in absense of a contract to the contrary, a right to retain
such goods until he receives due remuneration for the services he has rendered in respect of
them.
Illustrations - A delivers a rough diamond to B to be cut and polished, which is accordingly
done. B is entitled to keep the diamond until charges for his services are paid.
A gives cloth to B, a tailor, to make into a cloth. B promises to deliver the coat as soon as it is
done and also to give 3 months credit for the price. B is not entitled to keep the coat until he
is paid.

Conditions for Particular Lien -

Exercise of labor or skill - This right is subject to the condition that the bailee has exercised
labor or skill in respect of the goods. Further, it has been frequently pointed out that the labor
or skill must be such as improves the goods. This, in Hutton vs Car Maintenance Co 1915, it
was held that a job master has no lien for feeding and keeping the horse in his stable but a
horse trainer does get a lien upon the horse.
Labor or skill exercised must be for the purpose of the bailment - Any services rendered that
are beyond the purpose of the bailment do not give a right of lien. For example, A bails his
car to B to repair Engine. But B repairs tires instead. B will not get the right of lien.
Labor or skill exercised must be in respect of the goods - As mentioned before, the bailee gets
a right of lien only upon the goods upon which the service was performed.

General Lien -
As opposed to Particular Lien, General Lien gives a right to the bailee to keep the possession
of any goods for any amount due in respect of any goods. Section 171 says that, bankers,
factors, wharfingers, attorneys of a High Court, and policy brokers may, in the absence of a
contract to the contrary, retain as a security for a general balance of account, any goods bailed
to them; but no other persons have a right to retain, as a security for such balance, goods
bailed to them, unless there is an express contract to that effect.
Thus, this right is only available to bankers, factors, wharfingers, attorneys of high court, and
policy brokers. However, this right can be given to the bailee by making an express contract
between the bailor and the bailee.

4. Right to Sue (Section 180-181)

Section 180 enables a bailee to sue any person who has wrongfully deprived him of the use or
possession of the goods bailed or has done them any injury. The bailee's rights and remedies
against the wrong doer are same as those of the owner. An action may be brought either by
the bailor or the bailee.
Thus, in Umarani Sen vs Sudhir Kumar AIR 1984, a firm which had consigned the goods, of
which it was a bailee, with a carrier, was allowed to sue the carrier for loss of the goods.

Rights of finder of goods

If a person finds something, he does not automatically become the owner of that thing. He, in
fact, becomes a special kind of a baliee in the sense that he has to keep the thing until the
owner is found. He should take care of the thing just like a bailee. Section 168 and 169
describe the rights of such finder of goods.
Section 168 - The finder of goods has no right to sue the owner for compensation for trouble
and expense voluntarily incurred by him to preserve the goods and to find out the owner; but
he may retain the goods against the owner until he receives such compensation; and where
the owner has offered a specific reward for the return of goods lost, the finder may sue for
such reward, and may retain the goods until he receives it.
Thus, if the finder has incurred expenses in finding the owner and/or in maintaining the goods
voluntarily, he can retain the possession of the goods until the owner pays the expense to him,
though the finder cannot sue the owner for the expense. His only remedy is to keep the goods.
Further, if the owner has promised a reward for the return of the goods, the finder is entitled
to the rewards, and he can even sue the owner for the reward. He can retain the goods as well
until the reward is received.

As per Section 169, the finder of the goods can even sell the goods if they are of common
objects of sale, in the following conditions -
1. The finder of goods was not able to find the owner after good faith efforts.
2. The owner is found but the owner refuses to pay lawful expenses and
3. Either the goods are in danger of perishing or of losing greater part of the value
4. The lawful charges of the finder amount to two third of the value of the goods.
Q. What is pledge? What are the essentials of pledge? Can a pledge be made by a
person who is not the owner of goods? What is the difference between bailment and
pledge? Explain Pawner's right to redeem.
Pledge is a special kind of bailment in which a person transfers the possession of his property
to another for securing the loan taken from the other. It only differs from bailment in the
matter of purpose. When the purpose of the bailment is to secure a loan or a promise, it is
called a pledge. Section 172 of Indian Contract Act 1872 defines Pledge as follows -
Section 172 - The bailment of goods as a security for the payment of a debt or performance
of a promise is called Pledge. The bailor in this case is called a Pawnor and the bailee is
called Pawnee.
J Shelat in Lallan Prasad vs Rahmat Ali AIR 1967 observed that Pawn or pledge is a
bailment of personal property as a security for some debt or engagement.
The following are essential ingredients of a pledge –
1. Delivery of possession - As in bailment, the delivery of possession is essential in a
pledge. Thus, in Revenue Authority vs Sudarsanam Pictures, AIR 1968, a film
 producer borrowed a sum of money from a financier and agreed to deliver the final
prints of the film when ready. This was held not to be a pledge because there was no
delivery of possession at the time of the agreement.
It is possible to do delivery by atonement in which case a third person who has the
possession of the property agrees to hold it on behalf of the pledgee upon direction of
the pledger.

Hypothecation - It is also possible to let the pawner keep the physical goods even
though the legal possession is transfered to the pawner. Thus, in Bank of Chittor vs
Narsimbulu AIR 1966, a cinema hall equipment was pledged to the bank but the
bank allowed the hall owner to keep the equipment to show the movies. The hall
owner then sold the equipment to another party. It was held that the sale was subject
to the pledge.
2. In Bank of India vs Binod Steel AIR 1977, MP HC held that in such cases where
goods are hypothecated, other creditors cannot claim right on them until the claim of
the pledgee is satisfied.
3. In return of a loan or a promise - The delivery must be in return of a loan or of
acceptance of a promise to perform something. Thus, if A gives his bicycle to B in
friendship, it is not a pledge but a simple bailment. However, if A gives his bicycle to
B as a security for a debt of 100Rs it will be a pledge.
4. In pursuance of a contract - The delivery must be done under a contract though it is
not necessary that the delivery and the payment of loan be at the same time.
Delivery can be made even after the loan is received.

Rights of a Pawnee
1. Right of retainer (Section 173- 174) - As per section 173, the pawnee may retain the
goods pledged, not only for a payment of a debt or the performance of the promise, but
also for the interest of the debt, and all necessary expenses incurred by him in respect of
the possession or for the preservation of the goods pledged. Further, as per section 174, in
absence of any contract to the contrary, the pawner shall not retain the goods pledged for
debt or promise other than the debt or promise for which they have been pledged.
However, such contract shall be presumed in absence of any contract to the contrary with
respect to any subsequent advances made by the pawnee.
This means that if A pledges his gold watch with B for 1000 Rs and later on he promises
to teach B's son for a month and takes for 500Rs for this promise , and if he does not
teach B's son, B cannot retain A's gold watch after A pays 1000Rs. Thus, the right of
retainer is a sort of particular lien. The difference was pointed out in Bank of Bihar vs
State of Bihar 1972 by SC. It observed that a pawnee obtains a special interest in the
pledged goods in the sense that he can transfer or pledge that special interest to somebody
else. The lien only gives the right to detain the goods but not transfer. Thus, a pledgee get
the first right to claim the goods before any other creditor can get them. The pledgee's
loan is secured by the goods.
2. Right to extra ordinary expenses (Section 175) - As per section 175, the pawnee is
entitled to receive from the pawner extra ordinary expenses incurred by him for the
preservation of the goods pledged. For such expenses, however, he does not have right to
detain the goods. Section 175 says that the pawnee is entitled to receive from the pawner
extraordinary expenses incurred by him for the preservation of the goods pledged.
3. Right of sale (Section 176) - As per section 176 (Pawnee's right where pawnor makes
default) - If the pawnor makes default in payment of the debt or performance at the
stipulated time, of the promise, in respect of which the goods were pledged, the pawnee
may bring a suit against the pawnor upon the debt or the promise and retain the goods
pledged as a collateral security; or he may sell the thing pledged, on giving the pawnor
reasonable notice of the sale.
This right secures the debt for the pawnee up to the value of the goods pledged because it
allows the pawnee to either sue the pawnor for recovering the debt or perform the
promise or sell the goods pledged. If the value received after selling the goods, the
pawner is still liable for the difference and if the value of the sale is more than the amount
of debt, the pawnee is supposed to give the difference to the pawnor. However, if the
pawnee has sold the goods, he cannot sue for the debt. In Lallan Prasad vs Rahmat Ali
AIR 1967the defendant borrowed 20000Rs from the plaintiff on a promissory note and
gave him aeroscrapes worth about 35000Rs, as a security for the loan. The plaintiff sued
for repayment of the loan but was unable to produce the security, having sold it. SC
rejected his action. It held that pledgee cannot maintain a suit for recovery of debt as well
as retain the pledged property. The pawner is required to give a reasonable notice to the
pawnee about the sale. The notice is not a mere notice but reasonable notice. In Prabhat
Bank vs Babu Ram AIR 1966, the terms of an agreement of a loan enabled the bank to
sell the securities upon default without notice. The pawnor defaulted in payment. The
bank sent a reminder upon which the pawnor asked for more time. The bank sold the
securities. SC held that this was bad in law. The bank is required to give a clear and
specific notice of the impending sale. Pawner's request for more time cannot be
interpreted as a notice of sale. When the goods are lost due to pawnee's negligence, the
liability of the pawnor is reduced to the extent of value of the goods.
Pawnor's Right to Redeem (Section 177) Section 177 provides a very important right to
the pawnor. It allows the pawnor to redeem his property even if he has defaulted. It says
that if a time is stipulated for the payment of a debt or performance of the promise for
which the pledge is made, and the pawnor make default in payment of the debt or
performance of the promise at the stipulated time, he may redeem the goods pledged at
any subsequent time before the actual sale of them; but he must, in that case, pay, in
addition, any expense which have arisen from his default.

J Shelat in Lallan Prasad vs Rahmat Ali AIR 1967, observed that the pawnor has as
absolute right to redeem his property upon satisfaction or the debt or the promise. This
right is not extinguished by the expiry of the stipulated time for repayment of debt or
performance of the promise but only by the actual sale of the goods. If the pawnor
redeems his goods after the expiry of the stipulated time, he is bound to pay the expenses
as have arisen on account of his default.

The pawnor also has a right to take back any increase in the property. In M R Dhawan vs
Madan Mohan AIR 1969, certain shares of a company were pledged. During the period
of the pledge, the company issued bonus and rights shares. Delhi HC held that the pawnor
was entitled to those at the time of redemption. Pledge made by non-owner of the goods
Ordinarily goods may be pledged by the owner or by any person with the consent of the
owner. A pledge made by any other person is not valid. Thus, in Biddomoy Dabee vs
Sittaram, it was held that a pledge made by the servant who was holding the goods of his
master was not valid. Similarly, in Purushottam Das vs Union of India AIR 1967, a
railway company delivered goods on a forged railway receipt. The goods were then
 pledged with the defendants. In a suit by the railways to recover the goods it was held that
the pledge was invalid.
This is important to protect the interests of the owners. However, in many situations it is
equally important to allow trade and commerces and so there are some situations where a
person having the possession of the goods by owner's consent, is entitled to pledge those
goods even without owner's consent for the pledge. These situations are discussed below
–
1. Pledge by Mercantile agent (Section 178) When a mercantile agent is in possession
of the goods with consent of the owner, any pledge made by him in ordinary course of
business will be valid, provided that the pawnee acts in good faith and that he has no
notice of the fact that the pawnor is not authorized to pawn the goods. The essential
conditions of this rule are - he must be a mercantile agent, he must have possession of the
goods by consent of the owner, and it must be done in ordinary course of business.
Further, the pawnee should act in good faith and he must not have notice that the pawnor
has no authority to pledge.

2. Pledge by a person in possession under voidable contract (Section 178 A)

When the goods are obtained by a person under a contract that is voidable under section
19 or 19 A, he can pledge the goods if the contract is not avoided at the time of the
pledge. Thus, in Phillips vs Brooks Ltd 1919, a fraudulent person pretending to be a man
of credit induced the plaintiff to give him a valuable ring in return for his cheque which
proved worthless. Before the fraud could be discovered, he pledged the ring with the
defendants. The pledge was held to be valid.
3. Pledge by person with limited interest (Section 179) Section 179 says that where a
person pledges goods in which he has only a limited interest, the pledge is valid to the
extent of that interest. Thus, when a car worth 100,000Rs is owned jointly by A and B
both having 50% interest in the car, and if A pledges the car for 60000Rs, the value of the
pledge that the pledgee can receive upon default is only 50% of the value received by
sale.
Thus, if a pledgee further pledges the goods, his interest is only the amount for which the
first pledger pledged the goods. For example, if A pledged his car worth 100000Rs for
20000Rs to B. B's interest in the car is only 20000 Rs. He can further pledge it but if he
pledges it for more than 20000Rs, A will be liable only for 20000Rs. In Jaswantrai
Manilal Akhney vs State of Bombay 1956, a cooperative bank had an overdraft account
with the Exchange Bank, which was secured by the deposit of certain securities. After
many dealing and adjustments the last position of the account was that the overdraft limit
was set at Rs 66150 and the securities under the pledge of the bank were worth Rs 75000.
The cooperative bank did not make use of this overdraft for a long time and when it
attempted to use it, the Exchange Bank was itself in financial crisis and had pledged the
securities first with Canara Bank and then after having redeemed them, pledged them
again with a private financier. The SC held that the pledge was invalid.

Difference between Bailment and Pledge –

Pledge is a special kind of Bailment. Thus, all Pledges are Bailment’s but the reverse is not
true.

Bailment Pledge
Bailment can be for many reasons ranging A pledge is bailment done for a specific type
for reward to gratuitous. of purpose, which is to secure a loan or
 performance of a promise.
The bailee does not get a right to sell the A pawnee has a right to sell the goods in case
goods. of default.
The bailee only get a right of lien over the
goods. A pawnee gets a right of retainer and a
special interest in the goods, which is more
that just the lien.

The bailee can use the goods bailed. The pawnee has no right to use the goods.
The bailee is not responsible for the loss, The pawnee is absolutely liable for the
destruction, or deterioration if he uses the upkeep of the goods.
goods with reasonable care.

Q. Define Partnership. Is sharing of profit conclusive proof of partnership? Explain -

"partners are agents of each other". What are the mutual rights and liabilities of the
partners? What is implied authority of a partner? Can it be restricted? Can a partner
retire? What are its consequences? Can a partner be expelled? If so, when? Can minor
be admitted to the benefits of partnership? If yes, what are the rights and liabilities of
such a minor after attaining majority? Is the registration of a partnership firm
compulsory? What are the consequences of non-registration? Can a partner of an
unregistered firm bring a suit against a third party to release the property of the
dissolved firm? What is the procedure for registration? Explain various modes of
dissolution of the Firm. What are the liabilities of the partners after dissolution?

In common parlance, partnership is a business owned and managed by two or more people.
To form a partnership, each partner normally contributes money, valuable property or labor
in exchange for a partnership share, which reflects the amount contributed. Section 4 of
Indian Partnership Act 1932 defines Partnership as follows -
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. Persons who have entered
into partnership with one another are individually called partners and collectively called a
firm and the name under which their business is carried on is called firm name.
Examples -:
1. A and B buy 100 bales of cotton to sell later on profit which they agree to share
equally. A and B are partners in respect of such cotton.
2. A and B buy 100 bales of cotton together for personal use. There is no partnership
between A and B.
3. A, a goldsmith, agrees with B to buy and provide gold to B to work on an ornament
and to sell and that they shall share the profit. A and B are partners.
4. A and B are carpenters working together. They agree that A will keep all the profits
and will pay B a wage. They are not partners.
5. A and B jointly own a ship. This circumstance does not make them partners.

Section 5 of IPA 1932 says that the relation of partnership arises from contract and not from
status. Thus, if there is no specific contract, there can be no partnership. As per Section 6, to
determine whether a partnership exists between a group of persons, we have to look at the
real relation between them as shown by all relevant facts taken together. It further says that
sharing of profits or of gross returns arising from a property owned jointly by them does not
by itself makes them partners.

Based on these definitions, in Helper Girdharbhai vs Saiyed M Kadri and others AIR
1987, J Sabyasachi of SC identified that the following elements must be there in order to
establish a partnership - there must be an agreement entered into by all the parties concerned,
the agreement must be to share profits of the business, and the business must be carried on by
all or any of the person concerned for all. These three aspects can be discussed under four
heads -

1. Agreement - There has to be an agreement between two or more people to enter into
partnership. The agreement is the source of the partnership. It is not necessary that the
agreement be formal or written. An agreement can be express or implied. Further,
such agreement must follow all the requirements of a valid contract given by Indian
Contract Act 1872. This includes the parties must be competent to contract and the
object of the agreement should be legal.
2. Business - They must intend to start or do a business. A business is a very wide term
and includes any trade, occupation, or profession. Business may not be of long
duration or permanent and even a single activity may be considered a business. Thus,
if two persons are not partners, they can engage is a transaction with an intention to
share profits and can become partners in respect of that transaction. For example, if
two advocates are appointed to jointly plead a case and if they agree to divide the
profits, they are partners in respect to that case. Section 8 also mentions that a person
may become partner with another in particular adventures of undertaking. It is
however necessary that a business exists. If a business is simply contemplated and
has not been started, the partnership is not considered to be in existence. In Ram
Priya Saran vs Ghanshyam Das AIR 1981 All, two persons agreed that after their
tender is passed they will construct the dam in partnership. In order to deposit earnest
money, the plaintiff gave 2000 Rs. The tender was not accepted. It was held that since
a business was only contemplated and not started, there was no partnership and so the
plaintiff was entitled to get 2000 Rs from the defendant.
However, in Khan vs Miah 2000 WLR, two persons obtained loan from the bank to
start a restaurant. They also entered into a contract to purchase equipement and
laundary for the restaurant. But their relationship terminated before the opening of the
restaurant. It was held that there is no rule of law that parties to a joint venture do not
become partners untill they actually embark on the activity in question. It is necessary
to identify the venture in order to decide whether the parties have actually embarked
upon it but it is not necessary to attach any name to it. Many business require a lot of
investment and activities before the actual trading begins. This does not mean that the
business has not started until the trading begins. It was held that in this case the
activity of the business had begun and so the partnership was in existence.
3. Sharing of profits - Normally, an activity is done in partnership with a goal to make
profits. Thus, for a valid partnership to exist, the partners must agree to share the
profits according to their investment. Here, profits include losses as well.
4. Mutual Agency - The firm must be managed by the partners and thus when any
partner acts, he acts on behalf of the firm and thus on behalf of other partners.
Therefore, a partner is considered an agent of others. In absence of such mutual right
of agency, a partnership cannot exist. This was held in Cox vs Hickman 1860. In this
case, two person carried on business in partnership. Due to financial crisis they
obtained loans. Having unable to repay the loans they executed a trust deed of
properties in favor of the creditors. Some of the creditors were made trustees of the
 business. This included Cox and Wheatcroft. They were empowered to enter into
contracts and execute instruments to carry on business and to divide the profits among
the creditors. After the recovery of debts, the property was to be restored to the two
original partners. Cox never acted as trustee and retired, while Wheatcroft acted as a
trustee for some time and retired. Other trustee then became indebted to Hickman and
executed a bill of exchange, which was not accepted and paid. Hickman sued the
trustees for recovery of the money for materials supplied. The trustees could be held
liable if they were partners. However, it was held that they were not partners. They
observed that in partnership every partner is an agent of another and in this case this
element was absent.

As we can see, a partnership requires all the above ingredients to have legal validity, and so a
mere sharing of profits is not a conclusive proof of a partnership. It must have the other three
elements also. As mentioned in Section 6, merely sharing of profits arising out of a jointly
owned property does not necessarily create a partnership. For example, if two persons own a
house and give it on rent, the sharing of the rent does not create a partnership. Similarly, a
payment to a person contingent upon profits also does not necessarily create a partnership
until the element of mutual agency is not present. This is the case when profits is shared with
the lender of money for business. In case of Mollow March Co vs The Court of Wards
1872, a Hindu Raja loaned some money to Watson & Co. In return, he was to get a % of
profit and was to exercise control on some aspects of the business. He was not empowered to
direct the transactions of the company. It was held that although sharing of profits is a very
strong test, yet whether a relation of partnership exists depends on the real intention and
conduct of the parties.
Duty/Liabilities of the partners

General Duties - According to section 9, every partner is liable to carry on the business in
the best interest of the firm, to be just and faithful to each other, and to render true accounts
and full information affecting the firm to any partner or his legal representative. During the
course of business no partner can do any act which may be against his duty to work to
greatest common advantage.
In Bentlay vs Craven 1853, it was held that if a partner was authorized to purchase goods for
the firm and if he supplies the goods from his own stock and makes a profit, he is liable to
give the profit to the firm. This matter is further clarified in section 16 which says that subject
to contract between the partners, if a partner derives any profit for himself from any
transaction of the firm or from the use of the property or business connection of the firm, he
shall pay that profit to the firm. Further, if a partner carries on any business of the same
nature as and competing with that of the firm, he shall pay all such profit to the firm. Subject
to contract means, partners can choose to modify this rule while entering into partnership. For
example, the partnership contract may specify that a partner may be allowed to use firm's
property for personal use.

1. Duty to indemnify for loss caused by fraud - According to section 10, every partner
shall indemnify the firm for any loss caused to it by his fraud in the conduct of the
business of the firm. For example, a firm of A and B enter into a contract with the
government. Later on, due to B's conduct, the govt. cancels the contract and gives it to
B. Here, the contract obtained by B in his own name will be for the benefit of the
partnership. Further, if the second contract is of the lesser value, B is personally liable
to the firm for the difference.
2. Duties imposed by contract - As per Section11 any special rights and duties may be
given or imposed by the contract between the partners.
3. Duty relating to the conduct of business - According to section 12, every partner is
bound to attend to his duties diligently. Thus, if a partner is assigned some task, he
must do it to the best of his abilities. Further, if any difference arises in respect of
ordinary business matter, it may be decided by majority. However, no change in the
nature of business can be made without the consent of all the partners.
In Suresh Kumar vs Amrit Kumar AIR 1982, Delhi HC held that majority cannot
trample on the opinion of minority in the key matters of the partnership. Thus,
majority cannot replace the managing director of the firm because it is a key business
decision. It can be done only with the consent of all the partners.
4. Duty to contribute equally to the losses - According to section 13(b), partners shall
contribute equally to the losses sustained by the firm.
5. Duty to indemnify for loss caused by his willful neglect - According to section 13
(f), if a partner neglects the business activity willfully, he must compensate the firm
for the loss caused. It has been long held that if a partner during the course of business
commits breach of duty, or fraud, or culpable negligence and causes harm to the firm,
even if he is not liable in law, he must be held liable to indemnify the firm in equity.
This does not mean that a partner, when acting in good faith, makes an error in
judgment and causes loss to the firm, is liable. However, this is subject to the contract
among the partners. This means that the contract may specify that a partner is a
sleeping partner and may excuse him from doing any work.
6. Duty in respect of application of property of the firm - According to section 15,
the property of the firm shall be held and used exclusively for the purposes of the
business. If a partner uses it for personal benefits, he shall account for and pay such
profits to the firm.
7. Duty in respect of personal profits - According to section 16(a), if a partner derives
any profit for himself from any transaction of the firm or from any property or
business connection of the firm, he shall account for that profit and pay it to the firm,
subject to the contract.
8. Duty not to compete with the firm - According to section 16(b), if a partner engages
in a business in competition of the firm, he should pay the profits to the firm. But if a
partner does a private act, which is not in the scope of the business of the firm, he is
not liable to the firm for the profits.

Rights of the partners-:The partners of the firm have following rights -

1. Rights given by contract - As per Section11 any special rights, such as right to
remunerationmay be given by the contract between the partners.
2. Right to take part in the conduct of business - As per section 12(a), subject to the
contract between them, a partner has a right to take part in the conduct of business.
Only way to restrain a partner from getting involved in the business is to specify it in
the contract of partnership. Even courts cannot, through an injunction, restrain a
partner.
3. Right to have access to and inspect and copy books of the firm - As per section 12,
every partner has a right to inspect the books and make a copy if he wants.
4. Right to share in profit - As per section 13, subject to contract, a partner is entitled
to an equal share of the profit.
5. Right to receive interest on the capital subscribed - As per section 13, subject to
contract, where a partner is entitled to interest on the capital subscribed by him, such
 interest shall be payable only out of profits. Further, if a partner pays any money to
the firm, beyond the amount of capital, he is entitled to 6% interest.
6. Right to indemnity in respect of payments made and liabilities incurred -
According to section 13, the firm shall indemnify a partner in respect of payments
made and liabilities incurred by him in the ordinary and proper conduct of business or
in doing such act, in an emergency, for the purposes of protecting firm from loss as
would be done by a person of ordinary prudence in his own case under similar
circumstance.

Implied authority of a partner

As held in Cox vs Hickman 1860, if two or more agree to carry on a business, each
of them is a principal and each is an agent for the other. Further, each is bound by the
other's contract in carrying on the trade as much as a single principal would be bound
by the act of an agent. This principle has been incorporated in section 18 of IPA 1932.
It says that a partner is the agent of the firm for the purposes of the firm. Its
complimentary principle is incorporated in section 25 which says that every partner is
liable jointly with all other partners and also severally for all acts of the firm done
while he is a partner.

This brings us to the implied authority of the partners. Since, a partner is an agent of
the firm, his act binds every other partner and the firm. For example, if a partner A
gives a check in the firm's name to a creditor and if the check is unpaid, partner B is
equally liable even though B's signature does not appear on the check. This authority
to bind the firm is called "implied authority". It has been incorporated in section 19 of
IPA 1932, which says that the act of the partner which is done to carry on, in the usual
way, business of the kind carried on by the firm, binds the firm.

The following essential conditions are required for the exercise of Implied Authority
to bind the firm -

1. Usual way - The act must be done to carry on the business in the usual way. Any
drastic action, which is out of ordinary, requires the consent of all the partners. For
example, if a firm deals in coal, a partner has the implied authority to enter into a
contract to buy and sell coal, but not gold. The implied authority of partners is limited
to only those acts which are done in usual way and related to the business of the kind
carried on by the firm.
2. Mode of doing act to bind firm - Section 22 specifies that in order to bind the firm,
the act must be done in firm's name or in any manner expressing or implying the
intention to bind the firm. For example, if a partner A obtains a loan in his name
without mentioning anything about the firm, it will not bind the firm. It must be clear
from the action that it is intended as being done by the firm.
3. In Devji vs Magan Lal AIR 1965, a partner had taken a sublease in his own name
instead of the firm's name. Further, there did not seem to be any intention to bind the
firm. SC held that the firm was not bound by the lease as the parties did not intend to
bind the firm by this transaction.

Power of implied authority also has the following restrictions -

There are two kinds of restrictions - Statutory restrictions, as imposed by section 19 (2) and
Restrictions imposed by partnership deed and those imposed by the agreement between the
partners. Statutory restrictions are binding upon all the partners whether they know them or
not, while the second type of restrictions are applicable only when the partners have
knowledge about them.

Statutory restrictions - In the absence of any usage or custom of trade to the contrary, a
partner is not allowed to -

1. Refer a dispute to arbitration.

2. open a banking account on behalf of the firm in his own name.
3. compromise or relinquish any claim or portion of the claim by the firm.
4. withdraw a suit or proceeding filed on behalf of the firm.
5. admit any liability in a suit or proceeding against the firm.
6. acquire immovable property on behalf of the firm.
7. transfer immovable property belonging to the firm.
8. enter into partnership on behalf of the firm.

Contractual Restrictions - As per section 20, Partners may, by contract, put additional
restrictions or give additional powers to the partners. However, any act which falls under the
implied authority but is restricted by the contract, will bind the firm unless certain conditions
are satisfied. A firm can avoid its liability in such case, if the person dealing with the partner
knows the restriction or the person dealing with the partner does not know or does not believe
that the partner is a partner in the firm.

In Sanganer Dal & Flour Mill vs F C I AIR 1982, a partner of the firm, who had the
implied authority to enter the contract with FCI to purchase goods, entered in to a contract
with FCI to purchase Dal. The contract had an arbitration clause. In this case, the question
was whether the partner had the power to enter into such a contract? It was held by SC that
the partner was within his implied authority to enter into a contract to purchase goods from
the corporation because it was normal for their business and the contract was done in the
usual way. Thus, the contract was valid even if it contained an arbitration clause.
Admission of Partners (Section 23) Since a partner is an agent of the firm and can bind the
firm by his acts, an admission or representation by him concerning the affairs of the firm, is
evidence against the firm. This is incorporated in section 23, which says that an admission or
representation made by a partner concerning the affairs of the firm is evidence against the
firm if it is made in ordinary course of business. The key factor in this is that the admission or
representation must be made in ordinary course of business. This will also not include the
representation by which a partner increases his scope of authority. For example, if a partner
executes a bill of exchange for payment of his personal debts and on inquiry he makes a false
statement that the other partners have authorized him, the said bill of exchange will not bind
the firm.
Incoming partners-: The mutual relations of the partners is based on the principle that they
have to be just and fair to each other and are bound to carry on the business of the firm to the
greatest common advantage. Thus, it is important for each partner to have trust in each other.
Therefore, section 31 lays down a general principle that a partner cannot be introduced into a
firm without the consent of all the existing partners. However, the existing partners may, by
contract, authorize a partner to introduce a new partner. A contract may also be made that
upon death of a partner, a new partner may be nominated in his place. If there are only two
partners and one of them dies, there is no question of nominating a new partner because the
partnership ends as soon as the partner dies.
Also, a new partner is not liable for any act of the firm done before he became a partner.

Outgoing partners In many situations, a partner may have to leave the partnership. A partner
may leave in the following ways -
1. With the consent of all other partners - According to section 32(1) (a), a partner
may retire with he consent of all the other partners.
2. With an express agreement by partners - Section 32 (1)(b) provides that a partner
may retire with an express agreement by partners. This means that if there is a
provision in the contract deed of partnership that allows a partner to retire, a partner
can retire using that agreement.
In Vishnu Chandra vs Chandrika Prasad Agarwal AIR 1983, the question before
SC was whether a partner was entitled to retire on the basis of partnership deed. The
deed provided that a partner may retire by giving one month notice and that a partner
cannot retire within one year of commencement of business and if he does so, his
capital will not be returned. SC held that it is consistent with the provisions of section
31(1)(b) and the partner can retire according to the deed.
3. By giving notice to all other partners in case of partnership at will - According to
section 32(1)(c), a partner may retire where the partnership is at will, by giving notice
in writing to all the other partners of his intention to retire.
4. By Expulsion (Can a partner be removed? How?) - According to section 33 (1) a
partner may not be expelled by any majority of the partners, save in exercise of good
faith of powers conferred by contract between the partners. Thus, to expel a partner by
majority of the partners, the following two conditions must be satisfied -

1. Such a power must be conferred by contract between the partners. This means,
the contract of partnership must clearly give this power to the partners
otherwise, a partner cannot be expelled.
2. The power to expel a partner conferred under the contract must be exercised in
good faith. Thus, if majority of the partners try to expel a partner with evil
intention and without any reasonable cause, it is not possible.

In Carmichael vs Evans 1904, a partner was caught traveling without ticket and was
convicted on this charge. He was expelled by the majority of the partners. It was held
that the expulsion was justified.
In Blisset vs Daniel 1953, a partner was expelled by the majority of the partners
because he opposed the appointment of the son of a partner on the post of manager. It
was held that the expulsion was invalid.

On insolvency of a partner - According to section 34(1), where a partner in a firm is

adjudicated an insolvent he ceases to be a partner on the date on which the order of
adjudication is made, whether or not firm is thereby dissolved.

By Death - Upon death of a partner, his association with the firm ends and he ceases
to be a partner. His estate will not be liable for the acts of the firm after his death.
According to section 42(c), subject to the contract between the partners, a firm is
dissolved by the death of a partner. This means that partners may by contract that by
death of a partner the firm will not be dissolved but if there is no such contract, the
firm will be dissolved.
Liability of a retired partner The liability of a retired partner may be of two types - For acts
done before retirement and for acts done after retirement.
Acts before retirement - The general rule is that a partner is liable for all acts done before
retirement even after he is retired. However, a retiring partner may be discharged of his
liabilities for act before retirement by an agreement between the retiring partner and the
remaining partners. The agreement should specify that all such liabilities will be borne by the
remaining partners. A notice to this effect must also be given to the creditors.
Acts after retirement - The general principle is that a retired partner is not liable for the acts
of the firm done after his retirement. However, he must give a public notice of his retirement
to escape liabilities.

Partnership with a minor By virtue of section 10 and 11 of Indian Contract Act 1872, a
minor is not considered capable of giving consent and thus any contract with a minor is void
ab initio. Therefore, a contract of partnership with a minor is also void. In other words, a
partnership cannot be done with a minor and a minor cannot become a partner of a firm.
However, a minor can be admitted to the benefits of the partnership as per section 30 (1), by
the consent of all the partners. In Venkatarama Iyer vs Balayya AIR 1936, it was held that
there must be some positive act of the partners so that the court may infer that the minors
have been admitted to the benefits of the partnership. Merely assuming that the minors were
admitted would be an error in law and is not sufficient.
Further, in Addl Commr. of Income Tax vs Uttam Kumar Pramod Kumar 1975, a
partnership deed was not signed by minor or anybody on his behalf. It was held that to admit
the minor to the benefits of partnership it is necessary to have an agreement between the
partners and the minor. Since the property and money of the minor can be used for the firm,
an agreement is necessary between the partners and someone on behalf of the minor.
Rights and Liabilities of a minor He has the following rights –
1. to such share of the property and of the profits of the the firm as may be agreed upon.
2. to access, copy, and inspect the records of the firm.
3. his share is liable for the acts of the firm but he is not personally liable for them.
4. may sue the partners for his share of profits of the firms when severing his connection
with the firm.
5. As per Section 30(5), he has a right of election to become or not to become the partner
of the firm after becoming a major. Upon attaining the age of majority, the minor can,
within six months , give public notice that he has elected to become or not to become
a partner of the firm. If he fails to give such notice, he will be become partner of the
firm at the expiry of six months.

Illustration - In Shivganda R Patil vs Chandrakanth Neelkanth Sadalge AIR

1965, C a minor was admitted to the benefits of the partnership between A and B. The
partnership became indebted and was dissolved while C was still a minor. Upon
majority, C did not exercise the option of election. Later on, the creditor started
insolvency proceedings against the partners and impleaded C as well in the
proceedings. It was held that a minor cannot be impleaded in insolvency proceedings
against the firm on the ground that he had become a major after dissolution of the
firm. At the time of his majority the firm had ceased to exist and thus there was no
question of electing to become or not to become a partner.

Registration of a firm Chapter 7 of IPA 1932 deals with the registration of firms. Under this
act, registration of firms is not compulsory. There is no penalty for not registering. However,
the effects of non-registration are so severe that usually firms opt to register.
Consequences of not registering
1. Suits between partners and Firm - A per Section 69 (1) unless a firm is registered
and the party is shown as a partner, no suit can be filed by or on behalf of any partner
against the firm. In Loonkaran Sethia vs Mr Ivan E John AIR 1977, the firm was
not registered and the plaintiff filed the suit to enforce an agreement entered into by a
partner of the firm. The suit was filed on behalf of the firm and was for its benefit. SC
observed that a partner of an unregistered firm cannot bring a suit to enforce a right
arising out of a contract falling within the ambit of section 69. It held that the suit was
unmaintainable.
2. Suit between firm and third parties - Until the firm is registered, no suit can be
filed by the firm against third parties. In Ram Adhar vs Rama Kirat Tiwary AIR
1981, the plaintiff sold bricks to the defendant. The defendant did not pay the price to
the partnership firm and so the firm filed the suit. It was held that since the firm was
not registered the suit was unmaintainable.
3. Bar to claim set off and other proceedings - According to section 69(3), suit cannot
be filed for claim of set off or other proceedings to enforce a right arising from a
contract.

Exception
According to section 69(3)(a), the provisions of section 61(1) and (2) shall not affect the
enforcement of any right to sue for the dissolution of the firm, or for accounts of the
dissolved firm or any right or power to realize the property of dissolved firm. Thus, a partner
of a dissolved firm can sue a third party for releasing the property of the firm.
Procedure for registration As per section 58, registration of a firm can be done any time by
sending a statement in prescribed form by post or delivering to the registrar of the area in
which any place of business of the firm is situated or proposed to be situated. The form
should also be accompanied with the prescribed fee. The form must contain –
1. the firm name
2. place or principal place of the business of the firm.
3. the names of any places where the firm carries on business.
4. the date when each partner joined the firm.
5. the names in full and permanent address of the partners.
6. the duration of the firm.

The statement must be signed by all of the partners or by their agents specially authorized in
this behalf. Each person signing the statement shall also verify it in the manner prescribed.
There is a restriction on the name of the firm that it cannot contain certain words such as
Crown, Emperor, Empress, King etc. that give an impression that the firm is associated with
the govt. When the registrar is satisfied that the provisions of section 58 have been fulfilled,
he shall record an entry in the Register of Firms and shall file the statement.
Dissolution of the firm -: As per section 39, the dissolution of the partnership between all
the partners of a firm is called the dissolution of the firm. The firm is dissolved when all the
partners stop carrying on the partnership business. It is possible that some partners may
decide to disassociate from the firm while others carry on the business. In this case the
partnership is not dissolved.
After dissolution of the firm, the partnership between the partners does not completely end. It
continues for the purpose of realization of assets or properties of the firm. Also, after the
dissolution, the right and power of the partners of the firm to bind the firm exists as is
necessary to wind up the operation and for the acts that started before the dissolution but have
not yet ended.

1. Dissolution by agreement - According to section 40, a firm may be dissolved either

with the consent of all the partners or in accordance with a contract between the
partners.
2. Compulsory Dissolution - According to section 41, a firm will be compulsorily
dissolved if
1. all the partners or all but one of the partners become insolvent - This happens
because if a partner becomes insolvent, he becomes incompetent to contract
and so he ceases to be a partner as per section 34(1). Thus, if all or all but one
partners become insolvent the firm will compulsorily dissolved because for a
partnership, at least two partners are required.
2. If the business of the firm becomes unlawful - It is possible that due to
legislation, the business may become unlawful. For example, liquor sales may
become unlawful in a particular state. In such a case, a partnership that sells
liquor will be dissolved.
3. Dissolution upon contingencies - According to section 42, subject to the contract, a
firm is dissolved on the happening of following contingencies -
1. By Expiry of fixed term - A firm is dissolved, if it is constituted for a fixed
term, which that term expires.
2. On completion of adventures or undertakings - In many cases, a
partnership is started with a specific goal to accomplish or for a particular task.
Upon completion of such task, the partnership gets dissolved.
3. By the death of a partner - Subject to the contract between the partners,a
partnership gets dissolved if a partner dies.
4. By the adjudication of a partner as an insolvent - If a partner becomes
insolvent and if there is no provision in the contract to keep the partnership
alive in such case between the solvent partners, the partnership is dissolved.
4. Dissolution by notice of partnership at will - According to section 43, a partnership
at will can be dissolved any time by any partner by giving a notice of such intention to
other partners.
5. Dissolution by court - According to section 44, the court may dissolve a partnership
if -
1. a partner becomes of unsound mind - In such a case, the next friend of the
person with unsound mind may request the court to dissolve the firm.
2. a partner becomes permanently incapable - At the suit of a partner, the
court may dissolve the firm on the ground that a partner other than the one
suing has become permanently incapable of performing the duties of
partnership.
3. a partner is guilty of conduct likely to affect prejudicially the carrying on
of business - At the suit of a partner the court may dissolve a firm on the
ground that a partner other than the one suing, is guilty of conduct which is
likely to affect the business prejudicially. For example, in partnership of
doctors, if one doctor is guilty of immorality towards some patients, it is
possible for the court to dissolve the partnership upon suit of other partners.
In Carmichael vs Evans 1856, a partner was convicted of traveling without
ticket and the court dissolved the firm on this ground.
 4. willful or persistent breach of agreements relating to the business or
management of the affairs of the firm - If a partner willfully or persistently
commits breach of the agreements related to the firm, or the conduct of its
business, or conducts such that it is not reasonably practical for other partners
to carry on the business, the court may dissolve the firm upon suit by other
partners.
5. transfer of the whole interest in the firm by a partner to a third party - At
the suit of a partner the court may dissolve a firm on the ground that a partner
other than the one suing, has in any way transferred the whole of his interest in
the firm to a third party.
6. perpetual loss - At the suit of a partner, the court may dissolve the firm on
the ground that the business of a firm cannot be carried on without incurring
loss. It is indeed impractical to run a business that is continuously going in the
loss. Thus, if a partner of such a business desires, he can request the court to
dissolve the firm.
7. Just and Equitable cause - As per section 44(g), the court may dissolve the
firm on any just and equitable ground upon request by a partner. This gives
very wide powers to the court because the court has to decide whether there is
a just and equitable ground for dissolving a firm.

Consequences of Dissolution
1. Liabilities of the partners for acts done after dissolution - As per section 45, until
public notice is given of the dissolution, partners remain liable for their acts as they
were before dissolution. It is therefore essential to give notice of dissolution if the
partners want to escape liability for the acts of the firm.
2. Right of partners to have business wound up after dissolutions - Upon dissolution
of the firm, every partner is entitled, as against other partners, to have the property of
the firm applied in payments of debts and other liabilities of the firm and to have the
surplus distributed to the partners as per the contract.
3. Continuing authority of partners for purpose of winding - Each partner continues
to enjoy implied authority but for the acts done in the process of winding up of the
business.
4. Settlement of accounts - Upon dissolution, the accounts of the firm will be settled as
per the agreement of the partners.
5. Payment of debts - where there are any joint debts, the property of the firm will be
first applied to clear those debts and then it will be applied to any separate debts due
to a partner.
6. Restrain the use of name of the firm - Every partner has a right to restrain another
from using the name of the firm, subject to any contract between them. However, if
the goodwill of the firm is sold, the buyer may use the name of the firm for his
business.
7. Restrain in trade - Subject to contract, the partners of the firm may be restrained
from doing the same business as the firm after the dissolution as long as the
conditions of the restrain do not violate section 27 of ICA 1872.

Q Define Agency. Is a notice to agent notice to principal? Explain vicarious liability of

the principal. What are the various ways an agency can be created? Describe the rights
and duties of an agent towards his principal. An agent cannot delegate his authority.
Explain. Describe modes of termination. What are the effects of termination?
According to Sec 182 defines an ‘Agent’ as “a person employed to do any act for another or
to represent another in dealings with third person”. The person for whom such act is done or
who is represented is called the principal. The relationship between the agent and the
principal is called “agency”
Principal Of Agency Contracts of agency are based on two important principles, namely,
Whatever a person can do personally shall also be allowed to be done through an agent
except in case of contracts involving personal services such as painting, marriage, singing,
etc. He who does not act through a duly authorized agent does it by himself, i.e., the act of the
agent are considered the acts of the principal (Sec. 226)
Who Can Be An Agent Any person who is of the age of majority according to the law to
which he is subject and who is of sound mind, may an agent. The function of an agent is to
bring his principal into connectional relations with third parties. The agent is merely a
connecting link between the principal and third parties.
Difference between An Agent And A Servant Scope of authority: An agent can create a
contractual relationship between the principal and third parties. But a servant cannot create
contractual relationship between its employer and third parties.
Remuneration: An agent receives commission for his services. A servant is generally paid
wages or salary. On whose behalf: An agent may work for several principals at the same
time. A servant can serve only one master at a time
Control: An agent is not subject to direct control and supervision of the principal. He is often
discretion. But a servant acts under the direct control and supervision of his master and must
follow all his reasonable order. Liability of principal: The principal is liable for all the
wrongful acts of his agent which are within the “scope of his authority.” But the master is
bound by the wrongful acts of his servant if done in the course of servant’s employment.
Creation of Agency Modes of creating contract of Agency By express By implied By
authority authority ratification By holding By estoppels By necessity out

Agency Classification
1) Express Agency (sec186) – A person may be appointed agent, either by word of mouth or
by writing. No particular form is required for appointing an agent.
2) Implied Agency (sec187) - An agency which arises from the conduct, situation or
relationships of parties..
Agency by Estoppel (sec237) – When a person has by his conduct or statements induced
others to believe that a certain person is his agent, he is estopped from subsequently denying
it. Ex - A tells B that he is C’s agent, this he does in the presence of C and within his hearing.
C does not object to the statement of A is actually not his agent. Later B makes a deal with A
as agent of C. C shall be bound by this deal.
Agency by holding out (sec189) – Though part of the law of estoppel, some affirmative
conduct by the principal is necessary in creation of agency by holding out. Ex - A child
purchase goods from a shop and desires the shopkeeper to collect payment from his parents
later. The parents, though not bound to pay, make the payment. After a few days, the child
again makes purchases from the shop on the credit of the parents. The parents would be
bound this time because, by making payment earlier without raising any objection, they had
held their child out as their agent for making such purchases.
Agency of necessity (sec189) - This arises where there is no express or implied appointment
of a person as agent for another but he is forced to act on behalf of a particular person.
Ex - A horse was sent by rail at the destination it was not taken delivery by the owner. The
station master had to feed the horse. Held, station master became the agent by necessity and
hence the owner must compensate him.
Agency by ratification (sec197)– Where an agent does an act for his principal but without
knowledge or authority or where he exceeds the given authority, the principal is not held
bound by the transaction. Ex - L made an offer to X, MD of a company. X accepted the
offer though he had no authority to do so. L subsequently withdrew the offer, but the
company ratified X’s acceptance. Held – L was bound. The ratification related back to the
time X accepted the offer, thus rendering the revocation of the offer inoperative. An offer
once accepted cannot be withdrawn.

Classification Of Agents
ONE BROAD CLASSIFICATION OF AGENTS
1) Mercantile or Commercial Agentsi. Broker: A broker is a mercantile agent engaged to
buy and /or sell property or to make bargains and contract between the engager and a
third party for commission.
2) Factor: A factor is a mercantile agent who is entrusted with the possession of goods
with an authority to sell the same.
3) Commission Agent: A commission agent is an agent who is employed to buy or sell
goods or transact business.iv.
4) Del Credere Agent: A del credere agent is one who, in consideration of an extra
remuneration, called a del credere commission, guarantees the performance of the
contract by the other party.
Auctioneer: An auctioneer is an agent appointed to sell goods by auction.vi. Banker: though
the relationship between banker and customer is ordinarily that of debtor or creditor, he acts
as an agent when he buys or sells securities on his behalf.vii. Pakka and Katcha Adatias: A
pakka Adatia is a person who guarantees the performance of the contract, not only to his
principal but also to the broker to the other side. A katcha adatia does not guarantee the
performance of the contract.v. Indentor: An intentor is commission agent, who,, for a
commission, procures a sale or a purchase on behalf of his principal, with a merchant in a
foreign country.
Non-Mercantile or Non Commercial Agentsi. Wife As The Agentii. Sub-
AgentsANOTHER CLASSIFICATION OF AGENT1) General2) Special
Right to remuneration(Sec 219-220) :- An agent is entitled to his agreed commission or
remuneration and if there is no agreement, to a reasonable remuneration.[Sheikh Farid Baksh
v. Hasgulal Singh A.I.R (1937) ALL 46] However, an agent who is guilty of misconduct in
the business of agency is not entitled to any remuneration in respect of that part of the
business which he has misconducted. (Sec 220) Right of Retainer(Sec 217) :- This is also
known as agent’s right of retainer. It can only be claimed on money received by him in the
business of the agency. He can not therefore, retain, sums received by him in one business for
his commission or remuneration in other business on behalf of the same principle.
Rights of Lien(Sec 221) :- In the absence of any contract to the contrary, an agent is entitled
to retain goods, papers, and other property, whether movable or immovable of the principal
received by him until the amount due to himself for commission, disbursement, and services
in respect of the same has been paid or accounted for to him. Right of stoppage-in-transit :-
This right is available to agent in the following two cases:- Where he has purchased goods
with his own funds or by incurring personal liability. Like an unpaid seller, he enjoys the
right of stopping the goods in transit if in the meantime the principle has become insolvent.
Where he holds himself liable for the price of goods sold for example, del credere agent, he
may exercise the unpaid seller’s right of stopping the goods in transit in case at buyers
insolvency.
Right of Indemnification (Sec 222-224) :- The principal is bound to indemnify an agent
against the consequences of all lawful acts done by the agent in exercise of authority
conferred upon him. (Sec 222)
Example :- B, at Singapore, under instruction from A of Calcutta,contracts with C to deliver
certain goods to him. A does not send thegoods to B, and C sues B for breach of contract. B
informs A of thesuit, and A authorizes him to defend the suit. B defends the suit, andis
compelled to pay damages and costs, and incurs expenses. A isliable to B for such damages,
costs and expenses.According to Sec 224 an agent can not claim indemnification for
acriminal act, even though the principal had agreed to do so.
Example :- A employs B to beat C, and agrees to indemnify him against all consequences of
that act. B thereupon beats C and has pay damages to C for so doing. A is not liable to
indemnify B for those damages. Right to Compensation for injury caused by principal’s
neglect (Sec 225) :- The principal must make compensation to his agent in respect of injury
caused to such agent by the principal’s neglect or want of skill.
Example :- A employs B as a bricklayer in building a house, and puts up the scaffolding
himself. The scaffolding is unskillfully put up, and B is in consequence hurt. A must make
compensation to B.
Duties of Agent-:
1) To Conduct the business of agency according to the principal’s directions (Section 211)
Lilley v. Doubleday (1881)
2) The Agent should conduct the business with the skill and diligence that is generally
possessed by persons engaged in similar business, except where the principal knows that
Agent in wanting the skill (Section 212) e.g. Where a lawyer proceeds under a wrong section
and thereby the case is lost, he shall be liable for the loss.
3) To render proper accounts (Section 213) Rendering account does not mean showing the
account supported by the vouchers (Anand prashad v. Dwarkanath)
4) In cases of difficulty to communicate with the principal (Section 214)
5) Not to make any secret profits
6) Not to deal on his own account
7) Agent not entitled to remuneration for business mis-conducted
e.g. A employs B to recover Rs.10,000 from C. Through misconduct the money is not
recovered. B is entitled to no remuneration for his services, and must make good the loss.

Nemo Dat Quod Non Habet

In the development of our law, two principles have striven for mastery. The first is the
protection of property: no one can give a better title than he himself possesses. The second is
the protection of commercial transactions: the person who takes in good faith and for value
without notice should get a good title. The first principle held sway for a long time but it has
been modified by the common law itself and by statute so as to meet the needs of our times.
The first principle is enshrined in the ancient maxim, nemo dat quod non habet, which means
that no one can transfer a better title than he himself has.
When the seller himself is the owner of the goods which he sells or he is somebody’s agent to
dispose of the goods, he conveys a good title in the goods to the buyer. Difficulty arises when
the seller is neither himself the owner nor has he any such authority from the owner to sell the
goods.
Section 27 of the Act states this principle. It says that subject to the provisions of this Act and
of any other law for the time being in force, where goods are sold by a person who is not the
owner thereof and who does not sell them under the authority or with consent of the owner,
the buyer acquires no better title to the goods than the seller had. So where goods are sold by
a finder or a thief the buyer gets no title.
Section 27, as a general rule, tries to protect the interest of the true owner when it provides
that where the goods are sold by a person who is not the owner thereof and who does not sell
them under the authority or with the consent of the owner, the buyer acquires no better title to
the goods than the seller had.
Exceptions:
The principle of protecting bona fine commercial transactions is given effect to by engrafting
a number of exceptions upon the above principle. After stating the principle in general terms,
Section 27 and the three sections that follow it enumerate the situations in which nemo dat
does not apply.
I. Estoppel:[S.27]: Section 27 says that a purchaser may get a good title if, ‘the owner of the
goods is by his conduct precluded from denying the seller’s authority to sell.
When the owner is not permitted to deny the seller’s authority that is known as an estoppel
against him. Estoppel arises from a representation that the seller has the authority to sell. And
when that representation is innocently acted upon by the buyer, it becomes too late to deny
the seller’s authority. Representation may arise from words or declaration or it may arise
from an act or omission. An omission to perform one’s duty may create an estoppel. But the
duty must be a legal obligation.
Estoppel by negligence: Mere carelessness may not create an estoppel. “Negligence, in order
to give rise to a defence under this section, must be more than mere carelessness on the part
of a person in the conduct of his own affairs, and must amount to a disregard of his
obligations towards the person who is setting up the defence.
Failure to register a transaction where registration is compulsory may create an estoppel, but
not failure to register as a safety measure with a private organization such as Hire-Purchase
Information Ltd.
II. Sale by mercantile Agent [S. 27, Proviso]: A buyer of goods from a mercantile agent
acquires good title if the conditions laid down in Section 27(2) are satisfied.
Folkes V. King illustrates the protection that this section affords to an innocent purchaser
from a mercantile gent. The plaintiff entrusted his car to a mercantile agent for sale at a stated
price and not below that. He sold it to X below that price and misappropriated the proceeds.
X resold the car to the defendant. The plaintiff could not recover it from the defendant. X got
a good title from the mercantile agent and he conveyed a good title to the defendant. A
conveyance through documents of title to the goods is equally effective against the true
owner.
The conditions subject to which the rule operates may now stated as:
(1). Mercantile Agent: The first requirement is that the sale must be by a ‘mercantile agent;
(2). In Possession as mercantile agent: Secondly, the mercantile agent should be in possession
of the goods as mercantile agent. If the goods are entrusted to him in any other capacity, he
cannot convey a good title. This was so held in Staffs Motor Guarantee Ltd. V. British
Wagon Co. Ltd. A dealer in second-hand cars sold his lorry to a company and then
immediately took it back from the company under a hire-purchase agreement. He then resold
the lorry to another company, which claimed that it had good title to the lorry having bought
it from a mercantile agent in good faith.
But the court refused to sustain this claim. The lorry had been handed back to the dealer not
as an agent but as a hirer and, therefore, as its bailee. It was said because one happens to trust
his goods to a man is in other respects a mercantile agent, but with whom he is dealing, not as
a mercantile agent, but in a different capacity, I do not think that it is open to a third party
who buys the goods from that man to say that they were in his possession as a mercantile
agent.
(3). With owner’s Consent: Thirdly, the goods should be in the possession of the mercantile
agent ‘with the consent of the owner’. This requirement is satisfied when it is shown that ‘the
true owner did intentionally deposit in the hands of the mercantile agent the goods in
question. When this is so, then it is immaterial that the consent was obtained by fraud of
tricks or other methods which render the consent voidable.
For instance, if a mercantile agent should induce the owner to pass the property to him by
some false pretence, as by giving for display purposes, by falsely pretending that he was in a
large way of business when he was not, then the owner cannot claim the goods back from an
innocent purchaser.
Where the agent obtains possession of the goods by theft, or otherwise without the consent of
the owner, the buyer from him cannot acquire a good title. Pearson V. Rose & Young Ltd. Is
a well-known authority. P left his car with a mercantile agent and authorized him only to
receive offers and not to sell. The agent obtained possession of the registration books from P
without his consent and then promptly sold the car to the defendants. It was held that a sale
without the registration books would not have been a good sale and the registration books
were obtained without the consent of the owner, and, therefore, the buyer did not acquire a
good title.
(4). Must sell while acting as mercantile agent: Fourthly, the mercantile agent must sell the
goods ‘when acting in the ordinary course of business of a mercantile agent’. It means ‘acting
in such a way as a mercantile agent in the ordinary course of business as a mercantile agent
would act; that is to say, within business hours, at a proper place of business, and in other
respects in the ordinary way in which a mercantile agent would act, so that there is nothing to
lead the other party to suppose that anything wrong is being done.
(5). Good faith and without notice: Lastly, the buyer must act in good faith and should not
have notice that the seller has no authority to sell. Mere suspicion should not amount to
notice. But it is well established that suspicion in the mind of a person, and the means of
knowledge in his power willfully disregarded, would amount to notice.
III. Sale by Joint Owner [S. 28]: If one of the several joint owners of goods has the sole
possession of them by permission of the co-owners, the property in the goods is transferred to
any person who buys them of such joint owner in good faith and has not at the time of the
contract of sale notice that the seller has no authority to sell.
IV. Sale by Person in Possession under Voidable Contract [S. 29]: When a person has
obtained possession of the goods under a voidable contract and he makes a sale of them, the
buyer gets a good title provided the contract has not been avoided at the time of the sale and
the buyer acts in good faith and without notice of the seller’s defect in the title.
The first condition for application of this exception is that the goods should have been
obtained under a voidable contract as opposed to a void contract. Where possession of the
goods is obtained under a void contract, the buyer does not get a good title.
Sale after avoidance of contract does not pass title: The next requirement is that the contract
must not have been rescinded at the time of the sale. The usual method of rescinding a
contract is by giving notice to other party of the intention to rescind. If he makes a sale after
receiving this notice, he cannot convey a good title to the buyer. Where the goods have been
taken away by a fraudulent person who will keep out of the way and cannot be communicated
with, the contract may be rescinded by doing whatever the owner of the goods can do to
regain possession.
Good faith and without notice: The last requirement is that the buyer should act in good faith
and should not have notice of the seller’s defective title.
V. Seller in possession after the Sale [S. 30(1)]: Where a seller, having sold goods, continues
to be in possession of them, and sells them over again to another person, the buyer gets a
good title provided the conditions of Section 30(1) are satisfied.
The first requirement of the exception is that the seller should continue to be in possession of
the goods after having sold them. In Staffs Motor Guarantee Ltd. V. British Wagon Co. Ltd.,
the owner of a lorry sold it to the defendants and took it back on hire-purchase. He then
resold it to the plaintiffs. The later would not get a good title because the seller was not in
possession ‘as seller’ but as a bailee under a hire-purchase agreement.
It is however not necessary that the seller should be in personal possession of the goods. It is
enough that the goods are at his disposal even if they are in the custody of a warehouse
keeper. Thus, in City Fur Manufacturing Co. V. Fureenbond (Brokers) London Ltd. One H
purchase a quantity of skins from a broker. The goods remained in the broker’s warehouse
pending payment. H sold them to the plaintiffs who gave him a bill of exchange to enable
him to pay the broker and arrange delivery to the plaintiffs. Instead H pledged the goods with
the defendants. The defendants were held to have acquired a good title.
Where, however, the sale has been completed by delivering the goods to the buyer, this
exception will not apply even if the buyer has subsequently returned the goods to the seller
for some specific purpose and they are in the possession of the seller when he resells them. In
such cases the second buyer does not get a good title.
The buyer has to act in good faith and without notice of the fact that the goods in question
were already sold. It is necessary for this condition to be satisfied that the sale must take
place in the seller’s ordinary course of business of a mercantile agent.
VI. Buyer in possession before sale [S. 30(2)]: Where a person has bought or has agreed to
buy certain goods of which possession has been given over to him, but the seller still has
some lien or right over the goods, if the buyer resells the goods the second buyer will get a
title free from the seller’s right of lien.
The sale may have been made by actually transferring the goods or by transfer of documents
of title. A pledge or any other disposition of the goods will be equally effective. The second
buyer should act in good faith and without notice of the seller’s rights.
Possession obtained under a hire-purchase agreement does not make the possessor a buyer in
possession so that a sale by him will not convey a good title to the buyer.
It is necessary that the original seller should have the right to sell the goods. If he does not
have the right to sell the goods, e.g. he is a thief or finder, neither the person taking
possession from him nor any subsequent buyer will get a good title.
VII. Resale by an Unpaid Seller: According to Sec. 54(2), if an unpaid seller has exercised
the right of lien or stoppage in transit and the buyer does not pay him, he may resell the goods
after a notice to the buyer. If such a notice is not given, the seller is neither entitled to claim
from the buyer any loss if the goods bring lower than the contract price nor can he retain the
benefit if the goods are sold at a higher price. When an unpaid seller has exercised his right of
lien or stoppage in transit and resells the goods, the buyer acquires good title thereto as
against the original buyer, notwithstanding that no notice of the resale has been given to the
original buyer.
VIII. Sale by Finder of Goods: According to S 71, Indian Contract Act, the finder of goods is
subject to the same responsibility as the bailee. He is to take due care of the goods while they
are in his possession and also to return them when their owner has been found. According to
S 169 of the Indian Contract Act, however, if the owner cannot with a reasonable diligence be
found or if he refuses upon demand, to pay the lawful charges of the finder, the finder may
sell the goods.
When the goods is in danger of perishing or of losing the greater part of its value, or when the
lawful charges of the finder, in respect of the thing found, amount to two-third of its value the
finder may sell the goods and the buyer of such gods gets a good title.
IX. Sale by Pawnee: Normally, the pawnee of the goods is under a duty to return them if the
debt secured by such goods is paid back to him. According to S. 176, Indian Contract Act, if
the pawnor makes a default in the payment o the debt, the pawnee may either sue him for the
debt or may sell the goods pledged on giving the pawnor reasonable notice of the sale. Upon
such a sale being made by the pawnee, the buyer of such goods acquires a good title to them.
X. Sale in Market Overt: The sale of goods in market according to the usage of the market,
the buyer acquires a good title to the goods, provided he buys them in good faith and without
notice of any defect or want of title on the part of the seller. Such sale means sale in the open
market by a person who generally deals in such goods. The buyer’s title is protected in case
of such a sale though the seller may be liable for the tort of conversion.

SALES OF GOODS ACT

Sale & Agreement to Sale
Section 4 of the Sales of Goods Act defines the term ‘Sale’ and ‘Agreement to Sale’. Firstly
the Section states that ‘a contract of sale of goods is a contract whereby the seller transfers or
agrees to transfer the property in goods to the buyer for a price.’ The above explanation
pertains with it some certain features of a sale those are:
1. Bilateral Contract: A sale has to be bilateral because the property in goods has to pass from
one person to another. Its first essential, therefore, is that the seller and the buyer must be
different persons. A sale is said to be consensual because it is necessary that the parties
should agree with their free consent.
In Graff V. Evans, the accused was the manager of a club. The club was not licensed for the
sale of intoxicating liquors, but these were supplied by the manager to the members at fixed
prices. This was held to be not a sale within the meaning of licensing Acts. It was merely a
distribution of the liquors among the members, they being the joint owners of the club. But if
the club were an incorporated body, the result would perhaps have been different.
Sometimes a contract may not be entered into by the normal process of negotiation, but under
a statutory compulsion. When the goods are supplied under a statutory compulsion whether
that results in sale or not. In Vishnu Agencies V. Commercial Tax Officer, it was held that
the transaction of supply of cement by a distributor to a permit-holder, in terms of the
provisions of West Bengal Cement Control Act and control Order, amounts to ‘sale’ and thus
eligible to sales tax. The appellant contended that no volition or free will or bargaining power
was left to it, and since there was no element of mutual consent or agreement between it and
the allottees, the transactions were not sales within the meaning of Sales Tax Act.
The court observed that the offer and acceptance need not always be in an elementary form,
nor indeed does the Law of Contract or of Sale of goods require that the consent to a contract
must be ex press, it may be implied and can be spelt out from the conduct of the parties. In
the first place, it is not obligatory on a trader to deal in cement nor on anyone to acquire it.
The decision of trader to deal in an essential commodity is volitional. Such volition carries
with it the willingness to trade in the commodity strictly on the terms of Control Order. The
consumer too, who is under no legal compulsion to acquire or possess cement, decided as a
matter of his volition to obtain it on the terms of permit or the order of allotment issued in his
favour. Thus, though both parties are bound to comply with the legal requirements governing
the transaction they agree as between themselves to enter into transaction on agreeing to
supply on statutory terms and other agreeing to accept it on the very terms. Thus, transaction
between them, is ‘consensual’ or with their ‘free consent’
Also, there is some scope for the parties to bargain. The Cement Control Order provides that
no person shall sell cement at a “higher than notified price”, leaving it open to parties to
charge and pay a price which is less than the notified price.
In another case of Coffee Board, Karnataka V. Commissioner of Commercial Taxes, it was
held that the compulsory delivery of coffee by the coffee growers to the Coffee Board
constitutes a sale and not compulsory acquisition, and the State can impose Purchase tax on
the same.
2. Money Consideration: The consideration for a sale of goods must be money, called the
price. Where the property in goods is transferred for any consideration other than money that
will not be sale, but an exchange or barter. But where goods are sold for a definite sum and
the price is paid partly in terms of valued up goods and partly in cash, that is sale. For
example if 52 bullocks, valued £ 6 a piece, were exchanged for 100 quarters of barley at £ 2
per quarter, the difference to be made up in cash, the contract was treated as one of sale.
Similarly, where corn was delivered on terms that on demand either the price would be paid
or an equal quantity of corn would be returned, that was held to be a sale.
3. Goods: The subject-matter of the contract must be goods. ‘Goods’ means every kind of
movable property other than actionable claims and money; and includes stock and shares,
growing crops, grass and things attached to or forming part of that land which are agreed to
be severed before sale or under the contract of sale.
Thus, goods include every kind of movable property other than actionable claim or money.
Things like goodwill, copyright, trade mark, patents, water, gas, electricity and ships are all
goods and may be the subject of the contract of sale. Human organs and tissues have become
an object of sale subject to statutory restrictions.
The Goods which form the subject-matter of any contract of sale can be classified into
various categories. This classification help in determining as to when does the property in the
goods pass from the seller to the buyer. The goods may be either existing goods or future
goods. Existing goods may be further classified into specific goods and unascertained goods.
Specific goods are those goods which have been identified and agreed upon at the time of the
contract of sale. If the goods are not identified and agreed upon at the time of making of the
contract, they are known as ascertained goods. In case of specific goods, there is a possibility
of the property in the goods passing to the buyer at the time of making of the contract,
whereas in the case of unascertained goods, the property in the goods does not pass to the
buyer unless and until the goods are ascertained.
The parties are free to provide as to when the performance of the contract by each side will be
made. They may provide that the delivery of the goods will be made either immediately or by
instalments or on some future date. Similarly regarding the payment of price too the contract
may require either immediate payment, or payment by instalments or the payment on some
future date.
4. Transfer of ownership in the goods: Transfer of property i.e. the ownership in the goods
from the seller to the buyer, is the essence of the contract. A sale is said to be ‘consensual’
because it is necessary that the parties should agree with their free consent.
Sale and Agreement to Sell:
Further Section 4 distinguishes between ‘Sale’ and ‘Agreement to Sell’. It states where under
a contract of sale the property in the goods is transferred from the seller to the buyer, the
contract is called a sale, but where the transfer of the property in the goods is to take place at
a future time or subject to some condition thereafter to be fulfilled, the contract is called an
agreement to sell.
A ‘Contract of Sale’ is a generic term and includes both an actual sale, where the ownership
in the goods passes to the buyer immediately when the contract is made, and an agreement to
sell, where the ownership in goods is to pass subsequent to the making of the contract.
In order to constitute a sale there should be an agreement between the parties for the purpose
of transferring title to goods, which of course presupposed capacity to contract, that it must
be supported by money consideration, that as a result a transaction, the property must actually
pass in goods.
A sale has the immediate effect of transferring property, whereas in an agreement to sell the
property is to pass at some future time or subject to some condition. The sale of the whole of
the haystack on the seller’s farm, the buyer having the liberty to take away when he likes, is
an immediate sale.
The essential object of the contract of sale is the exchange of property for a money price.
There must be a transfer of property, or an agreement to transfer it, from one party, the seller,
to the other, the buyer, in consideration of a money payment or a promise thereof by the
buyer.
A contract of sale becomes a sale only when the property in the goods is transferred to the
buyer under the terms of the contract itself. As there must be a complete exchange of
property to constitute a sale, it follows that the seller and buyer must be different persons.
One co-owner may sell to another and therefore a partner may sell to his firm and the firm
may sell to a partner, but in the case of a member of an ordinary club paying for a meal at the
club, or even for provisions which he may carry away, there is no sale; the transaction is a
release of joint interest of the other members of the club, and the only contract involved is the
contract made once and for all by the member on ‘his admission to use the property of the
club only on the conditions laid down or authorised in its rules and usages. Members of a
club or voluntary society are undivided joint owners, not part owners.
In Ghasiram V. State, the accused, a retailer, made an agreement with State Government and
agreed to sell whet during shop-hours to consumers within his zone at a retail rate fixed by
government. The wheat was delivered by government to the retailer on his deposit of price of
wheat at the agreed whole-sale rate. At one stage, by night-time, retailer removed some bags
of wheat from shop and thereafter, possibly apprehensive of adverse consequences brought
them back to his shop.
The question in the case was whether there was an agreement of sale or that of an agency.
The court held that retailer by virtue of agreement could not be regarded as an agent of
government in respect of wheat received by him under agreement. The property in wheat
received by retailer, under the agreement, did pass to him. There was no criminal breach of
trust by him, as he was not agent of government.
If an agreement to sell contemplates passing of property at a future date, it becomes a sale
when that date arrives. If it contemplates certain conditions subject to which the property is to
pass, it becomes a sale when those conditions are fulfilled.
‘Sale’ and ‘Agreement to Sell’ can be distinguished on the following grounds:
1. In a sale the buyer becomes the owner of the goods at the time of making of contract but in
an agreement to sell buyer becomes owner of goods at a later time.
2. A sale makes the buyer the owner of the goods. He can exercise al the proprietary rights in
respect of them, such as an action for conversion or detenue. He acquires a jus in rem, that is,
a right against the goods. The effect is that if the seller refuses to deliver the goods, the buyer
may sue for recovery of the goods by specific performance. If the seller has resold the goods
to another person, the buyer may follow the goods in his hands, unless that other had bought
them in good faith and without notice. On the other hand, an agreement to sell is a contract
pure and simple. It is not a conveyance. The buyer’s right are only personal against the seller,
that is, a jus in personam. He can sue only for damages for breach and not for recovery of
goods.
3. In a sale, since the ownership in the goods has passed to the buyer, the risk of loss, if any,
of the goods is on the buyer. But in an agreement to sell, the seller remains the owner of the
goods and, therefore, he runs all the risks.
4. In a sale, if the buyer commits default, the seller may sue him for the price, that is, for
specific enforcement of the contract. In an agreement to sell, the seller’s only remedy is to
sue for damages for breach.
5. Sale is an executed contracted, where there is a contract plus a conveyance, whereas an
agreement to sell is termed as executory contract pure and simple.

Contract for Work & Material

Sometimes a contract may involve supply of some article which also involves rendering of
some work or service in respect of the same. In such a case, there may be difficulty in
deciding whether it is a contract of sale of goods or a contract for work and labour or a
contract of service. The problem of ascertaining the nature of the contract in such cases
generally arises in the context of the liability for sales tax, which could be levied in case of
sale of goods and not when the contract is one for work and labour.
A contract of sale has to be distinguished from a contract involving the exercise of skill or
labour on some material. Apart from the question of liability to sales tax, the distinction is
important because it is only a sale that carries a number of implied conditions and warranties.
In Lee V. Griffin, a lady engaged a dentist to make two sets of false teeth “to be fitted into
her mouth”. Before the work could be completed the lady died. In the doctor’s action to
recover his charges the contract was held to be one of sale. The court emphasized that we
should see the end of the transaction. If the result of a transaction is the passing of an article
for a price it is a sale.
Whether the contract is one of sale or of work and labour depends on the circumstances of
each case. If the object of the contract is to transfer the property in some chattel and the
delivery of the same to the buyer, it is a contract of sale, irrespective of the fact that the cost
of the materials used bear a very small proportion to the price charged. On the other hand, if
the object is not to transfer property in the chattel but to render skill and labour, the contract
is one for work and labour.
In Robinson V. Graves, the test laid down in above case was not approved by the Court. In
this case the defendant orally commissioned the plaintiff, an artist, to paint the portrait of a
lady, and subsequently repudiated the contract before the portrait was completed. In an action
by the plaintiff for the agreed price, it was held to be a contract of work and labour. The
painter recovered.
In Asstt. Sales Tax Officer V. B.C. Kame, it has been held by the Supreme Court that when a
photographer undertakes to take a photograph, to develop the negative, or to do other
photographic work and thereafter supply the prints to his client, the contract is one of skills
and labour and not that of sale of goods.
The primary difference between a contract for work or service and a contract for sale of
goods is that in the former there is in the person performing work or rendering service no
property, in the things produced as a whole notwithstanding that a part or even the whole of
the material used him may have been his property. In the case of contract of sale, the thing
produced as a whole has individual existence as the sole property, and of the party who
produced it, at some time before delivery, and the property therein passes only under the
contract relating thereto in goods used in the performance of the contract is not sufficient; to
constitute a sale there must be an agreement express or implied relating to the sale of goods
and completion of the agreement by passing of title in the very goods contracted to be sold.
In every case the court will have to find out what was the primary object of the transaction
and the intention of the parties while entering into it. Generally a contract to make a chattel
and deliver it, when made, is a contract of sale, but not always. The test would seems to be
whether the thing to be delivered has any individual existence before delivery as the sole
property of the party who is to deliver it.
For example ‘A’ is employed by ‘B’ to draw a conveyance on paper and with ink furnished
by ‘A’. This is a contract for work and not for the sale of goods.
In Northern India Caterers V. Lt. Governor of Delhi, the appellant, who ran a hotel in which
not only lodging and meals were provided to the residents on an all-inclusive basis, but meals
were also served to non-residents in the restaurant located in the hotel. Regarding the nature
of the contract in the two kinds of services rendered by the appellant it was held by the
Supreme Court that not only the service of meals to the visitors in the hotel on an all-
inclusive basis, but also service of meals in the restaurant to the casual visitors was in the
nature of a service provided to the customers and the same could not be considered to be a
transaction of sale, and therefore, the transactions were not subject to the imposition of sales
tax.
The Supreme Court reviewing its own decision in Northern India Caterers V. Lt. Governor,
Delhi, held that where food is supplied in an eating house or restaurant, and it is established
upon the facts that the substance of the transaction, evidenced by its dominant object, is a sale
of food and the rendering of services is merely, incidental, the transaction would undoubtedly
be eligible to sales tax.
When there is sale of an article with an additional and subsidiary contract to affix it, it is
considered to be a contract of sale. In such a case, the main contract is to deliver the goods in
which the property passes and the services put in the process is only ancillary to that. When,
on the other hand, the object is to complete a certain stipulated work.
In State of Rajasthan V. Nenu Ram, the Supreme Court held a contract to supply and fix
wooden door and window frames and shutter to be a contract for work and not a sale.
A contract of sale is a contract whose main object is the transfer of the property in, and the
delivery of the possession of a chattel as a chattel to the buyer. Where the main object of
work undertaken by the payee of the price is not the transfer of a chattel qua-chattel, the
contract is one for work and labour. The test is whether or not the work and labour bestowed
and in anything that can properly become the subject of sale neither the ownership of the
materials, nor the value of the skill and labour as compared with the value of the materials, is
conclusive, although such matters may be taken into consideration is determining, in the
circumstances of a particular case, whether the contract is in substance one for work and
labour or one for the sale of chattel.
The primary test is whether the contract is one whose main object is transfer of property in
chattel as a chattel to the buyer, though some work may be required to be done under the
contract as ancillary or incidental to the sale or is carrying out of work by bestowal of labour
and service and materials are used in execution of such work. The test has been recognized
and approved in a number of decisions of this court and it may now be regarded as beyond
controversy, but the real difficulty arises in its application as there are a large number of
cases which are on the border line and fall within what may be called grey area. To resolve
this difficulty, the courts have evolved some subsidiary tests.
The primary difference between a contract for work or service and a contract for sale of
goods is that in the former there is in the person performing work rendering service no
property in the things produced as a whole. In the case of a contract for sale, the thing
produced as a whole has individual existence as the sole property of the party who produced
it, at some time before delivery, and the property there in passes only under the contract
relating there to the other party. “this was the test applied by this court in the State of
Rajasthan V. Man Industrial Corporation, for holding that a contract for providing and fixing
four different types of windows of certain size according to specifications, designs, drawings
and instructions set out in the contract was a contract for work and labour and not a contract
for sale.
The same test was applied by the court in Sentinel Rolling Shutters V. CST. There the
question was whether a contract for fabrication, supply and erection of certain types of rolling
shutters, was a contract of sale or a contract for work and labour, this court analysed the
nature of the contract and pointed out that not only are the Rolling shutters to be
manufactured according to the specifications drawlings and instructions provided in the
contract, but they are also to be erected and installed at the premises of the company. The
price stipulated in the contract is inclusive of erection and installation charges and the
contract does not recognise any dichotomy between the fabrication and supply of the Rolling
Shutters and their erection and installation so far installation of Rolling shutters is as much an
essential part of the contract as the fabrication and supply and it is only on the erection and
installation of Rolling shutters that our contract would be fully executed.
This court then proceeded to examine what is a rolling shutter and how it is erected and
installed in the premises and observed that a rolling shutter consists of several component
parts and the component parts do not constitute a rolling shutter until they are foxed and
erected on the premises. It is only when the component parts are fixed on the premises and
fitted in the one another that they constitute a rolling shutter as a commercial article and till
then they are merely component parts and cannot be said to constitute a rolling shutter. The
erection and installation of the rolling shutter cannot therefore, be said to be incidental to its
manufacture and supply. It is a fundamental and integral part of the contract, because without
it the rolling shutter does not come into being. The manufacturer would undoubtedly be the
owner of the component part when he fabricates them but at no stage does as to transfer he
rolling shutter comes into existence as a unit when the component parts are fixed in position
on the premises and it, therefore becomes the property o the customer as soon as it comes into
being. There is no transfer of property in the rolling shutter by the manufacturer to the
customer as a chattel. It is essentially a transaction for fabricating component parts and fixing
them on the premises so as to constitute a rolling shutter. The contract for fabrication supply
and erection of the rolling shutters was, on this reasoning held by the court to be a contract
for work and labour and not a contract for sale.
The principle established in the above case is applied in Ram Singh & Sons Engineering
Works V. The Commissioner of Sales Tax, U.P. There was a contract for fabrication and
erection of 3 motion electrical overhead traveling cranes. The fabrication and erection was
one single indivisible process and such a crane came into existence only when the erection
was complete. The fabrication and erection of a 3 motion electrical overhead traveling crane
is highly skilled and specialized job and the component parts have to be taken to the site and
they are assembled and erected there and they are assembled and it is only when this process
is complete then a 3 motion electrical overhead traveling crane comes into being. The process
of assembly and erection requires a high degree of skill and it is not possible to say that the
erection of a 3 motion electrical overhead traveling crane comes into existence only when the
erection is complete. The erection is thus a fundamental and integral part of the contract
because without it the 3 motion electrical overhead traveling crane does not comes into being.
The manufacturer would undoubtedly be the owner of the component parts when he
fabricated them, but at no stage does he become the owner of the 3 motion electrical
overhead traveling crane as a unit so as to transfer the property into the customer. The 3
motion electrical overhead traveling crane comes into existence as a unit only when
component parts are fixed in position and erected at the site, but at that stage it becomes the
property of the customer because it is permanently embedded in the land belonging to the
customer. The result is that as soon as 3 motion electrical overhead traveling crane comes
into being it is the property of the customer and there is, therefore, no transfer of property in
it by the manufacturer to the Customer As A Chattel. It is essentially a transaction for
fabricating component parts and putting them together and erecting them at the site so as to
constitute a 3 motion electrical overhead traveling crane. The transaction is no different than
one for fabrication and erection of an open godown or shed with asbestos or tin sheets fixed
on columns. There can, therefore be no doubt that the contract in the present case was a
contract for work and labour and not contract for sale.

Conditions & Warranties

Some terms of the contract of sale constitute the hard core of the contract and their non-
fulfilment may seem to upset the very basis of the contract. They may be so vital to the
contract that their breach may seem to be a breach of the contract as a whole. Such terms are
known as conditions of the contract and their breach entitles the innocent party to repudiate
the contract. A term which is not of such vital importance is known as a warranty. Its breach
does not lead to repudiation, but only to damages for breach.
Section 12(1) provides that stipulations in a contract of sale with reference to goods may be
conditions or warranties. The section then goes on to explain the distinction between the two.
It says ‘a condition is a stipulation essential to the main purpose of the contract, the breach of
which gives rise to a right to treat the contract as repudiated.’ Whereas ‘a warranty is a
stipulation collateral to the main purpose of the contract, the breach of which gives rise to a
claim for damages but not to a right to reject the goods and treat the contract as repudiated.’
Whether a stipulation in a contract of sale is a condition or a warranty depends in each case
on the construction of the contract. A stipulation may be a condition, though called a
warranty in the contract.
The court is not bound by the terminology employed by the parties. The concept of a
condition is well illustrated by the case of Baldry V. Marshall. The plaintiff consulted the
defendants, motor car dealers, for a car “suitable for touring purposes”. The defendants
suggested that a “Bugatti” car would be appropriate and the plaintiff accordingly bought one.
The car turned out to be unfit for touring purpose and the plaintiff ought to reject it. The
defendants relied upon a term in the contract which guaranteed the car for twelve months
against mechanical defects and excluded every other guarantee or warranty.
But it was held that the suitability of the car for touring purposes was not a guarantee or
warranty, but a condition of the contract. The term was so vital that its non-fulfilment
defeated the very purpose for which the plaintiff bought the car. He was, therefore, entitled to
reject and have refund of the price.
Consequences of Breach: Since a condition is a stipulation essential to the main purpose of
the contract its breach by one party entitles the other to treat contract as repudiated. For
example, if the seller makes a breach of condition, the buyer may reject the goods. Similarly,
if the breach is made by the buyer, the seller may treat it as a breach of contract and not
perform his own part of the obligation.
Option to the buyer on breach of conditions by the seller: When there is a breach of condition
by the seller, the buyer may:
(i) treat the contract as repudiated, or
(ii) waive the condition, or
(iii) treat the breach of condition as a breach of warranty.
The law implies into every sale of goods a number of conditions and warranties. They are
read into every contract of sale unless they are excluded and are known as implied conditions
and warranties.
1. Conditions as to title: The essence of sale being the transfer of ownership, it is one of the
duties of the seller to ensure that he has the right to sell what he purports to sell. If the seller’s
title turns out to be defective the buyer may reject the goods. There can be no sale at all of the
goods which the seller has no right to sell. The whole object of sale is to transfer property
from one person to another. In fact the buyer has not received any part of that which he
contracted to receive-namely, the property and right to possession- and that being so, there
has been a total failure of consideration.
In Niblett V. Confectioners’ Material Co, the defendant sold the plaintiffs 3,000 tins of
condensed milk. On their arrival in England from New York it was found that 1,000 tins were
labeled ‘Nissley Brand’. Another manufacturer of condensed milks under the name of ‘Nestle
Brand’ claimed that this was an infringement of his trade mark. The plaintiff had to remove
all the labels in order to obtain the goods and subsequently sold them at a reduced value. He
sued the sellers for the breach of the condition as to title. It was held that the plaintiff had the
right to reject the goods or to recover as damages the loss caused by the sale at a reduced
price.
Explaining the meaning of ‘right to sell’ it was said that the seller had not the right to sell
these goods. Having admitted that they were an infringement of the Nestle Company’s trade
mark they were liable to an injunction restraining the sale. Therefore they had no right to sell
these goods at the time when the property was to pass. If a vendor can be estopped by process
of law from selling he has not the right to sell.
2. Sale by description: Section 15 of the Act lays down the conditions which is implied by
law in a sale by description. It says that where there is a contract for the sale of goods by
description, there is an implied condition that the goods shall correspond with the description.
Two things are necessary to enable a buyer to invoke the protection of this section. First,
there should be a sale by description and, secondly, the goods do not correspond with the
description. The expression ‘sale description’ includes many situations. Firstly, it refers to a
case where the buyer has never seen the goods and buys them on the basis of the description
given by the seller. This happened in Varley V. Whipp.
There was a sale of reaping machine which the buyer had never seen and which the seller
stated ‘to have been new the previous year and used to cut only 50 to 60 acres.’ On delivery
the buyer found the machinery to be extremely old and, therefore, returned it. The seller’s
action against the buyer for the price failed. It was a sale by description and the machine did
not correspond with the description.
Even where the buyer has seen the goods, it may be a sale by description if he relies not on
what he has seen but what was stated to him and ‘the deviation of the goods from the
description is not apparent’. This is illustrated in Nicholson and Venn V. Smith Marriott.
It was an auction sale of a set of linen napkins and table cloths, described as ‘dating from the
seventeenth century’. The plaintiff, who were dealers in antiquities, saw the set and bought it.
They subsequently found it to be an eighteenth century set and sought to reject it. It was held
that they could do so. They had relied on the description and the discrepancy between the
description and the quality could not have been discovered by the casual examination.
Thirdly, packing of goods may sometimes be a part of the description. Thus, in Moore & Co.
V. Landuer & Co., there was a contract for the purchase of 3,000 tins of canned fruit from
Australia, to be packed in cases each containing 30 tins. The sellers tendered a substantial
portion in cases containing 24 tins. The method of packing was held to be a part of the
description and, therefore, the purchasers were entitled to reject the whole consignment.
Once it is proved that the sale is by description, the law implies the condition that the goods
must correspond with the description. If they do not do so the buyer may reject them and it
will be no defence to say that they will serve the buyer’s purpose. Where is a sale of copra
cake, the goods were found adulterated with castor beans. It was held that the goods did not
correspond with description and the condition was broken.
3. Sale by description as well as by Sample: The section 15 further provides that if the sale is
by sample as well as by description, it is not sufficient that the bulk of the goods correspond
with the sample if the goods do not also correspond with the description. In other words, the
implied condition in such cases is that the goods shall not merely agree with the sample, but
must also correspond with the description. The basic insistence of the section is
‘correspondence with description.’
4. Sale by sample: This is defined in Section 17 of the Act. A contract of sale is a contract for
sale by sample where there is a term in the contract, express or implied, to that effect. A sale
by sample is indistinguishable from a sale by description. The law implies three conditions
into every contract of sale by sample:
(i) That the bulk shall correspond with the sample in quality.
(ii) That the buyer shall have a reasonable opportunity of comparing the bulk with the
sample.
(iii) That the goods shall be free from any defect, rendering them un-merchantable, which
would not be apparent on reasonable examination of the sample.
In Godley V. Perry, a retailer tested toy catapults by pulling at the elastic and found no
defect, but one of them subsequently exploded in the hands of a child who had bought it from
the retailer. It was held that the goods were un-merchantable by reason of the latent defect.
The court pointed out that ‘reasonable examination means as that phrase is understood by the
commonsense standards of everyday life.’ It obviously does not mean complete or through
examination.
There are certain types of warranties which are implied by law in a sale of goods contract.
1. Quite Possession: An implied warranty that the buyer shall have and enjoy quiet
possession of the goods. It is a warranty that the vendor shall not, nor shall anybody claiming
under a superior title, or under his authority, interfere with the quiet enjoyment of the vendee.
2. Free from Encumbrance: The goods shall be free from any charge or encumbrance in
favour of any third party not declared or known to the buyer before or at the time when the
contract is made.
Conditions reduced to warranty:
In certain circumstances a condition is reduced to the status of a warranty. The effect is that
the buyer losses his right to reject the goods. He has to be content with the remedy for
damages for the breach of the conditions. This happens in the following cases:
1. Waiver by Buyer: Where a contract of sale is subject to any condition to be fulfilled by the
seller, the buyer may waive the condition or elect to treat the breach of the condition as a
breach of warranty. The conditions, express or implied, are for the benefit of the buyer. He
has, therefore, the option to waive the breach of a condition. In that case he remains liable for
the price, but may recover damages for the breach. The buyer’s election may be express or
implied.
2. Acceptance of goods by buyer: Where a contract of sale is not severable and the buyer has
accepted the goods or part thereof, the breach of the condition to be fulfilled by the seller can
only be treated as a breach of warranty and not as a ground for rejecting the goods, unless
there is a term of the contract of that effect. Thus, where the buyer has accepted the goods
and thereafter discovers that some conditions was not fulfilled, he cannot reject.
An illustration in point is Hardy & Co. V. Hillerns & Fowler. Wheat sold under a contract
arrived at the port of destination. The buyers took up the shipping documents. The day on
which the wheat was unloaded they resold and dispatched a portion of it to sub-purchasers.
They subsequently discovered that the wheat was not of the contract quality and gave the
sellers a notice of rejection. All this happened within three days and, therefore, reasonable
time for the examination of the goods had not expired. It was held that the transfer of the
possession to the sub-purchasers was an act inconsistent with the ownership of the sellers
and, therefore, that put an end to the buyer’s right of rejection. Notwithstanding that it took
place before the expiry of reasonable time for inspection. The act of resale is inconsistent
with the seller’s ownership because the buyer has to place the rejected goods at the disposal
of the seller immediately on rejection, whereas if he has resold them, he cannot do that till he
receives them back from the sub-buyers.
When a condition is reduced to the status of a warranty, the effect is not that the condition
becomes a warranty, but that the condition remains a condition, it is only the remedy which
changes. When the contract of sale is not severable and the buyer has accepted the goods or
part thereof, the breach of condition has got to be treated as a breach of warranty. The idea
behind the provision is that when the buyer has a choice of either accepting or rejecting the
goods and he chooses to accept them, his right of rejection can no more be exercised. Merely
taking delivery of the goods by the buyer does not necessarily mean the acceptance of them.
This is demonstrated by the decision of the House of Lords in Wallis, Son & Wells V. Pratt.
The defendants sold seed to the plaintiffs, as “Common English Sanfoin” on the condition
that the “seller give no warranty express or implied as to growth, description or any other
matter.” The seed delivered to the buyers was not “Common English Sanfoin”, but “Giant
Sanfoin”, a different and inferior seed. The buyer accepted the seed believing it to be
“Common English Sanfoin” and resold it as such to other parties, to whom they were obliged
to pay damages for the mistake.
The time for rejection having been lost, the only course open to the buyers was to sue for
damages. The sellers contended that the “condition” was reduced to “warranty” and they had
excluded liability for warranties. The House of Lords rejected this contention and allowed the
buyers to recover damages for their loss. A condition is converted into warranty only for
remedial purposes. The result may be summed up as it was absurd to suggest that, because
subsequent events had prevented the buyers from repudiating the contract, they had also
converted a more into a less important term. Once a condition always a condition, whether or
not the remedies remained the same.
Where goods not answering to the description contracted for are delivered to a buyer, the
buyer has a right to one of two alternative remedies:
(a) reject the goods and obtain a refund of the price in advance and sue for damages for non
delivery. In such an event the damages he would obtain would be the difference between the
contract price and the market price of the goods on the date of the breach if the latter were
higher;
(b) waive condition and accept the goods and sue for damages for a breach of warranty.
When he accepts the goods, he has to pay the contract price less any claim for set-off for
breach of warranty.
Section 62 of the Act enables the parties to a sale to exclude liability for implied terms. The
section recognizes three modes by which liability for implied terms may be negatived:-
(i) By express Contract;
(ii) By course of dealing; and
(iii) By trade usage.

Caveat Emptor
Section 16 of the Act prescribes that ‘subject to the provisions of this Act or any other law for
the time being in the force, there is no implied warranty or condition as to the quality or
fitness for any particular purpose of goods supplied under a contract of sale.’ This is a
restatement of the principle of caveat emptor (buyer beware). It means that subject to the
implied conditions which have been seen above and the exception created by Section 16, the
seller is not bound to supply goods which should be fit for any particular purpose or which
should possess any particular quantity. It is the buyer’s duty to select goods of his
requirement. “It was for the buyer to make himself acquainted with qualities and defects of
the goods which he contemplated purchasing.
The principle is that it is for the buyer to satisfy himself that the goods which he is purchasing
are of the quality which he requires or, if he is buying them for a specific purpose, that they
are fit for the purpose. This principle is summed up in the maxim ‘Caveat emptor’; and is
based upon the presumption that the buyer is relying on his own skill and judgment, when he
effects a purchase.
One illustration of the application of this principle is Ward V. Hobbs. Certain pigs were sold
by auction and no warranty was given by the seller in respect of any fault or error or
description. The buyer paid fair price for healthy pigs, but they were ill and all but one died
of typhoid fever. They also infected a few of the buyer’s own pigs. The House of Lords held
that sending infected pigs to the market was an offence, but there was no implied condition or
warranty that they were sound. It was said hat although a vender is bound to employ no
artifice or disguise for the purpose of concealing defects in the article sold, since that would
amount to a positive fraud on the vendee; yet under the general doctrine of caveat emptor, he
is not ordinarily bound to disclose every defect of which he may be cognizant, although his
silence may operate virtually to deceive the vendee.
Another case of the same kind is Burnby V. Bollet. ‘A’, a farmer, bought from ‘B’ a butcher,
the carcass of a dead pig for consumption and left it hanging up, intending to return after
completing other business, and take it away. In his absence ‘C’, a farmer, on seeing and
wishing to buy it, was referred to ‘A’, and bought it of ‘A’. It turned out unsound and unfit
for human consumption. It was held that no warranty of soundness was implied by law
between the farmers ‘A’ and ‘C’. The result would have been different if the plaintiff had
bought the pig from a dealer in pork. In that case there would have been an obligation to
supply goods of merchantable quality.
Caveat Emptor does not mean that the buyer must ‘take chance’, it means he must ‘take care’.
It applies to the purchase of specific things upon which the buyer can, and usually does,
exercise his own judgment; it applies also whenever the buyer voluntarily chooses what he
buys; it applies also where by usage or otherwise it is a term of the contract, that the buyer
shall not rely on the skill or judgment of the seller.
Exceptions:
The exceptions to the rule of caveat emptor have now become more prominent than the rule
itself. The rule owes its origin to the times when nearly all sales took place in the open
market. The buyer and the seller came face to face, the seller exhibited his wares, the buyer
examined them and bought them if he liked. But as trade grew and assumed global
dimensions, it became difficult for buyers to examine goods beforehand, most transactions
being concluded by correspondence. Further on account of the complex structure of modern
goods, it is only the sellers who can assure the contents and quality of the goods. For these
reasons it became necessary to restrict the rule of caveat emptor by grafting a few exception
upon its scope.
The essence of these exceptions it thus explained as it is the duty of the court in administering
the law to lay down rules calculated to prevent fraud, to protect persons who are necessarily
ignorant of the qualities of a commodity they purchase, and to make it the interest of
manufactures and those who sell, to furnish the best article that can be supplied. Section 16
provides for the following exceptions:
(a) Fitness for buyer’s purpose: S. 16(1) requires the seller in certain circumstances to supply
goods which shall be fit for the buyer’s purpose. For this exception to apply, the following
points have to be proved:
(1) The buyer should make known to the seller the particular purpose for which the goods are
required.
(2) The buyer should rely on the seller’s skill or judgment.
(3) The goods must be of a description which it is the course of the seller’s business to
supply.
At first glance the exception seems to require too many conditions to be satisfied. But all of
them are implicitly satisfied in the routine course of the act of purchasing an article. This is
shown in Grant V. Australian Knitting Mills. The plaintiff, a doctor, purchased from a retailer
two woolen underpants manufactured by the defendants. Next day after wearing one of them
he became ill. His illness was diagnosed as dermatitis caused by a chemical irritant which the
defendants had negligently omitted to remove in the process of manufacture. It was held that
the sale was within the exception and the implied condition of fitness for the buyer’s purpose
was broken. It was said that it is no doubt essential that the buyer must rely upon the seller’s
skill or judgment. But the reliance will seldom be express, it will usually arise by implication
from the circumstances. Where the seller deals in certain goods, the buyer goes to the shop in
the confidence that the tradesman has selected his stock with skill and judgment.
This should be contrasted with a case where the plaintiff contacted dermatitis from Harris
tweed coat and the illness being due to her sensitiveness the sellers were held not liable, the
cloth being fit for a normal person.
Where the goods are capable of more than one use, the buyer should inform his purpose to
the seller and only then may depend upon him to supply goods for that purpose. Where this is
not done, the condition as to fitness will not be implied.
For example, in Re Andrew Yule and Co., Hessian cloth, which is generally used for packing
purpose, was supplied to the buyer who found it, because of an unusual smell, unfit for
packing foodstuffs, though it was good as a packing cloth, the buyer could not reject it,
because he had never disclosed his particular purpose to the seller. Where the “particular
purpose” is disclosed, the condition immediately attaches. The seller is entitled to assume that
the goods are required for their normal purposes, or one of their normal purposes, unless
otherwise indicated by the buyer.”
Sale under Trade Name: The proviso to Section 16(1) provides that sometimes a buyer may
rely more on the trade name of a commodity than on the skill and judgment of the seller. “If a
person goes in a shop and asks for a bottle of R White’s Lemonade, or somebody’s particular
brand of beer, he is not relying on the skill and judgment of the person who serves it to him.”
In such cases it would be manifestly unjust to burden the seller with responsibility for fitness.
The mere mention of the name of a product, or patent does not exclude the condition, for
even then the buyer may rely on the seller’s skill and judgment. In Baldry V. Marshall, a car
had to be selected for touring purpose and the seller recommended “Bugatti” car, a trade
name. This did not exclude the implied condition of fitness.
Stating the true effect of the proviso it was said that the mere fact that an article sold is
described in the contract by its trade name does not necessarily make the sale, a sale under a
trade name. we may illustrate meaning by reference to three different cases. First, where a
buyer asks a seller for an article which will fulfil some particular purpose and in answer to
that request the seller sells him an article by a well known trade name; there it is clear that
proviso does not apply. Secondly, where the buyer says to the seller “I have been
recommended such and such an article’ mentioning it by its trade name ‘will it suit my
purpose’, naming the purpose and thereupon the seller sells it without more; there again I
think the proviso has no application. But there is a third case where the buyer says to a seller,
I have been recommended so and so, ‘giving its trade name’ as suitable for the particular
purpose for which I want it. Please sell it to me. In that case it is equally clear that the proviso
would apply and that the implied condition of things’ fitness for the purpose named would
not arise.
The condition of fitness remains applicable even when goods are sold by an agent who does
not disclose that he is selling on behalf of his principal and the buyer does not know that he is
buying from an agent.
(b) Merchantable Quality [S. 16(2)]: The second leading exception of the principle of caveat
emptor is that a dealer who sells goods by description is bound to deliver goods of
merchantable quality. The only requirement for this condition to arise is that the goods must
be purchased by description from a seller who deals in goods of that description. When this
requirement is fulfilled it becomes the responsibility of the seller to supply goods which shall
be of ‘merchantable quality’.
For instance, in Godley V. Perry, a toy dealer displayed in his shop window some toy
catapults. A child of six was attracted by them and bought one. While he was using it, it
broke off an entered his left eye which had to be removed. The seller contended that there
was no condition of merchantable quality as the toy was not bought from him by description.
Rejecting this and holding him liable, the court said that a sale over the counter can be sale
‘by description’ is clear, and where, as here, a child asks for a catapult and one is sold to him
over the counter, that is no less a ‘sale by description’ than one where an order is placed on
the strength of a catalogue.
The term ‘merchantable quality’ includes the following propositions:
(i) Marketability: Merchantability does not merely mean that the goods shall be marketable,
but that they shall be marketable at their full value. “Merchantability does not mean that the
thing is saleable in the market because it looks all right; it is not merchantable in that event if
it has defects unfitting it for its only proper use but not apparent on ordinary examination.
(ii) Reasonable fitness for general purpose: “Merchantable quality” means, in the second
place, that if the goods are purchased for self use, they must be reasonably fit for the purpose
for which they are generally used. “It has long been recognized that merchantable quality
reflected in use value, as well a exchange value, and that the two are inseparably linked.
The principle has been applied in a great number of cases. In Priest V. Last, the plaintiff went
to the defendant, a chemist, and asked for a hot-water bottle. The defendant sold him an
American rubber bottle, saying that it would sand hot but not boiling water. The plaintiff had
purchased the bottle for his wife and while she was using, it burst and injured her. Since the
bottle was not fit for being used as a hot-water bottle, the ‘particular purpose’ for which the
buyer had purchase it, the defendant was held liable to pay compensation for the breach of
the implied condition.
Defective packing. Packing of the goods is an equally important consideration in judging
their ‘merchantability’. The plaintiff purchased a bottle of Stone’s Ginger Wine. When he
attempted to draw its cork with a corkscrew and with due care, the neck of the bottle broke
off, the bottle fell to the ground cutting the plaintiff’s hand. The seller had to answer in
damages.
Partly defective. Where a part of the goods are defective, the buyer may reject the whole lot
even if he had accepted some deliveries before finding out the defect.
Merchantable quality means that the goods shall be as fit for the purpose or purposes for
which goods of that kind are commonly bought as it is reasonable to expect having regard to
any description applied to them, the price (if relevant) and all other relevant circumstances.
There are points of distinction between the two exception. The Legislature intended, and the
courts have always treated, them to be two independent conditions. And they do make
sometimes a very practical difference to the buyer. In Henry Kendall & Sons V. William
Lillico & Sons Ltd, a Brazilian groundnut extraction was sold to a manufacturer for use as
ingredient in compounding food for poultry. The compound caused death of chicks and
poults due to toxic substance in the groundnut extraction. But the food was fit for older birds
and other animals. It was held that the food was not fit as a poultry feed and, therefore, the
implied condition of fitness by the buyer’s particular purpose was breached and the suppliers
were responsible for the loss caused to him, but the goods were of merchantable quality.
Secondly, the prerequisites of two exception are different. To avail of the first exception the
buyer had to rely on the seller’s skill and judgment, but this is not necessary to import the
condition of merchantable quality.
Lastly, the proviso the two exception are different. Where goods are sold under their patent or
trade name, the implied condition of fitness is excluded. But the condition of merchantability
arises even when the purchase is effected by reliance on the patent or trade mark.
(c) Conditions implied by trade usage [S. 16(3)]: S. 16(3) gives statutory force to conditions
implied by the usage of a particular trade. It says, ‘An implied warrant or condition s to
quality or fitness for a particular purpose may be annexed by the usage of trade’. It has long
been settled that in commercial transactions extrinsic evidence of custom and usage is
admissible to annex incidents to written contracts in matters with respect to which they are
silent. This is so because the parties ‘contract with reference to those known usages.’ An
unreasonable custom will not, however affect the parties contract.
(d) Express Terms [S. 16(4)]: It is open to the parties to include any express condition and/or
warranties in their contract. But an express warranty or condition does not negative a
warranty or condition implied by the Act unless the express terms are inconsistent with the
implied conditions.

Unpaid Seller
Section 45 of the Sales of Goods Act defines the term ‘unpaid seller’. The seller of goods is
deemed to be an ‘unpaid’ seller within the meaning of this Act:
(a) When the whole of the price has not been paid or tendered;
(b) When a bill of exchange or other negotiable instrument has been received as conditional
payment, and the condition on which it was received has not been fulfilled by reason of the
dishonour of the instrument or otherwise.
A seller who has only received a part of the price is also an unpaid seller. Where the seller
has received a negotiable instrument, like a bill of exchange, promissory note or cheque, for
the price, he is not a unpaid seller. But if, before he has delivered the goods, the negotiable
instrument is dishonoured, then he becomes an unpaid seller and may exercise his rights. This
is so because a negotiable instrument is always presumed to have been received as a
conditional payment and the condition is not fulfilled when it is dishonoured.
If the bill is dishonoured before delivery has been made, then the vendor’s lien revives; or if
the purchaser becomes openly insolvent before the delivery actually takes place, then the law
does not compel the vendor to deliver to an insolvent purchaser.
The protection afforded by the Act to an unpaid seller are also extended to “any person who
is in the position of a seller, as for instance, an agent of the seller to whom the bill of lading
has been endorsed or a consignor or agent who has himself paid, or is directly responsible for
the price.” But this provision does not operate so as to convert a buyer into a seller.
Section 46 seeks to protect the interest of an unpaid seller by conferring upon him the
following rights against the goods, notwithstanding the facts that the property in the goods
has passed to the buyer:
(i) a lien on the goods for price while he is in possession of them;
(ii) in case of the insolvency of the buyer a right of stoppage of the goods in transit after he
has parted with the possession on them.
(iii) a right of resale as limited by Act.
These rights of an unpaid seller do not depend upon any agreement, express or implied
between the parties. They arise by implication of law. They are some of the incidents
attached by law to a contract of sale. The buyer has no right to have possession of the goods
till he pays the price. The seller’s right in respect of the price is not a mere lien which he will
forfeit if he parts with the possession, but grows out of his original ownership and dominion,
and payment or a tender of the price is a condition precedent on the buyer’s part and until he
makes such payment or tender, he has no right to the possession.
These rights generally presuppose that the property in the goods has passed to the buyer, and,
in order to assure the same rights and protections to seller where the property has not passed,
Section 46(2) specially declares that where the property in the goods has not passed to the
buyer, the seller would have the same rights of lien and stoppage in transit which he would
have had as if the property had passed.
“Lien” is the right to retain possession of goods until certain charges due in respect of them
are paid. The unpaid seller has the right to retain the goods until he receives their price.
Section 47 provides that the unpaid seller of goods who is in possession of them is entitled to
retain his possession until payment or tender of the price in the following cases, namely:
(1) Where the goods have been sold without any stipulation as to credit;
(2) Where the goods have been sold on credit; but the term of credit has expired;
(3) Where the buyer becomes insolvent.
Where the goods are sold on credit, the right of lien is suspended during the term of credit.
But on the expiry of that term, if the goods are still in the possession of the seller, his lien
revives.
The right of lien is linked with possession and not with title. Thus, where seller has
transferred to the buyer the documents of title to the goods, his lien is not defeated as long as
he remains in the possession. Even where the seller issued to the buyer delivery orders
thereby converting himself from an owner into a bailee for the buyer, his lien was not
defeated. For Section 47(2) clearly declares that ‘the seller may exercise his lien
notwithstanding that he is in possession of the goods as agent or bailee for the buyers.
The right of lien exists only for the price of the goods. The seller is not entitled to lien for any
other charges, i.e., charges for stronger or the like.
Section 48 of the Act provides for part delivery. Where an unpaid seller has delivered a part
of the goods, he may exercise his lien on the remainder. Where delivery of a part is intended
as a delivery of the whole, the lien is lost. “If both parties intend it as a delivery of the whole,
then it is a delivery of the whole; but if either of the parties does not intend it as a delivery of
the whole if either of them dissents, then it is not a delivery of the whole.
Where the contract envisages delivery of goods by instalments, the buyer’s default in paying
for one instalment does not entitle the seller to stop delivery of the rest of the instalments
unless: (1) the buyer has become insolvent, or (2) the buyer’s default amounts to repudiation
of the whole contract.
Termination of Lien: Lien is linked with the possession and is lost when possession is lost.
Section 49 accordingly provides that the unpaid seller of goods loses his lien in the following
cases:
1. By delivery to Carrier: Delivery of the goods to a carrier for the purpose of transmission to
the buyer operates as a delivery to the buyer himself, and therefore, the right of lien is thereby
lost. Delivery to a carrier puts an end to lien, but the seller still has the right of stoppage in
transit. If the seller regains possession of the goods from the carrier by exercising his right of
stoppage in transit, his lien revives. But if he takes back the goods from the carrier for any
other purpose, the lien does not revive. Where the seller has reserved the right of disposal of
the goods his lien continues till the end of the transit.
2. By delivery to Buyer: The right of lien is also lost when the goods are delivered to the
buyer or his agent. The effect of delivery to the buyer is stated as when the vendor has given
the buyer possession under the contract of sale all his rights in the goods are completely gone;
he must recover the price exactly as he would recover any other debt and has no longer any
claims on the goods sold superior to those of any other creditor. The delivery and acceptance
of possession complete the sale, and give the buyer absolute, unqualified and indefeasible
right of property and possession in the things sold, though the price be unpaid and the buyer
be insolvent.
Where the goods are delivered back to the seller for a specific purpose, such as repair of a
machine sold, that does not revive the seller’s lien. The seller’s lien is, however, not defeated
where the buyer has obtained possession without the consent of the seller. The buyer has to
obtain possession lawfully and under the contract.
3. By waiver: The right of lien is attracted by implication of law to every contract of sale for
the benefit of the seller. The seller may, therefore, if he so likes, waive his right. Waiver may
be express or implied from the conduct of the seller. An implied waiver takes place when the
seller is guilty of some wrongful act in reference to the goods, ‘such as dealing with the
goods in a manner inconsistent with the mere right to have possession of them, as by
wrongfully re-selling or consuming them, or by claiming to keep them on some ground other
than his right to lien’.
4. By tender of price: When the buyer tenders price for the goods, the seller ceases to be an
unpaid seller, and, therefore cannot, by his voluntary refusal to accept the price, convert
himself into an unpaid seller and claim lien.
Both the rights are designed for the protection of the unpaid seller. The effect of their
exercise is also the same, because when the seller stops the goods in transit he resumes
possession and the goods once again fall into the spell of his lien until the price is paid. Yet,
‘it is important to keep them distinct, because, though the rights are analogous, they are in
certain respects governed by different considerations.’
Requirements of stoppage in transit:
(i) The first requirement is that the seller should be unpaid;
(ii) The second that the buyer should have become insolvent;
(iii) The property should have passed to the buyer, for, if the seller reserves the right of
disposal, the goods remain his property, and, therefore, under his lien; and
(iv) The goods should be in the course of transit.
Commencement and end of transit [S. 51]: Section 51 tries to solve the difficulty by laying
down basic propositions which govern the commencement and end of transit:
1. Delivery to Buyer: Goods are deemed to be in course of transit from the time when they
are delivered to a carrier or other bailee for the purpose of transmission to the buyer, until the
buyer or his agent takes delivery of them. Thus, transit ends when the goods are delivered to
the buyer or his agent. For example, in G I P Rly Co. V. Hanmandas, the seller consigned the
goods with the G I P Rly Co. for transportation to the buyer. On arrival at the destination the
company had delivered the goods to the buyer who had loaded them on his cart, but the cart
had not yet left the railway compound when a telegram was received by the company to stop
the goods. The company did not do so and were sued by the seller in damages.
It was held that the transit had ended as soon as the goods were handed over to the buyer. The
railway company was, therefore, left with no power to stop them. Where the buyer does not
accept the goods, the transit does not end even if the goods have been landed at the port of
destination.
2. Interception by Buyer: The transit ends when the buyer or his agent takes delivery of the
goods from the carrier before their arrival at the appointed destination. It may be wrongful for
the carrier to deliver the goods to the buyer before their arrival at the appointed destination
and the carrier may be held liable in damages for depriving the seller of his opportunity, but
transit ends with that. The mere fact that the buyer takes his seat as a passenger in the ship
which is carrying the goods does not amount to delivery to the buyer before their arrival at
the appointed destination.
3. Acknowledgement to buyer: When the goods have arrived at their appointed destination
and the carrier acknowledges to buyer or his agent that he is now holding the gods on his
behalf, the transit is at an end, and it is immaterial that the goods are still with the carrier or
that the buyer has indicated a further destination. It requires a very clear acknowledgement to
put an end to the original contract of carriage.
4. Rejection by Buyer: If the goods are rejected by the buyer and the carrier or other bailee
continues in possession of them, the transit is not at an end. This will be so even if the seller
himself has refused to take back the goods.
5. Delivery to ship chartered by buyer: Where the goods are delivered to a ship chartered by
the buyer, it is a question of fact in each case whether the carrier is acting independently or as
agent of the buyer. If the circumstances show that the carrier is acting as an agent of the
buyer, then the transit is at an end as son as the goods are loaded on board the ship. But the
mere fact that the ship is chartered by the buyer and he has given no indication of the
destination of the goods does not mean that the carrier has become the agent of the buyer.
When the vendor knows that he is delivering the goods to someone as carrier, who is
receiving them in that character, he delivers them with the implied right of stopping them so
long as they remain in the possession of the carrier as carrier.
6. Wrongful refusal to deliver: Where the carrier wrongfully refuses to deliver the goods to
the buyer or his agent, the transit is at an end. It is obvious that the goods should have been
arrived at their destination, because otherwise the carrier has the right to refuse to deliver
them.
7. Part Delivery: Where the goods have been delivered in part, the seller may stop the
remainder of the goods, unless the part delivery shows an agreement to give up the
possession of the whole.

How Stoppage is effected: A notice is given to the carrier to stop the gods and redeliver them
to the seller or according to his directions. Notice may be given to the person in actual
possession or to his principal, in which case there should be sufficient margin of time to
enable the principle to communicate with his agent.
Effect of Sub-Sale: The unpaid seller’s right to lien or stoppage in transit is not affected by
any sale or other disposition of the goods by the buyer. Thus, for example, in Mordaunt
Brothers V. British Oil and Cake Mills, an oil merchant sold a quantity of oil to B, without
appropriating any particular oil to the contract. B sold some of it to C and gave him a delivery
order. C lodged the delivery order with the merchant requesting him to await his orders.
Meanwhile B failed to pay the merchant, who, therefore, became an unpaid seller. It was held
that the merchant’s lien on the goods for the price was not defeated by B’s sale to C and he
could retain the goods till the price was paid.
But there are two cases in which the buyer’s dealings with the goods defeat the seller’s right
against the goods. They are :
1. Seller’s Consent: Where the buyer sells or makes other disposition of the goods with the
consent of the seller, that is binding on the seller. The assent contemplated must be ‘such an
assent as in the circumstances shows that the seller intends to renounce his rights against the
goods. It is enough to show that the fact of a sub-contract has been brought to his notice, and
that he has assented to it merely in the sense of acknowledging the receipt of information.
This was pointed out in Mordaunt Brothers V. British Oil and Cake Mills, where the seller
was informed of the sub-sale after it had been effected and it was held that by this the seller
had merely acknowledged the existence of the sub-sale subject to his own rights the goods
until paid for.
2. Transfer of documents of title: When the seller has issued to the buyer documents of title to
the goods and he has sold or pledged the goods by transferring the documents of title, then in
the case of sale, the seller’s right of lien and stoppage in transit are defeated and, in case of
pledge, his right become subject to the pledge. It is necessary that the transferee should act in
good faith and should have given value for the goods. He should not at the time have the
notice of the fact that the original seller is still unpaid and has rights against the goods.
Thus, resale by the buyer by transfer of the documents of title completely defeats the seller’s
right against the goods. But a pledge does not completely defeat the seller’s right against the
goods. It only makes his rights subject to the pledge. The effect is that the seller may still
exercise his rights by paying off the pledge.
3. Right of Resale: The contract of sale is not rescinded when the seller exercises his right of
lien or stoppage in transit. The contract still remains in force and the buyer can claim delivery
of the goods on tendering the price. The property having passed to the buyer, it is not
revested in the seller. But obviously the law cannot allow the things to stand in that condition
indefinitely. The seller is, therefore given a limited right to resell the goods.
In the first place, he may resell the gods without reference to the defaulting buyer if the goods
are of perishable nature.
Secondly, in other cases, the seller should give a notice to the defaulting buyer of his
intention to resell. If the buyer does not pay the price within reasonable time after receiving
the notice, the seller may resell the goods. He can recover from the defaulting buyer any loss
occasioned by his breach of contract. He can also keep any profit which may occur on the
resale. But if the unpaid seller sells the goods without serving upon the buyer a reasonable
notice, the seller cannot recover damages for the breach and he has also to hand over any
profit to the buyer made on the resale.
The seller may expressly reserve the right of resale in case the buyer should make a default.
In such a case no notice of sale is necessary. The contract is automatically rescinded when the
seller resells the goods. He does not resell as an unpaid seller, but as an original owner of the
goods.
Where the buyer pays a deposit he is entitled to refund of it when the seller resells the goods,
but subject to the seller’s claim for damages. Where the seller does not offer evidence of the
difference between the contract price and resale price on the date of breach, he is not entitled
to any compensation.

HOD